Market/Model Commentary

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Market/Model Commentary

Currently the active model portfolio as defined by our 5-factor model is the:

"Full-Risk " Model Portfolios

Please click on the above magenta link to review the suggested allocations if required.
The 5-factor model reverted to YELLOW on 16 October, 2020 (from RED on 28 February 2020)
The Full risk model was initiated 04 Dec 2020.

ECAM 5-Factor Composite Model

(Valid from 16 October 2020 to Present Date)

YELLOW

ECONOMIC FACTOR SUB-MODEL

TECHNICAL FACTOR SUB-MODEL

VALUATION FACTOR SUB-MODEL

SENTIMENT FACTOR SUB-MODEL

LIQUIDITY (Stress) FACTOR SUB-MODEL

"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)

Latest Updates

DOW JONES GLOBAL INDEX
(Weekly Close)

Global equities were lower this past week with a percentage return (as measured by the Dow Jones Global Index) of -3.39%. They continue to trade with an upward bias and remain above weekly support @ 492.80.

Weekly Global Macro Review

U.S. Equities
The major US benchmarks pulled back sharply in response to a steep rise in longer-term Treasury interest rates. The S&P 500 Index recorded its biggest weekly decline in a month, while the Nasdaq Composite index suffered its worst drop since October. Consumer discretionary shares were particularly weak, dragged lower in part by a steep decline in automaker Tesla, while a drop in Apple shares weighed on the information technology sector. Energy stocks outperformed as oil prices rose, and a rotation into cyclical shares continued as vaccine progress fueled optimism about the reopening of the global economy. The shift led value stocks to outperform their growth counterparts, leaving them well ahead for the year-to-date period.

S&P 500:
DJIA:
NASDAQ 100:
S&P 400 Mid-cap:
Russell 2000 Small Cap:

-2.4%
-1.8%
-4.9%
-1.5%
-2.9%

Much of the pullback appeared to be tied to lingering fears among investors that higher inflation and bond yields could cause an exodus from equities back into fixed income instruments. Consumer inflation data released earlier in the month surprised on the downside, but producer prices, reported at mid-month, rose 1.3% in January, much more than consensus expectations and the largest increase in data going back to 2009. Inflation has also been pronounced in the housing sector, and Tuesday brought news that home prices had increased 10.1% in December from a year before. Relatedly, lumber futures have reached record highs, while copper prices are at their highest levels in a decade.

The week’s strong economic signals also seemed to feed inflation worries. Weekly jobless claims hit their lowest level (730,000) in three months and recorded their biggest decline since August. Personal incomes, reported Friday, jumped 10.1% in January, thanks largely to payments from the coronavirus relief package passed in December. It was the largest gain since April, following the passage of the first pandemic relief package. The manufacturing sector remained in solid shape, with core (excluding defense and aircraft) capital goods orders rising 0.5%.

Fears that stronger growth and rising inflation would lead the Federal Reserve to begin removing monetary stimulus sooner than expected abated on Wednesday, when Fed Chair Jerome Powell confirmed policymakers’ dovish stance in testimony before Congress. Stocks surged briefly after Powell’s comments emphasizing that inflation remains “soft” and does not show signs of likely experiencing “very large” or “persistent” increases later this year. Powell said that it may take more than three years to reach the central bank's inflation goals.

Meanwhile, Democrats in Congress continued to move toward passage of another round of coronavirus relief before some current benefits expire on March 14, with the House of Representatives expected to pass a bill shortly after the trading week ends. Reports surfaced that President Joe Biden might be willing to cut the size of his proposed USD 1.9 trillion package, however, perhaps by lowering the income cap for individuals to receive direct payments of USD 1,400. The president has stated that he is open to suggestions to “make the package better and make it cheaper.”

The Senate Parliamentarian also ruled Thursday that the bill could not include an increase in the federal minimum wage to USD 15 per hour if passed through the reconciliation process, which would require a simple majority in the chamber and thus be achieved on a party line vote. Costco added its name to the list of companies raising wages on their own, however, announcing on Thursday that it is raising its hourly pay rate to at least USD 16.

US Bonds
Inflation worries, stronger-than-expected economic data, technical factors, and weak auction results combined to push the yield on the benchmark 10-year U.S. Treasury note to around 1.61% on Thursday afternoon, its highest level in over a year. (Bond prices and yields move in opposite directions.)

Investment-grade corporate bond spreads widened in anticipation of rising rates, but movements were hemmed in by more balanced flows and healthy trading volumes in the secondary market. Primary issuance was in line with expectations, and the new deals were well subscribed. Rising rate and inflation concerns also weighed on the high yield market, with weakness concentrated in longer-duration, higher-quality, and lower coupon bonds. The primary calendar was fairly active, and high yield funds reported outflows.

Europe/UK Equities
Shares in Europe fell along with global markets. Trading was volatile during the week as concerns grew that central banks might have to act sooner than expected to quell inflationary pressures that could accompany an economic recovery. In local currency terms, the STOXX Europe 600 Index ended the week -2.38% lower.

German DAX:
French CAC:
Italian MIB:
Spanish IBEX:
U.K. FTSE 100:

-1.5%
-1.2%
-1.2%
+0.9%
-2.1%

UK Prime Minister Boris Johnson unveiled a plan for gradually and irreversibly lifting lockdown restrictions in England from March 8 and ending on June 21. Almost all sections of the economy and many social activities are likely to be reopened by May 17. British finance minister Rishi Sunak is expected to extend the jobs support program until at least May in his budget next week, and there may be state support for industries hit hardest by the lockdowns, such as aviation. Denmark also said it would ease restrictions in the retail sector and allow some schools to reopen on March 1.

Only 6.4% of the European Union's (EU’s) population has received a vaccine, European Commission (EC) President Ursula von der Leyen said after an EU video summit. European Council President Charles Michel said, "I think we have to face the truth that there is indeed a difficult situation," and warned that “the next few weeks will continue to be difficult as far as vaccinations are concerned."

Fourth-quarter German gross domestic product (GDP) data were revised up unexpectedly to a growth rate of 0.3% from an initial estimate of 0.1% on strong exports and solid construction activity. The full-year figure was increased to -4.9% from -5.0%. The Eurozone Economic Sentiment Indicator rose to 93.4 in February from 91.5 the month before, the highest since March last year, the EC said. Separate surveys showed consumer confidence improving in Germany and Italy, but sentiment remained little changed in France.

Europe + U.K. Bonds
Core and peripheral Eurozone government bond yields rose, tracking moves in U.S. Treasury yields. Dovish rhetoric from Fed Chair Powell triggered a sharp bond sell-off across most developed markets as it failed to allay fears of inflation rising. Christine Lagarde, president of the European Central Bank, and other policymakers warned markets that they were monitoring borrowing costs, but the consequent decline in yields was short-lived.

UK Gilt yields also rose in line with other developed markets.

Japan
Japan’s stock markets tumbled on Friday, ending sharply lower for the holiday-shortened trading week. For the week, the Nikkei 225 Stock Average declined -3.5% with the large-cap TOPIX Index and the TOPIX Small Index logging similar weekly losses.

For the first time since mid-2019, Reuters monthly Tankan Index recorded a positive reading among manufacturers. The poll, which closely tracks the Bank of Japan’s quarterly Tankan Index, showed that Japan’s manufacturers in aggregate were more positive than negative on business prospects, thanks to improving overseas demand. The sentiment index rose to 3 from -1 in January, reflecting strengthening conditions in chemicals and manufactured foods. The survey also showed that sentiment is expected to continue rising over the next three months, in part due to improving business conditions and a more vibrant global economic environment. Although sentiment remained weak in the nonmanufacturing/services segments in February, the index rose to -7 in February from -11 in the prior month. Business conditions in the nonmanufacturing sectors are forecast to improve over the next three months, powered by better prospects for the information/communications sectors.

According to Finance Minister Taro Aso, Japan’s GDP growth in the first quarter of 2021 (the final quarter of Japan’s fiscal year) is expected to slow from the torrid pace in the three-month period ended December 31, 2020, when GDP expanded at a 12.7% annualized clip. Despite the economic slowing, the finance minister believes that the government is not currently considering adopting any fresh stimulus measures and that the government will likely maintain its current pace of bond issuance and fiscal stimulus. Bank of Japan Governor Haruhiko Kuroda intends to conduct a policy review in March to ensure that the central bank can continue to provide ultra-loose monetary policy for an extended period.

The falling coronavirus infection rate and lessened strains on hospital capacity in several of Japan’s regions have prompted government officials to okay the removal of the state of emergency status for six prefectures on Sunday, a week earlier than the initially scheduled March 7 deadline. Prime Minister Yoshihide Suga, in concurrence with a panel of experts on infectious diseases, will maintain the state of emergency in Tokyo and three nearby prefectures for another week. Suga noted that the decline in new coronavirus cases was encouraging but warned against complacency. The government intends to start administering vaccinations for the elderly on April 12, after vaccinating health care workers.

China
Chinese shares fell in tandem with the global sell-off. The Shanghai Composite Index shed -5.1%, while the large-cap CSI 300 Index fell -7.7% in its worst weekly performance since October 12, 2018.

It was announced China is considering a change in how its citizens can invest in overseas assets. Currently, Chinese citizens can purchase foreign currencies up to USD 50,000 annually for overseas travel, study, or work but are not permitted to buy overseas financial assets or property. The rule change would allow them to buy overseas securities and insurance policies within the USD 50,000 foreign exchange limit, according to a State Administration of Foreign Exchange official.

In a week devoid of economic readings, China investors are focusing on the National People’s Congress (NPC) that starts March 5. In addition to reviewing the past year’s performance, the annual parliament meeting will offer a road map for future economic plans, including goals for 2021 and Beijing’s latest five-year development plan. China has unveiled its annual gross domestic product and other official targets at past NPC meetings, although last year it did not, due to the coronavirus pandemic.

Weekly Performance

U.S. Indices
Dow -1.8% to 30,932. S&P 500 -2.5% to 3,811. Nasdaq -4.9% to 13,192. Russell 2000 -2.6% to 2,208. CBOE Volatility Index +26.8% to 27.95.

S&P 500 Sectors
Consumer Staples -2.7%. Utilities -5.1%. Financials -0.4%. Telecom -1.4%. Healthcare -1.6%. Industrials -0.5%. Information Technology -4.%. Materials -2.1%. Energy +4.3%. Consumer Discretionary -4.9%.

World Indices
London -2.1% to 6,483. France -1.2% to 5,703. Germany -1.5% to 13,786. Japan -3.5% to 28,966. China -5.1% to 3,509. Hong Kong -5.4% to 28,980. India -3.5% to 49,100.

Commodities and Bonds
Crude Oil WTI +4.% to $61.62/bbl. Gold -2.5% to $1,732.5/oz. Natural Gas -9.6% to 2.773. Ten-Year Treasury Yield -0.9% to 134.23.

Forex and Cryptos
EUR/USD -0.34%. USD/JPY +1.09%. GBP/USD -0.59%. Bitcoin -14.8%. Litecoin -22.2%. Ethereum -21.9%. Ripple -14.3%.

Weekly Significant Macro Events

Global Geopolitical Headlines

February 19 – Bloomberg: “China may ban the export of rare-earths refining technology to countries or companies it deems as a threat on state security concerns, according to a person familiar… The Chinese government is currently conducting a review of its rare-earths policy. Officials view the technology needed to refine and purify the raw materials as a more powerful weapon in protecting state interests than the actual minerals, and is looking at banning sales of the technology to some countries or companies, according to the person…”

February 22 – CNBC (Evelyn Cheng): “China’s Foreign Minister Wang Yi… called on the new U.S. administration to stop the ‘suppression’ of Chinese technology companies, as he laid out conditions for U.S.-China cooperation going forward… China would like the U.S. to remove tariffs and sanctions on companies, and ‘abandon irrational suppression of China’s technological progress, so as to create necessary conditions for China-U.S. cooperation,’ Wang said…”

February 24 – Reuters (Yew Lun Tian): “The Chinese military criticised the United States on Thursday for undermining regional peace and stability after a U.S. Navy warship sailed through the Taiwan Strait a day earlier.”

February 24 – Reuters (Patricia Zengerle and Mark Hosenball): “U.S. President Joe Biden’s nominee to be director of the CIA, William Burns, told a Senate committee… he saw competition with China - and countering its ‘adversarial, predatory’ leadership - as the key to U.S. national security… Testifying to the Senate Intelligence Committee, Burns outlined his four top priorities – ‘people, partnerships, China and technology’ - if he is confirmed. ‘Out-competing China will be key to our national security in the days ahead,’ Burns said. He called China ‘a formidable, authoritarian adversary,’ that is strengthening its ability to steal intellectual property, repress its people, expand its reach and build influence within the United States.”

February 26 – Associated Press (Eric Tucker and Aamer Madhani): “Saudi Arabia’s crown prince likely approved the killing of U.S.-based journalist Jamal Khashoggi inside the Saudi consulate in Istanbul, according to a newly declassified U.S. intelligence report released Friday that instantly ratcheted up pressure on the Biden administration to hold the kingdom accountable for a murder that drew worldwide outrage.

COVID-19 Virus Headlines:

February 22 – Associated Press (Adam Geller): “In recent weeks, virus deaths have fallen from more than 4,000 reported on some days in January to an average of fewer than 1,900 per day. Still, at half a million, the toll recorded by Johns Hopkins University is already greater than the population of Miami or Kansas City, Missouri. It is roughly equal to the number of Americans killed in World War II, the Korean War and the Vietnam War combined. It is akin to a 9/11 every day for nearly six months. ‘The people we lost were extraordinary’ President Joe Biden said Monday, urging Americans to remember the individual lives claimed by the virus, rather than be numbed by the enormity of the toll.”

February 23 – Bloomberg (Adam Minter): “In December, China announced that it planned to inoculate 50 million people against Covid-19 by Feb. 11. Although it was an ambitious goal, it wasn’t outlandish for a country that seemed to have done better than most in bringing the pandemic under control. Yet vaccination turns out to be the one Covid benchmark where China has fared badly: As of Feb. 22, it had managed just 2.89 doses per 100 people (or 40.5 million shots)… By contrast, the U.S. has administered 19.33 doses for every 100 people (a world-beating 64.18 million). Manufacturing issues and vaccine export diplomacy have certainly played a role in this underperformance. But a far more important factor is longstanding Chinese concerns over vaccine safety and side-effects.”

February 23 – Los Angeles Times (Melissa Healy): “A coronavirus variant that probably emerged in May and surged to become the dominant strain in California not only spreads more readily than its predecessors but also evades antibodies generated by COVID-19 vaccines or prior infection and is associated with severe illness and death, researchers said. In a study that helps explain the state’s dramatic holiday surge in COVID-19 cases and deaths — and portends further trouble ahead — scientists at UC San Francisco said the cluster of mutations that characterizes the homegrown strain should mark it as a ‘variant of concern’ on par with those from the United Kingdom, South Africa and Brazil… ‘The devil is already here,’ said Chiu, who led a team of geneticists, epidemiologists, statisticians and other scientists in a wide-ranging analysis of the new variant, which they call B.1.427/B.1.429. ‘I wish it were different. But the science is the science.’”

February 24 – CNBC (Noah Higgins-Dunn): “New, highly transmissible Covid-19 variants ‘stand to reverse’ the nation’s control of the pandemic and could ‘undermine all of our efforts’ against the disease if the virus is left to proliferate in different parts of the globe, the head of the U.S. Centers for Disease Control and Prevention said…”

COVID-19 Fallout Headlines:

February 22 – Wall Street Journal (Bob Tita and Austen Hufford): “U.S. manufacturers aced the shutdown of their factories and warehouses last spring in response to Covid-19. They’re botching the recovery. After carrying out an orderly retreat from assembly lines as the pandemic arrived in the U.S., many manufacturers pulled out the playbook they followed in past recessions, cutting costs and preserving cash. That left them unprepared for the sharp rebound in consumer demand that began just weeks later and never let up. Without restaurants to visit and trips to take, Americans bought out stocks of cars, appliances, furniture and power tools. Manufacturers have been trying to catch up ever since. Nearly a year since initial coronavirus lockdowns in the U.S., barbells, kitchen mixers, mattresses and webcams are still hard to find. A global shortage of semiconductors has forced many car makers to cut production in recent weeks.”

February 22 – Bloomberg (Christopher Condon and Erik Wasson): “The next phase of President Joe Biden’s legislative agenda is fast taking shape, with an economic-recovery package that will potentially far surpass his $1.9 trillion virus-relief plan in size, complexity and overall ambition. The White House and congressional Democrats are busy plotting strategy for the proposal, which could be unveiled next month, kicking off a legislative process that may culminate by August. The centerpiece will be possibly the biggest infrastructure-spending commitment since the New Deal -- including roads, bridges and rural broadband internet. Progressives are eyeing much more, such as an expansion of Obamacare and a public-sector jobs program, along with tax measures including an increase in the capital-gains levy.”

February 23 – Reuters (Rajesh Kumar Singh): “An aerospace parts maker in California is struggling to procure cold-rolled steel, while an auto and appliance parts manufacturer in Indiana is unable to secure additional supplies of hot-rolled steel from mills. Both companies and more are getting hit by a fresh round of disruption in the U.S. steel industry. Steel is in short supply in the United States and prices are surging. Unfilled orders for steel in the last quarter were at the highest level in five years, while inventories were near a 3-1/2-year low... The benchmark price for hot-rolled steel hit $1,176/ton this month, its highest level in at least 13 years. Soaring prices are driving up costs and squeezing profits at steel-consuming manufacturers, provoking a new round of calls to end former President Donald Trump’s steel tariffs. ‘Our members have been reporting that they have never seen such chaos in the steel market,’ said Paul Nathanson, executive director at Coalition of American Metal Manufacturers and Users.”

February 24 – Reuters (Nandita Bose and Steve Holland): “President Joe Biden will sign an executive order on Wednesday aimed at addressing a global semiconductor chip shortage that has forced U.S. automakers and other manufacturers to cut production and alarmed the White House and members of Congress, administration officials said… Administration officials said Biden’s executive order… will launch an immediate 100-day review of supply chains for four critical products: semiconductor chips, large-capacity batteries for electric vehicles, rare earth minerals and pharmaceuticals.”

Covid-19 Weekly Statistics (28 February 2021 @ 1400 GMT)

Global Recorded Cases
114,465,423

Previous Week
111,730,226

1 Week Change
+2,735,197 Cases
+2.45%
(Prev Week +2.34%)

Global Active Cases
21,917,253

Previous week
22,298,811

1 Week Change
-381,558 Cases
-1.71%
(Prev Week -12.21%)

Global Recovered
90,009,081

Current Recovery Rate
97.26%

Previous Week
Recovery Rate
(97.23%)

Global Deceased
2,539,089

Current Death Rate
2.74%

Previous week
Death Rate
(2.77%)

Global Recorded Case Weekly Trend
Increasing

Global Active Case
Weekly Trend
Increasing

Global Recovery vs. Global Death
Weekly Trend
Improving

Commentary

The Global Recorded Cases crossed 114 million this week with an additional 2,735,197 new Covid cases recorded globally over the past week. The weekly rate-of-change (ROC) had remained "sticky" in the 6% to 8% weekly increase since mid-August but has shown a significant decrease since the 1st week of January (remaining below 3% since 09 February). Ongoing vaccinations should continue to drive this infection rate lower througout 2021.

The total number of Global Active Cases peaked Monday, 01 Feb at 26,139,085 active cases. It has since declined at an accelerating rate with a decrease of -381,558 (-1.71%) new active cases recorded over the past week (with global active cases now 16.15% below the peak).

Global Daily New Cases
(7-Day Moving Average)

Global Daily Deaths
(7-Day Moving Average)

Daily Confirmed Regional New Cases
Per Million Population
(7-day moving average by region)

Daily Confirmed Regional New Deaths
Per Million Population
(7-day moving average by region)

Now that vaccines are being distributed it is important to monitor the degree of vaccination per region. Below is the current vaccinations per region and the cumulative vaccinations per population for the various regions.

Cumulative Total Vaccinations per Region

Cumulative Vaccinations per 100 Person Population

Presently the Asia region has administered the largest total number of 1st vaccine doses but North America leads other global regions in terms of the percentage of its population that has received at least 1 dose of the vaccine.

North America (12.72%)
European Union (7.20%)
South America (2.96%)
Asia (1.84%)
Africa (0.27%)

WEEKLY ASSET CLASS MONITOR
(week ending 26 February 2021)

Asset Class

Region

ETF Ticker

Weekly
Return

Year-to-Date
Return

Equities

World
U.S.
Europe
Asia Pacific
Emerging Market

VT
VTI
VGK
VPL
VWO

-3.33%
-2.86%
-2.23%
-3.96%
-6.37%

+2.44%
+2.79%
+1.66%
+1.41%
+4.75%

Bonds

U.S. Bonds
International Bonds

BND
BNDX

-0.37%
-0.37%

-2.40%
-2.28%

Real Estate Equities

U.S. Real Estate
International Real Estate

VNQ
VNQI

-1.18%
-0.07%

+3.46%
+0.63%

Precious Metals Equities

Global Gold Miners
Global Junior Gold Miners

RING
GDXJ

-4.83%
-3.74%

-13.48%
-15.63%

GLOBAL EQUITY MARKET MONITOR

Global equities had a wicked roller-coaster ride in 2020 on the back of the Covid pandemic. They peaked on 12 Feb 2020 and fell dramatically (-34%) into their 23 Mar lows. They have since recovered completely and all regions remain above their respective pre-COVID price peaks.

As difficult as it is to understand given the current pandemic situation remains largely unconstrained, this breakout is a bullish sign the bear market is over.

Hedgeye Risk Management LLC

"I skate to where the puck is going to be; not where it has been."
Wayne Gretzky

As we appear to reached a turning point in global growth, we continue to utilize global macroeconomic data provided by our data partners at Hedgeye Risk Management. Their data remains one of the most accurate available when attempting to forecast future macroeconomic shifts globally so we use their data to anticipate where the "puck may go" in global macroeconomics.

The Hedgeye Growth/Inflation/Policy (GIP) model uses 90 high frequency inputs per quarter within a Bayesian Inference algorithm to adjust in real-time for the current quarter along with 24 month rate-of-change base effects for future quarters. The forecast is subject to actual economic data as it is released in real time within the quarter so we continue to monitor each economic data point as it is released.

Hedgeye classify each countries model outputs according to the following "quadrants":

Quad 1 (Dark green):

Growth rising/Inflation falling.
Overweight equities/credit; underweight fixed income.

Quad 2 (Light green):

Growth rising/Inflation rising.
Overweight equities/credit; underweight fixed income.

Quad 3 (Yellow):

Growth falling/Inflation rising.
Overweight fixed income; underweight equities/credit.

Quad 4 (Red):

Growth falling/Inflation falling.
Overweight fixed income; underweight equities/credit.

Below is a view of the Global GIP model with their latest Quad outputs for the forward 4 quarters. The current model projects all global regions to experience strong growth in the first 2 quarters of 2021 with significant headwinds into the 3rd/4th quarters of 2021.

Recession Warning Indicators

Below we continue to 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 model reversed below 30 as of 01 October 2020 indicating the probability of a global recession risk at present is low.

CEO Confidence Surveys

We monitor Chief Executive Officer confidence survey's closely as CEO's are the single best source of insight into current and future business conditions. Below is their latest thoughts.

CEO Optimism Climbs to Multi-Year High In February

"Chief Executive’s latest poll of 302 CEOs finds confidence in future business conditions in the U.S. at its highest level since 2018—but concerns remain".
By Isabella Mourgelas and Melanie C. Nolen -February 8, 2021

"America’s CEOs are increasingly convinced that the Covid crisis — which has crushed the global economy, bloated the nation’s balance sheet will trillions of dollars in new debt, destroyed the livelihoods of millions of citizens and killed more Americans than WWII — will soon come to an end.

In Chief Executive’s latest poll of more than 300 U.S. CEOs, fielded from February 2-4, those surveyed rated their confidence in future business conditions at 7.1/10 on average — a 2-year high — and a growing number of business leaders now forecast growth in revenues and capital expenditures as well. Meanwhile, they rated their confidence in current business conditions “good,” at 6.2 out of 10 on our 1-10 scale (+1 percent since January)."

"Not all CEOs agree. More than a third of survey participants responded with varying degrees of concerns over what comes next. Some believe that rising inflation and stimulus packages will put the U.S. economy at risk of a recession; others say less business-friendly public policies could impede the recovery; and others observe that there is still hesitation from their customers to move forward with projects until more clarity is achieved.

For those reasons—and others—38 percent of the CEOs surveyed showed either caution or pessimism in their outlook, expecting business conditions a year from now to be either unchanged from today or worse—at 23 and 15 percent, respectively.

While the proportion of CEOs expecting an increase in profitability remains unchanged since last month, at 72 percent, the number of those expecting growing revenues, capital expenditures and headcount is up 4, 5 and 7 percent, respectively—at 78 percent, the proportion of CEOs forecasting increasing revenues is now at its highest level since April of 2019.

Similarly, the proportion of CEOs planning to add to their workforce in the year ahead has reached a level unseen since September 2018, further demonstrating growing confidence in the recovery among CEOs. It is up over 7 percent since last month.

On a year-over-year basis, the majority of CEOs across all sectors is forecasting “good” to “very good” business conditions by next February. Looking at the data year over year, all cohorts seem to have more or less the same level of confidence they did at this time last year, expect for the mid-sized revenue group."

Asset Class Return Monitor
(for week ending 26 February 2021)

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): (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) were down -3.33
European equities were the top performing equity region this past week with Emerging market equities lagging.
U.S. bonds (Black) and International bonds (Green) were lower on the week.
Commodities were higher on the week with the U.S. Dollar index up +0.57%.

Year-to-Date (2021) Asset Class returns

Thus far in 2021 global equities (as measured by the Vanguard Total World Stock ETF (shown in CYAN) have gained +2.44%.
Emerging market equities are the top performing equity region in 2021 with Asia Pacific markets lagging.
Bonds have shown negative returns in 2021 with U.S. bonds (Black) under-performing International Bonds (Green) .
Commodities have had very strong returns for 2021 with the U.S. Dollar index up +1.10%.

Typically bull/bear markets follow 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". The 11 year bull 1/2 cycle ended in Feb 2020 with the global spread of COVID-19 resulting in a rapid bear 1/2 cycle. We have now returned to the bull 1/2 cycle as of March 2020.

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 positive for all monitored regions.
The strongest equity region over the past 12 month has been Emerging Markets with European market equities lagging.
Overall world equity performance (as measured by the Vanguard Total World ETF) have returned +25.52% (including dividends) over the past 12 month rolling period.

3 Month Rolling Regional Equity Performance

Over the past 3 month rolling period the strongest performing world equity region has been Emerging markets with European markets the weakest.
Positive regional equity returns have been evident over the past quarter (3 months) in monitored regions (global equity 3 month bullish flip occurred as of 05 June market close on post COVID-19 panic rebound).

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.
Negative global equity returns are evident over the past month for all monitored regions.

Past Week Regional Equity Performance

Over the past week major global equities were lower with European 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 loss of -3.39%. As can be seen on the chart above, price remains above the 65 week moving average (blue line) and above support @ 444.09-446.78.

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 strength.

Value Line Geometric Index ($XVG) Daily

Global Dow Index ($GDOW) Daily

Below is a 40 year daily chart of the Value Line Geometric Index which clearly shows the importance of the critical support/resistance @ 508-523 (1st achieved in 1998). This past week price remained above this critical level (bullish).

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)

Global equity markets fell substantially from their Feb 2020 peak due to the Covid crisis to near their previous consolidation box lows (yellow box) @ 62.68. They have risen dramatically and have now closed above their previous top. This is a continued encouraging sign a new bull market is in progress.

For the month of February ACWI has gained +2.29%. It closed the month of January above the 12 month simple moving average keeping the long term trend bullish until month end.

ACWI Weekly Chart

This past week ACWI lost -3.46%. Price remains above the 65 week simple moving average (shown in BLUE) and the weekly support @ 80.76.

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 "Weakening" quadrant with the quantitative scoring negayibr. ACWI (our world equity fund benchmark) has also transitioned into the GREEN "Weakening" quadrant.

The RRG trend analysis status is Neutral for world equities:

ACWI price Relative Strength (horizontal axis): POSITIVE
ACWI price Momentum (vertical axis): NEGATIVE

Coincident Equity Market Indicators

Crude Oil

Crude oil was higher over the past week and continues to recover off its recent lows. Firm crude oil prices typically point to increasing demand on the back of world economic growth improvement. Its regaining of pre-Covid levels (above $50) remains equity bullish.

Gold

Gold was lower over the past week and closed below support @ 1775-1785. Golds fall from its July 2020 peak continues to indicate liquidity is flowing out of safe assets into equities and remains equity bullish.

Commodities

Commodities were higher over the past week and continue to recover over their recent 4 year lows. They have now regained pre-Covid levels and remain equity bullish above $168.

U.S. 30 Year Treasury Bond

U.S. 30 year bonds were lower on the week. Rising bond prices indicate a "flight to safety" trade associated with weakening economic data and the break back into pre-covid yields is equity bullish.

Current 5-Factor Model Indications

The combined 5-Factor quantitative model is currently YELLOW (neutral). This indicates a neutral level of risk at present. The 5-Factor model currently has the following sub-model readings:

Economic Model

The Economic model reverted to YELLOW as the economic data associated with the COVID-19 pandemic has begun to moderate from its recent bounce post-lockdown into a steady-state low growth condition. The model is composed of numerous inputs including data from the following sources:

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
DHL Global Trade Barometer

OECD Composite Leading Indicators
(09 February 2021)

Latest Overview
9 Feb 2021 - "The OECD Composite leading indicators (CLIs), designed to anticipate turning points in economic activity relative to trend, point to stable growth in most large OECD economies.

The CLIs continue to signal stable growth in the United States, Japan and the euro area as a whole, including Germany, France and Italy. In Canada, the CLI now points to stabilising growth. The CLI for the United Kingdom still signals a slowdown.

Among major emerging economies, the CLIs for the manufacturing sector of China and for India and Brazil all point to a steady increase in growth.In Russia, the CLI continues to signal stable growth.

The CLIs should continue to be interpreted with care as fluctuations in the underlying components are likely influenced by the changing measures to contain Covid-19 and the progress of vaccination campaigns."

The OECD (Total) Composite Leading Index topped in Mar 2018 @ 100.8 and remains below 100 (indicating below average global economic growth). Its most recent decline took it below the Feb, 2009 lows (95.70) seen during the last global recession.

Below is our latest heat-map of the Composite Leading Indicators for various monitored regions. 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.

Red/Green numbers indicates above/below average future projected economic growth.
Red/Green boxes indicates CLI rate of change month/month and year/year.

Highlights:
-Reporting countries with projected above average future economic growth (CLI > 100)

40.0% (previous month 35.3%).
TREND POSITIVE

-Reporting countries with month/month positive increase in CLI

85.7% (previous month 88.2%).
TREND STEADY

-Reporting countries with year/year positive increase in CLI

60.0% (previous month 47.1%).
TREND POSITIVE

BlackRock Macro GPS Growth/Inflation Forecast
(18 February 2021 Data)

The BlackRock macro-GPS aims to give a forward forecast on the growth & inflation outlook for G7 economies. It combines new sources of information using new "big-data" sources – including internet searches and text mining of corporate calls - as well as traditional economic data. Other big data inputs include online job postings, inflation chatter, satellite images, e-invoicing and traffic patterns.

The BlackRock GPS forecasts the following:

the potential year-over-year GDP economic growth reading versus current consensus 3 months forward.
the potential year-over-year Inflation reading versus current consensus 6 months forward.

BlackRock GDP Growth Forecast vs. Current Consensus

The BlackRock GDP growth forecast currently projects the greatest upside surprise in growth (versus current consensus) 3 months from now will be in Australia with the greatest downside surprise in growth (versus current consensus) in Italy. The growth GPS continues to project continued downward future growth projections globally relative to consensus 3-months forward with a G-7 economic growth forecast -0.87% below current consensus (bearish).

BlackRock Inflation Forecast vs. Current Consensus

The BlackRock inflation forecast currently projects the US will have the greatest upside surprise in future inflation (relative to consensus) 6 months from now with the Euro area having the furthest downside projected inflation relative to consensus. The inflation GPS projects mixed inflationary pressures globally relative to current consensus.

J.P. Morgan Global Composite Purchasing Managers Index (PMI)
(03 February 2021)

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.

readings > 50 indicating economic expansion
readings < 50 indicate economic contraction.

Global PMI Summary

Global Composite PMI Report Commentary

Global Composite PMI Summary 03 February:

"The rate of global economic expansion eased for the third month in a row during January. Output rose at the slowest pace since last July, as new business growth slipped to a five-month low. Businesses maintained a positive outlook, however, allowing for a further slight increase in employment.

The J.P.Morgan Global Composite Output Index – which is produced by J.P.Morgan and IHS Markit in association with ISM and IFPSM – posted 52.3 in January, down from 52.7 in December, to remain above the neutral 50.0 mark for the seventh successive month.

Manufacturing production continued to rise at a faster pace than service sector business activity at the start of the year, as has been the case since the current upturn started in July 2020. Rates of expansion eased in both categories, however, hitting a four-month low in manufacturing and a six-month low at service providers."

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 future global GDP reading approaching 2.9%; erasing all GDP losses associated with the Covid outbreak.

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 global stalling of the economic recovery. Of particular concern is the Eurozone where economic contraction in the Services component has reappeared over the past month.

World Bank Global Monthly Outlook
(January 2021)

U.S. Economic Growth & Inflation

Year-over-Year GDP growth

The Gross Domestic Product (GDP) in the United States contracted 2.40 percent in the fourth quarter of 2020 over the same quarter of the previous year.

Quarter-over-Quarter GDP growth

The US economy expanded an annualized 4.1% in Q4 2020, slightly higher than the advance estimate of a 4% growth, the second estimate showed. Upward revisions to residential fixed investment, private inventory investment, and state and local government spending were partly offset by a downward revision to personal consumption expenditures. Figures compare with market forecasts of 4.2%. Still, the economy slowed from a record 33.4% expansion in Q3 as the continued rise in COVID-19 cases and restrictions on activity moderated consumer spending. Considering full 2020, the American GDP contracted 3.5%, the same as in the advance estimate and the worst performance since 1946. The outlook for 2021 seems brighter than it was some months ago as vaccination rollout began although at a slower than expected pace and as the new Biden administration unveiled a $1.9 trillion stimulus plan. However, the package hasn't been approved yet and current unemployment insurance benefits expire on March 14th.

Annualized Inflation

The annual inflation rate in the US was steady at 1.4% in January of 2021, the same as in December and slightly below market forecasts of 1.5%. Main upward pressure came from food prices (3.8%), used cars and trucks (10%), utility gas service (4.3%), medical care services (2.9%), shelter (1.6%), electricity (1.5%) and new vehicles (1.4%). Meanwhile, apparel prices fell 2.5% and energy cost went down 3.6% mainly due to gasoline (-8.6%). On a monthly basis, consumer prices went up 0.3%, in line with forecasts and following a downwardly revised 0.2% rise in December driven by a 7.4% rise in gasoline cost. The indexes for electricity and natural gas declined, but the energy index rose 3.5%. The food prices rose slightly by 0.1% as an advance in the index for food away from home more than offset a decline in the index for food at home.

Eurozone Economic Growth & Inflation

Year-over-Year GDP growth

The Eurozone economy shrank by 5.0 percent year-on-year in the fourth quarter of 2020, less than an initial estimate of 5.1 percent fall and following a 4.3 percent contraction in the previous period.

Quarter-over-Quarter GDP growth

The Eurozone economy shrank by 0.6 percent on quarter in the three months to December 2020, less than an initial estimate of 0.7 percent fall, amid pandemic lockdowns. The latest reading followed a record 12.4 percent expansion in the previous three-month period and an unprecedent 11.7 percent contraction in the second quarter due to the COVID-19 crisis. Among the bloc's largest economies, France, Italy and the Netherlands contracted in the fourth quarter, while GDP growth in Germany and Spain slowed sharply. Year-on-year, the GDP shrank by 5.0 percent, also revised lower from a preliminary 5.1 percent decline.

Annualized Inflation

Annual inflation rate in the Euro Area jumped to 0.9 percent in January of 2021, the highest rate since February of 2020, and ending 5 months of deflation. Figures beat market forecasts of a 0.5 percent rise, preliminary estimates showed. Prices of food, alcohol & tobacco are expected to increase the most (1.5 percent vs 1.3 percent), followed by services (1.4 percent vs 0.7 percent) and non-energy industrial goods (1.4 percent vs -0.5 percent) while cost of energy is likely to decrease less (-4.1 percent vs -6.9 percent). On a monthly basis, consumer prices were up 0.2 percent. The annual core inflation, which excludes volatile prices of energy, food, alcohol & tobacco and at which the ECB looks in its policy decisions, jumped to 1.4 percent in January from a record low of 0.2 percent in each of the previous four months.

Japan Economic Growth & Inflation

Year-over-Year GDP growth

The Gross Domestic Product (GDP) in Japan contracted 1.20 percent in the fourth quarter of 2020 over the same quarter of the previous year.

Quarter-over-Quarter GDP growth

The Japanese economy advanced 3.0 percent on quarter in the three months to December of 2020, following a 5.3 percent growth in the previous period and beating market estimates of a 2.3 percent expansion, a preliminary reading showed. Gross fixed capital formation rebounded (3.2 percent vs -2.2 percent in Q3) while both private consumption (2.2 percent vs 5.1 percent in Q3) and public spending (2.0 percent vs 2.8 percent) grew at a softer pace. Net trade contributed positively to growth, as exports jumped 11 percent (from 7.4 percent in Q3) while imports increased 4.1 percent (from -8.2 percent in Q3). For the whole of 2020, the world's third-largest economy shrank 4.8 percent, marking the first contraction since 2009.

Annualized Inflation

Japan's consumer prices declined 0.6 percent year-on-year in January 2021, after falling 1.2 percent in the previous month, as the pandemic continued to weigh on consumption. Prices were mainly dragged by utilities (-6.3 percent vs -6.1 percent in December), education (unchanged at -2.2 percent), transportation & communication (-1.8 percent vs -1.3 percent), medical care (-0.5 percent vs -0.4 percent), food (-0.1 percent vs -0.8 percent), and culture & recreation (-0.1 percent vs -4.0 percent). Core consumer prices, which exclude fresh food, dropped 0.6 percent on an annual basis in January, less than a 0.7 percent decrease expected by markets.

China Economic Growth & Inflation

Year-over-Year GDP growth

The Chinese economy advanced 6.5 percent year-on-year in the December quarter, after a 4.9 percent growth in the third quarter and above market consensus of 6.1 percent. The latest reading pointed to pre-pandemic growth rates, with industrial output rising the most in 3-1/2 years in December. For full 2020, the country's GDP expanded 2.3 percent, the slowest pace in more than four decades. Still, China is likely to be the only major economy to avoid contraction due to the COVID-19 shocks. In 2020, the primary sector went up 3 percent, with live pig inventory surging 31 percent. Industry advanced 2.6 percent, with manufacturing rising 3.4 percent, utilities 2 percent and mining 0.5 percent. The tertiary sector expanded 2.1 percent. Also, real estate investment grew 7 percent, with residential rising 7.6 percent and office building 5.4 percent.

Quarter-over-Quarter GDP growth

The Chinese economy grew by a seasonally adjusted 2.6 percent on quarter in the three months to December 2020, following an upwardly revised 3 percent advance in the previous quarter and less than market expectations of a 3.2 percent expansion. This was the weakest quarterly growth since a contraction in the first quarter of 2020. For full 2020 however, the economy expanded 2.3 percent and China is likely to be the only major economy to avoid contraction due to the COVID-19 shocks.

Annualized Inflation

The consumer price index in China unexpectedly dropped by 0.3 percent year-on-year in January 2021, after a 0.2 percent gain a month earlier and compared with market consensus of a flat reading. The decline was mainly due to lower cost of non food, with prices falling for transport (-4.6% vs -3.1%); rent, fuel, and utilities (-0.4% vs -0.6%); clothing (-0.2% vs -0.1%); and other goods and services (-0.9% vs 2.2%). Meantime, prices of household goods and services were flat for the third straight month. Also, education cost was flat after rising 0.9% in December. In addition, prices of health slowed sharply (0.4% vs 1.3%). Meanwhile, food prices went up 1.6%, the most in three months, following a 1.2% gain in December. On a monthly basis, consumer prices rose by 1% in January, shifting from a 0.4% fall in December, due to adverse weather and rising demand ahead of the Lunar New Year holiday.

Valuation Model

The Valuation model remained RED this week. Global equity valuations remain near historical highs relative to underlying current global economic fundamentals (GDP output).

Technical Model

The Technical model remained GREEN this past week. Global equity markets have recovered significantly off their March 2020 lows and remain at critical technical levels.

Sentiment Model

The Sentiment model remained YELLOW this week as overall sentiment has turned mixed (sentiment acts as an inverse shorter-term trading indicator).

Liquidity/Economic Stress Model

The Liquidity/Economic Stress model remained GREEN this week with recent global financial stress associated with COVID-19 offset by unprecedented global central bank liquidity injections.

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 Treasury Bonds (GOVT): (Orange)
Foreign Developed Market Gov't Treasury 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 Int'l Investment Grade Corporate Bonds with U.S. Gov't Treasury 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 High Yield Bonds with US Investment Grade Corporate Bonds lagging.
U.S. Total Bond Market (RED) and International (ex-U.S.) Total Bond Market (BLUE) having delivered negative returns over the past quarter (3 months).

1 Month Rolling Bond Performance

Over the past 1 month rolling period the top performing bond asset class has been Int'l High Yield Bonds with Int'l Gov't Treasury Bonds lagging.
The U.S. Total Bond Market (RED) and the International (ex-U.S.) Total Bond Market (BLUE) have delivered negative returns over the past month.

Past Week Bond Asset Class Performance

Over the past week US Inflation Protected Bonds were the top performing bond class with Int'l Corporate Bonds lagging.
The U.S. Total Bond Market (RED) and the International (ex-U.S.) Total Bond Market (BLUE) delivered lower 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.

We are very cognizant of the fact bond yields remain at generational lows (bond 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. There is currently over $10 Trillion in negative yielding bonds globally (never before seen in 5000 years of history) so any sudden surge in global growth and/or inflation will have a devastating impact upon bond fund returns (hence the reason we place so much research into global macroeconomic conditions).

Rolling 12 month returns for bonds remain positive and we continue to 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 trend-change/breakout in all 3 key Treasuries in order to definitively state the global bull market in bonds is over.

ETF Bond Proxies

The current very strong short-term bond bull market began 01 Oct 2018. Below is the performance of the 3 ETF's we use as "bond proxies" 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)

Global bonds were lower over the past week. There remains a divergence between U.S. bonds (green) which continue to outperform International bonds (red).

U.S. 10 year Treasury Yield

After rates bottomed in mid-2016 at all time lows (bond prices peaked as they are inversely correlated), they rapidly rose to resistance on the hope of future economic growth + inflation from mid-2016 to the 3rd quarter of 2018. However, disappointing economic data out of the U.S. has allowed rates to plunge once gain and they recently set new record all-time yield lows.

Recently they have risen out of the RED consolidation box and have returned to pre-covid levels. Resistance remains 1.336%-1.429%.

German 10 year Bund Yield

German 10 year treasury yields peaked in early 2018 and plunged over the past 2 years to record all-time-lows of -0.72% on the back of recessionary economic conditions within the German economy. They have remained range bound since May 2019.

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 rose to a peak of 0.16% before they once again plunged in 2019 to once again retest -0.28%. They have since bounced dramatically on the back of renewed hope the worst of Japan's economic woes may be behind it.

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:

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 Australian Dollar with the U.S. Dollar Index the worst performing.

3 Month Rolling Currency Performance

Over the past 3 month rolling period the top performing currency has been the Australian Dollar with Gold 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 US Dollar Index with Gold lagging.

U.S. Dollar: (Bearish Bias)

Commentary:

The USD index was up +0.57% over the past week. It has been in a steady decline since March 2020 as global liquidity through Central Bank printing has reduced the shortage of US dollar demand which occurred during the worst of the COVID crisis in Asia and Europe.

Support / Resistance Levels (based upon close):

Weekly: 90.33 / 91.33
Monthly: 88.95 / 93.03

US Dollar Index Daily charts

The 1 year daily chart (above) shows the range-bound chop between 92-95 from Jul-Nov 2020 (red shaded box) before the recent drop below the bottom of its previous range .

The 4 year daily chart (above) clearly shows the uptrend channel from the 2018 lows. A break of the lower trendline occurred in mid-July. Daily resistance remains 90.55-91.33.

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 to highs in early 2020. It has now reversed in line with improving economic performance post-Covid panic as the demand for dollars globally subsides.

Price ended the week above support @ 90.33 and 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 91.66-92.33 weekly close area (thick RED line) has been a very significant bull/bear battle zone over the past 21 years (since 1998).

The break of the support confirms a possible "Double-Top" pattern with a price objective near 80 on the USD index.

US Dollar Index Monthly chart

For the month of February the U.S. Dollar index has gained +0.35%. Since bottoming in late 2011 the USD has been on a roller-coaster ride. It experienced:

a large acceleration in 2014-2015 (+27%),
a consolidation in 2015-2017,
a large drop in 2017-2018 (-15%) back to support and its uptrend line from 2011, and
its recent rise back to the top of its previous consolidation zone.
its most recent decline to break the bottom of the consolidation zone + uptrend line.

Price closed January below the long term trend 10 month moving average maintaining the long term bias to Bearish until months end. Monthly support is now @ 88.95 with resistance @ 92.63-93.03 on a monthly closing basis.
(Long Term Bearish)

Euro (Neutral Bias)

The Euro was down -0.38 over the past week. It had shown remarkable longer-term resilience given ongoing European political uncertainty (Brexit, Spain, Germany, Italy) and has strengthened considerably off the March 2020 lows as the Covid situation has dramatically improved in the Eurozone relative to the U.S. response.

Support / Resistance Levels (based upon close):

Weekly: 120.35 / 124.58
Monthly: 113.81 /123.02

Euro Daily Charts

The Euro topped out in early 2018 @ 125.10 and had been on a steady decline until March. It has since risen dramatically and has now achieved a bullish breakout.

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 broke above this key resistance level in July and closed the week between the short term trend 50 and 200 day moving averages.
(Short Term Neutral)

Euro Weekly Chart

The weekly chart shows the Euro's steady decline from its early 2018 peak. It found support @ 107.99-108.46 and the current advance has now cleared resistance @ 120.35-121.58.

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 -0.52%. 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 to bullish until months end.
(Long Term Bullish)

UK Pound (Bullish Bias)

U.K. Pound Daily Charts

U.K. Pound Weekly Chart

U.K. Pound Monthly Chart

The British Pound lost -0.58% over the past week. Clearly the fallout from Brexit will continue to weigh heavily upon cable's performance over the next several years but it has provided strong returns over the past 10 months.

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 following vote results)
133.09 monthly close (monthly close 30 June 2016 following vote results)

This past week the Pound closed the week above its short term trend daily 50 +200 day moving averages and above the intermediate term trend 20 + 65 week moving averages. For the month of February it has gained +1.63% and closed the month of January above its long term 10 month moving average (which technically keeps the long term bullish until months end).

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

Support / Resistance Levels (based upon close):

Weekly: 136.764 /143.39
Monthly: 139.17 /141.92

Australian Dollar (Bullish Bias)

Australian Dollar Daily Chart

Australian Dollar Weekly Chart(s)

Australian Dollar Monthly Chart

The Australian Dollar lost -2.07% over the past week and continues to strongly recover off its recent lows (it lost -44% from its 2011 peak to its recent lows).

For the month of February the Aussie dollar has gained +0.81%. It closed the week above the short term trend 50 + 200 day moving averages and above the intermediate term trend 20 + 65 week moving averages. It closed the month of January above the long term trend 10 month moving average keeping the long term outlook bullish until months end.

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

Support / Resistance Levels (based upon close):

Weekly: 73.35 / 77.26
Monthly: 76.59 / 79.12

Canadian Dollar (Bullish Bias)

Canadian Dollar Daily Chart

Canadian Dollar Weekly Chart

Canadian Dollar Monthly Chart

The Canadian dollar was down -0.68% 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 above the short term trend 50 + 200 day moving averages and above the intermediate term trend 20 + 65 week moving averages. For the month of February the Loonie has gained +0.74%. It continues to advance and closed the month of January above the long term trend 10 month moving average keeping the long term bullish until months end.

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

Support / Resistance Levels (based upon close)

Weekly: 76.82 / 79.67
Monthly: 73.20 / 79.67

Key Weekly Returns (week ending 26 February 2021):

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

-3.46%

-2.48%

-5.10%

-3.06%

-2.63%

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

-2.23%

-2.60%

-4.37%

-6.61%

-8.33%

-0.37%

-0.37%

-0.06%

-1.90%

Commodities

DBC (DB Commodities Tracking Index Fund)

DBA (PowerShares DB Agriculture Fund)

GLD (SPDR Gold Trust Shares)

SLV (iShares Silver Trust)

DBB (PowerShares Metals Fund)

USO (United States Oil Fund)

Commodity Basket

Soft Commodity Basket

Gold Bullion

Silver Bullion

Industrial Metals

Light Crude Oil

+1.27%

+1.47%

-3.11%

-2.38%

-0.32%

+4.11%

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

+0.70%

-2.15%

-0.53%

-0.81%

-0.45%

-1.08%

Important Charts to Watch

Commodity Basket Index

Commodities (as measured by the Reuters/Jefferies CRB index, a basket of 19 commodities) peaked in late 2007 and have have been in a steady deflationary decline since. They attempted to base in 2015-2020 but the Covid virus drastically pushed them lower to 40 year lows.

They have since recovered to the pre-covid consolidation zone (amber box on chart) and have returned back above their pre-Covid collapse. This is very encouraging for equities.

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 above 25. The volatility structure currently is NEUTRAL for equities.

European Banks

Since the 2009 market bottom Europe has been the weakest major equity growth region. As such, we continue to remain concerned about European financial stocks (represented below using the iShares MSCI European Financials ETF).

Of particular concern is Deutsche Bank which remains near 12 year lows (down over 95% 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 could potentially lead to a catastrophic ripple effects worldwide.

They announced a significant restructuring effort in the 2nd week of July, 2019 so we continue to keenly monitoring their price performance.

Chinese Equities

The Shanghai Composite index was up this past week and was able to hold above support @ 3317-3412. Resistance remains @ 3558-3630.

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) remain an area we recommend all investors have at least a small position within at present. Precious metals perform well during times when real (inflation adjusted) interest rates are falling and/or when the USD is weak. Real global rates have begun to rise (acting as a headwind to PM's) while the USD has been weak (acting as a tailwind to PM's).

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.

Gold stocks exceeded their 1st target. They remain in the lower end of 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 buying opportunities and it now appears gold stocks are attempting to play "catch-up" to the price of bullion (with a lot of room to rise further).

Even more 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 has recently moved up dramatically as we expected but remains still fairly cheap relative to gold. There still appears to be room to run.

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 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:

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 0.55 and remains near a record low.

U.S. Equity Market Valuation

Crestmont Price/Earnings Ratio
(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 February 2021 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 January 2021 was the most expensive market valuation in U.S. stock market history (since 1871) .

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.

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):

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.

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):

The Crestmont Research P/E Ratio
The cyclical P/E ratio using the trailing 10-year earnings as the divisor
The Q Ratio, which is the total price of the market divided by its replacement cost
The relationship of the S&P Composite price to a regression trendline

As of 30 December the average of these 4 measures places the U.S. stock market (S&P 500 index) as being 190% above its long term geometric mean. This remains the highest valuation in the history of the stock market going back to 1900 (now well over 3 standard deviations above the mean and above the market peaks in 2007, 2000 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 at 189.6%. It recently exceeded the 2000 equity bubble peak of 159.2% in terms of equity overvaluation relative to economic output.

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.

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

S&P 500 12 year forward projected annual returns

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
(data as of 30 November 2020)
(Source: Research Affiliates)

Below is the projected 10 year nominal (not inflation adjusted) returns for the majority of global assets.

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 Global Government Treasury bonds (especially U.S. Long Term Treasuries) showing minimal returns due to low global interest rates.

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 +5.5% average return) while the period May-September offers little in total return (-2.1% 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 2020 Composite Model

The following is the composite directional model forecast for the S&P 500 index for 2020 based upon the following parameters (each equal weighted within the composite model) for data from 1928-2019:

10 year Decennial Market Cycle (Year ending in 0 = Last Year of Decade)
4 year Presidential Market Cycle (Year 4 = U.S. Election Year)
1 year Annual Seasonal Market Cycle

The 2020 composite model indicates:

a strong open to the year in January with a pullback into end Jan/early Feb.
generally strong equity markets from early February into late March/early April.
a quick reversal into late May (typically associated with the political conventions to choose the candidate to run for president).
a run-up into September associated with the U.S. presidential campaigns.
a quick fall into the election associated with uncertainty.
a rise into year end once the election has passed.

U.S. 4 Year Presidential Election Cycle

*2020 is Year 4 (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: -4.38%
2019-Year 3: +31.49%
2020-Year 4:

U.S. Recessions and Equity Performance

Since 1929 there have been 14 recessions in the U.S. as follows:

Below is the equity performance during each of these periods: