SITREP for the week ending 5/26/17

Transcription

1 SITREP: n. a report on the current situation; a military abbreviation for - "SITuation REPort" CAVU: adj. a philosophy for life; the guiding principle for independent advice; an aeronautical abbreviation for Ceiling and Visibility Unlimited Quick week in review for the Busy Reader!! TIMEFRAME - The very big picture: Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best. The Cyclically-Adjusted Price to Earnings Ratio (CAPE) is at 29.59, up from the prior week s (See Fig. 2) The big picture: The U.S. Bull-Bear Indicator turned positive on July 8 th, and is in Cyclical Bull territory at 66.31, up from the prior week s (See Fig. 3) The intermediate picture: The intermediate (weeks to months) indicator turned negative on March 24th. The indicator ended the week at 24, unchanged from the prior week. (See Fig. 4) Separately, the Quarterly Trend Indicator - based on domestic and international stock trend status at the start of each quarter - was positive entering October, indicating positive prospects for equities in the fourth quarter of Timeframe Summary: Two of the three indicators are positive and one indicator is negative: The U.S. equity markets are rated as Neutral. OTHER - Institutional Investor Sentiment: The average ranking of Defensive SHUT sectors rose to from the prior week s 13.75, while the average ranking of Offensive DIME sectors slipped to from the prior week s The Defensive SHUT sectors slightly expanded their lead over the Offensive DIME sectors. The Markets: As always, this section has been updated with the latest facts and figures. It will help to understand what has been going on in the markets and economy over the last week. Chart of the Week (Page 6): Ever hear of the TSX Venture Exchange? (Different from the TSX we refer to in our weekly International Markets section.) Find out what the TSX Venture Exchange is, and see how it has done over the last 18 months. It is interesting to note that almost all of the return of this volatile index was realized in the first 8 months of the period shown on the chart. Please turn the page for our Weekly SITREP P a g e 1 12

2 THE VERY BIG PICTURE: In the "decades" timeframe, the question of whether we are in a continuing Secular Bear Market that began in 2000 or in a new Secular Bull Market has been the subject of hot debate among economists and market watchers since 2013, when the Dow and S&P 500 exceeded their 2000 and 2007 highs. The Bear proponents point out that the long-term PE ratio (called CAPE, for Cyclically-Adjusted Price to Earnings ratio), which has done a historically great job of marking tops and bottoms of Secular Bulls and Secular Bears, did not get down to the single-digit range that has marked the end of Bear Markets for a hundred years, but the Bull proponents say that significantly higher new highs are de-facto evidence of a Secular Bull, regardless of the CAPE. Further confusing the question, the CAPE now has risen to levels that have marked the end of Bull Markets except for times of full-blown market manias. See Fig. 1 for the 100-year view of Secular Bulls and Bears. Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best. The CAPE is at 29.59, up from the prior week s 29.26, and now exceeds the level reached at the pre-crash high in October, Since 1881, the average annual return for all ten year periods that began with a CAPE around this level have been just 3% a year (see Fig. 2). This further means that returns will likely come from the active management of portfolios than from passive buy-and-hold. Although a mania could come along and cause the CAPE to shoot upward from current levels (such as happened in the late 1920 s and the late 1990 s), in the absence of such a mania, buy-and-hold investors will likely have a long wait until the arrival of returns more typical of a rip-snorting Secular Bull Market. 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 66.31, up from the prior week s THE INTERMEDIATE PICTURE: The Intermediate (weeks to months) Indicator (see Fig. 4) turned negative on March 24th. The indicator ended the week at 24, unchanged from the prior week. Separately, the Quarterly Trend Indicator - based on domestic and international stock trend status at the start of each quarter was positive entering October, indicating positive prospects for equities in the fourth quarter of TIMEFRAME SUMMARY: In the Secular (years to decades) timeframe (Figs. 1 & 2), whether we are in a new Secular Bull or still in the Secular Bear, the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns. The Bull-Bear Indicator (months to years) is positive (Fig. 3), indicating a potential uptrend in the longer timeframe. The Quarterly Trend Indicator (months to quarters) is positive for Q4, and the Intermediate (weeks to months) timeframe (Fig. 4) is negative. Therefore, with all three indicators positive, the U.S. equity markets are rated as Neutral. P a g e 2 12

3 A GLOBAL LOOK AT THE MARKETS AND ECONOMY: Domestic Markets: Stocks recorded solid gains for the week, lifting the S&P 500 index and the Nasdaq Composite Index to record highs. The Dow Jones Industrial Average rose 275 points to close at 21,080, a gain of 1.3%. The tech heavy Nasdaq Composite added over 2% by rising 126 points, closing at 6,210. By market cap, large caps again showed relative strength over smaller caps. The large cap S&P 500 index rose 1.4%, while the S&P 400 mid cap index and Russell 2000 small cap index added smaller gains, 0.9% and 1.1% respectively. International Markets: Canada s Toronto Stock Exchange (TSX) fell for a fifth straight week by retreating -0.27%. In contrast, the United Kingdom s FTSE rallied for its fifth straight week by rising 1%. On Europe s mainland, France s CAC 40 rose 0.23%, while German s DAX pulled back -0.29%. Italy s Milan FTSE ended the week down -1.6%. In Asia, major markets were green across the board. China s Shanghai Stock Exchange rose for a second week, adding 0.63%, while Japan s Nikkei rose half a percent. Hong Kong s Hang Seng rose for a fourth straight week by rising 1.8%. As grouped by Morgan Stanley Capital International, emerging markets rose 1.4%, while developed markets fell -0.1%. Commodities: Precious metals traded higher for a second week. Gold added 1.16% or $14.50 to close at $1, an ounce. Silver did even better, surging 3.1% and closing the week at $17.32 an ounce. However, the industrial metal copper (thought by some analysts to be an indicator of global economic health) retreated -0.6%. Oil retreated for the first time in three week, falling -1.7% to $49.80 per barrel for West Texas Intermediate crude. Domestic Economic News Labor: The number of Americans applying for new unemployment benefits continued to drop to levels not seen in almost 50 years an indication that the U.S. labor market remains quite healthy after eight years of economic expansion. The Labor Department reported initial jobless claims rose 1,000 to 234,000 for the week ended May 20. The smoothed four-week average of new claims fell 5,750 to 235,250 to its lowest level since April New applications for benefits have remained under the 300,000 threshold for 116 straight weeks, its longest run since the early 1970 s. Continuing claims, the number of people already receiving benefits, rose by 24,000 to 1.92 million. Continuing claims have now remained under two million for six straight weeks a feat that hasn t occurred since The U.S. unemployment rate stands at 4.4%, while U.S. businesses continue to complain that they can t find enough skilled workers for open positions. Domestic Economic News Housing: Sales of newly constructed homes retreated in April following March s strong pace. The Commerce Department reported new-home sales ran at a seasonally-adjusted annual rate of 569,000 last month. That missed analyst expectations of 610,000. Last month s figures were down 11.4% from March, but remained 0.5% higher than the same time last year. In April, the median sales price for a new home was $309,200, down from $318,700. The slower sales pace also increased the months worth of inventory on the market. April s inventory was 5.7 months worth of homes available, up from 4.9 months in March. Traditionally, the U.S. housing market has about 6 months worth of inventory available. It was a similar story in existing home sales. Sales of previously-owned homes weakened in April after a strong first quarter. Existing home sales ran at a seasonally-adjusted 5.57 million annual rate, according to the P a g e 3 12

4 National Association of Realtors (NAR). That was a decline of 2.3% from March s sales pace, but 1.6% higher than the same time last year. Economists had estimated a 5.6 million annualized sales pace. Decreases were widespread, affecting every region except the Midwest (where sales were up 3.8%). In the Northeast, sales fell 2.7%, while in the South they were down 5%. The West was down 3.3%. Danielle Hale, the NAR s managing director of research, attributed the weaker reading to the dwindling inventory of homes available for sale at reasonable prices. Inventory was down 9% compared to last April, and there is only a 4.2 months supply of homes available on the market. From listing to contract, homes were on the market for an average of just 29 days the lowest since the NAR began tracking that metric in The median national sales price of existing homes was $244,800, a 6% increase from a year ago. It was the 62 nd consecutive month of annualized price gains. Domestic Economic News Manufacturing: American factories were busier and job prospects better last month, driving up the Chicago Federal Reserve s measure of national economic activity. The Chicago Fed s national activity index rose 0.42 point to 0.49 last month to its highest reading since March The smoothed three-month average of the index, which offers a clearer picture of trends in economic activity, rose to 0.23, up from 0. The national activity index is a weighted average of 85 economic indicators, devised so that zero represents on-trend growth and a three-month average below -0.7 suggests a recession has begun. This latest reading is seen by analysts as adding to the prevailing opinion that the Federal Reserve will raise interest rates again at its policy meeting next month. Orders for long-lasting goods meant to last at least three years, so-called durable goods, retreated in April for the first time in five months. Durable goods orders dropped -0.7% last month amid widespread weakness in heavy industry, according to the Commerce Department. Economists had expected a larger 1% decline. The decline followed four straight months of gains. Stripping out the volatile aircraft and military equipment orders, orders were flat for a second straight month. Stephen Stanley, chief economist at Amherst Pierpont Securities released an optimistic research note, writing Surveys suggest that businesses are ecstatic about the change in tone in Washington and are prepared to unleash a flurry of pent-up investment, but they are holding off until there is more clarity on corporate tax reform and other elements of the new administration s fiscal agenda. Research firm IHS Markit reported its manufacturing Purchasing Managers Index (PMI) fell 0.3 point to 52.5 still in expansion territory but an eight-month low. Manufacturers saw a surge that began at the end of last year and continued through early 2017 before easing up recently. However, on the services PMI side, Markit said its U.S. services index rose to a four-month high of 54 from The services side of the economy makes up about 80% of the nation s workforce in fields such as finance, retail, medical care, real estate, and travel. Chris Williamson, chief business economist at IHS Markit wrote, May saw an encouraging upturn in service-sector growth to the fastest so far this year, buoyed by rising domestic demand. Manufacturers, on the other hand, reported the smallest rise in production since last September amid lackluster export sales. Domestic Economic News GDP 1 st Quarter Update: The Commerce Department released its latest update for first quarter GDP and it turns out the economy wasn t as bad as it looked originally. The government raised its growth rate to 1.2% from the original 0.7%. The first quarter s slowdown was largely blamed on a pullback in consumer spending and business inventory production areas which appear to be stronger now. On a negative note, corporate profits declined for the first time in three quarters. Adjusted pre-tax profits fell at a 1.9% annual rate in the first quarter, but remain up 3.7% from the same time last year. Fixed business investment was also revised upward, from a 10.4% increase to 11.9%--largely due to more activity in the oil sector. Based on the improvement, analysts are expecting a P a g e 4 12

5 stronger second quarter. Michael Pearce of Capital Economics wrote in a research note, While business investment is likely to make a smaller contribution to growth in the second quarter, we still expect GDP growth to be between 2.5% and 3%. International Economic News: The Bank of Canada held its overnight interest rate unchanged at 0.5%, but hinted at its first rate hike in almost seven years in its statement. In its statement the bank said the global economy is gaining traction and there are signs business investment may be poised to pick up now that the collapse in oil prices has largely passed. Growth will gradually strengthen and broaden over the projection horizon, the bank said. The generally upbeat tone of the statement suggests that Bank of Canada Governor Stephen Poloz and his colleagues may be inching closer to an interest rate hike. Bank of Montreal chief economist Douglas Porter said in a note, The main message is that the bank now clearly sees the balance leaning more to the side of raising rates, rather than cutting them. The United Kingdom s economy slowed more than initially estimated in the first quarter, rising only 0.2% rather than the 0.3% originally reported. Growth in services, the largest part of the economy, and production were both revised down. The Office of National Statistics said in its statement, UK GDP growth in quarter one 2017 has been revised down by 0.1 percentage points from the preliminary estimate, mainly due to broadbased downward revisions within the services sector. The report from the Office for National Statistics also showed that exports fell 1.6% and net trade knocked 1.4% off GDP. Consumer spending weakened, with household activity adding the least to the economy since New French President Emmanuel Macron and his Labor Minister Muriel Penicaud started their first round of meetings with France s unions and business organizations in an attempt to find common ground in simplifying France s burdensome labor rules and letting individual companies negotiate wages rather than follow industrywide agreements. France s complex labor rules have frustrated French presidents for at least the last 20 years as the country s powerful unions opposed previous efforts to reduce job protections for their members. Macron signaled during his campaign that making French labor markets more flexible will be central to his strategy for boosting growth. German businesses reported stronger-than-expected activity in May. Research firm IHS Markit s composite Purchasing Managers Index (PMI) rose 0.5 point to 57.3 its highest level in more than six years. The increase was driven by better than expected reports from the manufacturing sector. In addition, the Munichbased IFO institute described German business leaders sentiments as a champagne mood, lifting the widelywatched IFO Business Sentiment Index to an all-time high. IFO s noted that moods in the manufacturing industry appear to be exuberant. "Many manufacturers are planning to ramp up production, and prices are expected to rise," IFO said. China s credit rating was downgraded by Moody s for the first time in almost three decades over fears that rising debts and slowing growth will weaken the world s second largest economy. The agency lowered China s sovereign rating one tick from Aa3 to A1, while the outlook was raised to stable from negative. Moody s said the downgrade reflected expectations that China s financial strength will erode somewhat over the coming years, with economy-wide debt continuing to rise as potential growth slows. The last time Moody s cut China s credit rating was in 1989, the year of the Tiananmen Square protests. Beijing was quick to respond with the finance ministry accusing Moody s of overestimating the risks facing the economy. P a g e 5 12

6 (2017 sources: all index return data from Yahoo Finance; Reuters, Barron s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, stocksandnews.com, marketwatch.com, wantchinatimes.com, BBC, 361capital.com, pensionpartners.com, cnbc.com, FactSet; Figs 1-5 source W E Sherman & Co, LLC) CHART OF THE WEEK: Have you ever heard of the TSX Venture Exchange? Most US investors have not, but it turns out to be the hottest investing venue in all of North America over the last 18 months. Headquartered in Calgary, Alberta with offices in Toronto, Vancouver, and Montreal the exchange is all electronic (like the NASDAQ in the US), so there is no trading floor. The TSX Venture Exchange is the home of many of Canada s smaller resource companies, such as precious metals mining, uranium mining, smaller energy companies, and even high-tech startups. Oh yeah, and the TSX Venture Exchange Index is up 71% over the last 16 months, more than triple the S&P 500 s gain! P a g e 6 12

7 INSTITUTIONAL INVESTER SENTIMENT: 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 from the prior week s 13.75, while the average ranking of Offensive DIME sectors slipped to from the prior week s The Defensive SHUT sectors slightly expanded their lead over the Offensive DIME sectors. Note: these are ranks, not scores, so smaller numbers are higher ranks and larger numbers are lower ranks. SUMMARY: The US has led the worldwide recovery, and continues to be among the strongest of global markets. However, the over-arching Secular Bear Market may remain in place globally, despite the superior US performance. Because the world may still be in a Secular Bear, we have no expectations of runs of multiple double-digit consecutive years, and we expect poor market conditions to be a frequent occurrence. Nonetheless, we remain completely open to any eventuality that the market brings, and our strategies, tactics and tools will help us to navigate whatever happens. CAVU Financial LLC, any of its representatives, or any of its affiliates specifically represent that the information contained in this document does not constitute an offer to sell or the solicitation of an offer to buy any security or other investment or an offer to provide investment services of any kind. While every effort is made to provide timely and accurate information, neither CAVU Financial LLC, nor its third party content providers shall be liable for any error, inaccuracies or delays in content, or for any actions taken in reliance thereon. PLEASE REFER TO IMPORTANT DISCLOSURES AT THE END OF THIS DOCUMENT P a g e 7 12

8 Fig. 1 Fig. 2 P a g e 8 12

9 Fig. 3 Fig. 4 P a g e 9 12

10 TYPE 1 = US Styleboxes; lower volatility TYPE 2 = International Equities and Hard Assets; moderate volatility TYPE 3 = Sectors; higher volatility Fig. 5 P a g e 10 12

11 IMPORTANT DISCLOSURES: >This material was prepared by W E Sherman & Co, LLC. >The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Investing involves risk including loss of principal. >There is no assurance that the investment objective of any investment strategy will be attained. An investor trading in stocks according an active management strategy may incur greater transaction costs than if the investor follows a Buy & Hold strategy. >International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. >The fast price swings in commodities and currencies will result in significant volatility in an investor s holdings. >Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price. INDEX REFERENCE GUIDE: The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors. The NASDAQ Composite Index measures all NASDAQ domestic and non-u.s. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index. S&P 500 Index measures performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The S&P 500 covers 80% of the U.S. market encompassing more than 100 industry groups. S&P MidCap 400 Index measures the performance of mid-sized companies. This Index represents about 7% of U.S. market cap. Russell 2000 SmallCap Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represents approximately 8% of the total market capitalization of the Russell 3000 Index. The S&P/TSX Composite Index contains stocks of the largest companies on the Toronto Stock Exchange (TSX). The index is calculated by Standard and Poor's, and contains both common stock and income trust units. Additions to the index are generally based on quarterly reviews. The DAX is a stock index that represents 30 of the largest and most liquid German companies that trade on the Frankfurt Exchange. The prices used to calculate the DAX Index come through Xetra, an electronic trading system. A free-float methodology is used to calculate the index weightings along with a measure of average trading volume. The United Kingdom FTSE 100 Index comprises the 100 most highly capitalized Blue Chip companies listed on the London Stock Exchange. The France CAC 40 Index represents a capitalization-weighted measure of the 40 most significant values among the 100 highest market caps on the Euronext Paris. The Italy Milan FTSE (Milano Italia Borsa) is the benchmark stock market index for the Borsa Italiana, the Italian national stock exchange, and consists of the 40 most-traded stock classes on the exchange. The China Shanghai SSE Composite Index is a stock market index of all stocks (A and B shares) that are traded at the Shanghai Stock Exchange. The Hang Seng Index is a free float-adjusted market capitalization-weighted stock market index in Hong Kong, and is used to record and monitor daily changes of the largest companies of the Hong Kong stock market. It is the main indicator of the overall market performance in Hong Kong, made up of 50 constituent companies represent about 58% of the capitalization of the Hong Kong Stock Exchange. The Nikkei 225 more commonly called the Nikkei, is a price weighted stock market index for the Tokyo Stock Exchange. The Developed Markets Index (MSCI World Index) captures large and mid cap representation across 23 Developed Markets countries. With 1,654 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country. MSCI Emerging Market Index is Morgan Stanley Capital International's float-adjusted market capitalization index composed of the following 25 emerging market country indexes: Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Jordan, Korea, Malaysia, Mexico, Morocco, Pakistan, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey. P a g e 11 12

12 NAR Pending Home Sales Index is a leading indicator of housing activity, measures housing contract activity, and is based on signed real estate contracts for existing single-family homes, condos and co-ops. Because a home goes under contract a month or two before it is sold, the Pending Home Sales Index generally leads Existing Home Sales by a month or two. The Purchasing Managers Index (PMI) is an indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment. The PMI U.S. Services Index release is published monthly by Markit Economics. The data are based on surveys of over 400 executives in private sector service companies. The surveys cover transport and communication, financial intermediaries, business and personal services, computing & IT, hotels and restaurants. P a g e 12 12