The very big picture:

In the “decades” timeframe, the current Secular Bull Market could turn out to be among the shorter Secular Bull markets on record. This is because of the long-term valuation of the market which, after only eight years, has reached the upper end of its normal range.

The long-term valuation of the market is commonly measured by the Cyclically Adjusted Price to Earnings ratio, or “CAPE”, which smooths out shorter-term earnings swings in order to get a longer-term assessment of market valuation. A CAPE level of 30 is considered to be the upper end of the normal range, and the level at which further PE-ratio expansion comes to a halt (meaning that increases in market prices only occur in a general response to earnings increases, instead of rising “just because”).

Of course, a “mania” could come along and drive prices higher – much higher, even – and for some years to come. Manias occur when valuation no longer seems to matter, and caution is thrown completely to the wind as buyers rush in to buy first and ask questions later. Two manias in the last century – the 1920’s “Roaring Twenties” and the 1990’s “Tech Bubble” – show that the sky is the limit when common sense is overcome by a blind desire to buy. But, of course, the piper must be paid and the following decade or two are spent in Secular Bear Markets, giving most or all of the mania gains back.

See Fig. 1 for the 100-year view of Secular Bulls and Bears. The CAPE is now at 32.46, down slightly from the prior week’s 32.56, and exceeds 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 in the 0% – 3%/yr. range. (see Fig. 2).

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 82.57, down from the prior week’s 83.63.

In the intermediate and Shorter-term picture:

The Shorter-term (weeks to months) Indicator (see Fig. 4) turned positive on December 27th. The indicator ended the week at 25, up 4 from the prior week’s 21. 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 2018.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2), unless a mania comes along 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 now also positive. Therefore, with internal unanimity expressed by all three indicators being positive, the U.S. equity markets are rated as Positive.

In the markets:

U.S. Markets: U.S. stock benchmarks fell modestly amid very light trading in the holiday-shortened week. Mid-cap stocks outperformed both large caps and small caps, while the technology-heavy NASDAQ Composite fared the worst. The Dow Jones Industrial Average gave up 34 points this week to end the year at 24,719—a loss of ‑0.14%. The NASDAQ Composite fell 56 points to close at 6,903, a loss of -0.8%. By market cap, the small cap Russell 2000 ended down -0.48%, while the large cap S&P 500 retreated -0.36% and mid cap S&P 400 fell by a lesser -0.21%.

International Markets: Canada’s TSX rose for a second straight week, adding 0.27%. The United Kingdom’s FTSE added another 1.25% (benefiting from a slipping British Pound), while on Europe’s mainland France’s CAC 40 fell ‑0.97%, Germany’s DAX retreated -1.2%, and Italy’s Milan FTSE lost -1.6%. In Asia, China’s Shanghai Composite rose a second week, adding 0.3%, while Japan’s Nikkei fell -0.6%. Hong Kong’s Hang Seng index rose another 1.15% following last week’s strong gains.

Commodities: Precious metals rallied a third straight week. Gold surged $30.50/oz. to close at $1,309.30/oz., a gain of 2.4%. Silver, which traditionally trades in the same direction as gold but with wider swings, rose 4.3%. In energy, oil rose 3.34% to close at $60.42 per barrel of West Texas Intermediate crude oil. The industrial metal copper rose a third straight week, picking up 1.9%.

December summary: In the U.S., bigger was better (continuing the year’s dominant theme). The Mega-Cap Dow Jones 30 Industrials rose 1.84%, the Large Cap S& 500 added 0.98%, but the Mid Cap S&P 400 barely budged with a gain of just 0.07%, and the Small Cap Russell 2000 lost ground, retreating -0.56% International stock indices were also mixed. For the month, Canada’s TSX added 0.88% and the United Kingdom’s FTSE surged a whopping 4.9%. But on Europe’s mainland, France’s CAC 40 retreated -1.1%, Germany’s DAX fell a lesser -0.8%, and Italy’s Milan FTSE slumped -2.3%. In Asia, China’s Shanghai Composite fell -0.3%, but Japan’s Nikkei rose 0.18%, and Hong Kong’s Hang Seng added 2.54%. Many commodities finished the year strongly, with Gold adding 2.22% in December, Silver rose 1.35%, Copper surged 7.84% and Crude Oil gained 4.61%

Q4 summary: US stocks were paced by the Dow 30 Industrials, gaining 10.33% for the quarter, followed by the NASDAQ Composite, which gained 6.27%. Other quarterly returns followed the 2017 pattern of Large, Mid and Small, in descending order: Large Cap S&P 500 rose 6.12%, the Mid Cap S&P 400 gained 5.83%, and the Russell 3000 brought up the rear with a gain of 2.99%. Leading major international market Q4 gains were Japan’s Nikkei 225 which rocketed higher by 11.83%, followed by the Hong Kong Hang Seng Index with a gain of 8.58%, Canada’s TSX, which rose 5.49%, and the UK’s FTSE 100, which gained 4.27%. Germany’s DAX was slightly positive at 0.68%, but France’s CAC40 dropped a slight -0.3% and Italy’s MIB lost -3.7%.

2017 summary: Led by the NASDAQ Composite, all the major U.S. stock indexes recorded solid gains for the year, with large-cap stocks generally performing better than smaller-caps. For the year, the Dow Jones Industrial Average surged 25.08%, while the NASDAQ Composite rocketed 28.24%. The large cap S&P 500 rose 19.42%, the mid cap S&P 400 added 14.5%, and the small cap Russell 2000 rose 13.14%. International major markets also prospered in 2017, but only Hong Kong’s Hang Seng index surpassed the Dow, rising 36%. Canada’s TSX rose 6% and the United Kingdom’s FTSE added 7.6%. In Europe, France’s CAC 40 added 9.26%, Germany’s DAX gained 12.5%, and Italy’s Milan FTSE rose 13.6%. In Asia, China’s Shanghai Composite added 6.56% and Japan’s Nikkei surged 19.1% and the aforementioned Hong Kong Hang Seng Index rocketed 36% higher. Gold gained 12.8% for the year, while Silver lagged rising just 5.8%, and Crude Oil finished 2017 up 12.5%.

U.S. Economic News: The number of Americans filing for new unemployment benefits remained unchanged last week, keeping the underlying trend consistent with a tight labor market. The Labor Department reported there were 245,000 claims for state unemployment benefits last week. Since mid-October, claims have remained between 223,000 and 252,000—well below the key 300,000 threshold that analysts use to indicate a “healthy” jobs market. Last week marked the 147^th consecutive week that claims have remained below the 300,000 level. The labor market is widely viewed as being near “full employment”, with the jobless rate at a 17-year low of 4.1%. Continuing claims, which counts the number of people already receiving unemployment benefits, increased by 7,000 to 1.94 million.

The National Association of Realtors (NAR) reported that pending home sales, in which a contract has been signed but not yet closed, ticked up 0.2% last month, missing economists’ forecasts for a 0.5% increase. In its statement, the NAR reported that the housing market’s biggest headwind remains “extremely lean levels of inventory” for sale. Last month, the NAR reported that November had just 3.4 months’ worth of homes for sale—the lowest going back to 1999. NAR Chief Economist Lawrence Yun said, “New buyers coming into the market are finding out quickly that their options are limited and competition is robust.” By region, pending sales were mixed. In the Northeast, pending sales rose 4.1%, while in the Midwest sales were up 0.4%. However, sales dipped -0.4% in the South, and fell -1.8% in the West.

Home prices remained near their highs, up 6.2% from the same time last year, according to the S&P Case-Shiller Home Price Index. The Case-Shiller national index rose a seasonally adjusted 0.7% in the three-month period ending in October. The more narrowly-focused 20-city index also rose a seasonally adjusted 0.7% in October and is up 6.4% for the year. Led by San Francisco and Las Vegas, prices rose in more than half of the largest U.S. markets. Overall, the national index is now 6% above its prior year-to-year peak, while the 20-city index sits just 1.3% below its all-time high. David Blitzer, chairman of the index committee at S&P Dow Jones Indices stated, “Home prices continue their climb supported by low inventories and increasing sales. Underlying the rising prices for both new and existing homes are low interest rates, low unemployment and continuing economic growth.”

Confidence among the nation’s consumers slipped slightly this month just off the 17-year high it reached in November. The Conference Board reported its index fell 6.5 points to 122.1 this month; economists had expected a reading of 127.5. In the details, respondents were a little less confident in their outlook for jobs and business conditions. However, consumers were much more pleased with their current conditions. The “present” situation index rose 1.7 points to 156.6, its highest level since 2001. Only 15.2% of Americans reported jobs were “hard to get”—a 16-year low. Lynn Franco, director of economic indicators at the board remarked, “Despite the decline in confidence, consumers’ expectations remain at historically strong levels, suggesting economic growth will continue well into 2018.”

The Chicago-area Purchasing Managers Index (PMI) rose 3.7 points to 67.6 this month, reaching its highest level since March 2011. December also marked the fourth consecutive month that the Chicago Business Barometer had a reading above 60—the first such occurrence since 2014. Among the components of the PMI, output and demand posted strong gains in the latest month, with both hitting multi-year highs. Production matched the highest level in 34 years while new orders rose to a three-and-a-half year high. Each month the survey asks a new, unique question. According to the latest report, this month’s question asked firms to predict how both their businesses and the U.S. economy would fare in the coming year. Just over 50% saw their business growing somewhere between 0-5%, with 37% forecasting growth between 5-10%, for a total of 87% in the growth camp.

International Economic News: In Canada, economic bulls received an early Christmas courtesy of a couple of positive economic reports. Both wholesale trade figures and retail sales rose 1.5% in October, with all provinces recording gains. Michael Dolega, senior economist at TD Bank stated, “The two reports suggest that consumers were out in full force ahead of the most important weeks for retailers.” The positive numbers gave a slight increase to the odds of an interest rate hike in January. On a somewhat negative note, October’s GDP report came in unchanged from the previous month. Statistics Canada reported goods-producing industries were down 0.4% from September while service-producing industries rose 0.2%. Compared with the same time last year, Canada’s GDP was up a robust 3.4% overall.

Across the Atlantic, according to the United Kingdom’s Office for National Statistics, economic growth was 0.4% in the third quarter, matching expectations. The result was a 0.1% increase over the previous quarter. In the details, household consumption rose at a faster pace and contributed the most to the UK’s economic growth, however growth in fixed investments stalled. On annualized basis, the UK’s gross domestic product improved by 1.6% from the same time last year. In a separate report, the Office for National Statistics reported that inflation in the U.K. is on the rise. Inflation rose by 0.3% last month, following a 0.1% rise in October. Overall, inflation in the United Kingdom was up 3.1% on a yearly basis last month—the highest reading since March 2012.

On Europe’s mainland, French President Emmanuel Macron has regained his footing in national polls following a rocky start to his presidency some seven months ago. A string of French polls show a clear surge in his popularity following a plunge to a near record low for a newly elected president over the summer. Macron had immediately set to revamp France’s extensive labor laws to make the country more economically competitive on the global stage. Surveys by Ifop, BVA, and Odoxa Institutes all showed a clear jump, with 52% of French citizens saying they are “satisfied” or have a “good opinion” of Macron, up from around 40% in November. Macron has re-asserted France as a prominent country on the international scene by taking the lead on the Paris climate accord, inviting London-based international companies to move to Paris following the Brexit vote, and maintaining France’s military involvement in the battle against the Islamic State in Iraq and Syria.

In Germany, the European Central Bank (ECB) now has a dilemma on its hands as German inflation hit its highest level in more than five years. Initial data showed that prices in Europe’s largest economy rose by 0.8% in December, faster than the 0.6% increase expected. Over the past year, German prices rose an average 1.7% in “harmonized terms”—its largest increase since 2012 when inflation hit 2.1%. Consumer prices are “harmonized” to make them compatible with inflation data in other European Union countries. The German data will give hawkish ECB members more arguments in favor of unwinding the ECB’s 2.55 trillion euro bond-buying program. Some economists say the ECB’s low interest rate environment risks causing the German economy to overheat.

Chinese industrial firms continued to increase production in the fourth quarter, but growth in wages and hiring is slowing according to a quarterly survey of thousands of Chinese firms by China Beige Book International (CBB). The CBB found that while “old economy” firms in the commodities sector sustained an increase in net capacity and production, the retail sector suffered from weak revenue, a slowdown in hiring, and a worsening cash flow situation. The results support views that China’s economy will slacken in 2018 after posting better-than-expected 6.9% growth through the first three quarters of this year. Much of this year’s performance was supported by robust exports, a construction boom, and a government-led infrastructure spending spree.

Japan’s unemployment rate dipped to its lowest level since November 1993 offering fresh evidence that the world’s third-largest economy is on track to recovery, official data showed. Unemployment stood at 2.7% in November while the jobs-to-applicants ratio improved slightly to 1.56:1 — its highest level in 44 years! The data comes as Japan has attained seven consecutive quarters of economic growth—its longest positive run in 16 years. In addition, the upward trend is expected to continue. Masaki Kuwahara, senior economist at Nomura Securities stated, “Japan’s economy is expected to keep expanding through the first half of next year [meaning 2018].” A separate report confirmed confidence among Japan’s biggest manufacturers is also at an 11-year high.

Finally: The year 2017 was a banner year in the financial markets. Major indexes in the U.S. hit a number of record highs, and there was not a single down month the entire year for the S&P 500 Total Return Index. The gains, however, have caused equity valuations to be stretched by almost all traditional metrics. By most measures, the US equity market is at its most overbought level in over 20 years. Duncan Lamont, head of research and analytics at Schroders Investment Management, writes that there is still some value in the market, “but it is hard work finding it.” In the following chart from Schroders, Dividend Yield is the only metric where the S&P 500 might be attractively valued compared to its 15-year average value (shown in parentheses). However, the reading of most concern is the CAPE, or cyclically-adjusted price-to-earnings multiple. The CAPE compares the S&P to its average, annual inflation-adjusted earnings over the previous 10 years. The current CAPE reading of 31 is above the 15-year average of 25, and nearly twice the long-term average of 16.8 that goes back to 1881. The only other times it has been above 30 were in 1929, before the Great Depression, and from 1997-2002, at the apex of the dot.com bubble. Some analysts say “It’s different this time”, citing rising profits from the new tax laws and differing accounting standards now vs then. Nonetheless, whenever one hears “It’s different this time” usually turns out to be a good time to look around the room for a door marked “Exit”! In this chart, Cape = CAPE, P/E = price to earnings, P/B = price to book value, DY = dividend yield and EM = Emerging Markets.

(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, zerohedge.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 fell to 23.75 from the prior week’s 22.75, while the average ranking of Offensive DIME sectors rose sharply to 4.25 from the prior week’s 9.25. The Offensive DIME sectors expanded their already-substantial lead over the 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®

The very big picture:

In the “decades” timeframe, the current Secular Bull Market could turn out to be among the shorter Secular Bull markets on record. This is because of the long-term valuation of the market which, after only eight years, has reached the upper end of its normal range.

The long-term valuation of the market is commonly measured by the Cyclically Adjusted Price to Earnings ratio, or “CAPE”, which smooths out shorter-term earnings swings in order to get a longer-term assessment of market valuation. A CAPE level of 30 is considered to be the upper end of the normal range, and the level at which further PE-ratio expansion comes to a halt (meaning that increases in market prices only occur in a general response to earnings increases, instead of rising “just because”).

Of course, a “mania” could come along and drive prices higher – much higher, even – and for some years to come. Manias occur when valuation no longer seems to matter, and caution is thrown completely to the wind as buyers rush in to buy first and ask questions later. Two manias in the last century – the 1920’s “Roaring Twenties” and the 1990’s “Tech Bubble” – show that the sky is the limit when common sense is overcome by a blind desire to buy. But, of course, the piper must be paid and the following decade or two are spent in Secular Bear Markets, giving most or all of the mania gains back.

See Fig. 1 for the 100-year view of Secular Bulls and Bears. The CAPE is now at 32.56, up from the prior week’s 32.45, and exceeds 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 in the 0% – 3%/yr. range. (see Fig. 2).

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 83.63, up from the prior week’s 82.09.

In the intermediate and Shorter-term picture:

The Shorter-term (weeks to months) Indicator (see Fig. 4) turned negative on November 9th. The indicator ended the week at 22, up 1 from the prior week’s 20. Separately, the Intermediate-term 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 2017.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2), unless a mania comes along 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 Q4, but the shorter (weeks to months) timeframe (Fig. 4) is negative. Therefore, with internal disagreement expressed by two of three indicators being positive but one being negative, the U.S. equity markets are rated as Neutral.

In the markets:

U.S. Markets: U.S. stocks recorded modest gains for the week, as small cap benchmarks outperformed their large-cap counterparts. The Dow Jones Industrial Average added 102 points to end the week at 24,754, a gain of 0.4%. The technology-heavy NASDAQ Composite rose 0.34% but remained just below 7,000, closing at 6,959.96. By market cap, the mid cap S&P 400 and small cap Russell 2000 indexes gained 0.95% and 0.82%, respectively. The large cap S&P 500 index added 0.28%.

International Markets: Canada’s TSX reversed last week’s decline and rose 0.77%. In the United Kingdom, the FTSE surged 1.4% to new highs, its third consecutive week of gains. On Europe’s mainland, France’s CAC 40 rose 0.3%, Germany’s DAX fell for a second week losing -0.2%, and Italy’s Milan FTSE rose 0.5%. In Asia, China’s Shanghai Composite reversed five straight weeks of losses by rising 0.9%. Japan’s Nikkei added 1.55% and Hong Kong’s Hang Seng surged 2.5%. As grouped by Morgan Stanley Capital International, developed markets added 0.2%, while emerging markets rose 0.7%.

Commodities: Gold experienced a second week of gains, rising 1.7% to end the week at $1278.80 an ounce. Silver likewise added 2.4%, closing the week at $16.44 an ounce. Energy rebounded following three weeks of losses, rising 2% to close at $58.47 a barrel for West Texas Intermediate crude oil. Copper, seen by some analysts as an indicator of global economic health due to its variety of uses, had a second week of strong gains, rising 3.3%.

U.S. Economic News: The Labor Department reported the number of people applying for new unemployment benefits rose by 20,000 last week to 245,000, but still remained far below the 300,000-level analysts use to indicate a “healthy” labor market. The reading was above the 230,000 estimate of economists, and its highest level in five weeks. The more stable four week average of new jobless claims increased by 1,250 to 236,000. The increase is unlikely to cause any concern over the strength of the labor market. Layoffs remain very low with the unemployment rate still at 4.1%, its lowest level in nearly 17 years. Continuing claims, which counts the number of people already receiving benefits, rose by 43,000 to 1.93 million. That number is reported with a one-week delay.

Confidence among the nation’s home builders rose to its highest level in eighteen years, surpassing the peak set during the housing boom of 2006-2007. The National Association of Home Builders (NAHB) reported that its monthly sentiment index surged five points to 74, exceeding analyst forecasts by 4 points. Overall, the builders seem to be in a good position with economy supporting a strong rate of home sales and a new tax overhaul that should boost profits. In its release the NAHB stated, “Housing market conditions are improving partially because of new policies aimed at providing regulatory relief to the business community.” In addition, it noted that the NAHB “fully supports” the legislation agreed upon by the conference committee of House and Senate members.

The number of housing starts reached their second-highest pace of the recovery last month running at a seasonally-adjusted 1.297 annual rate, according to the Commerce Department. The reading was 3.3% higher than October’s and 12.9% higher than the same time last year. The number of permits, tracked by analysts as an indication of future building activity, ticked down -1.4% to 1.298 million rate, but remained 3.4% higher than at the same time last year. Economists had forecast only a 1.25 million annual rate for starts. After the report’s release, Trulia chief economist Ralph McLaughlin noted that starts are still running at only about 67% of their long-term average, despite years of pent-up demand following the financial crisis. Still, the shift from construction of multi-family homes, which are almost always intended as rentals, to single-family ones, should be welcomed, McLaughlin added.

Sales of existing homes surged to their highest level since before the housing bubble of 2006, hitting their highest level in almost 11 years. The National Association of Realtors (NAR) reported existing home sales rose 5.6% to a 5.81 million seasonally adjusted annual rate last month and were 3.8% higher than the same time last year. The reading was the highest since December 2006 and followed an upwardly revised 5.5 million-unit pace in October. The reading shows that housing is regaining momentum after almost stalling earlier this year. Existing home sales make up about 90% of U.S. home sales. At November’s sales pace, it would take a record low 3.4 months to exhaust the current inventory on the market. Strong demand amid a shrinking supply of homes pushed the median home price up 5.8% to $248,000, the 69^th consecutive month of year-over-year price gains.

New orders for U.S.-made manufactured goods fell last month after four consecutive months of gains. The Commerce Department reported orders for non-defense capital goods ex-aircraft slipped -0.1% last month, missing economists’ forecasts for a 0.5% gain. On an annualized basis, core capital goods are 5.1% higher than the same time last year. Analysts believe that the dip is likely to be temporary given the passage of the Republicans tax cut package—the largest overhaul of the tax code in 30 years. Overall, orders for durable goods, items meant to last three years or more, rose 1.3% in November on the heels of strong demand for transportation equipment which surged 4.2%.

The mood of the nation’s consumers fell more than expected this month, slipping further from the decade high reached in October. The University of Michigan’s survey of consumer attitudes declined 2.6 points to 95.9 this month—economists had expected a dip to just 97.1. Overall, the indicator has remained in a narrow band this year, which the survey’s chief economist Richard Curtin said reflects American consumers’ increasing confidence about their income and employment prospects. The index measures 500 consumers’ attitudes on future economic prospects, in areas such as employment, personal finances, inflation, government policies, and interest rates. In its statement Richard Curtin, chief economist of the survey stated, “Consumer confidence continued to slowly sink in December, with most of the decline among lower income households.”

Spending among the nation’s consumers rose more than forecast last month, according to the Commerce Department. Purchases rose 0.6% following a 0.2% advance that was less than previously estimated. While partly reflecting rising prices and spending related to energy, the results indicate strength in consumption, which accounts for more than two-thirds of the U.S. economy. One concern is that the increase in spending may be coming at the expense of stored up funds. The savings rate fell to 2.9% in November, to the lowest level since late fall of 2007—just before the recession began.

The Philadelphia Fed’s Manufacturing Business Outlook Survey jumped 3.5 points to 26.2 in December, handily beating the consensus forecast of a fall to 21.8. According to the survey, factory conditions in the mid-Atlantic region are improving, with any reading over zero signaling improving conditions. In the details of the report, the new orders index surged 8.4 points to 29.8—a positive indicator about future activity. In addition, shipments also rose, while survey respondents “continued to report increases in employment”, according to the release. Analysts report that an improving overseas economy is stoking demand for American businesses, and sentiment has improved by the promise of tax cuts. Barclay’s economist Pooja Sriram noted, “Altogether, today’s reading remains well above the six-month average of 23.2 and continues to signal strong manufacturing production in the U.S.”

International Economic News: Ex-Canadian Prime Minister Pierre Trudeau once remarked that Canada’s relationship with the United States was like sleeping next to an elephant: “No matter how friendly and even-tempered is the beast, one is affected by every twitch and grunt.” With the biggest tax cut in decades being signed into law in the United States, the corporate tax rate drops from 35% to 21%. Previously, Canada could boast lower business taxes—the Canadian average combined federal-provincial tax rate had compared favorably to the American average combined federal-state rate of 39.1%. That advantage is now history. The new average American rate is just 26%. If that wasn’t enough, the current Troudeau government is heading in the opposite direction on taxes. Troudeau’s government has proposed a national carbon tax in 2018, scheduled a payroll tax beginning in 2019 to pay for higher Canada pension plan contributions, and introduced an automatic tax escalator on alcohol.

Across the Atlantic, in the United Kingdom households turned increasingly cautious in the third quarter as they increased their spending at the slowest annual pace since 2012, according to the Office for National Statistics. Britain has experienced slower growth than the other big European economies this year due the rise in inflation, caused largely by the fall in the value of the pound after the 2016 referendum decision to leave the European Union. Annual growth in the third quarter slowed to 1.7%, slightly higher than estimates, but still the weakest pace in over four years. From the second quarter, the economy expanded an unrevised 0.4%. In a Bloomberg survey, the U.K. economy is expected to expand at 1.5% this year and 1.4% in 2018. That would be well behind the rates expected for both the U.S. and the euro region.

On Europe’s mainland, ‘The Economist’ magazine has named France “country of the year 2017”, mainly due to the election of President Emmanuel Macron. The magazine, often described as center-left in regards to its political leanings, commended France for voting in Macron and his party La Republique en Marche. It noted that the President, despite coming from a party “full of political novices”, had “crushed the old guard” and “transformed the national political debate.” Macron was especially commended for having “passed a series of sensible reforms”, most notably restructuring France’s rigid labor laws. The magazine’s second place finisher was South Korea. The announcement came alongside an updated forecast from French national statistics bureau Insee that reported French gross domestic product would grow by 1.9% in 2017, a full percentage point higher than a previous estimate.

In Germany, business morale deteriorated unexpectedly this month after hitting a high in November, according to the Ifo Institute for Economic Research in Munich. The causative factor appears to be Chancellor Angela Merkel’s inability to form a stable government after her Conservatives lost voters to the Far Right in September’s election, and her attempts at a three-way alliance with two smaller parties also failed. The Ifo Institute said its business climate index, based on a monthly survey of about 7,000 firms, slipped 0.4 point to 117.2 from last month’s reading. In the details of the report, the decline was driven by managers’ less optimistic business expectations, however overall business morale remained at a relatively high level.

The Bank of Italy pointed blame at the European Union for plunging the Italian economy into crisis. Ignazio Visco, the Governor of the Bank of Italy, accused the European Union’s regulatory regime for contributing to Italy’s financial crisis. As ratings agencies downgraded Italy’s sovereign debt, it meant the cost of funding for Italian banks in the coming months would fall on the government. The country then received fiscal support from the Eurozone, and in particular Germany, leading to increased scrutiny over how its banks were supported after the 2008 financial crisis. Mr. Visco argues that the intervention from Brussels to use Eurozone public funds inhibited Italy’s ability to respond to the macroeconomic conditions. Italy is considered one of the most vulnerable economies in the Eurozone after twenty years of poor performance and a failure to adapt to increasing global competition.

In Asia, the most senior members of China’s Communist Party wrapped up a three-day, closed-door meeting on where they think the economy is headed. Some key points from the meeting are that China has left an era of “high-speed” growth and entered a new era of “high-quality” growth, meaning that economists don’t expect to see a dramatic rebound in economic expansion. Of utmost priority will be to manage and prevent major risks to the world’s second-biggest economy. In particular, China will work to strengthen its financial sector. Finally, Beijing will work to restore clean air over the country by cutting pollution dramatically by 2020.

The Bank of Japan left monetary stimulus unchanged in the final policy meeting of the year as weakness in the yen and the recovery in the global economy supported solid economic growth. Overnight interest rates remained at negative 0.1%, while 10-year bond yields were capped at “around zero”, and asset purchases will continue at an established pace of about $706 billion USD a year. Monetary policy has remained unchanged for a year as the Bank of Japan continues to strive to reach its 2% inflation target. As its press conference, Bank of Japan Governor Kuroda signaled that no tightening of monetary policy is imminent. As the BOJ aims for 2% inflation, monetary conditions would be “stable and sustained” adding that the policy will continue until the “necessary time”.

Finally: In a year of uncertainty that included a recalcitrant North Korea, Britain’s continued exit from the European Union, multiple terrorist attacks, and global populist uprisings, to say 2017 was a turbulent year is a bit of an understatement—except, that is, in stock markets. World stocks, as measured by the MSCI All-Country World Index have risen every month this year, so far. In fact, they haven’t had a negative return since October of 2016. As shown by the following graphic, if they were to finish December in the green, it would represent the first year ever without a single monthly decline. And the odds are good for the record continuing, with a positive December so far and just 4 trading days to go.

(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, zerohedge.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 22.75 from the prior week’s 22.50, while the average ranking of Offensive DIME sectors was unchanged from the prior week at 9.25. The Offensive DIME sectors retained their substantial lead over the 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®

The very big picture:

In the “decades” timeframe, the current Secular Bull Market could turn out to be among the shorter Secular Bull markets on record. This is because of the long-term valuation of the market which, after only eight years, has reached the upper end of its normal range.

The long-term valuation of the market is commonly measured by the Cyclically Adjusted Price to Earnings ratio, or “CAPE”, which smooths out shorter-term earnings swings in order to get a longer-term assessment of market valuation. A CAPE level of 30 is considered to be the upper end of the normal range, and the level at which further PE-ratio expansion comes to a halt (meaning that increases in market prices only occur in a general response to earnings increases, instead of rising “just because”).

Of course, a “mania” could come along and drive prices higher – much higher, even – and for some years to come. Manias occur when valuation no longer seems to matter, and caution is thrown completely to the wind as buyers rush in to buy first and ask questions later. Two manias in the last century – the 1920’s “Roaring Twenties” and the 1990’s “Tech Bubble” – show that the sky is the limit when common sense is overcome by a blind desire to buy. But, of course, the piper must be paid and the following decade or two are spent in Secular Bear Markets, giving most or all of the mania gains back.

See Fig. 1 for the 100-year view of Secular Bulls and Bears. The CAPE is now at 32.45, up from the prior week’s 32.17, and exceeds 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 in the 0% – 3%/yr. range. (see Fig. 2).

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 82.09, up from the prior week’s 80.49.

In the intermediate and Shorter-term picture:

The Shorter-term (weeks to months) Indicator (see Fig. 4) turned negative on November 9th. The indicator ended the week at 20, down 1 from the prior week’s 21. Separately, the Intermediate-term 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 2017.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2), unless a mania comes along 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 Q4, but the shorter (weeks to months) timeframe (Fig. 4) is negative. Therefore, with internal disagreement expressed by two of three indicators being positive but one being negative, the U.S. equity markets are rated as Neutral.

In the markets:

U.S. Markets: Most of the major U.S. indexes recorded modest gains during the week, bringing the large-cap benchmarks and the technology-heavy Nasdaq Composite to new highs. The Dow Jones Industrial Average added 322 points to end the week at 24,651 for a gain of 1.33%. The Nasdaq Composite reversed last week’s loss, rising 1.41% to close at 6,936. By market cap, however, markets ended the week mixed. The large cap S&P 500 added 0.92%, the small cap Russell 2000 gained 0.57%, but the S&P 400 mid cap index retreated -0.22%.

International Markets: Canada’s TSX reversed last week’s rise, falling -0.34%. In Europe, the United Kingdom’s FTSE had a second week of strong gains rising 1.3%, but the other major European markets did not do as well. France’s CAC 40 fell -0.9%, Germany’s DAX declined -0.38%, and Italy’s Milan FTSE slumped -3%. In Asia, China’s Shanghai Composite fell a second week, declining -0.7%. Japan’s Nikkei retreated -1.1%, while Hong Kong’s Hang Seng reversed some of last week’s losses rising 0.7%. As grouped by Morgan Stanley Capital International, emerging markets rose 0.5%, while developed markets added 0.2%.

Commodities: Precious metals ended the week with a gain following three down weeks. Gold rose $9.10 to close at $1257.50 an ounce, while silver gained 1.5% to close at $16.06 an ounce. In energy, oil ended essentially flat. West Texas Intermediate crude oil slipped -$0.03 to end the week at $57.33 per barrel. Copper, seen by some analysts as a barometer of worldwide economic health, surged 5.24% this week.

U.S. Economic News: The Labor Department reported that initial claims for new unemployment benefits fell by 11,000 to just 225,000 in the week ending December 9^th. In the details of the report, the biggest declines took place in New York, Texas, and California. The reading is just barely above the lowest post-recession low, and also near the lowest level since the early 1970’s. The less-volatile monthly average of new claims slipped 6,750 to 234,650. Overall, layoffs remain near a 45-year low and the unemployment rate is just 4.1%–the lowest in 17 years. Continuing jobless claims, which counts the number of people already receiving benefits, fell to 1.886 million from 1.913 million. That number is reported with a one-week delay.

The nation’s employers posted slightly fewer job openings in October than the previous month, but the number of people hired improved. The Labor Department reported that nearly 6 million jobs were available at the end of October, down from the 6.18 million open the month before, but total hires rose 4.4% to 5.55 million. Leading sources of the increased hiring were in restaurants and hotels, health care, manufacturers, and financial services. Overall, the U.S. has created almost 17.5 million jobs since 2010 bringing the unemployment rate down to a near 17-year low of 4.1%. Employers continue to report that their biggest problem is finding skilled workers among the shrinking labor pool. Some firms are dealing with the issue by spending more on technology such as automation to address the problem.

Sentiment among small-business owners surged last month to the second-highest reading on record the National Federation of Independent Business (NFIB) reported. The index of small business optimism rose 3.7 points to 107.5 last month, the second-highest reading in the 44-year history of the index and near its all-time high set in July 1983. Eight of the ten components of the index recorded gains, including a massive 16-point gain in expected better business conditions and a 13-point jump in the measure of sales expectations. NFIB Chief Economist Bill Dunkelberg said, “The NFIB indicators clearly anticipate further upticks in economic growth, perhaps pushing up toward four percent GDP growth for the fourth quarter. This is a dramatically different picture than owners presented during the weak 2009-16 recovery.”

Retail sales increased more than expected in November as holiday shopping got off to a brisk start. The Commerce Department reported retail sales rose 0.8% last month with households buying all types of goods. Internet retailers like Amazon posted a massive 2.5% increase in sales as consumers continued to favor online shopping for Black Friday and Cyber Monday deals. On an annualized basis, retail sales accelerated 5.8%. Core retail sales, which exclude automobiles, gasoline, building materials, and food services, jumped 0.8% following a 0.4% increase in October. David Berson, chief economist at Nationwide said, “November’s retail sales report suggests that consumers are responding positively to solid job gains, increasing income growth, and record levels of household net worth.”

The U.S. Consumer Price Index increased 0.4% last month according to the Bureau of Labor Statistics. Three-quarters of the gain were due to higher gas prices. Stripping out the volatile food and energy categories, the core rate of inflation rose a weaker 0.1%. Overall, the annual rate of inflation rose 0.2% to 2.2%, but the core rate fell slightly to 1.7%. While rising oil prices were a significant part of the increase in the cost of living, consumers also paid more for housing, rent, and new and used cars. Of note, clothing prices posted their biggest one-month decline in almost two decades.

At the wholesale level, the Producer Price Index (PPI) surged 0.4% last month, the third consecutive monthly gain leaving inflation near a nearly 6-year high. The Bureau of Labor Statistics reported the increase in producer prices was broad-based across multiple sectors. “Core” PPI, which strips out the volatile food and energy categories, also rose 0.4%. The increase in the PPI lifted the 12-month rate of wholesale inflation to 3.1%–its highest level since January 2012. The annual rate for core inflation climbed to 2.4%, its highest reading since mid-2014. Overall, the higher cost of energy was responsible for a sizeable part of the increase, but the wholesale prices for a larger variety of goods are on the rise.

The Federal Reserve Open Market Committee (FOMC) voted to lift the key U.S. interest rate a quarter percentage point, but the central bank took a wait-and-see stance in light of persistent low inflation and the pending change in leadership at the Fed. The FOMC raised its benchmark federal funds rate to 1.5%, its fourth increase in a year, and made no changes to its forecast for inflation and for three interest rate hikes in 2018. Interest rate hikes raise the cost of borrowing for consumers and businesses and are intended to help to keep the economy from overheating. Paul Ashworth, chief U.S. economist at Capital Economics noted, “The surprise is that, despite that stronger economic growth, the inflation and interest rate projections were left almost completely unchanged.”

International Economic News: Bank of Canada Governor Stephen Poloz stated Canada’s economy has reached a point of near-perfect balance, with most companies running at full capacity and inflation nearing the central bank’s 2% target. In a speech in Toronto, Mr. Poloz said, “We are at a point in the economic cycle that I think of as the “sweet spot”—we know that a majority of Canadian companies are running flat out.” The Bank of Canada has raised its benchmark interest rate twice so far this year to 1%. Mr. Poloz noted that rates at the level remain “stimulative”. Mr. Poloz said the bank would continue to be “cautious” and “data dependent” as it ponders its next rate decisions – the next of which is due on January 17^th.

Britain and China pledged cooperation with each other as the Britain prepares to leave the European Union. Britain and China have pledged to promote London as a center for use of Beijing’s currency and cooperate in clean energy research and trade. British leaders are looking to China for trade and investment opportunities as they forge a new global role with reduced access to the 27 nations of the European common market. The two sides agreed to promote international use of China’s yuan and develop yuan-based business in London. That would benefit Britain by reaffirming London’s status as a global financial center. Britain’s Chancellor of the Exchequer Philip Hammond stated, “These are welcome steps that will help deliver our vision of a stronger, fairer, more balanced economy in the U.K. and will also support China’s vision for the future direction of its economy.”

Across the Channel, the French economy kept up a surging rate of expansion into December, capping a year that has seen the country go from one of the Eurozone’s laggards to one of its strongest performers. Research firm IHS Markit said its preliminary Purchasing Managers Index (PMI) for manufacturing rose 1.6 points to 59.3 for December hitting a more than 17-year high. The PMI reading for the service sector retreated a point but remained above the 50-point threshold indicating expansion. IHS Markit Chief Economist Chris Williamson noted, “France is very much leading the pack in the fourth quarter in terms of overall growth rates.” “The fact the French economy has shaken off its malaise, picking up growth momentum almost continually throughout the year to end on this super strong high note is a key factor in why the Eurozone is doing so well,” he said.

In Germany, the Munich-based Ifo Institute for Economic Research reported the German economy will expand by 2.6% next year in its latest forecast for Europe’s economic powerhouse. The bullish projection comes despite the apparent political stalemate with Chancellor Angela Merkel still trying to form a coalition government nearly three months after a federal election. If the prediction comes true, the growth rate would be the highest since the 3.7% registered in 2011. Ifo head Clemens Faust said, “The German economy is humming,” adding that the strong economic upturn would extend well into 2018.

It is expected that U.S. President Donald Trump will accuse China of engaging in “economic aggression” this coming week during the release of his national security strategy. The national security strategy is a formal document produced by every U.S. president since Ronald Reagan. The accusation will be the most aggressive economic response to China since the U.S. supported its entry into the World Trade Organization in 2001. Critics worry that if the U.S. pushes too hard, it could start a trade war that could have severe consequences for U.S. business and the global economy. Evan Mederios, former Asia adviser to Barack Obama said, “The concern about Chinese economic policy and practices is serious and real but the question is how you deal with it. Unilateral trade enforcement mechanisms are not going to do it. You need systemic tools that shape the economic environment around China in order to reshape their incentives.”

In Japan, the central bank survey known as a tankan showed that business confidence improved for a fifth straight quarter in the three months to December hitting an 11-year high. On a negative note, big manufacturers and non-manufacturers expect business conditions to deteriorate in the next three months, and they are thus reluctant to increase worker wages and business investment. Premier Shinzo Abe has struggled for almost two decades to get firms to spend more on wages to help end the deflation that has plagued Japan. Abe’s ruling coalition approved a plan to slash the corporate tax rate, but only for companies that increase spending. Hidenobu Tokuda, senior economist at Mizuho Research Institute said, “The tankan results support the BOJ’s bullish economic view backed by global economic recovery.”

Finally: In what may be a surprising twist at the end of a strong year in the market, Boston Consulting Group found that fully 46% of investors were pessimistic about equity markets for the next year. The reading is up from 32% a year ago, and just 19% in 2015. As global equity benchmarks have rallied, more investors also see the market as too expensive. Fully 68% of respondents said the equity market is “overvalued,” more than double the 29% of respondents who thought as much last year. And nearly 80% of investors describing themselves as market bears cited “overvaluation” as the reason for their market pessimism, the survey found.

(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, zerohedge.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 22.50 from the prior week’s 23.00, while the average ranking of Offensive DIME sectors rose to 9.25 from the prior week’s 10.50. The Offensive DIME sectors expanded their lead over the 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®

The very big picture:

In the “decades” timeframe, the current Secular Bull Market could turn out to be among the shorter Secular Bull markets on record. This is because of the long-term valuation of the market which, after only eight years, has reached the upper end of its normal range.

The long-term valuation of the market is commonly measured by the Cyclically Adjusted Price to Earnings ratio, or “CAPE”, which smooths out shorter-term earnings swings in order to get a longer-term assessment of market valuation. A CAPE level of 30 is considered to be the upper end of the normal range, and the level at which further PE-ratio expansion comes to a halt (meaning that increases in market prices only occur in a general response to earnings increases, instead of rising “just because”).

Of course, a “mania” could come along and drive prices higher – much higher, even – and for some years to come. Manias occur when valuation no longer seems to matter, and caution is thrown completely to the wind as buyers rush in to buy first and ask questions later. Two manias in the last century – the 1920’s “Roaring Twenties” and the 1990’s “Tech Bubble” – show that the sky is the limit when common sense is overcome by a blind desire to buy. But, of course, the piper must be paid and the following decade or two are spent in Secular Bear Markets, giving most or all of the mania gains back.

See Fig. 1 for the 100-year view of Secular Bulls and Bears. The CAPE is now at 32.17, up from the prior week’s 31.98, and exceeds 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 in the 0% – 3%/yr. range. (see Fig. 2).

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 80.49, up from the prior week’s 78.88.

In the intermediate and Shorter-term picture:

The Shorter-term (weeks to months) Indicator (see Fig. 4) turned negative on November 9th. The indicator ended the week at 21, 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 October, indicating positive prospects for equities in the fourth quarter of 2017.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2), unless a mania comes along 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 Q4, but the shorter (weeks to months) timeframe (Fig. 4) is negative. Therefore, with internal disagreement expressed by two of three indicators being positive but one being negative, the U.S. equity markets are rated as Neutral.

In the markets:

U.S. Markets: U.S. stocks were mixed this past week as investors continued to process the potential impact of tax reform and political developments out of Washington D.C. The Dow Jones Industrial Average managed a third consecutive week of gains, adding 97.5 points to close at 24,329. The technology-heavy Nasdaq Composite retreated a slight -0.11% to 6,840. By market cap, large caps showed relative strength with the large cap S&P 500 adding 0.35%, but the mid cap S&P 400 slipped -0.20%, and the Russell 2000 fell -1.00%.

International Markets: Canada’s TSX retraced some of last week’s loss, rising 0.36%. It was a strong week in Europe with major market up across the board. The United Kingdom’s FTSE added 1.28%, while on the mainland France’s CAC 40 rose 1.6%, Germany’s DAX surged 2.3%, and Italy’s Milan FTSE soared over 3%. In Asia, China’s Shanghai Composite fell a fourth straight week, down -0.8%. Japan’s Nikkei ended the week essentially flat, down just -0.03%, while Hong Kong’s Hang Seng index retreated -1.5%. As grouped by Morgan Stanley Capital International, developed markets ended the week unchanged and emerging markets added 0.2%.

Commodities: Precious metals continued to lose their luster. Gold was down for a third straight week, falling -$33.90 to $1,248.40 an ounce, a loss of -2.64%. Silver, which often trades in tandem with gold, fell an even larger ‑3.45% to $15.82 an ounce. Energy continued to weaken following its surge of two weeks ago. West Texas Intermediate crude oil retreated -1.7% to $57.36 a barrel. Copper, seen by some analysts as an indicator of worldwide economic health, fell for a second week, declining -3.7%.

U.S. Economic News: The Labor Department reported that initial unemployment claims for new unemployment benefits fell by 2,000 to a five-week low of 236,000 last week. Economists had expected claims to rise to 240,000. Unemployment remains near a 17-year low and the biggest problem in the labor market continues to be a shortage of skilled workers, not a lack of job openings. Job openings are near a record high and many companies are actively recruiting. The less volatile monthly moving average of claims fell slightly to 241,500. Analysts view readings below the 300,000-level as indicative of a “healthy” jobs market. The number of people already receiving unemployment benefits, known as continuing claims, declined by 52,000 to 1.91 million. That number is reported with a one-week delay.

According to payrolls processor ADP, private employers added a healthy 190,000 jobs last month. The latest reading exceeded economists’ expectations for 180,000 new jobs, but was a decline of 45,000 from October. According to ADP, small private-sector businesses added 50,000 jobs, medium-sized businesses added 99,000, and large businesses added 41,000. The vast majority of the jobs added were in the service sector, with 155,000 new jobs. Goods producers added 36,000 new jobs. Mark Zandi, chief economist at Moody’s Analytics stated, “It is hard to find any problems in the job market. We are very likely to have a sub-4% unemployment rate as we move into 2018.”

The government’s Non-Farms Payroll (NFP) report said 228,000 new jobs were created last month, another strong gain highlighting the strongest U.S. labor market since the year 2000. The increase exceeded economists’ forecasts for a reading of 200,000. Unemployment remained unchanged near its 17-year low of 4.1%. Professional and business services, and education and health services led the gains, with 46,000 and 54,000 jobs created, respectively. According to most analysts, the strong jobs report almost guarantees the Federal Reserve will hike interest rates in December. Many analysts noted that there was one ingredient missing from the otherwise very healthy jobs report: wage growth. Companies don’t appear to be offering more generous pay to the vast majority of workers. Kate Warne, investment strategist at Edward Jones noted, “For highly skilled jobs, raising wages doesn’t really create more qualified applicants. And firms are not willing to pay for skills that people don’t have.” She added that she expects wage growth will remain soft for “a while”.

New orders for U.S.-made goods fell less than expected in October, dropping -0.1%, largely due to less demand for passenger planes, cars, and trucks, according to the Commerce Department. Economists had forecast factory orders falling -0.4%. John Ryding, chief economist at RDQ Economics stated, “These data remain consistent with a solid upswing in manufacturing activity and an acceleration in corporate capital spending.” Orders for non-defense capital goods excluding aircraft, so-called core capital goods orders, rose 0.3% in October instead of the 0.5% drop reported last month. These orders are used as an indication of business spending plans. Shipments of core capital goods, which are used to calculate business equipment spending in the gross domestic product report, advanced 1.1% in October instead of the previously reported 0.4% rise. Jesse Edgerton, an economist at JPMorgan noted, “The shipments revision adds upside risk to our already double-digit forecast for fourth-quarter equipment spending growth, and the revised orders data show no sign of a slowdown in capital expenditures in the months ahead.”

In the services sector, the Institute for Supply Management’s (ISM) index of service-oriented companies fell 2.7 points to 57.4 last month pulling back from its 12-year high of 60.1 in October. Despite the decline, overall the report was still very strong. Out of the 17 industries tracked by ISM, all except one said their businesses were expanding. In the details of the report, the new orders index fell 4.1 points to 58.7%, production slipped 2.7 points to 57% and employment declined 2.2 points to 55.3%. The services sector is the dominant force of the American economy, making up almost 80% of the U.S. economy. Andrew Hunter of Capital Economics noted that the readings from the two ISM indexes are “still consistent with annualized GDP growth of around 3.5%.”

Sentiment among the nation’s consumers dropped to a 3-month low as concerns over tax reform weighed. The University of Michigan’s index of consumer sentiment fell 1.7% to 96.8 in December, missing economists’ expectations for a rise to 99. Richard Curtin, chief economist for the Surveys of Consumers said in a statement that “most of the recent decline was concentrated in the long-term prospects for the economy. The rise in inflation expectations in early December was a surprise, and confidence in this finding must await confirmation in the months ahead before any inferences are drawn,” Curtin said. The index measures 500 consumers’ attitudes on future economic prospects, in areas such as personal finances, inflation, unemployment, government policies and interest rates.

International Economic News: The Bank of Canada kept its key interest rate steady but pointed to several positives that could support a rate increase in the coming months. The central bank left the rate at 1% for two straight policy meetings after the strengthening economy prompted it to raise its benchmark interest rate twice over the summer. In announcing its latest decision, the bank pointed to several recent positives that could support higher rates in the coming months. They included encouraging job and wage growth, sturdy business investment and the resilience of consumer spending despite higher borrowing costs and Canadians’ heavy debt loads. In addition, the bank said there’s increasing evidence in the economic data that the benefits from government infrastructure investments have begun to work their way through the economy. On a negative note, the bank reported exports had slipped more than expected in recent months and that the international outlook faces considerable uncertainty.

Across the Atlantic, in the United Kingdom, the question on everyone’s mind is “how much will it cost for the United Kingdom to leave the European Union?” It turns out nobody knows. The government official responsible for shepherding Britain’s departure from the EU acknowledged that the government had made no formal assessments of the economic impact of leaving the bloc. Brexit Secretary David Davis told a parliamentary committee that “no quantitative assessment” was carried out before the cabinet decided to leave the EU and that the nation should be prepared for a “profound shift” in the way the economy operates, on a scale similar to the 2008 financial crisis. The House of Commons’ Brexit committee’s chair, Hilary Benn, described the situation (with typical British understatement) as “rather strange” given the momentous decisions at hand and since authorities wish to start renegotiating Britain’s trade relations with the rest of Europe within weeks.

France and China held their fifth High-Level Economic and Financial Dialogue last week in Beijing. French Minister of Finance and Economy Bruno Le Maire and Chinese Vice-Premier Ma Kai co-chaired the annual dialogue. The two countries reached 71 agreements during the series of meetings, agreeing to boost cooperation in automobile, aerospace, nuclear power, advanced manufacturing, and the Belt and Road initiative. Le Maire described the meetings as the “beginning of the new era in the economic relationship between France and China.”

Germany is home to the fourth-largest economy in the world and the largest in Europe. The country has been the stable center of the EU for decades. Analysts believe that if Germany destabilizes, the existence of the European Union could be in question. While that’s not an imminent threat, what has occurred is Germany’s political environment has shifted somewhat dramatically. In recent elections, both of Germany’s predominant parties, the CDU and the SPD, have lost roughly 20% of their seats in parliament, with the right-wing Alternative for Germany, or AfD, gaining 93 seats to become the third-largest party in parliament. The AfD is characterized as a German nationalist far-right political party that is critical of the European Union and, especially, immigration.

Despite a decent performance this year the Italian economy is likely to underperform in 2018, according to Capital Economics economist Jack Allen. During the third quarter, gross domestic product grew 0.4% sequentially instead of 0.5% growth estimated previously, revised data showed on December 1. The growth was driven predominantly by a 3.0% rise in investment. Allen noted, “This is particularly encouraging as investment has been the slowest component of expenditure to recover from the crisis – it is still almost 24% below its pre-crisis peak.” Allen expects a weaker economic performance next year because after years of loose fiscal policy, he expects the government to “tighten its purse strings” going forward.

In Asia, China’s powerful Politburo has listed its top economic priorities for the coming year—curbing financial risks, eradicating poverty, and fighting pollution. The statement from the 25-member Politburo noted its most pressing task was to stem financial risks. Financial institutions would also be required to strengthen support for the real economy and “positive effects” should be achieved from risk prevention measures. The Politburo also called on rank-and-file members to improve living standards and to make “solid progress” on fighting poverty and environment protection. The International Monetary Fund warned in a financial risk analysis that Beijing should put financial stability above its development goals and said monetary and fiscal policies aimed at supporting employment and growth had led to a surge in debt.

The Japanese the economy expanded at an annualized 2.5% in the third quarter, data showed. The growth rate was faster than expected, and higher than the initial estimate of 1.4%. Growth was driven by rising global exports amid healthy global demand, and also by increased domestic spending by Japanese firms on equipment and facilities. The spending helped to offset weaker spending by consumers. The world’s third-largest economy has now grown for seven straight quarters, putting Japan on its longest stretch of uninterrupted growth since at least 1994. Prime Minister Shinzo Abe’s economic policies, known as “Abenomics”, have been partly credited for the expansion. The policies comprised a mix of monetary easing, government spending, and structural reforms designed to re-ignite the economy.

Finally: The Lords of Silicon Valley are supposed to be the drivers of our economy, and they certainly are this era’s economic rock stars. But at least for now, according to this week’s Non-Farm Payrolls report, the lowly blue-collar folks out in “flyover country” are experiencing a renaissance in jobs that has been a long time coming. Whether one credits Trump or not, the jobs growth is currently quite real in manufacturing – and, just for irony, note the decline in the high-tech “Information” category.

(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, zerohedge.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 slipped to 23.00 from the prior week’s 22.75, while the average ranking of Offensive DIME sectors rose to 10.50 from the prior week’s 13.00. The Offensive DIME sectors expanded their lead over the 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®

The very big picture:

In the “decades” timeframe, the current Secular Bull Market could turn out to be among the shorter Secular Bull markets on record. This is because of the long-term valuation of the market which, after only eight years, has reached the upper end of its normal range.

The long-term valuation of the market is commonly measured by the Cyclically Adjusted Price to Earnings ratio, or “CAPE”, which smooths out shorter-term earnings swings in order to get a longer-term assessment of market valuation. A CAPE level of 30 is considered to be the upper end of the normal range, and the level at which further PE-ratio expansion comes to a halt (meaning that increases in market prices only occur in a general response to earnings increases, instead of rising “just because”).

Of course, a “mania” could come along and drive prices higher – much higher, even – and for some years to come. Manias occur when valuation no longer seems to matter, and caution is thrown completely to the wind as buyers rush in to buy first and ask questions later. Two manias in the last century – the 1920’s “Roaring Twenties” and the 1990’s “Tech Bubble” – show that the sky is the limit when common sense is overcome by a blind desire to buy. But, of course, the piper must be paid and the following decade or two are spent in Secular Bear Markets, giving most or all of the mania gains back.

See Fig. 1 for the 100-year view of Secular Bulls and Bears. The CAPE is now at 31.98, up from the prior week’s 31.58, and exceeds 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 in the 0% – 3%/yr. range. (see Fig. 2).

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 78.88, up from the prior week’s 77.21.

In the intermediate and Shorter-term picture:

The Shorter-term (weeks to months) Indicator (see Fig. 4) turned negative on November 9th. The indicator ended the week at 21, up from the prior week’s 19. Separately, the Intermediate-term 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 2017.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2), unless a mania comes along 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 Q4, but the shorter (weeks to months) timeframe (Fig. 4) is negative. Therefore, with internal disagreement expressed by two of three indicators being positive but one being negative, the U.S. equity markets are rated as Neutral.

In the markets:

U.S. Markets: U.S. stocks were mostly higher in a week that was notable for the wide range of returns among the major indexes. The narrowly focused 30 stock Dow Jones Industrial Average had its best weekly gain for the year, while the technology-heavy Nasdaq Composite recorded a loss. The Dow Jones Industrial Average surged 673.60 points to close at 24,231 for a gain of 2.86%. Conversely, the Nasdaq Composite gave up some of last week’s gains by retreating -0.6% to close at 6847. By market cap, the S&P 400 mid cap index led the way with a 1.9% gain, while the small cap Russell 2000 and large cap S&P 500 gained 1.2% and 1.5%, respectively.

International Markets: Canada’s TSX reversed most of last week’s gain, falling -0.4%. Major European markets ended in the red, as well. The United Kingdom’s FTSE fell -1.5%, while on Europe’s mainland, France’s CAC 40 declined -1.4%, Germany’s DAX gave up -1.5% and Italy’s Milan FTSE ended down -1.4%. Asian markets were mixed. China’s Shanghai Composite fell -1.1% and Hong Kong’s Hang Seng dropped -2.7%, while Japan’s Nikkei rose 1.2%. As grouped by Morgan Stanley Capital International, developed markets finished the week down ‑0.7%, while emerging markets retreated -3.9%.

Commodities: Precious metals had a second down week with Gold falling -$5 to close at $1,282.30 an ounce, a loss of -0.4%. Silver suffered a much more severe drop, giving up -3.6% to end the week at $16.39 an ounce. Energy reversed some of last week’s gain. West Texas Intermediate crude fell -1% to close at $58.36 a barrel. Copper, seen by some analysts as a barometer of world economic health due to its variety of applications, retraced most of last week’s gain, ending the week down -2.4%.

November Summary: For the month of November, the Dow Jones Industrial Average rose 3.8%, while the Nasdaq Composite added 2.2%. The large cap S&P 500 and the small cap Russell 2000 each gained 2.8%, while the S&P 400 mid cap index added 3.5%. Outside the U.S., results were mixed. Canada’s TSX rose 0.26%, while the United Kingdom’s FTSE fell -2.2% and France’s CAC 40 ended down -2.4%. Germany’s DAX was down a lesser ‑1.6%. In Asia, China’s Shanghai Composite ended down -2.2%, but Japan’s Nikkei surged 3.2% and Hong Kong’s Hang Seng added 3.3%. As grouped by Morgan Stanley Capital International, emerging markets fell -0.4% while developed markets gained 0.7%. Gold went essentially nowhere in November, closing just 0.2% higher for the month, while West Texas Crude Oil ripped higher by 5.2%.

U.S. Economic News: According to the Labor Department, initial claims for unemployment benefits fell by 2,000 to 238,000 last week, a week that included the Thanksgiving holiday. The less volatile monthly average of new claims rose slightly to 242,250. Unemployment remains at a 17-year low. Jim O’Sullivan, chief U.S. economist at High Frequency Economics released a note stating that the very low level of jobless claims “continues to signal enough strength in employment growth to keep the unemployment rate trending down.” Continuing claims, which counts the number of people already collecting unemployment benefits increased by 42,000 to 1.96 million. That number is reported with a one-week delay.

Sales of new homes soared to their highest level in over ten years in October as sales were up 9% year to date, and 6.2% higher than in September. The Commerce Department reported new-home sales were running at a 685,000 seasonally-adjusted annual rate in the month of October. The reading was 18.7% higher than the same time last year. At the current sales rate, there is a 4.9 month supply of homes on the market—a decline of 0.3 month from September. The median price of a new home is $312,800—3% higher than a year ago. Stephen Stanley, chief economist for Amherst Pierpont Securities, released a note to clients stating, “The sector is in little danger of seeing inventories pile up any time soon…the months’ supply slid to 4.9 and has been below the 6 month level that has traditionally signaled a balanced market for more than three years running.”

Along with the number of new homes sold, home prices were also up according to the latest data from the S&P/Case-Shiller home price index. The Case-Shiller national index rose a seasonally-adjusted 0.7% in the third quarter, an increase of 6.2% compared to the same period a year ago. This slightly exceeded economists’ forecasts for a 6.1% increase. S&P Dow Jones indexes managing director David Blitzer said, “Most economic indicators suggest that home prices can see further gains.” The index is rising at its fastest annual rate since June of 2014. The more narrowly focused 20-city index rose a seasonally-adjusted 0.5% for the month, and was up 6.2% year-to-date. Of the 20 cities covered by the index, 13 reported price increases for the 12-months ending in September. Seattle, Las Vegas, and San Diego reported the highest year-over-year gains among the 20 cities. Case-Shiller’s national index regained its previous, bubble-era peak last year, but the 20-city index, which is skewed toward the metro areas that experienced the biggest booms, is still 1.5% shy of its 2006 high.

Pending home sales, which count the number of homes that are under contract but have not yet closed, surged 3.5% in October according to the National Association of Realtors (NAR). The reading exceeded analysts’ forecasts of only 1%. In the details of the NAR report, only the West recorded a decline—down -0.7%. In the Northeast, pending home sales rose 0.5%, while in the Midwest sales rose 2.8%. In the South, pending home sales soared 7.4%. On an annualized basis, the South is the only region in which pending home sales are higher than at the same time last year.

Confidence among the nation’s consumers hit a 17-year high last month; Americans haven’t been this optimistic about the economy since the year 2000. The Conference Board’s measure of consumer confidence rose to 129.5 in November, blowing past economists’ expectations of 124. Lynn Franco, Director of Economic Indicators at the Conference Board said, “Consumers are entering the holiday season in very high spirits and foresee the economy expanding at a healthy pace in the early months of 2018.” The index takes into account Americans’ views of current economic conditions and their expectations for the next six months. This indicator is particularly important because consumer spending accounts for about 70% of U.S. economic activity.

The Institute for Supply Management (ISM) reported its manufacturing index retreated slightly to a still-strong reading of 58.2 in November, down -0.5 point from October. In the details of the ISM report, the new orders index rose 0.6 point to 64, while the production index rose 2.9 points to 63.9—a six-year high. The employment gauge remained flat at 59.7. Overall the index reflected strong growth among manufacturers. Any reading over 50 indicates expansion, while readings near 60 are especially robust. One of the biggest problems manufacturers reported was getting supplies on time to produce enough goods to keep up with sales.

The U.S. economy’s rate of growth in the third quarter was raised 0.3% to 3.3% in the government’s latest revision to gross domestic product. The reading was the fastest rate of growth in three years. The improvement in GDP was primarily due to stronger business investment. Spending on equipment, particularly transportation-related, was raised by 1.8% to 10.4%. Overall the report was very positive. The U.S. has exceeded 3% growth for two quarters in a row and looks like it may have a third for the first time since 2004-2005.

The Federal Reserve’s Beige Book, a collection of anecdotal information on current economic conditions by each Federal Reserve Bank in its district, reported a “slight improvement in the outlook”, with overall growth in the U.S. remaining at a “modest to moderate pace”. In the report, inflation pressures strengthened over the past month with transportation and manufacturing costs rising. Wage gains remained modest to moderate despite the widespread reports of tightness in labor markets. The report was widely interpreted to give the Federal Reserve the green light to go ahead with an expected quarter-point rate hike at its next meeting later this month.

International Economic News: Canada’s economy is ending the year on a high note as the unemployment rate dropped below 6% for the first time since 2008 and employers added almost 400,000 workers over the past 12 months. Statistics Canada reported that the sharp rise in new positions brought the jobless rate down to 5.9% last month. The increase in employment is fueling an increase in household spending as well. A separate report showed that consumption is rising at its fastest pace since before the recession. Josh Nye, economist at Royal Bank of Canada stated, “Our forecast assumes the bank will raise rates again in April when they have more information on NAFTA renegotiation and how households are handling this year’s rate hikes. If anything, today’s blockbuster employment report raises the risk of an earlier move.”

United Kingdom surveys showed that British consumers, the main drivers of the economy, are their least confident since just after last year’s Brexit vote, and that business morale has also weakened. The GfK consumer confidence index dropped 2 points to -12 last month, to its lowest level since July 2016 and a point below economists’ forecasts. Joe Staton, executive at GfK stated, “Sadly there’s no festive cheer. Household jitters following the recent interest rate hike, squeezed incomes, higher inflation and economic uncertainty have dampened the consumer mood across the UK.” Britain’s economy has slowed this year as higher inflation, predominantly due to a fall in the British pound, pushed up costs for households and businesses.

French President Emmanuel Macron wants to create France’s own version of Silicon Valley. In a speech this week, the French president noted that France is among the world’s developed market economies where technology companies are significantly underrepresented. “I want France to be a start-up nation,” Macron told attendees at VivaTech, an entrepreneurial conference in Paris last June. Macron sees technology innovation as the way for his country to move up. The Macron government is expanding capital available to start-ups and proposing tax changes that will spur more private investment and support private initiatives. Analysts note that the French tax system, labor laws, and culture of avoiding risks have traditionally hindered technology investment.

The German central bank known as the Bundesbank warned that investors may be ignoring vulnerabilities, lulled into a sense of security by the country’s eight-year run of economic expansion. While Germany has been the main economic engine in the euro zone, the bank notes that there is a danger that the prolonged period of low interest rates may result in market participants underestimating risks. The central bank wrote, “Risks have built up, in particular, during the prolonged period of low interest rates — the valuations of many investments are very high, and the share of low-interest investments on the balance sheets of banks and insurers has risen steadily.” German banks are among the least efficient in Europe, with their return on assets among the lowest in the bloc and their cost to income ratio at 74.9% is the highest in the Eurozone. “This low level of profitability could increase the incentive to take on more risk in order to generate higher returns,” the report said.

In Asia, the United States has formally opposed China being granted “market economy” status by the World Trade Organization (WTO). China is also negotiating with the European Union for recognition as a market economy. The “market economy” designation makes it much more difficult for the targets of Chinese exports to impose tariffs or trade barriers. The U.S. and EU argue that the Chinese government’s pervasive role in the economy including huge subsidies means that domestic prices are deeply distorted and not market-determined. A victory for China before the WTO could open up many countries to a flood of cheap Chinese goods. U.S. Trade Representative Robert Lighthizer told Congress in June that the case was “the most serious litigation we have at the WTO right now” and a decision in China’s favor “would be cataclysmic for the WTO.”

The Japanese government reported that the Japanese economy remained in a “moderate recovery” for the sixth straight month, supported by private consumption, capital spending, and exports. In its monthly economic report, the Cabinet Office maintained its positive assessments on all key components of the economy including industrial output. The Cabinet Office said private consumption is “picking up moderately”, while business investment, industrial output, and exports were all “picking up”. But domestic demand, particularly private consumption (which accounts for nearly 60% of the country’s economy) is far from robust.

Finally: As the cryptocurrency Bitcoin hit a high of over $11,000 at one point this past week, more and more market watchers are predicting a crash of some severity. Unlike most of those “gut calls”, one study in particular was actually backed up with hard data.

The study, entitled “Bubbles for Fama” was authored by Robin Greenwood, finance and banking professor at Harvard Business School, and Andei Shleifer, economics professor. The researchers found that when an asset has a price run-up of 100% or more in a two-year period, the probability of a crash becomes 50%. When focusing on run-ups of at least 150%, that probability jumps to 80%. Higher than that and a crash is a near-certainty. Of note, the authors focused on the stock market in their study, not cryptocurrencies. But their research included nearly a century worth of historical stock data from around the world, and found similar conclusions regardless of the time period or country.

Bitcoin’s run-up over the last two years is nearly 2,500%.

(But who is “Fama”, you ask? He’s a well-known academic economist who is also a leading proponent of the “Efficient Market Hypothesis”, which states that the markets have already efficiently and effectively incorporated all known information into its pricing. But if that’s true, there can be no bubbles! So, the authors are offering up their study of genuine bubbles to Professor Fama for his consideration…)

(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, zerohedge.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 slipped to 22.75 from the prior week’s 21.50, while the average ranking of Offensive DIME sectors rose to 13.00 from the prior week’s 16.00. The Offensive DIME sectors expanded their lead over the 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®

The very big picture:

In the “decades” timeframe, the current Secular Bull Market could turn out to be among the shorter Secular Bull markets on record. This is because of the long-term valuation of the market which, after only eight years, has reached the upper end of its normal range.

The long-term valuation of the market is commonly measured by the Cyclically Adjusted Price to Earnings ratio, or “CAPE”, which smooths out shorter-term earnings swings in order to get a longer-term assessment of market valuation. A CAPE level of 30 is considered to be the upper end of the normal range, and the level at which further PE-ratio expansion comes to a halt (meaning that increases in market prices only occur in a general response to earnings increases, instead of rising “just because”).

Of course, a “mania” could come along and drive prices higher – much higher, even – and for some years to come. Manias occur when valuation no longer seems to matter, and caution is thrown completely to the wind as buyers rush in to buy first and ask questions later. Two manias in the last century – the 1920’s “Roaring Twenties” and the 1990’s “Tech Bubble” – show that the sky is the limit when common sense is overcome by a blind desire to buy. But, of course, the piper must be paid and the following decade or two are spent in Secular Bear Markets, giving most or all of the mania gains back.

See Fig. 1 for the 100-year view of Secular Bulls and Bears. The CAPE is now at 31.58, up from the prior week’s 31.51, and exceeds 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 in the 0% – 3%/yr. range. (see Fig. 2).

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 77.21, up from the prior week’s 75.78.

In the intermediate and Shorter-term picture:

The Shorter-term (weeks to months) Indicator (see Fig. 4) turned negative on November 9th. The indicator ended the week at 19, up from the prior week’s 18. Separately, the Intermediate-term 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 2017.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2), unless a mania comes along 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 Q4, but the shorter (weeks to months) timeframe (Fig. 4) is negative. Therefore, with internal disagreement expressed by two of three indicators being positive but one being negative, the U.S. equity markets are rated as Neutral.

In the markets:

U.S. Markets: U.S. stocks rose in the holiday-shortened week of light trading with many of the major indexes reaching new records. Small cap stocks, which are typically more volatile, recorded the biggest gains, while the technology-heavy Nasdaq Composite also performed well. The Dow Jones Industrial Average gained 0.86% to finish the week at 23,557. The Nasdaq Composite climbed a second week surging over 1.5% to end the week at 6,889. By market cap, smaller cap stocks outperformed large caps with the small cap Russell 2000 and mid-cap S&P 400 adding 1.76% and 1.00%, respectively, while the large cap S&P 500 rose 0.91%.

International Markets: Canada’s TSX rebounded from last week’s modest retreat by rising 0.68%, while across the Atlantic the United Kingdom’s FTSE added 0.39%. On Europe’s mainland major markets finished up. France’s CAC 40 rose 1.34%, along with Germany’s DAX which gained 0.50%, and Italy’s Milan FTSE which rose 1.46%. In Asia, China’s Shanghai Composite fell -0.86%, its second week of losses. But Japan’s Nikkei managed a 0.70% gain and Hong Kong’s Hang Seng surged a healthy 2.3%. As grouped by Morgan Stanley Capital International, developed markets jumped 2.08% while emerging markets added 1.90%.

Commodities: Precious metals gave up some of last week’s gains with Gold falling -0.7% to close at $1,287.30 an ounce. Silver, typically more volatile than gold, retreated ‑2.2%. In energy, oil hit its highest level in more than 2 years with a barrel of West Texas Intermediate crude oil rising almost 4% to close at $58.95 a barrel. Copper, watched by some analysts as an indicator of global economic health due to its diversity of uses, ended the week up 3.3%.

U.S. Economic News: Applications for new unemployment benefits fell by 13,000 to 239,000 in the week ended November 18, according to the Labor Department. The reading was just below economists’ expectations of 240,000 and remained near a 45-year low. The monthly average of claims, used by analysts as a more accurate measure of the labor market, rose slightly to 239,750. The release was welcome news for market pundits. Jim Baird, chief investment officer at Plante Moran Financial Advisors stated, “This morning’s release also marks the 142nd consecutive week that jobless claims have been below 300,000, which is the longest such streak since 1970, when the labor market was considerably smaller.” Continuing claims, the number of people already collecting unemployment benefits, increased 36,000 to 1.9 million.

Sales of previously owned homes rebounded last month to a seasonally-adjusted annual rate of 5.48 million, according to the National Association of Realtors (NAR). The reading was up 2% from September, and was the highest monthly rate since June. Economists had expected only a 5.45 million rate. In the NAR report, the median sales price was $247,000, up 5.5% from the same time last year. October marked the 68^th consecutive month in which prices rose compared to the same time the previous year. At the current sales pace, there is a 3.9 month supply of homes on the market, down from 4.4 months a year ago. Seasonally-adjusted, October’s inventory is the second-lowest on record going back to 1999. Unadjusted, sales are 4.6% higher year to date compared to the same period in 2016, the NAR said. By region, sales were up 4.2% in the Northeast, 0.8% in the Midwest, 1.9% in the South, and 2.4% in the West.

A surge in the Conference Board’s Leading Economic Indicators index (LEI) demonstrated a continuing strength in the economy. The LEI, a weighted gauge of 10 indicators, climbed 1.2% last month and showed no signs of slowing down with the end of the year fast approaching. The increase was a big improvement over September’s 0.1% gain, when twin hurricanes hit Florida and Texas. In the details of the report, almost all of the components rose last month. Layoffs declined, stocks continued to rise, and the housing market rebounded among other improvements. Ataman Ozyildirim, director of business cycles research at the Board, anticipates solid growth in the U.S. economy until the end of the year. He wrote “The growth of the LEI, coupled with widespread strengths among its components, suggests that solid growth in the U.S. economy will continue through the holiday season and into the new year.”

Orders for so-called “durable goods”, meaning goods expected to last longer than three years, fell 1.2% last month. The reading was far short of the 0.3% increase that was expected. October’s decline ended a three-month streak of healthy gains in goods orders. Stripping out defense-related goods and aircraft, the Commerce Department reported ”core” goods orders fell 0.5% last month. The decline was the biggest drop since September of last year. Economists had forecast orders for core capital goods to increase 0.5%. Actual shipments of core capital goods rose 0.4% last month, following a 1.2% advance in September. Shipments of core capital goods orders are used to calculate equipment spending in the government’s Gross Domestic Product (GDP) measurement.

Sentiment among the nation’s consumers reached its second-highest level in 13 years, according to the University of Michigan’s Consumer Sentiment index. The University of Michigan said its index hit 98.5 in November, higher than economists’ estimates of 98. Richard Curtin, chief economist for the Surveys of Consumers said that the indicator has remained largely unchanged in 2017, reflecting Americans’ increasing confidence and certainty about their income and employment prospects. “Increased certainty about future income and job prospects has become a key factor that has supported discretionary purchases”, Curtin said. Also of note, Curtin said that “neither changes in fiscal nor monetary policies have yet had any noticeable impact on consumer expectations.”

The Chicago Fed reported that its national economic index rebounded to its highest level in over ten years. The central bank branch reported October’s reading surged to 0.65 from a sharply upwardly revised positive 0.36 in September. October’s reading was the highest for the volatile index since December of 2006. The smoothed three-month moving average improved to a positive 0.19, up from a negative 0.05 in September. The Chicago Fed’s national economic index is a weighted average of 85 economic indicators, designed so that zero represents trend growth and a three-month moving average below negative -0.7 suggests a recession has begun. In the details of the report, the biggest contribution to the overall reading came from production-related indicators. Employment-related indicators remained positive but were down slightly from September’s reading.

In a pair of surveys, research firm IHS Markit reported that U.S. businesses continued to grow in November, but at their lowest pace in four months. Markit’s Purchasing Managers Index (PMI) fell 0.8 for manufacturing point to 53.8, while in services, the PMI declined 0.3 point to 54.3. Still, readings above 50 indicate more companies are growing rather than shrinking. In its release, chief economist at IHS Markit Chris Williamson wrote, “U.S. businesses reported another month of solid growth in November, putting the economy on course for a reasonable, though by no means stellar, fourth quarter. Current PMI readings are broadly consistent with GDP growing at an annualized rate of just over 2%.”

International Economic News: According to the latest forecast from the Conference Board of Canada, Alberta’s economy is set to grow by a blistering 6.7% this year – far ahead of every other Canadian province. Marie-Christine Bernard , director of the organization’s provincial forecasting, stated in the group’s release, “Thanks to rising oil production and a swift turnaround in drilling levels, Alberta surged out of recession this year.” The Conference Board’s report came two days after a projection from ATB Financial that estimated real GDP growth of 3.9% in Alberta for 2017. The explosive growth comes after two years of economic contraction. Along with the improvement in oil prices, the report pointed to the improvement in the domestic economy as consumers who had delayed making major purchases during the recession resumed spending.

Across the Atlantic, in its latest “Brexit Monitor” Moody’s Investor Service reported growth in the United Kingdom further stabilized in the third quarter suggesting the negative economic impacts of the UK’s vote to leave the European Union had been relatively modest to date. Colin Ellis, a Managing Director at Moody’s and co-author of the Brexit Monitor wrote, “Producer pricing pressures, which have subsequently been reflected in higher consumer prices since the vote to leave, cooled significantly in October, consistent with our expectation of inflation peaking over the coming months.” Growth indicators remained mixed with some surveys suggesting that overall GDP has continued to expand led by the services sector, while retail spending and consumer sentiment has been weak.

On Europe’s mainland, France’s election of a pro-business centrist President has led to a sea change in American business owners’ view of the country, according to a recent survey. A survey of 156 top executives of American companies with French divisions by the American Chamber of Commerce and Bain & Company showed that 52% were now planning to add more staff in France over the next few years, more than double the amount from only a year ago. Robert Vassoyan, head of AmCham France and Bain’s Marc-Andre Kamel said in its statement, “The 2017 survey underline the existence of a ‘Macron effect’ and the very positive signal sent to companies by the new French president’s reforms.” Since Macron took power earlier this year, he has enacted decrees overhauling France’s labor rules and passed a budget bill cutting corporate tax and scrapping a wealth tax on all but property assets.

In Germany, according to a recent survey by the Ifo Institute for Economic Research in Munich, optimism among German businesses rose to a record high this month as the global economy continues to boom. The Ifo business climate index climbed to 117.5, an increase of 0.7 point. Economists’ had forecast the gauge to remain unchanged. While Germany’s domestic economy has been growing strongly, the uptick was the result of a stronger global economy. Ifo Institute President Clemens Faust said “The recent uptick in the index is mostly due to the manufacturing sector, to the export industry specifically. We’ve had a strong domestic economy for some time and what’s being added now is a stronger global economy.” One potential headwind is the current political uncertainty after Chancellor Angela Merkel saw her efforts to form a coalition government collapse. Ifo reported 90% of its responses were submitted before the talks collapsed.

The European Commission warned Italy over its high level of public debt in the Eurozone’s third largest economy. In its statement this week, the European Commission said, “In the case of Italy, the persisting high government debt is a reason for concern.” Italy is predicted to have one of the lowest rates of growth in the whole EU over the next three years. The commission stated it will give Rome until spring of 2018 to bring things back in order.

China has been pumping a lot of cash into its economy in order to boost market sentiment. Last week alone, the People’s Bank of China injected 810 billion Chinese yuan ($122.4 billion) into the economy in five consecutive days of daily liquidity management operations. Analysts stated the actions were taken, in part, as a response to China’s 10-year sovereign bond yields spiking to multiyear highs. Nomura analysts said in a note last week that the bond rout was due to fears of regulatory tightening from Beijing. Bond yields, which move inversely to prices, hit 4% for a time—the first time in three years. A rise in the benchmark government bond yield could threaten to drive up overall borrowing costs and worsen the country’s debt situation.

Japanese export growth held steady last month, suggesting that brisk global demand for Japanese cars and electronic goods will likely carry its economic recovery into the current quarter. According to Ministry of Finance data, exports rose 14% year-over-year in October, led by shipments of cars to Australia and LCD production equipment and raw materials for plastics to China. The trade figures came on the heels of data that showed Japan’s economy expanded at an annualized rate of 1.4% in the third quarter, driven by solid global demand. Masaki Kuwahara, senior economist at Nomura Securities, said, “In the longer term, brisk demand for capital expenditure in advanced nations will support the global economy and Japan’s exports as receding political uncertainty releases pent-up demand for upgrades of existing production facilities.”

Finally: Shortly after the stock market rebounded from the depths of the financial crisis, Time magazine named Federal Reserve Chairman Ben Bernanke as its 2009 Person of the Year for the aggressive interventions he took to presumably prevent a second Great Depression. Bernanke used his position at the Fed to blast trillions of newly printed dollars into the financial system to shore up almost every aspect of the nation’s financial system. Investors were bailed out, banks were bailed out, but that avalanche of money somehow didn’t make its way into worker wages – arguably the most important measure of all.

According to the Economic Policy Institute, in data from 2007-2014 all workers except those with advanced degrees actually lost ground in inflation adjusted (“real”) terms, and even those with advanced degrees didn’t experience any wage gains – they just didn’t lose ground like everyone else!

(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, zerohedge.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 fell to 21.50 from the prior week’s 19.75, while the average ranking of Offensive DIME sectors fell to 16.00 from the prior week’s 14.50. The Offensive DIME sectors maintain a lead over the 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®

The very big picture:

In the “decades” timeframe, the current Secular Bull Market could turn out to be among the shorter Secular Bull markets on record. This is because of the long-term valuation of the market which, after only eight years, has reached the upper end of its normal range.

The long-term valuation of the market is commonly measured by the Cyclically Adjusted Price to Earnings ratio, or “CAPE”, which smooths out shorter-term earnings swings in order to get a longer-term assessment of market valuation. A CAPE level of 30 is considered to be the upper end of the normal range, and the level at which further PE-ratio expansion comes to a halt (meaning that increases in market prices only occur in a general response to earnings increases, instead of rising “just because”).

Of course, a “mania” could come along and drive prices higher – much higher, even – and for some years to come. Manias occur when valuation no longer seems to matter, and caution is thrown completely to the wind as buyers rush in to buy first and ask questions later. Two manias in the last century – the 1920’s “Roaring Twenties” and the 1990’s “Tech Bubble” – show that the sky is the limit when common sense is overcome by a blind desire to buy. But, of course, the piper must be paid and the following decade or two are spent in Secular Bear Markets, giving most or all of the mania gains back.

See Fig. 1 for the 100-year view of Secular Bulls and Bears. The CAPE is now at 31.51, unchanged from the prior week, and exceeds 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 in the 0% – 3%/yr. range. (see Fig. 2).

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 75.78, down from the prior week’s 76.83.

In the intermediate and Shorter-term picture:

The Shorter-term (weeks to months) Indicator (see Fig. 4) turned negative on November 9th. The indicator ended the week at 18, down from the prior week’s 20. Separately, the Intermediate-term 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 2017.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2), unless a mania comes along 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 Q4, but the shorter (weeks to months) timeframe (Fig. 4) is negative. Therefore, with internal disagreement expressed by two of three indicators being positive but one being negative, the U.S. equity markets are rated as Neutral.

In the markets:

U.S. Markets: U.S. large cap indexes were flat to slightly lower, while the technology-heavy Nasdaq Composite and smaller-cap benchmarks managed to close positive. The Dow Jones Industrial Average fell for a second week by losing 64 points to close at 23,358, a loss of -0.27%. The Nasdaq Composite retraced last week’s loss rising 0.47% to close at 6,314. Smaller cap indexes showed relative strength over large caps with the mid cap S&P 400 and small cap Russell 2000 rising 0.82% and 1.19%, respectively, while the large cap S&P 500 fell -0.13%.

International Markets: Canada’s TSX fell -40 points to close at 15,998, along with the United Kingdom’s FTSE which ended down -0.7%. Most bourses on Europe’s mainland major markets followed suit. France’s CAC 40 retreated -1.14%, along with Germany’s DAX which fell -1% and Italy’s Milan FTSE which lost over -2%. In Asia, China’s Shanghai Composite gave up most of last week’s gains by falling -1.45%, and Japan’s Nikkei retreated ‑1.25%. Hong Kong’s Hang Seng closed in the green, managing a 0.27% gain. As grouped by Morgan Stanley Capital International, emerging markets rose 1.1%, while developed markets fell -0.5%.

Commodities: Gold surged over $22 for the week to close at $1296.50, a gain of 1.75%. Silver, gold’s smaller and generally more volatile cousin, jumped almost 3% to close at $17.37 an ounce. In energy, a barrel of West Texas Intermediate crude oil fell just -0.05% to end the week at $56.71, while Brent crude oil fell -1.38% to $62.72 per barrel. Copper, seen by some analysts as an indicator of world economic health due to its variety of uses, fell a second week losing -0.29%.

U.S. Economic News: The Labor Department reported initial claims for unemployment rose 10,000 to 249,000 last week as the number of applications hit a six-week high and exceeded economist’ forecasts of just 235,000. New jobless claims rose in part to a backlog of applications from the areas recently hit by hurricanes such as Puerto Rico and the Virgin Islands. On a positive note, the number of claims remained far below the key 300,000 threshold that analysts use to indicate a “healthy” jobs market. The more stable four-week moving average of claims rose by 6,500 to 237,750. The number of people already receiving unemployment benefits, known as continuing claims, fell by 44,000 to 1.86 million. That number is at its lowest level since December of 1973.

Confidence has climbed to an 8-month high among U.S. home builders. The National Association of Home Builders (NAHB) reported its confidence gauge rose two points to 70—its highest since March and the second highest reading since the housing bubble of 2005. Economists had forecast a one point decline to 67. The sub-index that tracks current sales conditions also rose two points to 77, but the gauge of sales over the next six months slipped one point to 77. The NAHB noted in its statement that builder confidence is “a strong indicator that the housing market continues to grow steadily”, but voiced concern about “lot and labor shortages and ongoing building material price increases.”

Housing starts surged in October, rising 13.7% to a seasonally-adjusted 1.29 million—its second-highest level since the economic recovery began eight years ago. In the details of the repot, the Commerce Department noted large double-digit gains in the South and the Midwest (with some of that hurricane-related). Construction of single-family homes, which makes up the largest share of the housing market, increased 5.3% to 877,000 units, while starts for the volatile multi-family housing segment surged 36.8% to a rate of 413,000 units. Building permits, which analysts use as an indicator of future building activity, likewise, increased 5.9% to a rate of 1.297 million units. Single-family home permits rose by 1.9%, while permits for the construction of multi-family units jumped 13.9%.

Confidence among the nation’s small business owners improved as the promise of lower taxes lifted expectations for increased sales and growth. The National Federation of Independent Business’ (NFIB) small business optimism index rose 0.8 point to 103.8 in October; economists had predicted a reading of 105. In the survey, four of the index’s sub-gauges rose, while five declined and one remained unchanged. Quality of labor and taxes remained near the top of concerns among small business owners. The index surged after the election of Donald Trump on expectations of less regulation and lower taxes, as well as a rollback of the Affordable Care Act, but that has yet to materialize. This month, the NFIB noted that “Congress has taken its first cut at tax reform and small businesses are eagerly waiting to see how the developing legislation will benefit them.”

The Federal Reserve reported industrial production jumped a solid 0.9% last month as factory activity recovered following the effects of hurricanes Harvey and Irma. Economists had expected only a 0.5% increase. Manufacturing activity surged 1.3% on the heels of a sharp increase in the production of chemical, petroleum, and coal products. Motor vehicles and metals also reported healthy gains. Over the past year, industrial production has increased 2.9%. With the increase in activity, factories are hiring. Over the past 12 months, manufacturers have added 156,000 jobs—its strongest annual growth since the summer of 2015.

Costs for the nation’s producers rose more than expected last month, driven by an increase in the cost of services, according to the latest reading from the Labor Department. The Producer Price Index (PPI) for final demand increased 0.4% last month, following a similar gain in September. In the 12 months through October, the PPI jumped 2.8%, its largest increase since 2012. Prices for services advanced 0.5% last month, following a 0.4% increase in September. The PPI shows that inflation is building in the “pipeline” of the economy before it reaches consumers. The report from the Labor Department showed steady increases in underlying producer prices, which support expectations of a gradual increase in inflation and will probably keep the Federal Reserve on track for an interest rate hike in December.

For consumers, the Consumer Price Index (CPI) rose 0.1% in October, weighed down by a fall in energy prices as hurricane-related disruptions to Gulf Coast oil refineries were resolved. Stripping out the volatile food and energy categories, core CPI rose a slightly larger 0.2% to a 1.8% annual rate, the Labor Department said. The drop in energy prices in the CPI pushed the annualized rate of inflation down -0.2% to 2% in September. While the 1% drop in energy prices weighed on overall inflation, the rise in the core gauge was relatively broad-based. Housing costs were a significant factor, along with medical care, education, air fares and auto insurance. As with the PPI, the CPI report reinforces expectations that the Fed will raise interest rates in December for the third time this year.

Sales among the nation’s retailers rose unexpectedly last month, as an increase in purchases of motor vehicles and other goods offset a decline in demand for building materials. The Commerce Department reported retail sales increased 0.2% last month, and data for September was revised up 0.3% to 1.9%, rather than the 1.6% previously reported. Economists had expected retail sales to remain unchanged in October. On an annualized basis, retail sales increased 4.6%. Mike Loewengart, vice president for investment strategy at E*Trade noted, “Today’s retail sales numbers are encouraging for the U.S. economy, especially heading into the holiday shopping season. It’s important to keep in mind that these numbers are coming off one of the worst hurricane seasons ever, so the fact that 9 of 13 categories showed increases is a testament to the resiliency of the US consumer.”

International Economic News: To the north, Canada’s economy is booming but few Canadians are willing to give Prime Minister Justin Trudeau the credit, according to a recent poll. While Canada’s economy is currently leading the G-7 in growth, just 25% of Canadians describe the Prime Minister’s performance as an economic manager as “good” or “better”, while 36% call it “poor” or “worse”. The poll, conducted by Nano Research, was a disappointing result for Trudeau. According to the results, Canadians were more focused on rising interest rates and the deficit. In an interview, Nik Nanos of Nano Research stated, “What this survey shows is that there is fundamental disconnect between the macroeconomic reality and micro opinion of Canadians.”

Across the Atlantic, one notable benefit of the Brexit vote appears to be the United Kingdom’s re-establishment of its former trade ties with other Commonwealth nations before it entered the European Union, according to Member of the European Parliament (MEP) Patrick O’Flynn. Mr. O’Flynn noted that Brexit will allow the U.K. to put an end to EU tariff barriers and allow for increased trade with countries such as Australia and New Zealand. In a speech to the European Parliament he stated that it was regarded as a “sort of shame” in Britain that their country threw up tariff barriers against their historic commonwealth partners, and that it was “a wrong that is soon to be righted” as the United Kingdom broadens its economic and diplomatic relationships.

On Europe’s mainland, top investors at the Reuters 2018 Global Investment Outlook Summit stated that money will continue flowing into the bloc in 2018 as the best economic growth in a decade and a tightening of the Franco-German axis at the heart of the 19-member euro zone has de-sensitized markets to European political risks. Investments in the euro zone have had one of their best years since the single currency was established in 1999. The bloc had an unexpectedly brisk pickup in consumer and business confidence this year along with an economy expanding at its fastest rate in ten years. Views remained mixed on the effect of Brexit. Some felt that the vote would bind the remaining euro zone countries together more tightly, while others stated the ultimate result is still unknown. Overall, however, the political mood and economic backdrop is much more optimistic heading into 2018 than at the same time last year.

Is China’s 3 trillion in US dollar reserves actually an economic curse? According to Chinese government advisor Huang Qifan, it is “a major source of the country’s financial problems.” Huang told a forum organized by news organization Caixin that the central bank should stop feeding cash into the Chinese economy as it is fueling asset price bubbles and financial risks. Beijing should entrust its finance ministry to manage foreign exchange reserves and let the central bank focus on making independent monetary policy, Huang said. Huang is deputy director on the financial and economic committee at the National People’s Congress—and one of China’s most outspoken economic bureaucrats.

Japan’s economic growth streak has extended now for a seventh consecutive quarter—its longest streak in nearly two decades. According to government data, gross domestic product increased an annualized 1.4% in the third quarter, while the economy has been expanding overall since the start of 2016. Japanese businesses have benefited from increased global demand and sustained financial stimulus measures from the government and Japan’s central bank. On the positive side, unemployment is at a multidecade low, the stock market is hitting new highs, and persistent wage and price deflation has eased. However, of concern, the pace of expansion slowed from the previous quarter and consumer spending declined. After healthy domestic consumer spending in the second quarter, it was spending on Japanese goods abroad that fueled the third quarter increase. Exports have remained central to Japan’s recovery, helped in part by a weaker yen.

Finally: One of the criticisms of proposed tax breaks for businesses is that businesses probably won’t use the windfall for wage increases or hiring, but rather for continued stock buybacks – which only benefit shareholders (including, of course, the executives of the businesses). To shed light on this behavior, Credit Suisse studied net stock share purchases since the financial crisis of 2008-2009 by businesses, US households, and US financial institutions (mutual funds, ETFs and the like). The conclusion: the corporate sector has been the only net buyer of stocks over this period. In an independent but related study, Societe Generale concluded that virtually all the net debt issued this century has been used to fund stock buybacks. It seems the critics of coming tax relief for corporations have a point!

(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, zerohedge.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 19.75 from the prior week’s 22.00, while the average ranking of Offensive DIME sectors fell to 14.50 from the prior week’s 11.75. The Offensive DIME sectors saw their lead over Defensive SHUT sectors halved. 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®

The very big picture:

In the “decades” timeframe, the current Secular Bull Market could turn out to be among the shorter Secular Bull markets on record. This is because of the long-term valuation of the market which, after only eight years, has reached the upper end of its normal range.

The long-term valuation of the market is commonly measured by the Cyclically Adjusted Price to Earnings ratio, or “CAPE”, which smooths out shorter-term earnings swings in order to get a longer-term assessment of market valuation. A CAPE level of 30 is considered to be the upper end of the normal range, and the level at which further PE-ratio expansion comes to a halt (meaning that increases in market prices only occur in a general response to earnings increases, instead of rising “just because”).

Of course, a “mania” could come along and drive prices higher – much higher, even – and for some years to come. Manias occur when valuation no longer seems to matter, and caution is thrown completely to the wind as buyers rush in to buy first and ask questions later. Two manias in the last century – the 1920’s “Roaring Twenties” and the 1990’s “Tech Bubble” – show that the sky is the limit when common sense is overcome by a blind desire to buy. But, of course, the piper must be paid and the following decade or two are spent in Secular Bear Markets, giving most or all of the mania gains back.

See Fig. 1 for the 100-year view of Secular Bulls and Bears. The CAPE is now at 31.51, down from last week’s 31.57, and exceeds 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 in the 0% – 3%/yr. range. (see Fig. 2).

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 76.83, down from the prior week’s 78.47.

In the intermediate and Shorter-term picture:

The Shorter-term (weeks to months) Indicator (see Fig. 4) turned negative on November 9th. The indicator ended the week at 20, down sharply from the prior week’s 26. Separately, the Intermediate-term 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 2017.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2), unless a mania comes along 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 Q4, but the shorter (weeks to months) timeframe (Fig. 4) is negative. Therefore, with internal disagreement expressed by two of three indicators being positive but one being negative, the U.S. equity markets are rated as Neutral.

In the markets:

U.S. Markets: Major U.S. stock indexes recorded modest losses, bringing to an end the eight week winning streak of gains for the large cap benchmarks. The Dow Jones Industrial Average reversed last week’s gain and fell -0.50%, or 117 points to close at 23,422. The technology-heavy NASDAQ Composite retreated -0.20% to end the week at 6,751. By market cap, mid and small caps bore the brunt of the selling with the mid cap S&P 400 falling -0.56% and the small cap Russell 2000 falling -1.31%, whereas the large cap S&P 500 ended down just -0.21%.

International Markets: Canada’s TSX managed a ninth week of gains rising 0.12%, while the United Kingdom’s FTSE fell -1.68%. On Europe’s mainland, major markets finished in the red with France’s CAC 40 falling -2.49%, Germany’s DAX retreating -2.60%, and Italy’s Milan FTSE finishing down -1.97%. In Asia, major markets finished in the green. China’s Shanghai Composite reversed last week’s loss rising 1.8%, while Hong Kong’s Hang Seng rose 1.8%, and Japan’s Nikkei finished up 0.63%. As grouped by Morgan Stanley Capital International, developed markets finished down -0.74%, while emerging markets fell just -0.11%.

Commodities: Precious metals rebounded following a string of weekly losses. Gold rose 0.39% to close at $1274.20 an ounce, while Silver gained 0.22% ending the week at $16.87. Oil had its fifth consecutive week of gains with West Texas Intermediate crude oil ending the week at $56.74 a barrel, a gain of almost 2%. Copper, used by some analysts as a barometer of world economic health for its variety of industrial uses, ended the week down -1.33%.

U.S. Economic News: The Labor Department reported that initial claims for new unemployment benefits rose by 10,000 to 239,000 last week. Economists had expected an increase of only 231,000. The less-volatile four week moving average of claims fell by 1,250 to 231,250, its lowest level since March of 1973. The level of claims indicates a job market strong enough to keep the unemployment rate declining. Some analysts are predicting an unemployment rate below 4% in the near future. Continuing claims, the number of people already receiving unemployment benefits, rose by 17,000 to 1.9 million. That number is reported with a one week delay.

Eight years after the end of the Great Recession, the labor market continues to strengthen. The Labor Department reported the number of job openings rose to 6.09 million in September, near record highs. There have been over 6 million job openings each month for the last four months. In the details of the report, 5.27 million people were hired, a slight retreat from the 5.42 million hired the month before, while 5.24 million people lost their jobs. The quits rate among private-sector employees, closely watched by officials at the Federal Reserve because it is assumed that people only leave their jobs for better higher paying ones, remained unchanged at 2.4%.

Borrowing by U.S. consumers surged the largest amount in almost a year in September, according to the Federal Reserve. Total consumer credit increased $20.8 billion in September to a record seasonally adjusted $3.79 trillion—an annual growth rate of 6.6%. Economists had expected a gain of only $17.4 billion. For the third quarter, consumer credit increased at a 5.5% annual rate. In the details, all categories of borrowing showed strength. Non-revolving credit, which covers loans for education and vehicles, rose at an annual rate of 6.3% in September, a 3% increase over August and the biggest gain since January. Revolving credit, which is predominantly made up of credit-card charges, increased at an annual rate of 7.7% in September, an increase of 1% over August.

Sentiment among the nation’s consumers slipped slightly this month, but remained near the highest levels of the year. In its survey of 500 consumers’ attitudes on future economic prospects, the University of Michigan reported its consumer sentiment index fell 2.9 points to 97.8. Richard Curtin, chief economist for the survey, attributed the decline to “widespread losses across views of current and future economic conditions.” Curtin said that while wage gains and the overall number of consumers have been trending positively, “these favorable trends were countered by a slight rise in year-ahead inflation expectations and a growing consensus that interest rates will increase during the year ahead.” Economists had expected a reading of 100.7.

International Economic News: In Canada, inflation continues to fall short of the Bank of Canada’s 2% target, but Governor Stephen Poloz said not to worry, fundamental factors are continuing to drive price growth. In a speech this week, Poloz said the fundamental drivers of supply and demand, as well as short-term factors, can explain the lack of significant upward movement in prices. Over the first half of the year, inflation slowed and remained in the lower half of the Bank of Canada’s target range even as the economy grew quickly. However, Poloz noted that a number of one-time factors helped keep inflation in check, among them lower food costs and a reduction in electricity prices.

Across the Atlantic, U.K. industry had its strongest month so far this year in September, according to the latest reading from the Office for National Statistics (ONS). According to the report, strength in the manufacturing sector may help counteract a slowdown in consumer spending and a plunge in construction outlays. The report also gives some credence to the Bank of England’s decision to raise interest rates for the first time in more than 10 years. ING economist James Smith said, “Stronger global growth and the effect of the weaker pound seem to be finally showing through in the U.K. manufacturing numbers.” On a negative note, the ONS also reported a 1.6% monthly drop in construction, along with British shops recording their worst October sales in a decade.

On Europe’s mainland, French President Emmanuel Macron reaffirmed his commitment to strengthening political and business ties between the UAE and France as he addressed delegates at the UAE-France Business Forum in Dubai. During his statement, Macron highlighted the shared values of culture, civilization, and the economy between the two countries. He emphasized the role of business and education in creating “a new world for the young generation, based on respect, tolerance, and reason.” He noted that the UAE and France were making great strides in promoting innovation and building “smart” cities.

In Germany, a report from a government panel of independent economic advisers is predicting a healthy growth rate of 2% in Europe’s largest economy, followed by acceleration to 2.2% growth in 2018. Chairman Cristoph Schmidt said that “Germany is in a robust upswing and production capabilities are in overload.” However, the report continued, that growth combined with low interest rates threatens to bring about bubbles in sectors of the economy and general inflation. Of note in the report, the council accused the European Central Bank of being “too opaque” and called on it to end its mass bond buying program sooner than it intends to.

The Italian economic recovery that began in 2014 is finally taking off, but economists warn that the upturn is likely to remain short-lived since few of Italy’s many underlying structural problems have been fixed. Economy Minister Pier Carlo Padoan estimated this week that growth bounced back to 0.5% in the third quarter, a 0.2% increase from the second. “The recovery is consolidating and GDP growth is getting more robust,” he said. However, on a negative note, Italy has an overall jobless rate of 11.1% and a youth unemployment rate of 35.7%, both among the highest in the EU.

In Asia, at the Asia-Pacific Economic Cooperation summit in Da Nang, Vietnam Chinese President Xi Jinping spoke of the value of international “cooperation” and economic “openness”. Xi’s speech followed an address from U.S. President Donald Trump, where he likewise called for economic openness, but he spoke harshly against countries that he felt committed “chronic trade abuses.” The Chinese President added that his country will continue to open up and reform. The Chinese leader told the gathering of political and business leaders, “In pursuing economic globalization, we should make it more open, more inclusive, more balanced, more equitable and more beneficial to all.”

In Japan, a recent survey showed that the average financial assets of Japanese households rose 6.8% from the same time last year, predominantly due to an improving job market and a 25% rise in Japanese stock prices. The annual survey by the Central Council for Financial Services Information (CCFSI) suggested that Prime Minister Shinzo Abe’s reflationist “Abenomics” policies appear to be working. However, uncertainty over the stability of Japan’s social welfare system given the rapidly increasing elderly population prevented households from purchasing riskier investments such as equities. Over 54% of Japanese households’ financial assets were held in savings and bank deposits, with only 8.9% in stocks, according to the survey.

Finally: The last of the world’s major regional indices has finally gotten back to its 2007 highs. The MSCI Asia-Pacific Index includes stock markets in 15 Pacific region countries, including Australia, China, Hong Kong, India, Indonesia, Japan, Korea, Malaysia, New Zealand, Pakistan, the Philippines, Singapore, Sri Lanka, Taiwan and Thailand. The breaching of the 2007 highs happened a mere 56 months after the U.S. achieved the same feat in 2013.

Along with the markets now in a seemingly globally synchronized uptrend, economic conditions have similarly improved. Jeffrey Saut, chief investment strategist at Raymond James, released a research note highlighting the fact that global growth is expected to reach 3.6% next year—the best since the Great Recession. Further, a report from Deutsche Bank Securities says this should result in the lowest-ever number of countries in recession next year.

(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, zerohedge.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 22.00 from the prior week’s 23.00, while the average ranking of Offensive DIME sectors rose to 11.75 from the prior week’s 12.75. The Offensive DIME sectors maintained their lead over the 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®

The very big picture:

In the “decades” timeframe, the current Secular Bull Market could turn out to be among the shorter Secular Bull markets on record. This is because of the long-term valuation of the market which, after only eight years, has reached the upper end of its normal range.

The long-term valuation of the market is commonly measured by the Cyclically Adjusted Price to Earnings ratio, or “CAPE”, which smooths out shorter-term earnings swings in order to get a longer-term assessment of market valuation. A CAPE level of 30 is considered to be the upper end of the normal range, and the level at which further PE-ratio expansion comes to a halt (meaning that increases in market prices only occur in a general response to earnings increases, instead of rising “just because”).

Of course, a “mania” could come along and drive prices higher – much higher, even – and for some years to come. Manias occur when valuation no longer seems to matter, and caution is thrown completely to the wind as buyers rush in to buy first and ask questions later. Two manias in the last century – the 1920’s “Roaring Twenties” and the 1990’s “Tech Bubble” – show that the sky is the limit when common sense is overcome by a blind desire to buy. But, of course, the piper must be paid and the following decade or two are spent in Secular Bear Markets, giving most or all of the mania gains back.

See Fig. 1 for the 100-year view of Secular Bulls and Bears. The CAPE is now at 31.57, up from last week’s 31.49, and exceeds 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 in the 0% – 3%/yr. range. (see Fig. 2).

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 78.47, up from the prior week’s 76.67.

In the intermediate and Shorter-term picture:

The Shorter-term (weeks to months) Indicator (see Fig. 4) turned positive on September 7th. The indicator ended the week at 26, down from the prior week’s 28. Separately, the Intermediate-term 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 2017.

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 Q4, and the shorter (weeks to months) timeframe (Fig. 4) is positive. Therefore, with internal agreement expressed by all three indicators being positive, the U.S. equity markets are rated as Positive.

In the markets:

U.S. Markets: The major U.S. market indexes finished the week mixed. The large cap indexes continued to outperform, extending their number of weekly gains to eight, while small cap indexes reported a third week of losses of the last four. The Dow Jones Industrial Average rose 105 points to close at 23,539, a gain of 0.45%. The technology-heavy NASDAQ Composite added 63 points to end the week at 6,764, an increase of 0.94%. By market cap the large cap S&P 500 gained 0.26%, while the mid cap S&P 400 fell -0.17% and the small cap Russell 2000 retreated -0.89%.

International Markets: Canada’s TSX rose 0.4%, its eighth straight week of gains. In Europe, the United Kingdom’s FTSE rose 0.74%, while across the channel, France’s CAC 40 gained 0.4%, Germany’s DAX added almost 2%, and Italy’s Milan FTSE gained 1.5%. In Asia, China’s Shanghai Composite reversed last week’s gain by falling -1.3%, while Japan’s Nikkei had its fifth week of solid gains, rising over 2.4%. As grouped by Morgan Stanley Capital International, developed markets rose by 0.9% while emerging markets added 0.4%.

Commodities: Precious metals ended the week mixed. Gold had its third week of declines with a modest -0.2% loss to $1,269.20 an ounce, while silver rebounded slightly from last week’s loss closing at $16.83 an ounce, a gain of 0.49%. In energy, oil had its fourth week of gains rising 3.2% to close at $55.64 per barrel of West Texas Intermediate crude. The industrial metal copper, used by some analysts as a barometer of worldwide economic health due to its variety of uses, retraced some of last week’s loss and finished the week up 0.45%.

October Summary: In the U.S., the Dow Jones Industrial average was the big winner, gaining 4.3%, while the NASDAQ Composite added 3.6%, and the S&P 500 added 2.2%. The S&P 400 midcap index was up a similar2.2%, while the small cap Russell 2000 added just 0.78%. Internationally, Canada’s TSX rose 2.5%, the United Kingdom’s FTSE added 1.6% and France’s CAC 40 rose 3.25%. Germany’s DAX gained 3.1%, while in Asia, China’s Shanghai Composite rose 1.3%. The biggest mover in major world markets was Japan’s Nikkei, by a wide margin, which surged over 8.1% in October. As grouped by Morgan Stanley Capital Markets, developed markets added 3.28% for the month, while emerging markets gained a lesser but still respectable 1.7%. In commodities, gold declined by 1.1% for the month of October, while West Texas Intermediate oil gained 4.7%.

U.S. Economic News: The number of Americans applying for initial unemployment benefits fell to a near 45-year low last week according to the Labor Department. Initial jobless claims fell by 5,000 to 229,000, lower than the 235,000 estimated by economists and far below the key 300,000 threshold that analysts use to indicate a “healthy” jobs market. The less-volatile four-week moving average of initial claims declined by 7,250 to 232,500. That number hit its lowest level since April of 1973. The number of people already receiving unemployment benefits, known as continuing claims, dropped by 15,000 to 1.88 million. That’s the lowest level since December of 1973.

According to the Bureau of Labor Statistics’ Non-Farm Payrolls (NFP) report, the U.S. added 261,000 jobs in October as employment rebounded to normal levels following the twin hurricanes Harvey and Irma. Economists had expected an increase of 325,000 in nonfarm jobs. The biggest gainer was in the leisure and hospitality sector, followed by professional and business services. The unemployment rate fell from 4.2% to 4.1%, the lowest since 2000. A broader measure of unemployment, known as the U-6 jobless rate, fell to 7.9%. This is the first time that the U-6 rate has been below 8% since 2006. The U-6 rate counts all the unemployed, as well as those “marginally attached to the labor force” and employed “part time for economic reasons”. Analysts consider the U-6 rate a more representative measure of the health of the labor market than the headline number.

According to payroll processor ADP, hiring in the private sector rebounded in October with 235,000 jobs added following September’s relatively weak number. In the details of the report, small private-sector business employment rebounded with 79,000 jobs created. Medium-sized businesses added 66,000 jobs, while large businesses added 90,000. Most of the gains were in the services sector, with 150,000 jobs added, while goods‑producing businesses added 85,000.

Home prices across the country accelerated higher in August, according to the latest S&P/Case-Shiller home price indexes. The S&P/Case-Shiller 20-city home price index rose a seasonally-adjusted 0.5% in the third quarter, and was up 5.9% from the same time last year. That was stronger than the 5.8% annual gain in the period ending in July. The broader national index rose 6.1% for the year in August. The national index surpassed the high it previously set at the peak of the housing bubble last year, and is now 5.6% higher. The 20-city index sits just 1.8% below its peak in 2006. In the details, annual price gains in August were led by a whopping 13.2% increase in Seattle, followed by Las Vegas with an 8.6% increase. Some in the industry warned that these types of gains can’t continue forever. David Blitzer, chairman of the index committee at S&P Dow Jones Indices noted that “measures of affordability are beginning to slide, indicating that the pool of buyers is shrinking.”

The Commerce Department reported that spending on construction projects ticked up last month, led by public works and housing. Construction outlays ran at a seasonally-adjusted $1.22 billion rate. Spending increased 0.3% during the month, and stood 2% higher than the same time last year. For the second month in a row, public works projects drove the spending increase. Public-sector spending was 2.6% higher than in August, while private-sector spending was 0.4% lower. Compared to the same time last year, the pace of total public construction is 1.6% lower, while overall private spending is 3.1% higher. Residential construction remained flat on the month, but is 9.5% higher for the year. Almost all of that spending is on single-family houses.

Confidence among the nation’s consumers climbed to a 17-year high last month, according to the Conference Board. Consumer confidence rose to 125.9 in October – its highest level since December of 2000. The surge in confidence comes at a time when U.S. stock prices have hit record highs, lifted by strong economic growth, robust corporate earnings, and expectations of tax reform. Lynn Franco, Director of Economic Indicators at the Conference Board, stated that the high level of confidence suggests the economy will continue to expand “at a solid pace” for the rest of 2017. The index takes into account Americans’ views of current economic conditions and their expectations for the next six months. The index is particularly important because consumer spending accounts for about 70 percent of U.S. economic activity.

Spending by consumers hit an eight-year high in September, due to a surge in spending following hurricanes Harvey and Irma. The Commerce Department reported that spending rose 1%, its biggest monthly gain since 2009 shortly after the economic recovery began. Inflation, meanwhile, appears to still be under control. The 12-month rate of Personal Consumption Expenditures (PCE) inflation rose slightly to 1.6%, but the core rate remained near its two-year low of 1.3%. Both are well below the Federal Reserve’s 2% inflation target.

Manufacturing in the United States remained strong last month, according to the Institute for Supply Management’s (ISM) manufacturing survey index. ISM’s manufacturing index retreated to 58.7 in October from September’s 13-year high of 60.8. Of the eighteen industries tracked by ISM, sixteen reported growth. In the details of the report, both the new orders index and current production gauge fell 1.2 points, to 63.4 and 61.0, respectively. A measure of employment fell 0.5 to 59.8. Economists had expected the ISM gauge to fall to 59.5. Readings above 50 indicate continued expansion, while those less than 50 suggest contraction. In services, ISM’s non-manufacturing index hit 60.1 last month, reaching its best level since August 2005 and handily exceeding its forecasts. October’s reading was the 99^th consecutive month of growth in the overall economy, and the 94^th month of growth in the services sector.

The Federal Reserve remained optimistic that the economy would continue to perform well as it held rates steady at its latest meeting. As was widely expected, the Fed left rates unchanged in a range of 1% to 1.25%. Policymakers had signaled ahead of the meeting that were was virtually no chance of a rate hike this month, but December is still a possibility. In its statement released following its two-day meeting, policy makers said economic activity has been rising at a “solid rate”, an improvement from the language in the September minutes that described growth as “moderate”.

International Economic News: To the north, Canadian employers added 35,300 jobs last month as a surge in full-time jobs was offset by a smaller decline in part-time positions. According to Statistics Canada, the last time the country saw such strong gains was in March of 2000. On an annualized basis, 396,800 full-time positions have been created, marking the country’s strongest job growth since the beginning of the century. Bank of Montreal economist Doug Porter noted that the surge in full-time jobs came on the heels of an even larger gain in September, setting a new all-time record for any two-consecutive-month period. Despite the gains, the national jobless rate actually rose 0.1% as more people rejoined the work force, to 6.3%.

Across the Atlantic, the United Kingdom’s FTSE 100 index reached a record high this week after solid sales across the services sector showed the economy remained resilient following the post-Brexit vote. The new highs came as the Bank of England announced its first interest rate increase in more than 10 years. Services firms “signaled a shift in momentum”, according to a survey of the sector. Analysts said the survey showed that the services sector, which makes up almost 80% of UK economic activity, remained resilient despite the Brexit uncertainty.

On Europe’s mainland, the French economy expanded in the third quarter, putting the French economy on a stronger growth path than the United Kingdom. French national statistics institute INSEE reported that gross domestic product (GDP) expanded by 0.5% in the third quarter, following 0.5% and 0.6% increases in the first and second quarters. Over the past year, France’s economy has grown by 2.2%, its strongest showing since 2011. Analysts were quick to point out that the 12 month growth rate is higher than in the United Kingdom where the economy is up a still-respectable 1.5%. INSEE stated that the economic activity was driven by a pick-up in household consumption and rising investments.

In Germany, the Federal Labor Agency reported unemployment in Germany held steady at historic lows last month, suggesting Europe’s largest economy can look forward to continued good health. The jobless rate stood at a seasonally-adjusted 5.6% in October, matching September’s reading. However, in unadjusted terms, the rate fell to 5.4% – its lowest level since German reunification in 1990. Low unemployment has supported economic growth in Germany by increasing domestic demand for goods. Surveys show the public believes their prosperity will continue to grow, giving them the confidence to spend money. However, economist Casten Brzeski at ING Diba bank noted that many of the jobs created have been low-wage positions, often in the health or social care sectors.

Chinese President Xi Jinping’s promise to clamp down on corruption will ultimately help the nation’s economy. This surprising conclusion is contained in research led by Mariassunta Giannetti, finance professor at Stockholm School of Economics, The research found that the amount of money large companies spent on meals and gifts to attract the favor of government officials, commonly detailed in the accounting line known as “entertainment expenses”, dropped as a ratio of their sales in the two years after Xi’s campaign began. In turn, that has led to smaller companies without deep expense accounts to compete on a more level playing field, according to the research. “Small firms are more profitable and productive when their large peers spend less on so-called entertainment expenses in proportion to their sales, because they are able to increase their sales, invest more, and have cheaper funding,” the researchers wrote in the paper. The crackdown, launched only days after Xi came into power in late 2012, has snared more than 1.5 million officials.

According to several private sector estimates, Japan’s economy likely achieved annualized growth of around 1.5% in the third quarter. The gain would mark the seventh quarter of uninterrupted expansion for the Japanese economy. These projections for real gross domestic product growth come from the average of estimates from ten private sector think tanks. Japan’s Cabinet Office will publish its official preliminary third-quarter numbers on November 15. The current economic growth phase began in December 2012, and is poised to become Japan’s second-longest boom in the post-war era.

Finally: As the stock market continues to hit new highs it might be a shock to hear how few Americans actually own stock. According to a detailed study of stock ownership by New York University economist Edward Wolff, 84% of stocks available in the United States are owned by just the top 10% most-wealthy households. Furthermore, more than 93% of all stock is owned by just the top 20% of households. That means that the bottom 80% of households in the United States only own about 7% of the total stock market. And, he notes, his research includes everything, direct ownership of stocks and indirect ownership through mutual funds, trusts, IRA’s, Keogh plans, and other retirement accounts. Put bluntly, the policies of the Fed and the government that set the stage for the current long bull market greatly favored the rich, and they indeed got very much richer.

(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, zerohedge.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 dropped to 23.00 from 20.50, while the average ranking of Offensive DIME sectors fell to 12.75 from the prior week’s 12.25. The Offensive DIME sectors expanded their lead over the 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®

The very big picture:

In the “decades” timeframe, the current Secular Bull Market could turn out to be among the shorter Secular Bull markets on record. This is because of the long-term valuation of the market which, after only eight years, has reached the upper end of its normal range.

The long-term valuation of the market is commonly measured by the Cyclically Adjusted Price to Earnings ratio, or “CAPE”, which smooths out shorter-term earnings swings in order to get a longer-term assessment of market valuation. A CAPE level of 30 is considered to be the upper end of the normal range, and the level at which further PE-ratio expansion comes to a halt (meaning that increases in market prices only occur in a general response to earnings increases, instead of rising “just because”).

Of course, a “mania” could come along and drive prices higher – much higher, even – and for some years to come. Manias occur when valuation no longer seems to matter, and caution is thrown completely to the wind as buyers rush in to buy first and ask questions later. Two manias in the last century – the 1920’s “Roaring Twenties” and the 1990’s “Tech Bubble” – show that the sky is the limit when common sense is overcome by a blind desire to buy. But, of course, the piper must be paid and the following decade or two are spent in Secular Bear Markets, giving most or all of the mania gains back.

See Fig. 1 for the 100-year view of Secular Bulls and Bears. The CAPE is now at 31.49, up from last week’s 31.42, and exceeds 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 in the 0% – 3%/yr. range. (see Fig. 2).

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 76.67, up from the prior week’s 74.80.

In the intermediate and Shorter-term picture:

The Shorter-term (weeks to months) Indicator (see Fig. 4) turned positive on September 7th. The indicator ended the week at 28, 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 October, indicating positive prospects for equities in the fourth quarter of 2017.

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 Q4, and the shorter (weeks to months) timeframe (Fig. 4) is positive. Therefore, with internal agreement expressed by all three indicators being positive, the U.S. equity markets are rated as Positive.

In the markets:

U.S. Markets: Most of the major U.S. indexes ended the week higher and powered further into record territory. The broad-based S&P 500 Index recorded its seventh consecutive weekly gain, its longest run in almost three years, while the technology-heavy Nasdaq Composite was the best of the bunch powered by better-than-expected earnings reports from Microsoft, Amazon, Alphabet (Google), and Intel. The Dow Jones Industrial Average added 105 points to close at 23,434, a gain of 0.45%. The Nasdaq Composite rose 72 points to close at 6,701, a gain of 1.09%. By market cap, midcaps barely outperformed both large caps and small caps. The S&P 400 mid cap index gained 0.26%, while the large cap S&P 500 added 0.23%. However, the small cap Russell 2000 fell ‑0.06%.

International Markets: Canada’s TSX, like the S&P 500, also had its seventh straight week of gains, rising 0.6%. In Europe, the United Kingdom’s FTSE ended down -0.24%, but on the mainland results were uniformly positive: France’s CAC 40 surged 2.27%, Germany’s DAX rose 1.74%, and Italy’s Milan FTSE gained 1.42%. In Asia, China’s Shanghai Composite rose 1.13%, while Japan’s Nikkei powered ahead 2.57%. As grouped by Morgan Stanley Capital International, developed markets retreated -0.2%, and emerging markets which fell -0.3%.

Commodities: Precious metals had their second week of losses with Gold retreating -0.68%, ending the week at $1,271.80 an ounce, while silver dropped almost 2% to close at $16.75. In energy, oil rallied for a third straight week, rising almost 4% to $53.90 per barrel of West Texas Intermediate crude oil. The industrial metal copper, used by many analysts as a gauge of worldwide economic health, retreated almost 2% this week after reaching its highest level in almost three years.

U.S. Economic News: The number of newly unemployed people rose last week, returning to levels seen before hurricanes hit both Florida and Texas. According to the Labor Department, initial jobless claims rose by 10,000 to 233,000. The reading was less than the 235,000 forecast by economists and well below the key 300,000 threshold analysts use to indicate a healthy jobs market. The less-volatile monthly average of new claims fell by 10,000 to 239,500—its lowest level since late August. John Ryding, chief economist at RDQ Economics in New York said, “Firms remain unwilling to release labor. The labor market is very tight.” Continuing claims, which counts the number of people already receiving unemployment benefits, fell by 3,000 to 1.90 million—their lowest level since December 1973. That number is reported with a one-week delay.

Sales of newly-constructed homes surged last month to their highest pace in almost ten years as demand remained strong. The Commerce Department reported that new home sales ran at a 667,000 annual pace last month, up 18.9% from August, and a 17% increase from the same time last year. Economists had only expected a 555,000 annual rate. In the details of the report, every region of the United States saw growth. The median sales price was $319,700, compared to $314,700 a year ago. At the current sales rate, there is a five month supply of homes available on the market. Amherst Pierpont Securities’ chief economist Stephen Stanley said that the report was “shockingly strong” and he noted the bulk of the new homes were not yet started at the time of purchase, meaning homebuyers were purchasing “built-to-order” homes—another sign of strong demand.

An index measuring the number of contracts to buy a home, but not yet closed, remained unchanged last month, but the big news was that August’s reading was revised down. The National Association of Realtors Pending Home Sales index fell to its lowest level in almost three years as high prices and limited supply weighed on home sales. Pending home sales have fallen on an annualized basis now for five out of the last six months, and realtors aren’t expecting much improvement unless the supply issue eases. The pending home sales index is down 3.5% from the same time last year. Lawrence Yun, chief economist for the NAR stated, “Demand exceeds supply in most markets, which is keeping price growth high and essentially eliminating any savings buyers would realize from the decline in mortgage rates from earlier this year.”

According to the Commerce Department, new orders for goods expected to last longer than three years (‘durable goods’), rose 2.2% last month. The reading beat economists’ forecasts of 1.5%. Core capital-goods orders, which are durable goods orders minus defense equipment and aircraft, rose by 1.3%. This number is seen by analysts as a more accurate measure of domestic economic health. Core capital goods orders have climbed 7.8% over the past year, their fastest growth rate in five years. American manufacturers have rebounded this year, aided by strong demand at home and the best global economy in years. Sales, profits, and hiring are all up. Andrew Hunter of Capital Economics wrote in a note, “Overall, business equipment investment appears to be going from strength to strength, providing further reason to believe that the economy will continue to grow at a healthy pace in the fourth quarter as well.”

Sentiment among the nation’s consumers rose to a 13-year high this month, according to the University of Michigan. The University of Michigan’s final reading of consumer sentiment was 100.7 this month, a five point increase from September’s reading. The average of all readings in 2017 has been the highest since the year 2000. In the details of the report, consumers’ views of current conditions and future expectations rose by a strong 4.3% and 7.2%, respectively. Overall the strong jobs market, booming stock market, and rising home prices are all contributing to a more optimistic consumer.

The Commerce Department, in its third quarter Gross Domestic Product (GDP) “advance estimate” report, said the U.S. economy maintained its brisk pace of growth in the third quarter, shrugging off a decline in construction and weaker consumer spending following hurricanes Harvey and Irma. According to the Commerce Department, GDP increased at a 3.0% annual rate in the third quarter, a slight 0.1% drop from the second quarter but well above most expectations. The increase was attributed mostly to an increase in inventory investment and a smaller trade deficit. The third quarter advance estimate is based on source data that is usually incomplete and subject to further revision. It will be followed by a second estimate released in November. After a slow start to the year, GDP has now printed at or greater than 3% for two quarters in a row. This is the first time that’s happened since 2014.

International Economic News: The Bank of Canada indicated that it’s in no hurry to try to cool an economy that is very close to running up against capacity constraints. Bank of Canada policymakers led by Governor Stephen Poloz left the benchmark overnight interest rate at 1% this week, following consecutive hikes at the bank’s last two policy meetings in July and September. The central bank stated they would remain “cautious” before considering future hikes. Following a jump in the Canadian dollar earlier this year, the Bank of Canada is trying to curb expectations for accelerated rate increases. In addition to the stronger Loonie (which is negative for exports), the bank was concerned about growing risks with renegotiating the North American Free Trade Agreement.

Across the Atlantic, faster growth in the United Kingdom puts a possible rate hike back on the table. According to the Office for National Statistics, Britain’s economy grew more than forecast in the third quarter, rising 0.4% and beating estimates by 0.1%. With inflation running at its fastest rate in more than five years, the Bank of England governor Mark Carney has stated that tightening may be needed “within months”. Economists and traders are expecting the bank to raise interest rates for the first time in a decade at its next policy meeting on November 2. Some analysts have warned that a rate hike could be a policy mistake, given the United Kingdom’s relatively tepid growth and all the uncertainty surrounding the impacts of the Brexit decision. However, in Mr. Carney’s assessment, Brexit has crimped the United Kingdom’s potential growth, therefore lowering the level of expansion the economy can achieve without overheating.

On Europe’s mainland, French President Emmanuel Macron is facing renewed criticism over his measures to cut France’s contentious wealth tax and institute a flat rate on dividends after it emerged that the very wealthy would benefit from the tax breaks. According to estimates from the finance ministry, under the new tax breaks France’s top 100 wealthiest households will see their tax bill reduced by 582,380 euro on average. The top 1,000 richest families will save an average of 172,220 euros each year. Overall, the top 1% of France’s families will receive about 44% of the tax breaks. The tax breaks are part of a pro-business first budget designed to attract foreign investment, bring back French expatriates, and revitalize the Eurozone’s second-largest economy. The tax cuts have been used by Mr. Macron’s political opponents as further evidence that he is the “president of the rich”. A recent survey shows only 42% of French people back Macron’s policies, the lowest level yet and 20 points lower than his approval following his election in May.

In Germany, a monthly survey of the business climate hit its highest level ever this month, beating analysts’ forecasts and suggested continued strong performance for Europe’s largest economy. The Munich-based Ifo Institute reported its German business climate index reached 116.7 this month, rebounding strongly from its reading in September. The index is based on a survey of roughly 7,000 firms across Germany. Ifo President Clemens Fuest said in the release, “Germany’s economy is powering ahead…companies are very optimistic about the months ahead.” Analysts surveyed had predicted a fall in the Ifo reading after a complicated election outcome that left Chancellor Angela Merkel with the task of building a four-party governing coalition in Berlin.

In Italy, credit ratings agency Standard & Poor’s unexpectedly nudged up Italy’s rating one notch to BBB with a stable outlook, citing the country’s firming economic recovery and rising private-sector investment and employment. It was the first such increase by S&P for at least three decades. Matteo Renzi, who heads the ruling Democratic Party said, “After years, finally, S&P has raised Italy’s rating. The work is paying off.” S&P’s move came as Italy’s political parties are preparing for national elections in March 2018. So far, Renzi’s PD party is trailing in the polls behind the anti-establishment 5-star Movement and a resurgent center group. S&P is predicting economic growth of 1.4% this year and 1.3% next year.

In Asia, ratings agency Moody’s said in a report released this week that the further consolidation of power in China under President Xi Jinping could help the country achieve its economic rebalancing and reform goals. China announced its new leadership lineup after a week of closed-door meetings and what was conspicuously not present was an heir-apparent under the current Chinese president. The absence was viewed as an indication that Xi was not ceding any of his authority anytime soon. Moody’s remarked that they “believe this consolidation could increase the alignment of incentives between the central leadership and other officials, and thus could advance the process of economic reform and rebalancing.”

In Japan, the government maintained its moderately optimistic view on economic growth this month, due to increased consumer spending and capital expenditures. In addition, according to the report, exports and industrial output will continue to drive growth in the world’s third-largest economy. The Cabinet Office maintained its view that consumption is “picking up moderately”. The Cabinet Office report comes one week before a Bank of Japan policy meeting at which the central bank will update its forecasts of consumer prices. Currently the BOJ predicts consumer inflation will hit its 2% target by March 2020, but many analysts feel that this is a bit too ambitious. Despite four years of massive quantitative easing, core consumer prices are believed to have risen only 0.8% over the last year—less than half the BOJ’s inflation target.

Finally: What is the number one financial regret of Americans? According to personal finance website Nerd Wallet, it turns out that roughly 71% of Americans express regret about their ability to manage their money. First on the list was not planning early enough (48%), followed by too much spending on non-essentials (39%), credit-card debt (33%), and not having a budget (32%). While baby boomers led in the way in the “not planning early enough” category, Generation X and millennials were tied in regretting spending on non-essentials.

(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, zerohedge.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 slipped modestly to 20.50 from 20.25, while the average ranking of Offensive DIME sectors rose to 10.75 from the prior week’s 12.75. The Offensive DIME sectors expanded their lead over the 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®