FBIAS™ market update for the week ending 2/23/2018

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 33.25, up from the prior week’s 33.06, and still exceeds the level reached at the pre-crash high in October, 2007. This value is in the lower end of the “mania” range. 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 77.65, down from the prior week’s 78.53.

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In the intermediate and Shorter-term picture:

The Shorter-term (weeks to months) Indicator (see Fig. 4) turned positive on February 15th. The indicator ended the week at 16, up from the prior week’s 10. Separately, the Intermediate-term Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – was positive entering January, indicating positive prospects for equities in the first quarter of 2018.

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Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2), the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns – but the market has entered the low end of the “mania” range, and all bets are off in a mania. The only thing certain in a mania is that it will end badly…someday. The Bull-Bear Indicator (months to years) is positive (Fig. 3), indicating a potential uptrend in the longer timeframe. In the intermediate timeframe, the Quarterly Trend Indicator (months to quarters) is positive for Q1, and the shorter (weeks to months) timeframe (Fig. 4) is positive. Therefore, with internal unanimity expressed by all three indicators being positive, the U.S. equity markets are rated as Positive.

In the markets:

U.S. Markets: The majority of major U.S. stock indexes ended the holiday-shortened week positive for the week (thanks to a burst higher on Friday), with the technology-heavy NASDAQ Composite index performing the best. However, the modest gains for the week masked the volatility that occurred throughout with the Dow swinging almost 500 points on Wednesday alone. The Dow Jones Industrial Average rose for a second week, adding 0.36% to close at 25309.99. The NASDAQ Composite rose 1.35% to close at 7,337. By market cap, large caps outperformed smaller caps with the S&P 500 large cap index rising 0.55%, while the S&P 400 mid cap and Russell 2000 small cap indexes added 0.16% and 0.37%, respectively.

International Markets: Canada’s TSX also rebounded for a second week, rising 1.2%. Across the Atlantic, the United Kingdom’s FTSE slipped -0.69%, while on Europe’s mainland major markets were mixed. France’s CAC 40 rose 0.68%, Germany’s DAX gained 0.26%, while Italy’s Milan FTSE slipped -0.55%. In Asia, China’s Shanghai Composite rebounded sharply for the second week, jumping 2.8%, while Japan’s Nikkei added 0.8% and Hong Kong’s Hang Seng rose 0.5%. As grouped by Morgan Stanley Capital International, developed markets slipped ‑0.1% while emerging markets rose 0.4%.

Commodities: Energy rose for a second week with West Texas Intermediate crude oil rising 3.25% to close at $63.55 per barrel. Precious metals gave back much of last week’s gains with Gold falling -$25.90 to close at $1330.30 an ounce, a loss of -1.9% and Silver giving up -1.4% to close at $16.48. Copper, viewed by some analysts as an indicator of global economic health due to its variety of uses, also gave back some of last week’s gain by falling ‑1.1%.

U.S. Economic News: New claims for unemployment benefits dropped by 7,000 to 222,000, reclaiming their 45-year low last week. This reading marked the second lowest level since the end of the 2007-2009 recession. Economists had forecast 230,000 new claims. The less-volatile four-week average of new claims declined by 2,250 to 226,000. Claims are now down to their lowest levels since the early 1970’s. Most firms continue to report shortages of qualified workers, and the unemployment rate is at a 17-year low. Continuing claims, which counts the number of people already collecting unemployment benefits, dropped by 73,000 to 1.88 million.

Sales of existing homes plunged at their fastest rate in over 3 years as the available supply of homes continues to shrink. Existing-home sales were at a seasonally-adjusted annual pace of 5.38 million in January, according to the National Association of Realtors (NAR). Sales slipped 3.2% last month, for their second consecutive monthly decline and are down 4.8% from the same time last year – the steepest annual decline since 2015. Economists had forecast sales at a 5.59 million pace. The NAR notes that available supply is still the major factor weighing on the housing market – there’s no shortage of demand. At the current sales pace, there’s just 3.4 months of inventory available, which is especially lean compared to traditional averages. Inventory was 9.5% lower than a year ago, and marked its 32nd consecutive month of year-over-year inventory declines. As expected, the dwindling inventory pushed up home prices. The median price jumped 5.8% to $240,500.

Manufacturing activity in the United States surged to a nearly 3 ½ year high this month, while activity in the services sector hit a six-month peak, according to data from market research firm IHS Markit. Markit’s Purchasing Managers Index (PMI) reading for manufacturing rose 0.4 point to 55.9, while the services barometer rose 2.6 points to 55.9. Numbers over 50 signify expansion, and results over 55 are considered exceptional. The only negative within the report was that the costs of raw and partly finished materials rose to its highest level in 5 years, suggesting a sign of rising inflation. Chris Williamson, chief business economist at IHS Markit stated, “Business activity growth accelerated markedly in February, suggesting the economy is growing at its fastest pace in over two years.”

The Conference Board’s index of Leading Economic Indicators (LEI) jumped 1% last month, its fourth straight monthly gain and its biggest rise in three months. The Conference Board reported 8 of its 10 indicators were positive, with the building permits and financial subcomponents the main drivers of the strong gain. Ataman Ozyildirim, director of business cycles and growth research, stated “The leading indicators reflect an economy with widespread strengths coming from financial conditions, manufacturing, residential construction, and labor markets.” Ozyildirim noted that the recent stock market volatility, coming after the data collection for the LEI report had ended, “shouldn’t have a big impact.”

Minutes released this week from the Federal Reserve’s Federal Open Market Committee meeting at the end of January showed officials saw a stronger economy at the end of last year and that more rate hikes were anticipated for 2018. According to the minutes, the strengthening “increased the likelihood that a gradual upward trajectory of the federal funds rate would be appropriate”. Economists have been concerned that President Trump’s tax cuts would push wages up, leading to a surge in inflation. The minutes also showed that while several officials expected inflation to move higher this year, only “a couple” were worried that the economy may overheat. At the meeting, Fed officials agreed to hold rates steady at 1.25-1.5%.

International Economic News: Major Canadian bank Scotiabank said every year that proposed major oil pipelines are delayed costs Canada’s economy $15.6 billion. Delayed oil pipeline construction is causing a steep discount for Canadian crude prices that equates to roughly 0.75% of GDP. The shortage is expected to ease to $10.7 billion this year as more rail capacity becomes available to ship oil. The costs come as delays continue for all three major proposed oil pipelines to export oil from Western Canada—Kinder Morgan’s Trans Mountain expansion, Enbridge’s Line 3 replacement, and TransCanada’s Keystone XL. Scotiabank said the delay of new pipeline approvals have imposed “clear, demonstrable, and substantial economic costs on the economy.”

Britain’s economy grew less than originally reported in the fourth quarter of last year, according to the Office for National Statistics (ONS). Britain’s economy grew 0.4% in the final quarter of last year, a 0.1% decrease from the original estimate of 0.5%. The ONS explained that “A number of very small revisions to mining, energy generation, and services were enough to see a slight downward revision.” Services continued to be the dominant sector of the UK economy accounting for roughly 80% of economic output. Darren Morgan, the ONS’ head of GDP said “Services continued to drive growth at the end of 2017, but with a number of consumer-facing industries slowing, price rises led to household budgets being squeezed.” For the year, Britain grew 1.4% making it the slowest growing major economy behind both Italy and Japan.

On Europe’s mainland, French employers have a surprising problem in a nation with a 9% unemployment rate: finding skilled workers. Despite the stubbornly high unemployment rate that has not dropped below 9% for six years, employers lament the lack of skilled workers—particularly in the construction, engineering, and IT industries. More than a third of French manufacturers are operating at full capacity, its highest since early 1990, and 40% report difficulties recruiting workers, according to French statistics agency INSEE. In a sign of surging demand for labor, permanent contract hirings rose 6.4% to 48% in the final quarter of last year, levels last seen right before the onset of the global financial crisis.

Confidence among Germany’s business owners fell more than expected this month, but remained near a high level according to the Munich-based Ifo Economic Institute. Ifo stated its business climate index, based on a monthly survey of 7,000 firms, fell to a 5-month low of 115.4, down 2.2 points from January. February’s reading missed expectations by 1.6 points. The decline was attributed to exporters concerned about the stronger euro exchange rate which makes German products more expensive to customers outside the bloc. Ifo economist Klaus Wohlrabe stated, “The export euphoria is flattening out a bit. I would not yet speak of a change in the underlying trend, the German economy is still doing very well, but some of the steam has been let off.”

In a concerning development in China, the China Insurance Regulatory Commission (CIRC) said that it will take control of the Anbang Insurance Group for a year and that the company’s former chairman has been prosecuted for “economic crimes”. The move is aimed at protecting consumer interests as the company’s practices may have endangered Anbang’s solvency. The regulator reported it will maintain the company as a private enterprise and that Anbang’s debts and obligations will not be impacted. Anbang is best known in the West for its purchase of New York’s landmark Waldorf Astoria hotel in 2015. However this is not the first time Anbang has run into trouble with the CIRC. Last spring, the CIRC suspended the insurer from issuing new products for three months as it stated that one of the insurer’s product designs “deviates from the fundamentals of insurance”.

The Japanese government, in its latest monthly economic report, reasserted its assessment that the economy is “gradually recovering”. The economy has grown for eight consecutive quarters, its longest continuous expansion since a 12-quarter stretch between 1986 and 1989 during Japan’s infamous economic bubble. Continued steady growth may finally defeat the deflation that Japan has been mired in for decades. An end to deflation would be a huge victory for Prime Minister Shinzo Abe’s aggressive monetary policies intended to reflate the economy. Over the past few years, Abe’s labor reforms, corporate tax breaks and changes to other regulations have spurred economic growth. Stock prices are close to their highest levels in 26 years, corporate profits are near an all-time high, exports are growing and business investment continues to increase. To most, that sounds like more than “gradually” recovering, but the government is known to understate for purposes of expectation management.

Finally: Analyst and long-time market commentator Mark Hulbert noted this week that despite this past month’s price action, bonds are still a hedge against stock market losses. Hulbert pointed out that this month’s steep market decline also saw bond prices fall as well, spreading worry that in the “new normal” bonds may not serve as the protection for the stock market as well as they have traditionally. Hulbert believes that worry is unjustified, noting that while rare, the phenomenon of both stocks and bonds dropping in tandem is not unprecedented. Since 1926, both the S&P 500 and intermediate-term U.S. Treasury bonds have fallen together 12.4% of the months, or an average of once every eight months. Investors, he says, are being unrealistic if they “expect bonds—or any hedge, for that matter—to work every time, all the time.”

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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 21.75 from the prior week’s 21.00, while the average ranking of Offensive DIME sectors fell slightly to 11.00 from the prior week’s 10.00. The Offensive DIME sectors basically 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 2/16/2018

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 33.06, up from the prior week’s 31.69, and still exceeds the level reached at the pre-crash high in October, 2007. This value is in the lower end of the “mania” range. 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 78.53, down from the prior week’s 79.79.

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In the intermediate and Shorter-term picture:

The Shorter-term (weeks to months) Indicator (see Fig. 4) turned positive on February 15th. The indicator ended the week at 10, up from the prior week’s 8. Separately, the Intermediate-term Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – was positive entering January, indicating positive prospects for equities in the first quarter of 2018.

image

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2), the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns – but the market has entered the low end of the “mania” range, and all bets are off in a mania. The only thing certain in a mania is that it will end badly…someday. The Bull-Bear Indicator (months to years) is positive (Fig. 3), indicating a potential uptrend in the longer timeframe. In the intermediate timeframe, the Quarterly Trend Indicator (months to quarters) is positive for Q1, and the shorter (weeks to months) timeframe (Fig. 4) is positive. Therefore, with internal unanimity expressed by all three indicators being positive, the U.S. equity markets are rated as Positive.

In the markets:

U.S. Markets: Stocks rebounded strongly from the carnage of the previous week and recorded their best weekly gains since early 2013. The technology-heavy NASDAQ Composite performed the best, while the energy sector lagged despite the sharp rally in oil prices. After hitting the “correction” level, defined as a drop of 10% or more from recent highs, the indexes finished the week down just 4-5% from their January highs. The Dow Jones Industrial Average retraced most of last week’s loss, rising over 1000 points, or 4.25%, to close at 25,219. The NASDAQ surged 5.3% and regained the 7,000 level ending the week at 7,239. By market cap, large caps slightly lagged their smaller cap brethren. The large cap S&P 500 index gained 4.3%, while the S&P 400 mid cap and Russell 2000 small cap indexes rose 4.4% and 4.5%, respectively.

International Markets: Canada’s TSX also retraced most of last week’s losses by rising 2.8%. In Europe, the United Kingdom’s FTSE gained 2.9%, while on Europe’s mainland France’s CAC 40 gained 4%, Germany’s DAX added 2.9%, and Italy’s Milan FTSE rose 2.9%. In Asia, China’s Shanghai Composite only managed to retrace 2.2% of last week’s 9.6% plunge. Japan’s Nikkei rose 1.6% while with Hong Kong’s Hang Seng jumped 5.5%. As grouped by Morgan Stanley Capital International, emerging markets added a robust 6.7%, while developed markets gained 4.1%.

Commodities: Precious metals joined in the equity rebound with Gold rising 3.1% to $1,356.20 an ounce and Silver adding 3.6% to $16.71 an ounce. Energy rebounded almost 4% with West Texas Intermediate crude oil rising $2.35, ending the week at $61.55 per barrel. Copper, viewed by some analysts as an indicator of global economic health due to its variety of industrial uses, rose a very strong 7%.

U.S. Economic News: Applications for new unemployment benefits increased slightly last week, but layoffs in the U.S. remained near a 45-year low. According to the Labor Department, initial jobless claims increased by 7,000 to 230,000, which matched economists’ forecasts. The less-volatile four-week average of claims rose by 3,500 to 228,500. Jobless claims have now been below the key 300,000 threshold that signals a healthy labor market for 154 straight weeks, nearing the all-time record of 160 consecutive weeks. Continuing claims, which counts the number of people already collecting unemployment benefits rose by 15,000 to 1.94 million. Over 2.4 million people were receiving benefits at the same time last year.

The number of new homes under construction continues to close in on the highs set during the housing bubble of 2007 as housing starts surged 10% in January to an annual rate of 1.33 million. The reading was its second-highest since the Great Recession and blew away analysts’ forecasts of 1.24 million. In addition, the number of permits to build new homes jumped to a 10 ½ year high, up 7.4% to an annual rate of 1.4 million. Construction increased in the North, South, and West and, importantly, two-thirds of new construction was single-family homes. Compared to the same time last year, housing starts are up 7%. Analysts report that the biggest issue weighing on housing continues to be demand outstripping the available supply, pushing prices outside the reach of many would-be buyers.

The Commerce Department reported that sales among the nation’s retailers unexpectedly fell 0.3% in January, its biggest drop in a year, as households cut back on purchases of motor vehicles and building materials. December’s reading was revised to unchanged instead of rising 0.4% as previously reported. Economists had expected a gain of 0.2%. On an annual basis, retail sales were nevertheless up 3.6% from a year ago. Stuart Hoffman, senior economic adviser at PNC Financial Services, was optimistic following the report noting, “This is a temporary pause in consumer spending following a strong holiday sales season.”

Sentiment among the nation’s small business owners continues to soar due to the change in tone towards businesses in Washington. The National Federation of Independent Businesses (NFIB) small business optimism index climbed two points last month to a reading of 106.9. The improvement came following a dip in December and exceeded analysts’ forecasts by 1.4 points. Perhaps a harbinger for the nation’s future economy was the all-time high number of respondents reporting “now is a good time to expand.” The NFIB said in its release, “The record level of enthusiasm for expansion follows a year of record-breaking optimism among small businesses.” Of the index subcomponents, six of the ten improved, while two declined, and two remained unchanged. As has been the case, business owners continue to report that finding qualified workers continues to be their biggest problem—worse even than taxes and regulation. The index remains just below November’s reading, the second-highest in the survey’s 45-year history.

Consumer sentiment climbed to its second-highest level in 14 years, according to the University of Michigan. The University said its index rose to a reading of 99.9 in February, up 4.2 points from January, and soundly topped forecasts for a reading of 95.3. In the details, there were big gains in both the current economic conditions and the expectations sub-indexes. The tax cuts enacted by President Trump are now starting to impact workers’ paychecks, along with the strong jobs market, and solid economic growth has consumers confident about the future. Richard Curtin, chief economist of the survey stated in its release, “Purchase plans have been transformed from the attraction of deeply discounted prices and low interest rates that outweighed economic uncertainty, to being based on a sense of greater income and job security – the fewest consumers in decades mentioned the favorable impact of low prices and interest rates.”

Two separate gauges of manufacturing sentiment continued to show solid growth this month. The Philadelphia Fed’s manufacturing index rose 3.6 points to 25.8 this month, beating forecasts of a retreat to 21. In the details, the new orders gauge surged 14.4 points to 24.5, which bodes well for future economic activity. However on a down note, the shipments gauge declined to 15.5 from 30.3. The New York Fed’s Empire State index slowed 4.6 points to 13.1. In New York, both the new orders and shipments gauges were little changed. Both indexes remained well above zero which indicates improving conditions. John Silvia, chief economist at Wells Fargo stated, “The factory sector recovery that took hold in 2017 remains firmly in place. The collective 2015-2016 headwinds of weak demand at home and abroad, falling commodity prices and a strong U.S. dollar have been flipped on their heads, with no immediate end in sight.”

A key measure of inflation trends jumped more than forecast last month, sparking renewed fears of inflation. The Labor Department reported the Consumer Price Index (CPI) rose 0.5% last month, whereas economists had expected only a 0.3% increase. Excluding the volatile food and energy categories, the index was still up 0.3% versus estimates of 0.2%. The report showed that price pressures were “broad based” with gasoline, shelter, clothing, medical care, and food all rising. On an annualized basis, headline CPI rose 2.1%, up 0.2% from expectations, while core CPI increased 1.8% versus expectations of 1.7%. Peter Boockvar, chief investment officer at Bleakley Advisory Group stated, “The worry of the markets is not that inflation is becoming a big problem…it is that the Fed is now forced to play catch up at the same time they are shrinking their balance sheet.”

At the producer level, price inflation has also taken hold as wholesale prices jumped 0.4% last month. While oil prices were a contributor to the increase, the more stable core PPI, which strips out food, energy, and trade margins, also rose 0.4% suggesting that price pressures are more widespread. Annualized, wholesale inflation rose a tick to 2.7%, but it remained below its six-year high of 3.1% hit recently.

Adding to the consumer and producer inflation concerns, the import price index also jumped, up by 1% in January. The Bureau of Labor Statistics reported that increases in the price of oil, German automobiles, French food, and Italian wines all contributed. Ex-fuel, import prices were still up 0.4%, the biggest increase in six years. The falling dollar has made overseas goods more expensive, while the strong American economy has encouraged people to spend. The new inflation data has some analysts now thinking the Federal Reserve will raise interest rates four times this year instead of the three previously anticipated.

International Economic News: Canada’s Finance Minister Bill Morneau stated Canada won’t be “impulsive” responding to U.S. tax cuts. After meeting with private sector economists, Morneau stated that the Liberal government will not “act in an impulsive way” in response to U.S. corporate tax cuts that economists said may pose a threat to Canada’s competitiveness. Morneau said the government is conducting a careful analysis in connection with U.S. President Trump’s sweeping tax reforms. Morneau remained tight-lipped about the release of Canada’s budget on February 27th, but said that his recent discussions focused on negotiations of the North American Free Trade Agreement and the impact of U.S. tax changes on the Canadian economy.

Across the Atlantic, Britain’s government is ready to push for the kind of Brexit plan endorsed by the United Kingdom’s financial center of London. The City of London has stated it wants a mutual recognition system to regulate financial services after Brexit in the hopes of maintaining the City of London’s access to the European Union. An unnamed official stated, “It is obviously in everyone’s interest to not just totally turn on its head the pan-European banking system…Everyone has a lot to lose from this if we can’t get a deal.” Bank of England Governor Mark Carney has previously stated Britain and the EU should adopt a system of mutual recognition in the financial services sector. With a little more than a year before Brexit takes place, many banks have begun activating contingency plans to move some operations out of the country.

French President Emmanuel Macron’s policies continue to be praised as the French economy continues to power ahead. French unemployment fell to its lowest level since 2009 – the most obvious sign of economic improvement in the Eurozone’s second-largest economy. Unemployment dropped to just 8.9% in the final quarter of last year, down from 9.6% in the third quarter. The decrease was the largest drop for any single quarter since at least 1996. Christian Schulz, European economist at Citi stated, “France seems to have turned a corner. This is a real sign that the boost in confidence we have seen in France, which is reverberating across the Eurozone, is translating to stronger job creation in the country.” French statistics agency Insee reported France’s economy grew at its fastest rate in 10 years in 2017, expanding at 1.9%.

The German economy grew 2.2% last year, with another quarter of solid growth in the final months of 2017. As Europe’s main economic powerhouse, Germany is benefitting from economic strength throughout the bloc and with major trading partner around the world. According to Germany’s statistics agency Destatis, the economy grew 0.6% in the fourth quarter, matching economists’ forecasts. Destatis described the growth as “steady and strong”. Growth in the final quarter was driven primarily by foreign demand and “exports increased substantially.” In addition, Destatis noted that government spending rose and household consumption remained essentially flat. Analysts broadly agree that the strong economic performance is expected to continue in 2018.

The greatest risk to China’s economy, as seen by many analysts, is rising corporate and household debt. Since 2009, China has been one of the leading world generators of debt, contributing to the growing concern over global inflation. Thus far, China has amassed debt equivalent to $4.3 trillion USD, or about 41% of China’s gross domestic product. The debt has been managed…by issuing more debt. The latest data from the People’s Bank of China reveals that China created a record 2,900 billion yuan ($458 billion) in new loans in January. Beijing rolled out more policies last month to restrict riskier financial operations supported by loose lending, but the International Monetary Fund still warns that China’s inability to control expanding debt increases the risk of a financial crisis.

The Japanese economy has now posted its longest growth streak since the boom decade of the 1980’s as fourth quarter growth rose 0.5%, driven by an increase in consumer spending. This long run of growth is encouraging for the Bank of Japan and hints that the Japanese economy may finally build up enough momentum to reach the BOJ’s 2% inflation target. Hiroaki Mutu, economist at Tokai Tokyo Research Center noted, “Economic fundamentals look good and growth this year is likely to be above the economy’s potential.” World financial markets appear to be on edge because central banks in the United States and Europe are poised to raise interest rates to stay ahead of inflation, but the Bank of Japan is still expected to intentionally lag well behind its peers.

Finally: As of late, analysts have repeatedly sounded the alarm over the extreme valuation in the U.S. equity markets by looking at just about every traditional market valuation metric. Interestingly enough, a recent survey of institutional investors by Bank of America Merrill Lynch found that while most institutional investors agreed the market had an “excessive valuation”, those same managers also were heavily over-weighted in equities. Analysts have coined the term “fully invested bear”, to describe this new behavior. The explanation for this paradoxical stance could perhaps be best described by the relatively new acronym of “FOMO” – “Fear Of Missing Out”.

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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 21.00 from the prior week’s 19.50, while the average ranking of Offensive DIME sectors rose slightly to 10.00 from the prior week’s 10.50. The Offensive DIME sectors strengthened 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 2/02/2018

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 33.40, down from the prior week’s 34.75, and exceeds the level reached at the pre-crash high in October, 2007. This value is in the lower end of the “mania” range. 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 84.22, down from the prior week’s 87.59.

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In the intermediate and Shorter-term picture:

The Shorter-term (weeks to months) Indicator (see Fig. 4) turned positive on December 27th. The indicator ended the week at 29, down from the prior week’s 33. Separately, the Intermediate-term Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – was positive entering January, indicating positive prospects for equities in the first quarter of 2018.

image

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2), the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns – but the market has entered the low end of the “mania” range, and all bets are off in a mania. The only thing certain in a mania is that it will end badly…someday. The Bull-Bear Indicator (months to years) is positive (Fig. 3), indicating a potential uptrend in the longer timeframe. In the intermediate timeframe, the Quarterly Trend Indicator (months to quarters) is positive for Q1, and the shorter (weeks to months) timeframe (Fig. 4) is also positive. Therefore, with internal unanimity expressed by all three indicators being positive, the U.S. equity markets are rated as Positive.

In the markets:

U.S. Markets: Stocks recorded their first weekly loss of the young year, with the large-cap S&P 500 index suffering its worst weekly drop in two years. All major markets finished the week in the red with the Dow Jones Industrial Average falling -4.1% to close at 25,520, while the technology-heavy NASDAQ Composite fell -3.5%. By market cap, small caps fared slightly better than their larger cap brethren. The Russell 2000 small cap index retreated -3.8%, while the large cap S&P 500 and mid cap S&P 400 each lost -3.9%.

International Markets: The selling impacted major international markets as well. Canada’s TSX had a second down week, losing -3.9%. The United Kingdom’s FTSE fell a third consecutive week losing -2.9%. On Europe’s mainland, France’s CAC 40 fell -3%, Germany’s DAX plunged -4.2%, and Italy’s Milan FTSE ended down -2.7%. In Asia, China’s Shanghai Composite reversed last week’s 2% rise by falling -2.7%, Japan’s Nikkei closed down ‑1.5% and Hong Kong’s Hang Seng dropped -1.7%. As grouped by Morgan Stanley Capital International, developed markets fell -3.6% while emerging markets plunged -5.8%.

Commodities: Precious metals turned out to be of little value as a safe haven amid the market weakness. Gold retreated -1.1% to $1337.30 an ounce, while Silver plunged -4.2% to $16.71 an ounce. Energy was also weak, as oil traded down -1% to $65.45 per barrel of West Texas Intermediate crude oil. Copper, which some analysts use as an indicator of global economic health due to its variety of uses, fell just -0.4%.

January Summary: For the month of January, the Dow gained 5.8%, while the NASDAQ jumped 7.4%. Small caps rose a relatively lackluster 2.6%, mid caps an equally mediocre 2.8%, while large caps (S&P 500) jumped 5.6%. International markets were not as unanimously positive, but overall quite strong. Canada’s TSX fell -1.6%, the UK’s FTSE fell -2.1%, France’s CAC 40 rose 3.2% and Germany’s DAX finished January up 2.1%. In Asia, China’s Shanghai Composite rose by 5.25%, Japan’s Nikkei finished up 1.5%, and Hong Kong’s Hang Seng led all major international markets with a huge gain of +9.9% for January. As grouped by Morgan Stanley Capital International, developed markets jumped 5.0% and emerging markets ripped higher by 8.3% in January. Gold rose 3.6% in January, Silver gained a similar 3.5%, but copper was off -2.4%. Oil had a very strong run in January, with Light Sweet Crude gaining 9.8%.

U.S. Economic News: Payroll processer ADP reported that the U.S. added a stronger-than-expected 234,000 private sector jobs last month, the second straight month of strong gains. The report showed that small private-sector businesses added 58,000 jobs in January, while medium-sized and large businesses added 91,000 and 85,000 jobs respectively. Mark Zandi, chief economist for Moody’s Analytics, said that the data showed that the labor market was “excruciatingly tight”. Zandi also predicted the unemployment rate would drop further from the current 4.1% rate into the mid 3% range.

The Labor Department reported the number of people who applied for new unemployment benefits last week fell by 1,000 to 230,000, still remaining near a 45-year low. Economists had expected claims to rise to 240,000. Over the past year, claims have fallen 8% and are near their lowest level since the early 1970’s. The tight job market is finally starting to benefit workers: wages for private-sector employees climbed 2.8% over the year ending in December, its biggest year-over-year gain since 2008.

The Labor Department’s monthly Non-Farm Payrolls (NFP) report showed the U.S. created 200,000 new jobs in the first month of 2018, indicating that companies are still anxious to hire new employees more than eight years after the economic expansion began. The increase in hiring exceeded analysts’ forecasts of 190,000 jobs. Unemployment remained at its 17-year low of 4.1%. Construction, education/health services, and leisure/hospitality led the industries for job creation. As has been reported numerous times, the biggest concern among businesses continues to be the ongoing shortage of skilled workers. Dan North, chief economist at Euler Hermes North America, says many manufacturers are now desperate enough to hire unskilled workers at low wages and train them.

Home prices surged to new highs in November according to the latest report from S&P CoreLogic Case-Shiller. S&P/Case-Shiller’s national home price index rose 6.2% on an annualized basis, while the more narrowly-focused 20-city index gained 6.4%. Prices nationally are now 6% higher than their 2006 peak, while those in the top 20 markets are still 1.1% below. The robust gains show that the lack of inventory in the housing market is not letting up, and neither is the rise in the price of homes. David M. Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices stated, “Home prices continue to rise three times faster than the rate of inflation.” Blitzer cited the slow recovery in the home construction market as builders have yet to reach historically normal levels, despite the pent-up demand in the market. In the details of the report, Seattle and San Francisco continued to see the highest price gains, followed by San Diego, Los Angeles, and Las Vegas.

Pending home sales, which counts the number of homes in which a contract has been signed but not yet closed, also moved higher in December. The National Association of Realtors reported its pending home sales index rose 0.5% to its highest level since March. December marked the third consecutive increase for the index. Contract signings usually precede sales by 45 to 60 days, suggesting that the uptick in December means that 2018 should start the year with “a small trace of momentum.” Regionally, pending sales were mixed with sales down -5.1% in Northeast, down -0.3% in the Midwest, but up 2.6% in the South, and 1.5% in the West.

The Commerce Department reported that spending among the nation’s consumers hit a six-year high in December, climbing 0.4%. It was its biggest monthly increase since 2011. In the details of the release, incomes were up 0.4% in December and 3.1% for the full year. However, factoring in inflation, the gain was a much lesser 1.2% – the lowest inflation-adjusted reading since 2010. One item of concern, though: Americans reduce their savings rate to continue their purchasing. The savings rate fell to 2.4%, the lowest level since 2005. Greg Daco, chief U.S. economist at Oxford Economics said in a note to clients, “Looking ahead, we believe the Tax Cuts and Jobs Act will support stronger income growth in the first half of the year. This should help support the savings rate and continue to drive consumer outlays in 2018.” Americans increased spending in the final quarter of 2017 at the fastest pace in almost two years. The soaring stock market and strong labor market are giving households confidence to spend more money. Turning to inflation, the Federal Reserve’s preferred inflation measure, the Personal Consumption Expenditures Index rose a slight 0.1% in December. The “core” rate, which strips out the volatile food and energy categories, rose 0.2%. Overall, the rate of inflation over the past year slipped 0.1% to 1.7%, and the core rate remained flat at 1.5%.

Confidence among the nation’s consumers continued to strengthen, according to the Conference Board, with its index hitting a 17-year high of 125.4 last month. Economists had forecast a reading of 125. The Conference Board noted one area of uncertainty among consumers was the effect of recent tax cuts on their own incomes. Lower tax rates aren’t expected to show up in paychecks until the beginning of this month. Some have estimated that 90% of Americans could benefit from the tax cuts. In the details of the report, Americans are generally quite optimistic about the next six months with the index of future expectations rising 4.7 points to 105.5—near a 14-year high. However, the gauge of how Americans feel about the economy right now, the present situation index, slipped 1.2 points to 155.3 – but still just a few ticks below its 17-year high.

The Institute for Supply Management’s (ISM) manufacturing index retreated from a recent peak but remained strong last month. ISM’s manufacturing index slipped 0.2 to 59.1 last month, but that reading is still above the 57.4 average reading in all of 2017, and higher than the expected reading of 58.6. In the details, the numbers reveal a slight cooling off from the ultra-strong previous readings. The new orders sub-index dipped 2 points to 65.4, while the production sub-index ticked down -0.7 point to 64.5 and the employment sub-index fell to an eight-month low of 54.2. Of the 18 industry groups included in the survey, 14 reported expansion.

The Federal Reserve left its benchmark short-term interest rate unchanged at 1.25% to 1.5% in the first meeting of the year, a move (or non-move) that was widely expected. In addition, Chairwoman Janet Yellen stepped down and turned over the reins to Jerome Powell, Trump’s pick for new Fed Chair. The Fed continued to strongly hint that a rate hike is likely at its next meeting in March. The Fed made note that inflation is likely to hit its 2% target this year. Persistent low inflation has been the main stumbling block holding the Fed back from further rate hikes. “Inflation on a 12-month basis is expected to move up this year and to stabilize around the Committee’s 2 percent objective over the medium term,” the Fed wrote in its statement, adding that “further graduate increases” in interest rates are likely. The Fed projects three rate hikes this year.

International Economic News: Canada’s economy grew by 0.4% in November according to the latest data from Statistics Canada, matching economists’ expectations. Statistics Canada said 17 of 20 industrial sectors posted increases for the month, with the goods-producing sectors up 0.8% following a -0.5% decline in October. “November’s gain was mainly due to increases in the manufacturing and mining, quarrying and oil and gas extraction sectors, partly as a result of restoration in production capacity,” the federal government agency reported. The manufacturing sector was up 1.8% in November, marking its largest monthly increase since February 2014. Services-producing industries rose 0.3%, led by the real estate and rental and leasing, wholesale, and retail trade sectors. Toronto-Dominion Bank senior economist Brian DePratto said in a research note, “The Canadian economy fired on all cylinders in November: Production resumptions led the way, but nearly all major sectors reported gains on the month.”

Across the Atlantic, the head of the Bank of England Mark Carney continued to forecast headwinds for the British economy in its latest speech to the House of Lords. Mr. Carney had been criticized as being too pessimistic on the economy prior to the Brexit vote. Carney accepted that business investment had held up better than the bank predicted following the EU referendum, but he said areas of the economy were still not firing at rates that were consistent with world economic growth of 4%. Carney did not expect a “disorderly Brexit” to occur, but he stressed that Britain’s banks had sufficient capital reserves to cope with such an outcome should it occur.

In France, the economy expanded for its fifth consecutive quarter, delivering its best full year of performance since 2011. GDP rose 0.6% in the fourth quarter of last year, in line with forecasts. Capital investment rose 1.1%, while household spending increased 0.3% and net trade added to the bottom line. France’s economic revival comes following years of sluggish expansion, and has been supported by French President Emmanuel Macron’s economic reforms and business tax cuts.

The German government sharply upped its economic outlook for 2018 projecting a growth rate of 2.4%, an increase of 0.5% over its previous estimate. Brigitte Zypries, the economy minister, said in Berlin the economy accelerated by 2.2% last year, primarily due to increasing domestic demand. It was its strongest performance for the last 6 years and the eighth consecutive year of economic growth. Some business leaders and economists have started to warn that Germany’s economy, the largest in the Eurozone, is in danger of overheating. The economy ministry addressed the concerns by noting, “Despite a slight capacity overutilization in some sections of the economy, in Germany there is no overheating.”

China’s economy appears to be cooling again with a key reading of industrial activity falling to an eight-month low in January. China’s Purchasing Managers Index (PMI) indicated while activity was still in expansion, it was weaker than expected. The National Bureau of Statistics’ PMI declined 0.3 point to 51.3, remaining above the 50-point threshold that divides growth from contraction. However, the weaker reading was broad-based with key measures of output, imports, and new orders all showing declines and pointing to a weaker domestic economy. Capital Economics’ Julian Evans-Pritchard said the export order index looked particularly weak, “It fell to a 15-month low of 49.5, raising questions about the strength of foreign demand.”

In Japan, an average of 15 nongovernment think-tanks projected that Japanese real gross domestic product likely expanded for an eighth consecutive quarter for the first time since the 1980’s. The increase was driven by a pickup in consumer spending alongside solid exports and business investment. The average estimate of 0.8% was slower than the previous quarter’s 2.5% rise, but in line with the roughly 1% level seen as the potential ongoing growth rate. If preliminary government data due out February 14 confirms predictions of an expansion, it would continue a run of positive growth that began in the first quarter of 2016. This would be the longest streak since a 12-quarter stretch that began in the second quarter of 1986, before the economic bubble of the late ’80s and early ’90s.

Finally: Last week Bank of America Merrill Lynch (BofAML) released a research note that its “Bull & Bear” indicator was sending a sell signal “which has been accurate 11 straight times” since the firm started tracking it in 2002. The latest event to trigger the signal was the $33.2 billion that investors poured into stock-based funds the week before. While normally inflows are healthy for the market, they can be seen as a contrary indicator when they reach extremes of excess. The current reading on the indicator of 8.6 is firmly above the level of 8 established by BofAML as the “Sell” 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 21.25 from the prior week’s 22.00, while the average ranking of Offensive DIME sectors fell to 7.25 from the prior week’s 6.75. The Offensive DIME sectors kept a substantial lead over the Defensive SHUT sectors. Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

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

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

Sincerely,

Dave Anthony, CFP®

FBIAS™ market update for the week ending 1/26/2018

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 34.75, up from the prior week’s 33.90, and exceeds the level reached at the pre-crash high in October, 2007. This value is in the lower end of the “mania” range. 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 87.59, up from the prior week’s 86.29.

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In the intermediate and Shorter-term picture:

The Shorter-term (weeks to months) Indicator (see Fig. 4) turned positive on December 27th. The indicator ended the week at 33, up from the prior week’s 30. Separately, the Intermediate-term Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – was positive entering January, indicating positive prospects for equities in the first quarter of 2018.

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Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2), the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns – but the market has entered the low end of the “mania” range, and all bets are off in a mania. The only thing certain in a mania is that it will end badly…someday. The Bull-Bear Indicator (months to years) is positive (Fig. 3), indicating a potential uptrend in the longer timeframe. In the intermediate timeframe, the Quarterly Trend Indicator (months to quarters) is positive for Q1, and the shorter (weeks to months) timeframe (Fig. 4) is also positive. Therefore, with internal unanimity expressed by all three indicators being positive, the U.S. equity markets are rated as Positive.

In the markets:

U.S. Markets: Stocks continued their New Year’s winning streak with the major indexes hitting new record highs and notching their fourth consecutive weekly gains. Large cap indexes outperformed their smaller cap brethren, as fourth quarter earnings results from companies representing nearly one fifth of the S&P 500’s market capitalization reported results last week. The Dow Jones Industrial Average added 2.1% to last week’s gain to close at a new record high of 26,616. The technology-heavy NASDAQ Composite rose 169 points, or 2.3%, to close at 7,505, also a record high. The large cap S&P 500 surged 2.2%, while the S&P 400 midcap index added 0.8% and the small cap Russell 2000 index added “just” 0.65%.

International Markets: Canada’s TSX reversed last week’s gain, falling -0.7%. In Europe, the United Kingdom’s FTSE had its second consecutive down week, losing -0.80%. On Europe’s mainland, major markets were mixed. France’s CAC 40 rose just 0.05%, Germany’s DAX fell -0.70%, and Italy’s Milan FTSE added 0.45%. In Asia, China’s Shanghai Composite followed last week’s strong gain with a 2% rise. Japan’s Nikkei fell -0.74%, while Hong Kong’s Hang Seng index surged 2.8%–its seventh consecutive weekly gain.

Commodities: Energy led the way as West Texas Intermediate crude oil rose 4.5% to $66.14 per barrel, along with Brent crude which rose 2.5% to $70.35 per barrel. Precious metals were also bid higher with Gold rising 1.4% to end the week at $1,352.10 per ounce. Silver, which often trades similarly to gold but with more volatility, added 2.4% to close at $17.44 an ounce. Copper, which some analysts watch as an indicator of global economic health due to its variety of uses, rose 0.4% last week.

U.S. Economic News: Initial claims for unemployment benefits bounced higher from last week’s 45-year low. Jobless claims rose 17,000 to 233,000 last week, below the 240,000 that economists’ had forecast. The less-volatile monthly average of claims fell 3,500 to 240,000. Analysts note that claims tend to be volatile in January due to the winter weather, the Christmas and New Year’s holidays, and the end of the Christmas shopping season, when many companies add – and then drop – temporary employees. Layoffs continue to remain extremely low as well as the unemployment rate.

The National Association of Realtors (NAR) reported that the sales of existing-homes fell 3.6% to a 5.57 million seasonally-adjusted annual rate in December, missing expectations of 5.73 million. The cause was attributed to the shrinking supply of homes available for sale. Still, home sales were up 1.1% when compared to the same time last year. Sales of existing homes for 2017 were their best since 2006. In December, inventory dropped 11.4% on a monthly basis, the 31st consecutive month in which supply was lower when compared with the same time in the prior year. At the current sales rate, there is just a 3.2 months’ supply of homes available, the lowest level since the NAR began tracking it in 1999. The shortage pushed prices higher. The median sales price for an existing home last month was $246,800, a 5.8% increase from the same time last year. First-time buyers made up 32% of all transactions in December, up 3% from November.

Sales of new homes also slipped in December, but for the entire year of 2017 sales were up 8.3% compared to 2016. According to the Commerce Department, new home sales were at a 625,000 seasonally-adjusted annual rate in December, missing economists’ forecasts of a 680,000 annual rate. Analysts were quick to point out that the government’s data on new home construction is often erratic and heavily revised. For new homes, the median price of houses sold in December was $335,400—2.5% higher than the same time a year earlier. At its current sales pace, it would take 5.7 months to exhaust the available inventory—a level indicative of a very healthy housing market.

In the Windy City, the Chicago Federal Reserve’s index of national economic activity rose in December primarily due to strength in the nation’s manufacturing sector. The index rose to 0.15 last month, up 0.04 point from November. The index is a weighted average of 85 economic indicators designed so that above-zero readings represent trend growth, and a three-month average below -0.7 suggests a recession has begun. Out of the 85 indicators, just over half made positive contributions to the reading. The biggest contributor to the index was a large contribution from the factory sector, which improved to 0.25 from -0.02. Of concern, however, the employment index, personal consumption, and housing all weakened. The index’s less-volatile three-month moving average was 0.23 last month, a 0.03 decline from November.

The Chicago Fed’s data is supported by research firm IHS Markit’s Purchasing Managers Index (PMI) survey. The PMI reported manufacturers in the U.S. witnessed a solid start to 2018. The survey showed that production volumes and new orders experienced robust growth. In addition, strong export growth supported manufacturers as well. The Manufacturing-subset PMI increased 0.4 point to 55.5 points in January. Readings over 50 indicate expansion. Chris Williamson, chief business economist at IHS Markit, said, “January saw an encouraging start to the year for the US economy. Business activity across the manufacturing and service sectors continued to expand, driving further job gains as companies expanded capacity. Manufacturing is faring especially well, in part thanks to the weaker dollar, providing an important spur to the economy at the start of the year.”

The Commerce Department reported that durable goods, manufactured goods intended to last longer than 3 years, accelerated 2.9% last month, led by higher demand for airplanes and autos. Economists had only expected a gain of 0.9%. Ex-transportation, orders rose a lesser 0.6%. Large commercial aircraft were responsible for the bulk of the gain, with orders rising almost 16%. Auto orders were up 0.4%. Core capital goods orders, which remove defense and aircraft spending, slipped a slight 0.3%. Still, core capital goods orders are up 8.4% from the same time last year.

The Conference Board reported that its Leading Economic Indicators index (LEI) shows that the U.S. economy is primed for a healthy start to 2018. The LEI jumped 0.6% in December, its third straight increase. In the details, the measure of current economic conditions rose 0.3% in December, while a “lagging” index that looks back over the recent past rose 0.7%. Adding to the index’s reading were the rising stocks market, rising business orders, and higher consumer confidence. Ataman Ozyildirim, director of business cycles research at the Conference Board stated, “The U.S. LEI continued rising rapidly in December, pointing to a continuation of strong economic growth in the first half of 2018. The passing of the tax plan is likely to provide even more tailwind to the current expansion.”

The U.S. economy was strong at the end of last year, but inventories and trade weighed on the economy. The nation’s Gross Domestic Product for the fourth quarter came in at 2.6%, missing economists’ forecasts of 3%. For the full year, the U.S. economy expanded at 2.3%, exceeding 2016’s growth by 0.7%. Supporting GDP growth were consumer spending which grew at a 3.8% annual pace (its fastest in almost two years), and equipment spending by businesses which grew by 11.4%. However, weighing on GDP was a fall in the value of unsold goods/inventories. But even that might not be bad news as companies may have sold more goods than expected during the holiday season causing inventories to drop. The only clear negative was the bigger trade deficit. Imports rose 13.9%, predominantly due to higher oil prices, while exports rose just 6.9%.

International Economic News: The International Monetary Fund (IMF) raised its economic growth forecast for Canada. The IMF said Canada’s economy is expected to grow by 2.3% in 2018, and 2% in 2019, an increase of 0.2% and 0.3% from its previous forecast. The higher expectations are due to recent tax reforms in the United States that are expected to increase demand in all of North America. The IMF noted that it still considers uncertainty with the outcome of NAFTA negotiations as a risk to the Canadian economy.

When the British electorate voted to leave the EU in June 2016, many so-called economic experts and well-regarded global think tanks forecasted absolute economic doom for the country. And while some short-term volatility following the vote did indeed occur, overall the UK’s economic expansion remained intact. In fact, the UK economy expanded by a better-than-expected 0.5% in the final quarter of 2017. The reading brought the overall total economic growth for the year to 1.8%. The UK’s Office for National Statistics (ONS) reported the services sector, which accounts for the bulk of the economy, expanded by 0.6%. However, when compared to the same quarter a year ago, the ONS said that services showed a “weakening, particularly in the more domestic consumer-facing type sectors”, such as hotels, catering, transport, and storage and communications.

Economic confidence among French citizens remained strong but slipped from a 10-year high in its latest reading. French statistics agency Insee reported its business climate indicator slipped two points this month from December’s 10-year high, but remained well above the long-term average of 100. The employment indicator remained steady at 109, its healthiest level since August 2011. The strong employment environment was reflected among households where fears about unemployment declined over the past month. Consumers views of their living standards also improved, but the overall consumer confidence indicator slipped due to a slight increase in worries about households’ future financial situations.

In Germany, confidence among the nation’s businesses rebounded in January back to November’s record high, according to the Munich-based Ifo economic institute. The reading suggests that Europe’s biggest economy continued to fire on all cylinders at the beginning of the year, despite a stronger euro. Ifo’s business climate index rose 0.4 point to 117.6 this month, beating analyst expectations of a dip to 117.1. The surprisingly positive reading bodes well for Germany’s continued growth and will likely give Chancellor Angela Merkel support as she tries again to form a coalition government.

Two of the weaker nations in the European Union are the ones being hardest hit by the influx of migrants from Africa. At the World Economic Forum in Davos, the Prime Ministers of Italy and Greece delivered a forceful presentation that EU members must share migrants and refugees rather than expecting the Mediterranean nations to deal with the influx alone. Richer nations should also address the root cause of the migrant crisis by committing to a major development aid program in the form of a Marshal Plan for Africa, said Italy’s Paolo Gentiloni and Greece’s Alexis Tsipras.

The Chinese economy started the year on a solid trajectory, despite slowing industrial profits. Data released this week showed that momentum remains intact with sales managers the most upbeat since last summer, financial experts being more optimistic, and satellite imagery suggesting that manufacturing conditions are improving for the first time in four months. Xia Le, chief Asia economist at Banco Bilbao Vizcaya Argentaria SA in Hong Kong stated, “The strong momentum will likely be carried over to the first quarter, with the economy being supported by strong external demand and domestic consumption.” This transition was echoed by Chinese President Xi Jinping’s chief economic adviser Liu He, who told political and financial elites in Davos that China is moving to upgrade its output rather than just hit numerical targets.

Japanese inflation continued to perplexingly lag the strong economic revival seen in the island nation, leaving the central bank in a quandary on how to turn off some of the crisis-era stimulus policies that some of its board members warn will harm the economy if retained for too long. Adding to the concern is the recent rise in the value of Japan’s yen currency, which makes it even harder to stave off the deflation that has weighed on Japan’s economy for decades. Government data released on Friday gave little hope on the inflation front, with core prices last month rising just 0.9% year-over-year, unchanged from November. That was well below the Bank of Japan’s 2% price target and supported maintaining its ultra-easy monetary policy for now even as other central banks start to wind back.

Finally: It’s no secret that pharmaceuticals and healthcare are big business in the global economy. Last year alone, drugs and medicine made up over $318 billion of world exports—but where do all those pills, serums, and creams come from? It might surprise most Americans that the good ol’ US of A is a distant fifth in pharmaceutical exports, behind Switzerland, Germany, Belgium and France. At least it is comforting that the two countries most respected for quality and precision manufacturing – Switzerland and Germany – are atop the leader board in this industry where those characteristics are literally of life and death importance! (Chart source: www.howmuch.net)

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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 22.25, while the average ranking of Offensive DIME sectors fell to 6.75 from the prior week’s 4.25. 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 1/19/2018

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 33.90, up from the prior week’s 33.80, and exceeds the level reached at the pre-crash high in October, 2007. This value is in the lower end of the “mania” range. 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 86.29, up from the prior week’s 85.00.

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In the intermediate and Shorter-term picture:

The Shorter-term (weeks to months) Indicator (see Fig. 4) turned positive on December 27th. The indicator ended the week at 30, up from the prior week’s 29. Separately, the Intermediate-term Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – was positive entering January, indicating positive prospects for equities in the first quarter of 2018.

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Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2), the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns – but the market has entered the low end of the “mania” range, and all bets are off in a mania. The only thing certain in a mania is that it will end badly…someday. The Bull-Bear Indicator (months to years) is positive (Fig. 3), indicating a potential uptrend in the longer timeframe. In the intermediate timeframe, the Quarterly Trend Indicator (months to quarters) is positive for Q1, and the shorter (weeks to months) timeframe (Fig. 4) is also positive. Therefore, with internal unanimity expressed by all three indicators being positive, the U.S. equity markets are rated as Positive.

In the markets:

U.S. Markets: The major U.S. equity markets finished the holiday-shortened week with modest gains, with all the major indexes also hitting all-time highs. The Dow Jones Industrial Average rose 268 points to close at 26,071, a gain of 1.04%. The technology-heavy NASDAQ Composite added 75 points to end the week at 7,336, also a 1.04% gain. By market cap, large caps continued to show relative strength over their smaller brethren. The large cap S&P 500 added 0.86%, while the mid cap S&P 400 rose 0.67% and the Russell 2000 gained just 0.36%.

International Markets: Canada’s TSX reversed last week’s decline by rising 0.28%. In the United Kingdom, the FTSE retreated -0.6%. On Europe’s mainland, major markets finished in the green with France’s CAC 40 rising 0.2%, and Germany’s DAX and Italy’s Milan FTSE each adding 1.4%. In Asia, China’s Shanghai Composite gained 1.7%, Hong Kong’s Hang Seng surged 2.7%, and Japan’s Nikkei rose 0.7%. As grouped by Morgan Stanley Capital International, emerging markets rose 1.9%, while developed markets added 0.9%.

Commodities: Precious metals lost a bit of their luster as gold retreated -0.13% to close at $1,333.10 an ounce, and silver fell a larger -0.6% to $17.04 an ounce. Energy also retreated. Brent crude oil fell -1.75% to $68.65 a barrel, along with West Texas Intermediate crude oil which slipped -1.5% to $63.31 per barrel. The industrial metal copper, used by some analysts an indicator of global economic health due to its variety of uses, fell -1%.

U.S. Economic News: According to the Labor Department, the number of Americans seeking new unemployment benefits plunged by 41,000, its biggest one-week decline since 2009. In addition, the total number of initial claims was just 220,000—its lowest level since February 1973. Economists had forecast claims would fall only slightly to 250,000. The less-volatile monthly average of new claims declined a lesser 6,250 to 244,500. Initial jobless claims have remained under the key 300,000 threshold for 150 consecutive weeks, the longest stretch since 1967. Joshua Shapiro, chief U.S. economist at MFR Inc. stated, “The role of claims as a leading indicator of the unemployment rate remains intact and the signal is for further declines in the jobless rate.” Continuing claims, which counts the number of people already receiving unemployment benefits, rose by 76,000 to 1.95 million.

Confidence waned among the nation’s homebuilders, but overall sentiment remained positive. The National Association of Home Builders (NAHB) sentiment index dropped two points this month, but remained near its highest levels in 18 years. In the details, each of the index’s three sub-gauges retreated. Current sales conditions and future sales each fell a point, while buyer traffic fell four points, but all sub-gauges remained above 50 signaling improving conditions. As has been a common theme for months, the NAHB cited the rising price of building materials and lots, and shortages of skilled labor as the biggest concerns among its members.

The Commerce Department reported that new home construction fell 8.2% last month to a 1.19 million annual rate, missing economists’ forecasts for a reading of 1.28 million. In the details, single-family home starts were down 11.8%, while construction on buildings with five or more units, such as apartment buildings, rose 2.6%. Home construction in all four of the nation’s regions fell. The South led with a 14.2% drop, followed by a 4.2% decline in the Northeast. Permits, which are used as an indicator of future home building activity, remained essentially flat at 1.3 million. The final numbers for 2017 showed that it was a very good year overall, with permits, housing starts, and the number of new homes completed all hitting their highest levels since 2007.

Sentiment among the nation’s consumers fell this month to its worst reading since July, according to the University of Michigan. The University of Michigan’s consumer sentiment index fell to 94.4, missing economists’ expectations for a reading of 98. In the details, consumers reported their current conditions as worsening while they were a bit more optimistic about the future. The report stated “less attractive pricing” for goods and services was the reason for the concern. Consumers remained somewhat confident about future buying plans, thinking the tax cuts will help them to some extent. Tax reform was mentioned by 34% of respondents, with 70% believing the impact would be positive and 18% saying it would be negative. The survey’s chief economist Richard Curtin stated, “The disconnect between the uncertain future outlook assessment and the largely positive view of the tax reform is due to uncertainties about the delayed impact of the tax reforms on the consumers. Some of the uncertainty is related to how much a cut or an increase people, especially those in high income households living in high-tax states, face.”

The Federal Reserve’s latest ‘Beige Book’—a collection of anecdotes describing the current economic conditions in each of its districts, showed a relatively subdued response to the Republican tax plan. In the report that covered late November to early January, the Federal Reserve said the pace of growth continues to be “modest to moderate.” Most districts reported “on-going labor market tightness and challenges finding qualified workers across skills and sectors.” In some instances, the lack of workers was constraining growth. The report stated that the outlook for this year “remains optimistic for a majority of contacts across the country.” The report comes two weeks ahead of the Fed’s next rate-setting committee meeting, at which it is widely expected to hold short-term interest rates steady.

International Economic News: The Bank of Canada hiked its benchmark interest rate to 1.25%, its third increase since last summer. The central bank pointed to unexpectedly solid economic numbers as the key driver behind the decision. The bank also indicated that the economy will likely need an even higher benchmark over time. However, it also noted that it will remain cautious when considering future hikes by assessing incoming data such as the economy’s sensitivity and reaction to the higher borrowing rates. In its statement, the bank said, “Recent data have been strong, inflation is close to target, and the economy is operating roughly at capacity.” The rate increase by the Bank of Canada is expected to prompt Canada’s large banks to raise their prime lending rates, a move that will drive up the cost of variable-rate mortgages and other variable-interest rate loans.

The United Kingdom the Office for National Statistics reported that inflation in the UK has fallen for the first time since June—dipping to 3% (annualized) last month. The reading was a tick down from the 3.1% level set in November, which was a six-year high. The ONS acknowledged that it was too early to tell whether the decline was the start of a longer-term reduction in the rate of inflation. Separately, the Bank of England said that it believed inflation peaked at the end of last year, and should fall back to its target of 2% this year. The rate had been rising over the past year, partly due to the fall in the value of the British pound since the time of the Brexit vote, which has pushed up the cost of imported goods.

On Europe’s mainland, French Finance Minister Bruno Le Maire presented an upbeat view of France’s economic performance over the past year. According to Le Maire, France is likely to have exceeded its initial growth forecast and grown by 2% last year. Le Maire told business leaders that growth was solid and that 2018 should be even better than its forecasts. Last week, the Bank of France upgraded its estimate of growth in 2017 to 1.9% on the heels of strong economic data in the fourth quarter. Le Maire stated that business morale is at its highest level in 10 years and more than 250,000 jobs were added to the retail sector. However, Le Maire warned against becoming too optimistic. “Clarity demands that we recognize that daily life remains difficult for millions of French people, who are facing unemployment and poverty,” he said.

Germany again defended itself from criticism from the International Monetary Fund and Europe over its economic surplus. Germany has been criticized for not using its budget surplus to make further investments which could help other troubled Eurozone economies. Jens Weidmann, president of the German central bank responded stating, “Raising public spending in order to reduce Germany’s current account surplus would be a futile undertaking.” Based on macro-economic simulations, even if Germany were to increase its public investment by 1% of GDP over a two-year period, the models showed it would have a “very small” impact on other euro economies. In addition, the Bundesbank president noted that while Germany has been prudent to reach its current economic health, it must remain prudent due to demographic risks. Germany has an ageing population that will increase its costs for healthcare and pensions.

China reported its fastest economic growth in seven years, stating its gross domestic product grew by 6.9% in 2017. The reading beat Beijing’s official annual expansion target of 6.5%. In its release, the National Bureau of Statistics stated, “The economy has achieved stable and healthy development.” The report noted the value of Chinese exports grew by nearly 11% from the previous year, while the combined value of imports and exports rose by 14.2%. China’s trade surplus stands at near $447 billion. As the second-largest economy in the world, China’s is now about two-thirds the size of the United States – and gaining fast.

The Japanese government upgraded its assessment of the economy for the first time in seven months according Japan’s Cabinet Office. In its monthly report, the Cabinet Office stated, “The Japanese economy is recovering at a moderate pace”, a slightly more optimistic phrase than the one used in December, according to analysts. The wording in the report makes it more likely that the government will confirm that the economy is in its second-longest postwar expansion cycle. A Cabinet Office official stated, “With consumption picking up, improvements have been spreading (beyond the corporate sector) to households. This led to the upward revision.” Hiroshi Miyazaki, senior economist at Mitsubishi UFJ Morgan Stanley Securities stated, “The outlook for the global economy is good, and that influences things like Japan’s exports. In addition, there are no domestic factors that suggest Japan’s growth will falter.”

Finally: As the market continues to hit new highs, investment giant Merrill Lynch (ML) released a note to clients that investors are piling into equities in a big way. Per ML’s chief investment strategist Michael Hartnett, “FOMO”, or the “Fear of Missing Out”, has triggered a massive inflow into global equity funds over the last week and month. At $23.9 billion, it was the seventh largest weekly equity inflow on record, and led to the highest monthly inflow of $58 billion on record.

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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 22.25 from the prior week’s 23.25, while the average ranking of Offensive DIME sectors fell to 4.25 from the prior week’s 3.50. The Offensive DIME sectors maintained their already-substantial lead over the Defensive SHUT sectors. Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

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

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

Sincerely,

Dave Anthony, CFP®

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

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 33.80, up from the prior week’s 33.27, and exceeds the level reached at the pre-crash high in October, 2007. This value is in the lower end of the “mania” range. 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 85.00, up from the prior week’s 83.71.

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In the intermediate and Shorter-term picture:

The Shorter-term (weeks to months) Indicator (see Fig. 4) turned positive on December 27th. The indicator ended the week at 29, up 2 from the prior week’s 27. Separately, the Intermediate-term Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – was positive entering January, indicating positive prospects for equities in the first quarter of 2018.

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Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2), the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns – but the market has entered the low end of the “mania” range, and all bets are off in a mania. The only thing certain in a mania is that it will end badly…someday. The Bull-Bear Indicator (months to years) is positive (Fig. 3), indicating a potential uptrend in the longer timeframe. In the intermediate timeframe, the Quarterly Trend Indicator (months to quarters) is positive for Q1, and the shorter (weeks to months) timeframe (Fig. 4) is also positive. Therefore, with internal unanimity expressed by all three indicators being positive, the U.S. equity markets are rated as Positive.

In the markets:

U.S. Markets: U.S. stocks recorded a second week of solid gains in the new year as investors took in fourth-quarter earnings reports and celebrated some strong economic data. The Dow Jones Industrial Average added another 2% to last week’s rise closing up 507 points to 25,803. The technology-heavy NASDAQ Composite rose 124 points to close at 7,261, a gain of 1.7%. By market cap, small caps led the way with a 2% gain for the Russell 2000, followed by the large cap S&P 500 index, up 1.6%, and the mid cap S&P 400 index, up 1.5%.

International Markets: Canada’s TSX slipped a quarter of a percent, while across the Atlantic the United Kingdom’s FTSE gained 0.7%. On Europe’s mainland major markets were mixed. France’s CAC 40 rose 0.85%, and Italy’s Milan FTSE gained 2.9%, while Germany’s DAX retreated half a percent. In Asia, it was a similar story. Hong Kong’s Hang Seng added 1.9% to last week’s gain, along with China’s Shanghai Composite which rose 1.1%. Japan’s Nikkei closed down -0.26% following the prior week’s huge 4.2% surge. As grouped by Morgan Stanley Capital International, developed markets outpaced emerging markets by rising 1.6%, while emerging markets added 0.8%.

Commodities: Precious metals were mixed with Gold rising 0.95% to $1334.90 an ounce, while the traditionally more volatile Silver slipped -0.83% to $17.14 an ounce. In energy, West Texas Intermediate crude oil surged over 4.6% to close at $64.30 a barrel, while North Sea Brent crude rose 3.1% to $69.87 a barrel. The industrial metal copper, viewed by some analysts as an indicator of worldwide economic health due to its variety of uses, retreated -0.34%.

U.S. Economic News: The number of workers seeking initial unemployment benefits climbed by 11,000 to a nearly 4-month high of 261,000 last week, according to the Labor Department. The reading was the highest since the middle of September and well above the 248,000 forecast by economists. Volatility following the holiday season is not uncommon, with cutbacks of workers hired for temporary holiday-season jobs. The less-volatile monthly average of claims rose by 9,000 to 250,750. Continuing claims, which counts the number of people already receiving benefits, fell by 35,000 to 1.87 million. Overall, the U.S. labor market is starting the new year in its best shape in almost two decades. The nation’s unemployment rate sits at a 17-year low of 4.1%.

The number of job openings in the U.S. fell to a six-month low of 5.88 million in November, but it appears to be due to a surge in hiring that took place in the last few months of 2017. The Labor Department reported 5.5 million people were hired in November, the second largest increase in hiring since the end of the Great Recession. In the details, hiring in the “other services”, transportation, warehousing, and real estate categories all rose sharply in November. Companies still report that their biggest problem is a shortage of skilled labor. The U.S. created more than 2 million jobs in 2017 for the seventh year in a row, reflecting the second biggest hiring streak since World War II.

Sentiment among the nation’s small business owners slipped last month at the end of the strongest year on record, according to the National Federation of Independent Businesses (NFIB). The index of small-business optimism fell 2.6 points to 104.9 in December, but a slight pullback was expected—November’s reading was the index’s second highest level on record. In the details of the report, only the “Plans to Make Capital Outlays” and “Current Job Openings” sub-indexes posted gains, while all others were either flat or negative. Small businesses have been encouraged by the more business-friendly tone out of Washington. NFIB chief economist Bill Dunkelberg stated, “The 2016 election was like a dam breaking. Small-business owners were waiting for [more accommodating] policies from Washington, suddenly they got them, and the engine of the economy roared back to life.”

The cost of goods at the wholesale level fell last month for the first time in nearly a year and a half, according to the Labor Department. The Labor Department said its Producer Price Index (PPI) for final demand ticked down 0.1% in November—its first drop since August 2016. On an annualized basis, the PPI was up 2.6% in December, down from 3.1% in November. In the details, a decline in the cost of services was responsible for the downtick. Excluding food, energy, and trade services, core PPI ticked up 0.1%. On an annualized basis core PPI rose 2.3% through December. Economists note that the weaker PPI may weigh on inflation pressures going into the new year.

At the consumer level, higher rents and home prices were the prime causes of higher consumer prices last month. The Bureau of Labor Statistics reported the Consumer Price Index (CPI) rose a modest 0.1% last month with the majority of the increase due to the higher cost of housing. Stripping out gas and food, the so-called core rate of inflation rose a much sharper 0.3%–its highest reading in almost a year. The 12-month rate of inflation ticked down -0.1% to 2.1%. Core CPI on an annualized basis rose slightly to 1.8%. Jim Baird, chief investment officer at Plante Moran Financial Advisors stated, “Inflation has held relatively steady since late summer even as overall economic growth roared back.”

The cost of goods imported into the United States rose slightly last month, finishing the year with a 3% increase—its biggest gain in six years. The Bureau of Labor Statistics reported its Import Price index ticked up 0.1% following an increase in oil prices at the end of last year. Ex-energy, however, import prices actually fell -0.1% in December. Energy prices have a big impact on overall import inflation and accounted for the majority of the increase in 2017. Energy aside, the prices of other imports were up just 1.4% last year—still quite low by historical standards.

Sales at the nation’s retailers rose 0.4% in December marking their fourth consecutive gain monthly gain. Holiday sales put a spotlight on the growing divide between surging internet retailers and old-fashioned brick-and-mortar department stores. Sales at internet retailers jumped 1.2% in December, while department store sales tumbled by 1.1%–their biggest decline in a year and a half. Online sellers have been taking market share away from traditional retailers for years as Americans shift to shopping online. Following internet retailers, restaurants, home and garden centers, and home furnishings stores all performed well. Overall, the 2017 holiday season was quite good.

International Economic News: An internal memo to Canada’s finance minister from staff economists stated that while Canada is coming off a stellar year of economic growth, Canada’s economy is set to “wane”. The note for Finance Minister Bill Morneau forecasts average annual growth of just 1.7% this year through to 2022. The slower growth number has big implications for federal tax receipts and annual deficits—and suggests Morneau will have to be more conservative with spending in Canada’s budget for this year. Canada’s economy has been especially robust for about a year, averaging 3.7% growth, while the jobless rate recently hit a record low. The note, ordered by Monreau using internal economic analysis stated, “This very rapid pace of growth is not sustainable going forward as … transitory factors start to wane and interest rates will likely continue rising.”

In the UK, private think tank National Institute of Economic and Social Research (NIESR) reported the United Kingdom economy grew by 0.6% in the final quarter of 2017, up from 0.4% in the previous three months. The UK economy is on course to record its fastest growth rate since late 2016, and has had its longest spell of rising factory output in 23 years. Amit Kara, NIESR’s head of UK macroeconomic forecasting, said activity had picked up in the second half of the year following a weak start. “The recovery has been driven by both the manufacturing and the service sectors, supported by the weaker pound and a buoyant global economy, though construction output continues to lag,” Kara said. NIESR believes the stronger than expected performance of the economy, coupled with inflation above the 2% target, will lead to the Bank of England raising interest rates by a quarter point to 0.75% in May, with further increases every six months until mid-2021.

French union and business leaders have begun negotiations to overhaul France’s unemployment insurance rules, part of President Emmanuel Macron’s plan to modernize France’s welfare state and lower the country’s relatively high jobless rate. Mr. Macron pledged to extend unemployment insurance to the self-employed and to allow workers who resign to set up their own company to receive benefits. In exchange for tighter unemployment insurance controls, the French president has earmarked a 15 billion euro spending program to train the jobless. Mr. Macron is proposing a “flexisecurity” plan, which is a Nordic-style economic plan that makes it easier for companies to hire and fire but provides state support for workers between jobs.

Germany’s economy grew 2.2% last year—its fastest rate of expansion in 6 years. German statistics agency Destatis reported the expansion was in line with forecasts and driven primarily by big increases in the rate of growth in investments and exports. Growth was almost a full percentage point higher than the 1.3% annual average recorded over the past 10 years. In addition, Germany’s public finances posted a record surplus, fueling hopes for another strong showing next year. ING Diba bank economist Carsten Brzeski noted, it was “a strong performance by an economy firing on all cylinders.” He added that the same fundamentals which supported growth in 2016 and 2017 should still be in place in 2018.

Italian voters will be heading to the polls on March 4 where former Prime Minister Silvio Berlusconi will square off against the populist, anti-establishment Five Star Movement candidate Beppe Grillo. Italy continues to be the underperformer on the continent with a crushing debt load (130% of GDP) and the second-highest unemployment rate in Europe, just below Greece. In contrast to the Eurozone average of 8.7% unemployment, Italy’s rate was 11% in January. Even worse, youth unemployment is over 30% forcing Italy’s best and brightest to go to Germany, Britain, Canada, and other low unemployment countries to find work. This election is particularly important. As the Eurozone’s third largest economy, when it bogs down so does the rest of the Eurozone. And following Brexit, the last thing Germany and France want to see is another big member-state wanting to leave the European Union.

In Asia, China’s Premier Li Keqiang was upbeat on the Chinese economy, stating growth was about 6.9% in 2017 – higher than most market forecasts. The predicted figure would mark a rise from the 26-year low in annual GDP growth recorded in 2016 and exceeds economist forecasts of a 6.8% rise in 2017. The official figures are due to be released by China’s National Bureau of Statistics on January 18th. China’s economy posted strong results in the fourth quarter due to a construction boom and robust global demand for Chinese exports. Li said the unemployment rate in the country’s big cities was the lowest it had been for many years and that “the two-year fall in exports has been reversed”. The upbeat assessment was mirrored by private economists as well. Ding Shuang, chief Greater China economist at Standard Chartered Bank, said the Chinese economy was performing better than expected, boosted by an improved outlook for global growth and demand for Chinese goods and services.

The Bank of Japan’s December Tankan, or “Short-Term Economic Survey of Enterprises”, reported confidence in the Japanese economy is surging among Japanese businesses both large and small. Among large manufacturers, overall assessment of business conditions improved for the fifth straight quarter hitting an 11-year high of 25. Among small and medium-sized businesses, the confidence index reached 15—its highest level since 1991. Japan had its seven straight quarter of economic expansion, with the third quarter rising at an annualized rate of 2.5%. It was Japan’s longest quarterly growth streak since the government began compiling statistics in 1994.

Finally: As has been noted by one and all, 2017 was a year of amazingly low volatility and completely absent of pullbacks of any significance. But why? Standard & Poors (S&P) has documented what could be the hidden answer: extremely low correlations among stocks. In more usual times, stocks tend to move together, like the birds of a flock in flight. But in 2017, correlation was at record lows, meaning that fewer and fewer stocks were moving together, and more and more were zigging while others were zagging. This has the net effect of dampening overall volatility, as the opposing moves offset one another in the aggregate. “Record low correlations accompanied the relative lack of market swings, and indeed may be seen as a causal factor,” S&P wrote in its research report. “Markedly different reactions to the year’s major events created stronger diversification effects, dampening volatility in the benchmarks.”

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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 little changed at 23.25 compared to the prior week’s 23.50, while the average ranking of Offensive DIME sectors was unchanged from the prior week at 3.5. The Offensive DIME sectors maintained their already-substantial lead over the Defensive SHUT sectors. Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

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

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

Sincerely,

Dave Anthony, CFP®

FBIAS™ market update for the week ending 1/5/2018

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 33.27, up from the prior week’s 32.46, 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 83.71, up from the prior week’s 82.57.

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In the intermediate and Shorter-term picture:

The Shorter-term (weeks to months) Indicator (see Fig. 4) turned positive on December 27th. The indicator ended the week at 27, up 2 from the prior week’s 25. Separately, the Intermediate-term Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – was positive entering January, indicating positive prospects for equities in the first quarter of 2018.

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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 Q1, and the shorter (weeks to months) timeframe (Fig. 4) is also positive. Therefore, with internal unanimity expressed by all three indicators being positive, the U.S. equity markets are rated as Positive.

In the markets:

U.S. Markets: U.S. stocks got off to a strong start to the new year with all of the major indexes hitting new highs during the first week. The Dow Jones Industrial Average got the most attention by passing the 25,000 threshold while the NASDAQ Composite breached 7,000. The Dow Jones Industrial Average reversed last week’s fractional loss and gained 2.33% to close at 25,295. The technology-heavy NASDAQ Composite surged 3.38% to end the week at 7,136. By market cap, large cap’s outperformed with the S&P 500 rising 2.6%, while the midcap S&P 400 and small cap Russell 2000 added 1.9% and 1.6%, respectively.

International Markets: Canada’s TSX had its third consecutive weekly gain, up 0.9%. Across the Atlantic, the United Kingdom’s FTSE followed last week’s 1.25% gain by adding a further 0.5%. On the mainland, France’s CAC 40 reversed last week’s loss by rising 3%, while Germany’s DAX added 3.1%. Italy’s Milan FTSE surged over 4%. In Asia, China’s Shanghai Composite rose 2.6%, Japan’s Nikkei powered 4.2% higher, and Hong Kong’s Hang Seng added 3%. As grouped by Morgan Stanley Capital International, emerging markets added 4.3% while developed markets added 2.9%.

Commodities: Precious metals rallied for a fourth straight week with Gold rising 1% to $1322.30 an ounce. Silver, likewise, added 0.8% to close at $17.28 per ounce. Energy continued to rise for a third straight week with West Texas Intermediate crude oil now going for $61.44 a barrel, a gain of 1.7%. Bucking the trend, the industrial metal copper, seen by some analysts as an indicator of global economic growth due to its variety of uses slipped -2.15%–its first down week in four.

U.S. Economic News: The number of people seeking first-time unemployment benefits rose by 3,000 to 250,000 in the final week of 2017, according to the Labor Department. The more stable monthly average of claims rose 3,500 to 241,750. Both numbers remain far below the key 300,000 threshold that analysts use to indicate a “healthy” jobs market. Initial claims have remained under 300,000 for 147 consecutive weeks, its longest stretch since 1970. Continuing claims, which counts the number of people already receiving benefits, fell by 37,000 to 1.91 million. That number is reported with a one-week delay. The unemployment rate remained unchanged at 4.1%.

Payroll processor ADP reported the number of private-sector jobs increased by 250,000 last month, blowing away economists’ expectations of 188,000. Mark Zandi, chief economist for Moody’s Analytics stated, “The American job machine remains in full swing” and described the current rate of job growth as “unprecedented”. In the details, almost all of the gain was in the services sector, which accounted for 222,000 of the jobs. The trade/transportation/utilities category made up 45,000, a sign of the continued impact the growth of e-commerce is having on the job market. Zandi expects the momentum will continue into 2018, forecasting a gain of 2 million jobs this year, and that the jobless rate will decline further to the mid-3% range.

Manufacturing activity surged last month, according to the latest data from the Institute for Supply Management (ISM) manufacturing index. The ISM index rose 1.5 points to 59.7—the second highest reading in a year. The uptick in the index exceeded analysts’ expectations. In the details, sixteen of the eighteen industries tracked reported growth. Production rose 1.9 points to 65.8, while new orders jumped 5.4 points to 69.4–its fastest pace since January 2004. The only weak spot in the report was in the employment index which saw a slight drop to 57 from 59.7. Manufacturing is likely to get a boost this year from the $1.5 trillion tax cut approved by the Republican-controlled U.S. Congress last month. Manufacturing accounts for about 12% of the U.S. economy.

The strong ISM manufacturing reading was reinforced by IHS Markit’s manufacturing Purchasing Managers Index (PMI) which hit its highest level since March 2015. IHS Markit’s manufacturing PMI rose 1.2 points to 55.1 in December signaling solid improvement in the health of the sector. Output at manufacturers reached an 11-month high, with respondents attributing the increased production to more favorable demand conditions and increased new orders. In addition, conditions appear positive for the coming year. Chris Williamson, chief business economist at IHS Markit stated, “With business optimism about the year ahead running at its highest for two years in the closing months of 2017, companies are clearly expecting to be busier in 2018. The upbeat mood is underscored by an increased appetite to hire new staff, with the survey indicating that factory payroll numbers are rising at a rate not seen for over three years.”

In the services sector, the ISM non-manufacturing index slipped 1.5 points to 55.9 last month, the second down month in a row following the 12-year high set in October. In the release, ISM stated, “the majority of respondents’ comments indicate that they finished the year on a positive note. They also indicate optimism for business conditions and the economic outlook going forward.” In the details of the report, the new orders sub‑index slid 4.4 points to 54.3, signaling slower activity in the future. Both the jobs and gauge of prices paid sub‑indexes ticked up, 1 point and 0.1 point, respectively. Ian Shepherdson, chief economist for Pantheon Macro stated that December’s reading “looks more like a correction than the start of a trend decline”, noting that October’s and November’s readings “always looked too high to be sustained.”

Spending on construction projects rose 0.8% to an all-time high of $1.257 trillion in November according to the Commerce Department. Year-over-year construction spending was up 2.4%. In the details, private residential projects surged 1% to its highest level since February 2007, following a 0.3% increase in October. The increase was in line with the jump in homebuilding activity. On non-residential structures, spending rebounded 0.9% in November after a 0.2% decline in the prior month. Overall, spending on private construction projects increased 1.0% to a record high. Spending on public construction projects rose 0.2% in November after October’s 3.5% surge. State and local government projects increased 0.7%, while Federal construction spending fell -4.8%.

According to the latest minutes from the Federal Reserve’s Open Market Committee meeting, the Fed is still forecasting three rate hikes for this year, but the minutes show a distinct lack of unity with the projection. The minutes reveal essentially two viewpoints, of roughly the same size, that are both uncomfortable with the forecast—but for completely different reasons. On the dovish side, one camp believes that three rate hikes this year might be too aggressive; arguing that three rate hikes might prevent a “sustained” return to the Fed’s 2% inflation target. They felt interest rates didn’t have much further to rise before reaching the level that would no longer be “accommodative” for growth. The other, more hawkish camp, thought the forecast was too slow, noting that financial conditions had not tightened since the Fed started raising rates at the end of 2015 and that continued low rates risked financial instability. Currently, investors have pegged an approximately 70% chance of a rate hike at the central bank’s meeting in March.

International Economic News: Canadians haven’t been this confident about the economy since the Great Recession. The latest Bloomberg-Nanos consumer confidence index hit a level of 62.17, its highest level since the all-time high of 62.92 set at the end of 2009. The current mood is no surprise considering Canada’s robust jobs market. Canada’s unemployment rate fell to 5.9% in November– its lowest level in nearly a decade. In addition, wages have grown for 12 straight months. The recovery in energy prices is making consumers in the “Prairie provinces” more confident, according to pollster Nik Nanos. The province of Canada with the greatest economic optimism is Quebec, where the jobless rate is near all-time lows. Bloomberg suggested that the apparent arrival of foreign buyers in Montreal’s housing market may also be boosting consumer confidence in Quebec.

Across the Atlantic, Britain’s economy picked up speed at the end of last year and businesses were more upbeat regarding next year according to the latest IHS Markit/CIPS surveys of businesses. The survey signaled Britain’s economy likely grew 0.4-0.5% in the fourth quarter, slightly faster than the previous quarter—but the survey also suggested growth in Britain’s economy lagged that of the Eurozone during the same period. The economy largely withstood the immediate shock of the referendum decision in 2016 to leave the EU, but 2017 was a bit more difficult due to higher inflation.

On Europe’s mainland, French Economy and Finance Minister Bruno Le Maire said in an interview that France was looking to China and Russia to act as a “counterweight” to increasingly uncertain trade relations with the U.S. and Britain. The remarks are a further sign of how European powers are re-evaluating their traditional post-World War II ties. Mr. Le Maire stated, “We are moving from a world dominated by very exclusive trans-Atlantic relations towards a rebalancing.” According to Mr. Le Maire, France is looking to build a trade network that runs from Europe to Beijing via Moscow. French President Emmanuel Macron plans to launch this effort when he makes his first visit to China in January and attends the St. Petersburg International Financial Congress—Russia’s answer to the annual World Economic Forum in Davos, Switzerland.

In Germany, the number of people employed hit its highest-ever level at the end of 2017 and the unemployment rate fell to a record low, reflecting the economic boom in Europe’s largest economy that could push up wages and inflation. The jobless rate fell to 5.5% last month, its sixth consecutive decline according to the Federal Labor Agency. Germany’s economy has been on a strong footing, supported by domestic spending and solid global trade. Jens Kramer, an economist at NordLB in Hanover noted, “People are not afraid to spend money because unemployment is so low and that boosts domestic demand.” Kramer found it notable that wage growth continued to be “so moderate” after seeing effectively full employment for two years in Germany.

Top Chinese officials at the Communist Party’s Central Economic Work Conference decided to maintain China’s economic growth target for 2018 at “around 6.5%”, the same as last year. The forecast matched economists’ estimates. At the work conference, Chinese leaders criticized regulators and finance officials for not having done enough to prevent disorder in financial markets, the buildup in leverage and the growth of local debt. In addition, the group announced a three-year campaign to reign in financial risk, limit pollution, and reduce poverty. The world’s second-largest economy surpassed last year’s growth goal, coming in at 6.7% in the fourth-quarter.

Top Japanese business leaders are feeling more optimistic about the prospects for that nation’s economy during the upcoming year according to a recent survey. Yomiuri Shimbun surveyed the leaders of 30 major companies in Japan. Of the 30 surveyed, 28 reported that the economy is “recovering moderately”, and 26 predicted the economy will “recover moderately” in the next six months. The survey showed that a bright outlook is seen by almost all business sectors. Four holdout respondents predicted the economy would be at a “standstill” six months from now. Regarding predictions for 2018, 27 respondents stated they expected to see real economic growth of 1.0 to 1.5%. Japan’s government prediction is for a growth rate of 1.8% for fiscal 2018.

Finally: Bloomberg columnist and market analyst Barry Ritholtz noted that last year’s technical state of the market was “just plain weird”. Although 2017 was very volatile news-wise, what with daily Trump tweets, North Korean missile tests and a steady stream of terrorist attacks around the world, U.S. stock market volatility was its lowest in fifty years. Normally, markets are regularly rocked by headlines from around the world, but Ritholtz found you have to go back to 1964 to find a year with as small a maximum daily change as 2017. In addition, the S&P 500 total return index finished up every single month in a row for the last 13 months, another multi-decade record. The disconnect between the news and the markets was very unusual indeed – “just plain weird”.

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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 little changed at 23.50 compared to the prior week’s 23.75, while the average ranking of Offensive DIME sectors rose to 3.5 from the prior week’s 4.25. The Offensive DIME sectors maintained their already-substantial lead over the Defensive SHUT sectors. Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

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

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

Sincerely,

Dave Anthony, CFP®

FBIAS™ market update for the week ending 12/29/2017

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 32.46, down slightly from the prior week’s 32.56, and exceeds the level reached at the pre-crash high in October, 2007. Since 1881, the average annual return for all ten year periods that began with a CAPE around this level have been in the 0% – 3%/yr. range. (see Fig. 2).

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 82.57, down from the prior week’s 83.63.

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In the intermediate and Shorter-term picture:

The Shorter-term (weeks to months) Indicator (see Fig. 4) turned positive on December 27th. The indicator ended the week at 25, up 4 from the prior week’s 21. Separately, the Intermediate-term Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – was positive entering January, indicating positive prospects for equities in the first quarter of 2018.

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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 Q1, and the shorter (weeks to months) timeframe (Fig. 4) is now also positive. Therefore, with internal unanimity expressed by all three indicators being positive, the U.S. equity markets are rated as Positive.

In the markets:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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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 23.75 from the prior week’s 22.75, while the average ranking of Offensive DIME sectors rose sharply to 4.25 from the prior week’s 9.25. The Offensive DIME sectors expanded their already-substantial lead over the Defensive SHUT sectors. Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

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

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

Sincerely,

Dave Anthony, CFP®

FBIAS™ market update for the week ending 12/22/2017

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

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 83.63, up from the prior week’s 82.09.

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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 22, up 1 from the prior week’s 20. Separately, the Intermediate-term Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – was positive entering October, indicating positive prospects for equities in the fourth quarter of 2017.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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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 22.75 from the prior week’s 22.50, while the average ranking of Offensive DIME sectors was unchanged from the prior week at 9.25. The Offensive DIME sectors retained their substantial lead over the Defensive SHUT sectors. Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

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

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

Sincerely,

Dave Anthony, CFP®

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.

image

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).

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 82.09, up from the prior week’s 80.49.

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 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.

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Sincerely,

Dave Anthony, CFP®