FBIAS™ market update for the week ending 12/15/2017

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.

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See Fig. 1 for the 100-year view of Secular Bulls and Bears. The CAPE is now at 32.45, up from the prior week’s 32.17, and exceeds the level reached at the pre-crash high in October, 2007. Since 1881, the average annual return for all ten year periods that began with a CAPE around this level have been in the 0% – 3%/yr. range. (see Fig. 2).

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In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate. The U.S. Bull-Bear Indicator (see Fig. 3) is in Cyclical Bull territory at 82.09, up from the prior week’s 80.49.

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In the intermediate and Shorter-term picture:

The Shorter-term (weeks to months) Indicator (see Fig. 4) turned negative on November 9th. The indicator ended the week at 20, down 1 from the prior week’s 21. Separately, the Intermediate-term Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – was positive entering October, indicating positive prospects for equities in the fourth quarter of 2017.

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Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2), unless a mania comes along the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns. The Bull-Bear Indicator (months to years) is positive (Fig. 3), indicating a potential uptrend in the longer timeframe. In the intermediate timeframe, the Quarterly Trend Indicator (months to quarters) is positive for Q4, but the shorter (weeks to months) timeframe (Fig. 4) is negative. Therefore, with internal disagreement expressed by two of three indicators being positive but one being negative, the U.S. equity markets are rated as Neutral.

In the markets:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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(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)

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The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market. The average ranking of Defensive SHUT sectors rose to 22.50 from the prior week’s 23.00, while the average ranking of Offensive DIME sectors rose to 9.25 from the prior week’s 10.50. The Offensive DIME sectors expanded their lead over the Defensive SHUT sectors. Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

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

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

Sincerely,

Dave Anthony, CFP®

FBIAS™ market update for the week ending 12/8//2017

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.

image

See Fig. 1 for the 100-year view of Secular Bulls and Bears. The CAPE is now at 32.17, up from the prior week’s 31.98, and exceeds the level reached at the pre-crash high in October, 2007. Since 1881, the average annual return for all ten year periods that began with a CAPE around this level have been in the 0% – 3%/yr. range. (see Fig. 2).

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In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate. The U.S. Bull-Bear Indicator (see Fig. 3) is in Cyclical Bull territory at 80.49, up from the prior week’s 78.88.

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In the intermediate and Shorter-term picture:

The Shorter-term (weeks to months) Indicator (see Fig. 4) turned negative on November 9th. The indicator ended the week at 21, unchanged from the prior week. Separately, the Intermediate-term Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – was positive entering October, indicating positive prospects for equities in the fourth quarter of 2017.

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Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2), unless a mania comes along the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns. The Bull-Bear Indicator (months to years) is positive (Fig. 3), indicating a potential uptrend in the longer timeframe. In the intermediate timeframe, the Quarterly Trend Indicator (months to quarters) is positive for Q4, but the shorter (weeks to months) timeframe (Fig. 4) is negative. Therefore, with internal disagreement expressed by two of three indicators being positive but one being negative, the U.S. equity markets are rated as Neutral.

In the markets:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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(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)

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The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market. The average ranking of Defensive SHUT sectors slipped to 23.00 from the prior week’s 22.75, while the average ranking of Offensive DIME sectors rose to 10.50 from the prior week’s 13.00. The Offensive DIME sectors expanded their lead over the Defensive SHUT sectors. Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

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

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

Sincerely,

Dave Anthony, CFP®

FBIAS™ market update for the week ending 12/1/2017

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.

image

See Fig. 1 for the 100-year view of Secular Bulls and Bears. The CAPE is now at 31.98, up from the prior week’s 31.58, and exceeds the level reached at the pre-crash high in October, 2007. Since 1881, the average annual return for all ten year periods that began with a CAPE around this level have been in the 0% – 3%/yr. range. (see Fig. 2).

image

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate. The U.S. Bull-Bear Indicator (see Fig. 3) is in Cyclical Bull territory at 78.88, up from the prior week’s 77.21.

image

In the intermediate and Shorter-term picture:

The Shorter-term (weeks to months) Indicator (see Fig. 4) turned negative on November 9th. The indicator ended the week at 21, up from the prior week’s 19. Separately, the Intermediate-term Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – was positive entering October, indicating positive prospects for equities in the fourth quarter of 2017.

image

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2), unless a mania comes along the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns. The Bull-Bear Indicator (months to years) is positive (Fig. 3), indicating a potential uptrend in the longer timeframe. In the intermediate timeframe, the Quarterly Trend Indicator (months to quarters) is positive for Q4, but the shorter (weeks to months) timeframe (Fig. 4) is negative. Therefore, with internal disagreement expressed by two of three indicators being positive but one being negative, the U.S. equity markets are rated as Neutral.

In the markets:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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(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)

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The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market. The average ranking of Defensive SHUT sectors slipped to 22.75 from the prior week’s 21.50, while the average ranking of Offensive DIME sectors rose to 13.00 from the prior week’s 16.00. The Offensive DIME sectors expanded their lead over the Defensive SHUT sectors. Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

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

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

Sincerely,

Dave Anthony, CFP®

FBIAS™ market update for the week ending 11/24/2017

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.

image

See Fig. 1 for the 100-year view of Secular Bulls and Bears. The CAPE is now at 31.58, up from the prior week’s 31.51, and exceeds the level reached at the pre-crash high in October, 2007. Since 1881, the average annual return for all ten year periods that began with a CAPE around this level have been in the 0% – 3%/yr. range. (see Fig. 2).

image

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate. The U.S. Bull-Bear Indicator (see Fig. 3) is in Cyclical Bull territory at 77.21, up from the prior week’s 75.78.

image

In the intermediate and Shorter-term picture:

The Shorter-term (weeks to months) Indicator (see Fig. 4) turned negative on November 9th. The indicator ended the week at 19, up from the prior week’s 18. Separately, the Intermediate-term Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – was positive entering October, indicating positive prospects for equities in the fourth quarter of 2017.

image

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2), unless a mania comes along the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns. The Bull-Bear Indicator (months to years) is positive (Fig. 3), indicating a potential uptrend in the longer timeframe. In the intermediate timeframe, the Quarterly Trend Indicator (months to quarters) is positive for Q4, but the shorter (weeks to months) timeframe (Fig. 4) is negative. Therefore, with internal disagreement expressed by two of three indicators being positive but one being negative, the U.S. equity markets are rated as Neutral.

In the markets:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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(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)

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The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market. The average ranking of Defensive SHUT sectors fell to 21.50 from the prior week’s 19.75, while the average ranking of Offensive DIME sectors fell to 16.00 from the prior week’s 14.50. The Offensive DIME sectors maintain a lead over the Defensive SHUT sectors. Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

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

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

Sincerely,

Dave Anthony, CFP®

FBIAS™ market update for the week ending 11/17/2017

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.

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See Fig. 1 for the 100-year view of Secular Bulls and Bears. The CAPE is now at 31.51, unchanged from the prior week, and exceeds the level reached at the pre-crash high in October, 2007. Since 1881, the average annual return for all ten year periods that began with a CAPE around this level have been in the 0% – 3%/yr. range. (see Fig. 2).

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In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate. The U.S. Bull-Bear Indicator (see Fig. 3) is in Cyclical Bull territory at 75.78, down from the prior week’s 76.83.

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In the intermediate and Shorter-term picture:

The Shorter-term (weeks to months) Indicator (see Fig. 4) turned negative on November 9th. The indicator ended the week at 18, down from the prior week’s 20. Separately, the Intermediate-term Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – was positive entering October, indicating positive prospects for equities in the fourth quarter of 2017.

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Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2), unless a mania comes along the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns. The Bull-Bear Indicator (months to years) is positive (Fig. 3), indicating a potential uptrend in the longer timeframe. In the intermediate timeframe, the Quarterly Trend Indicator (months to quarters) is positive for Q4, but the shorter (weeks to months) timeframe (Fig. 4) is negative. Therefore, with internal disagreement expressed by two of three indicators being positive but one being negative, the U.S. equity markets are rated as Neutral.

In the markets:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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(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)

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The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market. The average ranking of Defensive SHUT sectors rose to 19.75 from the prior week’s 22.00, while the average ranking of Offensive DIME sectors fell to 14.50 from the prior week’s 11.75. The Offensive DIME sectors saw their lead over Defensive SHUT sectors halved. Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

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

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

Sincerely,

Dave Anthony, CFP®

FBIAS™ market update for the week ending 11/10/2017

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.

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See Fig. 1 for the 100-year view of Secular Bulls and Bears. The CAPE is now at 31.51, down from last week’s 31.57, and exceeds the level reached at the pre-crash high in October, 2007. Since 1881, the average annual return for all ten year periods that began with a CAPE around this level have been in the 0% – 3%/yr. range. (see Fig. 2).

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In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate. The U.S. Bull-Bear Indicator (see Fig. 3) is in Cyclical Bull territory at 76.83, down from the prior week’s 78.47.

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In the intermediate and Shorter-term picture:

The Shorter-term (weeks to months) Indicator (see Fig. 4) turned negative on November 9th. The indicator ended the week at 20, down sharply from the prior week’s 26. Separately, the Intermediate-term Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – was positive entering October, indicating positive prospects for equities in the fourth quarter of 2017.

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Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2), unless a mania comes along the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns. The Bull-Bear Indicator (months to years) is positive (Fig. 3), indicating a potential uptrend in the longer timeframe. In the intermediate timeframe, the Quarterly Trend Indicator (months to quarters) is positive for Q4, but the shorter (weeks to months) timeframe (Fig. 4) is negative. Therefore, with internal disagreement expressed by two of three indicators being positive but one being negative, the U.S. equity markets are rated as Neutral.

In the markets:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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(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)

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The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market. The average ranking of Defensive SHUT sectors rose to 22.00 from the prior week’s 23.00, while the average ranking of Offensive DIME sectors rose to 11.75 from the prior week’s 12.75. The Offensive DIME sectors maintained their lead over the Defensive SHUT sectors. Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

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

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

Sincerely,

Dave Anthony, CFP®

FBIAS™ market update for the week ending 11/3/2017

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.

image

See Fig. 1 for the 100-year view of Secular Bulls and Bears. The CAPE is now at 31.57, up from last week’s 31.49, and exceeds the level reached at the pre-crash high in October, 2007. Since 1881, the average annual return for all ten year periods that began with a CAPE around this level have been in the 0% – 3%/yr. range. (see Fig. 2).

image

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate. The U.S. Bull-Bear Indicator (see Fig. 3) is in Cyclical Bull territory at 78.47, up from the prior week’s 76.67.

image

In the intermediate and Shorter-term picture:

The Shorter-term (weeks to months) Indicator (see Fig. 4) turned positive on September 7th. The indicator ended the week at 26, down from the prior week’s 28. Separately, the Intermediate-term Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – was positive entering October, indicating positive prospects for equities in the fourth quarter of 2017.

image

Timeframe summary:

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

In the markets:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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(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)

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The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market. The average ranking of Defensive SHUT sectors dropped to 23.00 from 20.50, while the average ranking of Offensive DIME sectors fell to 12.75 from the prior week’s 12.25. The Offensive DIME sectors expanded their lead over the Defensive SHUT sectors. Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

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

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

Sincerely,

Dave Anthony, CFP®

FBIAS™ market update for the week ending 10/27/2017

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.

image

See Fig. 1 for the 100-year view of Secular Bulls and Bears. The CAPE is now at 31.49, up from last week’s 31.42, and exceeds the level reached at the pre-crash high in October, 2007. Since 1881, the average annual return for all ten year periods that began with a CAPE around this level have been in the 0% – 3%/yr. range. (see Fig. 2).

image

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate. The U.S. Bull-Bear Indicator (see Fig. 3) is in Cyclical Bull territory at 76.67, up from the prior week’s 74.80.

image

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.

image

Timeframe summary:

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

In the markets:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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(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)

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The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market. The average ranking of Defensive SHUT sectors slipped modestly to 20.50 from 20.25, while the average ranking of Offensive DIME sectors rose to 10.75 from the prior week’s 12.75. The Offensive DIME sectors expanded their lead over the Defensive SHUT sectors. Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

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

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

Sincerely,

Dave Anthony, CFP®

FBIAS™ market update for the week ending 10/20/2017

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.

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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).

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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.

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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.

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Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2), whether we are in a new Secular Bull or still in the Secular Bear, the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns. The Bull-Bear Indicator (months to years) is positive (Fig. 3), indicating a potential uptrend in the longer timeframe. In the intermediate timeframe, the Quarterly Trend Indicator (months to quarters) is positive for 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 25th 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.

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(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)

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The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market. The average ranking of Defensive SHUT sectors 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®