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Market/Model Commentary
Currently the active model portfolio as defined by our 5-factor model is:
- Please click on the above magenta link to review the suggested allocations if required.
- The Risk-Reduction Level 1 model was initiated 18 March 2022.
ECAM 5-Factor Composite Model
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ECONOMIC FACTOR SUB-MODEL
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TECHNICAL FACTOR SUB-MODEL
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VALUATION FACTOR SUB-MODEL
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SENTIMENT FACTOR SUB-MODEL
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LIQUIDITY (Stress) FACTOR SUB-MODEL
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"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 (Technical Analyst)
"Investing is the intersection of economics and psychology"
Seth Klarman (Hedge fund Manager, Baupost Group)
"Everyone's got a plan ..... until they get punched in the face"
Mike Tyson (Former World Heavyweight Boxing Champion)
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 (Technical Analyst)
"Investing is the intersection of economics and psychology"
Seth Klarman (Hedge fund Manager, Baupost Group)
"Everyone's got a plan ..... until they get punched in the face"
Mike Tyson (Former World Heavyweight Boxing Champion)
Latest Updates
DOW JONES GLOBAL INDEX
(03 February 2023)
Global equities were higher this past week with a percentage return (as measured by the Dow Jones Global Index) of +0.76%. This week they closed above the 40 week moving average and remains at significant price resistance from the May/Aug 2022 closing highs (gray banded area).
Technical Analysis Summary (Dow Jones Global Index)
Click to set custom HTML
Dow Jones Global Index Historical Monthly Returns
The month of January closed with a gain of +7.1% as we remain within the seasonally strong period for global markets. We are now within February which has historically been an "average" month within the seasonal cycle:
- -6.3% cumulative percentage return over the past 23 years.
- 52.2% win percentage.
- greatest gain +5.2% (2015)
- greatest loss -10.2% (2009)
Global Macro "GRID" Matrix Roadmap
(source: 42 Macro)
(source: 42 Macro)
"I skate to where the puck is going to be; not where it has been."
Wayne Gretzky
Wayne Gretzky
- Globally (median conditional probabilities of each regime are shown at the bottom of the table) the current bottom-up global macro roadmap model indicates we are about to rotation into a period of global "Deflation" (where both global growth and inflation are decelerating simultaneously) as we proceed through to the end of 2022. This suggests potential weakness in equities/strength in bonds could be expected into 2023.
Growth Reflation Inflation Deflation
(weekly update as of 27 January 2023)
(weekly update as of 27 January 2023)
Full Global Data-set
Zoomed-in Global Data-set
Conditional Probabilities of Regime Occurrence
Asset Class Over/Under Performance Per Quadrant
(20-year backtest using Bloomberg data)
Weekly Global Macro Review
U.S. Equities
Most of the major US indexes extended their winning streaks into February, helped by some upside surprises in economic data and fourth-quarter earnings reports, as well as what some saw as encouraging signals from the Federal Reserve. The S&P 500 Index reached an intraday high of 4,195 on Thursday, its best level since late August 2022.
Most of the major US indexes extended their winning streaks into February, helped by some upside surprises in economic data and fourth-quarter earnings reports, as well as what some saw as encouraging signals from the Federal Reserve. The S&P 500 Index reached an intraday high of 4,195 on Thursday, its best level since late August 2022.
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S&P 500:
DJIA: NASDAQ 100: S&P 400 Mid-cap: Russell 2000 Small Cap: |
+1.6%
-0.2% +3.3% +3.4% +3.9% |
Mega-Cap tech earnings were the focus of the week and delivered mixed messages. A +23% jump on Thursday in the share price of Facebook’s parent company (Meta Platforms) provided a major boost to the Nasdaq Composite Index and other mega-cap technology and internet-related growth stocks. Some of the enthusiasm drained on Friday, however, following disappointing results and outlooks from Apple, Alphabet (Google’s parent company), and Amazon.
Technical factors may have accelerated the week’s gains. On Thursday, the S&P 500 marked its first “golden cross” in two-and-a-half years, as the index’s 50-day moving average drifted slightly above its 200-day average. The metric is used by many technical analysts and CTA’s (commodity trading advisors) as an indicator that an upward trend in the markets is gaining momentum. Heavy “short covering,” (the buying of stocks by hedge funds and others to cover their bets that the stock’s price will fall) also appeared to be at work.
The busiest week of quarterly earnings reports (companies representing roughly a third of the S&P 500’s market capitalization released results) coincided with a string of closely watched economic reports, resulting in multiple crosswinds for investors to consider. Better than expected earnings from General Motors, United Parcel Service, and other companies helped futures gain momentum on Tuesday morning, but the real shift in sentiment followed the release of the Labor Department’s Employment Cost Index (ECI) as trading opened. The ECI rose 1.0% in the final quarter of 2022, a bit less than expected and its lowest level in a year, providing further evidence that a key concern of Fed policymakers (inflationary wage growth) was moving in the right direction.
On Wednesday, the Fed raised official short-term interest rates by another quarter point, as was widely expected, and Fed Chair Jerome Powell acknowledged at his post-meeting press conference that the ECI was “abating a little bit.” Powell also noted, however, that the ECI and average hourly earnings gains remained “fairly elevated” and that “the disinflationary process” was “at an early stage” and focused on goods prices because of healing supply chains. The major indexes jumped as investors seemed to interpret the overall tone of his remarks as more dovish than expected.
Friday’s economic data brought major surprises that caused investors to reconsider their rate expectations and sent bond yields sharply higher. The Labor Department reported that employers added 517,000 nonfarm jobs in January, (roughly triple consensus estimates) and the biggest gain in six months. The unemployment rate slipped to 3.4%, its lowest level since 1969. Investors seemed to take the news mostly in stride, as the tight labor market did not seem to be flowing proportionately into wage gains.
Friday’s other surprise was January’s jump in services sector activity. The Institute for Supply Management reported that its index of nonmanufacturing activity jumped to 55.2 from 49.2 in December, reversing nearly all its steep drop in December and moving it well back into expansion territory (the 50 level separates contraction from expansion).
US Bonds
Powell’s seemingly dovish comments, reassuring inflation signals, and upside economic surprises sent the yield on the benchmark 10-year U.S. Treasury note on a round trip over the week, falling as low as 3.33% in intraday trading on Thursday before turning higher to end Friday at 3.53%, just above where it had ended the previous week. (Bond prices and yields move in opposite directions.)
Investment-grade corporate credit spreads moved tighter (indicating strong performance relative to Treasuries and reduced equity risk) over the week. Conditions were generally supportive as volumes in the secondary market were above daily averages.
High yield bonds tracked equities higher, and the broad risk-on sentiment throughout most of the week led to expectations for the volume of new high yield deals to pick up.
Technical factors may have accelerated the week’s gains. On Thursday, the S&P 500 marked its first “golden cross” in two-and-a-half years, as the index’s 50-day moving average drifted slightly above its 200-day average. The metric is used by many technical analysts and CTA’s (commodity trading advisors) as an indicator that an upward trend in the markets is gaining momentum. Heavy “short covering,” (the buying of stocks by hedge funds and others to cover their bets that the stock’s price will fall) also appeared to be at work.
The busiest week of quarterly earnings reports (companies representing roughly a third of the S&P 500’s market capitalization released results) coincided with a string of closely watched economic reports, resulting in multiple crosswinds for investors to consider. Better than expected earnings from General Motors, United Parcel Service, and other companies helped futures gain momentum on Tuesday morning, but the real shift in sentiment followed the release of the Labor Department’s Employment Cost Index (ECI) as trading opened. The ECI rose 1.0% in the final quarter of 2022, a bit less than expected and its lowest level in a year, providing further evidence that a key concern of Fed policymakers (inflationary wage growth) was moving in the right direction.
On Wednesday, the Fed raised official short-term interest rates by another quarter point, as was widely expected, and Fed Chair Jerome Powell acknowledged at his post-meeting press conference that the ECI was “abating a little bit.” Powell also noted, however, that the ECI and average hourly earnings gains remained “fairly elevated” and that “the disinflationary process” was “at an early stage” and focused on goods prices because of healing supply chains. The major indexes jumped as investors seemed to interpret the overall tone of his remarks as more dovish than expected.
Friday’s economic data brought major surprises that caused investors to reconsider their rate expectations and sent bond yields sharply higher. The Labor Department reported that employers added 517,000 nonfarm jobs in January, (roughly triple consensus estimates) and the biggest gain in six months. The unemployment rate slipped to 3.4%, its lowest level since 1969. Investors seemed to take the news mostly in stride, as the tight labor market did not seem to be flowing proportionately into wage gains.
Friday’s other surprise was January’s jump in services sector activity. The Institute for Supply Management reported that its index of nonmanufacturing activity jumped to 55.2 from 49.2 in December, reversing nearly all its steep drop in December and moving it well back into expansion territory (the 50 level separates contraction from expansion).
US Bonds
Powell’s seemingly dovish comments, reassuring inflation signals, and upside economic surprises sent the yield on the benchmark 10-year U.S. Treasury note on a round trip over the week, falling as low as 3.33% in intraday trading on Thursday before turning higher to end Friday at 3.53%, just above where it had ended the previous week. (Bond prices and yields move in opposite directions.)
Investment-grade corporate credit spreads moved tighter (indicating strong performance relative to Treasuries and reduced equity risk) over the week. Conditions were generally supportive as volumes in the secondary market were above daily averages.
High yield bonds tracked equities higher, and the broad risk-on sentiment throughout most of the week led to expectations for the volume of new high yield deals to pick up.
Europe/UK Equities
Shares in Europe rose on hopes that central banks may be nearing the end of the most restrictive phase of this monetary tightening cycle. In local currency terms, the pan-European STOXX Europe 600 Index ended the week +1.2% higher.
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German DAX:
French CAC: Italian MIB: Spanish IBEX: U.K. FTSE 100: |
+2.2%
+1.9% +1.9% +1.8% +1.8% |
The ECB raised its key interest rates by half a percentage point, taking the deposit rate to 2.5%. The central bank expects to raise rates by the same amount in March due to underlying inflation pressures. The ECB added that it “will then evaluate the subsequent path of its monetary policy,” with “future decisions continuing to be data-dependent and following a meeting-by-meeting approach.”
The latest data showed the headline rate of inflation in the Eurozone cooled more than expected in January to an annual rate of 8.5%, from 9.2% the previous month. But core inflation (excluding changes in food and energy prices) remained at an all-time high of 5.2%. The Eurozone GDP unexpectedly grew 0.1% in the last three months of 2022.
The BoE’s nine policymakers voted 7-2 to raise the key interest rate by half a percentage point to 4%, in line with expectations. The bank said headline inflation has begun to edge back and projected that this metric would fall sharply over the course of the year, reaching 3% in the first quarter of 2024. But the BoE warned that “if there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required.” It also said that “the risks to inflation are skewed significantly to the upside.”
The BoE also said a UK recession was likely to be “much shallower” than forecast in November, largely due to a drop in energy prices. Meanwhile, the International Monetary Fund (IMF) projected that the UK economy would contract 0.5% this year.
Eurozone/UK Bonds
European government bond yields declined broadly as investors embraced the potential that major central banks could pivot their monetary policy later this year. Germany’s 10-year sovereign bond yield fell toward 2% despite the European Central Bank (ECB) raising interest rates by half a percentage point and signaling a similar move in March. French and Swiss government bond yields also declined.
In the UK, where the BoE also hiked rates, yields on benchmark 10-year debt followed global counterparts and approached 3%.
The latest data showed the headline rate of inflation in the Eurozone cooled more than expected in January to an annual rate of 8.5%, from 9.2% the previous month. But core inflation (excluding changes in food and energy prices) remained at an all-time high of 5.2%. The Eurozone GDP unexpectedly grew 0.1% in the last three months of 2022.
The BoE’s nine policymakers voted 7-2 to raise the key interest rate by half a percentage point to 4%, in line with expectations. The bank said headline inflation has begun to edge back and projected that this metric would fall sharply over the course of the year, reaching 3% in the first quarter of 2024. But the BoE warned that “if there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required.” It also said that “the risks to inflation are skewed significantly to the upside.”
The BoE also said a UK recession was likely to be “much shallower” than forecast in November, largely due to a drop in energy prices. Meanwhile, the International Monetary Fund (IMF) projected that the UK economy would contract 0.5% this year.
Eurozone/UK Bonds
European government bond yields declined broadly as investors embraced the potential that major central banks could pivot their monetary policy later this year. Germany’s 10-year sovereign bond yield fell toward 2% despite the European Central Bank (ECB) raising interest rates by half a percentage point and signaling a similar move in March. French and Swiss government bond yields also declined.
In the UK, where the BoE also hiked rates, yields on benchmark 10-year debt followed global counterparts and approached 3%.
Japan
Japan’s stock markets registered mixed performance for the week, with the Nikkei 225 Index rising +0.5% and the broader TOPIX Index down -0.6%. Sentiment was boosted by expectations that the U.S. Federal Reserve’s monetary policy tightening cycle may be nearing its peak.
The yield on the 10-year Japanese government bond (JGB) rose to 0.49%, from 0.47% at the end of the previous week. Figures released by the BoJ showed that the central bank’s JGB purchases reached a record high in January, as it sought to defend its wider 0.50% yield cap.
BoJ Deputy Governor Masazumi Wakatabe said during the week that the outcome of annual “shunto” wage negotiations (expected mid-March) between companies and unions and any changes to the inflation outlook would come under close scrutiny. He noted that an increasing number of companies were becoming keener to lift wages. BoJ Governor Haruhiko Kuroda also expects quite significant wage rises, as the economy improves and labor market conditions tighten.
Rengo (an umbrella organization for labor unions) has set a 5% wage hike as the target for the regular workers of the primarily large companies it represents. The pace of wage revisions announced by Japanese corporations has already accelerated markedly since late last year.
On the economic data front, Japan’s industrial production fell 0.1% month on month in December, a smaller-than-expected decline, while annualized retail sales growth of 3.8% beat expectations on a continued post-pandemic recovery in consumption. Consumer confidence improved in January, while the unemployment rate was unchanged. Although the final services Purchasing Managers’ Index was revised slightly lower, the survey showed that services sector activity expanded at a fast pace in January, boosted by the government’s travel subsidy program.
China
Chinese equities fell in the first full week of trading after the weeklong Lunar New Year holiday as investors pocketed gains from a recent rally and turned cautious about the strength of the country’s recovery. The broader capitalization-weighted Shanghai Composite Index eased -0.1% and the blue chip CSI 300 Index slipped -0.9%. In Hong Kong, the benchmark Hang Seng Index retreated -4.5%, its biggest weekly decline since the end of October.
In economic news, China’s official manufacturing Purchasing Managers’ Index (PMI) rose to 50.1 in January from December’s 47.0. This marked a return to growth for the first time since September as domestic activity improved after Beijing abandoned its coronavirus restrictions at year-end. The nonmanufacturing PMI rose to a better-than-expected 54.4 from 41.6, reaching its highest reading since June. Separately, the private Caixin/S&P Global survey of manufacturing activity in January remained below 50 (the level separating growth from contraction) as output prices and new orders declined and exports retreated amid softening global demand. However, the Caixin/S&P Global survey of services activity rose to a better-than-expected 52.9 reading compared with 48.0 in December.
Meanwhile, the IMF raised its annual growth forecast for China as the economy rebounds following the removal of pandemic curbs. The IMF projected that China’s GDP would grow 5.2% this year, up from its October forecast of 4.4%, and kept its estimate for 2024 at 4.5%.
New home sales in China fell by 48.6% in January as weak demand weighed on buying activity. The drop in sales comes even as many cities across the country have reportedly reduced mortgage rates for first-time homebuyers in advance of an expected rate cut by the central bank. In January, the People’s Bank of China announced that first-time buyers would be offered lower mortgage rates if new home prices fell for three consecutive months.
Weekly Performance
U.S. Indices
Dow -0.2% to 33,926. S&P 500 +1.6% to 4,136. Nasdaq +3.3% to 12,007. Russell 2000 +3.9% to 1,986. CBOE Volatility Index -1% to 18.33.
S&P 500 Sectors
Consumer Staples +0.6%. Utilities -1.5%. Financials +0.9%. Telecom +5.3%. Healthcare -0.1%. Industrials +1.7%. Information Technology +3.7%. Materials flat. Energy -5.9%. Consumer Discretionary +2.2%.
World Indices
London +1.8% to 7,902. France +1.9% to 7,234. Germany +2.2% to 15,476. Japan +0.5% to 27,512. China flat at 3,263. Hong Kong -4.5% to 21,660. India +2.6% to 60,842.
Commodities and Bonds
Crude Oil WTI -7.8% to $73.23/bbl. Gold -3% to $1,877.7/oz. Natural Gas -23.3% to 2.385. Ten-Year Bond Yield -0.2 bps to 3.519.
Forex and Cryptos
EUR/USD -0.66%. USD/JPY +1.03%. GBP/USD -2.77%. Bitcoin +1.3%. Litecoin +10.3%. Ethereum +5.2%. XRP +0.2%.
Dow -0.2% to 33,926. S&P 500 +1.6% to 4,136. Nasdaq +3.3% to 12,007. Russell 2000 +3.9% to 1,986. CBOE Volatility Index -1% to 18.33.
S&P 500 Sectors
Consumer Staples +0.6%. Utilities -1.5%. Financials +0.9%. Telecom +5.3%. Healthcare -0.1%. Industrials +1.7%. Information Technology +3.7%. Materials flat. Energy -5.9%. Consumer Discretionary +2.2%.
World Indices
London +1.8% to 7,902. France +1.9% to 7,234. Germany +2.2% to 15,476. Japan +0.5% to 27,512. China flat at 3,263. Hong Kong -4.5% to 21,660. India +2.6% to 60,842.
Commodities and Bonds
Crude Oil WTI -7.8% to $73.23/bbl. Gold -3% to $1,877.7/oz. Natural Gas -23.3% to 2.385. Ten-Year Bond Yield -0.2 bps to 3.519.
Forex and Cryptos
EUR/USD -0.66%. USD/JPY +1.03%. GBP/USD -2.77%. Bitcoin +1.3%. Litecoin +10.3%. Ethereum +5.2%. XRP +0.2%.
Covid-19 Weekly Statistics (05 February 2023 @ 1300 GMT)
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Global Recorded Cases
676,206,330 Previous
674,804,878 1-Week Change
+1,401,452 1 Week Rate-of-Change +0.21% (Prev Week +0.23%) |
Global Active Cases
20,826,804 Previous
21,110,012 1-Week Change
-283,208 1 Week Rate-of-Change -1.34% (Prev Week -2.82%) |
Global Recovered
648,607,827 Previous
646,935,786 1-Weekly Change
+1,672,041 Current Recovery Rate 98.97% (Prev Week 98.97%) |
Global Deceased
6,771,699 Previous
6,759,080 1-Weekly Change
+12,619 Current Mortality Rate 1.03% (Prev Week 1.03%) |
Weekly Trend Summary
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Global Recorded Cases
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Global Active Cases
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Global Covid Survivability Rate
Trend Steady |
Commentary
The total number of Global Recorded Cases since the pandemic began crossed 676 million this week with an additional +1,401,452 (+0.21%) new Covid cases recorded globally over the past week.
Global Daily New Confirmed Cases (7-Day moving average)
The total number of Global Recorded New Active Cases currently stands at 20,826,804 active cases. There was a decrease of -283,208 global active cases (-1.34%) over the past week.
1-Year Regional Daily New Confirmed Cases (7-day moving average)
The Oceania region current leads with the highest number of daily new confirmed cases per million population over the past week. However, all regions appear to have peaked from their latest increases and are in downtrends this past week.
Global Daily New Confirmed Deaths (7-Day Moving Average)
The global Covid mortality rate (chance of dying from contracting Covid) peaked 08 April 2020 @ 21.25%. It has since fallen in a steady manner to its most recent lows @ 1.03% mortality rate this past week. We have noted a significant reduction in mortality rates since Covid Omicron became the dominant strain (a very encouraging development).
The current mortality rate remains higher than initial estimates indicated the mortality rate from Covid-19 would be (< 1.0% was the expected Covid mortality rate and for comparison it is estimated the mortality rate from global seasonal flu is 0.1% to 0.5%).
The current mortality rate remains higher than initial estimates indicated the mortality rate from Covid-19 would be (< 1.0% was the expected Covid mortality rate and for comparison it is estimated the mortality rate from global seasonal flu is 0.1% to 0.5%).
1-Year Regional Daily New Confirmed Deaths Per Capita (7-day moving average)
North America leads in terms of number of daily new confirmed deaths per million population over the past week. All global regions remain below their worst death rates due to a combination of reduced COVID-Omicron lethality, vaccinations and improved treatment protocols.
Global Regional Per-Capita Vaccination Against COVID-19
South America leads other regions in terms of the percentage of its population to have received at least 1 vaccine dose (86%) as well as being fully vaccinated (77%). They also lead in the number of booster vaccines administered per 100 people (population).
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Top 10 Countries with the largest number of Covid Cases in the last 7-days
Top 10 Countries with the largest number of Covid Cases per 1M Population in the last 7-days
WEEKLY ASSET CLASS MONITOR
(week ending 03 February 2023)
(week ending 03 February 2023)
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Asset Class
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Region
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ETF Ticker
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Weekly
Return |
Year-to-Date
Return |
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Equities
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World
U.S. Europe Asia Pacific Emerging Market |
VT
VTI VGK VPL VWO |
+0.70%
+1.91% +0.43% -1.60% -2.80% |
+8.48%
+8.71% +9.92% +7.18% +6.95% |
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Bonds
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U.S. Bonds
International Bonds |
BND
BNDX |
-0.01%
+0.48% |
+3.13%
+2.98% |
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Real Estate Equities
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U.S. Real Estate
International Real Estate |
VNQ
VNQI |
+1.77%
-0.94% |
+11.47%
+7.31% |
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Precious Metals Equities
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Global Gold Miners
Global Junior Gold Miners |
RING
GDXJ |
-6.62%
-6.66% |
+6.09%
+3.39% |
GLOBAL EQUITY MARKET MONITOR
The past 3 years have been very challenging for global equities. They had a wicked roller-coaster ride in 2020 on the back of the Covid pandemic where they peaked on 12 Feb 2020 and fell dramatically (-34%) into their 23 Mar lows. They then rebounded and regained their losses by year-end.
For most of 2021 they remained largely in a "holding pattern" digesting their gains but declined considerably throughout 2022 before bottoming in October. Key support levels for all regions remains the Feb, 2020 pre-covid closing highs (blue solid line on the below charts).
The strongest regional area has now become Europe but all regions remain below late 2021 peaks on the back of the Russian invasion of Ukraine and subsequent rapid rise in global inflation. A break above the respective Aug highs (green dotted lines on each region) would be a very encouraging sign the bear market may have likely concluded.
For most of 2021 they remained largely in a "holding pattern" digesting their gains but declined considerably throughout 2022 before bottoming in October. Key support levels for all regions remains the Feb, 2020 pre-covid closing highs (blue solid line on the below charts).
The strongest regional area has now become Europe but all regions remain below late 2021 peaks on the back of the Russian invasion of Ukraine and subsequent rapid rise in global inflation. A break above the respective Aug highs (green dotted lines on each region) would be a very encouraging sign the bear market may have likely concluded.
Global Recession Probability Indicator
(High Risk)
(High Risk)
Below we show the latest Ned Davis Research Global Recession Probability model which measures a composite of leading indicators across 35 countries (weighing a number of economic indicators such as money supply, yield curve, building permits, consumer and business sentiment, share prices, and manufacturing production). The model uses a logistic regression method incorporating both the overall composite of leading indicators level and trend data of all 35 countries to predict the likelihood of a global recession. A score above 70 indicates high recession risks while a score below 30 means low risks.
As can be seen, the model has now registered a "high recession risk" warning (model crossing > 70). Since March 31, 1970 when the probability model has exceeded 70 it has resulted in a global recession 84.7% of the time. Global equities (defined by the MSCI ACWI index on the below chart) within the various regimes are shown below in the statistics boxes.
As can be seen, the model has now registered a "high recession risk" warning (model crossing > 70). Since March 31, 1970 when the probability model has exceeded 70 it has resulted in a global recession 84.7% of the time. Global equities (defined by the MSCI ACWI index on the below chart) within the various regimes are shown below in the statistics boxes.
Asset Class Return Monitor
(for week ending 03 February 2023)
(for week ending 03 February 2023)
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): (Dark 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)
- SPDR Gold ETF (GLD): (Sky Blue)
Past Week Asset Class returns
- Over the past week global equities (as measured by the Vanguard Total World Stock ETF (shown in CYAN) gained +0.70%.
- US markets were the top performing equity region this past week with Emerging markets lagging.
- U.S. bonds (Black) and International bonds (Green) were mixed on the week.
- Commodities were lower on the week with the U.S. Dollar index up +1.02%.
Year-to-Date (2023) Asset Class returns
- In 2023 global equities (as measured by the Vanguard Total World Stock ETF shown in CYAN) have gained +8.48%.
- European market equities are the top performing equity region in 2022 with Emerging markets lagging.
- Bonds have had positive returns thus far in 2023 with U.S. bonds (Black) out-performing International Bonds (Green).
- The US Dollar index has lost -0.50% year-to-date.
The stock market is driven by a combination of corporate profits, trends, economic data, fund flows, expectations, greed, fear, opinions, analysis, geopolitical events and human nature. These variables are often in conflict with one another (especially in the short run) and form a sine-wave cycle of investor psychology which begins with optimism, peaks with euphoria, bottoms with despair and returns to optimism.
It must be reemphasized a complete market cycles is composed of 2 distinct cycles/phases: a "bull 1/2 cycle" and a "bear 1/2 cycle". We now have transitioned into the Bear-market 1/2 cycle as of 03 January 2022.
The Math of Losses
- a 20% loss requires a 25% gain to return to breakeven
- a 30% loss requires a 43% gain to return to breakeven
- a 40% loss requires a 67% gain to return to breakeven
- a 50% loss requires a 100% gain to return to breakeven
- a 60% loss requires a 150% gain to return to breakeven
This is why it is so important to not let losses continue in the face of a bear market decline 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 sine-wave 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)
- Asia 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 been negative for monitored regions.
- The strongest equity regions over the past 12 month have been European/Asia Pacific/US with Emerging market equities lagging.
- Overall world equity performance (as measured by the Vanguard Total World ETF) have returned -6.24% (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 European markets with US markets the weakest.
- Positive equity returns have been evident over the past quarter (3 months) in monitored regions.
1 Month Rolling Regional Equity Performance
- Over the past 1 month rolling period the strongest performing world equity region has been US markets with Emerging markets the weakest.
- Positive equity returns have been achieved over the past month for most monitored regions.
Past Week Regional Equity Performance
- Over the past week the major global equities were mixed with US markets outperforming other regions.
Latest Global Equity "Big Picture"
World equity market returns are monitored via the following index and ETF equity charts:
- Dow Jones Global Market Index (cap-weighted)
- Value Line Geometric U.S. Index (equal-weighted)
- Global Dow Index (equal-weighted)
- MSCI ACWI ETF (cap-weighted)
Dow Jones Global Market Index
(market cap weighted index)
For the week the Dow Jones Global Index had a gain of +0.76%. As can be seen on the chart above, price remains below the 65 week moving average (blue line) and below resistance @ 492-505. Support zone is currently @ 444-447 (the pre-covid peak in Feb 2020).
Value Line Geometric Index and Global Dow Index
(equal weighted indexes)
The Value Line Geometric Index ($XVG) 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. The Global Dow index ($GDOW) is a measure of the top 150 international companies equal weighted within the index.
These indexes are important as they equal-weight the price performance of all the companies held within the respective index. This removes the distortions associated with a small group of highly valued companies (which may be performing well) masking the performance of struggling companies and represents a good overview of overall internal equity breadth/strength.
These indexes are important as they equal-weight the price performance of all the companies held within the respective index. This removes the distortions associated with a small group of highly valued companies (which may be performing well) masking the performance of struggling companies and represents a good overview of overall internal equity breadth/strength.
Value Line Geometric Index ($XVG) Weekly
Global Dow Index ($GDOW) Weekly
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
Global equity markets peaked in Nov 2021 and declined through to Oct 2022. They have been rangebound since but as of the end of Jan 2023 they closed above the previous trading range + 12 month simple moving average. This is typically a bullish development.
For the month of February ACWI has gained +0.67%. It closed the month of January above the 12 month simple moving average (blue moving average on the chart above) switching the long term trend BULLISH until month end.
For the month of February ACWI has gained +0.67%. It closed the month of January above the 12 month simple moving average (blue moving average on the chart above) switching the long term trend BULLISH until month end.
ACWI Weekly Chart
This past week ACWI gained +0.54%. Price remains above the 30 week simple moving average (shown in BLUE) and above support @ 76.99. Weekly closing resistance = 91.00-91.94.
World Equity Market Regional Relative Rotation Graphs
Below is a graph of 24 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)
The RRG trend analysis status is currently BULLISH for world equities:
- ACWI Weekly Quadrant: "LEADING" Quadrant
- 24 Country Net Score: POSITIVE
- ACWI price Relative Strength (horizontal axis): POSITIVE
- ACWI price Momentum (vertical axis): POSITIVE
Coincident Equity Market Indicators
Crude Oil
Crude oil was lower over the past week. Firm (but not excessive) crude oil prices typically point to increasing demand on the back of world economic growth improvement. Its recent break of resistance above $75 has changed the bias to equity neutral.
Gold
Gold was lower over the past week and closed below support @ 1886-1905. Gold acts as a "safe haven" and the the recent range is equity neutral.
Commodities
Commodities were lower over the past week and remain near 8 year highs. They have exceeded pre-Covid levels on both demand increase and supply constraints and and recent strong increase has greatly increased the global inflation narrative. This has shifted commodities to equity bearish.
U.S. 30 Year Treasury Bond
U.S. 30 year bond prices were lower on the week. Rising bond prices typically indicate a "flight to safety" trade and historically have a negative correlation to equities. However, currently global inflation has reversed the correlation (stocks/bonds now positively correlated) and the current bond downtrend remains equity bearish.
Current 5-Factor Model Indications
The combined 5-Factor quantitative model is currently YELLOW (neutral). This indicates an elevated level of risk at present. The 5-Factor model currently has the following sub-model readings:
Economic Model
The Economic model is currently YELLOW. The 1-year rate-of-change in global economic data had moved towards contraction but has stabilized over the past several weeks. The model is composed of numerous inputs including data from the following sources:
Forward Forecast Data:
Current Data:
Forward Forecast Data:
- OECD Composite Leading Indicators (CLI)
- BlackRock Macro GPS Growth/Inflation forecast monitor
Current Data:
- J.P. Morgan Global Purchasing Managers (PMI) Index
- World Bank Monthly Global Economic Report
OECD Composite Leading Indicators
(08 December 2022)
The OECD Composite Leading Indicator (CLI) is designed to predict business cycle changes 6-9 months in advance. It provides early signals of turning points in business cycles showing fluctuation of the economic activity around its long term potential level.
Long-Term View (G-20 Total)
Zoomed-In View (G-20 Total)
Below is our latest heat-map of the Composite Leading Indicators for various monitored regions.
- Red/Green numbers indicates above/below average future projected economic growth.
- Red/Green boxes indicates CLI rate of change month/month and year/year.
Click to set custom HTML
J.P. Morgan Global Composite Purchasing Managers Index (PMI)
(03 February 2023)
(03 February 2023)
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.
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.
- readings > 50 indicating economic expansion
- readings < 50 indicate economic contraction.
Latest Key Findings:
03 Feb 2023: "Global economic activity fell again in January. However, the start of the year also provided signs that the downturn may have passed its nadir. Declines in output and new orders were the weakest during their respective six-month sequences of contraction and moved closer to stabilisation. Business optimism meanwhile rose to an eight-month high, as companies' forecast growth (on average) for the coming year.
The J.P.Morgan Global Composite Output Index – produced by J.P.Morgan and S&P Global in association with ISM and IFPSM – posted 49.8 in January, up from 48.2 in December, a level only a few pips below the no-change mark of 50.0. The downturn in manufacturing production eased, while service sector activity ticked higher following a three-month sequence of contraction.
Two out of the six sub-sectors covered by the survey registered expansions of output during January – business services and consumer goods. Activity contracted in the consumer services, financial services, intermediate goods and investment goods categories, among which the steepest rate of decline was seen in financial services.
Data broken down by nation signalled that the main pockets of growth were located in Asia. China and Japan both returned to expansion following recent downturns, while India again recorded the strongest rate of growth of the nations covered.
The euro area also registered an increase in economic activity – albeit only marginal – as expansions in Italy, Spain and Ireland offset declines in the big-two of Germany and France. The US, UK, Russia, Australia and Kazakhstan all saw output decrease."
- Global PMI Output Index rises to 49.8
- Output and new orders down only slightly
- Input cost inflation picks up pace
03 Feb 2023: "Global economic activity fell again in January. However, the start of the year also provided signs that the downturn may have passed its nadir. Declines in output and new orders were the weakest during their respective six-month sequences of contraction and moved closer to stabilisation. Business optimism meanwhile rose to an eight-month high, as companies' forecast growth (on average) for the coming year.
The J.P.Morgan Global Composite Output Index – produced by J.P.Morgan and S&P Global in association with ISM and IFPSM – posted 49.8 in January, up from 48.2 in December, a level only a few pips below the no-change mark of 50.0. The downturn in manufacturing production eased, while service sector activity ticked higher following a three-month sequence of contraction.
Two out of the six sub-sectors covered by the survey registered expansions of output during January – business services and consumer goods. Activity contracted in the consumer services, financial services, intermediate goods and investment goods categories, among which the steepest rate of decline was seen in financial services.
Data broken down by nation signalled that the main pockets of growth were located in Asia. China and Japan both returned to expansion following recent downturns, while India again recorded the strongest rate of growth of the nations covered.
The euro area also registered an increase in economic activity – albeit only marginal – as expansions in Italy, Spain and Ireland offset declines in the big-two of Germany and France. The US, UK, Russia, Australia and Kazakhstan all saw output decrease."
Global Composite Output Index vs. Global GDP
There tends to be a reasonably tight correlation between the Global Composite Output Index and subsequent global GDP. The current Composite Output Index implies a forward global GDP reading approaching 2.0%.
Below is our PMI monitor for selected regions/countries.
- numerical values > 50 (BLACK) indicate economic expansion in progress.
- numerical values < 50 (RED) indicating economic contraction in progress.
- trend box GREEN indicates improvement over the past month with RED indicating a decline over the previous month.
The latest data points to a possible bottoming of the global growth decline. The Global Composite Index remains in contraction (reading below 50) but has improved over the past month ("less-bad"). This is an encouraging sign after the past year of continued continued global economic contraction.
World Bank Global Monthly Outlook
(January 2023)
(January 2023)
U.S. Economic Growth & Inflation
Year-over-Year GDP growth
The Gross Domestic Product (GDP) in the United States expanded 1 percent in the fourth quarter of 2022 over the same quarter of the previous year.
Quarter-over-Quarter GDP growth
The US economy expanded an annualized 2.9% on quarter in Q4 2022, following a 3.2% jump in Q3 and beating forecasts of 2.6%. Consumer spending rose 2.1%, below 2.3% in Q3 and forecasts of a 2.5% increase. Spending on goods jumped 1.1% led by motor vehicle and parts and spending on services slowed (2.6% vs 3.7%), with health care, housing and utilities, and personal care services leading the rise. Meanwhile, private inventories added 1.46 pp to the growth, after a drop in the previous two quarters, led by petroleum, coal products, chemicals and utilities. On the other hand, the contribution from net trade declined (0.56 pp vs 2.86 pp in Q3), as exports fell 1.3%, led by nondurable goods and imports went down 4.6%. Also, fixed investment declined faster (-6.7% vs -3.5%), led by equipment (-3.7% vs 10.6%). Residential investment continued to contract (-26.7% vs -27.1%), led by new single-family construction and brokers' commissions. Considering full 2022, the GDP expanded 2.1%.
Annualized Inflation
The annual inflation rate in the US slowed for a sixth straight month to 6.5% in December of 2022, the lowest since October of 2021, in line with market forecasts. It follows a 7.1% reading in November. Energy cost increased 7.3%, well below 13.1% in November, as gasoline cost dropped 1.5%, following a 10.1% surge in November. Also, fuel oil cost slowed (41.5% vs 65.7%) while electricity prices rose slightly faster (14.3% vs 13.7%). A slowdown was also seen in food prices (10.4% vs 10.6%) while cost of used cars and trucks continued to decline (-8.8% vs -3.3%). On the other hand, the cost of shelter increased faster (7.5% vs 7.1%). Compared to the previous month, the CPI edged 0.1% lower, the first decline since May of 2020, and beating forecasts of a flat reading. Inflation seems to have peaked at 9.1% in June of 2022 but it still remains more than three times above the Fed's 2% target.
Eurozone Economic Growth & Inflation
Year-over-Year GDP growth
The Euro Area economy expanded 1.9% year-on-year in the last three months of 2022, below 2.3% in Q3 and the least since the covid-induced contractions in 2020 and early 2021, but above market forecasts of 1.8%, according to preliminary estimates. Ireland recorded the biggest growth rate (15.7%), followed by Portugal (3.1%), Spain (2.7%) and Austria (2.7%). Considering the biggest economies, Germany expanded 1.1%, France 0.5% and Italy 0.1%. Considering full 2022, the Eurozone GDP expanded 3.5%.
Quarter-over-Quarter GDP growth
The Eurozone economy grew slightly by 0.1 percent in the final quarter of 2022, easing from a 0.3 percent expansion in the previous three-month period but beating market consensus of a 0.1 percent contraction, a preliminary estimate showed. It was the weakest pace of expansion since the first three months of 2021 as demand and activity were hit by high inflation and rising borrowing costs, as well as supply chain bottlenecks. Amongst the bloc's largest economies, the GDP grew in Spain (0.2 percent, the same as in Q3) and France (0.1 percent vs 0.2 percent), but contracted in Germany (-0.2 percent vs 0.5 percent) and Italy (-0.1 percent vs 0.5 percent).
Annualized Inflation
Annual inflation rate in the Euro Area fell to an eight-month low of 8.5% in January of 2023 from 9.2% in December, below forecasts of 9%, preliminary estimates showed. The data for Germany inflation is not available though, as the country's statistical office had to delay the release of its own figures due to technical issues with data processing. Inflation slowed in Italy, Ireland and the Netherlands, but edged higher in Spain and France. Also, core inflation which excludes prices of energy, food, alcohol and tobacco remained steady at 5.2%, adding to further evidence that price pressures remained elevated in the bloc's economy. In January, energy prices rose at a slower pace (17.2% vs 25.5%) and services inflation also eased (4.2% vs 4.4%) while cost increased faster for food, alcohol & tobacco (14.1% vs 13.8%) and non-energy industrial goods (6.9% vs 6.4%). Compared to the previous month, consumer prices fell 0.4%, the same as in December, led by a 0.9% decline in energy cost.
Japan Economic Growth & Inflation
Year-over-Year GDP growth
The Gross Domestic Product (GDP) in Japan expanded 1.50 percent in the third quarter of 2022 over the same quarter of the previous year.
Quarter-over-Quarter GDP growth
The Japanese economy shrank 0.2% quarter-on-quarter in the three months to September 2022, compared with flash data of a 0.3% fall and after a 1.1% growth in the previous period. The latest figure came amid an upward revision of both government spending (0.1% vs flat reading in the first estimate and after a 0.7% rise in Q2) and net trade with exports growing faster than initially anticipated (2.1% vs 1.9% in the flash figure and after a 1.5% previously). Meantime, private consumption was sluggish (0.1% vs 0.3% in the initial print and after a 1.7% rise in Q2), hit by another COVID wave in August and despite efforts from the government to step up support for households. Business investment growth slowed notably (1.5%, matching the preliminary print and after a 2.4% gain in Q2).
Annualized Inflation
The annual inflation rate in Japan rose to 4.0 % in December 2022, the highest since January 1991 amid a rise in prices of imported raw commodities and yen weakness. Upward price pressures came from all components, namely food (7.0% vs 6.9% in November); housing (1.2% vs 1.2%); fuel, light, and water charges (15.2% vs 14.1%), mainly electricity (21.3% vs 20.1%) and gas (23.3% vs 21.0%); transport & communication (2.1% vs 1.6%); medical care (0.4% vs 0.3%), furniture & household utensils (7.5% vs 7.3%); clothes (2.9% vs 2.7%), education (0.7% vs 0.7%), and miscellaneous (1.1% vs 0.9%). Core consumer prices also increased by 4.0% year-on-year, the most since December 1981, matching market forecasts but above the Bank of Japan's 2% target for a ninth straight month. On a monthly basis, consumer prices went up 0.3% in December, the least in four months, after an upwardly revised 0.4% gain in November.
China Economic Growth & Inflation
Year-over-Year GDP growth
The Chinese economy expanded 2.9% YoY in Q4 of 2022, easing from a 3.9% growth in Q3 but above market estimates of a 1.8% rise. Industrial output increased the least in seven months in December, retail sales remained weak, while the surveyed jobless rate dropped from November's 6-month high. For the full year of 2022, the economy grew by 3.0%, missing the official target of around 5.5% and marking the second slowest pace since 1976 amid the impact of Beijing's zero-COVID policy. "In 2022, the foundation of economic recovery is not solid as the global situation is still complicated and severe while the domestic triple pressure of demand contraction, supply shock, and weakening expectations is still looming," the statistics bureau said. China's leaders are set to announce the 2023 GDP growth target in March at an annual parliamentary meeting. It will be the first such gathering since President Xi Jinping consolidated his power in October 2022.
Quarter-over-Quarter GDP growth
The Chinese economy unexpectedly showed no growth on a seasonally adjusted basis in the three months to December of 2022, compared with market consensus of a 0.8 percent contraction and after a 3.9 percent expansion in the third quarter. The latest result underlined Beijing's sudden economic reopening in December after rare protests against strict restrictions in several large countries, including Beijing and Shanghai. Meantime, Beijing has pledged more support measures aimed at reviving the country's domestic consumption and business activity, as foreign demand weakens amid rising global recession risks.
Annualized Inflation
China's annual inflation rate rose to 1.8% in December 2022 from November's eight-month low of 1.6%, in line with market consensus. The latest result largely reflected a 4.8% rise in food prices, even as domestic demand was sluggish amid a spike in COVID infections. Meantime, non-food inflation was unchanged (at 1.1%), with prices continuing to rise for transport & communication (2.8% vs 2.9%), health (0.6% vs 0.5%), clothing (0.5% vs 0.5%), and education, culture (1.4% vs 1.3%); while the cost of housing fell further (-0.2% vs -0.2%). Core consumer prices, excluding the volatile prices of food and energy, rose 0.7% yoy in December, after a 0.6% gain in November. On a monthly basis, consumer prices unexpectedly were flat in December, compared with forecasts of a 0.1% fall and after a 0.2% drop in November. For the full year of 2022, inflation was 2%, below the government target of around 3%.
Valuation Model
The Valuation model is currently YELLOW. Equity valuations are currently near the upper region of "fair value" relative to underlying current global economic fundamentals. Distortions associated with the global Covid shutdown and subsequent reopening continue to cloud the valuation model.
Technical Model
The Technical model is currently GREEN. Global equity markets have been in a trending advance since Oct 2022.
Sentiment Model
The Sentiment model is currently YELLOW. Overall sentiment has turned neutral (sentiment acts as an inverse shorter-term trading indicator).
Liquidity/Economic Stress Model
The Liquidity/Economic Stress model is currently YELLOW. Unprecedented global central bank liquidity injections to combat the Covid shutdowns have begun to be reversed.
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 Treasury Bonds (GOVT): (Orange)
- Foreign Developed Market Gov't Treasury Bonds (BWX): (Pink)
- U.S. Corporate Bonds (LQD): (Maroon)
- International Corporate Bonds (PICB): (Black)
- U.S. High Yield Bonds (JNK): (Purple)
- International High Yield Bonds (IHY): (Green)
- U.S. Gov't Inflation Protected Bonds (TIP): (Lime Green)
- International Gov't Inflation-Protected Bonds (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 negative 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 International High Yield Bonds with U.S. Gov't Inflation Protected Treasury Bonds lagging.
- U.S. Total Bond Market (RED) and International (ex-U.S.) Total Bond Market (BLUE) have delivered positive 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 Int'l Corporate Bonds with US Gov't Inflation Protected 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 US High Yield Bonds were the top performing bond class with Int'l Treasury Bonds lagging.
- The U.S. Total Bond Market (RED) and the International (ex-U.S.) Total Bond Market (BLUE) posted mixed 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.
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.
ETF Bond Proxies
Global aggregate bonds lost -0.14% over the past week. They reached their lows in mid-October and have staged a strong move into December before the recent trading range.
The current bond bear market began 31 Dec 2020. Below is the performance of the 3 ETF's we use as "bond proxies" from that date to monitor global bond performance:
- BNDW: Vanguard Total World Bond market ETF (BLUE)
- BND: Vanguard Total U.S. Bond market ETF (GREEN)
- BNDX: Vanguard Total International (ex-U.S.) Bond market ETF (RED)
U.S. 10 year Treasury Yield
The most recent global bull market in bonds began in mid-1981 when the US Federal Reserve pushed interest rates to > 20% to combat inflation. Below is the downtrends in the various US Treasury yields from their peak (bond prices move inverse to yields so falling treasury yields are bullish for bond prices).
A weekly close above the respective trend-lines and previous peaks would be a technical breakout and define the end of the 42-year bull market in bonds.
A weekly close above the respective trend-lines and previous peaks would be a technical breakout and define the end of the 42-year bull market in bonds.
U.S. treasury yields have risen in a parabolic manner since the covid lows of July, 2020. That has led to the largest losses in government bonds in history. They have now exceeded previous highs @ 3.036%-3.248% that have remained as strong resistance since 2011.
German 10 year Bund Yield
German 10 year treasury yields bottomed in early 2020 during the depths of the European Covid shutdowns. They have rebounded strongly on inflation concerns and are now challenging 2013 highs.
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% in mid-2016, yields have risen and were able to finally break above 0.15% in early 2022. They are currently employing yield curve control (YCC) to keep rates pegged below 0.50% (increased from 0.25% in late Dec 2022). The Yen has massively declined as a result of YCC greatly increasing Japanese import prices.
After bottoming at near -0.28% in mid-2016, yields have risen and were able to finally break above 0.15% in early 2022. They are currently employing yield curve control (YCC) to keep rates pegged below 0.50% (increased from 0.25% in late Dec 2022). The Yen has massively declined as a result of YCC greatly increasing Japanese import prices.
Currencies
Below is the 12/3/1 month and weekly rolling returns for the 6 currencies that make up the U.S. Dollar index. The U.S. Dollar index is composed of a weighted geometric mean of the dollar's value relative to the 6 currencies in the following list:
In addition, we also include 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.
In addition, we also include the following for comparison purposes:
- The Australian Dollar (not a part of the USD Index) as it is a popular commodity currency.
- Gold (priced in USD) as it typically acts more like a currency void of fiat printing.
1 Year Rolling Currency Performance
- Over the past 12 months rolling period the top performing major currency has been the US Dollar Index 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 Gold with the US Dollar index lagging.
1 Month Rolling Currency Performance
- Over the past 1 month rolling period the top performing currency has been the Australian Dollar with the US Dollar index lagging.
Past Week Currency Performance
- Over the past week the top performing major currency was the US Dollar Index with the British Pound lagging.
U.S. Dollar: (Bearish Bias)
Commentary:
The USD index was up +1.02% over the past week. It had been within a steady uptrend since mid-2021 and recently reached 21 year highs in October, 2022 before its recent pullback.
Support / Resistance Levels (based upon respective time period closing price):
Weekly: 98.86 / 103.50
Monthly: 102.29 / 109.28
Support / Resistance Levels (based upon respective time period closing price):
Weekly: 98.86 / 103.50
Monthly: 102.29 / 109.28
US Dollar Index Daily charts
The 2 year daily chart (above) shows the steady up-trend starting from its May 2021 lows. It went parabolic in 2022 before peaking in Oct. It has now broken the main uptrend line from the May 2021 lows.
The 10 year daily chart (above) shows the price break below 103.29-103.61 which was daily support on pullbacks. Support is now 100.04-100.21.
Over the past week the USD closed below its short term trend 50 and 200 day moving averages.
(Short Term Bearish)
(Short Term Bearish)
US Dollar Index Weekly charts
The weekly chart shows the steady uptrend channel which was broken this week as well as support @ 102.95-103.50. The next weekly support is 98.86-99.19
Price closed the week below the intermediate term trend 20 and 65 week moving averages.
(Intermediate Term Bearish)
Price closed the week below the intermediate term trend 20 and 65 week moving averages.
(Intermediate Term Bearish)
A longer term 20 year look-back at the USD shows the 79.05-104.32 weekly close (yellow) area has been a very significant bull/bear battle zone since 1986. The recent close below 104.32 is a significant technical breakdown given the bottom of the price channel would target a price near $95.
US Dollar Index Monthly chart
For the month of February the U.S. Dollar index has gained +0.82%. Price remains confined to the rising price channel from the 2011 lows and is now back to multi-decade support @ 101.37-102.98.
Price closed January below the long term trend 10 month moving average switching the long term bias Bearish until months end.
(Long Term Bearish)
Price closed January below the long term trend 10 month moving average switching the long term bias Bearish until months end.
(Long Term Bearish)
Euro (Bullish Bias)
The Euro was down -0.70% over the past week. It had remained largely range bound between 116-123 over the past year before its most recent breakdown.
Support / Resistance Levels (based upon respective time period closing price):
Weekly: 107.50 / 111.75
Monthly: 105.25 /108.99
Support / Resistance Levels (based upon respective time period closing price):
Weekly: 107.50 / 111.75
Monthly: 105.25 /108.99
Euro Daily Charts
The Euro topped out in early 2018 @ 125.10 and had been on a steady decline until March 2020. It rose dramatically into the end of 2020 had remained range bound in 2021 until its recent breakdown.
On the 2nd daily chart price it can be seen how important the yellow band daily resistance zone @ 114.61-116.04 is going back to 2015. Other areas of daily support/resistance are seen at 108.24-108.66 and 103.90-105.69.
The Euro closed the week above the short term trend 50 and 200 day moving averages.
(Short Term Bullish)
On the 2nd daily chart price it can be seen how important the yellow band daily resistance zone @ 114.61-116.04 is going back to 2015. Other areas of daily support/resistance are seen at 108.24-108.66 and 103.90-105.69.
The Euro closed the week above the short term trend 50 and 200 day moving averages.
(Short Term Bullish)
Euro Weekly Chart
The weekly chart shows the Euro's steady rise from its Covid lows in March 2020 to the end of 2020. It has been on a steady decline but recently broke above important resistance @ 104.51-104.96.
This past week the Euro closed the week above the intermediate trend 20 week + 65 week moving averages.
(Intermediate Term Bullish)
This past week the Euro closed the week above the intermediate trend 20 week + 65 week moving averages.
(Intermediate Term Bullish)
Euro Monthly
For the month of February the Euro has lost -0.66%. On a monthly closing basis it closed the month of January above the long term trend 10 month moving average keeping the long term outlook bullish until months end.
(Long Term Bullish)
(Long Term Bullish)
UK Pound (Neutral Bias)
U.K. Pound Daily Charts
U.K. Pound Weekly Chart
U.K. Pound Monthly Chart
The British Pound was down -2.75% over the past week. It continues to recover from lows last seen 37 years ago. Historically since 1987 the Pound has traded within a range of 1.40 to 2.00 with brief excursions above/below this range. The previous all-time low over the past 200 years was 1.0520 (daily low @ 1.0438) seen in the 1st quarter of 1985 which was revisited in September 2022 (close 1.0696 27 Sep 2022).
This past week the Pound closed the week between its short term trend daily 50 +200 day moving averages and between the intermediate term trend 20 + 65 week moving averages. For the month of February it has lost -2.14% and closed the month of January above its long term 10 month moving average (which technically changes the long term bullish until months end).
(Short Term Neutral)
(Intermediate Term Neutral)
(Long Term Bullish)
Support / Resistance Levels (based upon respective time period closing price):
Weekly: 120.35/127.34
Monthly: 111.62 /122.43
This past week the Pound closed the week between its short term trend daily 50 +200 day moving averages and between the intermediate term trend 20 + 65 week moving averages. For the month of February it has lost -2.14% and closed the month of January above its long term 10 month moving average (which technically changes the long term bullish until months end).
(Short Term Neutral)
(Intermediate Term Neutral)
(Long Term Bullish)
Support / Resistance Levels (based upon respective time period closing price):
Weekly: 120.35/127.34
Monthly: 111.62 /122.43
Australian Dollar (Bullish Bias)
Australian Dollar Daily Chart
Australian Dollar Weekly Chart(s)
Australian Dollar Monthly Chart
The Australian Dollar was down -2.56% over the past week. It bottomed in mid-Oct and has been on a steady uptrend.
For the month of February the Aussie dollar has lost -1.90%. It closed the week above 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 January above the long term trend 10 month moving average switching the long term outlook to bullish until months end.
(Short Term Bullish)
(Intermediate Term Neutral)
(Long Term Bullish)
Support / Resistance Levels (based upon respective time period closing price):
Weekly: 67.35 / 71.87
Monthly: 63.58 / 70.17
For the month of February the Aussie dollar has lost -1.90%. It closed the week above 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 January above the long term trend 10 month moving average switching the long term outlook to bullish until months end.
(Short Term Bullish)
(Intermediate Term Neutral)
(Long Term Bullish)
Support / Resistance Levels (based upon respective time period closing price):
Weekly: 67.35 / 71.87
Monthly: 63.58 / 70.17
Canadian Dollar (Neutral Bias)
Canadian Dollar Daily Chart
Canadian Dollar Weekly Chart
Canadian Dollar Monthly Chart
The Canadian dollar was down -0.65% over the past week and continues to recover off its Covid-lows of late March 2020 (it is largely tied to the price of commodities so the anticipated global recovery has benefited CAD).
The Loonie closed the week between the short term trend 50 + 200 day moving averages and between the intermediate term trend 20 + 65 week moving averages. For the month of February the Loonie has lost -0.65%. It continues to recover off its 2020 lows but closed the month of January below the long term trend 10 month moving average keeping the long term bearish until months end.
(Short Term Neutral)
(Intermediate Term Neutral)
(Long Term Bearish)
Support / Resistance Levels (based upon respective time period closing price)
Weekly: 72.96 / 76.82
Monthly: 73.20 / 78.49
The Loonie closed the week between the short term trend 50 + 200 day moving averages and between the intermediate term trend 20 + 65 week moving averages. For the month of February the Loonie has lost -0.65%. It continues to recover off its 2020 lows but closed the month of January below the long term trend 10 month moving average keeping the long term bearish until months end.
(Short Term Neutral)
(Intermediate Term Neutral)
(Long Term Bearish)
Support / Resistance Levels (based upon respective time period closing price)
Weekly: 72.96 / 76.82
Monthly: 73.20 / 78.49
Key Weekly Returns (week ending 03 February 2023):
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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
Global 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
+0.54% +1.64% +3.35% +3.91% -0.42% |
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 |
+0.43% -1.92% -1.29% -3.36% -3.52% -0.01% +0.48% -0.85% +0.05% |
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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 |
-4.68% +0.96% -3.21% -5.12% -4.49% -7.34% |
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 |
+1.16%
-2.60% -2.73% -0.63% -0.65% -0.95% |
Important Charts to Watch
Commodity Basket Index
Commodities (as measured by the Reuters/Jefferies CRB index, a basket of 19 commodities) bottomed in April, 2020. They have since recovered on the back of a large rise in global inflation and remain near 8 year highs.
Resistance remains the early-March weekly close @ 292.25.
Resistance remains the early-March weekly close @ 292.25.
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 as the VIX but looks forward 3 months. When the VIX is greater than the VXV ($VIX:$VXV ratio > 1.0) the volatility structure is termed to be in "contango". It indicates traders are much more concerned about short term volatility than they are about longer term volatility and when that ratio returns to "normal" (< 0.93) it is typically a good sign market stress is easing (and a good time to add to equity positions).
As of this weeks market close volatility closed below the "VIX Event End Line" area with the VIX below 25. The volatility structure currently is BULLISH for equities.
The VXV uses the same calculation as the VIX but looks forward 3 months. When the VIX is greater than the VXV ($VIX:$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 closed below the "VIX Event End Line" area with the VIX below 25. The volatility structure currently is BULLISH for equities.
European Banks
Since the 2009 market bottom Europe has been the weakest major equity growth region. As such, we continue to monitor European financial stocks (represented below using the iShares MSCI European Financials ETF).
Of particular concern is Deutsche Bank and Credit Suisse. Both banks have massive derivatives exposure and should they be put forced into a position whereby they need to restructure it could potentially lead to a catastrophic ripple effects worldwide.
Deutsche Bank began a restructuring in July 2019 and remains above its March 2020 covid lows. Credit Suisse has has broken well beyond those lows and remains very weak. At present this is the #1 market risk to watch.
Chinese Equities
The Shanghai Composite index was flat over the past week and remained above support @ 3050-3147.
Chinese growth remains key to both Emerging market performance as well as an indication of Developed markets demand. From its peak in mid-2015, the Shanghai index lost more than -50% to its recent lows. We would like to see significant strength return to China further indicating world economic growth has positively turned the corner.
Chinese growth remains key to both Emerging market performance as well as an indication of Developed markets demand. From its peak in mid-2015, the Shanghai index lost more than -50% to its recent lows. We would like to see significant strength return to China further indicating world economic growth has positively turned the corner.
PRECIOUS METALS
Precious metals (and their respective producers) are an area we recommend all investors consider having a small position within. Precious metals perform well during times when real (inflation adjusted) interest rates are falling and/or when the USD is weak (not the case at present). The following charts can be utilized to determine when the risk/reward is favorable.
Below is a ratio price chart of gold stocks (HUI; the "Gold Bugs" Index) to gold bullion going back to 1996 when the Gold Bugs Index 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 acquire gold stocks.
Gold stocks remain in the "low-risk vs. high-reward" range and until recently remain near their cheapest valuations in 22 years. Historically purchases of gold equities when within the green-zone have been a very good long term buy-and-hold opportunities.
Gold stocks remain in the "low-risk vs. high-reward" range and until recently remain near their cheapest valuations in 22 years. Historically purchases of gold equities when within the green-zone have been a very good long term buy-and-hold opportunities.
Equally bullish is Silver (chart below) which remains at a price ratio relative to the price of gold (GREEN zone on the chart) which has historically been a low risk entry point over the past 40 years.
Silver remains cheap relative to gold.
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 1687. Clearly it can be seen a gold:silver ratio > 80 has historically been an outlier over the past 100+ years (and greater than 100 is historic):
The current Gold:Silver ratio recently exceeded 120 for the 1st time in history and remains near the top end of 40 year highs. It can be seen each instance in the past 40 years where the ratio has crossed above 80 has resulted in very good long term gains in silver.
The move in Silver we have been anticipating appears to have begun but there remains plenty of room to allow the ratio to fall to the "sell" level near 45.
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:
- The current Platinum:Gold ratio remains below 0.85 (red line on the chart below).
- A Platinum/Gold ratio < 0.85 has only occurred 4.7% of the time back to 1971.
- Prior to recent lows, the lowest Platinum:Gold ratio since August 1971 (when the USD was removed from the gold standard) was hit on 20 Sept 1982 when it hit a ratio low of 0.689 (Platinum $300.40/Gold $436.00).
- If Platinum were to return to its most common ratio relative to Gold (1.0x-1.25x which has been common 35% of the time) it would imply a price rise of approximately 50-90% from recent levels.
Platinum now sits on a price support extending back to 2004 and, combined with its ratio relative to the price of gold, represents a compelling long term 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 (Platinum has become even cheaper on a relative basis since the data was published):
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 0.55 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 0.55 and remains near a record low.
U.S. Equity Market Valuation
Crestmont Price/Earnings Ratio
(Source: Crestmont Research)
(Source: Crestmont Research)
A large part of the expected declines in bear markets hinges upon how "expensive" markets were when the bear market begins. In this measure, we have a long way to fall given the overvaluation at the market peak.
We illustrate the recent market overvaluation via 3 charts produced by Crestmont Research (as of 01 January 2023 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 149 years of history.
In the following graphs note the following:
We illustrate the recent market overvaluation via 3 charts produced by Crestmont Research (as of 01 January 2023 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 149 years of history.
In the following graphs note the following:
- the Crestmont Price/Earnings (P/E) ratio at the end of December 2022 remained near the most expensive market valuation in U.S. stock market history (but well off its most recent peak) .
- when compared to inflation the current Crestmont P/E has now exceeded the upper extreme portion of the bubble zone defining the 1998-2000 bubble peak as shown on the 2nd chart.
- pay particular attention to chart #2 where it can be seen high equity valuations are historically supported by inflation in the 0-3% range. Inflation is currently well outside this corridor (which occurred as of the end of April, 2021) and remains very concerning. Overvalued equities combined with high inflation tend be be a very dangerous combination.
U.S. (NYSE) Margin Debt
(Source: Advisor Perspectives)
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: D. 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.
A year-over-year contraction in margin debt tends to be negative for stocks as liquidity is removed from equity markets. Below is the latest YoY rate of change in margin debt (source: Yardini). Note in both the 2000 and 2007 bear markets margin debt bottomed below -40%.
U.S. Equity market Valuation Models
(Source: D. Short)
Below is a graph representing 4 different long-term valuation measures plotted back to 1900 (120 years):
As of 01 January 2023 the average of these 4 measures places the U.S. stock market (S&P 500 index) as being 102% above its long term geometric mean. This remains the highest valuation in the history of the stock market going back to 1900 (now 2 standard deviations above the mean and remains above the market peaks in 2007 and 1929).
- 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 01 January 2023 the average of these 4 measures places the U.S. stock market (S&P 500 index) as being 102% above its long term geometric mean. This remains the highest valuation in the history of the stock market going back to 1900 (now 2 standard deviations above the mean and remains above the market peaks in 2007 and 1929).
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 last reported GDP currently stands well above its de-trended regression. It remains near peak overvaluation relative to economic output (note previous bear markets have historically reverted back below the regression line).
7-Year Asset Class Real Return Forecast
(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.
We have followed GMO's methodology with interest for many years. In our experience we 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, we 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.
We have followed GMO's methodology with interest for many years. In our experience we 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, we 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.
Global Asset Class 10-year Expected Nominal Return Forecast
(data as of 31 December 2022)
(Source: Research Affiliates)
(data as of 31 December 2022)
(Source: Research Affiliates)
Below is the projected 10 year nominal (non-inflation adjusted) returns for the majority of global asset classes.
Data continues to point to Emerging Market and EAFE (Europe, Africa and Far East) equities as providing the greatest returns over the next 10 years with Government Short-term Treasury bonds (especially U.S. Long Term Treasuries) showing minimal returns due to low global interest rates.
Data continues to point to Emerging Market and EAFE (Europe, Africa and Far East) equities as providing the greatest returns over the next 10 years with Government Short-term Treasury bonds (especially U.S. Long Term Treasuries) showing minimal returns due to low global interest rates.
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Legend
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Cycle Commentary
Below is a 20 year chart of the seasonal monthly performance of the Dow Jones Global Index. The number at the top of the column is the percentage of time the month had a positive return and at the bottom is the average percentage gain/loss for the month.
Dow Jones Global Index Market ($DJW)
As can be seen, over the past 20 years (2003-2022) the period October-April yearly offers the highest potential global equity market returns (cumulative +6.7% average return) while the period May-September offers little in total return relative to risk (+0.7% cumulative average return). The month of April remains the strongest month with an 80% success rate and an average +2.5% return.
In the interest of moving more towards more recent market action broken down by region, below is the seasonal returns for our each of our selected ETF benchmarks going back to the start of the bull market in 2009:
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Region
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October-April
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May-September
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Global Equities (VT)
U.S. Equities (VTI) European Equities (VGK) Asia Pacific Equities (VPL) Emerging Market Equities (VWO) |
+8.9%
+10.9% +7.6% +6.0% +8.6% |
+1.8%
+3.0% +0.5% +0.9% -0.5% |
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Vanguard Total World Market (VT)
Vanguard FTSE European Total Market (VGK)
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Vanguard U.S. Total Market (VTI)
Vanguard FTSE Pacific Total Market (VPL)
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Vanguard FTSE Emerging Total Market (VWO)
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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 2022 Composite Model
The following is the composite directional model forecast for the S&P 500 index for 2022 based upon the following parameters (each equal weighted within the composite model) for data from 1928-2021:
- 10-year Decennial Market Cycle
- 4-year Presidential Market Cycle
- 1-year Annual Seasonal Market Cycle
The 2022 composite model indicates the following historical "glidepath" based upon cycles from 1928-2021:
- a rangebound choppy 1st quarter.
- a market decline from mid-March to the end of June.
- a summer market bounce into August with a correction into late Sept.
- strong market performance from late Sept into year-end.
U.S. 4-Year Presidential Election Cycle
* 2022 is Year-2 ("Midterm") of the 4-year cycle
As can be seen on the chart above, historically since 1900 the 2nd year of the 4 year Presidential Cycle (midterm) tends to provide the worst returns of the 4-year cycle. Alternately, year-3 of the cycle (2023) has historically provided the strongest 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 as they tend to define the political environment's influence upon stock market returns.
While we do not make investment decisions strictly based upon cycle analysis, we are cognizant of the historical nature of these cycles as they tend to define the political environment's influence upon stock market returns.
S&P 500 Index Year-2 Monthly Returns
Presidential Cycle S&P 500 returns (inc. dividends):
|
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: -4.38% 2019-Year 3: +31.49% 2020-Year 4: +16.26% 2021-Year 1: +26.89% 2022-Year 2: -19.44% 2023-Year 3: TBD |
U.S. S&P 500 Index Bear Markets
(source: Ben Carlson, CFA)
(source: Ben Carlson, CFA)
Recessionary Bear Markets (1928-2022):
Non-Recessionary Bear Markets (1928-2022):
Recessionary vs Non-Recessionary Bear Market Returns (1928-2022):
