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 31.42, up from last week’s 31.15, 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 74.80, up from the prior week’s 72.84.

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: U.S. stocks recorded solid gains and continued their advance into record territory as the flow of major third-quarter earnings reports continued to be stronger than expected. For the week, the Dow Jones Industrial Average surged over 450 points to close at 23,328, for a gain of 2.00%. The technology-heavy NASDAQ composite rose 0.35%, to end the week at 6,629. By market cap the large cap S&P 500 rose 0.86%, its fourth consecutive week of gains, while the S&P 400 mid cap index added 0.85% and the small cap Russell 2000 added 0.44%.

International Markets: Canada’s TSX had a sixth straight week of gains, rising 0.32%. Across the Atlantic the United Kingdom’s FTSE was off -0.16%. On Europe’s mainland, France’s CAC 40 rebounded from last week’s loss by rising 0.39%, and Germany’s DAX ended essentially flat. Italy’s Milan FTSE fell -0.3%. In Asia, China’s Shanghai Composite retraced some of last week’s gain, falling -0.35%, while Japan’s Nikkei surged a third straight week, gaining 1.4%. As grouped by Morgan Stanley Capital International, developed markets fell -0.3%, while emerging markets retreated -0.9%.

Commodities: Precious metals came under pressure after a brief respite last week. Gold fell -1.85%, or $24.10, to close at $1280.50 an ounce. Silver, which trades mostly in tandem with Gold albeit with more volatility, fell -1.9% to close at $17.08 an ounce. Crude oil rose for a second straight week, adding 0.76% to close at $51.84 per barrel of West Texas Intermediate crude oil. Copper, thought by some analysts to be an indicator of worldwide economic health due to its variety of uses, rose 1.02%.

U.S. Economic News: Initial claims for new unemployment benefits fell to a 44-year low last week, their lowest level since March of 1973. The Labor Department reported Initial claims fell by 22,000 to 222,000, well below economists’ forecast of 244,000. Overall, the U.S. labor market is the strongest it’s been in more than 15 years, as the current economic expansion enters its ninth year. Businesses still continue to complain about a shortage of skilled workers to fill a record number of job openings. Continuing claims, which counts the number of people already receiving benefits, declined by 16,000 to 1.89 million. That is also a 44-year low.

Home builders broke ground on fewer homes last month according to the Commerce Department, as housing starts for September fell to a 1.13 million seasonally-adjusted annual rate. Housing starts were down 4.7% from last month, but were 6.1% higher compared to the same time last year. Of note, in a positive sign for the U.S. economy as a whole, the number of single-family homes under construction continued to rebound. Single-family home starts were 9.1% higher year-to-date compared to the same period last year. Analysts view the shift from apartments to single-family homes as a sign of a stronger economy, as houses are predominantly built for purchase rather than rent, and they contribute more to overall economic growth.

Sentiment among the nation’s home builders jumped to five-month highs this month, according to the National Association of Home Builders (NAHB). The NAHB’s monthly confidence gauge rose four points to a reading of 68 (readings over 50 indicate improvement). Every component of the index increased, with current sales conditions and sales forecast over the coming six months both rising five points. Confidence among home builders surged following the presidential election as the industry believed there would be less regulation and more business-friendly policies. But the enthusiasm has somewhat faded as real reform has yet to materialize.

Low supplies and higher prices weighed on sales of existing homes, as sales rose 0.7% last month but remained below last year’s levels. The National Association of Realtors (NAR) reported that sales were at a 5.39 million annual rate, exceeding forecasts by 90,000. The increase was the first rise in the last four months. Total housing inventory was 6.4% less than the same time last year, currently at 1.9 million homes. The median price of an existing home increased 4.2% to $245,100. In the details, sales in the south fell 0.9%, while in the West and Midwest, sales rose 3.3% and 1.6%, respectively. Sales remained flat in the Northeast.

Manufacturing activity in the New York region jumped to a three-year high this month, according to the New York Federal Reserve’s Empire State manufacturing index. The index rose 5.8 points to close at 30.2 in October, beating economists’ expectations for a reading of 20. In the details of the report, the general optimism, shipments, and number of employees indexes all rose while the new orders index fell 6.9 points to 18. Analysts viewed the report as further evidence of optimism in the business sector due to a presumably more business-friendly administration along with an upturn in the global economy. The reading is compiled from a survey of about 200 manufacturers in New York State.

The Federal Reserve reported that industrial output across the country picked up in September, rising 0.3%. Industrial output rose as the effects of Hurricanes Harvey and Irma began to fade, and construction and utilities production rebounded. The Fed’s measure of the industrial sector is made up of manufacturing, mining, electric and gas utilities. In the details of the report, factory output improved 0.1%, while the mining and utilities sectors rebounded from declines in August. Mining posted a 0.4% monthly gain, while production at utilities rose 1.5%. Paul Ashworth, chief U.S. economist at Capital Economics, said “Overall, with global trade and economic growth booming and the dollar still down substantially from its peak early this year, the outlook for US manufacturing looks bright.”

The Federal Reserve’s “Beige Book”, more formally known as the Summary of Commentary on Current Economic Conditions, is a collection of “anecdotal information on current economic conditions” from each Federal Reserve Bank in its district. The Federal Reserve said the pace of growth in the U.S. was “split between modest and moderate”. In its latest Beige Book the Federal Reserve still isn’t seeing an inflation threat, despite shortages in the labor market that could lead to wage inflation. Despite the shortage of skilled labor, the increase in wages and cost of materials remained “modest”.

International Economic News: An unexpected decline in retail sales in Canada along with little evidence of inflation pressures will likely give the Bank of Canada reasons to delay a third consecutive rate increase at its meeting next week. Statistics Canada reported retail sales declined 0.3% in August, though analysts had expected a 0.5% gain. They also showed that inflation was little changed last month, other than a slight increase in gasoline prices. The two indicators are the last significant readings before the Bank of Canada’s October 25^th rate decision. Swaps trading suggested that the odds of a rate increase next week fell to just 19% after the reports.

Across the Atlantic, data in the UK showed that inflation rose by 3% in the year to September, reaching a five year high. Furthermore, the Governor of the Bank of England, Mark Carney, gave testimony to the Treasury Select Committee that the likelihood is that inflation will rise further in the coming months. This makes an interest rate hike from the Bank of England by year-end almost inevitable, analysts say. It would be the UK’s first increase in borrowing costs in almost ten years. Consumer prices rose by 3% last month, overshooting the Bank of England’s official target of 2%. This follows August’s inflation rate of 2.9%. A hike in base interest rates help tackle inflation, but has the unfortunate side-effect of negative impacts on GDP growth.

On Europe’s mainland, the Conference Board’s Leading Economic Indexes for France increased 0.5% in August to 113.6, while its Coincident Economic Index rose 0.2% to 104.7. The two composite economic indexes are the key elements in the Conference Board’s analytical system designed to signal peaks and troughs in the business cycle. The news came alongside President Emmanuel Macron’s first television interview since his election as he tries to regain public support. Macron pressed his vision for an “economic transformation” of a stagnant France in the interview insisting that he wants to make France more “effective”.

In Germany, confidence in Europe’s largest economy increased in October according to ZEW institute. The survey of analysts’ expectations from the Center for European Economic Research, known by its German initials ZEW, rose 0.6 point to 17.6 this month. Economists had expected a rise to 20.4. The data is particularly encouraging because the German economy is facing the twin threats of a stronger euro making German exports pricier overseas and the gradual end of the European Central Banks’s (ECB) quantitative easing program. Jennifer McKeown, chief European economist at Capital Economics said in a note, “It is encouraging that a majority of investors still expect conditions to improve despite the stronger likelihood that the ECB will taper its asset purchases next year and the fact that the euro exchange rate has remained at a fairly high level.”

For Q3, China’s economy grew 6.8% year-over-year – slightly less than the previous quarter but still above the government’s full-year target. This all but assures that China will exceed its full-year target of “around 6.5%”. In the details of the report, a flood of new mortgage lending drove the surge in the housing market, and local government borrowing led to strong spending on infrastructure. President Xi Jinping had put heavy pressure on almost every government ministry to make sure that the economy put in a solid performance. The Chinese Communist Party’s twice-a-decade congress began this week, during which the country’s leaders want to portray an image of strength and predictability.

Japanese parliamentary elections this weekend will either reaffirm or call into question Prime Minister Shinzo Abe’s program of economic reform. Abe called the snap election last month in an effort to bolster his Liberal Democratic Party’s influence over parliament. The LDP is widely expected to win in Sunday’s vote, keeping the economy and Abe’s monetary policy on an even keel. Japan’s exports climbed in the third quarter, although data released this week showed export growth slowed last month. Overall, exports are still up a healthy 14.1% year-over-year, although that missed the median estimates for a 14.9% increase.

Finally: According to Swiss global financial services company UBS, their proprietary UBS Global Real Estate Bubble Index in select world cities has “increased significantly over the last five years”. Their research found that real house prices in the metro areas in their “bubble-risk zone” have climbed by almost 50% on average over the last 6 years. In some other major cities, prices have risen only about 15% over the same period. UBS states that falling mortgage rates over the last decade have led to the increase. The following graphic shows the cities with the greatest “bubble risk” at the top. At the other end of the spectrum, Chicago is the only very-large US city currently below fair value.

(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 was unchanged from the prior week at 20.25, while the average ranking of Offensive DIME sectors fell to 12.75 from the prior week’s 12.25. The Offensive DIME sectors still maintain 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 31.15, up from last week’s 31.11, 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 just 3%/yr. (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 72.84, up from the prior week’s 70.90.

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: U.S. stocks largely continued their advance with many major indexes hitting record highs during the week. The Dow Jones Industrial Average rose for a fifth consecutive week closing at 22,871, a gain of 0.43%. The technology-heavy Nasdaq Composite added 15 points to close at 6,605, a gain of 0.24%. By market cap, large caps showed relative strength over smaller cap indexes with the S&P 500 large cap index rising 0.15%, while the S&P 400 index added just 0.02% and the small cap index was the lone loser for the week at -0.5%.

International Markets: Canada’s TSX rose for a fifth straight week, up 0.5%. In Europe, the United Kingdom’s FTSE enjoyed its fourth week of gains by rising 0.2%, while on the mainland France’s CAC 40 retreated -0.2%, Germany’s DAX added 0.3% and Milan’s FTSE rose just 0.09%. In Asia, major markets were green across the board. China’s Shanghai Composite rebounded from last week’s slight loss, rising 1.24%. Japan’s Nikkei surged 2.24%, while Hong Kong’s Hang Seng rose a slight 0.06%. As grouped by Morgan Stanley Capital International, emerging markets surged 2.3%, while developed markets added 1.7%.

Commodities: Precious metals rebounded strongly after four consecutive weeks of losses. Gold rose 2.3% last week to close back above $1,300 an ounce, at $1304.60. Silver, which trades similarly to gold albeit with more volatility, rose 3.7% to end the week at $17.41 an ounce. In energy, oil continued to trade in the $45-$55 a barrel range that has contained it for much of the last year and a half. Oil retraced most of last week’s weakness rising 4.48% to close at $51.45 a barrel. The industrial metal copper, seen by some analysts as an indicator of worldwide economic health, surged 3.45% last week—its third straight week of gains.

U.S. Economic News: According to the Labor Department, initial claims for unemployment fell by 15,000 to 243,000, a six-week low. Claims have remained in a downtrend since peaking near 300,000 on September 2, 2017 following Hurricanes Harvey and Irma. The four week moving average of claims, seen by analysts as a more accurate measure of labor market trends, dropped by 9,500 to 257,500. The number of people already receiving unemployment benefits, so-called continuing claims, dropped by 32,000 to 1.89 million. Continuing claims remain at their lowest levels in nearly 44 years.

U.S. employers continued to advertise a near-record number of job openings, although the number of job openings slipped 0.9% to 6.08 million in August. According to the Labor Department, job openings have risen as the number of unemployed has fallen to its lowest levels in more than ten years. The “quit rate”, which counts the number of people who voluntarily left jobs for presumably better opportunities, remained unchanged at 2.1%. In the details of the report, the number of job openings declined for most industries with employment in education hit with the heaviest losses. As has been the case for more than a year, employers continue to complain that they are unable to find enough skilled workers to fill available positions.

Sentiment among small-business owners weakened last month as expectations for future sales and economic growth plunged following the gridlock in Washington. The National Federation of Independent Business (NFIB) reported its sentiment gauge declined 2.3 points to 103 in September. Analysts had forecast a slight increase to 105.4. NFIB’s index soared following the election as business owners believed the election of Donald Trump would lead to more business-friendly policies from Washington. However, the inability of lawmakers to pass meaningful legislation to help businesses, such as a rollback of the Affordable Care Act, weighed on their outlook. NFIB’s chief economist William Dunkelberg said in the release, “Small business owners still expect policy changes from Washington on health care and taxes, and while they don’t know what those changes will look like, they expect them to be an improvement.”

Among consumers, sentiment soared to its highest level since 2004 according to the University of Michigan’s consumer sentiment index. The index rose to 101.1 this month, an increase of 5.8 points from September. Richard Curtin, chief economist for the survey, noted that current trends indicated consumer spending should continue to expand at least through the middle of next year. If that actually happens, it would mark the second longest expansion period since the mid-1800’s. The results reflect an “unmistakable sense among consumers that economic prospects are now about as good as could be expected.”

Consumer prices recorded their biggest gain in eight months as gasoline prices soared in the wake of storm-related refinery production disruptions along the Gulf Coast. The Labor Department reported its Consumer Price Index (CPI) jumped half a percent last month, lifting the year-over-year gain in the CPI to 2.2%. Gasoline prices surged 13.1% last month, and accounted for 75% of the increase in the CPI. Ex-gasoline, price pressures were relatively benign. In fact, excluding the volatile food and fuel categories consumer prices were up a mere 0.1%. In the 12 months ending in September, core CPI was up 1.7%.

Inflation at the wholesale level jumped by 0.4% last month led by a surge in gasoline prices. The Labor Department reported that its producer price index for final demand rose 2.6% for the 12 months through September. That’s the biggest gain since February of 2012, and a gain of 0.2% from August. Wholesale gasoline prices soared 10.9% last month after Hurricane Harvey knocked several major oil refineries out of commission. Core PPI, which excludes the volatile food, energy, and trade services categories, rose 0.2% in September and is up 2.1% over the last 12 months.

According to minutes of the Federal Reserve’s last policy meeting, the persistently low U.S. inflation had Federal Reserve officials debating whether or not an interest rate hike was needed in December. Multiple Fed officials said they now believed that it was going to take longer than they had previously anticipated for inflation to get back to the central bank’s 2% target. Multiple officials agreed that “some patience” was warranted before raising interest rates in order to assess trends in inflation. Kansas City Fed President Esther George, generally considered a Fed Hawk, was in favor of a hike and warned that a delay could spark asset bubbles. Minnesota Fed President Neel Kashkari, a Fed dove, argued for no further rate hikes until inflation was clearly above 2%. Mike Loewengart, vice president for investment strategy at E*Trade noted that “what is telling about these minutes is the growing rift among Fed officials and the notion that a December hike is anything but guaranteed.”

International Economic News: In Canada, the International Monetary Fund (IMF) raised its estimate for Canada’s economic growth rate for this year and 2018, lifting it to near the top of all advanced economies. The Washington-based IMF is now estimating Canada’s gross domestic product gain for 2017 will be 3%, an increase of 0.5% over its July estimate. The estimate puts Canada at the top of all other G-7 countries for the year, with the United States at an estimated 2.2%. The IMF’s estimate is consistent with the Paris-based Organization for Economic Cooperation and Development’s estimate which has also stated Canada’s growth would top the list of G7 countries.

The British Chamber of Commerce (BCC) stated that Britain’s economy showed little sign of breaking out of its lethargy and that it is “extraordinary” that the Bank of England is even considering raising interest rates. In the BCC’s Quarterly Economic Survey of businesses, it reported that sales at services firms, which make up the bulk of the UK economy, were steady in the third quarter. However, there was little sign of improvement in either pay pressures or investment, both of which the Bank of England somehow expects to rise notably next year. Overall, the BCC described its survey as “uninspiring”, with political uncertainty, currency volatility, and Brexit clearly affecting businesses. Suren Thiru, BCC head of economics stated, “We’d caution against an earlier than required tightening in monetary policy, which could hit both business and consumer confidence and weaken overall UK growth.”

On Europe’s mainland, French President Emmanuel Macron’s proposal to cut France’s wealth tax came closer to reality as a parliamentary committee approved the plan, despite opposition from the left. The measure which will limit the nation’s wealth tax was the most controversial proposal in the government’s 2018 budget. Macron and his supporters argue that the move will increase investment by reducing tax on “productive wealth”. The proposal limits the wealth tax, which is levied on incomes of 1.3 million euros or more, to real estate, exempting revenue from investments and savings. Under fire from the left, Macron’s Republic on the Move party amended the original proposal by adding extra taxes on “ostentatious signs of wealth” such as yachts, expensive sports cars, and gold.

German economics minister Brigitte Zypries made the prediction that Europe will be the big winner following the decision of Britain to leave the European Union as UK-headquartered companies may move their headquarters to the continent. In addition, she believes that French President Emmanuel Macron’s reforms in France will also benefit the whole of the EU. The German government now expects GDP growth of 2% this year, up from an earlier forecast of 1.5%, as Europe’s economic powerhouse continues to forge ahead. She also believes the economy will grow by 1.9% in 2018. At a press conference in Berlin, Ms. Zypries said Germany’s economic boom had “gained momentum and become more broad-based.”

Italian industrial production rose more than expected in August, further evidence that the recovery in the euro region’s third-biggest economy is gaining strength. According to Italy’s national statistics agency Istat, industrial output increased 1.2% from July, led by gains in intermediate goods such as basic metals, rubber, and plastics. On an annual workday adjusted basis, industrial production was up 5.7% year-over-year. In its monthly economic report, the statistics bureau said Istat’s leading indicator is “reinforcing the growth perspectives in the short term”, bolstered by the manufacturing sector and investments. August’s production increase was the fourth consecutive monthly increase.

In Asia, China’s exports were up 8.1% last month from the same time last year, while imports rose 18.7%. As an indication of overall global demand, Chi Lo, senior economist for Greater China at BNP Paribas Investment Partners stated “It seems the global demand is still there to support the demand for Chinese exports” and characterized the numbers as “pretty good”. China’s economic data has been showing robust growth ahead of leadership changes set to happen at the upcoming Party Congress. Chinese customs officials also highlighted the slide in trade with North Korea, perhaps to convince the world that China is “getting tough” with that rogue nation. Imports from North Korea collapsed 37.9% in September, marking its seventh month of decline, while Chinese exports to North Korea fell by 6.7%.

Japan’s main stock index, the Nikkei 225, rose to its highest level in almost 21 years this week, supported by a broad rally in global markets and growing optimism surrounding the Japanese economy. Japan’s gross domestic product has expanded for every quarter for the last year and a half, the longest expansion in 11 years. Unemployment is at multi-decade lows, and corporations are experiencing a surge in profits. Japan’s longtime economic nemesis—persistent deflation, appears to be on the mend with both consumer prices and incomes showing modest gains. It will still be some time, however, before Japan’s Nikkei can set all-time highs. Stocks remain well below the levels achieved at the height of Japan’s late 1980’s asset bubble.

Finally: An obscure but important record has been set in October: the velocity of money has set an all-time low. The velocity of money is defined as the number of times each dollar is spent to buy goods and services per unit of time. This is, on its face, shocking in a period of a rising US stock market and a growing economy. One would think that each dollar would be circulating faster and faster in such an environment. But analysts Viktor Shvets and Chetan Seth at global investment bank Macquarie Group note that “there is nothing normal in the current environment of unprecedented financialization and economic disruption.” They go on to explain that with the U.S. Federal Reserve and other major central banks around the world having pumped such massive amounts of money into the global financial system, there is simply too much money sloshing around in the system for the money to achieve anywhere near the “normal” range of monetary velocity and turnover. They also wonder if the artificial money buildup was the dominant reason for stock market gains and economic expansion, in place of the more traditional reason of honest to goodness increase in demand for goods and services.

(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 20.25 from the prior week’s 19.75, while the average ranking of Offensive DIME sectors fell to 12.25 from the prior week’s 10.75. The Offensive DIME sectors maintained their lead over the Defensive SHUT. 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 31.15, up from last week’s 31.11, 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 just 3%/yr. (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 72.84, up from the prior week’s 70.90.

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: U.S. stocks largely continued their advance with many major indexes hitting record highs during the week. The Dow Jones Industrial Average rose for a fifth consecutive week closing at 22,871, a gain of 0.43%. The technology-heavy Nasdaq Composite added 15 points to close at 6,605, a gain of 0.24%. By market cap, large caps showed relative strength over smaller cap indexes with the S&P 500 large cap index rising 0.15%, while the S&P 400 index added just 0.02% and the small cap index was the lone loser for the week at -0.5%.

International Markets: Canada’s TSX rose for a fifth straight week, up 0.5%. In Europe, the United Kingdom’s FTSE enjoyed its fourth week of gains by rising 0.2%, while on the mainland France’s CAC 40 retreated -0.2%, Germany’s DAX added 0.3% and Milan’s FTSE rose just 0.09%. In Asia, major markets were green across the board. China’s Shanghai Composite rebounded from last week’s slight loss, rising 1.24%. Japan’s Nikkei surged 2.24%, while Hong Kong’s Hang Seng rose a slight 0.06%. As grouped by Morgan Stanley Capital International, emerging markets surged 2.3%, while developed markets added 1.7%.

Commodities: Precious metals rebounded strongly after four consecutive weeks of losses. Gold rose 2.3% last week to close back above $1,300 an ounce, at $1304.60. Silver, which trades similarly to gold albeit with more volatility, rose 3.7% to end the week at $17.41 an ounce. In energy, oil continued to trade in the $45-$55 a barrel range that has contained it for much of the last year and a half. Oil retraced most of last week’s weakness rising 4.48% to close at $51.45 a barrel. The industrial metal copper, seen by some analysts as an indicator of worldwide economic health, surged 3.45% last week—its third straight week of gains.

U.S. Economic News: According to the Labor Department, initial claims for unemployment fell by 15,000 to 243,000, a six-week low. Claims have remained in a downtrend since peaking near 300,000 on September 2, 2017 following Hurricanes Harvey and Irma. The four week moving average of claims, seen by analysts as a more accurate measure of labor market trends, dropped by 9,500 to 257,500. The number of people already receiving unemployment benefits, so-called continuing claims, dropped by 32,000 to 1.89 million. Continuing claims remain at their lowest levels in nearly 44 years.

U.S. employers continued to advertise a near-record number of job openings, although the number of job openings slipped 0.9% to 6.08 million in August. According to the Labor Department, job openings have risen as the number of unemployed has fallen to its lowest levels in more than ten years. The “quit rate”, which counts the number of people who voluntarily left jobs for presumably better opportunities, remained unchanged at 2.1%. In the details of the report, the number of job openings declined for most industries with employment in education hit with the heaviest losses. As has been the case for more than a year, employers continue to complain that they are unable to find enough skilled workers to fill available positions.

Sentiment among small-business owners weakened last month as expectations for future sales and economic growth plunged following the gridlock in Washington. The National Federation of Independent Business (NFIB) reported its sentiment gauge declined 2.3 points to 103 in September. Analysts had forecast a slight increase to 105.4. NFIB’s index soared following the election as business owners believed the election of Donald Trump would lead to more business-friendly policies from Washington. However, the inability of lawmakers to pass meaningful legislation to help businesses, such as a rollback of the Affordable Care Act, weighed on their outlook. NFIB’s chief economist William Dunkelberg said in the release, “Small business owners still expect policy changes from Washington on health care and taxes, and while they don’t know what those changes will look like, they expect them to be an improvement.”

Among consumers, sentiment soared to its highest level since 2004 according to the University of Michigan’s consumer sentiment index. The index rose to 101.1 this month, an increase of 5.8 points from September. Richard Curtin, chief economist for the survey, noted that current trends indicated consumer spending should continue to expand at least through the middle of next year. If that actually happens, it would mark the second longest expansion period since the mid-1800’s. The results reflect an “unmistakable sense among consumers that economic prospects are now about as good as could be expected.”

Consumer prices recorded their biggest gain in eight months as gasoline prices soared in the wake of storm-related refinery production disruptions along the Gulf Coast. The Labor Department reported its Consumer Price Index (CPI) jumped half a percent last month, lifting the year-over-year gain in the CPI to 2.2%. Gasoline prices surged 13.1% last month, and accounted for 75% of the increase in the CPI. Ex-gasoline, price pressures were relatively benign. In fact, excluding the volatile food and fuel categories consumer prices were up a mere 0.1%. In the 12 months ending in September, core CPI was up 1.7%.

Inflation at the wholesale level jumped by 0.4% last month led by a surge in gasoline prices. The Labor Department reported that its producer price index for final demand rose 2.6% for the 12 months through September. That’s the biggest gain since February of 2012, and a gain of 0.2% from August. Wholesale gasoline prices soared 10.9% last month after Hurricane Harvey knocked several major oil refineries out of commission. Core PPI, which excludes the volatile food, energy, and trade services categories, rose 0.2% in September and is up 2.1% over the last 12 months.

According to minutes of the Federal Reserve’s last policy meeting, the persistently low U.S. inflation had Federal Reserve officials debating whether or not an interest rate hike was needed in December. Multiple Fed officials said they now believed that it was going to take longer than they had previously anticipated for inflation to get back to the central bank’s 2% target. Multiple officials agreed that “some patience” was warranted before raising interest rates in order to assess trends in inflation. Kansas City Fed President Esther George, generally considered a Fed Hawk, was in favor of a hike and warned that a delay could spark asset bubbles. Minnesota Fed President Neel Kashkari, a Fed dove, argued for no further rate hikes until inflation was clearly above 2%. Mike Loewengart, vice president for investment strategy at E*Trade noted that “what is telling about these minutes is the growing rift among Fed officials and the notion that a December hike is anything but guaranteed.”

International Economic News: In Canada, the International Monetary Fund (IMF) raised its estimate for Canada’s economic growth rate for this year and 2018, lifting it to near the top of all advanced economies. The Washington-based IMF is now estimating Canada’s gross domestic product gain for 2017 will be 3%, an increase of 0.5% over its July estimate. The estimate puts Canada at the top of all other G-7 countries for the year, with the United States at an estimated 2.2%. The IMF’s estimate is consistent with the Paris-based Organization for Economic Cooperation and Development’s estimate which has also stated Canada’s growth would top the list of G7 countries.

The British Chamber of Commerce (BCC) stated that Britain’s economy showed little sign of breaking out of its lethargy and that it is “extraordinary” that the Bank of England is even considering raising interest rates. In the BCC’s Quarterly Economic Survey of businesses, it reported that sales at services firms, which make up the bulk of the UK economy, were steady in the third quarter. However, there was little sign of improvement in either pay pressures or investment, both of which the Bank of England somehow expects to rise notably next year. Overall, the BCC described its survey as “uninspiring”, with political uncertainty, currency volatility, and Brexit clearly affecting businesses. Suren Thiru, BCC head of economics stated, “We’d caution against an earlier than required tightening in monetary policy, which could hit both business and consumer confidence and weaken overall UK growth.”

On Europe’s mainland, French President Emmanuel Macron’s proposal to cut France’s wealth tax came closer to reality as a parliamentary committee approved the plan, despite opposition from the left. The measure which will limit the nation’s wealth tax was the most controversial proposal in the government’s 2018 budget. Macron and his supporters argue that the move will increase investment by reducing tax on “productive wealth”. The proposal limits the wealth tax, which is levied on incomes of 1.3 million euros or more, to real estate, exempting revenue from investments and savings. Under fire from the left, Macron’s Republic on the Move party amended the original proposal by adding extra taxes on “ostentatious signs of wealth” such as yachts, expensive sports cars, and gold.

German economics minister Brigitte Zypries made the prediction that Europe will be the big winner following the decision of Britain to leave the European Union as UK-headquartered companies may move their headquarters to the continent. In addition, she believes that French President Emmanuel Macron’s reforms in France will also benefit the whole of the EU. The German government now expects GDP growth of 2% this year, up from an earlier forecast of 1.5%, as Europe’s economic powerhouse continues to forge ahead. She also believes the economy will grow by 1.9% in 2018. At a press conference in Berlin, Ms. Zypries said Germany’s economic boom had “gained momentum and become more broad-based.”

Italian industrial production rose more than expected in August, further evidence that the recovery in the euro region’s third-biggest economy is gaining strength. According to Italy’s national statistics agency Istat, industrial output increased 1.2% from July, led by gains in intermediate goods such as basic metals, rubber, and plastics. On an annual workday adjusted basis, industrial production was up 5.7% year-over-year. In its monthly economic report, the statistics bureau said Istat’s leading indicator is “reinforcing the growth perspectives in the short term”, bolstered by the manufacturing sector and investments. August’s production increase was the fourth consecutive monthly increase.

In Asia, China’s exports were up 8.1% last month from the same time last year, while imports rose 18.7%. As an indication of overall global demand, Chi Lo, senior economist for Greater China at BNP Paribas Investment Partners stated “It seems the global demand is still there to support the demand for Chinese exports” and characterized the numbers as “pretty good”. China’s economic data has been showing robust growth ahead of leadership changes set to happen at the upcoming Party Congress. Chinese customs officials also highlighted the slide in trade with North Korea, perhaps to convince the world that China is “getting tough” with that rogue nation. Imports from North Korea collapsed 37.9% in September, marking its seventh month of decline, while Chinese exports to North Korea fell by 6.7%.

Japan’s main stock index, the Nikkei 225, rose to its highest level in almost 21 years this week, supported by a broad rally in global markets and growing optimism surrounding the Japanese economy. Japan’s gross domestic product has expanded for every quarter for the last year and a half, the longest expansion in 11 years. Unemployment is at multi-decade lows, and corporations are experiencing a surge in profits. Japan’s longtime economic nemesis—persistent deflation, appears to be on the mend with both consumer prices and incomes showing modest gains. It will still be some time, however, before Japan’s Nikkei can set all-time highs. Stocks remain well below the levels achieved at the height of Japan’s late 1980’s asset bubble.

Finally: An obscure but important record has been set in October: the velocity of money has set an all-time low. The velocity of money is defined as the number of times each dollar is spent to buy goods and services per unit of time. This is, on its face, shocking in a period of a rising US stock market and a growing economy. One would think that each dollar would be circulating faster and faster in such an environment. But analysts Viktor Shvets and Chetan Seth at global investment bank Macquarie Group note that “there is nothing normal in the current environment of unprecedented financialization and economic disruption.” They go on to explain that with the U.S. Federal Reserve and other major central banks around the world having pumped such massive amounts of money into the global financial system, there is simply too much money sloshing around in the system for the money to achieve anywhere near the “normal” range of monetary velocity and turnover. They also wonder if the artificial money buildup was the dominant reason for stock market gains and economic expansion, in place of the more traditional reason of honest to goodness increase in demand for goods and services.

(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 20.25 from the prior week’s 19.75, while the average ranking of Offensive DIME sectors fell to 12.25 from the prior week’s 10.75. The Offensive DIME sectors maintained their lead over the Defensive SHUT. 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 31.11, up from last week’s 30.83, 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 just 3%/yr. (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 70.90, up from the prior week’s 68.87.

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, up from the prior week’s 25. 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: Stocks maintained their winning streak for most of the week, resulting in most of the major indexes setting new record highs. The large cap S&P 500 index had eight consecutive daily gains before retreating a bit on Friday—its longest winning streak since 2013. The Dow Jones Industrial Average recorded its fourth consecutive week of gains, rising 368 points or 1.65% to close at 22,773. The technology-heavy Nasdaq Composite had its second week of gains, rising 1.45% and ending the week at 6,590. By market cap, the smaller cap indexes showed a modest relative strength over large caps with the mid cap S&P 400 and Russell 2000 rising 1.25% and 1.3%, respectively, while the large cap S&P 500 added 1.2%.

International Markets: Canada’s Toronto Stock Exchange had its fourth week of gains, rising 0.6%. In Europe, the United Kingdom’s FTSE rose 2%, France’s CAC 40 gained 0.56%, Germany’s DAX rose 0.99%, but Italy’s Milan FTSE retreated -1.3%. In Asia, China’s Shanghai Composite slipped a slight -0.11%, while Japan’s Nikkei scored a fourth week of gains by rising 1.6%. Hong Kong’s Hang Seng surged 3.3% following last week’s down week. As grouped by Morgan Stanley Capital International, developed markets were essentially flat, off just -0.07%, while emerging markets added a strong 1.83%.

Commodities: Precious metals continued to lose their luster. Gold fell for a fourth straight week, falling -0.77% to $1274.90 an ounce. Silver, while generally trading in tandem with gold, nonetheless managed to finish positively gaining 0.68% to close at $16.79. In energy, the price of West Texas Intermediate crude oil retraced most of the last three weeks of gains, retreating -4.6% to $49.29 per barrel. Copper, seen by some analysts as an indicator of world economic health, notched its second week of gains by rising 2.5%.

U.S. Economic News: The number of applications for new unemployment benefits fell by 12,000 to 260,000 last week, returning to levels last seen prior to the disruptions caused by Hurricanes Harvey and Irma. The less-volatile four-week moving average of initial claims declined by 9,500 to 268,250. Both numbers remain under the key 300,000 threshold analysts use to indicate a healthy jobs market. Continuing claims, which counts the number of people already collecting unemployment benefits, fell slightly to 1.94 million. That number is reported with a one-week delay.

The Bureau of Labor Statistics’ Non-Farm Payrolls (NFP) report said that the economy lost 33,000 jobs last month, the first decline in seven years. The NFP attributed the cause to the widespread workplace disruptions following Hurricanes Harvey and Irma. On the plus side, the unemployment rate fell to 4.2% from 4.4%, hitting its lowest level since December 2000. Also on the positive side of the ledger, wages were on the rise adding 0.5% or 12 cents to $26.55 an hour. Over the past year, hourly pay has increased 2.9% matching the post-recession high. The government raised its estimate of new jobs created to 169,000 in August, an increase of 13,000 from July.

Manufacturing in the U.S. continues to rebound according to the latest figures from the Institute for Supply Management (ISM). ISM’s manufacturing index added two points last month, hitting its highest level in almost 13 years at 60.8. Economists had only expected a reading of 58.1. In the details, a remarkable seventeen out of the eighteen industries surveyed reported growth in the latest reading, reflecting the robust growth in an economy that’s been growing for more than eight years. Of concern, however, is that manufacturers continue to have a difficult time finding enough skilled workers. An executive at a manufacturer of transportation equipment remarked, “Labor shortages continue to haunt operational capacity.”

New orders for U.S.-made goods rose in August and orders for core capital goods were stronger than previously reported, according to the latest data from the Commerce Department. Factory goods orders increased 1.2%, exceeding economists’ expectations by 0.2%. Orders for non-defense capital goods ex-aircraft, seen as a measure of business spending plans, rose by 1.1%. Spending on these so-called core capital goods is helping to support manufacturing which currently makes up about 12% of the U.S. economy. Business investment in equipment grew at its fastest pace in nearly two years in the second quarter.

In the services sector, the Institute for Supply Management’s (ISM) index of service-oriented companies jumped to a 12-year high of 59.8 last month, a gain of 4.5 points. The ISM services reading is particularly important as the services sector is responsible for almost 80% of the nation’s jobs. In the details of the report, fourteen of the seventeen nonmanufacturing industries surveyed reported growth last month. In addition, the business activity index increased 3.8 points, the new orders index jumped 5.9 points to 63, production climbed 3.8 points to 61.3 and employment added 0.6 point to 56.8. The ISM services employment index increased for its 43^rd consecutive month.

The major automakers posted respectable gains last month following heavier consumer discounts and robust demand to replace hurricane-damaged vehicles. General Motors said U.S. sales rose 12% last month, compared with the same time last year, while Ford’s sales rose 9%. Both GM and Ford reported sharply higher sales of pickup truck and SUV’s—their most profitable products. Fiat Chrysler reported a drop in its sales by 10%, hurt by reduced demand from rental-car companies. Toyota and Nissan reported sales increases of 15% and 10%, respectively, while Honda’s sales increased by 7%. While auto makers cited replacement demand for the hundreds of thousands of vehicles lost due to flooding from the twin hurricanes, heftier discounts also helped lift September’s results. Research firm J.D. Power reported incentives averaged $4,048 per vehicle last month—a new record high.

The Commerce Department reported that construction spending rose 0.5% to $1.21 trillion in August, and increased 2.5% on a year-over-year basis. The government said the recent hurricanes did not appear to have a negative effect as the responses from Texas and Florida for construction spending data were “not significantly lower than normal.” Spending on private residential projects increased by 0.4%, its fourth consecutive month of gains, while spending on nonresidential structures rose by 0.5% snapping a two month losing streak. Public construction projects rose 0.7% in August after falling 3.3% in July. Spending on public construction projects rebounded 0.7% after falling 3.3% in July. State and local government construction spending gained 1.1%, while federal government construction spending fell to its lowest level since spring of 2007—down 4.7%.

International Economic News: In Canada, the merchandise trade deficit widened in August as exports fell for a third straight month. Statistics Canada reported that the country posted a merchandise trade deficit of $3.4 billion in August, an increase of almost $500 million CAD compared with July. The difference was substantially bigger than the $2.6 billion CAD economists had expected. The latest data is further evidence that the Canadian economy lost momentum in the third quarter. Robert Kavcic, senior economist at Bank of Montreal said, “In case there was any doubt that peak Canadian growth is behind us, this report all but cements the case.” Exports, which had been a major contributor to Canada’s impressive 4.5% second quarter annualized growth pace, fell 1% in August. Since peaking in May, exports have plunged nearly 11% in value. Economists say their expectation is that the economy has retreated to a much more moderate growth pace for the second half of the year.

In the United Kingdom, the Organization for Economic Cooperation and Development (OECD) reported that the United Kingdom has the highest inflation rate among all of the top economies of the world. In its latest indication that the Brexit vote is weighing on the living standards of Brits, the OECD stated the heightened cost of importing food and fuel is forcing prices to increase at a faster rate than anywhere in the G7 group of leading global economies. The annual growth in prices in the U.K. rose 0.3% in August to 2.9%–matching the four-year high reached in May. The average increase in prices across the OECD was 2.2%. Since the Brexit vote sparked a devaluation in the Pound Sterling, imports have become more expensive.

On Europe’s mainland, the French statistics agency Insee now expects the French economy to expand by 0.5% quarter-on-quarter in both the third and fourth quarters of 2017. For the year, the statistics agency hiked its economic growth forecast for France to 1.8%, which would be the fastest expansion in six years. With the French economy having expanded at a relatively weak 1% in recent years, an acceleration to 1.8% growth would represent considerable improvement. Business surveys point to renewed optimism following the election of the pro-business Emmanuel Macron. Insee also sees business investment growing by 3.9% this year, an increase of 0.5% over last year.

Recent German data showed industrial orders rebounded in August more than had been expected, due to strong foreign demanded. According to the Economy Ministry, industrial companies registered a 3.6% increase in orders after contracts for goods made in Germany fell by 0.4% in July. The latest reading was the strongest reading since December of 2016. In the details, domestic demand rose by 2.7%, while foreign orders jumped by 4.3%. ING Bank chief economist Carsten Brzeski stated in a note, “Combined with strong business surveys showing production expectations as well as order books close to record highs, German industry looks all set to end the year at maximum speed.”

In Asia, the People’s Bank of China cut its effective reserve requirement ratio for banks by 0.5% to 1.5% under certain circumstances, in what appears to be another example of the Chinese government pumping liquidity into its economy to support growth. Analysts believe that the cut in the reserve requirement is meant to increase loans to small and medium-sized businesses, with less of an effect on state-owned concerns. Officially, the Chinese government is still in a deleveraging phase as debt has increased from 85% of GDP in 2008 to more than 150% today. SMEs, or Small and Medium-sized Enterprises, have been negatively affected by the traditional governmental misallocation of capital from the banking system, and they stand to benefit the most from the cut in the reserve requirement ratio. SMEs account for less than 40% of loans, but contribute 65% to GDP, 75% of employment, and 50% of tax revenue according to recent comments from a government spokesperson.

A Japanese government index showed that Japan’s economy likely posted its second-best stretch of uninterrupted post-war growth. The index of coincident economic indicators rose a preliminary 1.9 points to 117.6 in August, the Cabinet Office reported. That marks the 57^th straight month of growth, matching the second-best stretch of expansion since World War II. The coincident index is used to measure the state of the economy and is among the indicators the government uses when determining whether the economy is expanding or in recession. Under the government’s definition, the economy has been in expansion since December 2012, when Abe came into office.

Finally: Warren Buffett famously said “Be fearful when others are greedy and greedy when others are fearful.” Given that, the latest reading from CNN’s Fear & Greed Index may be cause for concern. The latest reading of the index is 95 on a scale of 100, its highest level in at least three years. That level is labeled by CNN as “Extreme Greed”, which would seem to qualify for Buffett-like caution, if not outright fear.

(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 slightly to 19.75 from the prior week’s 19.50, while the average ranking of Offensive DIME sectors fell slightly to 10.75 from the prior week’s 10.25. The Offensive DIME sectors maintained their lead over the Defensive SHUT. 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 30.83, up from last week’s 30.62, 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 just 3%/yr. (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 68.87, up from the prior week’s 67.03.

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 25, up sharply 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), 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: U.S. market indexes closed higher for the week, with many hitting new highs in the process. The Dow Jones Industrial Average had a second week of gains, rising 0.25% to close at 22,405. The technology-heavy Nasdaq Composite retraced all of last week’s decline by rising 1.07% to close at 6,495. By market cap, smaller caps continued to close their year-to-date performance gap with the small cap Russell 2000 surging 2.76% and the mid cap S&P 400 rising 1.54%, while the large cap S&P 500 gained 0.68%.

International Markets: Canada’s TSX had a third week of strong gains, rising 1.17%. In Europe, major markets were also green across the board. The United Kingdom’s FTSE rose 0.85%, France’s CAC 40 gained 0.92%, and Germany’s DAX led the parade with a gain of 1.88%. Italy’s Milan FTSE continued its recovery with a gain of 0.73%. In Asia, major markets were mixed. China’s Shanghai Composite declined a slight -0.11%, while Japan’s Nikkei rose 0.29%. Hong Kong’s Hang Seng fell over -1.1%. As grouped by Morgan Stanley Capital International, developed markets rose 0.13%, while emerging markets fell -1.26%.

Commodities: Precious metals retreated for a third straight week with Gold falling -0.98% to $1,284.80, while Silver retreated -1.8% to $16.68. In energy, a barrel of West Texas Intermediate crude oil rose by almost 2% to $51.67 a barrel. Copper, seen by some analysts as a proxy for global economic health due to its varied uses, ended the week up 0.36%.

September Summary: Despite being statistically the worst month of the stock market year, the Dow Jones Industrial Average rose 2%, followed by the Nasdaq Composite which added 1%. The S&P 500 added 1.9%, the S&P 400 rose 3.76%, and the Russell 2000 surged a mighty 6.1%. International results were less unanimous. Canada’s TSX gained 2.78%, the United Kingdom’s FTSE fell -0.78%, and France’s CAC 40 and Germany’s DAX gained 4.8% and 6.4%, respectively. In Asia, China’s Shanghai Composite retreated -0.35%, while Japan’s Nikkei gained 3.6%. Overall, developed markets gained 2.4%, while emerging markets ended the quarter flat.

Third Quarter Summary: Strong gains across the board for the US for Q3. The Dow Jones Industrial Average gained 4.9%, while the Nasdaq Composite gained 5.79%. The S&P 500 added 3.96%, the S&P 400 rose 2.8%, and the Russell 2000 tacked on 5.3%. Gains were nearly universal in international markets for the quarter, as well. Canada’s TSX rose 2.98%, the United Kingdom’s FTSE was up a very modest 0.82%, and France’s CAC 40 rose 4.1%. Germany’s DAX, likewise, added 4.1%, while Italy’s Milan FTSE surged a strong 10.26%. In Asia, China’s Shanghai Composite rose 4.9%, while Japan’s Nikkei added 1.6%. For the quarter, developed markets rose 5% while emerging markets jumped 8.3%.

U.S. Economic News: The number of initial applications for new unemployment benefits rose by 12,000 to 272,000 last week, according to the Labor Department. Economists had only expected a total of 270,000. The less-volatile four-week moving average of claims rose by 9,000 to 277,750—its highest level in more than a year and a half. Still, new claims continue to remain under the key 300,000 threshold that analysts use to delineate a healthy jobs market. Continuing claims, the number of people already receiving benefits, fell by 45,000 to 1.93 million. That number is reported with a one-week delay.

Sales of new homes fell to an 8-month low last month even as demand remained strong. The Commerce Department reported that sales of new homes ran at a seasonally –adjusted annual rate of just 560,000 last month. That was 3.4% lower compared to last month, and 1.2% lower than the same time last year. New single-family home sales are down to their lowest annual sales rate since December. Economists had expected a 585,000 annual rate. The median sales price of a new home sold in August was $300,200, 0.4% higher than a year ago. The slower selling pace has allowed home inventory to return to more normal levels. At the current sales rate, there is a 6.1 month supply of homes for sale on the market. Home builders continue to struggle with three big challenges: a shortage of skilled labor, pricier land, and more expensive building materials.

Home prices overall continued to accelerate in July, led by the traditional hot markets – and one newcomer. The S&P/Case-Shiller 20-city index rose a seasonally-adjusted 5.8% in the three month period ending in July compared to the same time last year, and was up 5.6% from the previous month. For the month, both the 20-city and national indexes rose an unadjusted 0.7%. Seattle continued to lead the way, with prices rising 13.5% compared to the year-ago period, while home prices in Portland rose 7.6%. Las Vegas, which was one of the hottest housing markets during the housing bubble, enjoyed the third-strongest rate of price gains rising 7.4% compared to the same time last year. It was Las Vegas’ seventh-straight month of accelerating price gains. However, of note, Las Vegas home prices still remain about 30% lower than at their 2006 peak. Overall, the 20-City index is just 2.2% below its 2006 high.

The number of existing homes under contract fell last month, its fifth decline out of the last six months. The National Association of Realtors (NAR) reported that its pending home sales index fell 2.6% to 106.3. The index is now lower than any time since January 2016. Economists had only expected a 0.2% drop. The pending home sales index forecasts the number of future sales by tracking real estate transactions in which a contract has been signed but the deal has not yet closed. The group attributed the decline to the dwindling supply of homes available on the market. All regions reported declines. In the Northeast, pending home sales tumbled 4.4%. In the South pending sales fell 3.5%, and in the Midwest and West they retreated 1.5% and 1%, respectively. The NAR cut its full-year forecast for sales following the twin hurricanes of Irma and Harvey. The group now expects 5.44 million homes will be sold this year, down 0.2% from last year.

Confidence among consumers dipped slightly earlier this month, presumably due to the twin hits from hurricanes Harvey and Irma, but most Americans remained optimistic about the overall economy. According to the Conference Board, the consumer confidence index fell 0.6 point to 119.8. Economists had forecast a reading of 119.5. In Florida and Texas, two of the nation’s most populous states, confidence fell “considerably” following widespread damage from the two hurricanes. Lynn Franco, director of economic indicators at the board stated, “Despite the slight downtick in confidence, consumers’ assessment of current conditions remains quite favorable and their expectations for the short-term suggest the economy will continue expanding at its current pace.” Confidence soared after the election of Donald Trump and has remained high with the economy growing steadily and a healthy jobs market.

Orders for long-lasting manufactured goods, so-called durable goods, jumped last month and business investment increased in another positive report on the U.S. economy. The Commerce Department reported durable goods orders climbed 1.7% last month, although it was predominantly due to a big order for commercial aircraft. Orders for other manufactured goods rose as well, however at a weaker rate. Orders ex-transportation edged up 0.2%. Orders ex-defense and aircraft, used by analysts as a better measure of overall economic health, rose 0.9%. Core capital goods orders have risen in eight out of the last nine months.

Consumer spending was up just 0.1% last month, following a strong gain in July. Inflation continued to remain subdued. The Federal Reserve’s preferred measure of inflation, the Personal Consumption Expenditures index (PCE), increased by 0.1%. This matched the “core” consumer price index rate that strips out food and energy, which likewise edged up 0.1%. Weighing on consumer spending was a slowdown in August of vehicle purchases. Auto sales were down 1.8% last month. Over the last 12 months, the rate of PCE inflation remained unchanged at 1.4%, while the core rate fell to 1.3%. Both indexes remain well below the Federal Reserve’s 2% inflation target.

A measure of consumer sentiment retreated slightly this month, but Americans remained remarkably resilient after two hurricanes and some civil unrest. The University of Michigan’s consumer sentiment index fell 1.7 points to 95.1 this month. The survey director Richard Curtin noted that a slight decline was to be expected given the seemingly worsening political divide in the country, tensions with North Korea, racial issues in Charlottesville and St. Louis, and twin hurricane strikes. Given all that, confidence has remained “very favorable”, according to the release.

Overall U.S. economic output, or GDP, grew by 3.1% in the second quarter according to the latest reading from the Commerce Department. Growth was the quickest since the first quarter of 2015 and followed a 1.2% rate of growth in the first quarter. Economists had expected GDP would remain unrevised at 3.0%. Furthermore, economists point out, the rebuilding in Florida and Texas following the Hurricanes Harvey and Irma is expected to boost 4^th quarter GDP growth. Third quarter GDP estimates are currently 2.2%. For the first half of the year, the economy grew by 2.1%. Consumer spending, which makes up more than two-thirds of the U.S. economy, remained unrevised at a growth rate of 3.3%, was the fastest in a year during the second quarter.

International Economic News: Canada’s economy stalled in July, bringing its eight-month winning streak to an end and bringing growth back to more normal levels. Statistics Canada reported that Canadian real gross domestic product was flat in July, on a seasonally-adjusted basis, compared with June. It was the first time since October of 2016 that the economy failed to show month-over-month growth. After posting average month-over-month gains of 0.4% over the prior three months, economists had expected the economy to return to more normal levels of growth. Economists still expect a more reasonable but still healthy rate of growth in the second half of the year. Douglas Porter , chief economist at Bank of Montreal, wrote in a note, “The flat July GDP result represents a rare misstep for the Canadian economy in 2017. While we would never read too much into any one month, it could also mark a return to a more sustainable and realistic growth rate for the economy, after a year of staggeringly good news.”

Across the Atlantic, Britain has fallen from the top to the bottom of the group of seven largest economies in the year since the Brexit vote. Having been the fastest-growing economy in the G7 prior to the vote, new figures from the Office for National Statistics showed U.K. growth is now dead last, falling to -1.5% in the second quarter of 2017. Despite the poor economic reading, Bank of England governor Mark Carney hinted that interest rates were still likely to rise in November. Carney said, “If the economy continues on the track that it’s been on, and all indications are that it is, in the relatively near term we can expect that interest rates would increase somewhat.”

Across the Channel, the Bank of France raised its growth forecast for 2017 to 1.7%. Bank of France governor Francois Villeroy de Galhau made the forecast in an interview in newspaper Midi Libre. Villeroy de Galhau said “The economic recovery can’t be doubted…this year, it could reach 1.7%. But that would still put it below the average for the euro zone, which stands at over 2%. This underperformance highlights one imperative – we must take advantage of the recovery to step up reforms in France.” The updated forecast puts it in line with similar estimates from the Organization for Economic Cooperation and Development.

The German jobless rate fell to a new record low this month, but retail sales disappointed in a pair of conflicting reports on Europe’s largest economy. The unemployment rate dropped 0.1% to 5.6%, its lowest level since reunification in 1990, according to the Federal Labor Office. However, retail sales unexpectedly fell in August, declining 0.4%. The miss was almost a full percentage point down from the consensus forecast of a 0.5% rise. Over the last 12 months, retail sales were up 2.8% matching the previous month’s year-over-year increase but short of the 3.2% increase originally forecast.

China’s manufacturing sector expanded at its fastest pace in more than five years, according to the National Bureau of Statistics (NBS). The manufacturing Purchasing Managers’ Index (PMI) for September came in at 52.4, a 0.7 point increase from August. Readings above 50 indicate expansion. The reading has remained positive for 14 straight months and marked its highest level since May 2012. NBS statistician Zhao Qinghe stated the indicator has shown a stable upward trend and attributed the expansion to improving demand both at home and abroad and booming growth in high-tech industries.

In Japan, a collection of broadly positive economic reports released this week gave a boost to Prime Minister Shinzo Abe as he kicked off his re-election campaign. Factory output grew more than expected, along with household spending which edged up, while the unemployment rate remained at a more than two-decade low. Japan’s industrial production grew at 2.1% last month, capping six straight quarters of gains—its longest winning streak in over a decade. Household spending edged up 0.6% from the same time last year, slightly short of expectations for a 0.9% rise, but still positive. The spending data is particularly important as economists view household spending as the key to bringing Japan out of its deflationary environment. In addition, Japan’s unemployment rate came in at just 2.8%.

Finally: An unusual event occurred in the market during September. For the first time in more than three years, each of the three major Dow stock market averages all hit all-time highs during the month. The central tenet of the venerable “Dow Theory” is that a new high by one of the indexes, traditionally the Dow Industrials, is considered very bullish if confirmed by the Dow Transports, and even more bullish if the third (the Dow Utilities) joins in. The late Richard Russell, long-time proponent of the Dow Theory, called this a “Super Dow Theory” signal. This is a very rare development, happening in less than 4% of months since 1970. Encouragingly, never have any of these prior events occurred at a bull market top. And the worst performance of any prior occurrence (spring of 2007), still came five months before the eventual top. So, at the worst, the market appears poised for a continuation of market gains for at least a while. Market statistician Mark Hulbert compiled the statistics into the following table:

(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 sharply to 19.5 from the prior week’s 15.75, while the average ranking of Offensive DIME sectors rose to 10.25 from the prior week’s 11.75. The Offensive DIME sectors expanded their lead over the Defensive SHUT to the widest margin in more than 6 months. 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 question of whether we are in a continuing Secular Bear Market that began in 2000 or in a new Secular Bull Market has been the subject of hot debate among economists and market watchers since 2013, when the Dow and S&P 500 exceeded their 2000 and 2007 highs. The Bear proponents point out that the long-term PE ratio (called “CAPE”, for Cyclically-Adjusted Price to Earnings ratio), which has done a historically great job of marking tops and bottoms of Secular Bulls and Secular Bears, did not get down to the single-digit range that has marked the end of Bear Markets for a hundred years, but the Bull proponents say that significantly higher new highs are de-facto evidence of a Secular Bull, regardless of the CAPE. Further confusing the question, the CAPE now has risen to levels that have marked the end of Bull Markets except for times of full-blown market manias. See Fig. 1 for the 100-year view of Secular Bulls and Bears.

Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best. The CAPE is at 30.62, little changed from last week’s 30.60, and now 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 just 3%/yr (see Fig. 2).

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

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate. The U.S. Bull-Bear Indicator (see Fig. 3) is in Cyclical Bull territory at 67.03, up from the prior week’s 65.63.

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 20, 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 July, indicating positive prospects for equities in the third 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 Q3, 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 benchmarks were flat to slightly higher, with both the large cap S&P 500 and the Dow Jones Industrial Average finishing modestly higher, but the technology-heavy NASDAQ Composite ending the week down. The Dow Jones Industrial Average continued to rise, adding 81 points to end the week at 22,349, an increase of 0.37%. The Nasdaq composite gave up some of last week’s gains by falling 21 points to 6,426, a decline of -0.33%. By market cap, the large cap S&P 500 was essentially flat, rising just 0.08%, while the S&P 400 midcap index rose 0.84%, and the Russell 2000 small cap index gained 1.33%.

International Markets: Canada’s TSX rose for a second consecutive week gaining 1.85%. Europe was green across the board. The United Kingdom’s FTSE offset some of last week’s losses by rising 1.32%. On Europe’s mainland, France’s CAC 40 rose 1.29%, Germany’s DAX gained 0.59%, and Italy’s Milan FTSE increased 1.36%. In Asia, China’s Shanghai Composite ticked down just -0.03%, while Japan’s Nikkei tacked on an additional 1.94% and Hong Kong’s Hang Seng gained 0.26%. As grouped by Morgan Stanley Capital International, Developed Markets rose 0.48%, while emerging markets fell by -0.46%.

Commodities: Precious metals were under pressure for the second week in a row. Gold fell by -$27.70 an ounce to end the week at $1,297.50, a decline of -2.09%. Silver, Gold’s more volatile cousin, was also off down -4.09% to close at $16.98. The price of oil rose for a third straight week gaining 1.54% to end the week at $50.66 per barrel of West Texas Intermediate crude oil. Copper, used by some analysts as a gauge of worldwide economic health, fell for a third straight week declining a slight -0.15%.

U.S. Economic News: Applications for new unemployment benefits fell sharply last week, partially offsetting the previous week’s surge. Initial claims for the week ended September 16 fell by 23,000 to 259,000, according to the Labor Department. The number of Americans seeking jobless benefits remained near a 44-year low, and far below the 300,000 threshold analysts use to indicate a “healthy” jobs market. Economists were surprised, as they had expected claims to top 300,000 due to people temporarily put out of work due to hurricanes in Florida and Texas. The less-volatile four-week moving average of claims rose by 6,000 to 268,750. Continuing claims, which counts the number of people already receiving unemployment benefits, rose by 44,000 to 1.98 million. That number is reported with a one-week delay.

Construction of new homes dipped in August, but an indicator of future building activity improved, according to the Commerce Department. Housing starts declined 0.8% to an annual rate of 1.18 million in August, matching economists’ expectations. Housing starts fell -7.9% in the South and in the Northeast which plunged -8.7%. However, in the Midwest and West, starts improved. Permits to build new homes, an indicator of future housing activity, surged 5.7% to a 1.3 million annualized rate. New single-family construction lead the way, with starts on single-family homes at an 851,000 annualized rate—up 17% from the same time last year. Meanwhile, new construction on buildings with five or more units, such as apartment complexes, fell 5.8% to a 323,000 annualized rate—down 23% over the past year.

Confidence among the nation’s builders slipped this month on concerns about the continued shortage of qualified labor and the availability of building materials. The National Association of Homebuilders (NAHB) housing market index fell 3 points to 64 in its latest reading, while August’s reading was revised down by one point. NAHB chairman Granger MacDonald said in the release, “The recent hurricanes have intensified our members’ concerns about the availability of labor and the cost of building materials.” The concern is that recent hurricanes in Florida and Texas will draw many construction workers from across the nation to more lucrative jobs in those regions for rebuilding. Overall, the index is still in optimistic territory as readings over 50 indicate “improving” conditions. The group forecasts continued growth through the end of the year. NAHB Chief Economist Robert Dietz stated, “With ongoing job creation, economic growth and rising consumer confidence, we should see the housing market continue to recover at a gradual, steady pace throughout the rest of the year.”

However the news in the existing-home sales market isn’t as rosy. Existing-home sales have fallen four out of the last five months, with sales declining 1.7% last month. The National Association of Realtors said existing-homes fell 1.7% to a seasonally-adjusted annualized rate of 5.35 million, its worst level in a year. Economists had expected an annualized rate of 5.44 million. Housing inventory at the end of last month fell 2.1% to 1.88 million existing homes available for sale. That inventory level is 6.5% less than the same time last year. The limited inventory has been a primary driver of higher home prices. The median existing-home price is $253,500. In its statement, NAR Chief Economist Lawrence Yun said, “Sales have been unable to break out because there are simply not enough homes for sale.”

In the City of Brotherly Love, the Philadelphia Fed’s manufacturing index accelerated this month to a reading of 23.8, a three-month high that exceeded economists’ expectations. Manufacturing activity increased in the mid-Atlantic region with the sub-indicators for general activity, new orders, and shipments all showing improvement. Two-thirds of the survey respondents said they planned on increasing production in the third quarter, with a higher percentage stating it was due to business conditions rather than seasonal factors. The same ratio stated they intended to boost production either by hiring more workers or adding additional hours.

The Federal Reserve’s Open Market Committee announced this week that it intends to begin reducing its $4.5 trillion balance sheet starting next month. The Fed took the controversial step in 2008 to buy trillions of dollars’ worth of bonds in a frantic effort to lower U.S. interest rates and support endangered financial institutions. Now, nine years later, Fed officials believe the economy is strong enough to stand on its own. Chairwoman Janet Yellen stated in a press conference, “The basic message here is U.S. economic performance has been good”. In addition, Fed officials reiterated their intention to raise interest rates one more time this year (most analysts believe the Fed will wait until December for that next rate hike). The Fed maintained its forecast for three rate hikes in 2018, but reduced the number of anticipated hikes in 2019 to two.

As the stock market and housing prices have continued to increase, the net worth of households across the country rose by $1.7 trillion in the second quarter. The Federal Reserve reported the net worth of households and nonprofits rose by 1.7% to $96.2 trillion. Equities were responsible for $1.1 trillion of the increase while the value of real estate rose by about $600 billion. Unfortunately, the gains weren’t distributed across the board to all households – prior to this report, the Federal Reserve released another report stating that less than half of all households in the country currently own stocks.

International Economic News: The Organization for Economic Co-operation and Development (OECD) raised its expectations for economic growth in Canada this year to 3.2%, the highest in all of the G7. This report supports the International Monetary Fund’s report released earlier that stated Canada was set to beat all of its developed economy peers this year. However, the OECD also warned that the vulnerability of Canada’s red-hot housing market could weigh on growth in the future. Rising house prices and swelling household debt levels in Canada increase the risk of a real estate market correction that would reverberate through the economy, the report warned.

Ratings service Moody’s downgraded the UK one level to “Aa2” and rated its outlook for the country as “stable”. Moody’s attributed the downgrade to Brexit pressures on the country’s economic strength along with rising debt levels. Moody’s analyst Kathrin Muehlbronner stated “Moody’s expects weaker public finances going forward, partly linked to the economic slowdown under way but also reflecting the increasing political and social pressures to raise spending after seven years of spending cuts.” The UK didn’t take the downgrade lightly. Prime Minister Theresa May delivered a speech after the downgrade stating Moody’s assessment of the Brexit impact to the economy was “outdated” and that she had an “ambitious vision for the UK’s future relationship with the EU.”

Across the Channel in France, tens of thousands of people took to the streets in Paris to protest Emmanuel Macron’s overhaul of France’s labor laws. The demonstration was organized by Jean-Luc Melenchon, the far left leader who has emerged as Macron’s main political opponent. The protests were a day after Macron signed a new law making it easier for businesses to hire and fire staff. Across the country, more than 132,000 people took part in the protests condemning the reforms. Mr. Mélenchon, whose party opposes the controversial labor reforms, is an outspoken critic of the president’s reformist economic policies and has said that the policy changes are an attack on workers’ rights.

The German finance ministry stated the economy weakened at the beginning of the third quarter following a strong first half of the year, but that its indicators suggest solid growth will continue. Europe’s biggest economy is growing on the strength of its consumers, propelled by record-high employment, rising real wages, and lower borrowing costs. The economic growth is likely to help carry Chancellor Angela Merkel to her fourth term as Chancellor in Germany’s federal elections on Sunday. The German economy grew 0.7% in the first quarter and 0.6% in the second quarter, driven by increased household and state spending as well as higher investments in buildings and machinery.

Italian Economy Minister Pier Carlo Padoan stated that growth of 1.5% is estimated for both 2018 and 2019. In his statement, he acknowledged that some people may regard the estimates as too optimistic, but he thinks they are “totally justified”. The brighter outlook may help the ruling Democratic Party ahead of the national elections if voters notice an improvement in their standard of living. The Treasury department said GDP will rise by 1.5% this year, higher than the 1.1% forecasted earlier, due to better than expected data the first half of the year and better business sentiment.

In Asia, U.S. ratings agency S&P Global Ratings downgraded China’s sovereign credit rating from “AA-“ to “A+” saying the rating reflected increased economic and financial risks in China after a “prolonged period of strong credit growth.” The Chinese government fired back stating it was a “wrong decision”, and that the ratings agency was ignorant of China’s sound economic fundamentals. The decision brings S&P’s ratings in line with Moody’s and Fitch which had downgraded China earlier this year. The Finance Ministry complained S&P ignored China’s stable economic growth and reform efforts. Official data showed the economy grew by 6.9% in the first half of the year, and government revenue rose by over 10%.

Japanese Prime Minister Shinzo Abe pledged to implement “daring policies” targeting taxes, the budget, and regulations to promote domestic investment as well as push for further corporate governance reforms. Abe offered no specifics in a speech given to investors at the New York Stock Exchange, but said he was “absolutely” confident his government could deliver changes that would offset the weaker demographic challenges facing the world’s third-largest economy. While Japan’s Nikkei stock index has reached a more than two-year high this week and its economy has expanded for six straight quarters, Japan has not achieved its price inflation targets.

Finally: As the stock market continues its seemingly relentless march higher, it’s reasonable to expect that the mood of investors would be positive. However, analysts are getting concerned that optimism is reaching levels seen before at major stock market peaks. According to the Wells Fargo/Gallup Investor and Retirement Optimism Index, the level is at its highest since September of 2000. The latest boost in optimism pushed the index almost 100 points higher over the past 18 months. The 98 point hike in that time frame is the largest increase in the 20-year history of the index (other than during sharp rebounds from sudden plunges).

(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 sharply to 15.75 from the prior week’s 10.75, while the average ranking of Offensive DIME sectors rose sharply to 11.75 from the prior week’s 16.75. The Offensive DIME sectors reversed higher and now lead the Defensive SHUT sectors for the first time since late July. 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 question of whether we are in a continuing Secular Bear Market that began in 2000 or in a new Secular Bull Market has been the subject of hot debate among economists and market watchers since 2013, when the Dow and S&P 500 exceeded their 2000 and 2007 highs. The Bear proponents point out that the long-term PE ratio (called “CAPE”, for Cyclically-Adjusted Price to Earnings ratio), which has done a historically great job of marking tops and bottoms of Secular Bulls and Secular Bears, did not get down to the single-digit range that has marked the end of Bear Markets for a hundred years, but the Bull proponents say that significantly higher new highs are de-facto evidence of a Secular Bull, regardless of the CAPE. Further confusing the question, the CAPE now has risen to levels that have marked the end of Bull Markets except for times of full-blown market manias. See Fig. 1 for the 100-year view of Secular Bulls and Bears.

Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best. The CAPE is at 30.12, down from last week’s 30.31, and now 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 just 3%/yr (see Fig. 2).

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

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate. The U.S. Bull-Bear Indicator (see Fig. 3) is in Cyclical Bull territory at 64.35, down from the prior week’s 65.08.

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 14, up from the prior week’s 13. Separately, the Intermediate-term Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – was positive entering July, indicating positive prospects for equities in the third 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 Q3, 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: Major U.S. indexes recorded modest losses in the holiday-shortened week. Mid-cap shares were particularly weak and ended the week down the furthest from their recent highs, about -4.3% from their record highs set earlier this summer. The Dow Jones Industrial Average fell by -189 points last week to close at 21,797, a loss of -0.86%. The technology-heavy NASDAQ Composite gave up some of last week’s strong gains, retreating ‑1.17% to 6,360. All major market cap indexes finished in the red, with smaller indexes falling further than their large cap brethren. The S&P 500 large cap index ended down -0.61%, while the mid cap S&P 400 and small cap Russell 2000 indexes finished down, -1.08% and -1%, respectively.

International Markets: Canada’s TSX reverse last week’s gain and fell -1.36%. In Europe, the United Kingdom’s FTSE ended down -0.8%, while on the mainland major markets were mixed. France’s CAC40 index fell by -0.19%, Germany’s DAX gained 1.3%, and Italy’s Milan FTSE gave up some of last week’s half percent gain, falling by -0.37%. All major Asian markets were down for the week. China’s Shanghai Composite was barely down with just a ‑0.06% decline, Japan’s Nikkei declined ‑2.1% and Hong Kong’s Hang Seng finished down -1%. As grouped by Morgan Stanley Capital International, emerging markets ended the week down -0.60%, while developed markets gained 0.78%.

Commodities: Precious metals continued their ascent. Gold rose for the third week in a row, climbing $20.80 to close at $1,351.20 an ounce, a gain of 1.56%. Silver, likewise, ended the week with a healthy gain, rising by 1.7% to close at $18.12. The industrial metal copper, seen by some analysts as an indicator of world economic health, ended the week with a loss of -2.45%. Energy managed to break a 6-week string of losses by gaining 0.4% to close at $47.48 a barrel for West Texas Intermediate crude oil.

U.S. Economic News: New claims for unemployment benefits jumped 62,000 to 298,000 last week as the impact of Hurricane Harvey in Texas left many Americans unable to work, according to the Labor Department. Many businesses were closed after Harvey flooded the city of Houston and left many people out of work. The increase in initial claims was the largest since November of 2012. New claims are at their highest levels since the spring of 2015, but they still remain below the key 300,000 threshold that analysts use to indicate a healthy jobs market. The four-week moving average of new claims, smoothed to iron-out the weekly volatility, rose by 13,500 to 250,250. Continuing claims, which counts the number of people already receiving benefits, fell by 5,000 to 1.94 million.

Orders for U.S.-made manufactured goods fell 3.3% in July amid a drop off in spending on transportation equipment, according to the Commerce Department. The decline in factory goods orders was its biggest drop since August 2014. July’s data essentially reversed June’s 3.2% increase. Orders for transportation equipment plunged 19.2% due to a 70% plunge in civilian aircraft orders. Boeing reported that it received only 22 aircraft orders in July, down from 184 in the prior month. Motor vehicle orders retreated by 0.9%. Motor vehicle production has weakened in recent months as sales declines are leaving more dealerships with excess inventory. Orders for non-defense capital goods ex-aircraft were up 1% for the month.

The vast majority of companies in fields such as retail, medical care, and food service grew last month, according to the latest data from the Institute for Supply Management (ISM). ISM’s non-manufacturing index rose 1.4 points to 55.3 in August, its 92^nd consecutive month of expansionary numbers (greater than 50). 15 out of 18 industries reported growth for the month and the majority of survey respondents were optimistic about business conditions moving forward. The business activity/production index rose to 57.5 from 55.9, while the new orders component rose 2 points. The employment index also increased to 56.2 from 53.6.

The Commerce Department reported that the US trade deficit for the United States rose slightly in July, edging up $200 million to $43.7 billion in June. The trade deficit for the year is almost 10% higher than at the same time last year. Economists note that while the Trump administration is aiming to rework key trade deals like NAFTA, the trade deficit is likely to persist as the U.S. no longer produces popular consumer items like cellphones. Imports fell 0.2% to $238.1 billion as imports of crude oil, autos, and pharmaceutical goods all dropped. Exports dipped further, 0.3% to $194.4 billion amid declines in shipments of cars, trucks, and household goods.

A collection of anecdotes about the economy gathered from all of the Federal Reserve’s districts, known as the Federal Reserve’s Beige Book, expressed concerns about a prolonged slowdown in the auto industry. In Cleveland, production at auto assembly plants was down more than 16% year-to-date compared to the same time last year. In Chicago, one survey respondent reported auto suppliers were no longer searching for space to build new factories. Several districts reported concerns of falling auto sales and rising inventories. Despite the weak auto sector, the overall economy continued on a “modest to moderate” growth pace in August with little indication of inflation, per the report. Employment growth slowed in some districts as labor market conditions were still described as “tight” with many firms reporting that they had to turn down business because they could not find the necessary workers.

International Economic News: The Bank of Canada raised its benchmark interest rate a quarter percentage point to 1% this week, igniting a cascade of rate increases across Canada’s “Big 5” banks. Bank of Montreal, CIBC, Royal Bank of Canada, TD Bank, and Scotiabank all announced they are raising their prime lending rate to 3.2%, increasing rates by the same amount as the Bank of Canada. Bank of Canada Governor Stephen Poloz and his central bank colleagues acknowledged they have been surprised at the strength of the economy, which surged ahead at an annual pace of 4.5% in the second quarter, leading the Group of Seven countries. In its release the central bank stated, “Recent economic data have been stronger than expected, supporting the bank’s view that growth in Canada is becoming more broadly based and self-sustaining. The level of GDP is now higher than the bank had expected.”

In the United Kingdom, a variety of reports said the economy had a mixed start to the third quarter. Manufacturing rose 0.5% in July—its first increase this year, boosted by a rebound in auto production. However, construction shrank for the fourth consecutive month following a plunge in new orders, falling a larger-than-expected -0.9%, according to the UK statistics office. In addition, the British Chamber of Commerce stated that Britain is locked into a “low growth trajectory” that will see GDP growth next year. The BCC said a squeeze on household budgets and the failure of exporters to capitalize on the low pound meant the United Kingdom was “treading water”.

Across the Channel in France, French President Emmanuel Macron said in Athens this week that if the European Union isn’t overhauled, it will crumble. Macron’s comments came during a tour of European capitals organizing support for changes he believes are needed to protect Europe and the Eurozone from further economic or debt crises. Mr. Macron said he would propose to European leaders a plan in coming weeks for greater economic and social convergence in Europe. Macron is pushing for the Eurozone to have a new structure to create its own a budget, parliament and executive. “In Europe, today, sovereignty, democracy and trust are in danger,” Mr. Macron said.

In Germany, almost 27 years since reunification, the economy in the ex-Communist East still lags far behind the West German states, the government said. The economic disparity could lead to social divisions and the risk of those in the East becoming “radicalized”, said a government report. The government’s annual report found record-high employment, increased job security, and rising real wages are powering Germany’s economy forward. However, the gap in economic strength between the East and West remains substantial. GDP per head in East Germany still lags that of the west by 27%, and the unemployment rate is 8.5% – far above the national average of 5.7%. Support for the anti-immigrant Alternative for Germany (AfD) party is particularly strong in the East where it’s a common belief that refugees are overrunning the country and siphoning away resources and jobs from Germans.

Italy’s Lake Como was the site for an annual gathering last weekend of some of the world’s wealthiest and most influential people, called the Ambrosetti Forum. Among topics discussed was how to convince investors that Italian banks have overcome the threat of “systemic risk” and can again become attractive investments. Davide Serra, chief executive officer of Algebris Investments, said in an interview, “We are very positive on Italian banks.” London-based Algebris, has committed about 20% of its portfolio to Italian bank equity and credit. Chief Executive Officer of UniCredit SpA, Italy’s biggest bank, Jean Pierre Mustier said Italy has very strong fundamentals and its healthy economic growth is pushed by exports, consumers, and investments. “The core banking activity in Italy is actually quite profitable,” he said.

Chinese import/export data pointed to strong domestic demand as imports to China beat expectations last month, but exports eased. For the month of August, China reported exports were up 5.5% from the same time a year ago, while imports surged 13.3%. Analysts had expected a somewhat higher 6% rise in Chinese exports. Louis Kuijs, head of Asia economics at Oxford Economics said, “The strong import data suggests that domestic demand may be more resilient than expected in the second half.” But the weaker reading in exports may suggest that global demand is waning. The country’s surplus with the U.S. rose to $26.23 billion from $25.2 billion in July. Trade between the two countries is closely-watched amid current tensions over trade practices.

Japanese economic growth in the second quarter was revised down to a much less impressive 2.5% annualized growth rate from the whopping 4.0% growth rate originally reported. Economists were quick to point out that while the actual result was lower than the median forecast of 2.9%, the economy still managed to post a sixth straight quarter of expansion. Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute stated, “It’s indeed a big revision, but growth in the economy and capital expenditure is still pretty fast. There’s no need to be pessimistic about Japan’s economy. Given strong corporate profits and improving business sentiment, capital expenditure will remain firm.” Also, he pointed out, Japan’s GDP data tends to experience big revisions due to the way the Cabinet Office estimates capital expenditure, consumption and inventory in the preliminary reading.

Finally: After consolidating for much of the year, Gold has recently broken out of a trading range to the upside, back to levels not seen since the summer of 2016. Analyst Chris Kimble at Kimble Charting took it a step further and looked at the Gold to Dollar ratio in the chart below. The Gold/Dollar ratio has recently broken above both its resistance level, and a multiyear downward trend line. In the past, Gold/Dollar strength has been positive for precious metals and miners, Kimble notes.

(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 9.25 from the prior week’s 9.00, while the average ranking of Offensive DIME sectors was unchanged at 15.50. The Defensive SHUT’s lead over the Offensive DIME sectors continued, but has narrowed a bit. 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 question of whether we are in a continuing Secular Bear Market that began in 2000 or in a new Secular Bull Market has been the subject of hot debate among economists and market watchers since 2013, when the Dow and S&P 500 exceeded their 2000 and 2007 highs. The Bear proponents point out that the long-term PE ratio (called “CAPE”, for Cyclically-Adjusted Price to Earnings ratio), which has done a historically great job of marking tops and bottoms of Secular Bulls and Secular Bears, did not get down to the single-digit range that has marked the end of Bear Markets for a hundred years, but the Bull proponents say that significantly higher new highs are de-facto evidence of a Secular Bull, regardless of the CAPE. Further confusing the question, the CAPE now has risen to levels that have marked the end of Bull Markets except for times of full-blown market manias. See Fig. 1 for the 100-year view of Secular Bulls and Bears.

Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best. The CAPE is at 30.31, up from last week’s 29.90, and now 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 just 3%/yr (see Fig. 2).

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

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate. The U.S. Bull-Bear Indicator (see Fig. 3) is in Cyclical Bull territory at 65.08, up from the prior week’s 63.69.

In the intermediate and Shorter-term picture:

The Shorter-term (weeks to months) Indicator (see Fig. 4) turned negative on March 24th. The indicator ended the week at 13, 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 July, indicating positive prospects for equities in the third 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 Q3, and the shorter (weeks to months) timeframe (Fig. 4) is negative. Therefore, with internal disagreement expressed by two indicators positive and one negative, the U.S. equity markets are rated as Neutral.

In the markets:

U.S. Markets: Stock market gains later in the week helped offset a weak start and ultimately moved indexes higher despite relatively light trading in advance of the Labor Day holiday weekend. The advance brought the large-cap indexes and the tech-heavy Nasdaq close to their all-time highs, while the smaller-cap indexes remained a bit below. The Dow Jones Industrial Average rose 173 points to close at 21,987, a gain of 0.8%. The Nasdaq surged 2.7%, or 169 points to end the week at 6,435. By market cap, the small cap Russell 2000 index surged 2.6% (offsetting a portion of a very weak month), while the mid cap S&P 400 index gained 1.7%, and the large cap S&P 500 added 1.4%.

International Markets: Canada’s TSX rose 0.9%. Across the Atlantic, the United Kingdom’s FTSE added a half percent, while on Europe’s mainland major markets were mixed. France’s CAC 40 rose 0.4%, but Germany’s DAX fell -0.2%. Italy’s Milan FTSE added 0.5%. In Asia, China’s Shanghai Composite added 1.1%, Japan’s Nikkei rose 1.2% and Hong Kong’s Hang Seng rose a lesser 0.4%. As grouped by Morgan Stanley Capital Indexes, both developed markets and emerging markets gained, 0.4% and 0.5%, respectively.

Commodities: Precious metals were bid higher with Gold rising 2.5% to $1330.40 an ounce, alongside Silver, which surged 4.5%. Energy remained under pressure, with crude oil retreating -1.2% to $47.29 a barrel. The industrial metal Copper had a strong week, rising 2%.

August Summary: For the month of August, the Dow Jones Industrial Average gained 0.3% and the Nasdaq Composite added 1.3%. The large-cap S&P 500 remained essentially flat, up just 0.1%, while the mid cap S&P 400 fell -1.7% and the small cap Russell 2000 lost -1.4%. Canada’s TSX gained 0.5%. European markets were mixed, with the UK’s FTSE rising 0.8%, France’s CAC falling -0.2%, and Germany’s DAX declining -0.5%. In Asia, China’s Shanghai Composite rose 2.7%, while Japan’s Nikkei fell -1.4%. As grouped by Morgan Stanley Capital Indexes, developed markets were flat (-0.04%) in August, while emerging markets gained 2.4%. Copper surged 8.2% and Gold and Silver rose 4.4% and 6.7%, respectively. Oil, however, ended the month in the red, losing -3.3%.

U.S. Economic News: The number of people who applied for new unemployment benefits last week rose by just 1,000 to 236,000, according to the Labor Department. Initial jobless claims remained near their post-recession lows, and far below the 300,000 threshold analysts use to indicate a healthy jobs market. The less-volatile four-week moving average of new claims, which offers a more stable picture of layoff trends, fell by 1,250 to 236,750. That reading is the second lowest level recorded since the middle of 2009. New applications for benefits have remained less than 300,000 for 130 consecutive weeks, its longest streak since the early 1970’s. The U.S. has created 17 million jobs since 2010, supporting an economic expansion that’s now in its ninth year.

The U.S. added 156,000 new jobs in August, missing economists’ expectations but still enough to keep the economy growing. Economists had expected an increase of 170,000. The unemployment rate rose a tick to 4.4%, as more workers entered the job market, while wages increased by 3 cents to an average $26.39 an hour. The government cut its estimate of jobs created in the prior month of July by 20,000 to 189,000.

Private-sector job growth surged last month, according to payroll processor ADP. Employers added a seasonally-adjusted 237,000 jobs in August—a healthy increase from the 178,000 jobs reported in July. In the details, large companies added 115,000 people, while medium-sized businesses and small businesses added 74,000 and 48,000 people, respectively. Almost all the job gains came from the service sector which totaled 204,000 jobs. A significant contributor appears to be warehouse functions for online retailers and distributors, such as Amazon. Over 56,000 jobs were added in the trade/transportation/utilities category, which includes such warehouse work. In the goods producing sector, construction added 18,000 jobs, manufacturing added 16,000 jobs, but mining lost 1000 jobs.

Home prices across the nation rose in June, again, as strong demand continued to support the market. The S&P/Case-Shiller 20-city home price index rose a seasonally-adjusted 5.7% in the three-month period ending in June compared to the same time last year. The 5.7% increase matched the 5.7% gain seen the previous month. Of the 20 cities surveyed, 9 had a stronger annual increase in June from May with cities in the West garnering many of the top spots again. Of note, home prices in Seattle have rocketed over 13% the past year, while the prices of homes in Portland have surged over 8%. Overall, the national index was up 5.8% compared to the same time last year, a 0.1% increase from May’s number. The national price index has now exceeded its 2006 housing bubble peak, while the 20-city index remains just 2.9% away.

Pending home sales – measuring homes that are under contract but have not yet closed – fell for the fourth time in the last five months in July, according to the National Association of Realtors (NAR). Pending home sales were down -0.8% in July and down -1.3% from year-ago levels. Lawrence Yun, the NAR’s chief economist attributed the decline to low inventory, stating “The pace of new listings is not catching up with what’s being sold at an astonishingly fast pace.” Yun noted that inventory was down 9% from the same time last year.

Confidence among American consumers continued to strengthen last month, according to the Conference Board. The board’s Consumer Confidence Index rose 2.9 points to 122.9 in August, reaching its second-highest level since late 2000. Economists said consumers are feeling more secure with rising home prices, a healthy jobs market, and stocks close to record highs. The reading is a positive sign for consumer spending going into the fourth quarter. Household spending has contributed a significant portion of GDP growth in the first half of the year. In the details, the present situation index – a measure of respondents’ views of current conditions – jumped to a high of 151.2 in August from 145.4. The future-expectations index added a point, and consumers’ assessment of the labor market was also optimistic. Those stating that jobs were “plentiful” rose 2.2% to 35.4%, while those stating jobs were “hard to get” fell to just 17.3%, its lowest level since 2001.

As confidence among Americans rose, so did their spending. The Commerce Department reported that consumer spending rose 0.3% in July. Helped by higher incomes and tame inflation, households are in their best financial shape in years. Inflation has remained under control, according to the Personal Consumption Expenditures (PCE) index, the Federal Reserve’s preferred inflation measure. The PCE index rose just 0.1%. The 12-month rate of inflation remained unchanged at 1.4% in July. With inflation remaining below the Federal Reserve’s 2% target, analysts are starting to question whether the Fed will raise rates for a third time this year. Some senior Fed officials have stated the central bank should raise interest rates more slowly if inflation remains muted.

U.S. Gross Domestic Product (GDP) rose at a 3% rate in the second quarter, up 0.4% from its initial reading, according to the Commerce Department. Increases in consumer spending and business investment contributed to the economy’s strongest growth in more than two years. The economy grew at a 1.2% rate in the first quarter. A slower first quarter followed by an improved second quarter has occurred twice in the past three years. Consumer spending rose 3.3% in the second quarter, beating estimates by 1.4%. Business investment rose 0.6%, up from a 0.4% estimate.

In U.S. manufacturing, the Institute for Supply Management’s Purchasing Managers’ Index (PMI) surged to a six-year high in August, exceeding analysts’ expectations. ISM said its index climbed to 58.8, an increase of 2.5 points over July. That’s the highest reading since April 2011. In the details, it was a very strong report. The new-orders index slipped by just 0.1 points to 60.3, while the employment index jumped by 4.7 points to 59.9. Ian Shepherdson, chief economist at Pantheon Macroeconomics stated in a note to clients, “The report paints a picture of a robust recovery in the industrial sector immediately before Hurricane Harvey.” Readings above 50 indicate improving conditions.

International Economic News: Canada’s economy blew away forecasts by growing at an annual rate of 4.5% in the second quarter, according to Statistics Canada. Household spending and energy exports were the main drivers of the increase. In the details of the report, exports expanded 2.3% in the second quarter, a significant increase over the 0.4% gain in the first quarter. Household consumption rose at an annualized 4.6% pace in the second quarter, following a 4.8% gain in the first quarter. The solid growth numbers have analysts widely expecting that the Bank of Canada will raise its benchmark interest rate in the coming weeks. According to National Bank senior economist Krishen Rangasamy, it solidified those rate-hike predictions and has some analysts suggesting a rate hike could come as early as next week.

Referring to the United Kingdom’s economy, Japan’s Prime Minister Shinzo Abe told business leaders in Tokyo he has “trust” and “full-confidence” in the post-Brexit UK. The comments come as a huge boost to the United Kingdom as it continues its negotiations to leave the European Union. Speaking alongside the UK’s Theresa May at a business conference in Tokyo, Shinzo Abe told the leaders of Japan’s biggest firms he is convinced the U.K. will remain a compelling place to do business after Brexit. Theresa May told the business group she was ‘determined to seize the opportunity’ to build trade relations with “old friends and new allies” as Britain leaves the EU.

On Europe’s mainland, French President Emmanuel Macron and German Chancellor Angela Merkel joined together stating they are ready to press ahead with deeper European integration, promising a tighter euro zone at the core of the European Union. French President Emmanuel Macron said he wanted to strengthen Europe’s union and pledging to announce proposals after Germany’s election on September 24^th. Speaking to an assembly of French ambassadors in Paris, Macron promised “concrete steps in around 10 areas.” Likewise, Merkel endorsed the idea of a European Monetary Fund and said she could imagine creating a combined European finance and economy ministry.

The number of Italians employed full-time has risen above 23 million for the first time since 2008, boosting hopes that the recovery in the Eurozone’s third-largest economy is finally gathering steam. Italy’s statistical agency ISTAT said that employment increased in July by 59,000 lifting employment to the same level as it was prior to the financial crisis. In addition, economic confidence in Italy is at its highest level in almost 10 years. The country’s overall index of economic sentiment increased from 105.6 to 107 in August – its highest level since November 2007.

In Asia, China reported that its official manufacturing Purchasing Managers’ Index (PMI) for August came in at 51.7, exceeding analysts’ expectations by 0.4 point. China’s manufacturing sector has been posting solid growth of late, primarily due to infrastructure spending and a recovery in exports. However, on the services side, China’s services PMI fell 1.1 points to 53.4 – the lowest reading since May 2016. This is a concern because while China has traditionally been a more manufacturing-oriented economy, its policymakers are attempting to shift it to a more services-based economy like those in the West.

Japanese companies curbed their rates of investment in plants and equipment in the second quarter, suggesting the government may revise down its initial estimate of economic growth. Data from Japan’s Finance Ministry showed that capital expenditures rose 1.5% from the second quarter of last year, a substantial -3% decline from the 4.5% increase seen in the first quarter. A decline in spending by auto makers and manufacturing equipment makers was responsible for most of the loss. Excluding software, capital expenditures fell 2.8% from the previous quarter. The preliminary estimate showed Japan’s economy grew by an annualized 4% in the second quarter. Given the new data, analysts believe this could be revised down to around 3%.

Finally: Using data from a comprehensive employment report from the University of Oxford, Henrik Lindberg, chief technology officer at Swedish financial technology company Zimpler developed a chart depicting which jobs were most likely to be taken over by robots. According to his data, the first jobs to be performed by robots will be those working as retail clerks, fast food workers, and secretaries. He doesn’t say exactly when it will happen, but he expects that within 10 to 20 years, about 50% of jobs in existence today will transition to automation. Lindberg believes that occupations which will remain in demand are those that require the human characteristics of compassion, understanding, and moral judgement, such as nurses, teachers, and police officers.

(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 remained unchanged from the prior week at 9.00, while the average ranking of Offensive DIME sectors rose to 15.50 from the prior week’s 16.50. The Defensive SHUT’s lead over the Offensive DIME sectors narrowed a bit. 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 question of whether we are in a continuing Secular Bear Market that began in 2000 or in a new Secular Bull Market has been the subject of hot debate among economists and market watchers since 2013, when the Dow and S&P 500 exceeded their 2000 and 2007 highs. The Bear proponents point out that the long-term PE ratio (called “CAPE”, for Cyclically-Adjusted Price to Earnings ratio), which has done a historically great job of marking tops and bottoms of Secular Bulls and Secular Bears, did not get down to the single-digit range that has marked the end of Bear Markets for a hundred years, but the Bull proponents say that significantly higher new highs are de-facto evidence of a Secular Bull, regardless of the CAPE. Further confusing the question, the CAPE now has risen to levels that have marked the end of Bull Markets except for times of full-blown market manias. See Fig. 1 for the 100-year view of Secular Bulls and Bears.

Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best. The CAPE is at 29.909, up from last week’s 29.66, and now 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 just 3%/yr (see Fig. 2).

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

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate. The U.S. Bull-Bear Indicator (see Fig. 3) is in Cyclical Bull territory at 63.69, down from the prior week’s 64.30.

In the intermediate and Shorter-term picture:

The Shorter-term (weeks to months) Indicator (see Fig. 4) turned negative on March 24th. The indicator ended the week at 13, down from the prior week’s 15. Separately, the Intermediate-term Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – was positive entering July, indicating positive prospects for equities in the third 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 Q3, and the shorter (weeks to months) timeframe (Fig. 4) is negative. Therefore, with internal disagreement expressed by two indicators positive and one negative, the U.S. equity markets are rated as Neutral.

In the markets:

U.S. Markets: U.S. markets rose this week as all major indexes recorded gains. The Dow Jones Industrial Average added 139 points to end the week at 21,813, a gain of 0.64%. The tech-heavy Nasdaq Composite had its first positive week in five by rebounding 49 points to 6,265, an increase of 0.79%. By market cap, the beaten-up smaller capitalization indexes bounced back harder than large caps with the small cap Russell 2000 and mid cap S&P 400 indexes rising, 1.45% and 0.99% respectively, while the large cap S&P 500 index gained 0.72%.

International Markets: Canada’s TSX rose 0.69%, partially retracing last week’s decline. Major European markets were mixed: the United Kingdom’s FTSE rose 1.06%, France’s CAC 40 retreated -0.19%, Italy’s Milan FTSE fell ‑0.31%, and Germany’s DAX was essentially flat rising just 0.02%. In Asia, China’s Shanghai Stock Exchange rose 1.9%, while Japan’s Nikkei fell -0.09%. Hong Kong’s Hang Seng was the best of the major International indexes, surging almost 3%. As grouped by Morgan Stanley Capital International, developed markets rose 0.85% while emerging markets gained an outsized 2.89%.

Commodities: Oil fell -$0.79 to $47.87 a barrel for West Texas Intermediate crude oil, a decline of -1.6%. Precious metals continued their uptrend after a pause last week. Gold gained $6.30 an ounce, closing at $1297.90 – an increase of 0.49%. Silver gained $0.05, ending the week at $17.05 an ounce. Copper, seen as an indicator of world economic health due to its variety of uses, surged 3.2% in its seventh consecutive week of gains.

U.S. Economic News: The number of people who applied for new unemployment benefits ticked up by 2,000 to 234,000 last week, according to the Labor Department. Last week’s reading was the lowest level in six months and the second lowest reading of the current economic expansion that began in 2009. The last time claims were as low was in the early 1970’s. So far this year, initial claims have remained in a relatively stable range around 245,000. Continuing claims, the number of people already receiving benefits, remained unchanged at 1.95 million the prior week. That number is reported with a one-week delay.

New home sales fell to a 7-month low last month, according to the Commerce Department. In July, sales of newly-constructed homes fell to a seasonally-adjusted annual rate of 571,000, an almost 10% retreat from June’s reading. Compared to the same time last year, sales were down 8.9% year-over-year. Economists had expected an annualized pace of 608,000. July’s median sales price was $313,700, 6.3% higher than a year ago. At the current sales rate, there is 5.7 months of supply available on the market. So far this year, sales are 9.2% higher than the same time last year, signaling a steady rate of growth. Analysts were quick to point out that the Commerce Department’s data is based on small sample sizes and the data is often heavily revised. Ian Shepherdson, chief economist for Pantheon Macro, called the report “disappointing” in a research note, but also stated he expected improvement in August based on mortgage application data.

Sales of existing (i.e., previously-owned) homes fell to their lowest level of the year in July, according to the National Association of Realtors (NAR). Existing home sales in July were at a seasonally-adjusted annual rate of 5.44 million – a decline of -1.3% from June’s pace. Still, compared to the same time last year, sales were actually 2.1% higher. In its release, NAR Chief Economist Lawrence Yun said that the strong demand meant listings were under contract within 30 days and that the median sales price in July was $258,300, an increase of 6.2% compared to a year ago. At the current sales rate, there is a 4.2 month supply of existing homes currently on the market. By region, sales in the South rose 2.2%, while in the West sales were up 5%. However, in the Midwest, sales fell -5.3%, and in the Northeast sales plunged 14.5%.

Orders for goods intended to last longer than three years, so-called “durable goods”, fell 6.8% in July, according to the Commerce Department. The drop effectively reversed June’s 6.4% rise. The decline was led by a sharp drop in aircraft orders, a typically volatile sector. Ex-transportation (which really means “without Boeing”), durable goods orders were actually up 0.5% in its third straight monthly gain. Orders for core capital goods orders, used by analysts as a proxy for business investment, were up 0.4% in July. Economists at NatWest released a note to clients stating, “As this rebound in capital spending appears sustained, we are forecasting another mid- single digit advance in business investment in the third quarter.”

Market research firm HIS Markit reported that its “flash” manufacturing purchasing managers index (PMI) fell -0.8 point to a two-month low of 52.5 last month. In contrast, IHS Markit’s PMI for the services sector rose 2.2 points to 56.9—its highest level in more than two years. IHS’s flash readings are an early look at the survey data, before the final numbers are released. The flash readings are based on roughly 85-90% of the total PMI survey responses.

At the Federal Reserve’s summer retreat in Jackson Hole, Fed Chairwoman Janet Yellen gave a speech defending the post-crisis bank rules put into effect following the financial crisis. Chairwoman Yellen said that the Dodd-Frank law and additional regulations have made the financial system “substantially safer”. “Because of the reforms that strengthened our financial system, and with support from monetary and other policies, credit is available on good terms, and lending has advanced broadly in line with economic activity in recent years, contributing to today’s strong economy,” Yellen said. Yellen steered clear of any questions related to current interest-rate policy. A majority of analysts now expect the central bank to announce a decision to begin shrinking its massive balance sheet at its next meeting in mid-September, and to put off considering another interest-rate hike until it’s meeting in December.

International Economic News: U.S. President Donald Trump’s threat to terminate the North American Free Trade Agreement (NAFTA) less than a week into its renegotiation hasn’t generated much response from either Canada or Mexico, which are both downplaying his remarks. Adam Austen, spokesman for Canada’s Foreign Affairs Minister Chrystia Freeland said, “Trade negotiations often have moments of heated rhetoric. Our priorities remain the same and we will continue to work hard to modernize NAFTA. Canada’s economic ties with the United States are key to middle-class jobs and growth on both sides of the border. Nine million American jobs depend on trade and investment with Canada.”

The U.K.’s Office for National Statistics reported the U.K. economy grew at an annualized rate of 1.7% in the second quarter, in line with analyst expectations. However, the slight 0.1% increase in economic growth in the first quarter means that the United Kingdom is likely to have recorded the slowest second quarter growth among all the G7 group of nations. Of particular concern is the fact that growth in the second quarter was driven predominantly by government spending—not from businesses or consumers. Business spending showed no growth at all, and consumer spending was weak. Economists had expected the Brexit vote in Britain to withdraw from the European Union to have a large immediate negative effect. That didn’t happen, but it now appears that the negative effects will be felt over a longer period of time.

On Europe’s mainland, French Prime Minister Emmanuel Macron was rebuked by Polish Prime Minister Beata Szydlo after stating that Poland’s right-wing government was isolating itself within the European Union by going “against European interests.” His remarks followed Poland’s objections to changing a controversial EU rule that lets firms send temporary workers from low-wage EU countries to rich economies without paying the usual local social charges. Szydlo responded, “I advise the president that he should focus on the affairs of his own country, perhaps he may be able to achieve the same economic results and the same level of security for (French) citizens as those guaranteed by Poland.”

In Germany, the economy achieved a record surplus for the first half of the year of 18.3 billion euro, according to the latest figures from Destatis, the German Federal Statistical Office. The surplus was driven predominantly by an improving jobs market and export-driven growth. In addition, economists note the German economy remains on a path of growth supported by consumerism and increasing company investments. Research firm IHS Markit stated it would probably lift its full-year forecasts for German GDP growth after receiving positive responses to its survey of German corporations.

Chinese first-time home buyers are having a difficult time getting good mortgage rates as the country tightens its credit controls, intended to curb property speculation. In the east China city of Suzhou, the Agricultural Bank of China announced that rates on new housing loans for first-time home buyers would be 10% higher than the benchmark set by the central bank. Commercial banks have been raising mortgage rates in China’s major cities following the stringent housing purchase restrictions that have cooled house prices. Rong360, a financial data provider, reported the average mortgage rate for first-time home buyers rose 12.38% from July of last year to 4.99%.

Japanese core consumer prices rose for a seventh straight month, rising 0.5% in July from a year earlier. The increase is a sign the economy is making modest progress towards meeting the central bank’s 2% inflation target. The increase was driven predominantly by higher fuel costs, however, making them potentially transient. The economy expanded at its fastest pace in more than two years in the second quarter as both consumer and business spending picked up. However, both price and wage growth remains weak with companies still hesitant to pass more of their profits on to employees. Nonetheless, the Bank of Japan now expects inflation to hit its 2% target in the fiscal year ending in March of 2020.

Finally: The price-to-earnings (“P/E”) ratio remains one of the most widely-accepted valuation metrics in the financial markets today. However, it is not without its flaws. For a price-to-earnings ratio to exist, a company must have positive earnings. Therefore, companies that are losing money have no earnings and a nonsensical “infinite” P/E ratio. Major financial firms that produce market indexes, like FTSE, Russell and iShares, exclude these firms when calculating their index price-to-earnings ratios. However, this could have significant consequences in indexes that have a large number of companies with no earnings, by making the overall index P/E look artificially low. Take, for example, the small cap Russell 2000 index. Almost a third of companies in the small cap index are losing money (i.e., have no earnings). Global financial firms FTSE and iShares are both reporting the Russell 2000’s P/E currently at around 20. However, as head of global macro strategy at INTL FCStone’s Vincent Deluard points out, taking into account the companies that are losing money, the actual P/E of the Russell 2000 is more like 78.7. This new calculation puts the small cap Russell 2000’s P/E far higher than the same measurements at either the top of the internet bubble, or the bull market peak in 2007, as shown below in Deluard’s chart.

(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 9.00 from the prior week’s 9.25, while the average ranking of Offensive DIME sectors rose to 16.50 from the prior week’s 17.00. The Defensive SHUT maintained their lead over the Offensive DIME 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 question of whether we are in a continuing Secular Bear Market that began in 2000 or in a new Secular Bull Market has been the subject of hot debate among economists and market watchers since 2013, when the Dow and S&P 500 exceeded their 2000 and 2007 highs. The Bear proponents point out that the long-term PE ratio (called “CAPE”, for Cyclically-Adjusted Price to Earnings ratio), which has done a historically great job of marking tops and bottoms of Secular Bulls and Secular Bears, did not get down to the single-digit range that has marked the end of Bear Markets for a hundred years, but the Bull proponents say that significantly higher new highs are de-facto evidence of a Secular Bull, regardless of the CAPE. Further confusing the question, the CAPE now has risen to levels that have marked the end of Bull Markets except for times of full-blown market manias. See Fig. 1 for the 100-year view of Secular Bulls and Bears.

Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best. The CAPE is at 29.66, little changed from last week’s 29.86, and now 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 just 3%/yr (see Fig. 2).

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

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate. The U.S. Bull-Bear Indicator (see Fig. 3) is in Cyclical Bull territory at 64.30, down from the prior week’s 68.19.

In the intermediate and Shorter-term picture:

The Shorter-term (weeks to months) Indicator (see Fig. 4) turned negative on March 24th. The indicator ended the week at 15, down from the prior week’s 17. Separately, the Intermediate-term Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – was positive entering July, indicating positive prospects for equities in the third 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 Q3, and the shorter (weeks to months) timeframe (Fig. 4) is negative. Therefore, with internal disagreement expressed by two indicators positive and one negative, the U.S. equity markets are rated as Neutral.

In the markets:

U.S. Markets: Stocks finished the week on a down note as volatility returned to the market, with both domestic and global conflicts contributing. On Monday, the S&P 500 index recorded its biggest one-day gain in almost four months, but gave it all back on Thursday when it fell the most in three months. The Dow Jones Industrial Average registered its second down week, falling -183 points to close at 21,674, a decline of -0.8%. The tech-heavy Nasdaq Composite recorded its fourth consecutive week of losses, losing another 40 points to end the week at 6,216, a loss of -0.6%. By market cap, smaller cap indexes again fared worse than large cap. The large cap S&P 500 index fell -0.65%, while the mid cap S&P 400 and small cap Russell 2000 indexes lost -1.1% and -1.2%, respectively.

International Markets: Canada’s TSX fell the third week of the last four, losing -0.5%. Across the Atlantic, however, major European markets ended the week in the green. The United Kingdom’s FTSE rose 0.19%, while on Europe’s mainland France’s CAC 40 added 1.05%, Germany’s DAX rose 1.26%, and Italy’s Milan FTSE surged 2.16%. In Asia, major markets were mixed. China’s Shanghai Composite rose 1.88%, but Japan’s Nikkei fell -1.3%. As grouped by Morgan Stanley Capital International, developed markets gained 0.36%, while emerging markets rose 1.75%.

Commodities: Precious metals, which generally benefit from stock market weakness, nonetheless ended the week modestly down. Gold fell -$2.40 to $1291.60 an ounce, a decline of -0.19%. Silver likewise fell -0.4% to $17 an ounce. The industrial metal copper, seen by some as a barometer or global economic health, rose 0.94%. Crude oil ended the week down, losing -0.33%, to close at $48.66 for West Texas Intermediate.

U.S. Economic News: The number of Americans who applied for new unemployment benefits in the middle of August fell to its lowest level in six months, further evidence of the nation’s strongest labor market in almost twenty years. According to the Labor Department, initial jobless claims for the week ending August 12 declined by 12,000 to 232,000. That is the lowest level since February and the second lowest reading since the current economic expansion began in 2009. The U.S. has added roughly 16 million jobs over the last 7 ½ years, driving the unemployment rate down to 4.3%.

Sentiment among the nation’s home builders rose this month after falling to an 8-month low last month, according to the National Association of Home Builders (NAHB). The NAHB’s builder sentiment index jumped four points to a reading of 68, exceeding economists’ forecasts by three points. Every component of the index rose in August. Current conditions gained four points to 74, conditions expected over the coming six months rose five points to 78, and the index of buyer traffic added a point to 49. Builder sentiment had surged following the U.S. Presidential election in which then-candidate Donald Trump promised to roll back regulations and lower builder costs, but the index has lost some ground since then. In the latest release, the NAHB attributed the increase to “ongoing job and economic growth, attractive mortgage rates, and growing confidence.” Builders continued to be concerned with lot and labor shortages and the risings costs of building materials.

The number of new homes being built rose in June, but the rate at which builders broke ground slowed. Housing starts ran at a 1.16 million seasonally-adjusted annual rate in July, according to the Commerce Department. That’s a drop of 4.8% from June’s pace and 5.6% lower than the same time last year. Economists’ had expected a 1.23 million rate. Housing permits, a gauge of future building activity also fell, sliding 4.1% compared to June’s pace. Analysts were quick to point out that the government’s new-home data is volatile and often heavily revised in later months. In the details of the report, one sign of a stabilizing housing market was the number of single-family starts. That number was at a 856,000 rate, similar to June’s reading. One year ago they were at a 772,000 annual rate. The increased emphasis on single-family homes, rather than apartments, is a sign that builders believe the economy can support more homeownership—not just rentals.

Sales at U.S. retailers surged to the highest level of the year last month, lifted by demand for new vehicles and a very successful Amazon Prime Day. According to the Commerce Department, sales at retailers rose 0.6% last month, exceeding economists’ forecasts by 0.2%. In addition, June’s retail sales were revised up half a percent to a gain of 0.3% instead of the -0.2% drop originally reported. The latest report shows that American households still had plenty of buying power going into the third quarter, and that bodes well for the economy as a whole. Chief economist at Regions Financial Richard Moody said, “The inherent volatility in the monthly retail sales reports notwithstanding, consumers will remain the key driver of growth in the U.S. economy.” Ex-auto and gasoline, retail sales still rose at a robust 0.5%. Retail sales are up 4.2% over the past 12 months, close to its five-year average. Even if Amazon is crushing many retailers, at least the total $ spent by consumers continued to rise.

American consumers were more optimistic about the economy earlier this month, according to the University of Michigan’s consumer sentiment index. The index climbed 4.2 points to 97.6, nearing the 13-year high seen in January. In the details, while Republicans and most independents continue to be the most optimistic about the economy, more Democrats are reporting that they are not as pessimistic as they had been. Of note, the survey found a sizeable increase in the number of people who said their own financial well-being had improved.

For the first time in three months, the cost of imported goods rose. The U.S. import price index rose 0.1% last month, predominantly due to the increase in the price of crude oil. Excluding fuel, import prices actually fell 0.1%. Despite the long-running economic expansion and tight labor market, inflation still doesn’t appear to be a threat just yet. The 12-month rate of import inflation remained flat at 1.5% last month, and down sharply from the five-year high of 4.7% set in February. That corresponds with the readings from other measures of inflation. The subdued inflation data has spurred debate within the Federal Reserve about whether and how soon the central bank needs to raise interest rates again. A growing number of Fed officials appear to be having second thoughts despite data earlier in the year that suggested the bank would boost rates at least once more in 2017.

U.S. industrial production rose last month, according to the Federal Reserve. Production was led by a 1.6% surge in output among the nation’s utilities, presumably to cool U.S. homes during the summer heat. Overall, output was up 0.2%, not quite meeting expectations of a 0.3% rise. Mining was also strong, rising for a fourth consecutive month, up 0.5%. Separating out manufacturing output, however, showed a slip of 0.1%, led by lower production among auto makers. It was manufacturing’s third decline out of the last five months.

In the New York-region, manufacturing jumped to its highest levels in almost three years, according to the New York Federal Reserve’s Empire State manufacturing index. The index surged 15 points to 25.2. Economists had expected an essentially unchanged reading. In the details, the shipments gauge rose 1.9 points to 12.4, while two employment readings – number of employees and average workweek – also rose. The new orders gauge, seen by economists as a proxy for future business activity, surged 7.3 points to 20.6, indicating probable stronger business conditions in the future. New York firms also remained optimistic about the future—the gauge of future business conditions spiked 10 points.

Minutes from last month’s Federal Reserve meeting showed that Fed officials debated about the path of U.S. inflation after a series of unexpectedly low readings, and questions were raised about whether the bank should raise interest rates again this year. The Fed’s policy-setting group appeared more unified on another subject: a plan to announce the beginning of a long-awaited drawdown in the Fed’s massive $4.5 trillion asset portfolio, accumulated to prop-up the major banks during the 2007-2009 financial crisis. The Fed plans to shrink its holdings of Treasuries and mortgage-backed securities over a period of several years, a move that would gradually increase the cost of borrowing.

International Economic News: The U.S. kicked off the renegotiation of the North American Free Trade Agreement (NAFTA), with some harsh words. At the opening news conference, officials from the U.S. lectured Canada and Mexico on the failures of the current agreement, while behind closed doors negotiators began seeking significant concessions from the two countries. Robert Lighthizer, trade representative from the United States stated, “We feel that NAFTA has fundamentally failed many, many Americans and needs major improvement.” While trade with Canada has been more balanced in recent years, over time the United States has run a significant trade deficit. President Trump has made it clear that he regards trade deficits as a primary measure of the economy’s health. Chrystia Freeland, Canada’s minister of foreign affairs responded, “Canada doesn’t view trade surpluses or deficits as a primary measure of whether trade works.”

In the United Kingdom, consumer spending is weakening, according to a pair of separate reports. This is particularly ominous because the U.K. economy, like that of the U.S., relies on consumer spending for a dominant portion of GDP. According to the reports, annual growth in retail sales in the second quarter dropped to 1.8%, the weakest reading in almost four years. The weakness is believed to be due to a higher level of inflation following a decline in the value of the British pound. The British pound has been under pressure since Britain’s vote to leave the European Union. Because of the declining value of the pound, prices are now rising faster than average worker wages, with real incomes falling 0.5% in the second quarter. Andrew Sentence, economic adviser at PwC stated, “Consumers are watching and waiting for inflation to subside and for the post-Brexit situation to become clearer.”

The French economy, according to UBS Wealth Management, will grow at its fastest rate since the Eurozone crisis over the next two years. The wealth management arm of the Swiss bank said buoyant consumer confidence and increased investment will boost economic activity from 1.4% in 2018 to 1.6-1.7% in 2019. UBS asserted that high levels of consumer and business confidence will translate into higher investment and consumption. Dean Turner, economist at UBS, stated, “In our view, growth in France is likely to remain robust for the remainder of the year and into next. It is the only large Eurozone country where we do not see the pace of growth easing next year.” Of concern, however, is President Macron’s upcoming labor reforms which could “trigger economically disruptive union strikes”, in UBS’ words.

Germany’s strong household spending, more investment by German companies, and higher state spending kept Germany in the driver’s seat of the Eurozone economy in the second quarter. Seasonally and calendar-adjusted GDP rose 0.6% last quarter, according to the Federal Statistics Office. That was slightly weaker than the 0.7% economists had forecast. Bankhaus Lampe economist Alexander Krueger said, “The German economy is proving its staying power, and the upswing continues.” The Statistics Office said that growth in the April-June period was mainly driven by domestic demand as households and state authorities increased their spending and companies boosted investment in buildings and equipment. However, overall growth was weighed by a decline in net foreign trade as exports rose less strongly than imports.

Italy’s statistics agency Istat reported the country’s strongest economic growth in six years. Gross domestic product was reported as rising 0.4% in the second quarter and up 1.5% from the same time last year. The 1.5% annualized growth rate is the highest reading recorded since the beginning of 2011. The increase was driven by strength in the industrial and services sectors and domestic demand. Although still lagging behind other Eurozone countries, the Italian economic recovery looked more convincing this year, with industrial output expanding at a seasonally adjusted 1.1% in the second quarter and a rise in exports of Italian goods over the same period.

In Asia, China’s economy showed further signs slowing down in the second half of the year, with factory production, investment, and consumer spending all coming in below forecast in the midst of a national drive to tackle rising debt. Yao Wei, chief China economist at Societe Generale stated, “Deleveraging and lowering risk in the financial system are now clearly among the top medium-term objectives of the Xi administration.” According to the National Bureau of Statistics, China’s industrial output expanded at an annualized 6.4% last month, down from 7.6% in June as mining and manufacturing slowed. The main engine of growth, fixed-asset investment, grew by 8.3% in the first seven months of the year, down 0.3% from the first half.

The value of Japanese exports rose an eighth consecutive month in July on heavier shipments to the United States and a weaker yen. The data supports the Bank of Japan’s view that the world’s third largest economy is showing increasing signs of strength as private consumption adds to the momentum from exports. Imports also rose for the seventh straight month on solid demand for computers and digital cameras from China. Takeshi Minami, chief economist at Norinchukin Research Institute said, “Domestic demand is gaining momentum and will likely drive Japan’s economic recovery.”

Finally: Legendary stock market technician Tom McClellan released a note this week on the subject of the historical relationship between the stock price of General Electric and the U.S. equity markets as a whole, and the news wasn’t good. Historically, the price of General Electric and a broader U.S. benchmark such as the Dow Jones Industrial Average have moved in lock-step with each other as shown in the graphic below. Up until this spring, the two had followed that general historical relationship. Since then, however, GE has underperformed quite significantly.

Why is this concerning? Because according to McClellan, “The basic idea is that when the DJIA and such a major component as GE disagree, it is usually GE that ends up being right about where both are headed.”

The chart below, from FactSet and Marketwatch.com, shows the dramatic divergence.

(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 9.25 from the prior week’s 11.00, while the average ranking of Offensive DIME sectors fell to 17.00 from the prior week’s 16.25. The Defensive SHUT sectors again expanded their lead over the Offensive DIME 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®