FBIAS Market update for the week ending 6/23/2017

The very big picture:

In the “decades” timeframe, the question of whether we are in a continuing Secular Bear Market that began in 2000 or in a new Secular Bull Market has been the subject of hot debate among economists and market watchers since 2013, when the Dow and S&P 500 exceeded their 2000 and 2007 highs. The Bear proponents point out that the long-term PE ratio (called “CAPE”, for Cyclically-Adjusted Price to Earnings ratio), which has done a historically great job of marking tops and bottoms of Secular Bulls and Secular Bears, did not get down to the single-digit range that has marked the end of Bear Markets for a hundred years, but the Bull proponents say that significantly higher new highs are de-facto evidence of a Secular Bull, regardless of the CAPE. Further confusing the question, the CAPE now has risen to levels that have marked the end of Bull Markets except for times of full-blown market manias. See Fig. 1 for the 100-year view of Secular Bulls and Bears.

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Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best. The CAPE is at 25.35, down from the prior week’s 25.88, after having earlier reached the level also reached at the pre-crash high in October, 2007. Since 1881, the average annual return for all ten year periods that began with a CAPE around this level have been just 3%/yr (see Fig. 2).

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This further means that above-average returns will be much more likely to come from the active management of portfolios than from passive buy-and-hold. Although a mania could come along and cause the CAPE to shoot upward from current levels (such as happened in the late 1920’s and the late 1990’s), in the absence of such a mania, buy-and-hold investors will likely have a long wait until the arrival of returns more typical of a rip-snorting Secular Bull Market.

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate. The U.S. Bull-Bear Indicator (see Fig. 3) turned negative on January 15th, and remains in Cyclical Bear territory at 50.56, down from the prior week’s 52.03.

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In the intermediate picture:

The intermediate (weeks to months) indicator (see Fig. 4) turned negative on May 12th. The indicator ended the week at 28, down from the prior week’s 29. Separately, the quarter-by-quarter indicator – based on domestic and international stock trend status at the start of each quarter – gave a positive indication on the first day of April for the prospects for the second quarter of 2016.

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Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2), whether we are in a new Secular Bull or still in the Secular Bear, the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns. The Bull-Bear Indicator (months to years) is negative (Fig. 3), indicating a new Cyclical Bear may have arrived. The Quarterly Trend Indicator (months to quarters) is positive for Q2, and the Intermediate (weeks to months) timeframe (Fig. 4) is negative. Therefore, with two of the three indicators negative, the U.S. equity markets are rated as Mostly Negative.

In the markets:

The event that was never supposed to happen, happened. In a surprise upset, the people of the United Kingdom voted in favor of leaving the European Union. This triggered an avalanche of selling across global markets, all of which had rallied in anticipation of the “sure thing” win for the “Remain” side. On Friday the Dow plunged -610 points, erasing substantial gains from earlier in the week and a lot more, closing at 17,400, down -1.55%. The tech heavy NASDAQ composite fell -92 points, ending the week at 4,707, down -1.9%. The LargeCap S&P 500 dropped ‑1.63%. MidCaps and SmallCaps also lost ground, with the S&P 400 MidCap index giving up -1.5%, and the Russell 2000 small cap index also lost -1.5%. In a flight to safety, the defensive Utilities sector managed to avoid much of the carnage, down only -0.13%. The week’s declines brought the S&P 500, the Dow Jones Industrials, and the small cap Russell 2000 index all back into negative territory for the year to date (where the NASDAQ already was).

In international markets, Canada’s TSX fared relatively well with only a slight decline of -0.07%. In Europe, somewhat surprisingly the United Kingdom’s FTSE actually ended up at +1.95% (helped considerably by the plunge in the British Pound). However, on Europe’s mainland, Germany’s DAX ended down -0.77%, France’s CAC 40 gave up -2.08%, and Italy’s Milan FTSE plunged over -7%. In Asia, markets were mixed with China’s Shanghai Stock Exchange losing -1.07% and Japan’s Nikkei plunging over -4.15%. However, Hong Kong’s Hang Seng Index rose +0.44%.

In commodities, precious metals were strongly bid up in the wake of the Brexit vote, with Gold rising $17.50 to $1,319.10 an ounce, up +1.34% and silver rising $0.30 to $17.82 an ounce, up +1.71%. The industrial metal copper saw its second week of buying, up +3.14%. Crude oil continues to consolidate after its strong gains earlier in the year. West Texas Intermediate crude oil fell -$1.29 to $47.57 a barrel, down -2.64%.

In U.S. economic news, the number of Americans filing for unemployment benefits fell to a near-43 year low as weekly jobless claims fell 18,000 to 259,000. Economists polled by Reuters had forecast initial claims falling only to 270,000. Claims have now been below 300,000, a commonly accepted threshold of a strong job market, for 68 straight weeks– the longest streak since 1973. Continuing claims, a reading on the number of people receiving ongoing unemployment assistance, also fell by 20,000 to 2.14 million last week.

In housing, U.S. existing-home sales rose at the fastest pace since 2007. The National Association of Realtors reported that sales were up +1.8% last month to a seasonally-adjusted annual rate of 5.53 million. In addition, prices climbed to a new all-time high. The national median sales price for a previously owned home rose +4.7% from a year earlier to $239,700. Existing home sales make up roughly 90% of the housing market. Gregory Daco, head of US macroeconomics at Oxford Economics, stated that “housing demand is likely to remain solid in the coming months, underpinned by gradually strengthening wage growth and low mortgage rates.”

In contrast to existing-home sales, however, new-home sales declined -6% to an annualized 551,000 in May, according to the Commerce Department. The pullback wasn’t completely unexpected due to the outsized jump in new-home sales in April. While new-home sales are volatile and subject to heavy revision analysts point out that the overall trend remains up. The median price of a new home was $290,400, up 1% from a year ago. Throughout this tepid economic recovery homebuilders have been reluctant to resume the blistering pace of home-building that occurred prior to the housing bust.

In manufacturing, the Chicago Fed’s national economic index dropped sharply as factory output slowed. The index fell to -0.51 last month from a positive 0.05 in April. Most economists had expected an improved reading. The Chicago Fed index is a weighted average of 85 different economic indicators. All four broad categories of indicators decreased from April as weakness was broad-based. The index’s three month moving average, used by analysts to offer a clearer picture of the trend in economic activity, fell to -0.36, the lowest since August 2012.

In contrast to the Chicago Fed’s national report, the Kansas City Fed’s Regional Manufacturing Index rose +7 points to a positive 2 for June– the first positive reading in 18 months and all components were at their strongest levels for 2016. Specifically, the report noted a sharp improvement in the production index to 12 from -11 the previous month, with the components for shipments, new orders, and order backlogs all rising strongly.

American businesses were pulling back from purchasing new equipment as new orders for durable goods—airplanes, industrial machinery, and other products that are designed to last at least 3 years – fell a seasonally-adjusted ‑2.2% last month, according to the Commerce Department. That was a sharper decline than the ‑0.4% economists had forecast. While the drop was led by a -34% plunge in military-aircraft orders, orders were down across the board. Ex-transportation, orders fell -0.3%, and ex-defense spending, orders fell -0.9%. Barclay’s economist Jesse Hurwitz wrote in a note to clients that the report showed “broad-based and persistent softness across the U.S. manufacturing sector.” New orders for non-defense capital goods (a proxy for future business investment), also fell -0.7%.

In Europe, the Brexit vote dominated all market and economic news both before and (especially) after the vote became history. All markets were higher for the week before the vote, and all (save for the UK) were lower for the week after the vote.

The huge drop in the value of the British Pound was the single biggest move, hitting the lowest level versus the U.S. dollar since 1985.

The Eurozone manufacturing sector bounced in June. Markit’s Flash Manufacturing Purchasing Managers Index (PMI) rose to 52.6 in June, up +1.1 points from May and well above the expectation of 51.3. However, while manufacturing improved, the composite (manufacturing +services) PMI fell to a 17-month low of 52.8, down -0.3.

The German stock index, the DAX, fell -1000 points after the Brexit vote, the biggest drop since the financial crisis in 2008, and finished the day down -700. Key business groups in Germany have said that the uncertainty will hit the German economy particularly hard. The president of the Federation of German Wholesale, Foreign Trade and Services, Anton Barber said “Brexit has happened in a time of uncertainty. That is poison for the economy.” German industry is particularly concerned about any effects on trade with the UK, which is its third-biggest export market.

In Japan, representatives of the Japanese government and the Bank of Japan are set to hold meetings over the weekend to analyze the economic impact of Britain’s exit from the European Union. The focus of the meeting will be its impact on the global economy, negative effects on the yen, and the interests of the many Japanese companies on British territory. Japanese finance minister Taro Aso said his government will take “firm action on the yen, if needed”, however he stopped short of promising currency intervention or whether Japan had already intervened in the market.

In China, analysts are concerned that China may feel the effects of the “Brexit” vote particularly strongly. Over the years, Britain has played a significant role in promoting Chinese relations with the European Union, which has become China’s largest trading partner. Britain’s exit may lead to difficult trade and investment agreements between China and the bloc. He Weiwen, co-director of the China-US-EU Study Centre under China’s Ministry of Commerce stated “The European Union [without the presence of Britain] is likely to adopt a more protectionist approach when dealing with China. [The cooperation between China and the EU] may become more difficult.”

Finally, attempts at forecasting future market returns over coming 10-year periods have mostly focused on measurements of market valuation. The well-known Cyclically-Adjusted Price-to-Earnings ratio (CAPE) is a prominent example. Another is Warren Buffett’s favorite: US stock market capitalization divided by US GDP. Both have good records of predicting future returns when at high or low extremes – and both are predicting poor returns over the next 10 years.

clip_image002But one with an even better statistical correlation to future returns (an “r-squared” of 0.91, for you geeks), does not use market valuation at all! Rather, it is based on the percentage of all household financial assets that are invested in the stock market. The higher the percentage, the lower future returns. Currently, households are at the high end of the historical range, at 52% vs the long-term median of 44%. This level portends future 10-year annualized returns of slightly less than 4%, joining the late 60’s, 2000 and 2007 as years with similar readings.

(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, stocksandnews.com, marketwatch.com, wantchinatimes.com, BBC, 361capital.com, pensionpartners.com, cnbc.com, FactSet; Figs 1-5 source W E Sherman & Co, LLC)

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The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market. The average ranking of Defensive SHUT sectors fell to 12,5, down from the prior week’s 10.8, while the average ranking of Offensive DIME sectors rose to 10.8 from the prior week’s 11.8. The Offensive DIME sectors now lead the Defensive DIME sectors by a small margin. Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

If you have any questions about the FBIAS™ Fact-Based Investment Allocation Strategy portfolios, feel free to give your Anthony Capital, LLC advisor a call at 303-734-7178 or by scheduling a private virtual meeting/conference call. We work with clients from all over the country and would be happy to help.

You can also open up an online account by clicking HERE  at our preferred custodian, Interactive Brokers, LLC.

Sincerely,

Dave Anthony, CFP®

 

 

FBIAS™ Market Update for the week ending 12-30-2016

The very big picture:

In the “decades” timeframe, the question of whether we are in a continuing Secular Bear Market that began in 2000 or in a new Secular Bull Market has been the subject of hot debate among economists and market watchers since 2013, when the Dow and S&P 500 exceeded their 2000 and 2007 highs. The Bear proponents point out that the long-term PE ratio (called “CAPE”, for Cyclically-Adjusted Price to Earnings ratio), which has done a historically great job of marking tops and bottoms of Secular Bulls and Secular Bears, did not get down to the single-digit range that has marked the end of Bear Markets for a hundred years, but the Bull proponents say that significantly higher new highs are de-facto evidence of a Secular Bull, regardless of the CAPE. Further confusing the question, the CAPE now has risen to levels that have marked the end of Bull Markets except for times of full-blown market manias. See Fig. 1 for the 100-year view of Secular Bulls and Bears.

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Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best. The CAPE is at 27.68, down from the prior week’s 27.99, and now exceeding the level reached at the pre-crash high in October, 2007. Since 1881, the average annual return for all ten year periods that began with a CAPE around this level have been just 3%/yr (see Fig. 2).

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This further means that above-average returns will be much more likely to come from the active management of portfolios than from passive buy-and-hold. Although a mania could come along and cause the CAPE to shoot upward from current levels (such as happened in the late 1920’s and the late 1990’s), in the absence of such a mania, buy-and-hold investors will likely have a long wait until the arrival of returns more typical of a rip-snorting Secular Bull Market.

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate. The U.S. Bull-Bear Indicator (see Fig. 3) is in Cyclical Bull territory at 60.30, down from the prior week’s 62.01.

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In the intermediate and Shorter-term picture:

The Shorter-term (weeks to months) Indicator (see Fig. 4) turned positive on November 10th. The indicator ended the week at 29, unchanged from the prior week. Separately, the Intermediate-term Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – was positive entering January, indicating positive prospects for equities in the first quarter of 2017.

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Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2), whether we are in a new Secular Bull or still in the Secular Bear, the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns. The Bull-Bear Indicator (months to years) is positive (Fig. 3), indicating a potential uptrend in the longer timeframe. In the intermediate timeframe, the Quarterly Trend Indicator (months to quarters) is positive for Q1, and the shorter (weeks to months) timeframe (Fig. 4) is positive. Therefore, with all three indicators positive, the U.S. equity markets are rated as Very Positive.

In the markets:

Stocks declined in light trading over the holiday shortened week. Having neared the closely watched 20,000 level the previous week, the Dow Jones Industrial Average fell -171 points to record its first weekly loss since early November, down -0.86% to 19,762.6. The tech-heavy NASDAQ Composite had its first down week in 4, falling ‑1.46% to 5,383. The LargeCap S&P 500 index retreated -1.1%, while MidCaps and SmallCaps fell ‑0.78% and ‑1.05%, respectively. Utilities and Transports were both negative, with Transports falling -1.6% and the defensive Utilities ended down only -0.18%.

In international markets, Canada’s TSX gave up a portion of last week’s gains by falling ‑0.26%, while the majority of European markets rose for the week. The United Kingdom’s FTSE 100 gained +1.06%, along with France’s CAC 40 that added +0.47%. Germany’s DAX notched its fourth straight week of gains by adding +0.27%, but Italy’s Milan FTSE was unable to add a sixth week of gains, retreating‑0.57%. In Asia, China’s Shanghai Composite fell ‑0.21%, while Japan’s Nikkei retreated ‑1.6% after seven straight weeks of gains. Hong Kong’s Hang Seng rebounded +2% after two weeks of losses. As a group, emerging markets (as measured by the MSCI Emerging Markets Index) rose +2.13%, while developed markets (as measured by the MSCI Developed Markets Index) gained +0.09%.

In commodities, Gold had its first up week after 7 consecutive weeks of losses, rising +$18.10 to $1,151.70 an ounce. Silver also rose for the week, up +1.46% to $15.99 an ounce. In energy, West Texas Intermediate crude oil continued to break out of the last 6 month’s $50 a barrel range, rising $0.70, or 1.32%, to $53.72 a barrel. Overall, the Commodity Research Bureau’s CRB Index was up +1.04% for the week.

The month of December was positive for all U.S. equity indexes. The Dow showed the way, up +3.34%, SmallCaps and MidCaps followed with gains of +2.63% and 2.03%, LargeCap S&P 500 returned +1.82% and the NASDAQ comp trailed the pack with a gain of +1.12%. The MSCI Developed Markets Index did well, too, up +2.7%, but the MSCI Emerging Markets Index trailed with a negative return of -0.26%.

The fourth quarter of 2016 showed a wide disparity in returns among U.S. and international indexes. SmallCaps rocketed +8.43%, narrowly beating out the Dow which returned +7.94%. Not too far behind was the MidCap index, which gained +6.98%. However, the LargeCap S&P 500 lagged behind at +3.25%, and the NASDAQ Composite eked out a minor gain of +1.34% (the narrower NASDAQ 100 was actually negative for the fourth quarter, losing -0.25%). International indexes ran far behind the U.S. for the quarter. The MSCI Developed Markets Index fell -1.35%, and the MSCI Emerging Markets Index dropped -5.46%. Gold was the largest casualty of the quarter, losing almost -13% – largely a victim of the strengthening post-election dollar.

2016 again showed the futility of predictions – particularly in investing and politics. Virtually no one predicted the election of President-elect Trump, and absolutely no one predicted the market’s post-election response. Investors who acted on actual data did fine, but those acting on the vast majority of predictions did poorly. In the U.S., SmallCaps led the way with a gain of +19.48%, followed closely by MidCaps at +18.73%. The Dow was also in double digits, rising +13.42%. The LargeCap S&P 500, with a gain of +9.54%, returned half that of SmallCaps. Bringing up the rear for 2016 was the NASDAQ Composite with a rise of “only” +7.5%. International markets were mixed for 2016. The MSCI Emerging Markets Index gained +9.9%, but the MSCI Developed Markets Index lost ‑0.7%. Major international markets were bracketed at the upper end by the U.K., which gained +14.4%, and at the lower end by China’s Shanghai market, which lost -12.3%. The U.S. has been much stronger than non-U.S. markets for the past 5 years; for example, the broad FTSE Global All-Cap ex-US Index has still not yet exceeded its peak of 2007, in contrast to the U.S. which has forged ahead to numerous new highs in that period.

In U.S. economic news, the number of Americans who applied for unemployment benefits last week fell back to the extremely low levels that have been the norm for much of the year. Initial claims for unemployment fell last week by 10,000 to 265,000. Initial claims have remained below the key 300,000 level for 95 straight weeks, the longest streak in 46 years. With the unemployment rate below 5%, businesses have reported having a difficult time finding skilled workers. The less-volatile 4-week moving average of claims fell 750 to 263,000.

Demand in the housing market continues to be the strongest in years, according to the latest S&P Case-Shiller national home price index reading. U.S. home prices hit a new peak in October, up +5.6% from a year earlier and setting another new high from the previous month. In addition, all 20 cities in the Case-Shiller 20-city home price index saw annual home price increases, and 15 out of the 20 also posted month-over-month increases. Seattle, Portland, and Denver posted the largest year-over-year price gains, with Seattle and Portland rising over +10%, and Denver up +8%. David Blitzer, managing director and chairman of the Index Committee at S&P Dow Jones Indices warned that the current pace of growth can’t continue forever writing, “Home prices and the economy are both enjoying robust numbers. However, mortgage interest rates rose in November and are expected to rise further as home prices continue to out-pace gains in wages and personal income.” The home price index tracks prices on a rolling three-month average. October’s reading represents the three-month average of August, September, and October prices.

The National Association of Realtors’ (NAR) Pending Home Sales Index fell ‑2.5% in November to a seasonally-adjusted 107.3. The index measures homes under contract that have not yet closed. Despite the fall, the NAR noted that the reading still marked the index’s 31st straight month above its baseline reading of 100. The baseline reading is the rate at which homes went to contract in the year 2001, the first year in which the index was published and itself a good year for U.S. housing. Therefore, the current reading is seen as “exceptional” by the NAR, despite the drop. By region, pending home sales were mixed. The Northeast region was up +5.7% from the prior year, while the Midwest region declined -2.4%, and the South and West regions were each down ‑1%.

Confidence among American consumers surged in December to 113.7, reported the Conference Board – the highest level since 2001. Lynn Franco, the Conference Board’s director of economic indicators, attributed the strong reading to a “post-election surge in optimism for the economy”, citing strong jobs and income prospects, all-time highs in the stock market, and a new President and administration. The present situation index, which measures Americans’ current confidence, fell almost -6 points to 126.1, but that’s still near its highest level in 9 years. A measure of expectations over the next six months rose over +10 points to its highest level since 2003. Stephen Stanley, chief economist at Amherst Pierpont Securities said, “The election of Donald Trump has raised household expectations for the economy to a very high level. It remains to be seen whether Trump can deliver, but the ground would certainly appear to be ripe for a pickup in consumer spending based on this confidence data.”

In the Windy City, manufacturing activity fell more than expected in December, retreating from last month’s highest reading since January of 2015. The Institute for Supply Management (ISM) said its index decreased ‑3 points to a seasonally-adjusted 54.6 this month. Analysts had expected only a ‑0.6 point drop. In the details of the report three out of the five components decreased. New orders led the decline, losing ‑6.7 points to 56.5, while employment and supplier deliveries components remained positive. Economist Jamie Satchi reported, “Most firms are upbeat going into 2017 and believe new and better things are to come under the new administration.”

The U.S. trade deficit increased +5.5% last month to a seasonally adjusted annual $65.3 billion, according to the Commerce Department. A stronger U.S. dollar could weigh on U.S. exporters, as the dollar has surged +5% since Trump’s victory. Imports rose +1.2% to $187 billion, while exports were up +1% to $121.7 billion. This difference between imports and exports is known as the “trade gap”. Economists suggest that Trump’s proposals will lead to wider budget deficits which may trigger higher inflation and interest rate increases by the Federal Reserve.

In Canada, the U.K.’s Centre for Economics and Business Research had some bad news for Canadians. In a new report, the group stated Canada’s economic growth is set to flatline at 2% or less per year over the next 15 years, leading the country to lose ground in the ranking of the world’s economies. The forecasts call for Canadian GDP growth of just +1.8%/yr. from 2016-2020, then +2%/yr. growth from 2021 to 2030. The group is concerned with Canada’s public sector deficit which has risen to 2.5% of GDP, and its gross debt as a percentage of GDP of 92%.

Across the Atlantic, Britain’s corporate finance chiefs are more optimistic about the future than at any point over the past 18 months, according to a survey of chief finance officers by Deloitte. Overall companies remain cautious about launching big new investments, but their appetite for hiring is rebounding. Ian Stewart, Deloitte’s chief economist stated, “The economy has accelerated in the second half of the year and is stronger than people expected even before the referendum, so I think the resilience of the economy has boosted that measure of confidence.” Deloitte’s optimism index, which measures the proportion of CFO’s who are more optimistic than they were three months ago turned positive for the first time since the middle of last year.

On Europe’s mainland, German industry leaders warned in 2017, to “expect the unexpected”. The leaders of the German Industry Association (BDI), the Chamber of Commerce (DIHK) and the Employers’ Association all expressed fears about uncertainties, especially surrounding elections in Germany and France, and protectionist trends in other countries. In addition, BDI President Ulrich Grillo stated “The level of global uncertainty has increased as has the unpredictability. Unfortunately I fear that won’t change very much in 2017.”

In Italy, the world’s oldest and very troubled bank Monte dei Paschi di Siena (BMPS) said that the European Central Bank (ECB) has called for it to receive a bailout of $9.2 billion. The BMPS’ reported need for recapitalization was over 3 billion euro more than previously thought necessary. BMPS cited letters from the ECB to the Italian Ministry of Finance and Economy indicating that the results of 2016 stress tests showed the capital needs of BMPS at €8.8 billion. The ECB also noted that the bank’s liquidity had deteriorated between November 30th and December 21st. According to the Italian economic newspaper Il Sole 24 Ore, the Italian government will need to invest some six billion euros in the lender and the rest would be raised through the forced conversion of bonds into equity. “With these figures, the bank will in effect be nationalised, given that the state will own more than 67 percent,” the newspaper calculated.

China’s state news agency Xinhua reported China will meet its growth target of +6.5 to +7% this year, adding that the country’s stable growth will be reassuring to a “weak and vulnerable” global economy. Xinhua noted that unlike other countries, China has the flexibility to defend against sharp economic decline as it restructures its economy toward consumption and services. Chinese officials are confident in the country’s economy, says Xinhua, saying the positive trends of this year will continue into next year.

In Japan, the stagnant economy may finally be showing some tangible signs of life. Factory output data released by Japan’s trade ministry shows signs of economic recovery. Industrial production grew by +1.5% this month over November. That followed a +0.6% gain in September and a flat reading in October. In addition retail sales increased, while inventories dropped for three straight months. The data supports the Bank of Japan’s view that growing global demand will support a steady improvement in the economy. Takeshi Minami, chief economist at Norinchukin Research Institute stated, “While domestic demand still lacks strength, a pick-up in exports is driving up production. Output will likely continue recovering moderately ahead.”

Finally, a major part of American belief is that each generation should do a bit better than the preceding one. The Census Bureau released data this past week showing that on several measures, millennials are well behind the preceding generation. The Census Bureau compared today’s 30-year-olds with 30-year-olds of 1975, revealing that millennials are less likely to have reached many of the milestones of adulthood than their 1975 counterparts. In 1975, 75% of 30-year-olds had married, had a child, were not enrolled in school, and had lived on their own. In 2015, just 33% could make that claim. In addition, a survey by Washington D.C.-based think tank Pew Research Center showed that living with parents is now “the most common young adult living arrangement for the first time on record” and that millennials are less likely to be married by the time they are 34 than any previous generation. One possible major cause for the delay in reaching these milestones may be student loan payments. In a survey from bankrate.com, more than 56% of millennials said they have delayed a major life event because of their student loan debt. The following chart, from marketwatch.com, details these “milestone” discrepancies.

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(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, stocksandnews.com, marketwatch.com, wantchinatimes.com, BBC, 361capital.com, pensionpartners.com, cnbc.com, FactSet; Figs 1-5 source W E Sherman & Co, LLC)

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The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market. The average ranking of Defensive SHUT sectors rose to 20.75 from 21.25, while the average ranking of Offensive DIME sectors slipped to 12.50 from 11.75. The Offensive DIME sectors continue to strongly lead Defensive SHUT sectors. Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

If you have any questions about the FBIAS™ Fact-Based Investment Allocation Strategy portfolios, feel free to give your Anthony Capital, LLC advisor a call at 303-734-7178 or by scheduling a private virtual meeting/conference call. We work with clients from all over the country and would be happy to help.

 

You can also open up an online account by clicking HERE at our preferred custodian, Folio Institutional, LLC.

 

Sincerely,

Dave Anthony, CFP®

FBIAS™ Market Update for the week ending 12-23-2016

The very big picture:

In the “decades” timeframe, the question of whether we are in a continuing Secular Bear Market that began in 2000 or in a new Secular Bull Market has been the subject of hot debate among economists and market watchers since 2013, when the Dow and S&P 500 exceeded their 2000 and 2007 highs. The Bear proponents point out that the long-term PE ratio (called “CAPE”, for Cyclically-Adjusted Price to Earnings ratio), which has done a historically great job of marking tops and bottoms of Secular Bulls and Secular Bears, did not get down to the single-digit range that has marked the end of Bear Markets for a hundred years, but the Bull proponents say that significantly higher new highs are de-facto evidence of a Secular Bull, regardless of the CAPE. Further confusing the question, the CAPE now has risen to levels that have marked the end of Bull Markets except for times of full-blown market manias. See Fig. 1 for the 100-year view of Secular Bulls and Bears.

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Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best. The CAPE is at 27.99, up from the prior week’s 27.92, and now exceeding the level reached at the pre-crash high in October, 2007. Since 1881, the average annual return for all ten year periods that began with a CAPE around this level have been just 3%/yr (see Fig. 2).

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This further means that above-average returns will be much more likely to come from the active management of portfolios than from passive buy-and-hold. Although a mania could come along and cause the CAPE to shoot upward from current levels (such as happened in the late 1920’s and the late 1990’s), in the absence of such a mania, buy-and-hold investors will likely have a long wait until the arrival of returns more typical of a rip-snorting Secular Bull Market.

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate. The U.S. Bull-Bear Indicator (see Fig. 3) is in Cyclical Bull territory at 62.01, up from the prior week’s 60.94.

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In the intermediate picture:

The Intermediate (weeks to months) Indicator (see Fig. 4) turned positive on November 10th. The indicator ended the week at 29, unchanged from the prior week. Separately, the Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – was positive entering October, indicating positive prospects for equities in the fourth quarter of 2016.

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Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2), whether we are in a new Secular Bull or still in the Secular Bear, the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns. The Bull-Bear Indicator (months to years) is positive (Fig. 3), indicating a potential uptrend in the longer timeframe. The Quarterly Trend Indicator (months to quarters) is positive for Q4, and the Intermediate (weeks to months) timeframe (Fig. 4) is positive. Therefore, with all three indicators positive, the U.S. equity markets are rated as Very Positive.

In the markets:

After a strong start, the major equity indexes drifted lower and ended the week only marginally higher. The Dow Jones Industrial Average rose for a 7th straight week, adding +90 points to close at 19933. The Dow is inching closer to the psychologically-significant 20,000 level, up +0.46% for the week. The LargeCap S&P 500 edged higher by +0.25%, while the S&P 400 MidCap and Russell 2000 SmallCap indexes rose +0.35% and +0.52% respectively, continuing their 2016 outperformance relative to the LargeCaps.

In international markets, Canada’s TSX advanced +0.5%. Across the Atlantic, the United Kingdom’s FTSE rose for a third consecutive week, gaining +0.8%. On Europe’s mainland, France’s CAC 40 added +0.13%, Germany’s DAX gained +0.4%, and Italy’s Milan FTSE rose a fifth straight week, up 1.74%. In Asia, a mixed bag: Japan’s Nikkei had its seventh consecutive week of gains, rising +0.14%, China’s Shanghai Composite suffered a fourth straight week of losses losing -0.4%, and Hong Kong’s Hang Seng fell -2%. As a group, developed markets (as measured by the MSCI Developed Markets Index) rose +0.25%, while emerging markets (as measured by the MSCI Emerging Markets Index) fell -1.36%.

In commodities, precious metals are still searching for a bottom as Gold fell another -$3.80 an ounce to $1,133.60, and Silver caught up to Gold’s weakness losing -2.8% to end the week at $15.76 an ounce. Oil was basically flat, rising +$0.07 to $53.02 a barrel for West Texas Intermediate crude. Coincident with the rebound in oil prices, the number of U.S. previously-idled oil rigs going back into production surged to its highest level since January.

In U.S. economic news, the Labor Department reported that the number of newly unemployed jumped to the highest level since early summer. Initial jobless claims rose a seasonally-adjusted 21,000 to 275,000, a 6-month high. However, it also marks the 94th consecutive week of initial claims below 300,000—a threshold many analysts use as the sign of a healthy job market. Continuing jobless claims, the number of unemployed already receiving benefits, fell by almost 79,000 to 2.04 million.

Sales of previously owned U.S. homes rose +0.7% last month to an annual pace of 5.61 million, according to the National Association of Realtors (NAR). Analysts noted that higher prices and lean inventories continue to weigh on the housing market. NAR Chief Economist Lawrence Yun noted the “big obstacle is the ongoing housing shortage”. At the current pace of sales, there is a just a 4 month supply of homes on the market, compared to the more-desirable 6 month supply. The shortage of homes is pushing prices up: the median home price across the country is $234,900, an increase of +6.8% over November of last year. Sales were mixed regionally. In the Northeast, sales increased +8% accompanying a +1.4% gain in the South. The Midwest and West both declined, ‑2.2% and -1.6% respectively. First-time buyers made up 32% of all purchases last month.

Sales of new homes jumped last month to its second-highest pace since early 2008, another sign of robust housing demand. The Commerce Department reported that sales ran at a 592,000 seasonally-adjusted annual rate, up +5.2% from October and up +16.5% from this time last year. The median sales price was $305,400 in November, up $2,700 from October. The stronger sales continued to deplete the supply of new homes for sale, with 5.1 months’ worth of new homes available for sale last month, down from 5.4 months a year ago.

U.S. Consumer spending slowed in November after several months of gains as income growth flattened. Personal incomes were unchanged and spending rose +0.2%, according to the Commerce Department. Inflation also remained unchanged. The personal consumption expenditures (PCE) index rose +1.4% compared to this time last year. The PCE price index is the favored inflation gauge of the Federal Reserve. Ex-food and energy, the index is up +1.6% – a retreat from the +1.8% annual increase in October and a step further away from the Fed’s 2% target.

Confidence among consumers continued the surge following the election of Donald Trump to President, hitting its highest level in 12 years. The University of Michigan’s Consumer Sentiment index rose to 98.2, up a steep 5 points from November. The index is now at its highest level since January of 2004. Survey respondents stated that they expected a stronger economy that would create more jobs. Blerina Uruci, economist at Barclay’s, stated “Ongoing solid readings of consumer confidence reinforce our view that GDP growth should remain firm in the near term, and we see the level of confidence as consistent with ongoing strength in consumer spending.”

Orders for long-lasting “durable” goods fell last month for the first time in five months. Orders for durable goods fell -4.6% last month, led by a drop in orders for Boeing aircraft. The drop almost completely retraces the +4.8% increase in October. In an unusual twist, the details of the report were actually more optimistic than the headline. Ex-transportation (i.e., remove Boeing), orders for durable goods were up over +0.5%, the fifth straight monthly gain. Citi economists released a note stating “Core orders are a particularly important series to follow over the next few months as we try to discern whether investment spending is picking up in post-election data. Today’s number implies that at the very least equipment investment did not decline and may be a first hint that it is on a more favorable trajectory.”

Factory production weakened last month, according to the Chicago Federal Reserve. The Chicago Fed’s National Activity Index fell to -0.27 last month, down -0.22 from October. The index is a weighted average of 85 economic indicators, designed so that readings above zero indicate trend growth. Production-related indicators decreased to -0.2 in November falling from -0.01, reflecting weakness in the nation’s manufacturing sector. Steven Shields, economist with Moody’s wrote, “A reading of -0.27 still suggests the U.S. economy expanded at a below-average rate and is easing its foot off the accelerator after a stronger performance in early summer.”

The overall U.S. economy grew at a faster pace than originally thought in the 3rd quarter, according to the Commerce Department. Upward revisions in consumer spending and business investment pushed the latest GDP estimate up +0.3%, to a healthy 3.5% annualized rate. In addition, strong trade data in the form of a +10% spike in exports also contributed. Michael Gapen, chief U.S. economist at Barclay’s noted that the data signaled “the manufacturing, trade, and energy sectors stabilized during the quarter after nearly two years of contraction.”

In Canada, the steep rise of home prices has reached a level such that the Bank of Canada made the remarkable move of taking its warning of high household debt levels and red-hot home prices online in a most modern way: a video posted on YouTube. The Bank of Canada has voiced its concerns to Canadians for months, but it appears to have fallen on deaf ears. For example, Toronto home prices are up nearly +15% since this summer when Bank of Canada governor Stephen Poloz warned that price gains were “difficult to match up with any definition of fundamentals that you could point to.” In addition, Statistics Canada showed that the household debt-to-income ratio broke yet another record last quarter, further increasing the Bank of Canada’s unease.

In France, International Monetary Fund chief Christine Lagarde was found guilty of criminal negligence for an improper government payout to French businessman Bernard Tapie eight years ago while she served as France’s finance minister. The French court chose not to sentence Lagarde to a fine or jail time. In a statement Monday, Lagarde said she was not satisfied with the court’s decision but had chosen not to appeal.

In Germany, the Finance Ministry predicted that German economic activity will be shown to have picked up in the fourth quarter as household spending remains strong and exports are likely to show improvement. “For the final quarter, indicators are signaling a light acceleration in overall economic activity,” the Finance Ministry said in its monthly report.

The Italian government agreed to bail out the world’s oldest bank, Monte dei Paschi di Siena, after the bank failed to raise five billion euros from private investors. Paolo Gentiloni, Italy’s new prime minister said that the government would tap a 20 billion euro fund that had already been approved by the parliament earlier this week. In an effort to curb losses for Italy’s small investors that hold bank notes, finance minister Pier Carlo Padoan said the government would compensate small savers for their bank losses. Small investors are estimated to hold roughly 2 billion euros worth of Monte dei Paschi’s bonds.

The Bank of Japan is more optimistic about the Japanese economy, raising its assessment for the first time since May 2015. The BOJ’s more optimistic tone came as the government released its growth forecast for the coming year. The government now sees the economy picking up speed to a 1.5% growth rate, from the prior 1.3%. In a move widely expected, the BOJ kept its short-term rate target at -0.1% and its 10-year Japanese government bond yield at near zero. It also said it would continue to buy Japanese government bonds at the previous pace of around 80 trillion yen a year.

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Finally, for more and more of us, online shopping has become the new normal. The primary beneficiary of this trend has been Amazon. Market research firm Slice Intelligence looked at 1.7 million online shopping receipts from early November to mid-December and discovered that the leader in online purchases is far-and-away Amazon, with a 36.9% share of the online market. No one else is even close. The next four are brick-and-mortar retailers with major online operations, but their combined market share adds up to only 12%. (Chart from CNBC)

(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, stocksandnews.com, marketwatch.com, wantchinatimes.com, BBC, 361capital.com, pensionpartners.com, cnbc.com, FactSet; Figs 1-5 source W E Sherman & Co, LLC)

The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market. The average ranking of Defensive SHUT sectors rose to 21.25 from 22.25, while the average ranking of Offensive DIME sectors slipped to 11.75 from 11.25. The Offensive DIME sectors continue to strongly lead Defensive SHUT sectors. Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

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If you have any questions about the FBIAS™ Fact-Based Investment Allocation Strategy portfolios, feel free to give your Anthony Capital, LLC advisor a call at 303-734-7178 or by scheduling a private virtual meeting/conference call. We work with clients from all over the country and would be happy to help.

You can also open up an online account by clicking HERE  at our preferred custodian, Interactive Brokers, LLC.

Sincerely,

Dave Anthony, CFP®

 

`

FBIAS™ Market Update for the week ending 12-16-2016

The very big picture:

In the “decades” timeframe, the question of whether we are in a continuing Secular Bear Market that began in 2000 or in a new Secular Bull Market has been the subject of hot debate among economists and market watchers since 2013, when the Dow and S&P 500 exceeded their 2000 and 2007 highs. The Bear proponents point out that the long-term PE ratio (called “CAPE”, for Cyclically-Adjusted Price to Earnings ratio), which has done a historically great job of marking tops and bottoms of Secular Bulls and Secular Bears, did not get down to the single-digit range that has marked the end of Bear Markets for a hundred years, but the Bull proponents say that significantly higher new highs are de-facto evidence of a Secular Bull, regardless of the CAPE. Further confusing the question, the CAPE now has risen to levels that have marked the end of Bull Markets except for times of full-blown market manias. See Fig. 1 for the 100-year view of Secular Bulls and Bears.

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Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best. The CAPE is at 27.92, little changed from the prior week’s 27.94, and now exceeding level reached at the pre-crash high in October, 2007. Since 1881, the average annual return for all ten year periods that began with a CAPE around this level have been just 3%/yr (see Fig. 2).

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This further means that above-average returns will be much more likely to come from the active management of portfolios than from passive buy-and-hold. Although a mania could come along and cause the CAPE to shoot upward from current levels (such as happened in the late 1920’s and the late 1990’s), in the absence of such a mania, buy-and-hold investors will likely have a long wait until the arrival of returns more typical of a rip-snorting Secular Bull Market.

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate. The U.S. Bull-Bear Indicator (see Fig. 3) is in Cyclical Bull territory at 60.94, up from the prior week’s 59.49.

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In the intermediate picture:

The Intermediate (weeks to months) Indicator (see Fig. 4) turned positive on November 10th. The indicator ended the week at 29, unchanged from the prior week. Separately, the Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – was positive entering October, indicating positive prospects for equities in the fourth quarter of 2016.

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Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2), whether we are in a new Secular Bull or still in the Secular Bear, the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns. The Bull-Bear Indicator (months to years) is positive (Fig. 3), indicating a potential uptrend in the longer timeframe. The Quarterly Trend Indicator (months to quarters) is positive for Q4, and the Intermediate (weeks to months) timeframe (Fig. 4) is positive. Therefore, with all three indicators positive, the U.S. equity markets are rated as Very Positive.

In the markets:

The major U.S. indexes ended mixed for the week as the Dow Jones Industrial Average inched closer to the 20,000 level. Large caps were roughly flat while smaller-cap indexes, which have outperformed large caps this year, fell back. The Dow Jones Industrial Average gained +86 points to end the week at 19,843, up +0.44%. The NASDAQ Composite was essentially flat, down -7 points (-0.13%) to 5,437. The LargeCap S&P 500 retreated just -1 point to 2,258, while the MidCap S&P 400 fell -1.49% and the Russell 2000 SmallCap index tumbled -1.7%. Transports and Utilities diverged, with Transports falling -2.5% and Utilities tacked on a second week of gains rising +1.8%.

In international markets, Canada’s TSX retreated -0.4% from last week’s big gain. In Europe, the United Kingdom’s FTSE tacked on a second week of gains, rising +0.8%. Across the Channel, France’s CAC 40 rose +1.45%, Germany’s DAX tacked on 1.79%, and Italy’s Milan FTSE was up a fourth straight week, surging +3.95%. In Asia, China’s Shanghai Composite plunged -3.4% erasing all of its gains for the year. In contrast, Japan’s Nikkei had its sixth straight week of gains rising -2.1%. Hong Kong’s Hang Seng also had a difficult week, falling -3.25%. As a group, developed markets (as measured by the MSCI Developed Markets Index) were down -1%, while emerging markets (as measured by the MSCI Emerging Markets Index) posted a steeper -2.8% loss.

In commodities, the Commodity Research Bureau’s CRB Index fell a second straight week down -0.29%. Gold fell for a 6th straight week, losing -$24.50 to close at $1,137.40 an ounce, down another -2.1%. As expected, Silver was weak as well, losing -4.4% to $16.22 an ounce. Oil attempted to break out of the relatively narrow trading range it has been in since May, rising +2.8% to $52.95 per barrel of West Texas Intermediate crude oil.

In U.S. economic news, the number of Americans who applied for new unemployment benefits fell by -4,000 to 254,000 last week, indicating the extremely low level of layoffs taking place in the economy. In addition, the number remains below the key 300,000 threshold that economists view as a healthy job market. Initial claims fell under 300,000 early last year and have remained below that level for 93 straight weeks, the longest streak since 1970. Continuing jobless claims, those already receiving benefits, rose 11,000 to 2.02 million in the week ended Dec. 3.

Sentiment among homebuilders soared to its highest level in 11 years as construction firms anticipated a less regulatory environment under the new Republican president. The National Association of Home Builders (NAHB) sentiment index surged to a reading of 70, the highest level since July 2005 and beating expectations by 7 points. NAHB attributed the gain to a “post-election bounce” in its statement. “Builders are hopeful that President-elect Trump will follow through on his pledge to cut burdensome regulations that are harming small businesses and housing affordability.” All three of the index’s sub-gauges showed improvement in December. Current conditions jumped +7 points to 76, while expectations for the upcoming 6 months rose +9 points to 78. Both of these measures were the highest since 2005. Prospective buyer traffic rose +6 points to 53, the first time that index has risen above 50 in more than 10 years. All readings over 50 indicate improvement.

Housing starts tumbled -18% in November, pulling away from the 9-year high set in October. Following the +25.5% surge in October, homebuilding activity fell more than expected in November due to broad weakness in construction activity. Groundbreaking on new housing projects dropped to a seasonally adjusted annual rate of 1.09 million units, according to the Commerce Department. Last month’s decline was the largest in almost 2 years as all four regions declined. Analysts had noted that the number of permits had been lagging starts, so the drop in starts was widely anticipated. However, following last month’s drop in groundbreaking activity, building permits are now leading starts, which is a positive sign for the housing market.

Retail sales growth remained positive in November, but had its smallest gain in 3 months. Sales were up just +0.1%, predominantly due to weakness in auto sales. Across the board, most retailers reported improved results last month. Home furnishings, groceries, gasoline, and restaurants were all notably strong, with restaurant sales posting their strongest numbers since February. Yet auto dealers have been forced to offer deeper discounts as demand appears to be leveling off after years of surging sales. Showroom revenue fell -0.5% last month. Auto sales account for about 20% of total retail sales, and without autos, sales rose +0.2% last month. Economists had forecast a gain of +0.3%.

Higher gas prices, more expensive rent, and an increase in medical bills all contributed to a higher level of inflation last month, according to the Bureau of Labor Statistics. The Consumer Price Index (CPI), rose +0.2% last month, matching forecasts. Inflation has been rising steadily since July, which is one of the reasons the Federal Reserve increased interest rates this week. Annualized, the CPI advanced +1.7% to its highest level in more than two years. The rate of inflation has almost doubled since this summer. Higher gas prices at the pump were responsible for most of the increase. On a positive note, prices for food have remained relatively low. The cost of food for November was flat for the fifth straight month.

Inflation at the wholesale level is also beginning to pick up according to the Labor Department’s Producer Price Index (PPI). The PPI recorded its biggest gain in five months, jumping +0.4% in November. The rise was largely due to a +0.5% increase in the cost of services, responsible for more than 80% of the move. Year-over-year the PPI rose +1.3%, the biggest gain since November of 2014. A rebound in the price of oil also contributed to the increase. Core PPI, a measure that strips out the often-volatile food, energy, and trade-margin components rose a lesser +0.2%. Core PPI is up +1.8% over the past year, the largest rise since mid-2014.

Industrial output in the U.S. fell last month, primarily due to a decline in electricity usage amid unseasonably warm weather. Industrial production, which measures everything made by factories, mines, and utilities, fell ‑0.4% from the previous month according to the Federal Reserve. It was the third decline out of the last four months, and in line with economists’ expectations. Industrial output had back-to-back gains in June and July, but has struggled since. Stephen Stanley, chief economist at Amherst Securities stated in a note, “The sector is still just treading water.” In addition, capacity utilization fell -0.4% to 75%–the lowest rate since March.

The Commerce Department reported that business inventories fell -0.2% in October, the biggest decline in a year, as companies continue to reduce stockpiles. This is viewed as a positive by analysts because investment in inventory to replenish shelves should contribute to fourth-quarter economic growth. Inventory investment in the third quarter added half a percentage point to the U.S. economy’s 3.2% annualized GDP growth rate. Economists had forecasted a drop of -0.1%.

On Wednesday, the Federal Reserve raised its key U.S. interest rate for the first time in a year, and signaled that they would adopt a more aggressive stance in 2017. In a move that was widely expected, the central bank raised its key short-term interest rate a quarter point to a range of 0.5%-0.75%. The vote was unanimous. In addition, the Fed’s so-called “dot plot” indicated the central bank plans three additional rate hikes next year instead of the prior forecast’s two. Myles Clouston, senior director of NASDAQ Advisory Services stated, “What they did was highly anticipated. There was a slight surprise in next year, looking at an additional rate hike. Overall, the Fed remains pretty steady overall, looking at gradual raises in interest rates in the long run.”

Two measures of manufacturing activity, in the Fed’s Philadelphia and New York regions, climbed this week in another indication of the optimism among corporations following the election of Donald Trump to President. The Philadelphia Fed’s manufacturing index jumped almost +14 points to 21.5—the highest in 2 years. The New York Fed’s Empire State index rose over +7 points to 9. In both gauges, readings over 0 indicate improving conditions. In both cases, measures of future business conditions also saw significant improvement. The Empire State’s future business conditions surged +20 points to 50.2, the highest level in almost 5 years. The Philadelphia Fed’s future general activity measure also rocketed up over +23 points to 52.6, its highest level since January of last year.

In international economic news, the Bank of Canada warned that rising household debt and the growing proportion of highly indebted households threaten the Canadian economy. The central bank is expecting new mortgage rules to help ease the continued rise in household indebtedness that exposes the country to economic shock. Bank of Canada governor Stephen Poloz told reporters that debt levels are a risk to the economy that could be dangerous in an economic crisis. He likened the situation to a “large tree that has a crack in it. The situation may improve or worsen over time, but there’s no immediate crisis until the wrong kind of storm comes along.”

Across the Atlantic, in the United Kingdom the Bank of England left base borrowing costs unchanged at record lows of 0.25% but warned that higher inflation and slower wage growth may weigh on consumers’ budgets next year. The Bank’s 9-member committee voted unanimously to keep rates on hold and maintain the current program of quantitative easing in place. In minutes of its final meeting of the year, the Monetary Policy Committee said it would continue to trade the effects of the weaker pound raising inflation against the prospects of slower economic growth and employment. For now, they saw little need to change policy as little had appeared to have changed since last month’s report.

On Europe’s mainland, France’s national statistics agency Insee reported a steady uptick in French economic growth at the end of the year and the start of next year could be weighed down by political uncertainties. The French economy is set to gather momentum after a weak summer, Insee said – just as the country braces for an unpredictable French presidential election, the effects of the UK’s “Brexit” decision, and the impact of Donald Trump’s election as U.S. President. Insee said economic growth will rebound to +0.4% quarter-on-quarter at the end of this year, and forecasts growth of +0.3% for the first quarter of 2017.

In Germany, the economy is ending the year on a strong footing with a key index indicating growth accelerated in the final quarter. IHS Markit said its composite Purchasing Managers Index (PMI) was 54.8 this month, capping the economy’s strongest three-month stretch since the second quarter of 2014. While the services PMI declined slightly, it still remained well above the key 50 level that indicates expansion. The manufacturing PMI rose to 55.5, the highest in almost 3 years. Markit economist Philip Leake stated the PMI “signaled a strong end to the year for German private-sector firms.”

In Italy, the world’s oldest bank is in trouble amid Italy’s political crisis. Banca Monte dei Paschi di Siena (MPS) has put forward a $5.3 billion recapitalization plan that was approved by shareholders but received skeptically by investors. The bank has asked the European Central Bank for a third extension until January 20, 2017 to raise more capital. The European Central Bank had rejected the request earlier this year, but extended it to the end of the year. MPS is Italy’s 3rd largest bank and the oldest surviving bank in the world, established in 1472. The centuries-old bank has outlived many dynasties and kingdoms and is now in trouble after more than 500 years of existence. When the European Banking Authority published the results of its EU-wide stress test of 51 banks in the bloc, MPS was rated the weakest lender.

In Asia, the U.S. Federal Reserve may have rudely interrupted the Chinese Communist Party’s annual economic planning meeting for the second year in a row. During last year’s Central Economic Work Conference, the Fed raised interest rates for the first time in a decade. This week, the U.S. central bank raised rates again, and hinted at three more increases next year. Over the past 10 years, high interest rates in China compared with rock-bottom yields in the United States drew foreign capital into China. This fueled China’s renminbi decade-long currency appreciation versus the U.S. dollar. But those money flows are now moving in reverse as the interest rate spread narrows between the two. The move puts Beijing in a difficult position as Chinese officials attempt to stop the fall of the renminbi against the dollar without negatively impacting growth or raising Chinese companies’ already high debt burdens.

The Bank of Japan (BOJ) is likely to give a more optimistic view of the economy at next week’s rate review, sources say. A pickup in emerging Asian demand along with positive signs in private consumption improves the odds for a solid, export-driven recovery. An upgrade from the BOJ would reinforce market expectations that the central bank will hold off on further stimulus measures in the near future. “Global economic conditions are improving, and consumption appears to be picking up,” said one of the sources. “All in all, we’re seeing more bright signs for the economy.”  The BOJ’s nine-member board will reach a final decision after scrutinizing its closely-watched “Tankan” quarterly business sentiment survey.

Finally, as the Dow closes in on the 20,000 milestone, Mark DeCambre at MarketWatch (www.marketwatch.com) penned an article that asks the question, is reaching 20,000 really that significant? After all, the Dow Jones Industrial Average represents only 30 stocks out of the thousands that make up the broader market. Outsized moves in any of the 30 components can have a very big effect in the overall index. As an example, the latest surge in Goldman Sachs has contributed about a third of the Dow’s recent 1,000 point move. In addition, 1000-point moves aren’t as meaningful as they used to be. When the Dow moved from 1,000 to 2,000 it was a 100% move, and the move from 4,000 to 5,000 was a 25% move. But a 1,000 point move from 19,000 to 20,000 represents just a 5.3% advance.

Whether Dow 20,000 will be a ceiling or another milestone remains to be seen. But in any event, this 1,000 point marker is less of a Herculean feat than ever before, as the following chart illustrates.

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(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, stocksandnews.com, marketwatch.com, wantchinatimes.com, BBC, 361capital.com, pensionpartners.com, cnbc.com, FactSet; Figs 1-5 source W E Sherman & Co, LLC)

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The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market. The average ranking of Defensive SHUT sectors rose slightly to 22.25 from 22.50, while the average ranking of Offensive DIME sectors dropped to 11.25 from 10.00. The Offensive DIME sectors continue to strongly lead Defensive SHUT sectors. Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

If you have any questions about the FBIAS™ Fact-Based Investment Allocation Strategy portfolios, feel free to give your Anthony Capital, LLC advisor a call at 303-734-7178 or by scheduling a private virtual meeting/conference call. We work with clients from all over the country and would be happy to help.

 

You can also open up an online account by clicking HERE at our preferred custodian, Folio Institutional, LLC.

 

Sincerely,

Dave Anthony, CFP®

FBIAS™ Market Update for the week ending 12-9-2016

The very big picture:

In the “decades” timeframe, the question of whether we are in a continuing Secular Bear Market that began in 2000 or in a new Secular Bull Market has been the subject of hot debate among economists and market watchers since 2013, when the Dow and S&P 500 exceeded their 2000 and 2007 highs. The Bear proponents point out that the long-term PE ratio (called “CAPE”, for Cyclically-Adjusted Price to Earnings ratio), which has done a historically great job of marking tops and bottoms of Secular Bulls and Secular Bears, did not get down to the single-digit range that has marked the end of Bear Markets for a hundred years, but the Bull proponents say that significantly higher new highs are de-facto evidence of a Secular Bull, regardless of the CAPE. Further confusing the question, the CAPE now has risen to levels that have marked the end of Bull Markets except for times of full-blown market manias. See Fig. 1 for the 100-year view of Secular Bulls and Bears.

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Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best. The CAPE is at 27.94, up from the prior week’s 27.10, and now exceeding level reached at the pre-crash high in October, 2007. Since 1881, the average annual return for all ten year periods that began with a CAPE around this level have been just 3%/yr (see Fig. 2).

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This further means that above-average returns will be much more likely to come from the active management of portfolios than from passive buy-and-hold. Although a mania could come along and cause the CAPE to shoot upward from current levels (such as happened in the late 1920’s and the late 1990’s), in the absence of such a mania, buy-and-hold investors will likely have a long wait until the arrival of returns more typical of a rip-snorting Secular Bull Market.

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate. The U.S. Bull-Bear Indicator (see Fig. 3) is in Cyclical Bull territory at 59.49, up from the prior week’s 57.57.

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In the intermediate picture:

The Intermediate (weeks to months) Indicator (see Fig. 4) turned positive on November 10th. The indicator ended the week at 29, unchanged from the prior week. Separately, the Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – was positive entering October, indicating positive prospects for equities in the fourth quarter of 2016.

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Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2), whether we are in a new Secular Bull or still in the Secular Bear, the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns. The Bull-Bear Indicator (months to years) is positive (Fig. 3), indicating a potential uptrend in the longer timeframe. The Quarterly Trend Indicator (months to quarters) is positive for Q4, and the Intermediate (weeks to months) timeframe (Fig. 4) is positive. Therefore, with all three indicators positive, the U.S. equity markets are rated as Very Positive.

In the markets:

The post-election rally continued for a fifth straight week, bringing all the major indexes to a series of record highs. The Dow Jones Industrial Average rallied over +500 points to 19,756, up +3.06%. Similarly, the tech-heavy NASDAQ Composite gained over +180 points to close at 5,444.50, up +3.59%. Small- and Mid- cap indexes edged LargeCaps again as the MidCap S&P 400 index and SmallCap Russell 2000 surged +4.2% and +5.6% respectively, while the LargeCap S&P 500 gained +3.08%. Some analysts, invoking the “Dow Theory”, speculated that the strong returns were due at least in part to the new high set by the Dow Transports. The venerable “Dow Theory” (http://www.investopedia.com/terms/d/dowtheory.asp) suggests that a new high in the Dow Industrials – confirmed by the Transports also setting a new high – signifies that a Bull market is in effect and the trend should continue.

Markets were green around the world as well. Canada’s TSX reached a new high for the year gaining +1.7%. In Europe, the United Kingdom’s FTSE rallied +3.3%, but even substantial moves were on the mainland. France’s CAC 40 and Germany’s DAX surged +5.19% and +6.57%, respectively. Italy’s Milan FTSE shrugged off predictions of economic doom following its controversial vote last Sunday and catapulted an amazing +7.1%. Asian markets were less unanimous: China’s Shanghai Composite ended slightly down, -0.34%, while Japan’s Nikkei tacked on a 5th week of gains, rising +3.1%. As a group, emerging markets (as measured by the MSCI Emerging Markets Index) rose +2.99%, while developed markets (as measured by the MSCI Developed Markets Index) gained +3.54%.

In commodities, precious metals were mixed this week. Gold lost -$15.90 an ounce to end the week at $1161.90, down another -1.35%, while Silver rose +0.8% to close at $16.97 an ounce. The industrial metal copper, seen as an indicator of global economic health, consolidated recent gains while rising +0.86%. Oil continued to trade in a narrow range, losing -$0.18 to end the week at $51.50 per barrel of West Texas Intermediate.

In U.S. economic news, the number of Americans who applied for new unemployment benefits fell by -10,000 to 258,000 last week, according to the Labor Department. The pace of layoffs has remained near its lowest level in more than 40 years and well below the key 300,000 threshold analysts use to indicate a healthy jobs market. The less-volatile 4-week moving average of claims, seen as a more accurate measure of labor-market trends, rose by +1,000 to 252,000. Continuing claims, those people already receiving unemployment benefits, declined by ‑79,000 to 2.01 million the previous week. Job Openings – another important labor market indicator – also remained strong. The Labor Department reported there were 5.5 million openings in October, down -2% from the previous month, but near the highest levels in over 14 years.

America’s service industries grew last month at the fastest pace since the fall of last year, putting the nation’s biggest economic sector on a strong footing. The Institute for Supply Management’s (ISM) non-manufacturing index jumped to 57.2 in November, a gain of +2.4 points. The reading exceeded all analysts’ forecasts, where the median forecast called for 55.5. Anthony Nieves, Chairman of the ISM non-manufacturing survey reported “This last quarter is having the year finish up pretty strong…I don’t project that December is going to be much different.” The latest reading puts the ISM services gauge higher than the year-to-date average of 54.5.

In U.S. manufacturing, the Commerce Department reported factory orders jumped +2.7% in October. It was the fourth consecutive monthly gain and the largest rise since the beginning of last year. Of note, the annualized 12-month rate of change is now back in positive territory after being negative the last two years. However, most of the increase was due to a spike in the civilian aircraft sector (i.e., “Boeing”). Orders of non-defense capital goods, ex-aircraft, were up only +0.2%.

Consumer borrowing continued to grow in October, but at the slowest rate since June. Total consumer credit rose +$16 billion in October to a seasonally-adjusted $3.7 trillion, according to the Federal Reserve. That brings the annual growth rate to 5.1%. Though strong, the increase was below economists’ estimates for a +$19.3 billion rise in consumer credit. Consumer spending slowed in October, from a +0.7% gain the previous month to +0.3%. The main source of credit growth was non-revolving credit, which covers loans such as education and vehicles. Revolving credit, made up of mostly credit card loans, slowed to a +2.9% annual growth rate, down from a +5% rate of change in September.

Confidence among Americans soared following the election, according to the University of Michigan’s Consumer Sentiment survey. The index surged +4.5 points to 98.0, just 0.1 point away from the recovery cycle high last touched in 2015, and before that 2004. The enthusiasm of consumers surveyed surprised economist. Consumer views of the current state of the economy gained +4.5 points, and their views of the economic outlook rose +4.3 points. Survey director Richard Curtin wrote, “When asked what news they had heard of recent economic developments, more consumers spontaneously mentioned the expected positive impact of new economic policies than ever before recorded in the long history of the surveys.”

The U.S. trade deficit widened to a four-month high in October as American companies imported more equipment and consumer goods and overseas sales weakened. The Commerce Department reported the gap rose by over $10 billion to $42.6 billion from the prior month. The increase of +17.8% from September was the largest since the spring of 2015. Stronger demand for imported merchandise indicates that trade will add less to U.S. growth readings after 3rd quarter net exports contributed the most since the end of 2013. In addition, the latest rally in the U.S. dollar could also weigh on exports of American-made goods as they become more expensive overseas.

In international economic news, the Bank of Canada held rates steady at 0.5% citing a “significant” amount of slack in the Canadian economy. The central bank said that while the global economy has strengthened, it still faces “undiminished” uncertainty, especially among its major trading partners. The bank noted Canada’s healthy rebound in the third quarter and predicted that the nation would see “more-moderate growth” over the final three months of 2016. The decision to hold the rate steady was widely anticipated by market watchers.

Despite a turbulent year politically and dire warnings from mainstream economists on its Brexit decision, the United Kingdom will finish the year as the fastest-growing economy in all of the G7 group of major economies. According to the Purchasing Managers’ Index (PMI), the UK’s November services sector reading was 55.2, the highest since January and up +0.8 point from October. Experts say that Britain’s economy is on course to grow +0.5% in the final quarter of the year, which would put Britain in the forefront of the world’s leading economies. Chris Williamson of IHS Markit, which compiled the PMI survey, said “The further upturn in the vast services sector shows that the pace of UK economic growth remains resiliently robust in the fourth quarter, despite ongoing uncertainty.”

On Europe’s mainland, French President Francois Hollande became the first French President since 1958 to not seek re-election. Polls show that he is very unpopular. His exit clears the way for Prime Minister Manuel Valls to run as an economic reformer within the Socialist party. The center-right Republicans have chosen Francois Fillon as their candidate and the far-right National Front has chosen Marine Le Pen. Other potential contenders according to the polls include centrists Emmanuel Macron and Francois Bayrou. French voters will go to the polls for their presidential election on April 23, 2017.

The German central bank (the Bundesbank) raised its economic forecasts for Germany for this year and next. German households continue to take advantage of the strong labor market and rising incomes. Germany’s economy is now expected to grow by +1.8% this year and next according to the bank – an upward revision of +0.2% from June’s forecast. The optimistic near-term outlook for Europe’s biggest economy came after the ECB surprised markets by saying it would slow the pace of its asset purchases aimed at supporting weaker Eurozone economies.

In Italy, the International Monetary Fund called on the country to continue to make economic reforms despite Sunday’s failure of a government-backed referendum. The remarks followed an announcement from Moody’s ratings service that it was downgrading its outlook for Italy’s sovereign debt from stable to negative due to Italy’s “No” vote on proposals to modify the constitution. Italian voters rejected measures to expedite economic reforms sought by Prime Minister Matteo Renzi, who has since announced his resignation.

In Asia, the U.S. has decided it won’t grant China the highly sought after official “market economy status” that Beijing thinks it deserves. In a move that’s sure to raise tensions between the two powers, a senior U.S. administration official stated China’s failure to allow a market-driven economy have fueled trade tensions. “If China wants to benefit from treatment as a market-economy country, it must change its own practices to let the market play a decisive role in the economy,” the official said. Market economy status would benefit China by requiring global trade regulators to compare the price of Chinese exports to its domestic market (instead of higher-priced third countries) in anti-dumping cases, thus limiting their ability to impose tariffs on Chinese goods.

The Japanese economy grew by +$175 billion overnight (an amount equivalent to New Zealand’s economy), as the government adopted a new accounting standard known as the System of National Accounts 2008 (SNA). Using the new standard, research and development expenses will be included in the sum of all goods and services produced in the nation. Other nations including the U.S., the U.K., and Canada have already adopted SNA. However, unlike the U.K. which uses estimates of illicit drug use and prostitution in its economic number, Japan won’t be including illegal activities in its measurements.

Finally, Yale economist Robert Shiller appeared on CNBC this past week with a warning that his key measure of market valuation is at levels that have preceded most of the major crashes of the last 100 years. Shiller’s “cyclically-adjusted P/E” or CAPE ratio, now stands at 27.94, a level that has been exceeded only in the 1929 mania and the 2000 dot.com rally. Being extra-cautious with his wording, Dr. Shiller said “It’s not a good time, but I’m not saying to panic”. This commentary tracks the level of the CAPE ratio every week in “The Very Big Picture” section above. The chart below shows graphically that the CAPE is in territory only seen twice in more than a century.

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(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, stocksandnews.com, marketwatch.com, wantchinatimes.com, BBC, 361capital.com, pensionpartners.com, cnbc.com, FactSet; Figs 1-5 source W E Sherman & Co, LLC)

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The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market. The average ranking of Defensive SHUT sectors rose slightly to 22.50 from 22.75, while the average ranking of Offensive DIME sectors rose slightly to 10.00 from 10.25. The Offensive DIME sectors continue to strongly lead Defensive SHUT sectors. Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

If you have any questions about the FBIAS™ Fact-Based Investment Allocation Strategy portfolios, feel free to give your Anthony Capital, LLC advisor a call at 303-734-7178 or by scheduling a private virtual meeting/conference call. We work with clients from all over the country and would be happy to help.

 

You can also open up an online account by clicking HERE at our preferred custodian, Folio Institutional, LLC.

 

Sincerely,

Dave Anthony, CFP®

FBIAS™ Market Update for the week ending 12-2-2016

The very big picture:

In the “decades” timeframe, the question of whether we are in a continuing Secular Bear Market that began in 2000 or in a new Secular Bull Market has been the subject of hot debate among economists and market watchers since 2013, when the Dow and S&P 500 exceeded their 2000 and 2007 highs. The Bear proponents point out that the long-term PE ratio (called “CAPE”, for Cyclically-Adjusted Price to Earnings ratio), which has done a historically great job of marking tops and bottoms of Secular Bulls and Secular Bears, did not get down to the single-digit range that has marked the end of Bear Markets for a hundred years, but the Bull proponents say that significantly higher new highs are de-facto evidence of a Secular Bull, regardless of the CAPE. Further confusing the question, the CAPE now has risen to levels that have marked the end of Bull Markets except for times of full-blown market manias. See Fig. 1 for the 100-year view of Secular Bulls and Bears.

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Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best. The CAPE is at 27.10, down from the prior week’s 27.40, and only a little lower than the level reached at the pre-crash high in October, 2007. Since 1881, the average annual return for all ten year periods that began with a CAPE around this level have been just 3%/yr (see Fig. 2).

image

This further means that above-average returns will be much more likely to come from the active management of portfolios than from passive buy-and-hold. Although a mania could come along and cause the CAPE to shoot upward from current levels (such as happened in the late 1920’s and the late 1990’s), in the absence of such a mania, buy-and-hold investors will likely have a long wait until the arrival of returns more typical of a rip-snorting Secular Bull Market.

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate. The U.S. Bull-Bear Indicator (see Fig. 3) is in Cyclical Bull territory at 57.57, down slightly from the prior week’s 57.72.

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In the intermediate picture:

The Intermediate (weeks to months) Indicator (see Fig. 4) turned positive on November 10th. The indicator ended the week at 29, unchanged from the prior week. Separately, the Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – was positive entering October, indicating positive prospects for equities in the fourth quarter of 2016.

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Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2), whether we are in a new Secular Bull or still in the Secular Bear, the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns. The Bull-Bear Indicator (months to years) is positive (Fig. 3), indicating a potential uptrend in the longer timeframe. The Quarterly Trend Indicator (months to quarters) is positive for Q4, and the Intermediate (weeks to months) timeframe (Fig. 4) is positive. Therefore, with all three indicators positive, the U.S. equity markets are rated as Very Positive.

In the markets:

U.S. stocks broke a string of three consecutive weeks of gains with most indexes turning lower for the week. As has been the case most of the year, the losses were unevenly distributed. The Dow Jones Industrial Average outperformed the other indexes, helped by strong performance in bank, energy, and health care stocks. For the week, the Dow Jones Industrial Average added +18 (+0.1%) points to close at 19,170. The technology-heavy NASDAQ Composite fell over -143 points to 5,255, down -2.65%. Large caps outperformed mid and small caps. The LargeCap S&P 500 index ended down -0.97%, while the MidCap S&P 400 gave up -0.98%, while the SmallCap Russell 2000 dropped the most, at -2.45%.

In international markets, Canada’s TSX ended down slightly, -0.15%. In Europe, the United Kingdom’s FTSE gave up -1.6%. On Europe’s mainland, both France’s CAC 40 and Germany’s DAX were also down, -0.47% and -1.74%, respectively. However, Italy’s Milan FTSE had a second week of gains, rallying +3.46%. In Asia, major markets were mixed. China’s Shanghai Composite fell -0.55%, while Japan’s Nikkei rose +0.24%. Hong Kong’s Hang Seng was also down, pulling back -0.7%. As a whole, developed markets were down -0.1%, while emerging markets gave up -0.4%. As a group, emerging markets (as measured by the MSCI Emerging Markets Index) fell -0.4%, while developed markets (as measured by the MSCI Developed Markets Index) dropped just -0.1%.

Precious metals stabilized a bit after 3 weeks of heavy losses. Gold lost only a ‑$0.60 to end the week at $1,177.80 an ounce, and silver managed a gain of +2.2%, rising +$0.36 to $16.83 an ounce. The industrial metal copper, seen by some as an indicator of global economic health, retreated -1.6% after rallying 4 out of the 5 past weeks. The big commodity news of the week was in energy, where crude oil surged +$5.62 a barrel to $51.68, a weekly gain of +12.2%!

The month of November was great for the U.S., ok for Canada, and not so great for the rest of the world. In the U.S., SmallCaps ripped higher with a +10.99% gain, MidCaps followed at +7.82%, the LargeCap S&P 500 at +3.42%, and the NASDAQ Composite brought up the rear at a still-respectable +2.59%. Canada’s TSX tacked on an additional +2.00% on top of very nice year-to-date gains. But Emerging and Developed international markets didn’t participate in the gains, as the MSCI Emerging Markets Index dropped -4.42% and the MSCI Developed Markets Index lost -1.78%.

In U.S. economic news, initial claims for unemployment rose 17,000 to 268,000 according to the Labor Department. Initial claims have remained below the key 300,000 threshold for 91 straight weeks, the longest stretch since 1970. Consensus forecasts had been for 250,000 claims. The smoothed 4-week moving average of claims, used by analysts to smooth out volatility, rose by 500 to 251,500. Continuing claims, those people who are already collecting unemployment benefits rose 38,000 to 2.08 million.

The U.S. jobless rate hit a 9-year low of 4.6% last month, falling much more than expected as the economy added 178,000 new jobs last month. Gus Faucher, economist at PNC Financial Services Group said “The economy is close to full employment, and the Fed wants to start gradually raising interest rates before the economy reaches full employment and wage pressures accelerate too much and spark much higher inflation.” However, behind the headline number was the fact the unemployment rate dropped because that the civilian labor force shrunk by 226,000, as more people dropped out of the workforce. Many analysts prefer a broader measure of unemployment, known as the U6 rate. That rate fell to 9.3% from 9.5%. This measure includes part time workers looking for a full-time position, and job seekers who have recently given up looking for work.

Payrolls processor ADP reported private employers added 216,000 jobs last month. This was much higher than the consensus forecast of 160,000 jobs. The strong number prompted a response from Mark Zandi, chief economist of Moody’s Analytics who remarked “Mr. Trump is inheriting a strong economy.” In the details of the report, numbers were strong across the board. Small businesses added 37,000 jobs, medium businesses added 89,000, and large businesses added 90,000 workers. But, as has become the norm in this post-recession economy, all the gains were concentrated in the services sector. Goods-producing categories like mining and manufacturing were negative.

In real estate, pending home sales rose slightly in October, indicating that growth in the housing market may be tapering. The National Association of Realtors’ (NAR) index ticked up +0.1% to 110.0, economists had forecast a gain of +0.8%. The index forecasts future sales by tracking real estate transactions in which a contract has been signed, but the deal has not yet closed. Pending sales declined in only one region – the South – where the index fell ‑1.3%. The Northeast, Midwest, and West saw gains of +0.4%, +1.6%, and +0.7%, respectively. Indices for all regions are higher across-the-board compared to the same period last year. According to the NAR, roughly 40% of home sales were at or above list price in October. NAR Chief Economist Lawrence Yun stated, “Low supply has kept prices elevated all year and has put pressure on the budgets of buyers.” In addition, last month’s sales of previously-owned homes were at their highest levels since before the housing crash.

The S&P/Case-Shiller 20-city home price index was up +0.1% in the 3rd quarter, up +5.1% from the year-ago period. As in previous readings, metro areas in western states were the strongest. Seattle, Portland, and Denver all saw strong gains, up +11%, +10.9%, and +8.7% respectively. However, while the year-over-year numbers are strong, the month-to-month numbers have weakened, leading some analysts to suggest that things may be cooling off a bit. San Francisco, one of the fastest rising markets for the past few years, actually declined -0.4% for the month, and Seattle’s home prices were unchanged for the month.

According to the Commerce Department, the U.S. economy grew at the fastest pace in over 2 years in the 3rd quarter as both consumers and government increased their spending and exports surged. The U.S. Gross Domestic Product grew at a +3.2% annual rate in its second reading. The reading was the strongest since the 2nd quarter of 2014 and beat economists’ estimates of +3.1%. Supporting the strong reading was an increase in consumer spending, which accounts for about two-thirds of the economy. Spending rose +2.8% – stronger than the original estimate of +2.1%. In addition, business investments in structures like offices and factory buildings surged +10.1%, almost double the original +5.4% estimate. Corporate profits were also strong, rising +6.6% and after-tax profits surged +7.6% (following a -13.3% plunge over the previous year and a half). Exports of goods are the strongest in three years, while imports were down slightly from the previous quarter.

The Federal Reserve’s latest Beige Book report revealed that there was no sign of any postelection euphoria among the surveyed business contacts. The Beige Book is a culmination of surveys from each Federal Reserve regional bank to its contacts in finance, business, academia, market experts, and other sources. In the report, retails sales remained mixed—sales were higher for apparel and home furnishings, but vehicle sales were down in “most” Fed districts. Wage growth remained “modest, on balance” according to the report, a trend which has been in place most of the year.

Confidence among American consumers jumped to its highest level since 2007, according to the Conference Board. The consumer-confidence index rose to 107.1, an increase of +6.3 points from October. Economists had only expected a reading of 102. Stephen Stanley, chief economist at Amherst Pierpont stated that the data was consistent with a pattern of optimism following elections. “This campaign was so acrimonious that having the election over may have had people feeling better,” he said. The present situation index, which measures how consumers feel about their current conditions, gained +7.3 points to 130.3. The future expectations index also improved, rising +5.7 points to 91.7.

The incomes of Americans rose in October at the fastest rate in 6 months according to the Commerce Department. The positive result should make for a good holiday shopping season economists say. Consumer spending rose +0.3% in October, slightly less than forecasts of +0.5%. Personal incomes rose +0.6%, beating expectations by +0.2%. Richard Moody, chief economist at Regions Financial remarked “Solid income growth sets the stage for continued growth in consumer spending over coming months.” Consumer spending makes up about two-thirds of the nation’s gross domestic product (GDP). That fact makes this reading very significant.

Economic activity in the Chicago-area surged to its highest level in almost two years last month, further evidence that the manufacturing sector may have bottomed. The Chicago Purchasing Managers Index surged +7 points to 57.6, its highest level since January 2015 according to the Institute of Supply Management. Economists had been expecting a reading of 52. Shaily Mittal, senior economist at MNI Indicators stated “The November reading for the Business Barometer marked the sixth month of expansionary business activity in the U.S. Strength in orders, a recovery in oil prices and the stronger dollar have all impacted businesses with varying degrees.” Survey respondents were reportedly optimistic about 2017.

The Institute for Supply Management (ISM) said its manufacturing index rose to its highest level in 5 months. The ISM Manufacturing index rose to 53.2, up +1.3 points from October and beating the consensus forecast of 52.5. Readings over 50 indicate more companies are expanding instead of contracting. Rob Martin, an economist at Barclays said, “Overall, this morning’s report supports our view that manufacturing is likely to stabilize after the weakness early in the year.” In addition, ISM’s new orders index rose to 53, up +0.9 point and indexes for production and exports also showed strength. Of the 18 manufacturing industries in the survey, 11 reported growth.

Dallas Fed President Robert Kaplan stated that the Federal Reserve should take a “wait-and-see” stance towards the economic ideas of President-elect Donald Trump because some of the policies under discussion could boost growth, while others may slow the economy. Kaplan was in agreement with the market consensus that the U.S. central bank will raise interest rates at its policy meeting later this month. Analysts note that odds of a rate hike at the next Federal Reserve meeting are around 90%. In addition, Mr. Kaplan said there would likely be more rate hikes over the coming 12 months, but that the path of the hikes would be “somewhat shallower” than prior cycles.

Inflation continues to close in on the Federal Reserve’s 2% target. By the personal-consumption expenditures (PCE) measurement, inflation rose +1.4% over the past year, the highest rate in 2 years. Excluding the often volatile food and energy categories, core PCE grew +1.7% over the past year. This is an increase of +0.4% from this time last year. Earlier this week, the government raised its estimates for wages and salary income in the second and third quarters of this year. Andrew Schneider, economist at BNP Paribas said “This extra household income could explain why consumption growth is holding up in the fourth quarter, despite rising inflation.”

The Canadian economy grew +0.9% in the 3rd quarter rebounding from the 2nd quarter slump due to the Alberta wildfires. Annualized, GDP grew at a rate of 3.5%. StatsCan reported that growth was driven by a +6.1% increase in the energy sector. Exports of goods and services were also strong, rising +2.2% during the 3rd quarter. The quarter was a big turnaround from the second quarter which had contracted by -1.3%. The result exceeded the average estimate of 22 economists surveyed by Bloomberg who had expected an annualized growth rate of +3.38%.

Across the Atlantic in the United Kingdom, according to the Organization for Economic Cooperation and Development the UK will outgrow and outperform the Eurozone over the next decade. The OECD revised its forecast for Britain up to +2% this year, and up +1.2% in 2017. The group believes that the UK will be granted the best possible “most favored nation” status with other EU countries after its EU exit in 2019. The predictions are another blow to the many economists and established institutions who had very vocally and incorrectly predicted that a Brexit vote would cast the UK into an economic abyss.

In France, former Prime Minister Francois Fillon pledged deep economic reforms after winning France’s conservative party presidential nomination. Fillon is an outspoken right-wing candidate who has advocated slashing public sector jobs and deregulating the economy. He has promised to raise the retirement age to 65 and ending early pension rights for many in the state sector. Fillon defeated Alain Juppe in France’s conservative presidential primary with a substantial 66% of the votes.

Italian premier Matteo Renzi has promised to resign if he loses this weekend’s referendum. The referendum seeks to overhaul the country’s legislature, altering the composition of parliament, the way laws are passed, and the balance of power between the country’s central government and its 20 regions. If the referendum fails, the Constitution will stay as it is. Some believe that a ‘No’ win would be a third “anti-establishment revolt” in 2016, following the Brexit vote and election of Donald Trump in the U.S., that could lead to a banking crisis and the exit of Italy from the Eurozone.

Japan’s unemployment rate held steady in October as the availability of jobs improved and household spending fell at a slower rate. Hiroshi Miyazaki, economist at Mitsubishi UFJ Morgan Stanley Securities said, “The labor market has been improving for a while now, and this is starting to lift consumer sentiment.” Japan’s unemployment rate has been falling partly due to a shrinking labor force. The seasonally-adjusted unemployment rate was 3%, in-line with estimates. Data this week showed consumers increased spending on domestic travel and furniture last month. Household spending was down -0.4% in October, but it was less than the estimated ‑0.6%.

Finally, a team at Goldman Sachs sent out a survey to analysts immediately after the Presidential election, asking what they thought the election of Donald Trump might mean for the industries they covered. Turns out, they were quite optimistic. Avisha Thakkar, leader of the survey team, wrote “While their responses suggest that there is still uncertainty about the sector-level impact, the majority of sectors are anticipating favorable effects.” Respondents stated that expectations of lower tax rates and economic stimulus were the chief reasons for their optimism.

A minority of analysts were not so hopeful. Those that cover sectors such as autos, aerospace, clean energy and agribusiness said they expected the election to weigh negatively on their sectors.

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(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, stocksandnews.com, marketwatch.com, wantchinatimes.com, BBC, 361capital.com, pensionpartners.com, cnbc.com, FactSet; Figs 1-5 source W E Sherman & Co, LLC)

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The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market. The average ranking of Defensive SHUT sectors rose slightly to 22.75 from 23.00, while the average ranking of Offensive DIME sectors rose to 10.25 from 11.25. The Offensive DIME sectors continue to strongly lead Defensive SHUT sectors. Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

If you have any questions about the FBIAS™ Fact-Based Investment Allocation Strategy portfolios, feel free to give your Anthony Capital, LLC advisor a call at 303-734-7178 or by scheduling a private virtual meeting/conference call. We work with clients from all over the country and would be happy to help.

 

You can also open up an online account by clicking HERE at our preferred custodian, Folio Institutional, LLC.

 

Sincerely,

Dave Anthony, CFP®

FBIAS™ market update for the week ending 11/25/2016

The very big picture:

In the “decades” timeframe, the question of whether we are in a continuing Secular Bear Market that began in 2000 or in a new Secular Bull Market has been the subject of hot debate among economists and market watchers since 2013, when the Dow and S&P 500 exceeded their 2000 and 2007 highs. The Bear proponents point out that the long-term PE ratio (called “CAPE”, for Cyclically-Adjusted Price to Earnings ratio), which has done a historically great job of marking tops and bottoms of Secular Bulls and Secular Bears, did not get down to the single-digit range that has marked the end of Bear Markets for a hundred years, but the Bull proponents say that significantly higher new highs are de-facto evidence of a Secular Bull, regardless of the CAPE. Further confusing the question, the CAPE now has risen to levels that have marked the end of Bull Markets except for times of full-blown market manias. See Fig. 1 for the 100-year view of Secular Bulls and Bears.

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Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best. The CAPE is at 27.40, up from the prior week’s 27.01, and only a little lower than the level reached at the pre-crash high in October, 2007. Since 1881, the average annual return for all ten year periods that began with a CAPE around this level have been just 3%/yr (see Fig. 2).

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This further means that above-average returns will be much more likely to come from the active management of portfolios than from passive buy-and-hold. Although a mania could come along and cause the CAPE to shoot upward from current levels (such as happened in the late 1920’s and the late 1990’s), in the absence of such a mania, buy-and-hold investors will likely have a long wait until the arrival of returns more typical of a rip-snorting Secular Bull Market.

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate. The U.S. Bull-Bear Indicator (see Fig. 3) is in Cyclical Bull territory at 57.72, up from the prior week’s 55.40.

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In the intermediate picture:

The Intermediate (weeks to months) Indicator (see Fig. 4) turned positive on November 10th. The indicator ended the week at 29, up from the prior week’s 27. Separately, the Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – was positive entering October, indicating positive prospects for equities in the fourth quarter of 2016.

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Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2), whether we are in a new Secular Bull or still in the Secular Bear, the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns. The Bull-Bear Indicator (months to years) is positive (Fig. 3), indicating a potential uptrend in the longer timeframe. The Quarterly Trend Indicator (months to quarters) is positive for Q4, and the Intermediate (weeks to months) timeframe (Fig. 4) is positive. Therefore, with all three indicators positive, the U.S. equity markets are rated as Very Positive.

In the markets:

This week, the Dow Jones Industrial Average, NASDAQ, and Russell 2000 all hit all-time highs together for the first time since 1999. Major indexes were strong both at home and around the world. The Dow Jones Industrial Average gained +284 points to close at 19,152, up +1.5%. The tech-heavy NASDAQ Composite rose +77 points to end the week at 5398, up +1.45%. Smaller market caps outperformed large caps for the third consecutive week, as the MidCap S&P 400 index rose +2.17% and the SmallCap Russell 2000 added +2.4%, while the LargeCap S&P 500 gained +1.44%. Of note, both the Dow Jones Transports and Utilities indexes had strong weeks. The defensive Utilities sector joined the fun after having been beaten down since the election, gaining +2%.

Canada’s TSX rose a third straight week, up +1.4%. Across the Atlantic, the United Kingdom’s FTSE also had its third week of gains, up +0.96%. On Europe’s mainland, France’s CAC 40 rose +1%, while Germany’s DAX gained a third of a percent. Italy’s Milan FTSE added +1.5%. Major Asian markets were strong across the board. China’s Shanghai Composite rose +2.16%, Japan’s Nikkei surged +2.3%, and Hong Kong’s Hang Seng index gained +1.7%. Overall, emerging markets as a group (as measured by the MSCI Emerging Markets Index) edged developed markets as a group (as measured by the MSCI Developed Markets Index), with emerging markets rising +1.9%, while developed gained +1.1%.

In commodities, oil plunged almost -4% on Friday, but for the week managed to end down only -0.65%. Precious metals had a third consecutive down week as Gold fell -2.5% to close at $1,178.40 an ounce while Silver dropped ‑0.93% to $16.47. The industrial metal copper, an indicator of global economic activity, had a big week by surging over +8%

In U.S. economic news, the number of Americans who applied for new unemployment benefits rose by 18,000 to 251,000, according to the Labor Department. The increase comes one week after initial claims fell to a 43-year low. Economists had forecast initial claims to rise to a seasonally adjusted 248,000. Most of the increase appears to have come from Illinois and California. Initial claims have remained below the key 300,000 threshold for 90 straight weeks, the longest streak since 1970. The economy has been adding about 180,000 new jobs a month this year, and the unemployment rate remains at a low 4.9%.

Existing home sales soared to almost a 10-year high last month, further evidence of the strong demand supporting the housing market. According to the National Association of Realtors, existing home sales ran at a seasonally adjusted annual rate of 5.6 million, an increase of +2% from September and +5.9% higher than a year ago. Forecasts had been for only a gain of 5.4 million. It was the fastest rate of sales since February of 2007. All four regions of the country recorded gains. In addition, it was the 17th straight month of yearly inventory declines with 4.3% fewer homes on the market than in October of last year. With inventory shrinking, it’s no surprise that the median sale price ratcheted up to $232,200, +6% higher than last year.

In contrast to existing home sales, new single-family home sales actually fell -1.9% to 563,000 in October according to the Commerce Department. The number missed economists’ expectations of 595,000. Nevertheless, October’s sales were +17.8% higher than October of 2015, and year to date sales in 2016 are +12.6% higher than this time last year. The median sales price last month was $304,500, versus $298,700 a year ago. At the current sales rate, it would take 5.2 months to exhaust the supply of homes on the market. Strong demand for housing with the corresponding lean supply has been keeping prices relatively high. Home builders are just now starting to ramp up construction of new homes to a level that analysts believe will sustain a healthier housing market.

Sentiment among American consumers rose sharply following Donald Trump’s election, with many Americans expressing greater optimism now that the election is over according to the University of Michigan’s consumer sentiment survey. The monthly survey of 500 consumers measures attitudes toward topics like personal finances, inflation, unemployment, government policies and interest rates. The survey climbed to 93.8 last month, up a rather large move of +6.6 points to the highest level since early summer. Richard Curtin, chief economist of the U of M survey wrote, “The post-election boost in optimism was widespread, with gains recorded among all income and age subgroups and across all regions of the country.” However, he points out, “presidential honeymoons” can end quickly and consumers’ confidence in the economy can wane if the new administration doesn’t take quick action to improve the economy.

A gauge of manufacturing in the Midwest is running below its potential, according to analysts. The Chicago Fed’s national activity index rose +0.15 point to -0.08 last month as consumer spending, housing spending, factory production, and business orders all showed improvement. The Chicago Fed index is a weighted average of 85 different economic indicators, designed to have an average value of 0, so that a positive reading indicates growth above trend and negative readings correspond to growth below trend. As with other volatile data sets, analysts use a 3-month moving average to discern a clearer picture of the trend in economic activity and in this case it weakened to a -0.27. Bernard Yaros, economist with Moody’s stated that the weaker 3-month average is “indicating inflationary pressure from U.S. economic activity will be limited.”

Orders for long-lasting goods, known as durable goods, surged +4.8% last month, according to the Commerce Department. The increase is the fourth in a row and beat economists’ forecasts of a +3.3% gain. Behind the impressive result, was a +94.1% spike in new orders for passenger planes. Aircraft orders often swing sharply from month-to-month and their effects can wildly skew trends in durable goods data. Demand for autos fell ‑0.6%. Ex-aircraft and auto industries, orders for durable goods increased a much less impressive +1% last month. Joshua Shapiro, chief economist at MFR Inc. stated “The underlying details in the report were lackluster in October.” Core capital goods orders, a key measure of business investment, rose an anemic +0.4% following a drop in September. Although these orders have recovered slightly, they are 4% lower than this time a year ago.

Growth in the service sector reached its second highest level in 12 months according to Markit’s flash November Purchasing Managers’ Index (PMI). The service sector PMI came in at 54.7, down -0.1 from October. In the survey, respondents commented on “stronger demand from both businesses and consumers in November, helped by the improving economic backdrop.” In the details of the report, new business growth rose to the strongest pace since last November. Backlogs fell, but that was due in part to stronger hiring. Survey respondents were optimistic on growth prospects over the coming year. Markit reported that growth is continuing to accelerate as the year comes to an end.

Minutes of the most recent Federal Reserve meeting show senior Fed officials agreed that it may finally be appropriate to raise interest rates “relatively soon”, given the environment of an improving labor market and somewhat higher inflation. Minutes from a two-day session in early November, show that “most participants expressed a view that it could well become appropriate to raise the target range for the federal-funds rate relatively soon.” Noteworthy in the latest minutes is concern among several officials that the U.S. economy could be at risk if the central bank waits too long to raise rates, a marked change from just a few months ago. The Federal Reserve will reconvene in December where an increase in key interest rates is seen as essentially guaranteed. Financial markets see a 93.5% chance the central bank will raise its benchmark short-term interest rate range by a quarter point to 0.5%-0.75%, according to the Chicago Mercantile Exchange’s FedWatch Tool.

Canada’s Environment Minister Catherine McKenna announced that Canada will shutter all of its coal-fired power plants by 2030 as part of its strategy to cut greenhouse gas emission under the Paris climate accord. The plants, located in four provinces, produce an estimated 10% of Canada’s total CO2 emissions. Closing them will remove the equivalent of 1.3 million cars from Canada’s roads (roughly 5 megatons of greenhouse gas emissions), she announced. “As part of our government’s vision for a clean growth economy, we will be accelerating the transition from traditional coal power to clean energy by 2030,” she said. With an abundance of hydroelectric power, as well as nuclear, solar and wind power, 80 percent of Canada’s electricity production emits no air pollution.

In the United Kingdom, the global think-tank Organization for Economic Cooperation and Development (OECD) said that Britain’s economy is growing faster than the rest of the G7 – another sign that most of the fears surrounding the Brexit vote were (so far) unfounded. The UK grew by +2.3% in the third quarter of 2016, outpacing all other countries in the group. The average third-quarter growth rate of G7 economies was +1.4%. The robust economic growth comes after strong employment numbers, lower than expected inflation, and surging retail figures.

In France, Former French President Nicolas Sarkozy’s political career is essentially over after a humiliating defeat by his former Prime Minister Francois Fillon in the first round of the race to choose the Republican party’s candidate for the presidency next spring. Fillon, a social conservative and free-market reformer, came close to winning the nomination getting 43% of the vote. He now faces a runoff vote against a more moderate Alain Juppe. Mr. Juppe is the mayor of Bordeaux and former prime minister under Jacques Chirac. Sarkozy had come under fire following several legal investigations into corrupt campaign financing.

In Germany, Bavarian economic minister Ilse Aigner said that Germany needs a “comprehensive” new EU trade deal with the UK following the Brexit vote, in order to minimize the potential fallout for its own economy. She argued that Brexit poses a “high risk” to the German economy and that the UK is “one of the most important trading partners for Bavaria”, one of Germany’s most prosperous states. Britain’s leaders have been optimistic that Germany will help temper France’s call for Britain to pay a tough economic price for its decision to leave the EU.

Italian voters will head to the polls on December 4th in a referendum on constitutional reforms that will have far-reaching consequences for the country – and for the euro. If Italian leader Matteo Renzi loses the vote, it’s believed that the anti-euro 5-star Movement could take over as ruling party and reject the country’s debts. Market risk assigned to Italian government debt has consequently surged in recent weeks. European Central Bank vice-president Vitor Constancio said he is closely watching the outcome of Italy’s vote amid concerns that the outcome could impact stability in the whole of the European Union.

In Asia, refusal by the U.S., European Union, and others to recognize China as a market economy is the latest sign of friction in the trade between the Asian economic giant and other world powers. Penny Pritzker, U.S. Secretary of Commerce, said that the time “was not ripe” to grant China market-economy status under World Trade Organization rules. China’s status therefore remains a “non-market economy” under the treaty, meaning that Chinese products such as steel can be saddled with steep tariffs if it is determined that the country is “dumping” those goods. Recognition as a market economy would force trading partners to use domestic Chinese prices as a baseline for judgements about export prices, limiting their ability to impose restrictions. For many goods, prices are far lower in China than their international prices.

Japanese consumer prices fell last month extending the streak to the longest in 5 years, government data showed. Japan has been struggling to reverse a deflationary spiral of falling prices and tepid growth. October’s reading marked the 8th straight month of price declines, the longest since 2011. Bank of Japan governor Haruhiko Kuroda blamed weak crude oil prices. Yasunari Ueno, chief market economist at Mizuho Securities said he believed that “prices will turn into positive territory eventually, but so far upward movement of prices…is still weak.” In addition he stated that the reason behind the slow pace of price rises is because the economic recovery is very slow.

Finally, television executives and advertisers are concerned over a disturbing new trend: young people are turning off sports, crime dramas and – most especially – news at an alarming rate. On the other hand, comedy was enjoyed by 18-24 year olds much more than by older cohorts. Viewers between the ages of 18 and 24 were the least interested in news as a genre, according to a survey of 31,000 people across 10 countries carried out by research firm Ampere Analysis. The trend was most pronounced in the United Kingdom and United States.

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(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, stocksandnews.com, marketwatch.com, wantchinatimes.com, BBC, 361capital.com, pensionpartners.com, cnbc.com, FactSet; Figs 1-5 source W E Sherman & Co, LLC)

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The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market. The average ranking of Defensive SHUT sectors rose to 23.00 from 23.50, while the average ranking of Offensive DIME sectors was unchanged at 11.25. The Offensive DIME sectors continue to lead Defensive SHUT sectors. Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

If you have any questions about the FBIAS™ Fact-Based Investment Allocation Strategy portfolios, feel free to give your Anthony Capital, LLC advisor a call at 303-734-7178 or by scheduling a private virtual meeting/conference call. We work with clients from all over the country and would be happy to help.

You can also open up an online account by clicking HERE at our preferred custodian, Folio Institutional, LLC.

Sincerely,

Dave Anthony, CFP®

FBIAS™ for the week ending 11/18/2016

FBIAS™ Fact-Based Investment Allocation Strategies for the week ending 11/18/2016

The very big picture:

In the “decades” timeframe, the question of whether we are in a continuing Secular Bear Market that began in 2000 or in a new Secular Bull Market has been the subject of hot debate among economists and market watchers since 2013, when the Dow and S&P 500 exceeded their 2000 and 2007 highs.  The Bear proponents point out that the long-term PE ratio (called “CAPE”, for Cyclically-Adjusted Price to Earnings ratio), which has done a historically great job of marking tops and bottoms of Secular Bulls and Secular Bears, did not get down to the single-digit range that has marked the end of Bear Markets for a hundred years, but the Bull proponents say that significantly higher new highs are de-facto evidence of a Secular Bull, regardless of the CAPE.  Further confusing the question, the CAPE now has risen to levels that have marked the end of Bull Markets except for times of full-blown market manias.  See graph below for the 100-year view of Secular Bulls and Bears.

Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best.   The CAPE is at 27.01, up modestly from the prior week’s 26.80, and only a little lower than the level reached at the pre-crash high in October, 2007.  Since 1881, the average annual return for all ten year periods that began with a CAPE around this level have been just 3%/yr (see graph below).

This further means that above-average returns will be much more likely to come from the active management of portfolios than from passive buy-and-hold.  Although a mania could come along and cause the CAPE to shoot upward from current levels (such as happened in the late 1920’s and the late 1990’s), in the absence of such a mania, buy-and-hold investors will likely have a long wait until the arrival of returns more typical of a rip-snorting Secular Bull Market.

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate.  The U.S. Bull-Bear Indicator (see graph below) is in Cyclical Bull territory at 55.40, up from the prior week’s 53.47.

In the intermediate picture:

The Intermediate (weeks to months) Indicator (see graph below) turned positive on November 10th.  The indicator ended the week at 27, up sharply from the prior week’s 19.  Separately, the Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – was positive entering October, indicating positive prospects for equities in the fourth quarter of 2016.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2 above), whether we are in a new Secular Bull or still in the Secular Bear, the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns.  The Bull-Bear Indicator (months to years) is positive (Fig. 3 above), indicating a potential uptrend in the longer timeframe.  The Quarterly Trend Indicator (months to quarters) is positive for Q4, and the Intermediate (weeks to months) timeframe (Fig. 4 above) is positive.  Therefore, with all three indicators positive, the U.S. equity markets are rated as Very Positive.

In the markets:

Stocks added to the strong post-election rally, pushing many of the major benchmarks to new all-time highs.  The smaller-cap indexes, typically more volatile, performed the best.  The Dow Jones Industrial Average rose +20 points to 18,867, up +0.11%, while the tech-heavy NASDAQ Composite rallied +1.6% to 5,321.  The LargeCap S&P 500 added +0.8%, but was sharply outpaced by its Small- and Mid- brethren:  the MidCap S&P 400 index surged +2.75% and the Russell 2000 SmallCap index gained +2.59%. 

In international markets, Canada’s TSX rose +2.12%, a second week of gains.  Across the Atlantic, the United Kingdom’s FTSE recovered a bit more from early November’s plunge adding +0.67%.  On Europe’s mainland, France’s CAC40 gained +0.34%, Germany’s DAX ended nearly flat, down just -0.03%, and Italy’s Milan FTSE fell 3.25%.  In Asia, China’s Shanghai Stock Exchange was flat-to-down at -0.1%.  Japan’s Nikkei surged a very handsome +3.4%, possibly due to views that President-elect Trump’s economic policies may benefit Japan—more on that below. 

In commodities, precious metals had a second difficult week as Gold fell another $15.60 an ounce to $1208.70, down -1.27%.  Silver plunged even further down -4.36%.  Precious metals typically respond negatively to a rising dollar, and that has been the situation of late – in spades – as the dollar has ripped higher since the election all the way to a 14-year high.  The industrial metal copper gave back some of last week’s gains by falling -1.65%.  Crude oil rebounded following 3 weeks of losses, rising $2.95 a barrel to end the week at $46.36, a weekly gain of +6.8%.

In U.S. economic news, jobless claims are at a 43-year low as the number of people who applied for unemployment benefits last week fell by 19,000 to 235,000.  Initial claims have now remained under the key 300,000 threshold level for 89 straight weeks, the longest stretch since 1970.  The U.S. unemployment rate also remains near an 8 year low of 4.9%.  Continuing jobless claims, the number of people already receiving unemployment benefits, also decreased by 66,000 to 1.98 million – the first time that number has been below 2 million since mid-2000.

Sentiment among home builders remained unchanged in November, according to the National Association of Home Builders’ (NAHB) index.  The latest reading of 63 matched the median forecast among economists.  Current sales conditions and sales expectations were at 69, while the index of buyer traffic rose a point to 47.  Readings over 50 signal improving conditions.  Robert Dietz, the home builder trade group’s chief economist, said in a statement “Ongoing job creation, rising incomes and attractive mortgage rates are supporting demand in the single-family housing sector.  This will help keep housing on a steady, upward glide path in the months ahead.”

Construction of new houses jumped 26% last month to the highest level in 9 years, boosted by a spike in multi-family units.  Housing starts climbed to an annual rate of 1.32 million from 1.05 million in September, according to the Commerce Department.  Economists had expected only 1.17 million new starts.  Higher prices and a shortage of properties for sale have encouraged builders to step up construction.  New construction accelerated in all regions of the country, surging by more than +44% in the Northeast and Midwest.  Construction of apartment buildings, condominiums, and multi-unit dwellings were up +75% last month.  Single-family home starts rose almost +11%, the fastest pace since October, 2007.  Future building activity also looks promising as permits are running about +5% above year-ago levels.

Retail sales surged for a second consecutive month for the best two-month performance since early 2014.  October retail sales jumped +0.8% last month, following a +1% rise in September.  Economists had forecast a +0.7% gain.  With consumer spending a main driver of economic growth, the increase in retail sales suggests that the U.S. economy got off to a good start in the 4th quarter.  Alan MacEachin, an economist at Navy Federal Credit Union, stated “A solid jobs market is driving up household incomes and boosting spending power.”  A large portion of the gains were due to auto dealers where sales hit an 11-month high following strong incentive programs.  Even ex-autos and gas, sales were still up a healthy +0.6%. 

The New York Fed’s Empire State Index turned positive for the first time in four months following improvement in new orders and shipments.  The Empire State Manufacturing sub-index rose back into expansion by rising +8.3 points to 1.5.  New-orders surged +8.7 points to 3.1, and shipments jumped +9.1 points to 8.5.  Inventory levels declined significantly, plunging -11.3 points to -23.6—a multiyear low.

Manufacturing in the mid-Atlantic region recorded slightly slower growth, according to the Philadelphia Fed’s manufacturing index.  The index slowed slightly to 7.6, down -2.1 points from September.  The index has remained above the 0 level, indicating improving conditions, for four consecutive months.  Most sub-indexes remained positive with general activity, new orders, and shipments all recording strong results. 

Inflation at the wholesale level remains low, coming in unchanged for October, but the reading follows several years of weaker prices.  Higher costs for natural gas and gasoline were offset by declines in food and services.  Taking a long-term view, over the past 12 months wholesale costs have risen +0.8%, the highest one-year change since the end of 2014.  Stripping out the volatile food, energy, and trade margin categories yields the so-called core producer prices.  That measure is rising at an even faster rate, up +1.6% over the past 12 months, the fastest in 2 years.  If these trends continue, higher wholesale prices will eventually lead to higher prices for consumer goods and services. 

Consumer inflation rose at the fastest rate in 6 months, according to the latest Consumer Price Index (CPI) reading.  The Labor Department reported that the index rose +0.4% last month, after rising +0.3% in September.  On an annualized basis, the CPI is up +1.6% – the biggest year-over-year increase since October of 2014.  The increase was in line with economists’ forecasts.  Core inflation, which strips out potentially volatile food and energy costs, climbed +0.1% last month.  Annualized, core inflation is currently 2.1% – right in line with the Federal Reserve’s 2% inflation target.  The firming inflation along with the labor market approaching full capacity leads many analysts to believe that the Federal Reserve will have the green light to raise interest rates at its December 13-14 policy meeting.

Industrial production—a measure of output from America’s factories, utility plants, and mines—was unchanged in October, said the Federal Reserve, as a sharp drop in utilities production was offset by modest gains in factory output.  Economists had forecast a +0.2% gain.  In the details of the report, manufacturing output rose +0.2% and mining output jumped by +2.1%, but utilities production plunged 2.6%.  High Frequency Economics chief U.S. economist Jim O’Sullivan said in a note to clients “Through the volatility, the trend in manufacturing appears to be at least modestly positive, and the oil-drilling-led plunge in mining seems to have ended.”  Capacity utilization, a gauge of slack in the industrial economy, ticked down 0.1 percentage point to 75.3% last month in line with expectations.

In international economic news, the Bank of Canada said it won’t necessarily move in lockstep with the Federal Reserve if the U.S. central bank hikes its key interest rate next month, a move which is widely expected.  Deputy Governor Timothy stated “We are free to adjust our policy interest rate in the context of Canadian economic conditions—and in particular, we do not need to move in step with the Federal Reserve” in a speech in Waterloo, Ontario.  Mr. Lane pointed out that Canadians will no doubt feel the reverberations from whatever the U.S. does.  Higher U.S. interest rates will likely push the Canadian dollar lower, boost exports, and push up some Canadian rates.  As a net importer of foreign capital, Canada’s economy is exposed to the “vagaries of global flows”, Mr. Lane acknowledged.

In France, Emmanuel Macron formally declared that he will seek the French presidency in next year’s election, ending months of speculation.  The 38-year-old former economic minister and protégé of President Francois Hollande left his government post in August saying he wanted more freedom for his ideas to repair France’s ailing economy and growing social divisions.  Macron created his own political movement known as “En Marche” roughly translated as “On the Move!” and remains a popular political figure.  His platform offers voters a pro-EU platform, in contrast with the National Front party of Marine LePen, the current front-runner.

German economic growth slowed in the third quarter of the year, hampered by weaker exports.  Europe’s largest economy grew by just +0.2%, half the rate of the second quarter and far below the first quarter’s +0.7% advance.  Germany’s Federal Statistics Office stated “Exports were slightly down while imports were slightly up compared with the second quarter of 2016.  Positive impulses on the quarter came mainly from domestic demand.  Both household and state spending managed to increase further.”  Some analysts stated that the uncertainty caused by Britain’s vote to leave the EU may have counteracted the country’s solid domestic activity.  In addition, worries of a more protectionist U.S. economy added to fears.  ING Bank economist Carsten Brzeski said, “If Germany’s single most important trading partner, the US, really moves towards more protectionism, this would definitely leave its mark on German growth.”

In Asia, the election of Donald Trump may have put China in the driver’s seat for a new trade deal in the Pacific Rim.  A decade-old plan for a free-trade area in Asia is set to be resurrected at a meeting of Pacific Rim country leaders in Peru, as the region works on an alternative to the U.S.-led Trans-Pacific Partnership.  Donald Trump had taken a strong anti-TPP stance during his campaign.  Leaders are looking to resurrect the Free Trade Area of the Asia Pacific (FTAAP).  Completion of the deal would hand Chinese President Xi Jinping the reins in a most important geopolitical shift.

In Japan, Goldman Sachs chief Asia Pacific economist Andrew Tilton released a note that a firmer U.S. dollar is positive for Japan, even as Donald Trump’s victory cast uncertainty over the Asian economic outlook.  The dollar surged to a 14 year high against a basket of major currencies and U.S. debt yields hit nearly one-year highs on expectations that Trump’s policies will boost the U.S. economy.  Tilton told the Reuters Global Investment Outlook Summit in Hong Kong, “More Fed tightening and a stronger dollar is probably good for Japan.  Japan is a very low-inflation country that is trying to stimulate the economy… but can’t really lower rates feasibly much further.  So if the U.S. can raise rates and raise the currency versus the yen, then yen can depreciate without Japan having to do anything else.  For Japan, this is great news.”

Finally, treasury yields have soared following the surprising election of Donald Trump for President of the United States.  Theories abound regarding the causes and consequences of the move, but as always it is good practice to step back and take a look at the big picture.  Veteran technical analyst Louise Yamada, in a CNBC interview, looked at interest rates in the U.S. over the last 200 years and draws our attention to a few points.  First, according to Ms. Yamada, is that interest rates are most likely to only go up from here.  Yamada refers to an apparent “bottoming formation” that has been forming over the last several years.  On the 10-year Treasury note, a move above 3% would confirm her assessment because that’s the “level at which we can definitively say that rates have reversed”, Yamada states.  Yamada predicts that higher rates will boost equity prices in the near term, as in past cycles.  However, she will be watching the roughly 5% level where “you’ll start having problems.”  10-year Treasury notes finished this past week at 2.34%, so we’re a long way away from her danger zone.

(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, stocksandnews.com,  marketwatch.com,  wantchinatimes.com, BBC, 361capital.com, pensionpartners.com, cnbc.com)

The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market.  The average ranking of Defensive SHUT sectors fell slightly to 23.50 from 23.30 , while the average ranking of Offensive DIME sectors was unchanged at 11.25.  The Offensive DIME sectors continue to lead Defensive SHUT sectors.  Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

If you have any questions about the FBIAS™ Fact-Based Investment Allocation Strategy portfolios, feel free to give your Anthony Capital, LLC advisor a call at 303-734-7178 or by scheduling a private virtual meeting/conference call.  We work with clients from all over the country and would be happy to help.

You can also open up an online account by clicking HERE at our preferred custodian, Interactive Brokers, LLC.

Sincerely,

FBIAS™ market update for the week ending 11/18/2016

The very big picture:

In the “decades” timeframe, the question of whether we are in a continuing Secular Bear Market that began in 2000 or in a new Secular Bull Market has been the subject of hot debate among economists and market watchers since 2013, when the Dow and S&P 500 exceeded their 2000 and 2007 highs. The Bear proponents point out that the long-term PE ratio (called “CAPE”, for Cyclically-Adjusted Price to Earnings ratio), which has done a historically great job of marking tops and bottoms of Secular Bulls and Secular Bears, did not get down to the single-digit range that has marked the end of Bear Markets for a hundred years, but the Bull proponents say that significantly higher new highs are de-facto evidence of a Secular Bull, regardless of the CAPE. Further confusing the question, the CAPE now has risen to levels that have marked the end of Bull Markets except for times of full-blown market manias. See Fig. 1 for the 100-year view of Secular Bulls and Bears.

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Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best. The CAPE is at 27.01, up modestly from the prior week’s 26.80, and only a little lower than the level reached at the pre-crash high in October, 2007. Since 1881, the average annual return for all ten year periods that began with a CAPE around this level have been just 3%/yr (see Fig. 2).

image

This further means that above-average returns will be much more likely to come from the active management of portfolios than from passive buy-and-hold. Although a mania could come along and cause the CAPE to shoot upward from current levels (such as happened in the late 1920’s and the late 1990’s), in the absence of such a mania, buy-and-hold investors will likely have a long wait until the arrival of returns more typical of a rip-snorting Secular Bull Market.

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate. The U.S. Bull-Bear Indicator (see Fig. 3) is in Cyclical Bull territory at 55.40, up from the prior week’s 53.47.

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In the intermediate picture:

The Intermediate (weeks to months) Indicator (see Fig. 4) turned positive on November 10th. The indicator ended the week at 27, up sharply from the prior week’s 19. Separately, the Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – was positive entering October, indicating positive prospects for equities in the fourth quarter of 2016.

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Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2), whether we are in a new Secular Bull or still in the Secular Bear, the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns. The Bull-Bear Indicator (months to years) is positive (Fig. 3), indicating a potential uptrend in the longer timeframe. The Quarterly Trend Indicator (months to quarters) is positive for Q4, and the Intermediate (weeks to months) timeframe (Fig. 4) is positive. Therefore, with all three indicators positive, the U.S. equity markets are rated as Very Positive.

In the markets:

Stocks added to the strong post-election rally, pushing many of the major benchmarks to new all-time highs. The smaller-cap indexes, typically more volatile, performed the best. The Dow Jones Industrial Average rose +20 points to 18,867, up +0.11%, while the tech-heavy NASDAQ Composite rallied +1.6% to 5,321. The LargeCap S&P 500 added +0.8%, but was sharply outpaced by its Small- and Mid- brethren: the MidCap S&P 400 index surged +2.75% and the Russell 2000 SmallCap index gained +2.59%.

In international markets, Canada’s TSX rose +2.12%, a second week of gains. Across the Atlantic, the United Kingdom’s FTSE recovered a bit more from early November’s plunge adding +0.67%. On Europe’s mainland, France’s CAC40 gained +0.34%, Germany’s DAX ended nearly flat, down just -0.03%, and Italy’s Milan FTSE fell ‑3.25%. In Asia, China’s Shanghai Stock Exchange was flat-to-down at -0.1%. Japan’s Nikkei surged a very handsome +3.4%, possibly due to views that President-elect Trump’s economic policies may benefit Japan—more on that below.

In commodities, precious metals had a second difficult week as Gold fell another $15.60 an ounce to $1208.70, down -1.27%. Silver plunged even further down -4.36%. Precious metals typically respond negatively to a rising dollar, and that has been the situation of late – in spades – as the dollar has ripped higher since the election all the way to a 14-year high. The industrial metal copper gave back some of last week’s gains by falling -1.65%. Crude oil rebounded following 3 weeks of losses, rising $2.95 a barrel to end the week at $46.36, a weekly gain of +6.8%.

In U.S. economic news, jobless claims are at a 43-year low as the number of people who applied for unemployment benefits last week fell by 19,000 to 235,000. Initial claims have now remained under the key 300,000 threshold level for 89 straight weeks, the longest stretch since 1970. The U.S. unemployment rate also remains near an 8 year low of 4.9%. Continuing jobless claims, the number of people already receiving unemployment benefits, also decreased by 66,000 to 1.98 million – the first time that number has been below 2 million since mid-2000.

Sentiment among home builders remained unchanged in November, according to the National Association of Home Builders’ (NAHB) index. The latest reading of 63 matched the median forecast among economists. Current sales conditions and sales expectations were at 69, while the index of buyer traffic rose a point to 47. Readings over 50 signal improving conditions. Robert Dietz, the home builder trade group’s chief economist, said in a statement “Ongoing job creation, rising incomes and attractive mortgage rates are supporting demand in the single-family housing sector. This will help keep housing on a steady, upward glide path in the months ahead.”

Construction of new houses jumped 26% last month to the highest level in 9 years, boosted by a spike in multi-family units. Housing starts climbed to an annual rate of 1.32 million from 1.05 million in September, according to the Commerce Department. Economists had expected only 1.17 million new starts. Higher prices and a shortage of properties for sale have encouraged builders to step up construction. New construction accelerated in all regions of the country, surging by more than +44% in the Northeast and Midwest. Construction of apartment buildings, condominiums, and multi-unit dwellings were up +75% last month. Single-family home starts rose almost +11%, the fastest pace since October, 2007. Future building activity also looks promising as permits are running about +5% above year-ago levels.

Retail sales surged for a second consecutive month for the best two-month performance since early 2014. October retail sales jumped +0.8% last month, following a +1% rise in September. Economists had forecast a +0.7% gain. With consumer spending a main driver of economic growth, the increase in retail sales suggests that the U.S. economy got off to a good start in the 4th quarter. Alan MacEachin, an economist at Navy Federal Credit Union, stated “A solid jobs market is driving up household incomes and boosting spending power.” A large portion of the gains were due to auto dealers where sales hit an 11-month high following strong incentive programs. Even ex-autos and gas, sales were still up a healthy +0.6%.

The New York Fed’s Empire State Index turned positive for the first time in four months following improvement in new orders and shipments. The Empire State Manufacturing sub-index rose back into expansion by rising +8.3 points to 1.5. New-orders surged +8.7 points to 3.1, and shipments jumped +9.1 points to 8.5. Inventory levels declined significantly, plunging -11.3 points to -23.6—a multiyear low.

Manufacturing in the mid-Atlantic region recorded slightly slower growth, according to the Philadelphia Fed’s manufacturing index. The index slowed slightly to 7.6, down -2.1 points from September. The index has remained above the 0 level, indicating improving conditions, for four consecutive months. Most sub-indexes remained positive with general activity, new orders, and shipments all recording strong results.

Inflation at the wholesale level remains low, coming in unchanged for October, but the reading follows several years of weaker prices. Higher costs for natural gas and gasoline were offset by declines in food and services. Taking a long-term view, over the past 12 months wholesale costs have risen +0.8%, the highest one-year change since the end of 2014. Stripping out the volatile food, energy, and trade margin categories yields the so-called core producer prices. That measure is rising at an even faster rate, up +1.6% over the past 12 months, the fastest in 2 years. If these trends continue, higher wholesale prices will eventually lead to higher prices for consumer goods and services.

Consumer inflation rose at the fastest rate in 6 months, according to the latest Consumer Price Index (CPI) reading. The Labor Department reported that the index rose +0.4% last month, after rising +0.3% in September. On an annualized basis, the CPI is up +1.6% – the biggest year-over-year increase since October of 2014. The increase was in line with economists’ forecasts. Core inflation, which strips out potentially volatile food and energy costs, climbed +0.1% last month. Annualized, core inflation is currently 2.1% – right in line with the Federal Reserve’s 2% inflation target. The firming inflation along with the labor market approaching full capacity leads many analysts to believe that the Federal Reserve will have the green light to raise interest rates at its December 13-14 policy meeting.

Industrial production—a measure of output from America’s factories, utility plants, and mines—was unchanged in October, said the Federal Reserve, as a sharp drop in utilities production was offset by modest gains in factory output. Economists had forecast a +0.2% gain. In the details of the report, manufacturing output rose +0.2% and mining output jumped by +2.1%, but utilities production plunged 2.6%. High Frequency Economics chief U.S. economist Jim O’Sullivan said in a note to clients “Through the volatility, the trend in manufacturing appears to be at least modestly positive, and the oil-drilling-led plunge in mining seems to have ended.” Capacity utilization, a gauge of slack in the industrial economy, ticked down 0.1 percentage point to 75.3% last month in line with expectations.

In international economic news, the Bank of Canada said it won’t necessarily move in lockstep with the Federal Reserve if the U.S. central bank hikes its key interest rate next month, a move which is widely expected. Deputy Governor Timothy stated “We are free to adjust our policy interest rate in the context of Canadian economic conditions—and in particular, we do not need to move in step with the Federal Reserve” in a speech in Waterloo, Ontario. Mr. Lane pointed out that Canadians will no doubt feel the reverberations from whatever the U.S. does. Higher U.S. interest rates will likely push the Canadian dollar lower, boost exports, and push up some Canadian rates. As a net importer of foreign capital, Canada’s economy is exposed to the “vagaries of global flows”, Mr. Lane acknowledged.

In France, Emmanuel Macron formally declared that he will seek the French presidency in next year’s election, ending months of speculation. The 38-year-old former economic minister and protégé of President Francois Hollande left his government post in August saying he wanted more freedom for his ideas to repair France’s ailing economy and growing social divisions. Macron created his own political movement known as “En Marche” roughly translated as “On the Move!” and remains a popular political figure. His platform offers voters a pro-EU platform, in contrast with the National Front party of Marine LePen, the current front-runner.

German economic growth slowed in the third quarter of the year, hampered by weaker exports. Europe’s largest economy grew by just +0.2%, half the rate of the second quarter and far below the first quarter’s +0.7% advance. Germany’s Federal Statistics Office stated “Exports were slightly down while imports were slightly up compared with the second quarter of 2016. Positive impulses on the quarter came mainly from domestic demand. Both household and state spending managed to increase further.” Some analysts stated that the uncertainty caused by Britain’s vote to leave the EU may have counteracted the country’s solid domestic activity. In addition, worries of a more protectionist U.S. economy added to fears. ING Bank economist Carsten Brzeski said, “If Germany’s single most important trading partner, the US, really moves towards more protectionism, this would definitely leave its mark on German growth.”

In Asia, the election of Donald Trump may have put China in the driver’s seat for a new trade deal in the Pacific Rim. A decade-old plan for a free-trade area in Asia is set to be resurrected at a meeting of Pacific Rim country leaders in Peru, as the region works on an alternative to the U.S.-led Trans-Pacific Partnership. Donald Trump had taken a strong anti-TPP stance during his campaign. Leaders are looking to resurrect the Free Trade Area of the Asia Pacific (FTAAP). Completion of the deal would hand Chinese President Xi Jinping the reins in a most important geopolitical shift.

In Japan, Goldman Sachs chief Asia Pacific economist Andrew Tilton released a note that a firmer U.S. dollar is positive for Japan, even as Donald Trump’s victory cast uncertainty over the Asian economic outlook. The dollar surged to a 14 year high against a basket of major currencies and U.S. debt yields hit nearly one-year highs on expectations that Trump’s policies will boost the U.S. economy. Tilton told the Reuters Global Investment Outlook Summit in Hong Kong, “More Fed tightening and a stronger dollar is probably good for Japan. Japan is a very low-inflation country that is trying to stimulate the economy… but can’t really lower rates feasibly much further. So if the U.S. can raise rates and raise the currency versus the yen, then yen can depreciate without Japan having to do anything else. For Japan, this is great news.”

Finally, treasury yields have soared following the surprising election of Donald Trump for President of the United States. Theories abound regarding the causes and consequences of the move, but as always it is good practice to step back and take a look at the big picture. Veteran technical analyst Louise Yamada, in a CNBC interview, looked at interest rates in the U.S. over the last 200 years and draws our attention to a few points. First, according to Ms. Yamada, is that interest rates are most likely to only go up from here. Yamada refers to an apparent “bottoming formation” that has been forming over the last several years. On the 10-year Treasury note, a move above 3% would confirm her assessment because that’s the “level at which we can definitively say that rates have reversed”, Yamada states. Yamada predicts that higher rates will boost equity prices in the near term, as in past cycles. However, she will be watching the roughly 5% level where “you’ll start having problems.” 10-year Treasury notes finished this past week at 2.34%, so we’re a long way away from her danger zone.

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(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, stocksandnews.com, marketwatch.com, wantchinatimes.com, BBC, 361capital.com, pensionpartners.com, cnbc.com, FactSet; Figs 1-5 source W E Sherman & Co, LLC)

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The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market. The average ranking of Defensive SHUT sectors fell slightly to 23.50 from 23.30 , while the average ranking of Offensive DIME sectors was unchanged at 11.25. The Offensive DIME sectors continue to lead Defensive SHUT sectors. Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

If you have any questions about the FBIAS™ Fact-Based Investment Allocation Strategy portfolios, feel free to give your Anthony Capital, LLC advisor a call at 303-734-7178 or by scheduling a private virtual meeting/conference call. We work with clients from all over the country and would be happy to help.

You can also open up an online account by clicking HERE at our preferred custodian, Folio Institutional, LLC.

Sincerely,

Dave Anthony, CFP®

FBIAS™ market update for the week ending 11/11/2016

The very big picture:

In the “decades” timeframe, the question of whether we are in a continuing Secular Bear Market that began in 2000 or in a new Secular Bull Market has been the subject of hot debate among economists and market watchers since 2013, when the Dow and S&P 500 exceeded their 2000 and 2007 highs. The Bear proponents point out that the long-term PE ratio (called “CAPE”, for Cyclically-Adjusted Price to Earnings ratio), which has done a historically great job of marking tops and bottoms of Secular Bulls and Secular Bears, did not get down to the single-digit range that has marked the end of Bear Markets for a hundred years, but the Bull proponents say that significantly higher new highs are de-facto evidence of a Secular Bull, regardless of the CAPE. Further confusing the question, the CAPE now has risen to levels that have marked the end of Bull Markets except for times of full-blown market manias. See Fig. 1 for the 100-year view of Secular Bulls and Bears.

image

Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best. The CAPE is at 26.80, up from the prior week’s 25.82, and only a little lower than the level reached at the pre-crash high in October, 2007. Since 1881, the average annual return for all ten year periods that began with a CAPE around this level have been just 3%/yr (see Fig. 2).

image

This further means that above-average returns will be much more likely to come from the active management of portfolios than from passive buy-and-hold. Although a mania could come along and cause the CAPE to shoot upward from current levels (such as happened in the late 1920’s and the late 1990’s), in the absence of such a mania, buy-and-hold investors will likely have a long wait until the arrival of returns more typical of a rip-snorting Secular Bull Market.

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate. The U.S. Bull-Bear Indicator (see Fig. 3) is in Cyclical Bull territory at 53.47, up from the prior week’s 51.91.

image

In the intermediate picture:

The Intermediate (weeks to months) Indicator (see Fig. 4) turned positive on November 10th. The indicator ended the week at 19, up from the prior week’s 14. Separately, the Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – was positive entering October, indicating positive prospects for equities in the fourth quarter of 2016.

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Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2), whether we are in a new Secular Bull or still in the Secular Bear, the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns. The Bull-Bear Indicator (months to years) is positive (Fig. 3), indicating a potential uptrend in the longer timeframe. The Quarterly Trend Indicator (months to quarters) is positive for Q4, and the Intermediate (weeks to months) timeframe (Fig. 4) is positive. Therefore, with all three indicators positive, the U.S. equity markets are rated as Very Positive.

In the markets:

U.S. stocks enjoyed their best week since 2011 as investors reassessed future corporate earnings, overall economic growth, and inflation expectations following the surprise victory of Donald Trump in the U.S. presidential election. Although all major indexes recorded solid gains, small-cap equities smartly outperformed large caps. The blue chip Dow Jones Industrial Average reached a record high of 18,847 rallying +959 points to end the week up +5.36%. That impressive move was eclipsed by the +10.2% surge in the SmallCap Russell 2000. The MidCap S&P 400 also had a strong week, rallying almost +5.7%. The S&P 500 LargeCap index gained +3.8% while the tech heavy NASDAQ Composite brought up the rear with a gain of +3.78%.

Canada’s TSX gained a modest +0.32%, held down by lower gold and energy prices. Across the Atlantic, the United Kingdom’s FTSE added half a percent. On Europe’s mainland France’s CAC 40 rose +2.55% and Germany’s DAX gained +3.98%. In Asia, markets were mostly green with China’s Shanghai Composite rising +2.26% and Japan’s Nikkei gaining +2.78%, but Hong Kong’s Hang Seng fell half a percent. As a group, emerging markets (as measured by the MSCI Emerging Markets Index) fell -3.8%, hurt by rocketing interest rates on emerging market debt, while developed markets (as measured by the MSCI Developed Markets Index) gained +0.8%.

Commodities markets diverged sharply. In precious metals, Gold surrendered 4 weeks of gains, plunging over ‑$80 to $1,224.30 an ounce, a loss of -6.15%. Silver had a similar move, also plunging over -5.4% to $17.38 an ounce. The industrial metal copper, though, had a 3rd week of strong gains by surging over +10.7% last week. Weakness was also the theme in the energy markets, where a barrel of West Texas Intermediate crude oil fell ‑1.5% to $43.41 a barrel, a 3rd consecutive week of losses. The hoped-for OPEC production limit agreement has seemingly fallen apart before it was even implemented, and the continued supply glut seems a higher probability.

In U.S. economic news, the number of people who applied for unemployment benefits the first week of November fell by -11,000 to 254,000. Initial claims have remained below the key 300,000 threshold for 88 straight weeks, an achievement not seen since 1970. Economists had forecast a reading of 260,000. The less-volatile 4-week moving average of claims rose slightly to 259,750 according to the Labor Department. Stephen Stanley, chief economist at Pierpont Securities wrote, “Whether initial claims are 250,000 or 270,000 in a given week is virtually irrelevant in the big picture. Either one points to an extremely slow pace of layoffs and is consistent with a very healthy and tight labor market.” Continuing claims, those people already receiving unemployment benefits, increased by 18,000 to 2.04 million.

According to a government survey of employers known as the Job Openings and Labor Turnover Survey (JOLTS) companies were intent on hiring 5.49 million people in September, up from 5.45 million the previous month. The JOLTS report showed that the number of job openings rose slightly and remains near record levels—more evidence that companies are willing to hire despite economic uncertainty. In addition, the percentage of people who quit their jobs in September was 2.1%, unchanged from the prior month. The rate of people quitting their jobs rose to normal levels earlier this year for the first time in over 8 years. Workers are more likely to quit their jobs only when they get a better offer or think they can quickly find a better job. The rapid pace of hiring has pushed the unemployment rate below 5% and the tighter labor market is forcing many companies to raise wages to retain and attract skilled workers.

Commercial real estate loans are getting more difficult to obtain as banks continued to tighten lending standards in the 3rd quarter. In a survey by the Federal Reserve of senior loan officers at 69 domestic banks and 21 U.S. branches of foreign banks, standards were tightened on all types of commercial real estate (CRE) loans. Standards for commercial and industrial (C&I) loans were basically unchanged. Demand for C&I loans was slightly weaker among large and middle-market firms. For CRE loans, stronger demand was noted for construction and land development loans, while demand for loans secured by multifamily residential and nonfarm residential properties remained basically unchanged.

Optimism among small business owners rose slightly last month according to the National Federation of Independent Business (NFIB). The NFIB’s Small Business Optimism Index rose +0.8 point to 94.9, beating economists’ forecasts by 0.6 point. More respondents said that now is a good time to expand, however more also reported they expect business conditions to worsen before they improve. In the release, the NFIB stated small business owners are experiencing “record levels” of uncertainty that’s “paralyzing” them. Specifically referenced were “high taxes, ball-and-chain regulations, and spiraling health insurance costs.” According to the survey, the single biggest problem facing small businesses were “taxes” and “government regulations and red tape”.

The confidence of American consumers soared earlier this month as Americans reported that their economic outlook brightened. The University of Michigan’s Consumer Sentiment reading, taken before the results of the presidential election, rose +4.4 points to 91.6. The result was 0.3% higher than the same time last year, and also above the 2016-to-date average of 91.1. Economists had predicted a reading of 88. Sentiment improved even as inflation expectations for the near and long term rose +0.3% to 2.7%. Richard Curtin, director of the survey, released in a note that the change may be a one-time event and that “it may be viewed as added justification for next month’s expected interest rate hike.”

Credit balances of U.S. consumers rose in September, led by student and auto loans according to the Federal Reserve. Outstanding consumer credit, a measure of nonmortgage-related debt, rose by $19.29 billion in September from August. Economists had expected an increase of $18.8 billion. September’s 6.28% seasonally-adjusted annual growth rate was down from August’s 8.77% rate. Household balance sheets have been expanding steadily since early 2011. Of the increase, $15.1 billion was non-revolving credit, namely student and auto loans. This category rose at an annualized 6.68% growth rate in September, following a 9.41% annualized rate in August. Revolving credit, made up of mostly credit card debt, rose at a 5.16% annualized rate in September.

In international news, for the first time ever Canadians’ household debt is now worth more than the country’s entire economy. According to Statistics Canada in the second quarter total household debt amounted to 100.6% of Canada’s gross domestic product. Desjardins economist Benoit P. Durocher noted that Canadians now carry more debt than people in any other G7 country calling it a “fairly troubling snapshot” of Canadians’ finances. “The high level of household debt is undermining the Canadian economy and this represents a significant risk over the medium and long terms,” he wrote in a recent client note. Durocher blamed rising house prices along with piling up on non-mortgage debt. Average consumer non-mortgage debt balances rose to $21,686 at the end of the third quarter, up from $21,195 in the same quarter last year.

In the United Kingdom, under revised rules from the Bank of England, the UK’s largest banks will no longer be “too big to fail” by the year 2022. The new regulations will force banks to hold enough money from their investors to absorb losses without help from the taxpayers. If any bank does collapse, remaining funds will be used for an orderly wind-down. Mark Carney, Governor of the Bank, said the new rules were a “significant milestone”. “The implementation of [the rules] will ensure that banks that provide essential economic functions hold sufficient resources to be resolved in an orderly way, without recourse to public funds, and whilst allowing households and businesses to continue to access the services they need,” he said.

Across the Channel, France saw its fastest job creation in 9 years last quarter with 52,200 jobs created. National statistics office INSEE showed the +0.3% increase in non-farm private sector jobs was driven by an increase of 29,600 temporary jobs. The jobs report is a good sign for a fragile economy whose unemployment rate has been hovering around 10%. With one of the higher birth rates in Europe, France in particular needs to create more jobs to absorb the rise in the labor force.

In Germany, the country’s economic ministry reported several data sets that point to slower growth in the 3rd quarter. Total industrial output fell by -1.8%, reversing much of last month’s 3% gain. Berenberg economist Florian Hense does not believe the decline is the start of a new trend, but rather just monthly volatility. Germany’s adjusted trade surplus was lower than the expected 23 billion euros, coming in at only 21.3 billion euros. Despite those disappointments, economists point to the positive sentiment among German firms. The country’s IFO business survey has risen 2 months in a row, and a purchasing managers’ survey last week hit a nearly 3-year high.

In Asia, economic cooperation between China and Russia is meeting the two countries’ expectations. The two did more than $40 billion in trade this year, according to Russian Prime Minister Dmitry Medvedev. Moscow and Beijing are making additional efforts to increase trade to $200 billion in the next 3-7 years. Medvedev noted that the establishment of a preferential trade regime between the two countries would importantly allow the use of their own national currencies in settlements.

In Japan, gross domestic product was estimated to have grown an annualized +0.9% in the 3rd quarter according to a survey of economists. If so, it would mark the longest stretch of growth for Japan in 3 years. Household spending, which accounts for roughly 60% of Japan’s GDP, is expected to fall -0.1% on the quarter. The gain is estimated to have come from a +1.9% rebound in exports for the quarter, combined with a fall in imports. Together, economists predict that net exports added 0.5% to the figure. Despite the weak demand at home, the 0.9% estimate was still welcome news to Japan’s leadership. The Bank of Japan most recently estimated Japan’s growth rate at 0.24%, while the Cabinet Office estimates 0.3%.

Finally, trading in the financial markets has become quite sophisticated over the last decade. Added to traders’ lexicon are terms like algorithmic trading, dark pools, and high-frequency trading. However, one aspect of trading continues to be the Wild West—the so-called “after-hours” or overnight market. After-hours sessions almost always have less liquidity and far fewer participants than the day session, which means prices spike up and down much more violently, orders receive poor executions (“fills”), and overall trading can be more costly. Late on Tuesday evening, when the presidential election began to tilt in favor of Donald Trump, the bottom started falling out of the overnight market. At one point, Dow futures had plunged over -800 points and the S&P lost -5.7% as panicked investors sold. Selling begets selling when “stops” are hit, triggering further selling. Paul Krugman, leftist economist at the New York Times, aghast at the thought of a President Trump, tweeted when the markets were falling “If the question is when markets will recover, a first-pass answer is never….we are very probably looking at a global recession, with no end in sight.” His hyperbole was completely overblown, of course, as by market open almost all of the overnight carnage had disappeared. Investors who sold in the after-hours market missed out on the recovery rally that took place that morning and continued the rest of the week. Bespoke Investment Group used the opportunity to remind investors in a blog post that “The best advice anyone could ever receive in their formative years is that whenever an important and emotional decision needs to be made, it often helps to ‘sleep on it.’” Marketwatch.com added another timeless piece of wisdom: “Teenagers and investors alike should be reminded that nothing good ever happens in the middle of the night!”

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(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, stocksandnews.com, marketwatch.com, wantchinatimes.com, BBC, 361capital.com, pensionpartners.com, cnbc.com, FactSet; Figs 1-5 source W E Sherman & Co, LLC)

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The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market. The average ranking of Defensive SHUT sectors fell to 23.25 from 20.25, while the average ranking of Offensive DIME sectors rose to 11.25 from the prior week’s 14.00. The Offensive DIME sectors continue to lead Defensive SHUT sectors. Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

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Sincerely,

Dave Anthony, CFP®