Market/Model Commentary

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Market/Model Commentary

"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)

Overview

The ECAM Composite 5-Factor model remained RED at the end of the trading week. There have been substantial negative changes to sub-components within our 5-Factor model over the past several months. This shift altered the 5-Factor model from GREEN (09 Dec 2016-11 Oct 2018) to YELLOW (12 Oct-25 Oct 2018) to RED (as of 26 Oct 2018). The RED signal puts us on alert for a potential bear market to begin.

Equity markets reached oversold conditions rarely seen over the past 20 years on 24 Dec 2018 with many market participants panic selling into the waterfall decline (never a sound investment strategy). Since the lows, markets have now participated in an oversold bounce over the past 12 weeks and have returned to important price resistance. As such, markets remain at a critical decision point.

Global macroeconomic data continues to deteriorate but recently there have been small signs of stabilization. Central Banks in most major regions continue to use quantitative easing (QE) as their primary monetary tool to combat global deflation. However, given bloated balance sheets from fighting the last economic decline, it is unclear how much more Central Banks can continue to manipulate market conditions given the untested nature of QE throughout history.

Predictive tracking algorithms continue to indicate no foreseeable significant improvement in macroeconomic conditions for the majority of G-20 countries for at least the next 2 quarters.

Given the current macroeconomic backdrop, it remains appropriate to begin to partially de-risk portfolios as a safety measure (RED Level I model) once the current oversold bounce appears to have reached its apex. While there is no guarantee the recent uptrend will not continue, ongoing weakening global macroeconomic conditions have us concerned this may be the "dead-cat bounce" before the beginning of a larger bear market decline and a possible global recession.

All changes to model portfolios will be emailed directly to subscribers.

"Waterfall Decline" statistics

The recent "waterfall decline" on the S&P 500 index was -19.8% (waterfall decline defined as a total decline > 15% with less than a 5% counter trend rally during the total decline period). There have been 19 such incidents since 1945 with the following statistics:

the largest counter trend rally following the decline was +21.33% (current rally +20.05%)
the largest counter trend rally retraced 109.7% of the decline
100% (19/19) of the waterfall declines retested their initial low
79% (15/19) of the initial decline went on to make new lows (average peak-to-trough decline -33%)
84% of the declines (16/19) resulted in a recession

Given the statistical backdrop, it is clear the current market rally is not without precedent. Also statistically it would be expected once the current short term rally has run its course there is a high probability of a decline to retest the lows seen on 24 Dec 2018 (with a high probability of falling below those lows).

ECAM 5-Factor Model

(as of market close 15 March 2019)

Economic Model

Valuation Model

Technical Model

Sentiment Model

Financial Stress Model

YELLOW

RED

YELLOW

YELLOW

GREEN

RED
(as of 26 October 2018)

Weekly Summary

After posting their worst December in 87 years, stocks have bounced back in spectacular fashion in 2019 from extreme oversold conditions. The following returns have been achieved for the various equity regions we monitor since their 24 Dec 2018 closing prices:

Global: +18.03%
US: +21.14%
Europe: +16.32%
Asia Pacific: +11.84%
Emerging Markets: +14.07%

Global equity markets rebounded from last week’s losses on the back of generally upbeat economic data and a lack of negative headlines.

Developments on the U.S.-China trade front were modest, though early-week headlines indicating that Beijing is “full of confidence” about the next stage of trade growth, along with data that showed Chinese exports surged 39.9% year over year in the first nine days of March, helped stocks get off to a fast start that halted the S&P 500’s five-day losing streak. U.S. economic data leaned positive and included a pickup in durable goods orders, a solid rebound in January retail sales, and stagnant consumer inflation readings that support the Federal Reserve’s recent pivot to a more accommodative monetary policy stance. Gains moderated over the balance of the week, but eventually the S&P 500 broke through a key resistance level (2817) that has plagued it for the past several months. A surge in technology stocks helped the Nasdaq rally nearly 4%, while a 10% skid in shares of Boeing dragged industrial stocks to the bottom of the sector rankings and prevented the Dow from keeping pace with the broader market.

Overseas, consumer inflation continues to stagnate across Europe, while the composite Eurozone saw a pickup industrial production last month despite Germany, the region’s largest industrial economy, registering a surprise decline. Elsewhere, U.K. policymakers voted to extend the March 29 deadline for the country’s pending separation from the European Union by two months after Prime Minister Theresa May again failed to secure a majority of votes for an updated deal.

Below we show the latest Ned Davis Research Global Recession Probability model which triggered a "high risk" global recession warning in the 3rd quarter of 2018. This is a seriously negative indication which drastically increases the probability (89.74%) a global recession is either occurring or forthcoming (recessions are officially registered only by OECD assessment of backdated data).

WEEKLY ASSET CLASS MONITOR

Asset Class

Region

ETF Ticker

Weekly
Return

Year-to-Date
Return

Equities

World
U.S.
Europe
Asia Pacific
Emerging Market

VT
VTI
VGK
VPL
EEM

+2.85%
+2.85%
+3.50%
+1.66%
+3.46%

+12.39%
+13.62%
+12.42%
+8.30%
+10.29%

Bonds

U.S. Bonds
International Bonds

BND
BNDX

+0.24%
+0.05%

+1.75%
+2.12%

Real Estate Equities

U.S. Real Estate
International Real Estate

VNQ
VNQI

+2.27%
+2.55%

+15.01%
+11.24%

Precious Metals Equites

Global Gold Miners
Global Silver Miners
Gold Bullion ETF
Silver Bullion ETF
Platinum Bullion ETF

RING
SIL
GLD
SLV
PPLT

-0.23%
+1.29%
+0.11%
-0.56%
+1.50%

+7.52%
+6.35%
+1.42%
-1.31%
+4.64%

As shown below, global equites peaked in late Jan 2018 and remained range-bound until the U.S. began its decline in early Oct. The have recovered dramatically since the 24 Dec 18 lows and have returned to their previous consolidation zone.

A breakdown of current regional divergences in equity performance is as follows:

Global equites have broken back into the consolidation zone they had been trapped within for the first 3 quarters of 2018 (Nov 2017-Oct 2018). In addition, they have broken above the lower highs in late 2018 before the substantial decline. Price is above the descending 200 day moving average. (Neutral)
U.S. equities broke above their recent consolidation zone. Total U.S. market index closed above the rising 200 day moving average. (Bullish)
European equites remain below their 2018 consolidation zone but have broken above short term resistance. They are now above the descending 200 day moving average. (Neutral)
Asia Pacific returned to their trading range and remain below the descending 200 day moving average. (Neutral)
Emerging market equities broke above their recent trading range and remain above the descending 200 day moving average. (Neutral)

RETURNS SINCE U.S. MARKET PEAK (20 SEP 2018)

Below is the percentage returns for each of the monitored equity regions since the U.S. market peak closing price on 20 Sep 2018 (all time high 21 Sep 2018). The strongest region since this date has surprisingly been Emerging Markets with Asia Pacific equites lagging.

RETURNS SINCE U.S. MARKET BOTTOM (24 DEC 2018)

Below are the returns for the various monitored equity regions since the U.S. market bottom on 24 Dec 2018. All regions have advanced significantly off their 24 Dec 2018 lows with World equities up +18.03%.

Hedgeye Risk Management LLC

As we appear to be approaching a potential turning point in global growth, we continue to utilize global macroeconomic data purchased from Hedgeye Risk Management LLC to supplement our own macroeconomic model. Hedgeye is a U.S. based company which monitors 100's of global macro data points and uses predictive tracking algorithms to attempt to forecast growth, inflation and policy (GIP) for 50 countries. Using the algorithm, they attempt to "crystal ball" where markets may go up to 4 quarters in advance.

They classify their model using "Quadrants" defined as follows:

Quad 1

rising Growth/falling Inflation (economic recovery phase)
overweight equities/credit
underweight fixed income

Quad 2

rising Growth/rising Inflation (economic boom phase)
overweight equities/credit
underweight fixed income

Quad 3

falling Growth/rising Inflation (economic stagflation phase)
overweight fixed income
underweight equites/credit

Quad 4

falling Growth/falling Inflation (economic deflation phase)
overweight fixed income
underweight equities/credit

Below is their current projections for the top 20 OECD economies (as of 19 February 2019). In general it can said Quads 1 & 2 are bullish for equities (dark/light Green is "good") with Quads 3 & 4 bearish for equities (Yellow and Red are "bad"). Also note as each economic data point is released their algorithm recalculates the projected path so this model needs constant monitoring.

It can be seen their algorithm current projects the U.S. to be within Quad 4 (slowing Growth, falling Inflation) in 4Q18-1Q19 while within Europe (Germany/Spain) Quad 1 conditions (rising Growth/falling Inflation) are forecast to occur. Should their model be correct, it would be expected European equities would begin to outperform U.S. equities in early 2019 with overall global conditions shifting to Quad 1 (bullish global equities) in 1Q19.

Below is their suggest asset exposure for each of Quadrants:

* Retirement Fund Current Model Portfolios *
(click above link to access)

Asset Class Return Monitor
(for week ending 15 March 2019)

Equities 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): (Light Blue)

Past Week Asset Class returns

Over the past week world equites (as measured by the Vanguard Total World Stock ETF (shown in CYAN) gained +2.85%.
Emerging market equities were the top performing equity region this past week with Asia Pacific markets lagging.
U.S. bonds (Black) and International bonds (Green) were higher on the week.
Commodities were moderately higher over the past week with the USD moderately lower.

Year-to-Date (2019) Asset Class returns

Thus far in 2019 global equites (as measured by the Vanguard Total World Stock ETF (shown in CYAN) have gained +12.39%.
US equities have been the top performing equity region thus far in 2019 with Asia Pacific markets lagging.
Bonds have shown positive returns thus far in 2018 with International Bonds (Green) out-performing U.S. bonds (Black).
Commodities have had positive returns with the USD index slightly higher for 2019.

We remain concerned about excessive equity valuation (especially in the U.S.) relative to historical values. Markets continue to be priced for perfection and and any one of the following events (which we refer to as the 6 Horsemen of the Apocalypse) could quickly bring on a recession and a rapid reduction (40%+) in equity prices:

a central bank policy mistake (excessive balance sheet reduction and/or interest rate increases)
a major disruption to international trade (trade wars or tariffs)
a surge in inflation
a surge in yields (which may be occurring currently)
significant US dollar appreciation
a geopolitical shock (region military conflict, war)

* Note for the 1st time one of our major event triggers (potential trade disruption due to trade tariffs) has triggered with the recent introduction of the US imposing $200B in trade tariffs on China along with steel/aluminum tariffs on Canada and the Eurozone. This has the potential to escalate rapidly into international trade wars which NEVER result in increased equity prices. This is a major concern we continue to monitor over the near term.

Typically bull/bear markets follow a cycle of investor psychology which peaks with euphoria.

In the big picture, it is apparent we saw signs of investor exhilaration/euphoria in early Jan 2018 and have now moved into the back half of the sentiment sin curve (towards "panic" in late Dec 2018).

It must be reemphasized a complete market cycles is composed of 2 distinct cycles/phases: a Bull phase and a Bear phase. We are currently within the the final innings of the "bull 1/2 cycle" and the "bear 1/2 cycle" is oncoming. The key to long term investment success is to protect the majority of those bull 1/2 cycle gains when the bear market comes calling.

We illustrate current market overvaluation via 3 charts produced by Crestmont Research (as of 01 March 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 148 years of history.

In the following graphs note the following:

the Crestmont Price/Earnings (P/E) ratio is at 31.6 and remains near the most expensive market valuation in U.S. stock market history (since 1871). It peaked well above both the 2007 peak (24.7) and 1929 peak (26.4) as shown on the 1st chart.

when compared to inflation the current Crestmont P/E remains within the very top region of the bubble zone defining the 1998-2000 bubble peak as shown on the 2nd chart.

the current Crestmont P/E is 136% above its geometric mean; well above the 2007 peak (89%) and 1929 peak (99%) as shown on the 3rd chart. In Sept 2018 it reached the 2000 bubble peak at 153% (the absolute maximum in history).

We remain within the very dangerous period near the end of bull markets where only a minor change in either investor risk appetite or economic performance would be all it takes to "upset the apple cart". Unfortunately valuation measures are a "blunt instrument" when it comes to market timing. Each bull market is different in character and market sentiment can remain bullish long past metrics of reasonable valuation. However, from a risk-reward perspective it is essential to understand risk remains highly elevated and long term equity returns (on a buy-and-hold basis) remain extremely low.

It cannot be overstated how important it is to protect the bulk of one's market gains during the bear market half-cycle. As can be seen below, as the percentage losses increase the required returns to get back to breakeven move in an exponential manner:

a 20% loss requires a 25% gain
a 30% loss requires a 43% gain
a 40% loss requires a 67% gain
a 50% loss requires a 100% gain

This is why it is so important to not let losses continue in the face of a bear market and why we advocate phased movements into cash as our 5-factor model reverts towards Red. The below graphic represents how we move within equity markets through a complete market cycle:

Given current market valuations and our expectation of a -40% or greater decline during the next bear market, "careful and cautious" remains our game plan. When we enter this sort of environment we can play the game on the long side but carefully eye the door for when the music stops. We have no intention in participating in the substantial downside yet to come to complete this current market cycle.

World Regional Equity Monitor

We use the following U.S. exchange traded funds to monitor equity performance for the various world regions:

World Equities: Vanguard Total World ETF (Cyan)
U.S. Equity: Vanguard Total Market ETF (Red)
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 remains mixed for the various equity regions.
The strongest equity region over the past 12 month has been U.S. Markets with Emerging market equities lagging.
Overall world equity performance (as measured by the Vanguard Total World ETF) are negative with a return of -0.71% (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 Asia Pacific markets the weakest.
Positive regional equity returns have been evident over all regions over the past quarter (3 months).

1 Month Rolling Regional Equity Performance

Over the past 1 month rolling period the strongest performing world equity region has been Emerging markets with Asia Pacific markets the weakest.
Positive global equity returns are evident over the past month.

Past Week Regional Equity Performance

Over the past week all major equity regions were higher with Asia Pacific markets lagging.

Latest Global Equity "Big Picture"

World equity market returns are monitored via the following charts:

Dow Jones Global Market Index
(market cap weighted index)

For the week the Dow Jones Global Index had a gain of +2.73%. As can be seen on the 1st line chart above chart, price remains near the 65 week moving average (for the 1st time in over 2 years) and on the 2nd weekly candlestick chart price closed the week just above the significant 2018 consolidation zone bottom @ 386.98-387.58.

Value Line Geometric Index and Global Dow Index
(equal weighted indexes)

The Value Line Geometric Index ($XVG; top panel) is the median price performance of 1700 U.S. companies equal weighted (as opposed to most indexes which are market cap weighted) into an index. Below that is the Global Dow index ($GDOW; bottom panel). It is a measure of the top 150 international companies equal weighted within the index and represents a good overview of equity performance worldwide.

The above chart is the daily line chart of both indexes. Both indexes broke key support in the December market decline and have now rebounded back to this breakdown area. Key price levels remain:

-$XVG: 529-535 (closed within this past week)
-$GDOW: 2985-3018 (closed above this level this past week)

Below are weekly charts of the same indexes. As can be seen, the Value Line index closed above the weekly breakdown point @ 532 but remains above the very important 510-520 area. It has yet to regain the 65w SMA which remains a concern.

Below is a 38 year daily chart of $XVG which clearly shows the critical price support/resistance @ 508-523. Also shown is the 2 previous corrections within the bull market from 2009 to put the current decline into context. A weekly close below this level would very concerning.

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:

ACWI Monthly Chart (since 2009)

As shown on the monthly chart above, world equity markets remained range bound for most of 2018 with a breakdown in the month of October. The recent decline has broken the uptrend line from the 2009 market bottoms and the 12 month simple moving average.

For the month of March ACWI has gained +1.45%. It closed the month of February above the 12 month simple moving average (a very bullish development).

ACWI Weekly Chart

This past week ACWI gained +3.03%. Price closed above the 65 week simple moving average (which acted as support throughout the 2014-2015 topping process) and remains above the price support (69.32-69.87).

World Equity Market Regional Relative Rotation Graphs

Below is a graph of 25 major regional equity market ETF's + ACWI (our world equity benchmark) shown on a Relative Rotation chart measured weekly with a 10 week look-back period (which forms the "tail" of the ETF). This graph allows us to observe over time how various regional ETF's are moving relative to both each other and also relative to cash.

Leading (Green): (Momentum Positive + Price Relative Strength Positive)
Weakening (Yellow): (Momentum Negative + Price Relative Strength Positive)
Lagging (Red): (Momentum Negative + Price Relative Strength Negative)
Improving (Blue): (Momentum Positive + Price Relative Strength Negative)

Given the cyclical nature of momentum and price within equity markets, in general the RRG charts will cycle in a clockwise manner (though not necessarily will each pass through all 4 quadrants as it is possible to rotate through an adjacent quadrant only).

Weekly Regional (Country) Relative Rotation Graphs (long term)

As can be seen on the above table, the majority of monitored countries have transitioned into the blue "improving" or green "leading" quadrant. ACWI (our world equity fund benchmark) also remains within the "leading" quadrant this past week. This is a bullish development.

The RRG trend analysis status is Leading for world equities:

ACWI price Relative Strength: Positive
ACWI price Momentum: Positive

Coincident Equity Market Indicators

Crude Oil

Crude oil was higher over the past week. It broke out the broad uptrend channel in Oct 2018 and fell rapidly into late Dec along with global equities. Since then it has been able to regain the important $50 level. Firm crude oil prices typically point to increasing demand on the back of world economic growth improvement and the recent recovery is equity bullish.

Gold

Gold was flat over the past week. It was broadly lower through 2018 but began to turn bullish in late October as the global equity decline occurred. It has now broken above target resistance @ $1289-1295 and looks to challenge 1351-1356 next.

Since bottoming near $1200 in October the advance in Gold indicates increased concern in equities with a flight to safety. As long as gold continues to advance it remains equity bearish.

Commodities

Commodities were modestly higher over the past week but remain near 2017 lows. Since bottoming in early 2016, commodities had been on a steady (but not overly steep) rise indicating increased demand (and thus increased world growth). This reversed in May 2018 and the recent price break is confirmation world growth is slowing. This remains equity neutral.

U.S. 30 Year Treasury Bond

U.S. 30 year bonds were modestly higher on the week and remain below their 3 year long support (near $146-$148). However, they broke above the downtrend line from their June 2016 peak recently changing their trend to bullish. Rising bond prices indicate a "flight to quality" trade and a break above the resistance would be very equity bearish.

Current 5-Factor Model Indications

The combined 5-Factor quantitative model reverted to RED (26 Oct 2018) with a number of the sub-models now either YELLOW or RED. This indicates a certain level of caution and close monitoring is warranted at present. However, equity markets became drastically oversold in late 2018 and the short term bounce we expected has begun. Reducing equity exposure into market strength appears appropriate.

Click the following link to access current model positioning: "Current Model Portfolio Positions"

The 5-Factor model currently has the following sub-model readings:

Economic Model

The Economic model switched to YELLOW in early August 2018 (GREEN from in May 2016) on the back of subtle but gradually declining world growth. It is unclear if trade tariffs are to blame or something more systemic but it is a growing concern world equities may become vulnerable.

The model is composed of numerous inputs including the following data:

OECD Composite Leading Indicators (CLI)
J.P. Morgan Global Purchasing Managers (PMI) Index
International Monitory Fund (IMF) World Economic Report
OECD Economic Outlook

OECD Composite Leading Indicators (11 March 2019)

The OECD Composite Leading Indicator (CLI) is designed to provide a 6-9 month lead time on turns in economic performance. As such, it is a useful "look-forward" tool we use to attempt to predict regional economic weakening/strengthening turn points.

The current report indicates continued declining growth momentum in the OECD area.

Below is a look-back graph of the Composite Leading Indicator for the OECD along with the 4 largest economic regions. All regions are amplitude adjusted to use 100 as their long term growth average. As such, readings less than 100 indicate below average projected growth.

It can be seen the OECD CLI peaked in Nov 2017 and descended below 100 in Jul 2018. Using a 6-9 month look-forward, this indicates global growth is forecast to have peaked in Jul-Oct 2018 and will fall below its average historical growth rate in Jan-Apr 2019.

ECAM Composite Leading Indicator (CLI) Heat Map
6-9 Month Business Cycle Lead Time
(color code shows respective CLI trend)

Below is our latest heat-map of the CLI for various monitored regions. Red/Green boxes indicates CLI rate of change month/month and year/year. Readings < 100 indicate projected below average economic growth. The CLI is designed to predict business cycle changes 6-9 months in advance so the Peak/Trough dates can be used to predict turning point months for the various regions.

As can be seen, the map indicates very few regions/countries with CLI's > 100. This indicates weak world economic growth is projected over the next 6-9 months. Until we see a trough/reversal in the major regional signals, it is premature to anticipate a return to global synchronized growth.

At present the OECD CLI continues to decline indicating no forecast change in global growth for the next 6-9 months. Of the 39 countries we monitor, only 3 (New Zealand, Mexico and India) show a positive YOY change in CLI with only 15% of the monitored countries having CLI's above 100 (showing projected above average economic growth).

Until the OECD indicator bottoms it is expected global growth will continue to be under pressure.

J.P. Morgan Global Composite Purchasing Managers Index (05 March 2019)

The Global Composite PMI Report is based on the results of manufacturing and service sector surveys covering over 18,000 purchasing executives in over 40 countries. Together these countries account for an estimated 89% of global gross domestic product (GDP). Questions are asked about real events and are not opinion based. Data are presented in the form of diffusion indices, where an index reading above 50.0 indicates an increase in the variable since the previous month and below 50.0 a decrease. As such, using the PMI data gives us a real-time look at global growth with readings > 50 indicating economic expansion and readings < 50 indicate economic contraction.

The latest monthly report indicates a potential bottoming in the global growth slowdown as of the end of February 2019. While global growth remained expansionary (Global Composite PMI > 50), global growth has now slowed to levels last seen in September 2016.

Below is a graph of the J.P. Morgan Global Composite PMI as well as the Manufacturing and Services PMI
sub-components.

It can be seen current global economic growth continues to expand (PMI > 50 indicated economic expansion) but has declined substantially from its Mar 2018 peak. Also it is apparent the weakness is mostly within the Manufacturing sub-component (thin dark line) which has fallen dramatically from its Jan 2018 peak (likely due to the current trade/tariff war between the U.S. and China). It is important to note the global economic weakness experienced in mid-2014 to early 2016 was led by the manufacturing sub-component pulling global growth downwards. We are experiencing the same once again.

The Global Composite PMI sub-components are shown below. As of the last reading, most sub-components improved over the past month with only one of the sub-components now in contraction (< 50). This is an encouraging sign the global growth slowdown in place over the past year may be about to turn positive once again.

Below is our PMI monitor for selected regions/countries.

values > 50 indicate economic expansion
values < 50 indicating economic contraction (shown in RED)
trend GREEN indicates improvement over the past month with RED indicating a decline over the previous month.

G-20 Manufacturing PMI (February 2019)

# of G-20 countries with expanding manufacturing PMI: 13/22 = 59%
# of G-20 countries with contracting manufacturing PMI: 9/22 = 41%

IMF World Economic Outlook Update (January 2019)

The global expansion has weakened. Global growth for 2018 is estimated at 3.7 percent, as in the October 2018 World Economic Outlook (WEO) forecast, despite weaker performance in some economies, notably Europe and Asia. The global economy is projected to grow at 3.5 percent in 2019 and 3.6 percent in 2020, 0.2 and 0.1 percentage point below last October’s projections.

The global growth forecast for 2019 and 2020 had already been revised downward in the last WEO, partly because of the negative effects of tariff increases enacted in the United States and China earlier that year. The further downward revision since October in part reflects carry over from softer momentum in the second half of 2018—including in Germany following the introduction of new automobile fuel emission standards and in Italy where concerns about sovereign and financial risks have weighed on domestic demand—but also weakening financial market sentiment as well as a contraction in Turkey now projected to be deeper than anticipated.

Risks to global growth tilt to the downside. An escalation of trade tensions beyond those already incorporated in the forecast remains a key source of risk to the outlook. Financial conditions have already tightened since the fall. A range of triggers beyond escalating trade tensions could spark a further deterioration in risk sentiment with adverse growth implications, especially given the high levels of public and private debt. These potential triggers include a “no-deal” withdrawal of the United Kingdom from the European Union and a greater-than-envisaged slowdown in China.

The main shared policy priority is for countries to resolve cooperatively and quickly their trade disagreements and the resulting policy uncertainty, rather than raising harmful barriers further and destabilizing an already slowing global economy. Across all economies, measures to boost potential output growth, enhance inclusiveness, and strengthen fiscal and financial buffers in an environment of high debt burdens and tighter financial conditions are imperatives.

OECD Economic Outlook (06 March 2019)

U.S. Economic Growth & Inflation

Year-over-Year GDP growth

The Gross Domestic Product (GDP) in the United States expanded 3.10 percent in the fourth quarter of 2018 over the same quarter of the previous year. GDP Annual Growth Rate in the United States averaged 3.20 percent from 1948 until 2018, reaching an all time high of 13.40 percent in the fourth quarter of 1950 and a record low of -3.90 percent in the second quarter of 2009.

Quarter-over-Quarter GDP growth

The US economy advanced an annualized 2.6 percent on quarter in the fourth quarter of 2018, beating market expectations of a 2.4 percent growth, the initial estimate showed. It follows a 3.4 percent expansion in the previous period. The increase in real GDP in the fourth quarter reflected positive contributions from personal consumption expenditures (PCE), nonresidential fixed investment, exports, private inventory investment, and federal government spending. Those were partly offset by negative contributions from residential fixed investment, and state and local government spending. Imports increased. GDP Growth Rate in the United States averaged 3.22 percent from 1947 until 2018, reaching an all time high of 16.70 percent in the first quarter of 1950 and a record low of -10 percent in the first quarter of 1958.

Annualized Inflation

Annual inflation rate in the United States slowed for the third straight month to 1.6 percent in January of 2019 from 1.9 percent in December. It is the lowest rate since June of 2017, compared to market expectations of 1.5 percent, mainly due to a sharp fall in energy prices, namely gasoline. On a monthly basis, consumer prices were flat, the same as in both December and November. The energy index declined for the third consecutive month, offsetting increases in the indexes for all items less food and energy and for food. Inflation Rate in the United States averaged 3.27 percent from 1914 until 2019, reaching an all time high of 23.70 percent in June of 1920 and a record low of -15.80 percent in June of 1921.

Eurozone Economic Growth & Inflation

Year-over-Year GDP growth

The Eurozone annual economic growth was revised lower to 1.1 percent in the fourth quarter of 2018, compared to a preliminary 1.2 percent and below the third-quarter 1.6 percent expansion. GDP Annual Growth Rate in the Euro Area averaged 1.70 percent from 1995 until 2018, reaching an all time high of 5 percent in the first quarter of 1995 and a record low of -5.50 percent in the first quarter of 2009.

Quarter-over-Quarter GDP growth

The Eurozone quarterly economic growth was confirmed at 0.2 percent in the fourth quarter of 2018, slightly above the previous period's revised figure of 0.1 percent. The expansion was driven by net exports, household consumption, fixed investment and public spending, which offset a sharp decline in inventories. GDP Growth Rate in the Euro Area averaged 0.39 percent from 1995 until 2018, reaching an all time high of 1.30 percent in the second quarter of 1997 and a record low of -3 percent in the first quarter of 2009.

Annualized Inflation

The annual inflation rate in the Euro Area is expected to pick up to 1.5 percent in February 2019 from a nine-month low of 1.4 percent in the previous month and in line with market consensus, a preliminary estimate showed. Main upward pressure should come from food and energy prices while services inflation is set to fall. Inflation Rate in the Euro Area averaged 2 percent from 1991 until 2019, reaching an all time high of 5 percent in July of 1991 and a record low of -0.60 percent in July of 2009.

Japan Economic Growth & Inflation

Year-over-Year GDP growth

The Gross Domestic Product (GDP) in Japan advanced 0.3 percent in the fourth quarter of 2018 over the same quarter of the previous year. GDP Annual Growth Rate in Japan averaged 1.98 percent from 1981 until 2018, reaching an all time high of 9.40 percent in the first quarter of 1988 and a record low of -8.80 percent in the first quarter of 2009.

Quarter-over-Quarter GDP growth

The Japanese economy advanced 0.5 percent quarter-on-quarter in the December quarter 2018, stronger than the preliminary estimate of a 0.3 percent expansion and recovering from a downwardly revised 0.6 percent contraction in the third quarter. The latest GDP reading was above market expectations of a 0.4 percent growth, supported by a rebound in household consumption and an upward revision of business spending following a series of natural disasters. On an annualized basis, the economy grew 1.9 percent, faster than the preliminary figure of 1.4 percent, slightly above forecasts of a 1.8 percent expansion and rebounding from a downwardly revised 2.4 percent contraction in the previous quarter. GDP Growth Rate in Japan averaged 0.49 percent from 1980 until 2018, reaching an all time high of 3.20 percent in the second quarter of 1990 and a record low of -4.80 percent in the first quarter of 2009.

Annualized Inflation

Japan's consumer price inflation inched lower to 0.2 percent year-on-year in January 2019 from 0.3 percent in the previous month and in line with market expectations. It was the lowest inflation rate since October 2017, amid further decreases in prices of food, transport and housing. On a monthly basis, consumer prices rose by 0.3 percent in January, following a 0.2 percent drop in December and marking the first monthly increase in three months. Inflation Rate in Japan averaged 2.98 percent from 1958 until 2019, reaching an all time high of 24.90 percent in February of 1974 and a record low of -2.50 percent in October of 2009.

China Economic Growth & Inflation

Year-over-Year GDP growth

The Chinese economy advanced 6.4 percent year-on-year in the December quarter of 2018, after a 6.5 percent growth in the previous quarter and matching market expectations. It was the lowest growth rate since the global financial crisis, amid intense trade dispute with the US, weakening domestic demand and alarming off-balance-sheet borrowings by local governments. Considering full 2018, the economy expanded 6.6 percent, the weakest pace since 1990. Previously, China's statistic bureau revised down the country's GDP growth for 2017 to 6.8 percent from 6.9 percent. GDP Annual Growth Rate in China averaged 9.55 percent from 1989 until 2018, reaching an all time high of 15.40 percent in the first quarter of 1993 and a record low of 3.80 percent in the fourth quarter of 1990.

Quarter-over-Quarter GDP growth

The Chinese economy grew by 1.5 percent quarter-on-quarter in the three months to December 2018, compared to a 1.6 percent expansion in the previous period and in line with market estimates. It was the weakest pace of quarterly expansion since the first quarter of the year. GDP Growth Rate in China averaged 1.79 percent from 2010 until 2018, reaching an all time high of 2.40 percent in the first quarter of 2011 and a record low of 1.40 percent in the first quarter of 2016.

Annualized Inflation

China's consumer price inflation slowed to 1.7 percent year-on-year in January 2019 from 1.9 percent in the previous month and below market consensus of 1.9 percent. It was the lowest inflation rate since January 2018, as food prices rose at a softer pace. On a monthly basis, consumer prices went up 0.5 percent in January, after being unchanged in December and matching market estimates. Inflation Rate in China averaged 5.19 percent from 1986 until 2019, reaching an all time high of 28.40 percent in February of 1989 and a record low of -2.20 percent in April of 1999.

Valuation Model

The Valuation model remains RED/negative due to overvaluation of equity markets at current prices relative to historical data. We continue to update forecasts from a number of historically reliable sources (see section titled "Market Valuation"). Long term equity returns vary inversely with market valuation and at current price levels forward returns will be much lower than historical average returns (projected to be approximately 2% per year ex-inflation over the next 10 years).

Technical Model

The Technical model remained YELLOW this past week. World Equity markets remain within their recent consolidation zones in established downtrends.

Sentiment Model

The Sentiment model remained YELLOW this week on the back of a neutral sentiment among retail and institutional investors (sentiment acts as an inverse trading indicator).

Economic Stress Model

The U.S. Economic Stress model remains GREEN this week with very little U.S. financial stress indicated. Our 1 year forward U.S. recession indicators for the U.S. remained "Low Risk" but our Global ex-U.S. 1 year forward recession indicators recently moved up to "High Risk".

World Bond Asset Class Return Monitor

We use the following U.S. exchange traded funds to monitor bond performance for the various bond asset classes:

Total Market Bond Basket:

U.S. Total Bond Market (BND): (Red)
International (ex-U.S.) Total Bond Market (BNDX): (Blue)

Government Bonds:

U.S. Gov't Bonds (GOVT): (Orange)
Foreign Developed Market Gov't Bonds (BWX): (Pink)

Corporate Bonds:

U.S. Corporate Bond (LQD): (Maroon)
International Corporate Bond (PICB): (Black)

High Yield Bonds:

U.S. High Yield Bond (JNK): (Purple)
International High Yield Bond (IHY): (Green)

Inflation Protected Bonds:

U.S. Gov't Inflation Protected Bonds (TIP): (Lime Green)
International Gov't Inflation-Protected Bond (WIP): (Cyan)

1 Year Rolling Bond Performance

Over the past 12 months rolling period the top performing bond asset class has been U.S. High Yield Bonds with Int'l Gov't Bonds the worst performing.
The U.S. Total Bond Market (RED) and the International (ex-U.S.) Total Bond Market (BLUE) have delivered positive returns over the past year.

3 Month Rolling Bond Performance

Over the past 3 month rolling period the top performing bond asset class has been Int'l Corporate Bonds with U.S. Treasury Bonds lagging.
U.S. Total Bond Market (RED) and International (ex-U.S.) Total Bond Market (BLUE) having 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' Corporate Bonds with U.S. Gov't 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 Int'l Gov't Inflation protected bonds were the top performing bond class with U.S Gov't Bonds lagging.
The U.S. Total Bond Market (RED) and the International (ex-U.S.) Total Bond Market (BLUE) delivered positive returns over the past week.

Commentary:

It has been shown in repeated studies over many years a balanced portfolio consisting of both equities and bonds (with percentage holdings in each adjusted according to personal risk tolerances) remains the best methodology in managing a long term retirement portfolio (due to the independent/low correlated function each takes when navigating though various market cycles and economic conditions).

It is best to think of bonds and equities as 2 independent brains each looking at the market from a different perspective:

Equities: Corporate profits focused.
Bonds: Economic growth and Inflation focused.

As such, both serve a useful purpose in a well balanced portfolio.

Bonds delivered flat returns throughout 2018 as rising inflation and strong growth persisted. We are very cognizant of the fact bond yields are potentially at generational lows (prices overbought and at generational highs) and any significant economic recovery (with associated increases in inflation) has the potential to be very detrimental to bond fund returns.

Rolling 12 month returns for bonds remain positive but recent weakness has been noted and we are monitoring closely US, German & Japanese rates to determine if (when) it may be appropriate to reduce bond positions. Our premise is these 3 bonds tend to be somewhat "tethered" due to capital flows so it would take a breakout in all 3 key Treasuries above their respective price levels (described below) in order to definitively state the bull market in bonds is over.

As of present International bond funds have not been affected by the rise in rates as U.S. bond funds have. We continue to reassessing each of the bond funds within our models to determine their exposure to duration risk should rates outside the U.S. also begin to rapidly rise.

U.S. 10 year Treasury Yield

After rates bottomed in mid-2016 (bond prices peaked as they are inversely correlated), rates rapidly rose to resistance on the perception of future economic growth + inflation. Importantly, price resistance near 2.6% (which had contained yields for almost 4 years) was broken in early 2018. A key resistance level at 3.006% - 3.036% was broken on May 15, 2018 (high 3.115%, daily close 3.109%) but was unable to hold for more than 1 trading day. The same level was broken upward in late Sept but broke down in mid-Dec.

Current support is the 2018 breakout level @ 2.597%-2.648%.

German 10 year Bund Yield

German 10 year treasury yields have remained confined below 0.92% since 2014 with a bottom of -0.19% achieved in June 2016. Since then rates have gradually climbed within a rising channel (until recently) towards 0.92%.

Yields have pulled back since early 2018 and this past week remained below the weekly breakout level of 0.60%. A weekly close above 0.93% and it is likely the bull market in German bonds is over. There is no indication at present to suggest such will occur but we are monitoring for such an event.

Japanese 10 year Treasury Yield

Japan has been fighting deflation for decades and only recent unprecedented monetary policy by the BOJ appears to be having some effect upon deflation (and yields).

After bottoming at near -0.28% yields in mid 2016, a rapid rise to near 0.11% had held as resistance over the past 2 years. Yields have remained range-bound since (indicating deflation remains an ongoing problem in Japan) but a weekly close above 0.12% (which it was unable to hold this week) would likely indicate the bull market in Japanese bonds is probably over.

U.S. 30 year Treasury Yield

An extremely important longer-term chart we continue to watch is the yield on the U.S. 30 year treasury relative to its 100 month exponential moving average (red dotted line on the below chart going back to 1980) as well as the yield on the 10 year treasury with its 115 month EMA. As can be seen below, since the mid 1980's these moving average have acted as a cap on each attempted increase in yields.

Should any given month close with a yield higher than their respective moving average it would be strong confirmation the 35 year bull market in bonds is likely over.

* Note as of the end of Nov 2018 both the 30 year Treasury (top chart) and 10 year yield (bottom chart) closed above its long term moving average but have been unable to hold the breakout. We will continue to monitor this through 2019.

Currencies

Below is a 12 month rolling return for the 6 currencies that make up the U.S. Dollar index. The U.S. Dollar index is a weighted geometric mean of the dollar's value relative to the 6 currencies in the following list:

Euro (EUR), 57.6% weight.
Japanese yen (JPY) 13.6% weight.
U.K. Pound sterling (GBP), 11.9% weight.
Canadian dollar (CAD), 9.1% weight.
Swedish krona (SEK), 4.2% weight.
Swiss franc (CHF) 3.6% weight.

Also shown in the below chart is the following for comparison purposes:

The U.S. Dollar Index to allow comparison to its constituents.
The Australian Dollar (not a part of the USD Index) as it is a popular commodity currency.
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 U.S. Dollar with the Swedish Krona the worst performing.

3 Month Rolling Currency Performance

Over the past 3 month rolling period the top performing currency has been the British Pound with the Swedish Krona lagging.

1 Month Rolling Currency Performance

Over the past 1 month rolling period the top performing currency has been the British Pound with Gold lagging.

Past Week Currency Performance

Over the past week the top performing major currency was the British Pound with the U.S. dollar lagging.

U.S. Dollar: (Bullish Bias)

Commentary:

The USD index was down -1.25% over the past week. The USD struggled throughout 2017 and into early 2018 as growth indicators had remained stagnant, U.S. officials complained about their "overvalued U.S. dollar", and rate expectation differentials between Central Banks began to narrow on gradual improvements in the Euro area economic data. However, since early 2018 this process has reversed with the USD remaining very bullish as weakening economic data out of the Eurozone have been offset by strengthening data (and rising interest rates) out of the U.S.

Support / Resistance Levels (based upon close):

Weekly: 94.82 / 98.18
Monthly: 94.58 / 98.66

US Dollar Index Daily charts

The 1 year daily chart above shows the steady rise in the USD from late April 2018 to present. Over 2018 it remained very strong but has recently struggled with a double top in Nov + Dec 2018 @ 97.53.

At weeks end the USD remained above the short term daily support @ 94.86-95.10.

The 4 year daily chart above clearly shows the important daily close support for the USD over the past 3 years @ 91.88-93.15 with resistance @ 97.21-98.43 (which has stalled the 2018 advance).

Over the past week the USD closed between its short term trend 50 and 200 day moving averages.
(Short Term Neutral)

US Dollar Index Weekly charts

The weekly chart shows the steady -15% decline the USD index experienced from late Dec 2016-early Jan 2018 (from 103.82 to 88.15). It remained in a consolidation zone (88.89-90.33) for 3 months and then in late April 2018 it broke out of its weekly consolidation box.

Price ended the week above the strong support @ 94.25-94.59 and closed the week between the intermediate term trend 20 and 65 week moving averages.
(Intermediate Term Neutral)

A longer term 20 year look-back at the USD shows the 91.66-92.28 weekly close area (thick RED line) has been a very significant bull/bear battle zone over the past 20 years (since 1998). As long as price continues to hold above this significant price level the longer term USD call remains bullish.

It continues to hold the uptrend line from the 2011 bottom and appears to be within a large multi-year bullish ascending price channel.

US Dollar Index Monthly chart

For the month of March the US Dollar index has gained +0.01%.

For all of 2017 the USD had been in a steady decline. It broke its critical support at 92.63-93.03 in late 2017 and rapidly fell to find support at the 86.48-88.01 level. Since the beginning of 2018 it has rebounded back into its previous consolidation zone (shown in AMBER).

Price closed February above the long term trend 10 month moving average maintaining the long term bias to bullish until months end. It remains within the middle of its past 3 year range and is range-bound between the previous monthly support @ 94.58-94.97 and resistance @ 98.66-100.21.
(Long Term Bullish)

Euro (Bearish Bias)

The Euro gained +1.06% over the past week. It had shown remarkable longer-term resilience given European political uncertainty (Brexit, Spain, Germany, Italy) but has weakened since early 2018 due to eroding economic growth metrics out of the EU.

Support / Resistance Levels (based upon close):

Weekly: 107.99 / 114.62
Monthly: 112.12 /116.45

Euro Daily Charts

The Euro topped out in early 2018 @ 125.10 and has been on a steady decline since. Recent 2018 lows @ 112.15 were broken this past week with the next level of support @ 108.24-108.66.

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. It is now back below this key resistance level and closed the week below the short term trend 50 and 200 day moving averages.
(Short Term Bearish)

Euro Weekly Chart

The weekly chart shows the Euro had remained range bound for 2 1/2 years (January 2015-July 2017) between 104.96-105.95 and 114.47-114.62. A significant breakout occurred in the 2nd week of July 2017 when a weekly close above the trading range was established.

This past week the Euro closed below the support @ 114.47-114.62. It closed the week below the intermediate trend 20 week + 65 week moving averages.
(Intermediate Term Bearish)

Euro Monthly

For the month of March the Euro has lost -0.19%. On a monthly closing basis it closed the month of February below the long term trend 10 month moving average remaining long term bearish.
(Long Term Bearish)

UK Pound (Neutral Bias)

U.K. Pound Daily Chart

U.K. Pound Weekly Chart

U.K. Pound Monthly Chart

The British Pound gained +2.16% over the past week. Clearly the ongoing Brexit saga will continue to weigh heavily upon cable's performance over the next year so it remains very volatile.

Critical levels to watch on the Pound remain the respective weekly and monthly reactionary closing prices following the Brexit vote in June 2016:

136.76 weekly close (weekly close 20 June 2016)
133.09 monthly close (monthly close 30 June 2016)

This past week the Pound closed the week above 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 March it has gained +0.26% and closed the month of February above its long term 10 month moving average.

(Short Term Bullish)
(Intermediate Term Neutral)
(Long Term Bullish)

Support / Resistance Levels (based upon close):

Weekly: 127.34 / 132.94
Monthly: 125.09 / 133.09

Australian Dollar (Bearish Bias)

Australian Dollar Daily Chart

Australian Dollar Weekly Chart

Australian Dollar Monthly Chart

The Australian Dollar was up +0.61% over the past week. Price this past week remained below the critical 2 year weekly support @ 71.71-71.87 established as a consequence of the surprise RBA interest rate cut in late April, 2016 which led to a substantial 5 week decline of -8% and a subsequent 18 month consolidation (as shown in the blue box on the weekly chart).

For the month of March the Aussie dollar has lost -0.09%. It closed the week below the short term trend 50 + 200 day moving averages and below the intermediate term trend 20 + 65 week moving averages. It closed the month of February below the long term trend 10 month moving average.

(Short Term Bearish)
(Intermediate Term Bearish)
(Long Term Bearish)

Support / Resistance Levels (based upon close):

Weekly: 70.49 / 71.87
Monthly: 70.17 / 76.59

Canadian Dollar (Bearish Bias)

Canadian Dollar Daily Chart

Canadian Dollar Weekly Chart

Canadian Dollar Monthly Chart

The Canadian dollar was up +0.70% over the past week. After topping in Aug, 2017, the Canadian Dollar has remained within a firmly established downtrend and has gradually returned to price levels last seen in early 2017.

The Loonie closed the week below the short term trend 50 + 200 day moving averages and below the intermediate term trend 20 + 65 week moving averages. It remains confined to a down-sloping weekly price channel from its mid-2017 peak.

For the month of March the Loonie has lost -2.05%. It continues to attempt to consolidate near recent lows and closed the month of February below the long term trend 10 month moving average.

(Short Term Bearish)
(Intermediate Term Bearish)
(Long Term Bearish)

Support / Resistance Levels (based upon close)

Weekly: 73.83 / 76.26
Monthly: 74.42 / 78.49

Key Weekly Returns (week ending 15 March 2019):

Countries/Regions

World Equities

ACWI (iShares MSCI ACWI Index Fund)

North American Equities

SPY (S&P 500 SPDRs)

QQQ (PowerShares QQQ Trust)

IWM (Russell 2000 iShares)

EWC (Canada iShares)

Characteristics

World Equity Fund

U.S. Large Cap S&P 500 Index

U.S. NASDAQ 100 Fund

U.S. Russell 2000 Small Cap Fund

Canada

Week % Change

+3.03%

+2.95%

+4.19%

+2.06%

+1.61%

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

+3.50%

+1.20%

+1.80%

+3.46%

+4.88%

+0.24%

+0.05%

+0.61%

+1.02%

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

+0.95%

+2.33%

+0.11%

-0.56%

+1.40%

+4.01%

Currencies

UUP (PowerShares DB US Dollar Bullish Fund)

FXA (Currency Shares Australian Dollar Trust)

FXB (Currency Shares British Pound Sterling Trust)

FXC (Currency Shares Canadian Dollar Trust)

FXE (Currency Shares Euro Trust)

FXY (Currency Shares Japanese Yen Trust)

U.S. Dollar

Australian Dollar

U.K. Sterling

Canadian Dollar

Euro

Japanese Yen

-0.73%

+0.54%

+2.13%

+0.47%

+0.81%

-0.29%

Charts to Watch

Commodity Basket Index

For the past 4 years the deflationary debt overhang has gripped world economies and equity markets have run up on the "hope" a return to world growth would begin soon. This would typically be reflected in a rise in commodity prices.

Commodities (as measured by the Reuters/Jefferies CRB index) bottomed in early 2016 (along with equities) and have been on a gradual rise. In order to confirm world growth is firming we would like to see commodities moving higher but they have broken down in late 2018.

This past week price closed the week above the strong resistance @ 176.35-179.99 and above the uptrend line from the 2016 lows. This is encouraging as it indicates deflation (decreasing growth + decreasing inflation) may be waning.

Equity Market Volatility

The Volatility Index (VIX) is a measure of expected price fluctuations of options on the S&P 500 index options over the next 30 days (technically the VIX is quoted in percentage points and represents the expected range of movement in the S&P 500 index over the next year, at a 68% confidence level i.e. one standard deviation of the normal probability curve). For example, if the VIX is 15, this represents an expected annualized change, with a 68% probability, of less than 15% up or down.

The VXV uses the same calculation but looks forward 3 months. When the VIX is greater than the VXV ($VIX:$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" area (VIX:VXV ratio > 0.93) with the VIX below 16. This is a bullish configuration as long as it continues to hold.

European Equities

Since the 2009 market bottom Europe has been the weakest major equity growth region. As such, we continue to monitor the Euro Stoxx 50 and Stoxx 600 for indications of improving performance out of Europe.

For most of 2015-2016 Europe remained within a deflationary environment with poor stock performance. This changed in late 2016 when both the Stoxx 50 and Stoxx 600 were able to break above their respective trading ranges. These price levels remain important barometers of European equity performance.

This past week the European Stoxx 50 and Stoxx 600 were able to close above their respective resistance levels but below the downtrend lines from the Jan 2018 highs.

We remain very concerned about European financial stocks. These are represented below using the iShares MSCI European Financials ETF. As can be seen below, European financial stocks were down over 33% from their January 2018 highs to late 2018 lows. This is a significant concern as European banks are among the weakest globally and could be a focal point for global systematic risk.

Of particular concern is Deutsche Bank which continues to decline (down over 93% from its 2007 peak!) DB has a massive derivatives exposure (currently estimated at $40T notional with net exposure near $100B) and should they be put forced into a position whereby they need to restructure it will lead to a catastrophic ripple effects worldwide.

Chinese Equities

The Shanghai Composite index was higher this past week and was able to break above key weekly price resistance @ 2715-2820 as shown below. The next target for weekly resistance is @ 3050-3147.

Chinese growth remains key to both Emerging market performance as well as an indication of Developed markets demand. Since its peak in mid-2015, the Shanghai index has lost more than -50% to its recent lows. We would like to see significant strength return to China further indicating world economic growth continues to increase but currently there is little evidence of a significant change in China's economic performance.

PRECIOUS METALS

Below is a ratio price chart of gold stocks (HUI; the "Gold Bugs" Index) to gold bullion going back to 1996 when the HUI first came into existence. As can be seen, whenever the HUI:GOLD ratio dips to below approximately 0.14 (the GREEN zone on the chart) has been a low-risk opportunity to purchase gold stocks.

This past week gold stocks remained deep into the "low-risk vs. high-reward" range and remain near their cheapest valuations in 22 years. Historically purchases of gold equities when within this range have been a very good long term buying opportunities.

Even more bullish is Silver (chart below) which has entered a price ratio relative to gold (GREEN zone on the chart < .0130) which has historically been a low risk entry point over the past 38 years.

Silver remains near at its "cheapest" price since 2008 and 1995 (chart circles). Both previous moves to this ratio led to large silver price gains.

To put the valuation into a longer term perspective, below is a chart of the Gold/Silver ratio (the opposite ratio to Silver/Gold) going back to 1915. Clearly it can be seen a gold:silver ratio > 80 has historically been an outlier over the past 100+ years:

The current Gold:Silver ratio is 85.16 and it can be seen each instance in the past where the ratio has crossed above 80 (Green line) has resulted in very good gains.

There is no guarantee the ratio will not go higher (allowing for further silver losses or range bound trade as in 1991-1994) but it is now at a level that deserves attention (cautious traders may want to wait for a reversal < 80 to avoid a potential range bound episode as the 1990's)

EVEN MORE BULLISH is the price of Platinum (chart below) which has exceeded the "buy zone" last seen in 1982! Platinum is 15-20 times rarer than gold and has rarely in history traded at a price below the price of gold (only 9.7% of the time going back to 1971). It is now the cheapest it has been GOING BACK TO AUGUST 1971 WHEN THE U.S. LEFT THE GOLD STANDARD on a relative basis:

The current Platinum:Gold ratio is 0.66.
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:

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

< 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:

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 0.63 and remains near a record low.

Elliott Wave

We use Elliott Wave theory in conjunction with cycle analysis to attempt to "crystal ball" what to expect going forward. We have included some basic information below for those who might be interested followed by our current interpretation/analysis.

The Elliott wave principle is a form of technical analysis that some traders use to analyze financial market cycles and forecast market trends by identifying extremes in investor psychology, highs and lows in prices, and other collective factors. Ralph Nelson Elliott (1871–1948), a professional accountant, discovered the underlying social principles and developed the analytical tools in the 1930s. He proposed that market prices unfold in specific patterns, which practitioners today call Elliott waves, or simply waves. Elliott published his theory of market behavior in the book The Wave Principle in 1938, summarized it in a series of articles inFinancial World magazine in 1939, and covered it most comprehensively in his final major work, Nature’s Laws: The Secret of the Universe in 1946. Elliott stated that "because man is subject to rhythmical procedure, calculations having to do with his activities can be projected far into the future with a justification and certainty heretofore unattainable."

The Elliott Wave Principle posits that collective investor psychology, or crowd psychology, moves between optimism and pessimism in natural sequences. These mood swings create patterns evidenced in the price movements of markets at every degree of trend or time scale.

In Elliott's model, market prices alternate between an impulsive, or motive phase, and a corrective phase on all time scales of trend, as the illustration shows. Impulses are always subdivided into a set of 5 lower-degree waves, alternating again between motive and corrective character, so that waves 1, 3, and 5 are impulses, and waves 2 and 4 are smaller retraces of waves 1 and 3. Corrective waves subdivide into 3 smaller-degree waves starting with a five-wave counter-trend impulse, a retrace, and another impulse.

In a bear market the dominant trend is downward, so the pattern is reversed—five waves down and three up. Motive waves always move with the trend, while corrective waves move against it.

Wave 1 (I): Wave one is rarely obvious at its inception. When the first wave of a new bull market begins, the fundamental news is almost universally negative. The previous trend is considered still strongly in force. Fundamental analysts continue to revise their earnings estimates lower; the economy probably does not look strong. Sentiment surveys are decidedly bearish, put options are in vogue, and implied volatility in the options market is high. Volume might increase a bit as prices rise, but not by enough to alert many technical analysts.

Wave 2 (II): Wave two corrects wave one, but can never extend beyond the starting point of wave one. Typically, the news is still bad. As prices retest the prior low, bearish sentiment quickly builds, and "the crowd" haughtily reminds all that the bear market is still deeply ensconced. Still, some positive signs appear for those who are looking: volume should be lower during wave two than during wave one, prices usually do not retrace more than 61.8% (see Fibonacci section below) of the wave one gains, and prices should fall in a three wave pattern.

Wave 3 (III): Wave three is usually the largest and most powerful wave in a trend (although some research suggests that in commodity markets, wave five is the largest). The news is now positive and fundamental analysts start to raise earnings estimates. Prices rise quickly, corrections are short-lived and shallow. Anyone looking to "get in on a pullback" will likely miss the boat. As wave three starts, the news is probably still bearish, and most market players remain negative; but by wave three's midpoint, "the crowd" will often join the new bullish trend. Wave three often extends wave one by a ratio of 1.618:1.

Wave 4 (IV): Wave four is typically clearly corrective. Prices may meander sideways for an extended period, and wave four typically retraces less than 38.2% of wave three (see Fibonacci relationships below). Volume is well below than that of wave three. This is a good place to buy a pull back if you understand the potential ahead for wave 5. Still, fourth waves are often frustrating because of their lack of progress in the larger trend.

Wave 5 (V): Wave five is the final leg in the direction of the dominant trend. The news is almost universally positive and everyone is bullish. Unfortunately, this is when many average investors finally buy in, right before the top. Volume is often lower in wave five than in wave three, and many momentum indicators start to show divergences (prices reach a new high but the indicators do not reach a new peak). At the end of a major bull market, bears may very well be ridiculed (recall how forecasts for a top in the stock market during 2000 were received).

Wave A: Corrections are typically harder to identify than impulse moves. In wave A of a bear market, the fundamental news is usually still positive. Most analysts see the drop as a correction in a still-active bull market. Some technical indicators that accompany wave A include increased volume, rising implied volatility in the options markets and possibly a turn higher in open interest in related futures markets.

Wave B: Prices reverse higher, which many see as a resumption of the now long-gone bull market. Those familiar with classical technical analysis may see the peak as the right shoulder of a head and shoulders reversal pattern. The volume during wave B should be lower than in wave A. By this point, fundamentals are probably no longer improving, but they most likely have not yet turned negative.

Wave C: Prices move impulsively lower in five waves. Volume picks up, and by the third leg of wave C, almost everyone realizes that a bear market is firmly entrenched. Wave C is typically at least as large as wave A and often extends to 1.618 times wave A or beyond.

S&P 500 Weekly Elliott Wave Chart

For those who are new to Elliott wave, it is essential to understand as market participant psychology changes (and, as a consequence, the various waves unfold in specific patterns) objective analysis requires readjustment of counts as the waves unfold. Elliott wave is not a "crystal ball" but more a quantitative tool to analyze changes in market psychology as market conditions evolve. Elliott wave analysis can be quite confusing and intricate but in our experience we find it is best used as a "road map" towards the bigger picture.

Below is the current long term view of the equity market from 1929-Present. Clearly the 2008-2009 market decline was of such stature as to be historic (has "historic" as the 1929-1932 market crash). Given such, we have begun to think out of the box with respect to Elliott Wave as it has recently progressed.

In broadest terms markets cycle through 65-80 year "Grand Super-Cycles" (generally coinciding with generational demographic expansion/contraction). If one were to use the end of the 1929-1932 market crash/depression as the beginning point for a new Grand Super-Cycle, it could be argued a complete 77 year Grand Super-Cycle began in 1932 and ended in 2009. A 5 wave Super-Cycle advance (SC-1, SC-2, SC-3, SC-4, SC-5) occurred between 1932 and 2000 (68 years in length) followed by a 9 year Super-Cycle decline (SC-A, SC-B, SC-C) from 2000-2009 (culminating in the 2007-2009 market decline; the worst since the great depression). If this is the case we would have completed a full 77 year Elliott Wave Grand Super-Cycle pattern from 1932-2009 (5 wave Super-Cycle advance with a 3 wave Super-Cycle decline) and have embarked on a new 65-80 year Grand Super-Cycle beginning in March 2009.

We have marked this Grand Super-Cycle on the below chart with the 68 year SC-1 through to the SC-5 advance (1932-2000) followed by the 9 year SC-A, SC-B, and SC-C decline (2000-2009). If this is the case, an argument can be made the period from 2009-to-Present is unfolding as follows:

The market is currently within the early stages of Primary Wave III implying a long-term upwards trend for many more years.
The market is currently within Major Wave ((2)) projecting downwards as a shallow bear market decline.
Intermediate wave (C) wave was projecting downwards to end the Major Wave ((2)) bear market @ 2240-2374. The bottom 24 Dec 2018 was 2346 so the target decline was achieved.

Alternately, our original EWT weekly chart we have been following since 2009 is shown below with "classic" Elliott Wave indications projecting we are within the ending stages of the 2009-present bull market (wave IV decline followed by final wave V advance to end the bull market from 2009).

At present we remained torn between 2 possible Elliott Wave counts:

If the market is within Major Wave 2 as per the 1st chart, we would expect a fairly shallow Major Wave (((2)) decline (possibly complete) composed of an Intermediate Wave (A)-(B)-(C) bear market decline followed by another full bull market Major Wave 3 advance. This would project much higher equity prices into the future.

Alternately, if the have completed Primary Wave IV of the entire bull market advance from 2009-2018, a Primary Wave V may be underway to end the bull market (or we remain within Primary wave IV within wave b). At its peak; we would project much lower equity prices once complete.

The difference between the 2 counts is either a continued "new" bull market (scenario 1) or the last stages of a 10 year bull market with a large bear market on the horizon (scenario 2).

Market Valuation

U.S. (NYSE) Margin Debt

We have been studying with interest the current margin debt on US markets. For those who are unfamiliar, margin debt is the amount of "loans" taken out by market speculators to leverage up their equity positions. During normal bull markets margin debt will increase as the market continues to climb. This increased margin debt amplifies equity market prices. However, at some point speculators become nervous and begin to reduce their margin positions. This reduction in margin is like letting the air out of a balloon and deflates equity asset prices.

As can be seen on the below graphic, both the 2000 and 2007 market tops were signaled in advance by tops in margin debt (margin debt not inflation adjusted on this chart):

The following chart (source: Doug Short) shows US equity margin debt adjusted for inflation. As can be seen, in both 2000 and 2007 inflation-adjusted margin debt peaked and then began to decline leading to the tops in the S&P 500 index. As such, margin debt rollovers acts as a good lead indicator of possible future market weakness.

As of the end of October U.S. margin debt has shown a significant decline from its summertime peak. A similar decline occurred in 2015 (and did not derail the bull market) but the recent decline is a concern given how late we are in the market cycle combined with the extreme levels of margin debt relative to past market cycles.

U.S. Equity market Valuation Models (data as of 28 February 2019)
(Source: D. Short)

Below is a graph representing 4 different long-term valuation measures plotted back to 1900 (118 years):

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 28 February 2019 the average of these 4 measures places the U.S. stock market (S&P 500 index) as being 105% overvalued relative to its long term geometric mean. This remains the 2nd highest valuation in the history of the stock market going back to 1900. This level is well over 2 standard deviations above the mean and above the market peaks in both 2007 and 1929. It is only surpassed by the 2000 dotcom bubble peak.

Another popular valuation metric is know as the "Buffett-Indicator". In an interview with Fortune magazine back in 2001 Warren Buffett remarked "it is probably the best single measure of where valuations stand at any given moment."

The indicator measures the price of Corporate Equities (Mkt Cap) to Gross Domestic Product (GDP) as a ratio going back to the 1950's. As can be seen below, the ratio of equity prices relative to GDP currently stands at 140.9%. It has exceeded the recent 2015 peak of 128.9% and is second only to the 2000 equity peak of 161.1% in terms of equity overvaluation relative to economic output.

The de-trended graph indicates it would take a 38% market decline to return valuations back to the long term detrended regression line (shown in red on the 1st chart). This would be our minimum expected decline when the next bear market begins.

7-Year Asset Class Real Return Forecast
(Source: GMO LLC)

Each month GMO (Grantham, Mayo, Van Otterloo & Co.) publishes a forward forecast for expected annual real rates of return (i.e. inflation adjusted) for a number of different asset classes with a 7 year forward outlook. They have historically had a very good track record (0.97 correlation) of estimating forward 7 year asset class returns based primarily upon current valuations combined with mean reversion. Charts are published following analysis of the previous months data.

I have followed GMO's methodology with interest for many years. In my experience I have found them to be conservative over the shorter term with a tenancy to make calls too early. HOWEVER, similar to Dr. John Hussman of Hussman Funds, they also tend to be right over the longer term. As such, I use their outlook as part of the valuation model within the ECAM 5 Factor model.

Above is their current forecast of expected real returns (after inflation) for the next 7 years broken down by asset class. It is clear based upon current market valuations GMO forecasts well below average annual investment returns in all asset classes with a 7 year forward time horizon (the dotted line is the historical real return of U.S. equities of +6.5% per year). This is important for those who may be soon retiring and expecting "average" returns on their equity and bond investments over the next 7 years. Current high market valuations make it a certainty forward returns over the next 7-10 years will be well below historical averages.

12-Year US Equity Real Return Forecast
(Source: Hussman Funds)

S&P 500 12 year forward projected annual returns (Mkt Cap-GVA)

S&P 500 12 year forward projected annual returns (margin-adjusted CAPE)

Balanced Portfolio 12 year forward projected annual returns
(60% in the S&P 500, 30% in Treasury bonds, and 10% in Treasury bills)

Dr. John Hussman uses a unique measure of estimating future equity returns over a 12 year period based upon market capitalization relative to gross corporate value added. He claims the measure has a 91.9% correlation to actual S&P 500 future returns over a 12 year horizon. As per his previous explanations:

"Across the scores of measures I’ve evaluated or created over three decades of research, the ratio of non-financial market capitalization to corporate gross value added (essentially corporate revenues, including estimated foreign revenues, excluding double-counting of intermediate inputs) is best correlated to actual subsequent market returns over a 10-12 year horizon".

As can be seen on the above chart, since 1950 his approach has correlated quite closely with future returns (blue line is his estimates and the red line the subsequent returns 12 years later). Currently his calculations project a "buy and hold" rate of return on the S&P 500 index of -0.6% nominal per year out to 2028 should one employ a "buy and hold" strategy. Clearly tactical asset allocation will be required as we transition to the back half of the current market cycle.

His recent conclusion:

" At present, the valuation measures that we find best correlated with actual subsequent S&P 500 total returns are at the most offensive levels in history, matching or eclipsing the 1929 and 2000 extremes. Even considering the level of interest rates, economic growth, and other factors, the S&P 500 currently stands about 2.8 times the level that we believe the index will revisit over the completion of the current market cycle, implying an interim market loss something on the order of -64%. Moreover, the most reliable valuation measures uniformly imply the likelihood of negative total returns in the S&P 500 over the coming 10-12 year period."

Clearly the high level of current market valuations does not bode well for the "buy and hope" investor.

Global Asset Class 10-year Expected Nominal Return Forecast
(as of 28 February 2019)
(Source: Research Affiliates)

Cycle Commentary

At left 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 is positive and at the bottom is the average % gain/loss for the month.

As can be seen, over the past 20 years the period October-April yearly offers the highest potential global equity market returns (cumulative +6.3% average return) while the period May-September offers little in total return (-1.9% cumulative average return).

In the interest of moving more towards more recent market action broken down by region, below is the past 10 years seasonal returns for our selected benchmark ETF's:

Global Equities (VT)
U.S. Equities (VTI)
European Equities (VGK)
Asia Pacific Equities (VPL)
Emerging Market Equities (VWO)

It is interesting to note over the past 10 years the month of September has begun to perform better than it has in the past. Also it is interesting to note the exceptionally poor equity returns in Europe during the month of June with very strong returns in July. This is an interesting phenomenon that can be used to potentially time regional equity exposure.

S&P 500 Seasonality (historical 50 year look-back annual seasonality)

"Turning to the months ahead, the performance for January and February is rather lacklustre compared to the months that bookend this start of year period. The S&P 500 Index has gained an average of 0.8% and 0.2%, respectively in the first two months of the year, based on the past 50 periods. These months are easily the weakest of the best six month trend for stocks. The large-cap benchmark has closed positive just over half of the time (56%) in January and February, making this winter lull little better than a flip of a coin in terms of the frequency of success.. Returns for January have ranged from a loss of 8.6% in 2009 to a gain of 13.2% in 1987. Performance tends to gyrate in the middle of January with the majority of the strength achieved in the first few days and last few days of the period".

Ned Davis Research 2018 Composite Model

Composite directional model forecast for the S&P 500 index based upon the following parameters equal weighted:

10 year Decennial Market Cycle (Year 7)
4 year Presidential Market Cycle (Year 2)
1 year Annual Seasonal Market Cycle

U.S. 4 Year Presidential Election Cycle

2018 is Year 2 (post-election year)

As can be seen on the chart above, historically since 1928 the 2nd year of the 4 year Presidential Cycle tends to provide the worst returns of the 4 year cycle.

While we do not make investment decisions strictly based upon cycle analysis, we are cognizant of the historical nature of these cycles and tend to be a bit more wary as they approach.

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: TBD