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Market/Model Commentary
The ECAM Composite 5-Factor model remained RED this week as annotated below.
- There have been substantial negative changes to several sub-components within our 5-Factor model over the past several months. This shift has altered the 5-Factor model from GREEN (from 09 Dec 2016) to YELLOW (as of 12 Oct 2018) to RED (as of 26 Oct 2018).
- Global equity markets reverted from a "globally synchronized recovery" regime in late 2017 to a "globally disorganized recovery" regime from early Feb 2018 to early Oct 2018. As we have noted for many months, there has been a large divergence between U.S. growth/equity performance and ex-U.S. growth/equity performance. The divergence was primarily a function of the global trade/tariff situation which allowed the U.S. economy to continue to advance while other economies declined. However, it appears now we may have entered a "globally synchronized deceleration" regime given our expectation U.S. economic data has peaked.
- Global equity markets bounced from their recent lows (as we advised) and remained steady his past week. The bounce took us back into the lower boundary of the previous trading zone which must now act as firm support. Any breakdown below this zone would be a very bearish development.
- Given the current undecided picture it is not recommended to make portfolio changes until the equity market direction becomes clear.
Much our technical analysis is done using a number of global ETFs as proxies. Below is a chart of one of the global equity ETFs we use as benchmarks for global equity funds (the Vanguard Total World Stock ETF).
The price action since the decline from late September to present has formed a classic Head & Shoulders bottoming formation. We have detailed the formation details on the chart but should global equities move upwards from recent lows and exceed the "neckline" we would target a +10% return from present levels.
It is premature to make judgments upon the pattern (as it has yet to activate) but it provides sufficient prospect such that we will not alter our "GREEN" model allocations until we let this play out.
The price action since the decline from late September to present has formed a classic Head & Shoulders bottoming formation. We have detailed the formation details on the chart but should global equities move upwards from recent lows and exceed the "neckline" we would target a +10% return from present levels.
It is premature to make judgments upon the pattern (as it has yet to activate) but it provides sufficient prospect such that we will not alter our "GREEN" model allocations until we let this play out.
ECAM 5-Factor Model
(as of market close 16 November 2018)
|
Economic Model
Valuation Model Technical Model Sentiment Model Financial Stress Model |
YELLOW
RED RED YELLOW GREEN |
|
RED (as of 26 October 2018) |
"Slow and Steady wins the race"
The Hare and the Tortoise
Aesop (Greek slave & fable author 620 BC - 560 BC)
"Technical Analysis is a windsock, not a crystal ball"
Carl Swenlin
The Hare and the Tortoise
Aesop (Greek slave & fable author 620 BC - 560 BC)
"Technical Analysis is a windsock, not a crystal ball"
Carl Swenlin
Weekly Summary
Global equity returns were modestly lower over the past week with under-performance in the U.S. and Europe offset by flat returns in Asia Pacific and modestly positive returns in Emerging markets.
U.S. equities moved lower for the week, but ended on a high note as the S&P 500 Index broke a five-day losing streak on Thursday and then closed higher Friday as well, partly boosted by positive comments on U.S.-China trade talks. Oil snapped a record 12-day losing streak on Thursday, but falling prices continued to drag on the energy sector, while technology underperformed once again amid disappointing earnings reports from several high-profile names and a continued slide in heavily-weighted Apple.
Outside the U.S., Brexit took center stage with officials reaching a tentative plan for the U.K.’s withdrawal from the European Union following more than a year of negotiations. However, regional stock indexes dropped more than 2% on the week amid a resurgence in uncertainty tied to the deal. Investors’ angst stemmed from Prime Minister Theresa May’s struggles to gain buy-in for her “final” plan with multiple members of her own party stepping down since it was unveiled, including Brexit Secretary Raab. In other developments, the Italian budget proposal remained deadlocked with the European Commission refusing to allow Italy to move towards a 2.4% deficit target for 2019 (from its previously mandated 0.8% level). It appears EU sanctions may be forthcoming and will be the 1st time an EU country has been penalized for exceeding budget mandates.
In Asia, Chinese stocks finished up more than 3%, buoying emerging markets, after government officials stepped up policy support following a series of data that showed its economy is under increasing downward pressure. Indicators released midweek showed October fixed-asset investment and industrial production both increased more than expected, though retail sales grew at their slowest pace since May and lagged forecasts. In Japan the Cabinet Office reported Japan’s economy contracted 0.3% in 3Q18.
All eyes are now looking at the upcoming G-20 meeting in Bueno Aires on 30 Nov-01 Dec to see if there is any movement between the U.S. and China on the trade/tariff issues currently impacting global growth.
At weeks end global equities returned to the lower boundary of their 2018 trading range (defined by the Feb-Mar 2018 lows and the subsequent rebound levels). There remains significant divergence between U.S. equity market performance and other global regional equity returns and any signs of progress in the current trade wars between the U.S. and the rest of the world would be met with massive equity buying. Obviously this is a binary event which is very difficult to predict. As a reminder, global equities can be thought of as being a table with 4 legs. Three of those legs (Europe, Asia Pacific and Emerging markets) have broken and it has only been the U.S. leg that was keeping global equities positive.
U.S. equities moved lower for the week, but ended on a high note as the S&P 500 Index broke a five-day losing streak on Thursday and then closed higher Friday as well, partly boosted by positive comments on U.S.-China trade talks. Oil snapped a record 12-day losing streak on Thursday, but falling prices continued to drag on the energy sector, while technology underperformed once again amid disappointing earnings reports from several high-profile names and a continued slide in heavily-weighted Apple.
Outside the U.S., Brexit took center stage with officials reaching a tentative plan for the U.K.’s withdrawal from the European Union following more than a year of negotiations. However, regional stock indexes dropped more than 2% on the week amid a resurgence in uncertainty tied to the deal. Investors’ angst stemmed from Prime Minister Theresa May’s struggles to gain buy-in for her “final” plan with multiple members of her own party stepping down since it was unveiled, including Brexit Secretary Raab. In other developments, the Italian budget proposal remained deadlocked with the European Commission refusing to allow Italy to move towards a 2.4% deficit target for 2019 (from its previously mandated 0.8% level). It appears EU sanctions may be forthcoming and will be the 1st time an EU country has been penalized for exceeding budget mandates.
In Asia, Chinese stocks finished up more than 3%, buoying emerging markets, after government officials stepped up policy support following a series of data that showed its economy is under increasing downward pressure. Indicators released midweek showed October fixed-asset investment and industrial production both increased more than expected, though retail sales grew at their slowest pace since May and lagged forecasts. In Japan the Cabinet Office reported Japan’s economy contracted 0.3% in 3Q18.
All eyes are now looking at the upcoming G-20 meeting in Bueno Aires on 30 Nov-01 Dec to see if there is any movement between the U.S. and China on the trade/tariff issues currently impacting global growth.
At weeks end global equities returned to the lower boundary of their 2018 trading range (defined by the Feb-Mar 2018 lows and the subsequent rebound levels). There remains significant divergence between U.S. equity market performance and other global regional equity returns and any signs of progress in the current trade wars between the U.S. and the rest of the world would be met with massive equity buying. Obviously this is a binary event which is very difficult to predict. As a reminder, global equities can be thought of as being a table with 4 legs. Three of those legs (Europe, Asia Pacific and Emerging markets) have broken and it has only been the U.S. leg that was keeping global equities positive.
As the below graphs show, we have now exited the blackout period associated with 3Q18 earnings reports and will remain within a strong period for corporate stock buybacks through to 17 Dec. This should act as a tailwind for U.S. equities over the near term and thus provide support for global equites.
An interesting statistic which lends a bullish "floor" to U.S. equities into the end of 2018 is since World War II the S&P 500 index has never closed below its October lows during a midterm year into year-end (18/18 periods). The 2018 October low occurred on Monday, 29 Oct @ 2641 close.
Going forward into 2019, historically the S&P 500 index has been higher 1 year after the midterms for 18 straight times since 1946.
An ongoing concern is the recent decline in global economic (ex-U.S.) growth. Below we show the latest Ned Davis Research Global Recession Probability model which triggered a "high risk" warning recently. This is a seriously negative indication which drastically increases the probability (92.11%) a global recession is forthcoming.
Below that is the latest U.S. Recession model which clearly shows the U.S. is no where near the possibility of a recession. This is an interesting divergence as the last time these 2 models disagreed (mid-2014 to early 2016) U.S. equities continued to advance while global ex-U.S. equities remained weak and range-bound. This is not encouraging for global equity mutual funds which must have exposure to all regions.
Despite the recent shift to RED within our 5-Factor model, we continue to monitor and suggest no immediate changes to portfolio positions are indicated until we see how the expected bounce progress. The earnings season thus far has been strong and historically equity markets tend to do well post the U.S. midterm elections (06 Nov).
WEEKLY ASSET CLASS MONITOR
|
Asset Class
|
Region
|
ETF Ticker
|
Weekly
Return |
Year-to-Date
Return |
|
Equities
|
World
U.S. Europe Asia Pacific Emerging Market |
VT
VTI VGK VPL EEM |
-0.88%
-1.47% -1.41% +0.02% +2.76% |
-3.08%
+3.40% -9.63% -9.65% -12.63% |
|
Bonds
|
U.S. Bonds
International Bonds |
BND
BNDX |
+0.41%
+0.04% |
-2.13%
+1.19% |
|
Real Estate Equities
|
U.S. Real Estate
International Real Estate |
VNQ
VNQI |
+0.24%
+1.03% |
+0.61%
-7.98% |
|
Precious Metals Equites
|
Global Gold Miners
Global Silver Miners Gold Bullion ETF Silver Bullion ETF Platinum Bullion ETF |
RING
SIL GLD SLV PPLT |
+2.52%
+2.36% +1.00% +1.58% -1.02% |
-19.68%
-26.78% -6.49% -15.38% -9.38% |
As shown below, global equites had remained range-bound from early-February through mid-October before the recent breakdown. This past week they remained back within the lower boundary of their trading range as shown on the chart.
A breakdown of current regional divergences in equity performance is as follows:
A breakdown of current regional divergences in equity performance is as follows:
- Global equites have now bounced back up to the lower boundary of the consolidation zone they had been trapped within since early Feb. Price remains below the descending 200 day moving average. (Neutral)
- U.S. equities had broken to new all-time highs but have now returned to the consolidation zone. As long as they do not break below the early-Feb lows they remain bullish. Total U.S. market index closed above the flat 200 day moving average. (Bullish)
- European equites remain below their trading range. They remain below the descending 200 day moving average. (Bearish)
- Asia Pacific remain below their trading range and remain below the descending 200 day moving average. (Bearish)
- Emerging market equities remain below their recent trading range and remain below the descending 200 day moving average. (Bearish)
Below is the year-to-date returns for each of the monitored equity regions. As can be seen, as of Fridays market close only the U.S. equity region remain positive thus far in 2018 (with Europe, Asia Pacific & Emerging Markets having fallen to negative year-to-date returns). Overall global equities have delivered modestly negative returns thus far in 2018 (-3.08%) on the back of the U.S. market strength continuing to counter Europe/Asia Pacific/EM weakness.
Since topping in late January, 2018 there has been a tremendous difference in performance between U.S. equities (Wilshire 5000 Composite index shown in BLUE) and Chinese equities (Shanghai Composite index shown in RED). Whether a function of the trade wars or otherwise, this divergence continues to act upon global equites (Dow Jones Global index shown in dotted BLACK).
As mentioned previous, the U.S. midterm elections many times lead to large equity market gains into the end of the year. Below is a chart showing the historical U.S. equity performance during midterms from 1950-2018. Note U.S. equities tend to be weak into mid-October and then begin to move upwards into year end.
The below chart shows all midterm years since 1962. Note since 1962 every midterm year has had negative market returns into the midterm elections and post-elections there has not been a following calendar year with a negative market return (the weakest gains from midterm lows to subsequent yearly gains was +16% in 2014). Also it is interesting to note this years market correction (-3.5%) is the smallest midterm market decline in the data set.
Below is our monitor of the top 6 U.S. technology companies and their recent market performance. Most mutual funds hold large positions in the following companies and should U.S. Large-cap technology companies begin to falter it would likely signal an end to the bull market (we consider these "Big 6" to be the the "canary in the coal mine" stocks):
- Alphabet (Google)
- Apple
- Amazon
- Microsoft
- Netflix
On July 25 Facebook was crushed on earnings outlooks. We have noted the event with a red vertical dotted line and one can note it appears this may have been the "high-watermark" for large cap tech companies. If so, this has the potential to begin to unwind quickly into the start of a bear market decline.
As mentioned previous, we continue to monitor the divergence between US equity market performance vs. the rest of the world. This is reflected below in the stark divergence between the U.S. Wiltshire 5000 index (BLUE) vs. the MSCI World ex-US Index (RED) year-to-date. Clearly trade war potentiality has made investors much more U.S. equity oriented since 03 May 2018.
The End of Global Quantitative Easing
The #1 concern that remains on our mind as we move towards the end of 2018 is how equity markets will react to the steady decline in global liquidity associated with Central Bank balance sheet normalization.
As is well documented, since the global financial crisis of 2008 central banks have injected trillions of dollars into the world's financial system by way of an untried/unproven financial engineering experiment known as "Quantitative Easing" (purchase of assets by way of printing money to support the equity/bond markets) . However, central banks are determined to shrink their balance sheets as per the below graph. At the current pace, it is projected in the 1st quarter of 2019 net liquidity will begin to be removed from the global financial system.
Below we have noted the various movements in QE since 2007. Each boxed area shows where central banks expanded their balance sheets and the subsequent global equity market gains. Of particular note is the short period in early 2015 (circled) where central bank liquidity reverted to "Quantitative Tightening" (net balance sheet reduction on a 12 month rate of change). This short period of reduction led to the largest equity market declines (-20%) of the current bull market.
As 2019 approaches we are mindful a repeat of 2015 (or worse) is highly likely.
As is well documented, since the global financial crisis of 2008 central banks have injected trillions of dollars into the world's financial system by way of an untried/unproven financial engineering experiment known as "Quantitative Easing" (purchase of assets by way of printing money to support the equity/bond markets) . However, central banks are determined to shrink their balance sheets as per the below graph. At the current pace, it is projected in the 1st quarter of 2019 net liquidity will begin to be removed from the global financial system.
Below we have noted the various movements in QE since 2007. Each boxed area shows where central banks expanded their balance sheets and the subsequent global equity market gains. Of particular note is the short period in early 2015 (circled) where central bank liquidity reverted to "Quantitative Tightening" (net balance sheet reduction on a 12 month rate of change). This short period of reduction led to the largest equity market declines (-20%) of the current bull market.
As 2019 approaches we are mindful a repeat of 2015 (or worse) is highly likely.
Hedgeye Risk Management LLC
As we appear to be approaching a potential turning point in global growth, we continue to utilize global macroeconomic data from Hedgeye Risk Management LLC to supplement our own macroeconomic model. Hedgeye is a U.S. based company which monitors 100's of global macro data points and uses a predictive tracking algorithm to attempt to forecast growth, inflation and policy (GIP) for 50 countries. Using the algorithm, they attempt to "crystal ball" where markets may go up to 4 quarters in advance.
Below is their current projections for the top 20 OECD economies (as of 31 October 2018).
Below is their current projections for the top 20 OECD economies (as of 31 October 2018).
It can be seen their algorithm current projects the U.S. to enter Quad 4 (slowing growth, falling inflation) in 4Q18-1Q19 while pockets of strength are currently indicated during the same time frame for Europe (Germany/Spain) and the UK. Should there model be correct, it would be expected European equities would outperform both U.S. and Asia Pacific equities into early 2019.
Below is their suggest asset exposure for each of Quadrants:
As can be seen, once in Quad 3 or Quad 4 the top performing asset class is fixed income (long duration bonds) and defensive equities (REITs, utilities, healthcare, consumer staples) with equities favorable in Quad1 or Quad 2.
Overall Summary:
- Equity markets pulled back from severe overbought conditions in late Jan-early Feb 2018.
- Until recently, various regions have individually begun to decline. Asia Pacific, Europe and Emerging markets have remained weak with U.S. strong.
- U.S. equities continue to significantly outperform other regions since early May 2018. This may be due to the escalating trade war rhetoric combined with early signs of reduced growth in Europe and China.
- Global macro economic data continues to decline (with the U.S. still showing the strongest economic data at present).
- Bonds have delivered mixed returns year-to-date but have shown recent signs of weakness. This is a concern as bond typically act as a diversifier within portfolios (they tend to be negatively correlated to equities).
- World growth now indicates a higher probability of a global recession.
- The equity markets are "late-stage". We still believe this bull market in equities has room to run but are on watch for a market top.
- Monthly ongoing contributions are never modified and remain as per the Monthly Allocation model to take advantage of lower unit prices on pullbacks.
- The 5-Factor model has reverted to RED. It does not indicate a need to de-risk (yet) but it has us now on careful watch. Risk averse investors may wish to wait to fully reinvest until each of the world equity regions establish new short term technical uptrends.
Asset Class Return Monitor
(for week ending 16 November 2018)
(for week ending 16 November 2018)
Equities Legend:
Bonds Legend:
Currencies Legend:
Commodities Legend:
- Vanguard Total World Stock ETF (VT): (Cyan)
- Vanguard Total U.S. Stock Market ETF (VTI): (Red)
- Vanguard FTSE Europe ETF (VGK): (Lime Green)
- Vanguard FTSE Asia Pacific ETF (VPL): (Blue)
- Vanguard FTSE Emerging Markets ETF (VWO): (Pink)
Bonds Legend:
- Vanguard Total U.S. Bond Market ETF (BND): (Black)
- Vanguard Total International ex-U.S. Bond ETF (BNDX): (Green)
Currencies Legend:
- U.S. Dollar Index (Cash Settlement EOD) ($USD): (Orange)
- Euro (Philadelphia Index) ($XEU): (Maroon)
Commodities Legend:
- PowerShares DB Commodity Index Tracking Fund (DBC): (Purple)
Past Week Asset Class returns
- Over the past week world equites (as measured by the Vanguard Total World Stock ETF (shown in CYAN) lost -0.88%.
- Emerging market equities were the top performing equity region this past week with U.S. markets lagging.
- U.S. bonds (Black) and International bonds (Green) were up on the week.
- Commodities were down modestly over the past week with the USD lower.
Year-to-Date (2018) Asset Class returns
- Thus far in 2018 world equites (as measured by the Vanguard Total World Stock ETF (shown in CYAN) have lost -3.08%.
- U.S. equities have been the top performing equity region thus far in 2018 with Emerging markets lagging.
- Bonds have shown mixed returns thus far in 2018 with International Bonds (Green) outperforming U.S. bonds (Black).
- Commodities have now moved to negative returns with the USD index remaining positive for 2018.
While we remain positive on equity markets over the next quarter, we remain concerned about excessive equity valuation (especially in the U.S.) relative to historical values. Markets continue to be priced for perfection and and any one of the following events (which we refer to as the 6 Horsemen of the Apocalypse) could quickly bring on a recession and a rapid reduction (40%+) in equity prices:
* Note for the 1st time one of our major event triggers (potential trade disruption due to trade tariffs) has triggered with the recent introduction of the US imposing $200B in trade tariffs on China along with steel/aluminum tariffs on Canada and the Eurozone. This has the potential to escalate rapidly into international trade wars which NEVER result in increased equity prices. This is a major concern we continue to monitor over the near term.
- a central bank policy mistake (excessive balance sheet reduction and/or interest rate increases)
- a major disruption to international trade (trade wars or tariffs)
- a surge in inflation
- a surge in yields (which may be occurring currently)
- significant US dollar appreciation
- a geopolitical shock (region military conflict, war)
* Note for the 1st time one of our major event triggers (potential trade disruption due to trade tariffs) has triggered with the recent introduction of the US imposing $200B in trade tariffs on China along with steel/aluminum tariffs on Canada and the Eurozone. This has the potential to escalate rapidly into international trade wars which NEVER result in increased equity prices. This is a major concern we continue to monitor over the near term.
Typically bull/bear markets follow a cycle of investor psychology which peaks with euphoria.
In the big picture, it is apparent we had begun to see signs of investor exhilaration/euphoria in early Jan 2018. As such, now we have entered the stage where fundamentals have been overridden by greed pushing market valuations to extremes.
Typically bull market bubbles end in 3 distinct phases:
- a period of exponential rising prices,
- a consolidation period (which we are currently within), and
- a final blow-off phase into extreme over-valuation before a massive market crash.
It must be reemphasized a complete market cycles is composed of 2 distinct cycles/phases: a Bull phase and a Bear phase. We are currently within the the final innings of the "bull 1/2 cycle" and the "bear 1/2 cycle" is yet to come. The key to long term investment success is to protect the majority of those bull 1/2 cycle gains when the bear market comes calling.
We illustrate current market overvaluation via 3 charts produced by Crestmont Research (as of 01 November with data from 1871-to-present). While it is not necessary to understand exactly how the data is plotted, it is important for every investor to realize where current valuations stand relative to this 147 years of history.
In the following graphs note the following:
We illustrate current market overvaluation via 3 charts produced by Crestmont Research (as of 01 November with data from 1871-to-present). While it is not necessary to understand exactly how the data is plotted, it is important for every investor to realize where current valuations stand relative to this 147 years of history.
In the following graphs note the following:
- the Crestmont Price/Earnings (P/E) ratio is at 32.3 and has now reached the most expensive market valuation in U.S. stock market history (since 1871). It has now greatly exceeded both the 2007 peak (24.7) and 1929 peak (26.4) as shown on the 1st chart.
- when compared to inflation the current Crestmont P/E is now well within the very top region of the bubble zone defining the 1998-2000 bubble peak as shown on the 2nd chart.
- the current Crestmont P/E is 142% above its geometric mean; well above the 2007 peak (89%) and 1929 peak (99%) as shown on the 3rd chart. It has now reached the 2000 peak at 153% (the absolute maximum in history).
This does not mean a market crash is imminent but it does mean we are (on a valuation basis) well within the last innings of this bull market. We have entered the very dangerous period near the end of bull markets where only a minor change in either investor risk appetite or economic performance would be all it takes to "upset the apple cart". We expect the catalyst will be an increase in inflation > 3% (which one can see on chart #2 does not allow for such high valuations for more than a few months). We are very close to this threshold (headline year-over-year CPI in the U.S. as of September was 2.7%).
Unfortunately valuation measures are a "blunt instrument" when it comes to market timing. Each bull market is different in character and market sentiment can remain bullish long past metrics of reasonable valuation. However, from a risk-reward perspective it is essential to understand risk is now highly elevated and long term equity returns (on a buy-and-hold basis) are extremely low.
It cannot be overstated how important it is to protect the bulk of one's market gains during the bear market half-cycle. As can be seen below, as the percentage losses increase the required returns to get back to breakeven move in an exponential manner:
Unfortunately valuation measures are a "blunt instrument" when it comes to market timing. Each bull market is different in character and market sentiment can remain bullish long past metrics of reasonable valuation. However, from a risk-reward perspective it is essential to understand risk is now highly elevated and long term equity returns (on a buy-and-hold basis) are extremely low.
It cannot be overstated how important it is to protect the bulk of one's market gains during the bear market half-cycle. As can be seen below, as the percentage losses increase the required returns to get back to breakeven move in an exponential manner:
- a 20% loss requires a 25% gain
- a 30% loss requires a 43% gain
- a 40% loss requires a 67% gain
- a 50% loss requires a 100% gain
This is why it is so important to not let losses continue in the face of a bear market and why we advocate phased movements into cash as our 5-factor model reverts towards Red. The below graphic represents how we move within equity markets through a complete market cycle:
Given current market valuations and our expectation of a -50% or greater decline during the next bear market, "careful and cautious" remains our game plan. When we enter this sort of environment we can play the game on the long side but carefully eye the door for when the music stops. We have no intention in participating in the substantial downside yet to come to complete this current market cycle.
World Regional Equity Monitor
We use the following U.S. exchange traded funds to monitor equity performance for the various world regions:
- World Equities: Vanguard Total World ETF (Cyan)
- U.S. Equity: Vanguard Total Market ETF (Red)
- Pacific Equity: Vanguard FTSE Pacific ETF (Blue)
- European Equity: Vanguard FTSE Europe ETF: (Lime Green)
- Emerging Market Equity: Vanguard FTSE Emerging Market ETF (Pink)
1 Year Rolling Regional Equity Performance
- Over the past 12 month rolling period regional equity performance has turned mixed for the various equity regions.
- The strongest equity region over the past 12 month has been U.S. Markets with Emerging Market equities continuing to lag.
- Overall world equity performance (as measured by the Vanguard Total World ETF) are fractionally positive with a return of +0.21% (including dividends) over the past 12 month rolling period.
3 Month Rolling Regional Equity Performance
- Over the past 3 month rolling period the strongest performing world equity region has been Emerging markets with Euopean markets the weakest.
- Negative regional equity performance has been evident over the past quarter (3 months) with Global equity returns moderately negative.
1 Month Rolling Regional Equity Performance
- Over the past 1 month rolling period the strongest performing world equity region has been Emerging markets with Euopean markets the weakest.
- Moderately negative global equity returns are evident over the past month.
Past Week Regional Equity Performance
- Over the past week Emerging market equities were the strongest performing equity region with U.S. markets lagging.
Latest Global Equity "Big Picture"
World equity market returns are monitored via the following charts:
Dow Jones Global Market Index
(market cap weighted index)
For the week the Dow Jones Global Index had a loss of -1.14%. As can be seen on the 1st above chart, price remains below the 65 week moving average for the 1st time in over 2 years and closed the week below the support established back in Feb/Mar 2018. The next area of support remains the 2014-2015 tops of 334.341.
The 2nd chart shows the 386-387 price zone which acted as support. In technical analysis support once broken becomes resistance so any weekly close back above this level would be a very welcome development.
The 2nd chart shows the 386-387 price zone which acted as support. In technical analysis support once broken becomes resistance so any weekly close back above this level would be a very welcome development.
Value Line Geometric Index and Global Dow Index
(equal weighted indexes)
(equal weighted indexes)
The Value Line Geometric Index (top panel) is the median price performance of 1700 U.S. companies equal weighted (as opposed to most indexes which are market cap weighted) into an index. Below that is the Global Dow index (bottom panel). It is a measure of the top 150 international companies equal weighted within the index and represents a good overview of equity performance worldwide.
As can be seen on the daily chart above, both the Global Dow (bottom panel) and the US. based Value Line Geometric Index (top panel) have now returned back to key support/resistance prices ($XVG @ 533, $GDOW @ 2928). Both indexes remain below their descending 200 day moving averages indicating continued market weakness.
As can be seen on the daily chart above, both the Global Dow (bottom panel) and the US. based Value Line Geometric Index (top panel) have now returned back to key support/resistance prices ($XVG @ 533, $GDOW @ 2928). Both indexes remain below their descending 200 day moving averages indicating continued market weakness.
Below are 2 weekly charts of the same indexes. The 1st chart goes back to the beginning of 2009 while the 2nd zooms in over the past 2 years using candles. As can be seen, both the Global Dow and Value Line index remain above their respective trend lines from the 2009 lows. Both closed the week at important support and both have broken their respective 65 week moving averages for the 1st time since early 2016.
Below is a 38 year daily chart of $XVG which clearly shows critical support now focuses on 508-522. This level acted as resistance for almost 20 years and should the breakout in late 2017 not hold this would indicate a failed breakout and have the potential for a significant market decline. As of this past week this level held but the direction remains uncertain.
iShares MSCI ACWI ETF
(market cap weighted ETF)
The iShares MSCI ACWI (All Country World Index) ETF is used as a benchmark to compare the performance of the various broad-based equity funds available in the Emirates Group Provident Scheme (EGPS) A/B/C accounts. It serves as a benchmark to determine how equity markets are performing on a worldwide basis. This assists in determining 2 parameters; whether to be invested in equities and also which funds within the EGPS offer the best performance relative to the benchmark.
The ETF is composed of the following regional components/weightings:
The ETF is composed of the following regional components/weightings:
ACWI Monthly Chart (since 2009)
As shown on the monthly chart above, world equity markets had been stuck in a fairly narrow trading range (shown as the yellow band) from October 2013-December 2016. Only once world growth began to reappear in late 2016 did world equity markets begin to react with a breakout of the range. This remains long term bullish for world equities but similar range-bound market action has reasserted itself once again.
For the month of November ACWI has gained+1.22%. It remains fractionally below its Feb 2018 closing lows but continues to remain above the trendline from the 2009 market lows.
For the month of November ACWI has gained+1.22%. It remains fractionally below its Feb 2018 closing lows but continues to remain above the trendline from the 2009 market lows.
ACWI Weekly Chart
This past week ACWI lost -0.85%. Price remains below the 65 week simple moving average (which acted as support throughout the 2014-2015 topping process) but was able to remain above the price support (69.32-69.87).
World Equity Market Regional Relative Rotation Graphs
Below is a graph of 23 major regional equity market ETF's + ACWI (our world equity benchmark) shown on a Relative Rotation chart measured weekly with a 10 week look-back period (which forms the "tail" of the ETF). This graph allows us to observe over time how various regional ETF's are moving relative to both each other and also relative to cash.
- Leading (Green): (Momentum Positive + Price Relative Strength Positive)
- Weakening (Yellow): (Momentum Negative + Price Relative Strength Positive)
- Lagging (Red): (Momentum Negative + Price Relative Strength Negative)
- Improving (Blue): (Momentum Positive + Price Relative Strength Negative)
Given the cyclical nature of momentum and price within equity markets, in general the RRG charts will cycle in a clockwise manner (though not necessarily will each pass through all 4 quadrants as it is possible to rotate through an adjacent quadrant only).
Weekly Regional (Country) Relative Rotation Graphs (long term)
As can be seen on the above table, the global RRG quantitative relative scoring peaked on 21 September (+5) and has been in decline since. However, this past week it improved slightly (from -35 to -34 quantitative net score) which is the 1st positive change in direction since the September peak. This is a potentially bullish development but is only 1 data point at present.
ACWI (our world equity fund benchmark) remained within the RED "Lagging" quadrant this past week (as shown on the below RRG chart with the other countries blanked out to focus upon only ACWI). This remains a negative development until we see ACWI begin to trend upwards and return to the blue "Improving" quadrant.
The RRG trend analysis status is Bearish for world equities:
- ACWI price Relative Strength: Negative
- ACWI price Momentum: Negative
Coincident Equity Market Indicators
Crude Oil
Crude oil was strongly lower again over the past week. It broke out the broad uptrend channel and broke strong support near $60. Firm crude oil prices typically point to increasing demand on the back of world economic growth improvement. The recent decline is concerning as it may be an indication the global economy is beginning to slow.
Gold
Gold was modestly higher over the past week. It broke the trendline from the Dec 2015 bottom in June and continues to bounce near the $1202-$1215 region. It currently indicates little risk of serious economic market stress or inflation. This remains bullish for global equities.
Commodities
Commodities were modestly lower over the past week and remain below the important price resistance of 200-204. For all of 2018 they have remained range-bound (as shown be the RED box) and within a gradually up-sloping trend channel from the 2016 lows (YELLOW) .
Since bottoming in early 2016, commodities have been on a steady (but not overly steep) rise indicating increased demand (and thus increased world growth). This remains overall bullish for global equites but the recent price break is confirmation world growth is faltering. A break of $180 + the uptrend line from the Feb 2016 bottom would be a very negative development.
Since bottoming in early 2016, commodities have been on a steady (but not overly steep) rise indicating increased demand (and thus increased world growth). This remains overall bullish for global equites but the recent price break is confirmation world growth is faltering. A break of $180 + the uptrend line from the Feb 2016 bottom would be a very negative development.
U.S. 30 Year Treasury Bond
U.S. 30 year bonds were modestly higher on the week and remain below their 3 year long support (near $146-$148) as well as the downtrend line from their June 2016 peak. This is somewhat concerning as rising yields (which move inverse to bond prices) will weigh on corporate borrowing and may hinder the equity advance if rates move too quickly (especially in the high yield market). This is currently equity market neutral but should they continue to fall this will eventually put continued yield pressure on equities.
Current 5-Factor Model Indications
The combined 5-Factor quantitative model reverted to RED (26 Oct 2018) with a number of the sub-models now either YELLOW or RED. This indicates a certain level of caution and close monitoring is warranted at present. However, equity markets are drastically oversold and entering the bullish seasonal period so no changes in current positions are indicated at present.
Click the following link to access current model positioning: "Current Model Portfolio Positions"
The 5-Factor model currently has the following sub-model readings:
Click the following link to access current model positioning: "Current Model Portfolio Positions"
The 5-Factor model currently has the following sub-model readings:
Economic Model
The Economic model switched to YELLOW in early August 2018 (GREEN from in May 2016) on the back of subtle but gradually declining world growth. It is unclear if trade tariffs are to blame or something more systemic but it is a growing concern world equities may become vulnerable.
The model is composed of numerous inputs including the following data:
The model is composed of numerous inputs including the following data:
- OECD Composite Leading Indicators (CLI)
- J.P. Morgan Global Purchasing Managers (PMI) Index
- International Monitory Fund (IMF) World Economic Report
OECD Composite Leading Indicators (12 November 2018)
The OECD Composite Leading Indicator is designed to provide a 6-9 month lead time on turns in economic performance. As such, it is a useful "look-forward" tool we use to attempt to predict regional economic weakening/strengthening turn points.
The current report indicates continued easing growth momentum in the OECD area.
The current report indicates continued easing growth momentum in the OECD area.
Below is a 2 year look-back graph of the Composite Leading Indicator for the OECD (33 countries) + the 4 largest economic regions. All regions are amplitude adjusted to use 100 as their long term growth average. As such, readings less than 100 indicate below average projected growth.
It can be seen the OECD CLI peaked in Nov 2017 and descended below 100 in May 2018. Using a 6-9 month look-forward, this indicates global growth is forecast to have peaked in May-Aug 2018 and will fall below its average historical growth rate in Nov 2018-Feb 2019.
The only major region that shows a potential positive growth reversal is China (projected to begin to improve in Oct 2018 - Jan 2019 based upon its Apr 2018 trough).
ECAM Composite Leading Indicator Monitor
6-9 Month Business Cycle Lead Time
(color code shows respective CLI trend)
Below is our latest heat-map of the CLI for various monitored regions. Red/Green boxes indicates CLI rate of change month/month and year/year. Readings < 100 indicate projected below average economic growth. The CLI is designed to predict business cycle changes 6-9 months in advance so the Peak/Trough dates can be used to predict turning point months for the various regions.
As can be seen, the map indicates very few regions/countries with CLI's > 100. This indicates weak world economic growth is projected over the next 6-9 months. Until we see a trough/reversal in the major regional signals, it is premature to anticipate a return to global synchronized growth.
As can be seen, the map indicates very few regions/countries with CLI's > 100. This indicates weak world economic growth is projected over the next 6-9 months. Until we see a trough/reversal in the major regional signals, it is premature to anticipate a return to global synchronized growth.
J.P. Morgan Global Composite Purchasing Managers Index (06 Nov 2018)
The Global Composite PMI Report is based on the results of manufacturing and service sector surveys covering over 18,000 purchasing executives in over 40 countries. Together these countries account for an estimated 89% of global gross domestic product (GDP). Questions are asked about real events and are not opinion based. Data are presented in the form of diffusion indices, where an index reading above 50.0 indicates an increase in the variable since the previous month and below 50.0 a decrease. As such, using the PMI data gives us a real-time look at global growth with readings > 50 indicating economic expansion and readings < 50 indicate economic retraction.
The latest monthly report indicates a slight uptick in global growth as of October 2018 PMI data.
The latest monthly report indicates a slight uptick in global growth as of October 2018 PMI data.
Below is a graph of the J.P. Morgan Global Composite PMI (thick black line) as well as the Manufacturing (thin black line) and Services (thin grey line) sub-components.
It can be seen current global growth continues (Global PMI > 50) but has declined from its Mar 2018 peak. Also it is apparent the weakness is mostly within Manufacturing component which has fallen dramatically from its Jan 2018 peak (assumed to be a result of the current global tariff situation) and continues to drag the overall PMI downwards.
Below is our PMI monitor for selected countries.
- values > 50 indicate economic expansion
- values < 50 indicating economic contraction
- trend green indicates improvement over the past month with red indicating a decline over the previous month.
IMF World Economic Report (October 2018)
The International Monitory Fund completes a quarterly Global Economic Review. From their latest report:
"The steady expansion under way since mid-2016 continues, with global growth for 2018–19 projected to remain at its 2017 level. At the same time, however, the expansion has become less balanced and may have peaked in some major economies. Downside risks to global growth have risen in the past six months and the potential for upside surprises has receded".
"The steady expansion under way since mid-2016 continues, with global growth for 2018–19 projected to remain at its 2017 level. At the same time, however, the expansion has become less balanced and may have peaked in some major economies. Downside risks to global growth have risen in the past six months and the potential for upside surprises has receded".
Executive Summary
Forward
IMF World Economic Outlook
U.S. Economic Growth & Inflation
Year-over-Year GDP growth
The Gross Domestic Product (GDP) in the United States expanded 3 percent in the third quarter of 2018 over the same quarter of the previous year. GDP Annual Growth Rate in the United States averaged 3.20 percent from 1948 until 2018, reaching an all time high of 13.40 percent in the fourth quarter of 1950 and a record low of -3.90 percent in the second quarter of 2009.
Quarter-over-Quarter GDP growth
The US economy advanced an annualized 3.5 percent on quarter in the third quarter of 2018, beating market expectations of 3.3 percent, the advance estimate showed. It follows a 4.2 percent growth in the previous period which was the highest since the third quarter of 2014. The increase in real GDP reflected positive contributions from personal consumption expenditures (PCE), private inventory investment, state and local government spending, federal government spending, and nonresidential fixed investment that were partly offset by negative contributions from exports and residential fixed investment. GDP Growth Rate in the United States averaged 3.22 percent from 1947 until 2018, reaching an all time high of 16.70 percent in the first quarter of 1950 and a record low of -10 percent in the first quarter of 1958.
Annualized Inflation
Annual inflation rate in the US increased to 2.5 percent in October of 2018 from 2.3 percent in September. Figures match market expectations, mainly due to prices of fuel oil and gasoline. On a monthly basis, consumer prices increased 0.3 percent, higher than 0.1 percent in September and matching forecasts. It is the highest monthly gain in nine months, mainly due to gasoline. Inflation Rate in the United States averaged 3.27 percent from 1914 until 2018, reaching an all time high of 23.70 percent in June of 1920 and a record low of -15.80 percent in June of 1921.
Eurozone Economic Growth & Inflation
Year-over-Year GDP growth
The Eurozone economy grew 1.7 percent year-on-year in the third quarter of 2018, following an upwardly revised 2.2 percent expansion in the previous period and missing market expectations of a 1.8 percent advance, a flash estimate showed. GDP Annual Growth Rate in the Euro Area averaged 1.70 percent from 1995 until 2018, reaching an all time high of 5 percent in the first quarter of 1995 and a record low of -5.50 percent in the first quarter of 2009.
Quarter-over-Quarter GDP growth
The Eurozone economy grew 0.2 percent on quarter in the three months to September 2018, following a 0.4 percent expansion in the previous period and missing market expectations of a 0.4 percent advance, a flash estimate showed. It was the weakest growth rate since the second quarter of 2014 as Italy’s economy stalled for the first time in almost four years. GDP Growth Rate in the Euro Area averaged 0.39 percent from 1995 until 2018, reaching an all time high of 1.30 percent in the second quarter of 1997 and a record low of -3 percent in the first quarter of 2009.
Annualized Inflation
The annual inflation rate in the Euro Area is expected to pick up to 2.2 percent in October 2018 from 2.1 percent in the previous month and in line with market consensus. That should be the highest inflation rate since December 2012 on the back of higher prices of services, energy, processed food and industrial goods. Inflation Rate in the Euro Area averaged 1.97 percent from 1991 until 2018, reaching an all time high of 5 percent in July of 1991 and a record low of -0.70 percent in July of 2009.
Japan Economic Growth & Inflation
Year-over-Year GDP growth
The Gross Domestic Product (GDP) in Japan expanded 0.30 percent in the third quarter of 2018 over the same quarter of the previous year. GDP Annual Growth Rate in Japan averaged 2 percent from 1981 until 2018, reaching an all time high of 9.40 percent in the first quarter of 1988 and a record low of -8.80 percent in the first quarter of 2009.
Quarter-over-Quarter GDP growth
The Japanese economy contracted 0.3 percent on quarter in the three months to September 2018, following an upwardly revised 0.8 percent growth in the previous period and matching market consensus, a preliminary estimate showed. The number of natural disasters weighed on personal consumption,investments and exports. On an annualized basis, the economy shrank 1.2 percent, worse than market forecasts of a 1 percent contraction and following a 3 percent expansion in the June quarter. GDP Growth Rate in Japan averaged 0.49 percent from 1980 until 2018, reaching an all time high of 3.20 percent in the second quarter of 1990 and a record low of -4.90 percent in the first quarter of 2009.
Annualized Inflation
Japan's annual inflation rate edged down to 1.2 percent in September 2018 from 1.3 percent in the previous month, mainly due to lower prices of food. Still, it is the second-highest figure in the last seven months. Inflation Rate in Japan averaged 3 percent from 1958 until 2018, reaching an all time high of 24.90 percent in February of 1974 and a record low of -2.50 percent in October of 2009.
China Economic Growth & Inflation
Year-over-Year GDP growth
The Chinese economy advanced 6.5 percent year-on-year in the September quarter of 2018, after a 6.7 percent growth in the previous period and missing market consensus of 6.6 percent. It was the lowest growth rate since the first quarter of 2009 during global financial crisis, amid intense tariff dispute with the US and alarming off-balance-sheet borrowings by local governments. GDP Annual Growth Rate in China averaged 9.58 percent from 1989 until 2018, reaching an all time high of 15.40 percent in the first quarter of 1993 and a record low of 3.80 percent in the fourth quarter of 1990.
Quarter-over-Quarter GDP growth
The Chinese economy grew by 1.6 percent quarter-on-quarter in the three months to September 2018, compared to a 1.8 percent expansion in the previous period and matching market estimates. GDP Growth Rate in China averaged 1.80 percent from 2010 until 2018, reaching an all time high of 2.40 percent in the first quarter of 2011 and a record low of 1.40 percent in the first quarter of 2016.
Annualized Inflation
China's consumer price inflation stood at 2.5 percent year-on-year in October 2018, unchanged from the previous month's seven-month high and in line with market expectations. A slowdown in prices of food was offset by a faster rise in cost of non-food products. On a monthly basis, consumer prices went up 0.2 percent in October, easing from a 0.7 percent advance in September and also matching market consensus. Inflation Rate in China averaged 5.21 percent from 1986 until 2018, reaching an all time high of 28.40 percent in February of 1989 and a record low of -2.20 percent in April of 1999.
Valuation Model
The Valuation model remains RED/negative due to overvaluation of equity markets at current prices relative to historical data. We continue to update forecasts from a number of historically reliable sources (see section titled "Market Valuation"). Long term equity returns vary inversely with market valuation and at current price levels forward returns will be much lower than historical average returns (projected to be approximately 2% per year ex-inflation over the next 10 years).
Technical Model
The Technical model remained YELLOW this past week. World Equity markets remain range-bound with no clear directional bias. Market breadth remains consistent with bull market conditions.
Sentiment Model
The Sentiment model remained YELLOW this week on the back of a neutral sentiment among retail and institutional investors (sentiment acts as an inverse trading indicator).
Economic Stress Model
The U.S. Economic Stress model remains GREEN this week with very little U.S. financial stress indicated. Our 1 year forward U.S. recession indicators remained "Low Risk" but our Global ex-U.S. 1 year forward recession indicators recently moved up to "Moderate Risk".
World Bond Asset Class Return Monitor
We use the following U.S. exchange traded funds to monitor bond performance for the various bond asset classes:
Total Market Bond Basket:
- U.S. Total Bond Market (BND): (Red)
- International (ex-U.S.) Total Bond Market (BNDX): (Blue)
- U.S, Gov't Bonds (GOVT): (Orange)
- Foreign Developed Market Gov't Bonds (BWX): (Pink)
- U.S. Corporate Bond (LQD): (Maroon)
- International Corporate Bond (PICB): (Black)
- U.S. High Yield Bond (JNK): (Purple)
- International High Yield Bond (IHY): (Green)
- U.S. Gov't Inflation Protected Bonds (TIP): (Lime Green)
- International Gov't Inflation-Protected Bond (WIP): (Cyan)
1 Year Rolling Bond Performance
- Over the past 12 months rolling period the top performing bond asset class has been U.S. High Yield Bonds with Int'l Corporate Bonds the worst performing.
- The U.S. Total Bond Market (RED) and the International (ex-U.S.) Total Bond Market (BLUE) have delivered mixed returns over the past year.
3 Month Rolling Bond Performance
- Over the past 3 month rolling period the top performing bond asset class has been Int'l Inflation Protected bonds with U.S. Corporate bonds lagging.
- U.S. Total Bond Market (RED) and International (ex-U.S.) Total Bond Market (BLUE) having delivered negative returns over the past quarter (3 months).
1 Month Rolling Bond Performance
- Over the past 1 month rolling period the top performing bond asset class has been U.S. Treasury Bonds with U.S. High Yield Bonds lagging.
- The U.S. Total Bond Market (RED) and the International (ex-U.S.) Total Bond Market (BLUE) have delivered positive returns over the past month.
Past Week Bond Asset Class Performance
- Over the past week U.S. Treasury Bonds were the top performing bond class with U.S. High Yield bonds lagging.
- The U.S. Total Bond Market (RED) and the International (ex-U.S.) Total Bond Market (BLUE) delivered positive returns over the past week.
Commentary:
It has been shown in repeated studies over many years a balanced portfolio consisting of both equities and bonds (with percentage holdings in each adjusted according to personal risk tolerances) remains the best methodology in managing a long term retirement portfolio (due to the independent/low correlated function each takes when navigating though various market cycles and economic conditions).
It is best to think of bonds and equities as 2 independent brains each looking at the market from a different perspective:
As such, both serve a useful purpose in a well balanced portfolio.
Bonds delivered positive returns throughout 2017 as low inflation and weak growth persisted. We are very cognizant of the fact bond yields are potentially at generational lows (prices overbought and at generational highs) and any significant economic recovery (with associated increases in inflation) has the potential to be very detrimental to bond fund returns.
Rolling 12 month returns for bonds remain positive but recent weakness has been noted and we are monitoring closely US, German & Japanese rates to determine if (when) it may be appropriate to reduce bond positions. Our premise is these 3 bonds tend to be somewhat "tethered" due to capital flows so it would take a breakout in all 3 key Treasuries above their respective price levels (described below) in order to definitively state the bull market in bonds is over.
As of present International bond funds have not been affected by the rise in rates as U.S. bond funds have. We are reassessing each of the bond funds within our models to determine their exposure to duration risk should rates outside the U.S. also begin to rapidly rise.
It is best to think of bonds and equities as 2 independent brains each looking at the market from a different perspective:
- Equities: Corporate profits focused.
- Bonds: Economic growth and Inflation focused.
As such, both serve a useful purpose in a well balanced portfolio.
Bonds delivered positive returns throughout 2017 as low inflation and weak growth persisted. We are very cognizant of the fact bond yields are potentially at generational lows (prices overbought and at generational highs) and any significant economic recovery (with associated increases in inflation) has the potential to be very detrimental to bond fund returns.
Rolling 12 month returns for bonds remain positive but recent weakness has been noted and we are monitoring closely US, German & Japanese rates to determine if (when) it may be appropriate to reduce bond positions. Our premise is these 3 bonds tend to be somewhat "tethered" due to capital flows so it would take a breakout in all 3 key Treasuries above their respective price levels (described below) in order to definitively state the bull market in bonds is over.
As of present International bond funds have not been affected by the rise in rates as U.S. bond funds have. We are reassessing each of the bond funds within our models to determine their exposure to duration risk should rates outside the U.S. also begin to rapidly rise.
U.S. 10 year Treasury Yield
After rates bottomed in mid-2016 (bond prices peaked as they are inversely correlated), rates rapidly rose to resistance on the perception of future economic growth + inflation. Importantly, price resistance near 2.6% (which had contained yields for almost 4 years) was broken in early 2018. A key resistance level at 3.006% - 3.036% was broken on May 15, 2018 (high 3.115%, daily close 3.109%) but was unable to hold for more than 1 trading day. The same level was broken in late Sept (and held this past week) with a target of 3.32%.
German 10 year Bund Yield
German 10 year treasury yields have remained confined below 0.92% since 2014 with a bottom of -0.19% achieved in June 2016. Since then rates have gradually climbed within a rising channel (until recently) towards 0.92%.
Yields have pulled back since early 2018 and this past week remained below the weekly breakout level of 0.60%. A weekly close above 0.93% and it is likely the bull market in German bonds is over. There is no indication at present to suggest such will occur but we are monitoring for such an event.
Yields have pulled back since early 2018 and this past week remained below the weekly breakout level of 0.60%. A weekly close above 0.93% and it is likely the bull market in German bonds is over. There is no indication at present to suggest such will occur but we are monitoring for such an event.
Japanese 10 year Treasury Yield
Japan has been fighting deflation for decades and only recent unprecedented monetary policy by the BOJ appears to be having some effect upon deflation (and yields).
After bottoming at near -0.28% yields in mid 2016, a rapid rise to near 0.11% had held as resistance over the past 2 years. Yields have remained range-bound since (indicating deflation remains an ongoing problem in Japan) but a weekly close above 0.12% (which it was unable to hold this week) would likely indicate the bull market in Japanese bonds is probably over.
After bottoming at near -0.28% yields in mid 2016, a rapid rise to near 0.11% had held as resistance over the past 2 years. Yields have remained range-bound since (indicating deflation remains an ongoing problem in Japan) but a weekly close above 0.12% (which it was unable to hold this week) would likely indicate the bull market in Japanese bonds is probably over.
U.S. 30 year Treasury Yield
An extremely important longer-term chart we continue to watch is the yield on the U.S. 30 year treasury relative to its 100 month exponential moving average (red dotted line on the below chart going back to 1980) as well as the yield on the 10 year treasury with its 115 month EMA. As can be seen below, since the mid 1980's these moving average have acted as a cap on each attempted increase in yields.
Should any given month close with a yield higher than their respective moving average it would be strong confirmation the 35 year bull market in bonds is likely over.
* Note as of the end of Nov 2018 both the 30 year Treasury (top chart) and 10 year yield (bottom chart) closed above its long term moving average. This is a very bearish bond development.
Should any given month close with a yield higher than their respective moving average it would be strong confirmation the 35 year bull market in bonds is likely over.
* Note as of the end of Nov 2018 both the 30 year Treasury (top chart) and 10 year yield (bottom chart) closed above its long term moving average. This is a very bearish bond development.
Currencies
Below is a 12 month rolling return for the 6 currencies that make up the U.S. Dollar index. The U.S. Dollar index is a weighted geometric mean of the dollar's value relative to the 6 currencies in the following list:
Also shown in the below chart is the following for comparison purposes:
- Euro (EUR), 57.6% weight.
- Japanese yen (JPY) 13.6% weight.
- U.K. Pound sterling (GBP), 11.9% weight.
- Canadian dollar (CAD), 9.1% weight.
- Swedish krona (SEK), 4.2% weight.
- Swiss franc (CHF) 3.6% weight.
Also shown in the below chart is the following for comparison purposes:
- The U.S. Dollar Index to allow comparison to its constituents.
- The Australian Dollar (not a part of the USD Index) as it is a popular commodity currency.
1 Year Rolling Currency Performance
- Over the past 12 months rolling period the top performing major currency has been the U.S. Dollar with the Swedish Krona the worst performing.
3 Month Rolling Currency Performance
- Over the past 3 month rolling period the top performing currency has been the Swedish Krona with the Japanese Yen lagging.
1 Month Rolling Currency Performance
- Over the past 1 month rolling period the top performing currency has been the Australian Dollar with the British Pound lagging.
Past Week Currency Performance
- Over the past week the Euro was the strongest performing major currency with the British Pound lagging.
U.S. Dollar: (Bullish Bias)
Commentary:
The USD index was down -0.41% over the past week. The USD struggled throughout 2017 and into early 2018 as growth indicators had remained stagnant, U.S. officials complained about their "overvalued U.S. dollar", and rate expectation differentials between Central Banks began to narrow on gradual improvements in the Euro area economic data. However, since early 2018 this process has reversed with the USD remaining very bullish as weakening economic data out of the Eurozone have been offset by strengthening data out of the U.S.
Support / Resistance Levels (based upon close):
Weekly: 94.82 / 98.18
Monthly: 94.58 / 98.66
Support / Resistance Levels (based upon close):
Weekly: 94.82 / 98.18
Monthly: 94.58 / 98.66
US Dollar Index Daily charts
The 1 year daily chart above shows the bottoming process in the USD since the beginning of 2018. In early 2018 price dropped to a close of 88.51 and retested this level on 3 separate occasions. It remained confined to a trading range for 3 months (shown in the BLUE box) but broke out in late April 2018. Over the summer it has remained very strong but has remained confined to a fairly tight range (0.93-0.97) since May.
At weeks end the USD closed right at the previous resistance @ 96.86-96.98.
At weeks end the USD closed right at the previous resistance @ 96.86-96.98.
The 4 year daily chart above clearly shows the important daily close support for the USD over the past 3 years @ 91.88-93.15 with resistance @ 97.21-98.43.
Over the past week the USD closed above its short term trend 50 and 200 day moving averages.
(Short Term Bullish)
(Short Term Bullish)
US Dollar Index Weekly charts
The weekly chart shows the steady -15% decline the USD index experienced from late Dec 2016-early Jan 2018 (from 103.82 to 88.15). It remained in a consolidation zone (88.89-90.33) for 3 months and then in late April 2018 it broke out of its weekly consolidation box.
Price ended the week above the strong support @ 93.03-93.18 and closed the week above the intermediate term trend 20 and 65 week moving averages.
(Intermediate Term Bullish)
Price ended the week above the strong support @ 93.03-93.18 and closed the week above the intermediate term trend 20 and 65 week moving averages.
(Intermediate Term Bullish)
A longer term 20 year look-back at the USD shows the 91.66-92.28 weekly close area (thick RED line) has been a very significant bull/bear battle zone over the past 20 years (since 1998). As long as price continues to hold above this significant price level the longer term USD call remains bullish.
It continues to hold the uptrend line from the 2011 bottom and appears to be within a large multi-year bullish ascending price channel.
It continues to hold the uptrend line from the 2011 bottom and appears to be within a large multi-year bullish ascending price channel.
US Dollar Index Monthly chart
For the month of November the US Dollar index has lost -0.59%.
For all of 2017 the USD had been in a steady decline. It broke its critical support at 92.63-93.03 in late 2017 and rapidly fell to find support at the 86.48-88.01 level. Since the beginning of 2018 it has rebounded back into its previous consolidation zone (shown in AMBER).
Price closed October above the long term trend 10 month moving average maintaining the long term bias to bullish until months end. It remains within the middle of its past 3 year range and is range-bound between the previous monthly support @ 94.58-94.97 and resistance @ 98.66-100.21.
(Long Term Bullish)
For all of 2017 the USD had been in a steady decline. It broke its critical support at 92.63-93.03 in late 2017 and rapidly fell to find support at the 86.48-88.01 level. Since the beginning of 2018 it has rebounded back into its previous consolidation zone (shown in AMBER).
Price closed October above the long term trend 10 month moving average maintaining the long term bias to bullish until months end. It remains within the middle of its past 3 year range and is range-bound between the previous monthly support @ 94.58-94.97 and resistance @ 98.66-100.21.
(Long Term Bullish)
Euro (Bearish Bias)
The Euro was up +1.47% over the past week. It had shown remarkable longer-term resilience given European political uncertainty (Brexit, Spain, Germany, Italy) but has weakened since early 2018 due to eroding economic growth metrics out of the EU.
Support / Resistance Levels (based upon close):
Weekly: 114.47 / 116.07
Monthly: 113.81 /116.45
Support / Resistance Levels (based upon close):
Weekly: 114.47 / 116.07
Monthly: 113.81 /116.45
Euro Daily Charts
The Euro had remained above 121.87 until late April 2018 and then began a series of declines on the back of the Italian election and the Turkish debt situation. It touched 2018 lows @ 112.15 in early Nov but has rebounded since.
On the 2nd daily chart price it can be seen how important the yellow band daily resistance zone @ 114.61-116.04 is. It is now back at this resistance level but closed the week below the short term trend 50 and 200 day moving averages.
(Short Term Bearish)
On the 2nd daily chart price it can be seen how important the yellow band daily resistance zone @ 114.61-116.04 is. It is now back at this resistance level but closed the week below the short term trend 50 and 200 day moving averages.
(Short Term Bearish)
Euro Weekly Chart
The weekly chart shows the Euro had remained range bound for 2 1/2 years (January 2015-July 2017) between 104.96-105.95 and 114.47-114.62. A significant breakout occurred in the 2nd week of July 2017 when a weekly close above the trading range was established.
This past week the Euro closed back above the support @ 114.47-114.62. It closed the week below the intermediate trend 20 week + 65 week moving averages keeping the intermediate term trend bearish.
(Intermediate Term Bearish)
This past week the Euro closed back above the support @ 114.47-114.62. It closed the week below the intermediate trend 20 week + 65 week moving averages keeping the intermediate term trend bearish.
(Intermediate Term Bearish)
Euro Monthly
For the month of November the Euro has gained +1.68%. On a monthly closing basis it closed the month of October below the long term trend 10 month moving average remaining long term bearish.
(Long Term Bearish)
(Long Term Bearish)
UK Pound (Bearish Bias)
U.K. Pound Daily Chart
U.K. Pound Weekly Chart
U.K. Pound Monthly Chart
The UK Pound was down -1.08% over the past week. Clearly over the next year the ongoing Brexit transition process will dominate the movement of the Pound and the strong price action demonstrated through 2017 has almost been completely reversed thus far in 2018.
Critical levels to watch on the Pound remain the respective weekly and monthly reactionary closing prices following the Brexit vote in June 2016:
This past week the Pound closed the week below its short term trend daily 50 +200 day moving averages and below the intermediate term trend 20 + 65 week moving averages. For the month of November it has gained +1.59% and closed the month of October below its long term 10 month moving average.
(Short Term Bearish)
(Intermediate Term Bearish)
(Long Term Bearish)
Support / Resistance Levels (based upon close):
Weekly: 127.34 / 132.94
Monthly: 125.09 / 129.79
Critical levels to watch on the Pound remain the respective weekly and monthly reactionary closing prices following the Brexit vote in June 2016:
- 136.76 weekly close (weekly close 20 June 2016)
- 133.09 monthly close (monthly close 30 June 2016)
This past week the Pound closed the week below its short term trend daily 50 +200 day moving averages and below the intermediate term trend 20 + 65 week moving averages. For the month of November it has gained +1.59% and closed the month of October below its long term 10 month moving average.
(Short Term Bearish)
(Intermediate Term Bearish)
(Long Term Bearish)
Support / Resistance Levels (based upon close):
Weekly: 127.34 / 132.94
Monthly: 125.09 / 129.79
Australian Dollar (Bearish Bias)
Australian Dollar Daily Chart
Australian Dollar Weekly Chart
Australian Dollar Monthly Chart
The Australian Dollar was up +1.44% over the past week. Price this past week remained above the critical 2 year weekly support @ 71.71-71.87 established as a consequence of the surprise RBA interest rate cut in late April, 2016 which led to a substantial 5 week decline of -8% and a subsequent 18 month consolidation (as shown in the blue box on the weekly chart).
For the month of November the Aussie dollar has gained +3.58%. It closed the week between the short term trend 50 + 200 day moving averages and between the intermediate term trend 20 + 65 week moving averages. It closed the month of October below the long term trend 10 month moving average.
(Short Term Neutral)
(Intermediate Term Neutral)
(Long Term Bearish)
Support / Resistance Levels (based upon close):
Weekly: 71.71 / 73.40
Monthly: 72.04 / 76.59
For the month of November the Aussie dollar has gained +3.58%. It closed the week between the short term trend 50 + 200 day moving averages and between the intermediate term trend 20 + 65 week moving averages. It closed the month of October below the long term trend 10 month moving average.
(Short Term Neutral)
(Intermediate Term Neutral)
(Long Term Bearish)
Support / Resistance Levels (based upon close):
Weekly: 71.71 / 73.40
Monthly: 72.04 / 76.59
Canadian Dollar (Bearish Bias)
Canadian Dollar Daily Chart
Canadian Dollar Weekly Chart
Canadian Dollar Monthly Chart
The Canadian dollar was up +0.33% over the past week. After topping in Aug, 2017, the Canadian Dollar has remained within a firmly established downtrend and has gradually returned to price levels last seen in early 2017.
The Loonie closed the week below the short term trend 50 + 200 day moving averages and below the intermediate term trend 20 + 65 week moving averages. It remains below the weekly trendline begun at the Jan 2016 lows of 68.09 and is confined to a down-sloping price channel.
For the month of November the Loonie has lost -0.00%. It continues to attempt to consolidate near recent lows and closed the month of October below the long term trend 10 month moving average.
(Short Term Bearish)
(Intermediate Term Bearish)
(Long Term Bearish)
Support / Resistance Levels (based upon close)
Weekly: 76.26 / 78.13
Monthly: 74.42 / 78.49
The Loonie closed the week below the short term trend 50 + 200 day moving averages and below the intermediate term trend 20 + 65 week moving averages. It remains below the weekly trendline begun at the Jan 2016 lows of 68.09 and is confined to a down-sloping price channel.
For the month of November the Loonie has lost -0.00%. It continues to attempt to consolidate near recent lows and closed the month of October below the long term trend 10 month moving average.
(Short Term Bearish)
(Intermediate Term Bearish)
(Long Term Bearish)
Support / Resistance Levels (based upon close)
Weekly: 76.26 / 78.13
Monthly: 74.42 / 78.49
Key Weekly Returns (week ending 09 November 2018):
|
Countries/Regions
World Equities ACWI (iShares MSCI ACWI Index Fund) North American Equities SPY (S&P 500 SPDRs) QQQ (PowerShares QQQ Trust) IWM (Russell 2000 iShares) EWC (Canada iShares) |
Characteristics
World Equity Fund U.S. Large Cap S&P 500 Index U.S. NASDAQ 100 Fund U.S. Russell 2000 Small Cap Fund Canada |
Week % Change
-0.85% -1.45% -2.34% -1.39% -0.11% |
Non-North America Equities
|
VGK (Vanguard European VIPERs) EPP (iShares MSCI Pacific ex-Japan ) EWJ (Japan iShares) EEM (iShares MSCI Emerging Markets) ILF (Latin America 40 Index iShares) Bonds
BND (Vanguard Total U.S. Bond Market) BNDX (Vanguard International Bond ETF) TIP (iShares Barclays TIPS Bond Fund) PCY (PowerShares Emerging Markets Debt Portfolio) |
Europe/U.K Pacific ex-Japan (inc. Australia + NZ) Japan Emerging Markets Latin America US Total Bond (44% Gov't Tsy, 56%Corp) World Investment Grade Bonds ex-US Inflation Protected Gov't Bonds Emerging Market Sovereign Debt |
-1.41% +0.84% -0.73% +2.76% +1.04% +0.41% +0.04% +0.64% -0.61% |
|
Commodities
DBC (DB Commodities Tracking Index Fund) DBA (PowerShares DB Agriculture Fund) GLD (SPDR Gold Trust Shares) SLV (iShares Silver Trust) DBB (PowerShares Metals Fund) USO (United States Oil Fund) |
Commodity Basket Soft Commodity Basket Gold Bullion Silver Bullion Industrial Metals Light Crude Oil |
-1.71% +0.64% +1.00% +1.58% +3.03% -4.96% |
Currencies
|
UUP (PowerShares DB US Dollar Bullish Fund)
FXA (Currency Shares Australian Dollar Trust) FXB (Currency Shares British Pound Sterling Trust) FXC (Currency Shares Canadian Dollar Trust) FXE (Currency Shares Euro Trust) FXY (Currency Shares Japanese Yen Trust) |
U.S. Dollar
Australian Dollar U.K. Sterling Canadian Dollar Euro Japanese Yen |
-0.31%
+1.58% -1.08% +0.37% +0.67% +0.88% |
Charts to Watch
Commodity Basket Index
For the past 4 years the deflationary debt overhang has gripped world economies and equity markets have run up on the "hope" a return to world growth would begin soon. This would typically be reflected in a rise in commodity prices.
Commodities (as measured by the Reuters/Jefferies CRB index) bottomed in early 2016 (along with equities) and have been on a gradual rise. In order to confirm world growth is firming we would like to see commodities moving higher but they have remained range bound throughout 2018.
This past week price closed the week just below the strong resistance (192.89-194.54) and also broke below the 65 week moving average. This is concerning as it indicates deflation (decreasing growth + decreasing inflation) may have returned (as was the case through 2015).
It is now critical the uptrend line and support @ 176.35-179.99 hold any further decline.
Commodities (as measured by the Reuters/Jefferies CRB index) bottomed in early 2016 (along with equities) and have been on a gradual rise. In order to confirm world growth is firming we would like to see commodities moving higher but they have remained range bound throughout 2018.
This past week price closed the week just below the strong resistance (192.89-194.54) and also broke below the 65 week moving average. This is concerning as it indicates deflation (decreasing growth + decreasing inflation) may have returned (as was the case through 2015).
It is now critical the uptrend line and support @ 176.35-179.99 hold any further decline.
Equity Market Volatility
The Volatility Index (VIX) is a measure of expected price fluctuations of options on the S&P 500 index options over the next 30 days (technically the VIX is quoted in percentage points and represents the expected range of movement in the S&P 500 index over the next year, at a 68% confidence level i.e. one standard deviation of the normal probability curve). For example, if the VIX is 15, this represents an expected annualized change, with a 68% probability, of less than 15% up or down.
The VXV uses the same calculation but looks forward 3 months. When the VIX is greater than the VXV (ratio > 1.0) the volatility structure is termed to be in "contango". It indicates traders are much more concerned about short term volatility than they are about longer term volatility and when that ratio returns to "normal" (< 0.93) it is typically a good sign market stress is easing (and a good time to add to equity positions).
As of this weeks market close volatility remained within the "VIX event" area (VIX:VXV ratio > 0.93). Until the ratio falls to less than 0.93 we would expect equity volatility to continue.
The VXV uses the same calculation but looks forward 3 months. When the VIX is greater than the VXV (ratio > 1.0) the volatility structure is termed to be in "contango". It indicates traders are much more concerned about short term volatility than they are about longer term volatility and when that ratio returns to "normal" (< 0.93) it is typically a good sign market stress is easing (and a good time to add to equity positions).
As of this weeks market close volatility remained within the "VIX event" area (VIX:VXV ratio > 0.93). Until the ratio falls to less than 0.93 we would expect equity volatility to continue.
European Equities
Since the 2009 market bottom Europe has been the weakest major equity growth region. As such, we continue to monitor the Euro Stoxx 50 and Stoxx 600 for indications of improving performance out of Europe.
For most of 2015-2016 Europe remained within a deflationary environment with poor stock performance. This changed in late 2016 when both the Stoxx 50 and Stoxx 600 were able to break above their respective trading ranges. These price levels remain important barometers of European equity performance.
This past week the European Stoxx 50 and Stoxx 600 gave mixed indications. The Stoxx 50 closed right at the important support @ 2922-2977 while the Stoxx 600 index remained above the 348-351 price support level. As such, the picture remains mixed as the larger market cap Stoxx 50 is under-performing the more broadly based Stoxx 600 index.
For most of 2015-2016 Europe remained within a deflationary environment with poor stock performance. This changed in late 2016 when both the Stoxx 50 and Stoxx 600 were able to break above their respective trading ranges. These price levels remain important barometers of European equity performance.
This past week the European Stoxx 50 and Stoxx 600 gave mixed indications. The Stoxx 50 closed right at the important support @ 2922-2977 while the Stoxx 600 index remained above the 348-351 price support level. As such, the picture remains mixed as the larger market cap Stoxx 50 is under-performing the more broadly based Stoxx 600 index.
While the broad Stoxx 50 & 600 remain range bound, we are very concerned with European financial stocks. These are represented below using the iShares MSCI European Financials ETF. As can be seen below, European financial stocks are now down over 28% from their January 2018 highs. This is a significant concern as European banks are among the weakest globally and could be a focal point for systematic risk.
Of particular concern is Deutsche Bank which continues to decline (down 92.2% from its 2007 peak!) DB has a massive derivatives exposure (currently estimated at $40T notional with net exposure near $100B) and should they be put forced into a position whereby they need to restructure it will lead to a catastrophic ripple effects worldwide.
Chinese Equities
The Shanghai Composite index was up moderately this past week but remains below key weekly support between 2715-2820 as shown below. The next target for weekly support is @ 2432-2452.
This is a major concern as Chinese growth is key to both Emerging market performance as well as an indication of Developed markets demand. Since its peak in mid-2015, the Shanghai index has lost -52%. We would like to see significant strength return to China further indicating world economic growth continues to increase but currently there is little evidence of a significant change in China's economic performance.
This is a major concern as Chinese growth is key to both Emerging market performance as well as an indication of Developed markets demand. Since its peak in mid-2015, the Shanghai index has lost -52%. We would like to see significant strength return to China further indicating world economic growth continues to increase but currently there is little evidence of a significant change in China's economic performance.
A longer term daily chart (shown below) shows the massive Shanghai market decline from its 2015 peak. Until China can begin to turn around Emerging market equities will continue to be under immense pressure.
PRECIOUS METALS
Below is a ratio price chart of gold stocks (HUI; the "Gold Bugs" Index) to gold bullion going back to 1996 when the HUI first came into existence. As can be seen, whenever the HUI:GOLD ratio dips to below approximately 0.14 (the GREEN zone on the chart) has been a low-risk opportunity to purchase gold stocks.
This past week gold stocks remained deep into the "low-risk vs. high-reward" range and remain near their cheapest valuations in 22 years. Historically purchases of gold equities when within this range have been a very good long term buying opportunities.
This past week gold stocks remained deep into the "low-risk vs. high-reward" range and remain near their cheapest valuations in 22 years. Historically purchases of gold equities when within this range have been a very good long term buying opportunities.
Even more bullish is Silver (chart below) which has entered a price ratio relative to gold (GREEN zone on the chart < .0130) which has historically been a low risk entry point over the past 38 years.
Silver is now at its "cheapest" price since 2008 and 1995 (chart circles). Both previous moves to this ratio led to large silver price gains.
To put the valuation into a longer term perspective, below is a chart of the Gold/Silver ratio (the opposite ratio to Silver/Gold) going back to 1915. Clearly it can be seen a ratio > 80 has historically been an outlier over the past 100+ years:
The current Gold : Silver ratio is 85.04 (as shown below it is at the same level as 1993) and it can be seen each instance in the past where the ratio has crossed above 80 (Green line) has resulted in very good gains.
There is no guarantee the ratio will not go higher (allowing for further silver losses or range bound trade as in 1991-1994) but it is now at a level that deserves attention (cautious traders may want to wait for a reversal < 80 to avoid a potential range bound episode as the 1990's)
EVEN MORE BULLISH is the price of Platinum (chart below) which has exceeded the "buy zone" last seen in 1982! Platinum is 15-20 times rarer than gold and has rarely in history traded at a price below the price of gold (only 9.7% of the time going back to 1971). It is now the cheapest it has been GOING BACK TO AUGUST 1971 WHEN THE U.S. LEFT THE GOLD STANDARD on a relative basis:
- Current Platinum/Gold ratio is 0.69.
- Platinum/Gold ratio < 0.85 has only occurred 4.7% of the time back to 1971.
- Lowest Platinum/Gold ratio since August 1971 when gold began to free-float (gold fix price removed) was hit on 20 Sept 1982 when it hit a ratio of 0.689 (Platinum $300.40/Gold $436.00)
Platinum now sits on a price support extending back to 2005 and, combined with its ratio relative to gold, represents a compelling buy point.
The following charts and commentary (in italics; bold print is our emphasis) are sourced from Kitco from commentary sourced in Feb 2017 when the ratio was near 0.85 (since which Platinum has become even cheaper on a relative basis):
Platinum to gold ratios show wide variance over the 46 year period ranging from highs above 2.5 before and soon after Nixon began taking the United States off the gold standard to periodic lows below 1.0:
Platinum to gold ratios show wide variance over the 46 year period ranging from highs above 2.5 before and soon after Nixon began taking the United States off the gold standard to periodic lows below 1.0:
Our data set covers 553 months beginning in January 1971. The distribution of ratios in both tabular and chart format follows:
Platinum/Gold Ratio: % of Months
Platinum/Gold Ratio: % of Months
- <0.85: 4.7%
- .85-1.01: 5.0%
- 1.0-1.25: 34.7%
- 1.25-1.5: 19.3%
- 1.5-2.0: 15.4%
- 2.0-2.5: 8.9%
- >2.5: 2.0%
From our data set and the distributions of monthly average platinum-gold ratios from January 1971 thru January 2017, I glean the following:
From a compendium of sources, the average crustal abundance of both metals is around 4 ppb. Based solely on this fact, platinum and gold should trade at about the same price.
And indeed, our compilation shows that for nearly 50% of the time since gold was decoupled from the world’s reserve currency and allowed to trade freely on exchanges, the price ratio has ranged from 0.85 to 1.25. That said, since January 1971, the average price of platinum has been $637/oz and gold has been $518/oz for an overall ratio of 1.23:1. Clearly there are other factors other than the nearly equal crustal abundances that account for this historic price relationship.
A variety of supply and demand factors cause platinum to trade at a premium to gold:
Fluctuations in the relative prices of platinum and gold are largely driven by:
Platinum functions both as a precious and industrial metal. It is usually tied to the price of gold in both short- and long-term trading patterns. In times of financial distress and economic turmoil, platinum tends to behave more like gold with widespread hoarding.
The platinum-gold ratio can be used to ascertain whether one metal is over- or undervalued with respect to the other. The current monthly average ratio below 0.85 is unusual and indicates that platinum is severely undervalued with respect to gold *
* The ratio recently hit 0.66 and remains near a record low.
- A ratio of less than 0.75 is a single outlier that occurred once during the second half of 1982 when overall ratios averaged 0.81.
- Ratios <0.85 are quite unusual at 4.7%. They occurred for two months in the first quarter of 1975, the aforementioned six months in 1982, in June-July of 1985, and for an ongoing run of 16 months that commenced in October 2015.
- Ratios from 0.85 to 1.0 constitute 15.0% of the record.
- Pt:Au from 1.0 to 1.25 is the most common range and comprises 34.7% of ratios since 1971.
- The ratios between 1.25 and 1.5 occur 19.3% of the time.
- Ratios from 1.5 to 2.0 make up 15.4% of the record.
- The 2.0-2.5 interval covers 8.9% of the months in our compendium.
- The 11 monthly outliers at >2.5 comprise 2.0% of the total record and have not occurred since 1971.
From a compendium of sources, the average crustal abundance of both metals is around 4 ppb. Based solely on this fact, platinum and gold should trade at about the same price.
And indeed, our compilation shows that for nearly 50% of the time since gold was decoupled from the world’s reserve currency and allowed to trade freely on exchanges, the price ratio has ranged from 0.85 to 1.25. That said, since January 1971, the average price of platinum has been $637/oz and gold has been $518/oz for an overall ratio of 1.23:1. Clearly there are other factors other than the nearly equal crustal abundances that account for this historic price relationship.
A variety of supply and demand factors cause platinum to trade at a premium to gold:
- Platinum is a much smaller market. Cumulative world production of platinum is estimated to be about 5% of gold (9400 tonnes versus 182,000 tonnes). From 1994-2014, 3700 tonnes of platinum were mined versus 52,600 tonnes of gold or about 7% (source: USGS).
- Platinum is largely an industrial metal. Catalytic converters, electronics, petroleum and chemical catalysts, medical technologies, and many minor uses constitute over 60% of its annual demand. Around 30% is used in jewelry and 10% for investment demand. Also, 30% of the annual platinum supply now comes from recycling, mostly from catalytic converters. Some demand is consumed and lost to the marketplace.
- Gold is overwhelmingly a precious metal; 90% is used in jewelry and investments and only 10% in industrial applications. An estimated 98% of all the gold ever mined in the world remains available and held in jewelry, by central banks, in private hoards, and as fabricated products (source: USGS).
- About 70% of yearly platinum mine supply comes from South Africa, a geopolitically risky country. Much new platinum is a by-product of nickel-copper mining and smelting; therefore, annual platinum production is dependent on the supply-demand fundamentals and prices of these primary metals.
Fluctuations in the relative prices of platinum and gold are largely driven by:
- the overall growth and health of the world’s economy and in the case of platinum, the automotive industry;
- labor, power, currency, and political issues in South Africa that cause major perturbations in the platinum supply;
- safe haven hoarding of gold and to a much lesser extent, platinum, in times of economic uncertainty and major geopolitical events; speculators moving in and out of paper markets of both metals (bullion exchanges, ETFs, and derivatives) and to a lesser extent, central bank trading of physical gold.
Platinum functions both as a precious and industrial metal. It is usually tied to the price of gold in both short- and long-term trading patterns. In times of financial distress and economic turmoil, platinum tends to behave more like gold with widespread hoarding.
The platinum-gold ratio can be used to ascertain whether one metal is over- or undervalued with respect to the other. The current monthly average ratio below 0.85 is unusual and indicates that platinum is severely undervalued with respect to gold *
* The ratio recently hit 0.66 and remains near a record low.
Elliott Wave
We use Elliott Wave theory in conjunction with cycle analysis to attempt to "crystal ball" what to expect going forward. We have included some basic information below for those who might be interested followed by our current interpretation/analysis.
The Elliott wave principle is a form of technical analysis that some traders use to analyze financial market cycles and forecast market trends by identifying extremes in investor psychology, highs and lows in prices, and other collective factors. Ralph Nelson Elliott (1871–1948), a professional accountant, discovered the underlying social principles and developed the analytical tools in the 1930s. He proposed that market prices unfold in specific patterns, which practitioners today call Elliott waves, or simply waves. Elliott published his theory of market behavior in the book The Wave Principle in 1938, summarized it in a series of articles inFinancial World magazine in 1939, and covered it most comprehensively in his final major work, Nature’s Laws: The Secret of the Universe in 1946. Elliott stated that "because man is subject to rhythmical procedure, calculations having to do with his activities can be projected far into the future with a justification and certainty heretofore unattainable."
The Elliott Wave Principle posits that collective investor psychology, or crowd psychology, moves between optimism and pessimism in natural sequences. These mood swings create patterns evidenced in the price movements of markets at every degree of trend or time scale.
In Elliott's model, market prices alternate between an impulsive, or motive phase, and a corrective phase on all time scales of trend, as the illustration shows. Impulses are always subdivided into a set of 5 lower-degree waves, alternating again between motive and corrective character, so that waves 1, 3, and 5 are impulses, and waves 2 and 4 are smaller retraces of waves 1 and 3. Corrective waves subdivide into 3 smaller-degree waves starting with a five-wave counter-trend impulse, a retrace, and another impulse.
In a bear market the dominant trend is downward, so the pattern is reversed—five waves down and three up. Motive waves always move with the trend, while corrective waves move against it.
In Elliott's model, market prices alternate between an impulsive, or motive phase, and a corrective phase on all time scales of trend, as the illustration shows. Impulses are always subdivided into a set of 5 lower-degree waves, alternating again between motive and corrective character, so that waves 1, 3, and 5 are impulses, and waves 2 and 4 are smaller retraces of waves 1 and 3. Corrective waves subdivide into 3 smaller-degree waves starting with a five-wave counter-trend impulse, a retrace, and another impulse.
In a bear market the dominant trend is downward, so the pattern is reversed—five waves down and three up. Motive waves always move with the trend, while corrective waves move against it.
Wave 1 (I): Wave one is rarely obvious at its inception. When the first wave of a new bull market begins, the fundamental news is almost universally negative. The previous trend is considered still strongly in force. Fundamental analysts continue to revise their earnings estimates lower; the economy probably does not look strong. Sentiment surveys are decidedly bearish, put options are in vogue, and implied volatility in the options market is high. Volume might increase a bit as prices rise, but not by enough to alert many technical analysts.
Wave 2 (II): Wave two corrects wave one, but can never extend beyond the starting point of wave one. Typically, the news is still bad. As prices retest the prior low, bearish sentiment quickly builds, and "the crowd" haughtily reminds all that the bear market is still deeply ensconced. Still, some positive signs appear for those who are looking: volume should be lower during wave two than during wave one, prices usually do not retrace more than 61.8% (see Fibonacci section below) of the wave one gains, and prices should fall in a three wave pattern.
Wave 3 (III): Wave three is usually the largest and most powerful wave in a trend (although some research suggests that in commodity markets, wave five is the largest). The news is now positive and fundamental analysts start to raise earnings estimates. Prices rise quickly, corrections are short-lived and shallow. Anyone looking to "get in on a pullback" will likely miss the boat. As wave three starts, the news is probably still bearish, and most market players remain negative; but by wave three's midpoint, "the crowd" will often join the new bullish trend. Wave three often extends wave one by a ratio of 1.618:1.
Wave 4 (IV): Wave four is typically clearly corrective. Prices may meander sideways for an extended period, and wave four typically retraces less than 38.2% of wave three (see Fibonacci relationships below). Volume is well below than that of wave three. This is a good place to buy a pull back if you understand the potential ahead for wave 5. Still, fourth waves are often frustrating because of their lack of progress in the larger trend.
Wave 5 (V): Wave five is the final leg in the direction of the dominant trend. The news is almost universally positive and everyone is bullish. Unfortunately, this is when many average investors finally buy in, right before the top. Volume is often lower in wave five than in wave three, and many momentum indicators start to show divergences (prices reach a new high but the indicators do not reach a new peak). At the end of a major bull market, bears may very well be ridiculed (recall how forecasts for a top in the stock market during 2000 were received).
Wave A: Corrections are typically harder to identify than impulse moves. In wave A of a bear market, the fundamental news is usually still positive. Most analysts see the drop as a correction in a still-active bull market. Some technical indicators that accompany wave A include increased volume, rising implied volatility in the options markets and possibly a turn higher in open interest in related futures markets.
Wave B: Prices reverse higher, which many see as a resumption of the now long-gone bull market. Those familiar with classical technical analysis may see the peak as the right shoulder of a head and shoulders reversal pattern. The volume during wave B should be lower than in wave A. By this point, fundamentals are probably no longer improving, but they most likely have not yet turned negative.
Wave C: Prices move impulsively lower in five waves. Volume picks up, and by the third leg of wave C, almost everyone realizes that a bear market is firmly entrenched. Wave C is typically at least as large as wave A and often extends to 1.618 times wave A or beyond.
Wave 2 (II): Wave two corrects wave one, but can never extend beyond the starting point of wave one. Typically, the news is still bad. As prices retest the prior low, bearish sentiment quickly builds, and "the crowd" haughtily reminds all that the bear market is still deeply ensconced. Still, some positive signs appear for those who are looking: volume should be lower during wave two than during wave one, prices usually do not retrace more than 61.8% (see Fibonacci section below) of the wave one gains, and prices should fall in a three wave pattern.
Wave 3 (III): Wave three is usually the largest and most powerful wave in a trend (although some research suggests that in commodity markets, wave five is the largest). The news is now positive and fundamental analysts start to raise earnings estimates. Prices rise quickly, corrections are short-lived and shallow. Anyone looking to "get in on a pullback" will likely miss the boat. As wave three starts, the news is probably still bearish, and most market players remain negative; but by wave three's midpoint, "the crowd" will often join the new bullish trend. Wave three often extends wave one by a ratio of 1.618:1.
Wave 4 (IV): Wave four is typically clearly corrective. Prices may meander sideways for an extended period, and wave four typically retraces less than 38.2% of wave three (see Fibonacci relationships below). Volume is well below than that of wave three. This is a good place to buy a pull back if you understand the potential ahead for wave 5. Still, fourth waves are often frustrating because of their lack of progress in the larger trend.
Wave 5 (V): Wave five is the final leg in the direction of the dominant trend. The news is almost universally positive and everyone is bullish. Unfortunately, this is when many average investors finally buy in, right before the top. Volume is often lower in wave five than in wave three, and many momentum indicators start to show divergences (prices reach a new high but the indicators do not reach a new peak). At the end of a major bull market, bears may very well be ridiculed (recall how forecasts for a top in the stock market during 2000 were received).
Wave A: Corrections are typically harder to identify than impulse moves. In wave A of a bear market, the fundamental news is usually still positive. Most analysts see the drop as a correction in a still-active bull market. Some technical indicators that accompany wave A include increased volume, rising implied volatility in the options markets and possibly a turn higher in open interest in related futures markets.
Wave B: Prices reverse higher, which many see as a resumption of the now long-gone bull market. Those familiar with classical technical analysis may see the peak as the right shoulder of a head and shoulders reversal pattern. The volume during wave B should be lower than in wave A. By this point, fundamentals are probably no longer improving, but they most likely have not yet turned negative.
Wave C: Prices move impulsively lower in five waves. Volume picks up, and by the third leg of wave C, almost everyone realizes that a bear market is firmly entrenched. Wave C is typically at least as large as wave A and often extends to 1.618 times wave A or beyond.
S&P 500 Weekly Elliott Wave Chart
For those who are new to Elliott wave, it is essential to understand as market participant psychology changes (and, as a consequence, the various waves unfold in specific patterns) objective analysis requires readjustment of counts as the waves unfold. Elliott wave is not a "crystal ball" but more a quantitative tool to analyze changes in market psychology as market conditions evolve. Elliott wave analysis can be quite confusing and intricate but in our experience we find it is best used as a "road map" towards the bigger picture.
Below is the current long term view of the equity market from 1929-Present. Clearly the 2008-2009 market decline was of such stature as to be historic. Given such, we have begun to think out of the box with respect to Elliott Wave as it has recently progressed.
In broadest terms markets cycle through 65-80 year "Grand Super-Cycles" (generally coinciding with generational demographic expansion/contraction). If one were to use the end of the 1929-1932 market crash/depression as the beginning point for a new Grand Super-Cycle, it could be argued a complete 77 year Grand Super-Cycle began in 1932 and ended in 2009. A 5 wave Super-Cycle advance (SC-1, SC-2, SC-3, SC-4, SC-5) occurred between 1932 and 2000 (68 years in length) followed by a 9 year Super-Cycle decline (SC-A, SC-B, SC-C) from 2000-2009 (culminating in the 2007-2009 market decline; the worst since the great depression). If this is the case we would have completed a full 77 year Elliott Wave Grand Super-Cycle pattern from 1932-2009 (5 wave Super-Cycle advance with a 3 wave Super-Cycle decline) and have embarked on a new 65-80 year Grand Super-Cycle beginning in March 2009.
We have marked this Grand Super-Cycle on the below chart with the 68 year SC-1 through to the SC-5 advance (1932-2000) followed by the 9 year SC-A, SC-B, and SC-C decline (2000-2009). If this is the case, an argument can be made the period from 2009-to-Present is we are currently within Intermediate wave V of Major Wave 1 of Super-Cycle 1 within a still young new 77+ year Grand Super-Cycle (expected to extend to 2085-2090).
Below is the current long term view of the equity market from 1929-Present. Clearly the 2008-2009 market decline was of such stature as to be historic. Given such, we have begun to think out of the box with respect to Elliott Wave as it has recently progressed.
In broadest terms markets cycle through 65-80 year "Grand Super-Cycles" (generally coinciding with generational demographic expansion/contraction). If one were to use the end of the 1929-1932 market crash/depression as the beginning point for a new Grand Super-Cycle, it could be argued a complete 77 year Grand Super-Cycle began in 1932 and ended in 2009. A 5 wave Super-Cycle advance (SC-1, SC-2, SC-3, SC-4, SC-5) occurred between 1932 and 2000 (68 years in length) followed by a 9 year Super-Cycle decline (SC-A, SC-B, SC-C) from 2000-2009 (culminating in the 2007-2009 market decline; the worst since the great depression). If this is the case we would have completed a full 77 year Elliott Wave Grand Super-Cycle pattern from 1932-2009 (5 wave Super-Cycle advance with a 3 wave Super-Cycle decline) and have embarked on a new 65-80 year Grand Super-Cycle beginning in March 2009.
We have marked this Grand Super-Cycle on the below chart with the 68 year SC-1 through to the SC-5 advance (1932-2000) followed by the 9 year SC-A, SC-B, and SC-C decline (2000-2009). If this is the case, an argument can be made the period from 2009-to-Present is we are currently within Intermediate wave V of Major Wave 1 of Super-Cycle 1 within a still young new 77+ year Grand Super-Cycle (expected to extend to 2085-2090).
Our original EWT weekly chart is shown below with "classic" Elliott Wave indications projecting we are within the ending stages of the 2009-present bull market (with projected Fibonacci Wave extension targets for the Primary Wave V top as shown):
At present we remained torn between 2 possible Elliott Wave counts (which centers upon whether the market decline between mid 2015-early 2016 was a bear market or not). It "technically" did not decline 20% on the S&P 500 (but did exceed a 20% decline on other indices) so we are left with 2 possibilities:
The difference between the 2 counts is either a 10-15% pullback (in the 1st case of a P-II decline) or a > 40% bear market decline (in the 2nd case). Only once the decline has begun will be able decipher which count is correct but in both cases it indicates we are near a market top (either a short term top or a major bull market major top).
- If the 2015-2016 decline was a bear market (ending a full 5 wave up/3 wave down Elliott Wave Pattern), we have perhaps several years to go to complete the current bull market (which would have begun in Feb 2016). If correct, we are now nearing the top of Primary Wave I of a five wave advance. We would expect a shallow Primary Wave II (down) to near 2500 (-15%) followed by a Primary Wave III up, IV down, and V up to complete the bull market cycle. This would extend the current bull market years into the future.
- Alternately, if the 2015-2016 decline was not a bear market (and instead Wave III up/Wave IV down as indicated on the 2nd chart), we would now be competing Wave 5 up of the entire bull market advance. If this count is correct the bull market is very near its end and a Primary Wave A, B, C bear market with a projected decline to near 1820 (> -40%) decline is forthcoming.
The difference between the 2 counts is either a 10-15% pullback (in the 1st case of a P-II decline) or a > 40% bear market decline (in the 2nd case). Only once the decline has begun will be able decipher which count is correct but in both cases it indicates we are near a market top (either a short term top or a major bull market major top).
Market Valuation
U.S. (NYSE) Margin Debt
We have been studying with interest the current margin debt on US markets. For those who are unfamiliar, margin debt is the amount of "loans" taken out by market speculators to leverage up their equity positions. During normal bull markets margin debt will increase as the market continues to climb. This increased margin debt amplifies equity market prices. However, at some point speculators become nervous and begin to reduce their margin positions. This reduction in margin is like letting the air out of a balloon and deflates equity asset prices.
As can be seen on the below graphic, both the 2000 and 2007 market tops were signaled in advance by tops in margin debt (margin debt not inflation adjusted on this chart):
As can be seen on the below graphic, both the 2000 and 2007 market tops were signaled in advance by tops in margin debt (margin debt not inflation adjusted on this chart):
The following chart (source: Doug Short) shows US equity margin debt adjusted for inflation. As can be seen, in both 2000 and 2007 inflation-adjusted margin debt peaked and then began to decline leading to the tops in the S&P 500 index. As such, margin debt rollovers acts as a good lead indicator of possible future market weakness.
As of the end of August 2018 US margin debt remained near 300% and has not shown a significant decline (yet). This remains supportive for US equities until it begins to decline meaningfully.
U.S. Equity market Valuation Models (data as of 31 August 2018)
(Source: D. Short)
Below is a graph representing 4 different long-term valuation measures plotted back to 1900 (118 years):
As of 30 September 2018 the average of these 4 measures places the U.S. stock market (S&P 500 index) as being 120% overvalued relative to its long term mean. This is the 2nd highest valuation in the history of the stock market going back to 1900. This level is well over 2 standard deviations above the mean and above the market peaks in both 2007 and 1929. It is only surpassed by the 2000 dotcom bubble peak.
- The Crestmont Research P/E Ratio
- The cyclical P/E ratio using the trailing 10-year earnings as the divisor
- The Q Ratio, which is the total price of the market divided by its replacement cost
- The relationship of the S&P Composite price to a regression trendline
As of 30 September 2018 the average of these 4 measures places the U.S. stock market (S&P 500 index) as being 120% overvalued relative to its long term mean. This is the 2nd highest valuation in the history of the stock market going back to 1900. This level is well over 2 standard deviations above the mean and above the market peaks in both 2007 and 1929. It is only surpassed by the 2000 dotcom bubble peak.
Another popular valuation metric is know as the "Buffett Indicator". In an interview with Fortune magazine back in 2001 Warren Buffett remarked "it is probably the best single measure of where valuations stand at any given moment."
The indicator measures the price of Corporate Equities (Mkt Cap) to Gross Domestic Product (GDP) as a ratio going back to the 1950's. As can be seen below, the ratio of equity prices relative to GDP currently stands at 151.1%. It has exceeded the recent 2015 peak of 128.9% and is second only to the 2000 equity peak of 161.1% in terms of equity overvaluation relative to economic output.
The de-trended graph indicates it would take a 48% market decline to return valuations back to the long term detrended regression line (shown in red on the 1st chart). This would be our minimum expected decline when the next bear market begins.
7-Year Asset Class Real Return Forecast (as of 31 August 2018)
(Source: GMO LLC)
(Source: GMO LLC)
Each month GMO (Grantham, Mayo, Van Otterloo & Co.) publishes a forward forecast for expected annual real rates of return (i.e. inflation adjusted) for a number of different asset classes with a 7 year forward outlook. They have historically had a very good track record (0.97 correlation) of estimating forward 7 year asset class returns based primarily upon current valuations combined with mean reversion. Charts are published following analysis of the previous months data.
I have followed GMO's methodology with interest for many years. In my experience I have found them to be conservative over the shorter term with a tenancy to make calls too early. HOWEVER, similar to Dr. John Hussman of Hussman Funds, they also tend to be right over the longer term. As such, I use their outlook as part of the valuation model within the ECAM 5 Factor model.
Above is their current forecast of expected real returns (after inflation) for the next 7 years broken down by asset class. It is clear based upon current market valuations GMO forecasts well below average annual investment returns in all asset classes with a 7 year forward time horizon (the dotted line is the historical real return of U.S. equities of +6.5% per year). This is important for those who may be soon retiring and expecting "average" returns on their equity and bond investments over the next 7 years. Current high market valuations make it a certainty forward returns over the next 7-10 years will be well below historical averages.
I have followed GMO's methodology with interest for many years. In my experience I have found them to be conservative over the shorter term with a tenancy to make calls too early. HOWEVER, similar to Dr. John Hussman of Hussman Funds, they also tend to be right over the longer term. As such, I use their outlook as part of the valuation model within the ECAM 5 Factor model.
Above is their current forecast of expected real returns (after inflation) for the next 7 years broken down by asset class. It is clear based upon current market valuations GMO forecasts well below average annual investment returns in all asset classes with a 7 year forward time horizon (the dotted line is the historical real return of U.S. equities of +6.5% per year). This is important for those who may be soon retiring and expecting "average" returns on their equity and bond investments over the next 7 years. Current high market valuations make it a certainty forward returns over the next 7-10 years will be well below historical averages.
12-Year US Equity Real Return Forecast
(Source: Hussman Funds)
(Source: Hussman Funds)
S&P 500 12 year forward projected annual returns (Mkt Cap-GVA)
S&P 500 12 year forward projected annual returns (margin-adjusted CAPE)
Balanced Portfolio 12 year forward projected annual returns
(60% in the S&P 500, 30% in Treasury bonds, and 10% in Treasury bills)
(60% in the S&P 500, 30% in Treasury bonds, and 10% in Treasury bills)
Dr. John Hussman uses a unique measure of estimating future equity returns over a 12 year period based upon market capitalization relative to gross corporate value added. He claims the measure has a 91.9% correlation to actual S&P 500 future returns over a 12 year horizon. As per his previous explanations:
"Across the scores of measures I’ve evaluated or created over three decades of research, the ratio of non-financial market capitalization to corporate gross value added (essentially corporate revenues, including estimated foreign revenues, excluding double-counting of intermediate inputs) is best correlated to actual subsequent market returns over a 10-12 year horizon".
As can be seen on the above chart, since 1950 his approach has correlated quite closely with future returns (blue line is his estimates and the red line the subsequent returns 12 years later). Currently his calculations project a "buy and hold" rate of return on the S&P 500 index of -0.6% nominal per year out to 2028 should one employ a "buy and hold" strategy. Clearly tactical asset allocation will be required as we transition to the back half of the current market cycle.
His recent conclusion:
" At present, the valuation measures that we find best correlated with actual subsequent S&P 500 total returns are at the most offensive levels in history, matching or eclipsing the 1929 and 2000 extremes. Even considering the level of interest rates, economic growth, and other factors, the S&P 500 currently stands about 2.8 times the level that we believe the index will revisit over the completion of the current market cycle, implying an interim market loss something on the order of -64%. Moreover, the most reliable valuation measures uniformly imply the likelihood of negative total returns in the S&P 500 over the coming 10-12 year period."
Clearly the high level of current market valuations does not bode well for the "buy and hope" investor.
"Across the scores of measures I’ve evaluated or created over three decades of research, the ratio of non-financial market capitalization to corporate gross value added (essentially corporate revenues, including estimated foreign revenues, excluding double-counting of intermediate inputs) is best correlated to actual subsequent market returns over a 10-12 year horizon".
As can be seen on the above chart, since 1950 his approach has correlated quite closely with future returns (blue line is his estimates and the red line the subsequent returns 12 years later). Currently his calculations project a "buy and hold" rate of return on the S&P 500 index of -0.6% nominal per year out to 2028 should one employ a "buy and hold" strategy. Clearly tactical asset allocation will be required as we transition to the back half of the current market cycle.
His recent conclusion:
" At present, the valuation measures that we find best correlated with actual subsequent S&P 500 total returns are at the most offensive levels in history, matching or eclipsing the 1929 and 2000 extremes. Even considering the level of interest rates, economic growth, and other factors, the S&P 500 currently stands about 2.8 times the level that we believe the index will revisit over the completion of the current market cycle, implying an interim market loss something on the order of -64%. Moreover, the most reliable valuation measures uniformly imply the likelihood of negative total returns in the S&P 500 over the coming 10-12 year period."
Clearly the high level of current market valuations does not bode well for the "buy and hope" investor.
Global Asset Class 10-year Expected Return Forecast (as of 31 July 2018)
(Source: Research Affiliates)
(Source: Research Affiliates)
Cycle Commentary
At left is a 20 year chart of the monthly performance of the S&P 500 index (1998-2017) showing seasonal rates of return by month.
On the chart the top number is the percentage of months in which the market closed higher than it opened and at the bottom is the average % return by month.
As can be seen, over the past 20 years the period October-April yearly offers the highest potential return (cumulative +8.0% average return) while the period May-September offers little in total return (-2.2% cumulative average return).
On the chart the top number is the percentage of months in which the market closed higher than it opened and at the bottom is the average % return by month.
As can be seen, over the past 20 years the period October-April yearly offers the highest potential return (cumulative +8.0% average return) while the period May-September offers little in total return (-2.2% cumulative average return).
In the interest of moving more towards recent market action, below is the past 10 years monthly returns for the S&P 500 index ($SPX), the Dow Jones Industrial index ($INDU), the NASDAQ Composite index ($COMPQ) and the Dow Jones World index ($DJW).
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S&P 500 Seasonality (historical 50 year look-back annual seasonality)
"Turning to the months ahead, the performance for January and February is rather lacklustre compared to the months that bookend this start of year period. The S&P 500 Index has gained an average of 0.8% and 0.2%, respectively in the first two months of the year, based on the past 50 periods. These months are easily the weakest of the best six month trend for stocks. The large-cap benchmark has closed positive just over half of the time (56%) in January and February, making this winter lull little better than a flip of a coin in terms of the frequency of success.. Returns for January have ranged from a loss of 8.6% in 2009 to a gain of 13.2% in 1987. Performance tends to gyrate in the middle of January with the majority of the strength achieved in the first few days and last few days of the period".
Ned Davis Research 2018 Composite Model
Composite directional model forecast for the S&P 500 index based upon the following parameters equal weighted:
- 10 year Decennial Market Cycle (Year 7)
- 4 year Presidential Market Cycle (Year 2)
- 1 year Annual Seasonal Market Cycle
U.S. 4 Year Presidential Election Cycle
*2018 is Year 2 (post-election year)*
As can be seen on the chart above, historically since 1928 the 2nd year of the 4 year Presidential Cycle tends to provide the worst returns of the 4 year cycle.
While we do not make investment decisions strictly based upon cycle analysis, we are cognizant of the historical nature of these cycles and tend to be a bit more wary as they approach.
While we do not make investment decisions strictly based upon cycle analysis, we are cognizant of the historical nature of these cycles and tend to be a bit more wary as they approach.
Presidential Cycle S&P 500 returns (inc. dividends):
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1988-Year 4: +12.40%
1989-Year1: +27.25% 1990-Year 2: -6.56% 1991-Year 3: +26.31% 1992-Year 4: +4.46% 1993-Year 1: +7.06% 1994-Year 2: -1.54% 1995-Year 3: +34.11% 1996-Year 4: +20.26% 1997-Year 1: +31.01% 1998-Year 2: +26.67% 1999-Year 3: +19.53% 2000-Year 4: -10.14% |
2001-Year 1: -13.04%
2002-Year 2: -23.37% 2003-Year 3: +26.38% 2004-Year 4: +8.99% 2005-Year 1: +3.00% 2006-Year 2: +13.62% 2007-Year 3: +3.53% 2008-Year 4: -38.49% 2009-Year 1: +23.45% 2010-Year 2: +12.78% 2011-Year 3: +0.00% 2012-Year 4: +13.41% 2013-Year 1: +29.60% |
2014-Year 2: +11.39%
2015-Year 3: -0.73% 2016-Year 4: +11.96% 2017-Year 1: +21.83% 2018-Year 2: TBD |