Sentry Page Protection
Market/Model Commentary
Currently the active model portfolio as defined by our 5-factor model remains the:
- Please click on the above magenta link to review the suggested allocations if required.
- The 5-factor model reverted to RED on 28 Feb, 2020.
- The Risk Reduction Level - 1 model was initiated 04 Mar 2020.
ECAM 5-Factor Composite Model
(Valid from 28 February 2020 to Present Date)
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ECONOMIC FACTOR SUB-MODEL
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TECHNICAL FACTOR SUB-MODEL
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VALUATION FACTOR SUB-MODEL
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SENTIMENT FACTOR SUB-MODEL
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LIQUIDITY (Stress) FACTOR SUB-MODEL
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"Slow and Steady wins the race"
The Hare and the Tortoise
Aesop (Greek slave & fable author 620 BC - 560 BC)
"Technical Analysis is a windsock, not a crystal ball"
Carl Swenlin (Technical Analyst)
"Investing is the intersection of economics and psychology"
Seth Klarman (Hedge fund Manager, Baupost Group)
"Everyone's got a plan ..... until they get punched in the face"
Mike Tyson (Former World Heavyweight Boxing Champion)
The Hare and the Tortoise
Aesop (Greek slave & fable author 620 BC - 560 BC)
"Technical Analysis is a windsock, not a crystal ball"
Carl Swenlin (Technical Analyst)
"Investing is the intersection of economics and psychology"
Seth Klarman (Hedge fund Manager, Baupost Group)
"Everyone's got a plan ..... until they get punched in the face"
Mike Tyson (Former World Heavyweight Boxing Champion)
Perspective
It’s not hyperbole today to use “depression” to describe the recent deep global economic downturn as upon look-back this is expected to be the most serious global macroeconomic shock since 1929. Whether it was/was not a wise decision by global governments to shut down their economies to combat this virus, the economic fallout to individuals/families/businesses will be immense and long lasting.
Ongoing Coronavirus cases and an unknowable rate of progress on possible treatments/vaccines makes it impossible to forecast the length and severity of the economic decline. The outbreak in Asia, Europe and the U.S. has begun to subside while cases in Central/South America are rapidly increasing as they move into their winter months. Globally the rate-of-change in active cases has reduced but we have yet to see a peak in global active cases. As South American virus cases peak will it be just-in-time for Asia/North America/Europe to experience a second wave into the fall/winter months? These remain unknowns at present.
Irrespective, the world entered this event massively over-leveraged and the unwind will likely unfold over many months. Extraordinary central bank measures will spur rallies and hopes for recovery and at times it will appear that liquidity is returning. Yet it is highly likely the Bubble will not be reflated and it will be many years before we recover to previous levels of economic activity.
We believe this crisis will unfold in 3 distinct phases over the next several years:
While it remains an open question as to whether it was wise for governments to instigate a global shutdown to combat the virus, it is now apparent governments recently crossed an important threshold as they were forced to make a very difficult decision:
It is obvious now the 2nd option has been chosen as it is politically less painful to transfer blame for future deaths from the government to the individual. Expect the new mantra from government officials to be "Don't blame us; we told you to be careful but you insisted upon going to work, restaurants/bars, malls, etc. and it was your personal choices that caused you sickness/death".
Equity markets have rallied as we expected off the 23 March lows while within the "Hope Phase" and have exceeded the levels we anticipated they would reach. It remains true decision time and the next few months will be critical. We remain very cautious until we see how the "Hope Phase" transitions into the "Reality Phase" and we can assess the damage from the first season of "Hurricane Covid". We think we are in the eye of the storm and are bracing for the worst.
Stay safe and wash you hands.
Ongoing Coronavirus cases and an unknowable rate of progress on possible treatments/vaccines makes it impossible to forecast the length and severity of the economic decline. The outbreak in Asia, Europe and the U.S. has begun to subside while cases in Central/South America are rapidly increasing as they move into their winter months. Globally the rate-of-change in active cases has reduced but we have yet to see a peak in global active cases. As South American virus cases peak will it be just-in-time for Asia/North America/Europe to experience a second wave into the fall/winter months? These remain unknowns at present.
Irrespective, the world entered this event massively over-leveraged and the unwind will likely unfold over many months. Extraordinary central bank measures will spur rallies and hopes for recovery and at times it will appear that liquidity is returning. Yet it is highly likely the Bubble will not be reflated and it will be many years before we recover to previous levels of economic activity.
We believe this crisis will unfold in 3 distinct phases over the next several years:
- The "Panic" phase (now past). This was the initial phase where a new novel-coronavirus (thought to be non-transmissible among humans and centralized to a small part of China known as Wuhan) morphed into the current global pandemic.
- The "Hope" phase (current/ongoing). This is the phase where there is a sense of relief the worst of the pandemic has crested (there is "light at the end of the tunnel") and we are about to recover. Many believe over time the virus will be eradicated and we will recover to the level of economic activity we had previous. We doubt that is the case but this is what the equity markets are telling us is the current perception.
- The "Reality" phase (coming soon). This will be the phase when the global community realizes its assumptions about the recovery were incorrect. It will be the world with millions of global small business bankruptcies, high levels of unemployment, reduced efficiencies due to supply chain decentralization and social distancing and possible 2nd/3rd waves of the virus over the next several years (inducing further panic phases). It will become the new reality and markets will adjust to much lower levels of economic performance.
While it remains an open question as to whether it was wise for governments to instigate a global shutdown to combat the virus, it is now apparent governments recently crossed an important threshold as they were forced to make a very difficult decision:
- keep their economies closed to fully eradicate the spread of the virus and kill their people through economic collapse and civil disobedience, or
- re-open their economies with the virus still present to prevent economic collapse and have the spread of the virus kill their people in a "controlled" manner.
It is obvious now the 2nd option has been chosen as it is politically less painful to transfer blame for future deaths from the government to the individual. Expect the new mantra from government officials to be "Don't blame us; we told you to be careful but you insisted upon going to work, restaurants/bars, malls, etc. and it was your personal choices that caused you sickness/death".
Equity markets have rallied as we expected off the 23 March lows while within the "Hope Phase" and have exceeded the levels we anticipated they would reach. It remains true decision time and the next few months will be critical. We remain very cautious until we see how the "Hope Phase" transitions into the "Reality Phase" and we can assess the damage from the first season of "Hurricane Covid". We think we are in the eye of the storm and are bracing for the worst.
Stay safe and wash you hands.
Latest Updates
Global equity markets have experienced an interesting series of events since the COVID-19 epidemic began.
Technical analysis allows us an opportunity to look at market price action objectively. It is so easy to be "sucked" into what is referred to as FOMO (Fear Of Missing Out) during bear market rallies. Is the bear market over and has a new bull market begun? Maybe. Is the bear market still in force? Maybe. We continue to keep an open mind and be objective to both outcomes.
Below we show a daily price chart of the Dow Jones Global Index over the past 30 years with a 5 day rate-of-change (ROC) in the lower panel. A 5 day ROC is useful as a trading week is composed of 5 business days.
- The decline from the February market peak into the March lows was the fastest decline in global equity markets since ........ October 2008 during the worst part of the global financial crisis.
- The subsequent market advance which began in March to present date has been the fastest rise in global equity markets since ........ October 2008 during the worst part of the global financial crisis.
Technical analysis allows us an opportunity to look at market price action objectively. It is so easy to be "sucked" into what is referred to as FOMO (Fear Of Missing Out) during bear market rallies. Is the bear market over and has a new bull market begun? Maybe. Is the bear market still in force? Maybe. We continue to keep an open mind and be objective to both outcomes.
Below we show a daily price chart of the Dow Jones Global Index over the past 30 years with a 5 day rate-of-change (ROC) in the lower panel. A 5 day ROC is useful as a trading week is composed of 5 business days.
Dow Jones Global Index 1990-2020
As can be seen above, only twice in the past 30 years have we seen a 5 day ROC go from a -18% decline (blue line) to a +16% advance (Red line). Ironically the only time this occurred before present day was during the last financial crisis. History does not repeat but sometimes it rhymes. Let us zoom in to both instances:
Dow Jones Global Index 2008
In 2008 the bear market was well established but not "excessive" with declines approaching -25% as we entered mid- September. However, it was Lehman Brothers filing for Chapter 11 bankruptcy protection on 15 September that triggered the large market decline (5 day ROC -18) into late October. This was followed by a large bounce (5 day ROC +16) into early November before the next series of market declines. From the 5 day ROC high in early November to the final bottom took just over 4 months and a further -31% decline.
Dow Jones Global Index 2020
Above is the current situation. It is not exactly the same setup as there was no bear market in process when the 5 day ROC decline occurred but the setup is similar enough we do not think it can be dismissed.
As shown on the chart, the decline took the form of 3 phases:
We have now retraced a considerable portion of the entire decline with the area between the "initial panic" and the "second thought" phases shown as a grey box. Price on Friday closed within the box but until we see a definitive clearing of this zone we believe it is premature to suggest a new multi-month bull market has begun.
As shown on the chart, the decline took the form of 3 phases:
- the initial panic "we think this coronavirus is a major problem" swift market decline phase from 444.59 to 399.43 (-10.1%).
- the "maybe it is not so bad" market bounce phase up to 410.06 (+2.7%) into 04 March (the date when we suggested it was prudent to reduce equity exposure by 50%).
- the large panic phase into the 23 March lows (-28.7%).
We have now retraced a considerable portion of the entire decline with the area between the "initial panic" and the "second thought" phases shown as a grey box. Price on Friday closed within the box but until we see a definitive clearing of this zone we believe it is premature to suggest a new multi-month bull market has begun.
Bear Market Historical Data
(source: Pension Partners, First Trust)
(source: Pension Partners, First Trust)
Having entered a bear market (> -20% decline) in March, we now need to look to how long it may last, how much we may fall and when we could expect to regain our previous highs.
In general it can be seen bear markets not associated with a recession tend to be short/painful events (average 12 months/-29% decline) while those that have an associated recession tend to be much longer drawn-out declines (average 17 months) with much greater peak-to-trough declines (average -42% peak-to-trough decline).
We need to keep this in mind as we assess the current market bounce. Until data proves otherwise, we expect this will be a global recession and it would be unprecedented for a bear market to have ended so quickly.
In general it can be seen bear markets not associated with a recession tend to be short/painful events (average 12 months/-29% decline) while those that have an associated recession tend to be much longer drawn-out declines (average 17 months) with much greater peak-to-trough declines (average -42% peak-to-trough decline).
We need to keep this in mind as we assess the current market bounce. Until data proves otherwise, we expect this will be a global recession and it would be unprecedented for a bear market to have ended so quickly.
Market Overview
- Global equities were higher this past week with a return (as measured by the Dow Jones Global Index) of +1.53%. They continue to trade with an upward bias as volatility continues to decline.
- Global composite bonds were higher on the week with a global benchmark return of +0.22%. Bonds have continued to perform very well in this slowing global macro environment over the past 2 years and at present continue to act as a portfolio hedge.
- Global economic growth remains at multi-year lows with the entire globe essentially shutdown. There had been encouraging signs of global economic stabilization early in 2020 but the COVID-19 outbreak (a "black swan" event) has derailed any global economic recovery. The probability of a deep global recession is now almost a certainty but the length/depth has yet to be determined until high frequency economic data begins to emerge.
DOW JONES GLOBAL INDEX
(WEEKLY CLOSE)
Weekly Global Macro Review
U.S. Equities
The major indexes ended mixed for the week, with large-caps outperforming small-caps. The technology-heavy Nasdaq Composite Index fared best and reached new record highs, thanks in part to strong gains for “work from home” shares, such as Amazon.com, Apple, Facebook, and Netflix. The latter two also boosted the communication services sector, which outperformed within the S&P 500 Index, while energy shares were weak as crude oil prices fell back below $40 per barrel.
The major indexes ended mixed for the week, with large-caps outperforming small-caps. The technology-heavy Nasdaq Composite Index fared best and reached new record highs, thanks in part to strong gains for “work from home” shares, such as Amazon.com, Apple, Facebook, and Netflix. The latter two also boosted the communication services sector, which outperformed within the S&P 500 Index, while energy shares were weak as crude oil prices fell back below $40 per barrel.
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S&P 500:
DJIA: NASDAQ 100: S&P 400 Mid-cap: Russell 2000 Small Cap: |
+1.8%
+1.0% +4.8% -0.3% -0.6% |
Stocks jumped at the start of trading Monday, with many attributing the strength to a front-page editorial in the China Securities Journal, which stated that “fostering a healthy bull market after the pandemic is now more important to the economy than ever”. Growing hopes for a COVID-19 vaccine being released as early as the end of the year also seemed to support the gains, but few concrete developments appeared to drive the rally.
Stocks drifted lower over the next few sessions as optimism about progress in fighting the pandemic appeared to drain away. More states announced increases in newly diagnosed cases and hospitalizations, and several governors announced new restrictions or delays in reopening measures. By the end of the week, the U.S. had crossed the threshold of 60,000 new cases reported in a single day, with over 3 million confirmed cases recorded since the start of the pandemic. On Friday, however, stocks seemed to get a lift after Gilead Sciences announced a new study showing that Remdesivir, its COVID-19 treatment, might reduce mortality rates in severely ill patients by nearly two-thirds. Earlier studies had demonstrated only that Remdesivir could shorten hospital stays.
Investors appeared to be particularly concerned that the impact of the resurgence in the virus seemed to be showing up in economic data. In an interview published Tuesday morning, Atlanta Federal Reserve Bank President Raphael Bostic told a reporter that high-frequency data “suggest that the trajectory of this recovery is going to be a bit bumpier than it might otherwise.” Later that day, his counterpart at the Cleveland Federal Reserve Bank, Loretta Mester, told CNBC that it was likely “to take quite a long time to get back to where activity and employment was pre-pandemic.” On Thursday, however, St. Louis Federal Reserve Bank President James Bullard struck a markedly different tone, telling CNBC that “I think we’re tracking very well right now” and predicting that the unemployment rate could fall as low as 7% by the end of the year.
The week’s major economic reports generally surprised on the upside but may have been dismissed by some investors as largely reflecting conditions before the recent resurgence in the virus. The Institute for Supply Management’s gauge of service sector activity rose more than expected in June and nearly matched its February level, before the recognized onset of the pandemic. Job openings in May also rose more than expected, while weekly initial and continuing jobless claims fell more than anticipated.
US Bonds
Longer-term Treasury yields decreased through most of the week on growing coronavirus concerns and briefly slid to levels last seen in late April, aided by particularly strong demand in the Treasury Department’s 10-year note and 30-year bond auctions. (Bond prices and yields move in opposite directions.)
The investment-grade corporate bond market saw light trading volumes and modest new issuance, but market sentiment received a boost after Bullard’s optimistic comments Thursday (+0.61%). It was also a quiet week in the high yield market (+0.40%). Buyers were more active than sellers as the asset class continued to experience positive flows, and demand outstripped supply due to modest new issuance.
Stocks drifted lower over the next few sessions as optimism about progress in fighting the pandemic appeared to drain away. More states announced increases in newly diagnosed cases and hospitalizations, and several governors announced new restrictions or delays in reopening measures. By the end of the week, the U.S. had crossed the threshold of 60,000 new cases reported in a single day, with over 3 million confirmed cases recorded since the start of the pandemic. On Friday, however, stocks seemed to get a lift after Gilead Sciences announced a new study showing that Remdesivir, its COVID-19 treatment, might reduce mortality rates in severely ill patients by nearly two-thirds. Earlier studies had demonstrated only that Remdesivir could shorten hospital stays.
Investors appeared to be particularly concerned that the impact of the resurgence in the virus seemed to be showing up in economic data. In an interview published Tuesday morning, Atlanta Federal Reserve Bank President Raphael Bostic told a reporter that high-frequency data “suggest that the trajectory of this recovery is going to be a bit bumpier than it might otherwise.” Later that day, his counterpart at the Cleveland Federal Reserve Bank, Loretta Mester, told CNBC that it was likely “to take quite a long time to get back to where activity and employment was pre-pandemic.” On Thursday, however, St. Louis Federal Reserve Bank President James Bullard struck a markedly different tone, telling CNBC that “I think we’re tracking very well right now” and predicting that the unemployment rate could fall as low as 7% by the end of the year.
The week’s major economic reports generally surprised on the upside but may have been dismissed by some investors as largely reflecting conditions before the recent resurgence in the virus. The Institute for Supply Management’s gauge of service sector activity rose more than expected in June and nearly matched its February level, before the recognized onset of the pandemic. Job openings in May also rose more than expected, while weekly initial and continuing jobless claims fell more than anticipated.
US Bonds
Longer-term Treasury yields decreased through most of the week on growing coronavirus concerns and briefly slid to levels last seen in late April, aided by particularly strong demand in the Treasury Department’s 10-year note and 30-year bond auctions. (Bond prices and yields move in opposite directions.)
The investment-grade corporate bond market saw light trading volumes and modest new issuance, but market sentiment received a boost after Bullard’s optimistic comments Thursday (+0.61%). It was also a quiet week in the high yield market (+0.40%). Buyers were more active than sellers as the asset class continued to experience positive flows, and demand outstripped supply due to modest new issuance.
Europe/UK
European shares ended the week little changed, depressed by renewed concerns about a resurgence of coronavirus cases.
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German DAX:
French CAC: Italian MIB: Spanish IBEX: U.K. FTSE 100: |
+0.8%
-0.7% +0.2% -1.1% -1.0% |
UK Finance Minister Rishi Sunak pledged an additional GBP 30 billion to support employment, on top of the GBP 133 billion in coronavirus measures he has already unveiled. The money includes over GBP 5 billion in accelerated infrastructure spending, about GBP 9 billion for employers to retain workers through the end of January, funds for home insulation, and help for homebuyers and for hospitality firms. Still, business leaders warned that the measures were not enough to save jobs at risk in retail and manufacturing.
Bank of England Governor Andrew Bailey warned banks in a letter last month to be prepared for negative interest rates in the UK, the Sunday Times reported. He said adapting to such a move would prove to be a “significant operational undertaking” that would require changes to computer systems, updating of financial contracts, and new communications for clients.
In an interview with the Financial Times, European Central Bank President Christine Lagarde suggested that next week’s policy meeting is unlikely to yield fresh loosening measures. She pointed out that financial markets had calmed down enormously and that the central bank had done so much that it now has to time to assess the incoming economic data carefully. She warned, however, that an economic recovery would be constrained, uncertain, and fragmented.
Europe is facing a deeper-than-expected recession in 2020 and a weaker-than-expected economic recovery, the European Commission said. The European Union’s gross domestic product is forecast to shrink 8.3% in 2020 and then to rebound 5.8% in 2021. The Eurozone is predicted to contract 8.7%, with growth then accelerating to 6.1%. Both sets of numbers are worse than those unveiled in May.
Bank of England Governor Andrew Bailey warned banks in a letter last month to be prepared for negative interest rates in the UK, the Sunday Times reported. He said adapting to such a move would prove to be a “significant operational undertaking” that would require changes to computer systems, updating of financial contracts, and new communications for clients.
In an interview with the Financial Times, European Central Bank President Christine Lagarde suggested that next week’s policy meeting is unlikely to yield fresh loosening measures. She pointed out that financial markets had calmed down enormously and that the central bank had done so much that it now has to time to assess the incoming economic data carefully. She warned, however, that an economic recovery would be constrained, uncertain, and fragmented.
Europe is facing a deeper-than-expected recession in 2020 and a weaker-than-expected economic recovery, the European Commission said. The European Union’s gross domestic product is forecast to shrink 8.3% in 2020 and then to rebound 5.8% in 2021. The Eurozone is predicted to contract 8.7%, with growth then accelerating to 6.1%. Both sets of numbers are worse than those unveiled in May.
Japan
Japanese stocks were almost unchanged for the week with the Nikkei 225 Stock Average down -0.07%.
Japan's Finance Ministry reported that tax receipts of JPY 58 trillion (USD 540 billion) in fiscal year 2019 (ended March 31, 2020) declined 3.2% versus fiscal year 2018. While consumption taxes expanded modestly thanks to the tax increase in October, corporate taxes plunged more than 12% due to a government moratorium on collections from companies hurt by the coronavirus. The JPY 63 trillion tax revenue estimate for fiscal year 2020 seems unachievable to many observers given the falloff in consumer spending, social distancing measures that forced the cancellation of many events, and the faltering economic conditions.
Japan relaxed its coronavirus-related restrictions on holding major events, as planned. Economic Revitalization Minister Yasutoshi Nishimura announced that the number of people allowed at major events would be increased to 5,000 from 1,000 currently, allowing for the 50%-of-capacity restriction that is still in force. Japanese professional baseball and soccer games, which have been played without spectators, reopened to fans on Friday.
Tokyo Governor Yuriko Koike was reelected and declared victory on Sunday, July 5. Koike won the election by a larger margin than in 2016, recording more than 3.6 million votes. The governor reasserted that the coronavirus is the most pressing issue facing her city. Despite the latest resurgence—243 new coronavirus cases were reported in Tokyo on Friday and have averaged more than 100 for the past week—the governor said that she was not currently considering another round of business closures. The metropolitan government no longer relies on numerical targets for its coronavirus policy decision-making. Koike said, without providing details, that she preferred a targeted approach to stemming the spread of the virus.
China
Stocks in China surged after a state-run publication talked up the country’s recovery and appeared to officially endorse the rally in equities. A bullish editorial in the China Securities Journal on Monday set in motion a risk-on rally for the rest of the week that sent the benchmark Shanghai Composite Index to a two-year high with a gain of +7.3%.
China's June consumer price inflation rose 2.5%, in line with expectations. However, headline inflation is expected to decline in future readings as food price inflation continues to ebb on lower pork prices. A food basket tracked by China Reality Research fell to a 16-month low and an annual rise of 9%, down from 10.6% in May. More noteworthy was the continued decline in factory gate prices, which fell for the fifth straight month in annual terms. The producer price index fell 3.0% in June from a year earlier, underscoring the threat of deflation due to the coronavirus-induced demand shock, though it exceeded the consensus forecast and the prior month’s 3.7% drop.
After June's positive economic data, many analysts have upgraded their second-quarter estimates for China’s economic growth. Economists now expect a double-digit sequential rebound in China’s gross domestic product (GDP) after the first quarter’s record contraction. For the year, analysts forecast that China’s economy will grow between 2% and 3%. Next week, trade data will be in focus for any signs of divergence between domestic and external demand. Exports are expected to be strong amid soaring global demand for medical and personal protective equipment due to the coronavirus pandemic.
Weekly Performance
U.S. Indices
Dow +1% to 26,075. S&P 500 +1.8% to 3,185. Nasdaq +4% to 10,617. Russell 2000 -0.1% to 1,419. CBOE Volatility Index -1.4% to 27.29.
S&P 500 Sectors
Consumer Staples +2.5%. Utilities -0.2%. Financials +2.2%. Telecom +4.7%. Healthcare -0.9%. Industrials -1.4%. Information Technology +2.7%. Materials +0.8%. Energy -4.6%. Consumer Discretionary +4.8%.
World Indices
London -1.% to 6,095. France -0.7% to 4,970. Germany +0.8% to 12,634. Japan -0.1% to 22,291. China +7.3% to 3,383. Hong Kong +1.4% to 25,727. India +1.6% to 36,594.
Commodities and Bonds
Crude Oil WTI +0.7% to $40.56/bbl. Gold +0.8% to $1,801.6/oz. Natural Gas +4.1% to 1.818. Ten-Year Treasury Yield 0.% to 139.12.
Forex and Cryptos
EUR/USD +0.45%. USD/JPY -0.55%. GBP/USD +1.11%. Bitcoin +1.5%. Litecoin +5.5%. Ethereum +5.1%. Ripple +13.7%.
Dow +1% to 26,075. S&P 500 +1.8% to 3,185. Nasdaq +4% to 10,617. Russell 2000 -0.1% to 1,419. CBOE Volatility Index -1.4% to 27.29.
S&P 500 Sectors
Consumer Staples +2.5%. Utilities -0.2%. Financials +2.2%. Telecom +4.7%. Healthcare -0.9%. Industrials -1.4%. Information Technology +2.7%. Materials +0.8%. Energy -4.6%. Consumer Discretionary +4.8%.
World Indices
London -1.% to 6,095. France -0.7% to 4,970. Germany +0.8% to 12,634. Japan -0.1% to 22,291. China +7.3% to 3,383. Hong Kong +1.4% to 25,727. India +1.6% to 36,594.
Commodities and Bonds
Crude Oil WTI +0.7% to $40.56/bbl. Gold +0.8% to $1,801.6/oz. Natural Gas +4.1% to 1.818. Ten-Year Treasury Yield 0.% to 139.12.
Forex and Cryptos
EUR/USD +0.45%. USD/JPY -0.55%. GBP/USD +1.11%. Bitcoin +1.5%. Litecoin +5.5%. Ethereum +5.1%. Ripple +13.7%.
Weekly Significant Macro Events
COVID-19 Virus Headlines:
July 5 – The Hill (Kristin Tate): “A combination of the coronavirus pandemic, economic uncertainty, and social unrest is prompting waves of Americans to move from large cities and permanently relocate to more sparsely populated areas. The trend has been accelerated by technology and shifting attitudes that make it easier than ever to work remotely. Residents of all ages and incomes are moving in record numbers to suburban areas and small towns.”
July 6 – CNBC (Noah Higgins-Dunn): “Texas had more than 8,000 hospitalized Covid-19 patients on Sunday, a record number of hospitalizations and one of the highest in the country… The number of people hospitalized with Covid-19 grew by 5% or more Sunday in 23 states, based on a seven-day moving average…”
July 6 – Reuters (Sharon Bernstein, Dan Whitcomb and Lisa Shumaker): “New coronavirus cases soared in California over the July Fourth weekend, stressing some hospital systems and leading to the temporary closure of the state capitol building in Sacramento for deep cleaning… The number of people hospitalized with COVID-19 has increased by 50% over the past two weeks to about 5,800…”
July 6 – CNBC (Chloe Taylor): “It is not a ‘safe bet’ to rely on immunity to Covid-19 as a strategy for coping with the pandemic, one expert has warned, adding that herd immunity strategies were ‘probably never going to work.’ Speaking… on CNBC…, Danny Altmann, professor of immunology at Imperial College London, said that in towns and cities where there had been coronavirus infections, only 10% to 15% of the population was likely to be immune. ‘And immunity to this thing looks rather fragile — it looks like some people might have antibodies for a few months and then it might wane, so it’s not looking like a safe bet… It’s a very deceitful virus and immunity to it is very confusing and rather short-lived.’”
July 7 – CNN (Christina Maxouris and Amir Vera): “In the span of a week and a half, the number of coronavirus cases in the United States has doubled, yet officials are saying this is still the first wave of the pandemic. ‘We are still knee-deep in the first wave of this,’ Dr. Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases, said… ‘I would say, this would not be considered a wave. It was a surge, or a resurgence of infections superimposed upon a baseline ... that really never got down to where we wanted to go.’ … ‘We are in free fall,’ said Dr. Rochelle Walensky, chief of infectious diseases at Massachusetts General Hospital.”
July 7 – CNBC (Noah Higgins-Dunn): “Texas reported more than 10,000 new Covid-19 cases Tuesday, a record-breaking daily surge as the state responds to a growing outbreak and rising hospitalizations. The Texas Health and Human Services Commission reported 10,028 new cases, which surpasses the state’s previous record of nearly 8,260 cases set on July 4.”
July 8 – Reuters (Gayle Issa): “Global coronavirus cases exceeded 12 million on Wednesday…, as evidence mounts of the airborne spread of the disease that has killed more than half a million people in seven months. The number of cases is triple that of severe influenza illnesses recorded annually, according to the World Health Organization.”
July 8 – AFP (Patrick Galey): “Potentially fatal COVID-19 complications in the brain including delirium, nerve damage and stroke may be more common than initially thought, a team of British-based doctors warned… Severe COVID-19 infections are known to put patients at risk of neurological complications, but research led by University College London suggests serious problems can occur even in individuals with mild cases of the virus. The team looked at the neurological symptoms of 43 patients hospitalized with either confirmed or suspected COVID-19. They found 10 cases of temporary brain dysfunction, 12 cases of brain inflammation, eight strokes and eight cases of nerve damage. Most of those patients with inflammation were diagnosed with acute disseminated encephalomyelitis (ADEM) -- a rare condition typically seen in children after viral infections.”
July 10 – Reuters (Lisa Shumaker): “New cases of COVID-19 rose by over 69,000 across the United States on Friday, according to a Reuters tally, setting a record for the third consecutive day… A total of nine U.S. states - Alaska, Georgia, Idaho, Iowa, Louisiana, Montana, Ohio, Utah and Wisconsin - also reached records for single-day infections. In Texas, another hot zone, Governor Greg Abbott warned on Friday he may have to impose new clampdowns if the state cannot stem its record-setting caseloads and hospitalizations through masks and social distancing… Overall, coronavirus cases are rising in 44 American states, based on a Reuters analysis of cases for the past two weeks…”
COVID-19 Fallout Headlines:
July 6 – Financial Times (James Politi): “A senior Federal Reserve official has warned that the rebound in the world’s largest economy is in danger of stalling as a result of the recent spike in coronavirus infections... Raphael Bostic, the president of the Federal Reserve Bank of Atlanta… said high-frequency data had shown a ‘levelling off’ of economic activity both in terms of business openings and mobility. ‘There are a couple of things that we are seeing and some of them are troubling and might suggest that the trajectory of this recovery is going to be a bit bumpier than it might otherwise… And so we’re watching this very closely, trying to understand exactly what’s happening.’”
July 7 – Reuters (Howard Schneider and Jonnelle Marte): “A surge in coronavirus cases that threatens to pinch consumer spending and job gains just as some stimulus programs are due to expire has Federal Reserve policymakers worried, with at least one pledging more support ahead from the U.S. central bank. ‘We have a lot of accommodation in place; there’s more that we can do, there’s more that we will do,’ Fed Vice Chair Richard Clarida told CNN… There is ‘no limit’ to the amount of bond buying the Fed can do, he said…”
July 7 – Wall Street Journal (Andrew Ackerman): “Global policy makers responded decisively to the coronavirus outbreak earlier this year but the financial system isn’t out of the woods yet, a top Federal Reserve official said… ‘The COVID event is not behind us yet,’ Randal Quarles, the Fed’s vice chairman for financial regulation, said… ‘We know that the financial system will face more challenges.’… Many households face ‘bleak’ employment prospects, Mr. Quarles said, and the next phase of the pandemic will ‘inevitably involve an increase in nonperforming loans and provisions as demand falls and some borrowers fail.’”
July 7 – Reuters (Howard Schneider): “The surge in U.S. coronavirus cases has made business owners ‘nervous again,’ Atlanta Federal Reserve Bank President Raphael Bostic said…, and prompted him to focus on company decisions over the next three to six weeks. ‘We are hearing it more and more as we get more data. People are getting nervous again. Business leaders are getting worried. Consumers are getting worried. And there is a real sense this might go on longer than we have planned for,’ Bostic said…”
July 7 – CNBC (Scott Cohn): “Economic activity at the state level plunged in the first three months of 2020…, as the Covid-19 pandemic brought the national economy to a standstill. In New York and Nevada, where the coronavirus was raging by March, state Gross Domestic Product plunged 8.2% for the quarter, compared to the national drop of 5%. Other big drops included Michigan at 6.8% and Louisiana at 6.2%... The smallest drop was Nebraska at 1.3%... State revenue shortfalls could reach a staggering $200 billion in fiscal year 2020 which just ended, and fiscal year 2021, which began on July 1, according to the Tax Policy Center.”
July 9 – Bloomberg (Joanna Ossinger): “Markets are still struggling to restore liquidity after the Covid-19 meltdown and that may leave them exposed to new shocks, according to JPMorgan… ‘Liquidity conditions have improved considerably, though not fully, and overall functioning has mostly been restored, but markets remain in an unstable equilibrium and vulnerable to shocks,’ strategists including Joyce Chang, Nikolaos Panigirtzoglou and Marko Kolanovic wrote… Strategists have been cautioning on tight liquidity and fragility for some time, citing everything from the growth of passive investing to high-frequency trading as factors that could exacerbate market stress, particularly when volatility spikes.”
July 9 – Reuters (Lucia Mutikani): “New applications for U.S. jobless benefits fell last week, but a record 32.9 million Americans were collecting unemployment checks in the third week of June, suggesting the labor market was struggling to claw out of the COVID-19 pandemic slump… Initial claims for state unemployment benefits dropped 99,000 to a seasonally adjusted 1.314 million for the week ended July 4. That was the 14th straight weekly decline. Economists polled by Reuters had forecast 1.375 million applications in the latest week.”
July 5 – The Hill (Kristin Tate): “A combination of the coronavirus pandemic, economic uncertainty, and social unrest is prompting waves of Americans to move from large cities and permanently relocate to more sparsely populated areas. The trend has been accelerated by technology and shifting attitudes that make it easier than ever to work remotely. Residents of all ages and incomes are moving in record numbers to suburban areas and small towns.”
July 6 – CNBC (Noah Higgins-Dunn): “Texas had more than 8,000 hospitalized Covid-19 patients on Sunday, a record number of hospitalizations and one of the highest in the country… The number of people hospitalized with Covid-19 grew by 5% or more Sunday in 23 states, based on a seven-day moving average…”
July 6 – Reuters (Sharon Bernstein, Dan Whitcomb and Lisa Shumaker): “New coronavirus cases soared in California over the July Fourth weekend, stressing some hospital systems and leading to the temporary closure of the state capitol building in Sacramento for deep cleaning… The number of people hospitalized with COVID-19 has increased by 50% over the past two weeks to about 5,800…”
July 6 – CNBC (Chloe Taylor): “It is not a ‘safe bet’ to rely on immunity to Covid-19 as a strategy for coping with the pandemic, one expert has warned, adding that herd immunity strategies were ‘probably never going to work.’ Speaking… on CNBC…, Danny Altmann, professor of immunology at Imperial College London, said that in towns and cities where there had been coronavirus infections, only 10% to 15% of the population was likely to be immune. ‘And immunity to this thing looks rather fragile — it looks like some people might have antibodies for a few months and then it might wane, so it’s not looking like a safe bet… It’s a very deceitful virus and immunity to it is very confusing and rather short-lived.’”
July 7 – CNN (Christina Maxouris and Amir Vera): “In the span of a week and a half, the number of coronavirus cases in the United States has doubled, yet officials are saying this is still the first wave of the pandemic. ‘We are still knee-deep in the first wave of this,’ Dr. Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases, said… ‘I would say, this would not be considered a wave. It was a surge, or a resurgence of infections superimposed upon a baseline ... that really never got down to where we wanted to go.’ … ‘We are in free fall,’ said Dr. Rochelle Walensky, chief of infectious diseases at Massachusetts General Hospital.”
July 7 – CNBC (Noah Higgins-Dunn): “Texas reported more than 10,000 new Covid-19 cases Tuesday, a record-breaking daily surge as the state responds to a growing outbreak and rising hospitalizations. The Texas Health and Human Services Commission reported 10,028 new cases, which surpasses the state’s previous record of nearly 8,260 cases set on July 4.”
July 8 – Reuters (Gayle Issa): “Global coronavirus cases exceeded 12 million on Wednesday…, as evidence mounts of the airborne spread of the disease that has killed more than half a million people in seven months. The number of cases is triple that of severe influenza illnesses recorded annually, according to the World Health Organization.”
July 8 – AFP (Patrick Galey): “Potentially fatal COVID-19 complications in the brain including delirium, nerve damage and stroke may be more common than initially thought, a team of British-based doctors warned… Severe COVID-19 infections are known to put patients at risk of neurological complications, but research led by University College London suggests serious problems can occur even in individuals with mild cases of the virus. The team looked at the neurological symptoms of 43 patients hospitalized with either confirmed or suspected COVID-19. They found 10 cases of temporary brain dysfunction, 12 cases of brain inflammation, eight strokes and eight cases of nerve damage. Most of those patients with inflammation were diagnosed with acute disseminated encephalomyelitis (ADEM) -- a rare condition typically seen in children after viral infections.”
July 10 – Reuters (Lisa Shumaker): “New cases of COVID-19 rose by over 69,000 across the United States on Friday, according to a Reuters tally, setting a record for the third consecutive day… A total of nine U.S. states - Alaska, Georgia, Idaho, Iowa, Louisiana, Montana, Ohio, Utah and Wisconsin - also reached records for single-day infections. In Texas, another hot zone, Governor Greg Abbott warned on Friday he may have to impose new clampdowns if the state cannot stem its record-setting caseloads and hospitalizations through masks and social distancing… Overall, coronavirus cases are rising in 44 American states, based on a Reuters analysis of cases for the past two weeks…”
COVID-19 Fallout Headlines:
July 6 – Financial Times (James Politi): “A senior Federal Reserve official has warned that the rebound in the world’s largest economy is in danger of stalling as a result of the recent spike in coronavirus infections... Raphael Bostic, the president of the Federal Reserve Bank of Atlanta… said high-frequency data had shown a ‘levelling off’ of economic activity both in terms of business openings and mobility. ‘There are a couple of things that we are seeing and some of them are troubling and might suggest that the trajectory of this recovery is going to be a bit bumpier than it might otherwise… And so we’re watching this very closely, trying to understand exactly what’s happening.’”
July 7 – Reuters (Howard Schneider and Jonnelle Marte): “A surge in coronavirus cases that threatens to pinch consumer spending and job gains just as some stimulus programs are due to expire has Federal Reserve policymakers worried, with at least one pledging more support ahead from the U.S. central bank. ‘We have a lot of accommodation in place; there’s more that we can do, there’s more that we will do,’ Fed Vice Chair Richard Clarida told CNN… There is ‘no limit’ to the amount of bond buying the Fed can do, he said…”
July 7 – Wall Street Journal (Andrew Ackerman): “Global policy makers responded decisively to the coronavirus outbreak earlier this year but the financial system isn’t out of the woods yet, a top Federal Reserve official said… ‘The COVID event is not behind us yet,’ Randal Quarles, the Fed’s vice chairman for financial regulation, said… ‘We know that the financial system will face more challenges.’… Many households face ‘bleak’ employment prospects, Mr. Quarles said, and the next phase of the pandemic will ‘inevitably involve an increase in nonperforming loans and provisions as demand falls and some borrowers fail.’”
July 7 – Reuters (Howard Schneider): “The surge in U.S. coronavirus cases has made business owners ‘nervous again,’ Atlanta Federal Reserve Bank President Raphael Bostic said…, and prompted him to focus on company decisions over the next three to six weeks. ‘We are hearing it more and more as we get more data. People are getting nervous again. Business leaders are getting worried. Consumers are getting worried. And there is a real sense this might go on longer than we have planned for,’ Bostic said…”
July 7 – CNBC (Scott Cohn): “Economic activity at the state level plunged in the first three months of 2020…, as the Covid-19 pandemic brought the national economy to a standstill. In New York and Nevada, where the coronavirus was raging by March, state Gross Domestic Product plunged 8.2% for the quarter, compared to the national drop of 5%. Other big drops included Michigan at 6.8% and Louisiana at 6.2%... The smallest drop was Nebraska at 1.3%... State revenue shortfalls could reach a staggering $200 billion in fiscal year 2020 which just ended, and fiscal year 2021, which began on July 1, according to the Tax Policy Center.”
July 9 – Bloomberg (Joanna Ossinger): “Markets are still struggling to restore liquidity after the Covid-19 meltdown and that may leave them exposed to new shocks, according to JPMorgan… ‘Liquidity conditions have improved considerably, though not fully, and overall functioning has mostly been restored, but markets remain in an unstable equilibrium and vulnerable to shocks,’ strategists including Joyce Chang, Nikolaos Panigirtzoglou and Marko Kolanovic wrote… Strategists have been cautioning on tight liquidity and fragility for some time, citing everything from the growth of passive investing to high-frequency trading as factors that could exacerbate market stress, particularly when volatility spikes.”
July 9 – Reuters (Lucia Mutikani): “New applications for U.S. jobless benefits fell last week, but a record 32.9 million Americans were collecting unemployment checks in the third week of June, suggesting the labor market was struggling to claw out of the COVID-19 pandemic slump… Initial claims for state unemployment benefits dropped 99,000 to a seasonally adjusted 1.314 million for the week ended July 4. That was the 14th straight weekly decline. Economists polled by Reuters had forecast 1.375 million applications in the latest week.”
Covid-19 Weekly Statistics (12 July 2020 @ 1500 GMT)
|
Global Recorded Cases
12,896,904 Previous Week
11,425,183 1 week Change
+1,471,721 Cases +12.88% (Prev Week +12.60%) |
Global Active Cases
4,815,530 Previous week
4,417,267 1 week Change
+398,263 Cases +9.02% (Prev Week +6.56%) |
Global Recovered
7,512,787 Current Recovery Rate
92.96% Previous Week
Recovery Rate (92.37%) |
Global Deceased
534,491 Current Death Rate
7.04% Previous week
Death Rate (7.63%) |
|
Recorded Case Trend
Increasing |
Active Case Trend
Increasing |
Recovery Trend
Improving |
Death Trend
Improving |
Commentary
The Global Recorded Cases passed 12 million this week. The weekly rate-of-change has remained in the 12%-13% range since 01 June indicating the virus remains globally unconstrained and continues its linear expansion.
The total number of Global Active Cases continues to rise and make new all time highs. It has remained on a positive trajectory since 01 June. Until the weekly global active case rate-of-change begins to decline below zero it is premature to believe the first wave of the global pandemic has passed.
The total number of Global Active Cases continues to rise and make new all time highs. It has remained on a positive trajectory since 01 June. Until the weekly global active case rate-of-change begins to decline below zero it is premature to believe the first wave of the global pandemic has passed.
COVID-19 Calculated Reproductive Rates
Below are the latest calculated reproductive rates (R_t) for a number of countries. In order for virus mitigation to continue the reproductive rate ("Current R" on each of the bars) must remain below 1 (note the U.S. pushed back above 1 for the 1st time since post-mitigation in late-June and continues to contribute approximately 25% of all new global cases).
Total number of confirmed COVID-19 cases per million population
Below is a graph outlining the number of confirmed cases of COVID-19 per 1 million population. We believe this a much better metric to compare the virus spread among various regions/countries.
Note the rising diagonal dotted gray (grey) lines indicating the rate of change of confirmed cases/million population for each country.
Note the rising diagonal dotted gray (grey) lines indicating the rate of change of confirmed cases/million population for each country.
- Place cursor over individual countries to highlight individual country confirmed cases/million.
- Use the regions breakdown on the right side of the chart to isolate specific regions
- Use the "Select countries" link in the lower left corner to isolate specific countries
Website Links
(click below to view)
(click below to view)
* John Hopkins University
* World-o-Meter Statistics
*World Health Organization (WHO) Situation Reports
*The Lancet COVID-19 Resource Centre
*medRxiv COVID-19 Research Papers
* World-o-Meter Statistics
*World Health Organization (WHO) Situation Reports
*The Lancet COVID-19 Resource Centre
*medRxiv COVID-19 Research Papers
WEEKLY ASSET CLASS MONITOR
(week ending 10 July 2020)
(week ending 10 July 2020)
|
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 |
+1.82%
+1.82% +1.00% +0.56% +4.84% |
-3.64%
-0.69% -10.58% -6.60% -2.53% |
|
Bonds
|
U.S. Bonds
International Bonds |
BND
BNDX |
+0.23%
+0.28% |
+6.87%
+2.66% |
|
Real Estate Equities
|
U.S. Real Estate
International Real Estate |
VNQ
VNQI |
-2.48%
-0.95% |
-14.31%
-19.02% |
|
Precious Metals Equities
|
Global Gold Miners
Global Junior Gold Miners |
RING
GDXJ |
+5.84%
+7.94% |
+31.58%
+25.49% |
GLOBAL EQUITY MARKET MONITOR
Global equities peaked on 12 Feb 2020 and fell dramatically (-34%) into their most recent 23 Mar lows. They have since recovered substantially and all regions are testing the "decision zone" (shown in purple for each respective region) where the initial pause from the peak was modestly reversed as new COVID virus data became apparent.
A close above these respective zones would be a bullish sign the bear market is likely over.
A close above these respective zones would be a bullish sign the bear market is likely over.
Hedgeye Risk Management LLC
"I skate to where the puck is going to be; not where it has been."
Wayne Gretzky
Wayne Gretzky
As we appear to be approaching a potential 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):
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.
- Growth rising/Inflation rising.
- Overweight equities/credit; underweight fixed income.
- Growth falling/Inflation rising.
- Overweight fixed income; underweight equities/credit.
- 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 current quarter (2Q20) and subsequent 3 future quarters. The current model projects continued weakness through the 2nd quarter, a recovery in the 3rd quarter and further weakness into the 4th quarter. Of course data is backward looking so until we get some better information on the true economic impact COVID-19 is having the below data must be viewed with skepticism.
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 had reduced the risk of global recession to "moderate" (with a reading below 70) but the COVID-19 outbreak has now reverse this back upwards.
Adding to our concern about potential recession concerns, below is the US recession probability model published by the New York Federal Reserve. The reading at the end of June 2019 rose above 30% for the 1st time since 2007; the threshold that has accurately predicted a pending recession within the US in the following 12 months since 1960. The forecast has fallen since its late-summer peak and now is at the 30% threshold; a pattern very similar to the 2001 and 2007 recession warning. This remains on our radar.
CEO Confidence Surveys
We monitor CEO 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.
As Economy Reopens In June, CEO Confidence Inches Up
A nationwide survey of CEOs conducted June 2-3 shows CEOs are growing more optimistic about business conditions over the coming months. But uncertainty remains.
(By Melanie C. Nolen -June 7, 2020)
A nationwide survey of CEOs conducted June 2-3 shows CEOs are growing more optimistic about business conditions over the coming months. But uncertainty remains.
(By Melanie C. Nolen -June 7, 2020)
"The reopening of businesses across nation is sparking a resurgence in CEO optimism, with business leaders across the country feeling an increasing confidence in both current and future economic conditions—as well as their ability to grow revenue, hire employees and spend on their companies.
Confidence in current business conditions jumped 14 percent in the first few days of June versus May, according to Chief Executive’s CEO Confidence Index, and CEO confidence in business conditions a year from now rose 2 percent over the prior month. CEOs we talked to attribute the growing optimism to the reopening of the economy, interest rates being at an all-time low, order backlogs and revitalized consumer demand across many sectors.
The reading of business conditions a year from now is back where it was at this time last year, at 6.5 out of 10 on our 1-10 scale. Nevertheless, it remains 7 percent below its peak in February, before the onset of the Covid-19 crisis. Our reading of current business conditions remains in “weak” territory, at 4.6 out of 10, according to our scale, down 34 percent from where it began the year. CEOs say their optimism is being tempered by concerns over a potential second wave of Covid-19, social unrest, the presidential election and spiking unemployment. One respondent summed up the general sentiment: “Can’t be worse than the last two months, but there is still some uncertainty.”
The survey of 240 U.S. CEOs across a range of industries and states, was conducted June 2-3."
Confidence in current business conditions jumped 14 percent in the first few days of June versus May, according to Chief Executive’s CEO Confidence Index, and CEO confidence in business conditions a year from now rose 2 percent over the prior month. CEOs we talked to attribute the growing optimism to the reopening of the economy, interest rates being at an all-time low, order backlogs and revitalized consumer demand across many sectors.
The reading of business conditions a year from now is back where it was at this time last year, at 6.5 out of 10 on our 1-10 scale. Nevertheless, it remains 7 percent below its peak in February, before the onset of the Covid-19 crisis. Our reading of current business conditions remains in “weak” territory, at 4.6 out of 10, according to our scale, down 34 percent from where it began the year. CEOs say their optimism is being tempered by concerns over a potential second wave of Covid-19, social unrest, the presidential election and spiking unemployment. One respondent summed up the general sentiment: “Can’t be worse than the last two months, but there is still some uncertainty.”
The survey of 240 U.S. CEOs across a range of industries and states, was conducted June 2-3."
"Most CEOs we talked to remain concerned about how long it will take the U.S. economy to fully recover. Many seem in agreement that a return to pre-Covid highs isn’t likely for some time, particularly in an election year with a potential second wave of the virus looming, they say.
With government restrictions easing, three-quarters of polled CEOs say their business is now fully operational; 31 percent of which are back on site and no longer working remotely. Only 13 percent say they are still operating at less than 50 percent capacity.
We see a similar trend when looking at the proportion of CEOs who anticipate increases in hiring and capital expenditures over the next 12 months. Overall, in June, 26 percent of polled CEOs are anticipating adding to both their workforce and capex. That reflects an increase of 26 and 16 percent, respectively, from the month prior.
We had noted last month that the data was pointing to a tapering of negative forecasts across all four indicators (revenue, profit, headcount and capex), as fewer CEOs reported anticipating decreases over the coming year than the proportion recorded in April. The June data highlights a marked continuation of this trend, as governments continue to lift restrictions and more and more companies—and industries—reopen. We will continue to monitor this trend.
If optimism is increasing among CEOs in general, there remain certain industries where the forecast isn’t as rosy, according to the June polling data. For instance, Healthcare CEOs, who had experienced an 18 percent uptick in confidence in May, are now the second-least confident sector. Similarly, Real Estate CEOs, who also had registered a sizeable increase in confidence last month (a spectacular +43 percent), have now given 12 of those percentage points back. The majority of sectors, however, are either flat or turning positive, with Transportation CEOs leading the charge (+21 percent).
When looking at CEO confidence by company size (by annual revenues), the data doesn’t reveal as broad variations as those observed by sector—an indication that the current environment is affecting small, mid and large companies alike.
Nevertheless, large companies remain the least optimistic in future business conditions. Among the factors they cite as reasons for their decreasing optimism are concerns over a change in administration that would lead to tax increases, new regulations and the potential withdrawal of Fed support.
For small companies, a slower-than-anticipated reopening and fears of a second wave of the coronavirus are among the reasons cited for the slight drop in confidence."
With government restrictions easing, three-quarters of polled CEOs say their business is now fully operational; 31 percent of which are back on site and no longer working remotely. Only 13 percent say they are still operating at less than 50 percent capacity.
We see a similar trend when looking at the proportion of CEOs who anticipate increases in hiring and capital expenditures over the next 12 months. Overall, in June, 26 percent of polled CEOs are anticipating adding to both their workforce and capex. That reflects an increase of 26 and 16 percent, respectively, from the month prior.
We had noted last month that the data was pointing to a tapering of negative forecasts across all four indicators (revenue, profit, headcount and capex), as fewer CEOs reported anticipating decreases over the coming year than the proportion recorded in April. The June data highlights a marked continuation of this trend, as governments continue to lift restrictions and more and more companies—and industries—reopen. We will continue to monitor this trend.
If optimism is increasing among CEOs in general, there remain certain industries where the forecast isn’t as rosy, according to the June polling data. For instance, Healthcare CEOs, who had experienced an 18 percent uptick in confidence in May, are now the second-least confident sector. Similarly, Real Estate CEOs, who also had registered a sizeable increase in confidence last month (a spectacular +43 percent), have now given 12 of those percentage points back. The majority of sectors, however, are either flat or turning positive, with Transportation CEOs leading the charge (+21 percent).
When looking at CEO confidence by company size (by annual revenues), the data doesn’t reveal as broad variations as those observed by sector—an indication that the current environment is affecting small, mid and large companies alike.
Nevertheless, large companies remain the least optimistic in future business conditions. Among the factors they cite as reasons for their decreasing optimism are concerns over a change in administration that would lead to tax increases, new regulations and the potential withdrawal of Fed support.
For small companies, a slower-than-anticipated reopening and fears of a second wave of the coronavirus are among the reasons cited for the slight drop in confidence."
Asset Class Return Monitor
(for week ending 10 July 2020)
(for week ending 10 July 2020)
Equities Legend:
Bonds Legend:
Currencies Legend:
Commodities Legend:
- Vanguard Total World Stock ETF (VT): (Cyan)
- Vanguard Total U.S. Stock Market ETF (VTI): (Red)
- Vanguard FTSE Europe ETF (VGK): (Lime Green)
- Vanguard FTSE Asia Pacific ETF (VPL): (Dark Blue)
- Vanguard FTSE Emerging Markets ETF (VWO): (Pink)
Bonds Legend:
- Vanguard Total U.S. Bond Market ETF (BND): (Black)
- Vanguard Total International ex-U.S. Bond ETF (BNDX): (Green)
Currencies Legend:
- U.S. Dollar Index (Cash Settlement EOD) ($USD): (Orange)
- Euro (Philadelphia Index) ($XEU): (Maroon)
Commodities Legend:
- PowerShares DB Commodity Index Tracking Fund (DBC): (Purple)
- SPDR Gold ETF (GLD): (Sky Blue)
Past Week Asset Class returns
- Over the past week world equities (as measured by the Vanguard Total World Stock ETF (shown in CYAN) gained +1.82%
- Emerging market equities were the top performing equity region this past week with Asia Pacific market equities lagging.
- U.S. bonds (Black) and International bonds (Green) were higher on the week.
- Commodities were higher on the week with the USD lower.
Year-to-Date (2020) Asset Class returns
- Thus far in 2020 global equities (as measured by the Vanguard Total World Stock ETF (shown in CYAN) have lost -3.64%.
- U.S. equities have been the top performing equity region thus far in 2020 with European markets lagging.
- Bonds have shown positive returns thus far in 2020 with U.S. bonds (Black) outperforming International Bonds (Green) .
- Commodities have had substantially negative returns for 2020 with the USD index modestly positive.
Typically bull/bear markets follow a cycle of investor psychology which peaks with euphoria and ends with despair. We do not think we have reached the despair level yet (we are in the "denial-pessimism" area).
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 and we are now within the bear 1/2 cycle.
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 July 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:
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 July 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 February 2020 was the most expensive market valuation in U.S. stock market history (since 1871) and remains near its historical peak.
- when compared to inflation the current Crestmont P/E remains within the upper portion of the bubble zone defining the 1998-2000 bubble peak as shown on the 2nd chart.
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 and why we advocate phased movements into cash as our 5-factor model reverts towards Red. The below graphic represents how we move within equity markets through a complete market cycle:
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 mixed for the various monitored regions.
- The strongest equity region over the past 12 month has been U.S. Markets with European market equities lagging.
- Overall world equity performance (as measured by the Vanguard Total World ETF) have returned +4.06% (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 U.S. markets with Asia Pacific markets the weakest.
- Positive regional equity returns have been evident over the past quarter (3 months) in the majority of monitored regions (3 month 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 Emerging markets with Asia Pacific markets the weakest.
- Mixed global equity returns are evident over the past month for all monitored regions.
Past Week Regional Equity Performance
- Over the past week major equity regions were higher with Emerging 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
(market cap weighted index)
For the week the Dow Jones Global Index had a gain of +1.53%. As can be seen on the chart above chart, price has attempted to get back above the 65 week moving average (blue line) and the resistance @ 404-407. The market remains overbought and on any pullback we would like to see 379-387 hold to rule out this advance as a "dead-cat" bounce.
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 ($GDOW) is a measure of the top 150 international companies equal weighted within the index.
These indexes are important as they equal-weight the price performance of all the companies held within the respective index. This removes the distortions associated with a small group of highly valued companies (which may be performing well) masking the performance of struggling companies and represents a good overview of overall internal equity strength.
These indexes are important as they equal-weight the price performance of all the companies held within the respective index. This removes the distortions associated with a small group of highly valued companies (which may be performing well) masking the performance of struggling companies and represents a good overview of overall internal equity strength.
Below charts are the daily line charts of both indexes with 50 (blue) + 200 day (green) moving averages plus their previous "pause-points" (red shaded areas) during the last decline.
If price can break above the respective 200 DMA's + the pause-points it is highly likely the bear market is over (unsuccessful to-date).
If price can break above the respective 200 DMA's + the pause-points it is highly likely the bear market is over (unsuccessful to-date).
Value Line Geometric Index ($XVG) Daily
Global Dow Index ($GDOW) Daily
Below is a 40 year daily chart of the Value Line Geometric Index which clearly shows the critical price support/resistance @ 508-523 (1st achieved in 1998). Price is now trying to regain this very important level.
iShares MSCI ACWI ETF
(market cap weighted ETF)
The iShares MSCI ACWI (All Country World Index) ETF is used as a benchmark to compare the performance of the various broad-based equity funds available in the Emirates Group Provident Scheme (EGPS) A/B/C accounts. It serves as a benchmark to determine how equity markets are performing on a worldwide basis. This assists in determining 2 parameters; whether to be invested in equities and also which funds within the EGPS offer the best performance relative to the benchmark.
The ETF is composed of the following regional components/weightings:
The ETF is composed of the following regional components/weightings:
ACWI Monthly Chart (since 2009)
Global equity markets fell substantially from their Feb 2020 peak but remained within their previous consolidation box (yellow box) with support @ 62.57-62.65. The have risen dramatically and are now attempting a breakout (unconfirmed until the end of the month).
For the month of July ACWI has gained +3.68%. It closed the month of June above the 12 month simple moving average switching the long term trend bullish until month end.
For the month of July ACWI has gained +3.68%. It closed the month of June above the 12 month simple moving average switching the long term trend bullish until month end.
ACWI Weekly Chart
This past week ACWI gained +1.96%. Price remained above the 65 week simple moving average (shown in BLUE) and at support @ 72.22-74.15.
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, all monitored countries have transitioned into the BLUE "Improving" quadrant with the quantitative scoring now positive. In addition, ACWI (our world equity fund benchmark) has also moved into the GREEN "Leading" quadrant this week.
The RRG trend analysis status is BULLISH for world equities:
- ACWI price Relative Strength (horizontal axis): POSITIVE
- ACWI price Momentum (vertical axis): POSITIVE
Coincident Equity Market Indicators
Crude Oil
Crude oil was lower over the past week and remains trapped between $30 and $40.00 a barrel. Firm crude oil prices typically point to increasing demand on the back of world economic growth improvement and the recent trend reversal upwards is equity bullish.
Gold
Gold was higher over the past week and remains above its recent breakout level. The summer 2019 breakout above $1600 indicates increased uncertainty in equities with a move to the safety of gold. As long as gold continues to advance it remains equity bearish.
Commodities
Commodities were higher over the past week but remain near 4 year lows. This remains equity bearish until prices can regain the previous support near $160.
U.S. 30 Year Treasury Bond
U.S. 30 year bonds were higher on the week. Rising bond prices indicate a "flight to safety" trade associated with weakening economic data and the current trend reversal above $176 remains equity bearish.
Current 5-Factor Model Indications
The combined 5-Factor quantitative model is currently RED (bearish). This indicates a high level of risk at present. The 5-Factor model currently has the following sub-model readings:
Economic Model
The Economic model reverted to RED 03 April 2020 as the toll from the global lockdown associated with the COVID-19 pandemic began to be reflected in the reported data. The model is composed of numerous inputs including data from the following sources:
Forward Forecast Data:
Current Data:
Forward Forecast Data:
- OECD Composite Leading Indicators (CLI)
- BlackRock Macro GPS Growth/Inflation forecast monitor
Current Data:
- J.P. Morgan Global Purchasing Managers (PMI) Index
- World Bank Monthly Global Economic Report
- DHL Global Trade Barometer
OECD Composite Leading Indicators
(09 July 2020)
Latest Overview:
09/07/2020 - Composite leading indicators (CLIs) point to a significant improvement from the unprecedented slowdown reached at the height of the current crisis in April but the recovery remains fragile, as uncertainty persists around the possibility of future lockdowns.
CLIs rebounded strongly in most OECD large economies, as restrictions related to Covid-19 have gradually eased and uncertainty reduced, but they remain below the levels recorded prior to the coronavirus outbreak and well below long-term trends.
Similar patterns are visible among major emerging economies, with the CLI in China in particular, where the crisis hit first, returning above pre-crisis levels, albeit below long-term trends. However, in India, the CLI remains close to the crisis low.
However, it should be noted that, in the current circumstances, the CLIs should be interpreted with care as considerable uncertainty surrounding the impact of current lock-downs and transitions out of lock-downs remains. As always, the magnitude of the CLI decline should not be regarded as a measure of the degree of contraction in economic activity, but rather as an indication of the strength of the signal.
09/07/2020 - Composite leading indicators (CLIs) point to a significant improvement from the unprecedented slowdown reached at the height of the current crisis in April but the recovery remains fragile, as uncertainty persists around the possibility of future lockdowns.
CLIs rebounded strongly in most OECD large economies, as restrictions related to Covid-19 have gradually eased and uncertainty reduced, but they remain below the levels recorded prior to the coronavirus outbreak and well below long-term trends.
Similar patterns are visible among major emerging economies, with the CLI in China in particular, where the crisis hit first, returning above pre-crisis levels, albeit below long-term trends. However, in India, the CLI remains close to the crisis low.
However, it should be noted that, in the current circumstances, the CLIs should be interpreted with care as considerable uncertainty surrounding the impact of current lock-downs and transitions out of lock-downs remains. As always, the magnitude of the CLI decline should not be regarded as a measure of the degree of contraction in economic activity, but rather as an indication of the strength of the signal.
The OECD (Total) Composite Leading Index topped in Mar 2018 @ 100.8 and is now well below 100 (indicating global economic growth below average). Its most recent decline took it to near the same lows as the Feb, 2009 lows (95.70).
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.
As can be seen, the heat-map indicates all regions (and most countries) continue to have current CLI's < 100 (indicating below average projected economic growth over the next 6-9 months). However, there are signs of a potential bottoming in the rate of change in all regions on a month/month basis (green boxes).
Once a number of major regions turn positive on a year/year basis (far right column) we would feel comfortable to declare the global recession is likely over.
BlackRock Macro GPS Growth/Inflation Forecast
(02 July 2020 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 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 projects the greatest upside surprise in growth (versus current consensus) will be in Canada with the greatest downside surprise in growth (versus current consensus) in the U.K. The forward G-7 economic growth forecast is modestly above current consensus (bullish).
BlackRock Inflation Forecast vs. Current Consensus
The BlackRock inflation forecast projects the U.K. will have the greatest upside surprise in future inflation (relative to consensus) with the U.S. having the furthest downside projected inflation relative to consensus.
J.P. Morgan Global Composite Purchasing Managers Index (PMI)
(06 July 2020)
(06 July 2020)
The Global Composite PMI Report is based on the results of manufacturing and service sector surveys covering over 18,000 purchasing executives in over 40 countries. Together these countries account for an estimated 89% of global gross domestic product (GDP).
Questions are asked about real events and are not opinion based. Data are presented in the form of diffusion indices, where an index reading above 50.0 indicates an increase in the variable since the previous month and below 50.0 a decrease. As such, using the PMI data gives us a real-time look at global growth.
Questions are asked about real events and are not opinion based. Data are presented in the form of diffusion indices, where an index reading above 50.0 indicates an increase in the variable since the previous month and below 50.0 a decrease. As such, using the PMI data gives us a real-time look at global growth.
- readings > 50 indicating economic expansion
- readings < 50 indicate economic contraction.
Global PMI Summary
Global Composite PMI Report Summary
Global Manufacturing 01 July:
"The downturn in the global manufacturing sector eased sharply again in June. The J.P.Morgan Global Manufacturing PMI™ – a composite index produced by J.P.Morgan and IHS Markit in association with ISM and IFPSM – rose by a record 5.4 points to 47.8, up from 42.4 in May. Please note that due to a later release date, final numbers for Canada were not available to include in the Global Manufacturing PMI calculation. PMI survey indices tracking output, new orders and new export orders also registered their steepest month-on-month gains in June, but by remaining below 50.0 continued to signal contractions in all cases. The Future Output Index also rose to a record extent to signal an improvement in business optimism to a four-month high. Measured overall, the rate of decline in global manufacturing production was the weakest during the current five-month sequence of decrease. The downturns in the three subsectors covered – consumer, intermediate and investment goods – also slowed sharply, taking each closer to stabilising only two months after April's substantial contractions."
Global Services 06 July:
"The J.P.Morgan Global Services Business Activity Index posted 48.0 in June, up by a record 12.9 points from 35.1 in May. The headline index has now signalled contraction for five successive months, a sequence that has coincided with an identical run of declines in new work received. The ongoing downturn in the sector resulted in further job losses. Business sentiment recovered to a four-month high, reflecting a further relaxing of COVID-19 restrictions in many nations and renewed forecasts of growth during the coming year. Output charges fell slightly, despite input costs increasing for the first time in three months."
Global Composite 06 July:
"The global economy moved closer to stabilising during June, as rates of contraction eased sharply in both the manufacturing and service sectors. Conditions firmed as lockdown restrictions to combat the spread of coronavirus disease 2019 (COVID-19) eased across much of the world, businesses re-opened and confidence recovered.
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 47.7 in June, a five-month high and up by a record 11.4 points from 36.3 in May. Notes: due to a later-than-usual release date, Manufacturing PMI data for Canada were not included in the June Global PMI calculation.
Global output contracted for the fifth successive month during June, although the rate of decline eased sharply. Both the Manufacturing Output Index and Services Business Activity Index rose to the greatest extents in their respective series histories, breaking the records set in the prior month. Sub-industry data signalled that output rose in financial services for the first time in five months, making it the first sub-category to return to growth territory. Although downturns continued in the other five sectors (business services, consumer goods, consumer services, intermediate goods and investment goods), rates of contraction slowed noticeably in each."
"The downturn in the global manufacturing sector eased sharply again in June. The J.P.Morgan Global Manufacturing PMI™ – a composite index produced by J.P.Morgan and IHS Markit in association with ISM and IFPSM – rose by a record 5.4 points to 47.8, up from 42.4 in May. Please note that due to a later release date, final numbers for Canada were not available to include in the Global Manufacturing PMI calculation. PMI survey indices tracking output, new orders and new export orders also registered their steepest month-on-month gains in June, but by remaining below 50.0 continued to signal contractions in all cases. The Future Output Index also rose to a record extent to signal an improvement in business optimism to a four-month high. Measured overall, the rate of decline in global manufacturing production was the weakest during the current five-month sequence of decrease. The downturns in the three subsectors covered – consumer, intermediate and investment goods – also slowed sharply, taking each closer to stabilising only two months after April's substantial contractions."
Global Services 06 July:
"The J.P.Morgan Global Services Business Activity Index posted 48.0 in June, up by a record 12.9 points from 35.1 in May. The headline index has now signalled contraction for five successive months, a sequence that has coincided with an identical run of declines in new work received. The ongoing downturn in the sector resulted in further job losses. Business sentiment recovered to a four-month high, reflecting a further relaxing of COVID-19 restrictions in many nations and renewed forecasts of growth during the coming year. Output charges fell slightly, despite input costs increasing for the first time in three months."
Global Composite 06 July:
"The global economy moved closer to stabilising during June, as rates of contraction eased sharply in both the manufacturing and service sectors. Conditions firmed as lockdown restrictions to combat the spread of coronavirus disease 2019 (COVID-19) eased across much of the world, businesses re-opened and confidence recovered.
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 47.7 in June, a five-month high and up by a record 11.4 points from 36.3 in May. Notes: due to a later-than-usual release date, Manufacturing PMI data for Canada were not included in the June Global PMI calculation.
Global output contracted for the fifth successive month during June, although the rate of decline eased sharply. Both the Manufacturing Output Index and Services Business Activity Index rose to the greatest extents in their respective series histories, breaking the records set in the prior month. Sub-industry data signalled that output rose in financial services for the first time in five months, making it the first sub-category to return to growth territory. Although downturns continued in the other five sectors (business services, consumer goods, consumer services, intermediate goods and investment goods), rates of contraction slowed noticeably in each."
Global Composite Output Index vs. Global GDP
Below is our PMI monitor for selected regions/countries.
- numerical values > 50 indicate economic expansion (shown in BLACK)
- numerical values < 50 indicating economic contraction (shown in RED)
- trend GREEN indicates improvement over the past month with RED indicating a decline over the previous month.
The latest data points to a continuation of the global economic recession (RED numbers indicate economic contraction) with continued improvement over the May data.
World Bank Global Monthly Outlook
(June 2020)
(June 2020)
DHL Quarterly Global Trade Barometer
(Q2 2020 Update Posponed)
The DHL Global Trade Barometer is a new and unique early indicator for the current state and future development of global trade. It is based on large amounts of logistics data that are evaluated with the help of artificial intelligence. Since global trade fuels the world economy, the DHL Global Trade Barometer not only provides an outlook on future trade, but also on the prospects for the global economy.
2020/03/25: Q2 Update postponed
The GTB stands for accuracy, reliability and credibility. However, the analyzed data is unable to assess the impact of such disruptive events as Covid-19. This is why we have taken the decision to postpone the GTB update for the second quarter of 2020 as this would present an inaccurate picture. The next update of our index will be published when the Covid-19 situation improves and the market data will be able to reflect first effects.
The GTB stands for accuracy, reliability and credibility. However, the analyzed data is unable to assess the impact of such disruptive events as Covid-19. This is why we have taken the decision to postpone the GTB update for the second quarter of 2020 as this would present an inaccurate picture. The next update of our index will be published when the Covid-19 situation improves and the market data will be able to reflect first effects.
U.S. Economic Growth & Inflation
Year-over-Year GDP growth
The Gross Domestic Product (GDP) in the United States expanded 0.23 percent in the first quarter of 2020 over the same quarter of the previous year.
Quarter-over-Quarter GDP growth
The US economy shrank by an annualized 5 percent in the first quarter of 2020, more than an advance estimate of a 4.8 percent contraction and ending the longest period of expansion in the country's history, the second estimate showed. It is the biggest drop in GDP since the last quarter of 2008 as the Covid-19 pandemic forced several states to impose lockdown measures in mid-March, throwing millions of people out of work. Private inventory investment was revised downwards while personal consumption and business investment shrank less than anticipated. In the second quarter of the year, the economy is seen contracting as much as 40%, which would be the biggest plunge ever as the "stay-at-home" orders issued in March extended through the quarter, with businesses and schools switching to remote work or canceling operations, and consumers canceling, restricting, or redirecting their spending.
Annualized Inflation
The annual inflation rate in the US eased to 0.1% in May of 2020 from 0.3% in April and below forecasts of 0.2%. It is the lowest inflation rate since September of 2015, mainly due to a 33.8% plunge in gasoline cost. Also, prices of apparel went down 7.9% and transportation services declined 8.7% as many stores remained closed and Americans were forced to stay at home due to coronavirus lockdown restrictions. On the other hand, food inflation accelerated to 4%, the highest since January of 2012, with food at home prices jumping 4.8%. On a monthly basis, consumer prices were down 0.1% after falling 0.8% in April and compared to forecasts of a flat reading. Declines in the indexes for motor vehicle insurance, energy, and apparel more than offset increases in food and shelter indexes. Annual core inflation slowed to 1.2% while the monthly index was down 0.1%.
Eurozone Economic Growth & Inflation
Year-over-Year GDP growth
The Gross Domestic Product (GDP) In the Euro Area contracted 3.10 percent in the first quarter of 2020 over the same quarter of the previous year.
Quarter-over-Quarter GDP growth
The Eurozone economy shrank by 3.6 percent on quarter in the first three months of 2020, compared with preliminary estimates of a 3.8 percent contraction and the previous period's 0.1 percent growth. It was still the steepest contraction on record as a coronavirus lockdown from mid-March forced non-essential businesses to close and consumers to stay at home. Among the bloc's largest economies, Germany's GDP contraction was the sharpest since 2009, while France, Spain and Italy economies shrank the most on record. Germany, France and Italy all entered a recession.
Annualized Inflation
The annual inflation rate in the Euro Area is expected to pick up to 0.3 percent in June 2020 from a four-year low of 0.1 percent in the previous month and above market expectations of a 0.1 percent gain, a flash estimate showed. Main upward pressure should come from services (1.2 percent vs 1.3 percent in May), non-energy industrial goods (0.2 percent, the same as in May) and food, alcohol & tobacco (3.1 percent vs 3.4 percent). At the same time, energy prices are seen falling at a softer pace (-9.4 percent vs -11.9 percent). The annual core inflation, which excludes volatile prices of energy, food, alcohol & tobacco and at which the ECB looks in its policy decisions, is likely to ease to 0.8 percent from 0.9 percent in the prior month. On a monthly basis, consumer prices are expected to increase 0.3 percent, reversing a 0.1 percent decline in May.
Japan Economic Growth & Inflation
Year-over-Year GDP growth
The Gross Domestic Product (GDP) in Japan contracted 1.70 percent in the first quarter of 2020 over the same quarter of the previous year.
Quarter-over-Quarter GDP growth
The Japanese economy shrank 0.6% on quarter in Q1 2020, compared with the preliminary estimate of a 0.9% contraction and market consensus of a 0.5% decline. This was the first recession since 2015, as the COVID-19 crisis took a huge toll on activity and demand. Private consumption fell slightly more than anticipated (-0.8% vs -0.7% in the preliminary estimate), while there was a significant upward revision of capital expenditure (1.9% vs -0.5%). Meantime, government spending was flat (vs 0.1% in the preliminary estimate), with public investment dropping for the first time in five quarters (-0.6%). At the same time, net external demand subtracted 0.2 percentage points from growth as exports (-6%) fell more than imports (-4.9%). On an annualized basis, the economy contracted 2.2 % in Q1, less than the initial reading of a 3.4% contraction and compared with consensus of a 2.1% fall.
Annualized Inflation
Japan's consumer price inflation stood at an over 3-year low of 0.1 percent yoy in May 2020, in line with market estimates, as Covid-19 pandemic continued to hamper consumption. Prices fell further for transport & communication (-1.7 percent vs -1.2 percent in April), amid slumping oil prices. In contrast, inflation edged up for housing (0.8 percent vs 0.7 percent) while it remained unchanged for medical care (at 0.5 percent); clothing & footwear (at 1.4 percent) and food (at 2.1 percent). On a monthly basis, consumer prices were flat after declining 0.2 percent. Core consumer prices, which exclude fresh food, dropped 0.2 percent (the same pace as in April) and compared with market consensus of a 0.1 percent drop.
China Economic Growth & Inflation
Year-over-Year GDP growth
The Chinese economy shrank 6.8 percent year-on-year in the first quarter of 2020, after a 6 percent growth in the last three months of 2019 and compared with market forecasts of a 6.5 percent decline. It is the first GDP contraction since records began in 1992, reflecting the severe damage caused by the COVID-19 outbreak after the authorities enforced a near two-month-long shutdown of all non-essential business activity. The industrial sector dropped 9.6 percent, services fell 5.2 percent and the primary sector went down 3.2 percent. Car production recorded the sharpest decline (-44.6 percent). However, China's long term growth potential will not be affected by the short term fallout of the coronavirus pandemic, as the country's economic fundamentals remain unchanged, the authorities said.
Quarter-over-Quarter GDP growth
The Chinese economy contracted by a seasonally adjusted 9.8 percent on quarter in the three months to March 2020, following a 1.5 percent growth in the previous quarter and compared with market estimates of a 9.9 percent decrease. This was the first quarterly contraction on record, as the coronavirus outbreak paralyzed production and activities.
Annualized Inflation
China's annual inflation rate rose to 2.5 percent in June 2020 from a 14-month low of 2.4 percent in the prior month and in line with market expectations. Food inflation accelerated to 11.1 percent from 10.6 percent in May as pork prices continued to rise (81.6 percent vs 81.7 percent). On the other hand, non-food prices slowed (0.3 percent vs 0.4 percent in May), due to healthcare (1.9 percent vs 2.1 percent), education, culture & recreation (1.9 percent vs 2.2 percent), and other goods & services (5.1 percent vs 5.3 percent). Meantime, cost fell for transport (-4.6 percent vs -5.1 percent), rent, fuel, and utilities (-0.6 percent vs -0.5 percent) and clothing (-0.4 percent, the same as in May). On a monthly basis, consumer prices dropped 0.1 percent, after a 0.8 percent decline in May and compared with forecasts of a flat reading.
Valuation Model
The Valuation model reverted to RED on the recent equity market advance post the COVID-19 decline. Global equity valuations remain near historical highs with the outliers as follows (source: Star Capital):
Best Valuations
Worst Valuations
Technical Model
The Technical model remained GREEN this past week. Global equity markets have recovered significantly off their March 2020 lows and have reached critical technical levels.
Sentiment Model
The Sentiment model remained YELLOW this week as overall negative sentiment among retail and institutional investors has been reduced with the equity market rise off the 23 March lows (sentiment acts as an inverse trading indicator).
Liquidity/Economic Stress Model
The Liquidity/Economic Stress model remained YELLOW this week with increasing global financial stress associated with COVID-19 offset by global central bank liquidity injections. Our 1 year forward recession indicators for both the U.S. and International remain "High Risk".
World Bond Asset Class Return Monitor
We use the following U.S. exchange traded funds to monitor bond performance for the various bond asset classes:
Total Market Bond Basket:
- U.S. Total Bond Market (BND): (Red)
- International (ex-U.S.) Total Bond Market (BNDX): (Blue)
- U.S. Gov't Treasury Bonds (GOVT): (Orange)
- Foreign Developed Market Gov't Treasury Bonds (BWX): (Pink)
- U.S. Corporate Bond (LQD): (Maroon)
- International Corporate Bond (PICB): (Black)
- U.S. High Yield Bond (JNK): (Purple)
- International High Yield Bond (IHY): (Green)
- U.S. Gov't Inflation Protected Bonds (TIP): (Lime Green)
- International Gov't Inflation-Protected Bond (WIP): (Cyan)
1 Year Rolling Bond Performance
- Over the past 12 months rolling period the top performing bond asset class has been U.S. Corporate Bonds with Int'l Inflation Protected Gov't Bonds the worst performing.
- The U.S. Total Bond Market (RED) and the International (ex-U.S.) Total Bond Market (BLUE) have delivered strong 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 U.S. Gov't Treasury Bonds lagging.
- U.S. Total Bond Market (RED) and International (ex-U.S.) Total Bond Market (BLUE) having delivered positive returns over the past quarter (3 months).
1 Month Rolling Bond Performance
- Over the past 1 month rolling period the top performing bond asset class has been U.S. Corporate Bonds with U.S. High Yield Bonds lagging.
- The U.S. Total Bond Market (RED) and the International (ex-U.S.) Total Bond Market (BLUE) have delivered positive returns over the past month.
Past Week Bond Asset Class Performance
- Over the past week Int'l Gov't Treasury Bonds were the top performing bond class with Int'l Gov't Inflation Protected bonds lagging.
- The U.S. Total Bond Market (RED) and the International (ex-U.S.) Total Bond Market (BLUE) delivered mixed returns over the past week.
Commentary:
It has been shown in repeated studies over many years a balanced portfolio consisting of both equities and bonds (with percentage holdings in each adjusted according to personal risk tolerances) remains the best methodology in managing a long term retirement portfolio (due to the independent/low correlated function each takes when navigating though various market cycles and economic conditions).
It is best to think of bonds and equities as 2 independent brains each looking at the market from a different perspective:
As such, both serve a useful purpose in a well balanced portfolio.
Bonds delivered strong returns throughout 2019 but have been mixed recently. The COVID-19 outbreak has been positive for global Treasury bonds (flight to safety trade) and negative for global Corporate and High Yield bonds (default risk).
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.
It is best to think of bonds and equities as 2 independent brains each looking at the market from a different perspective:
- Equities: Corporate profits focused.
- Bonds: Economic growth and Inflation focused.
As such, both serve a useful purpose in a well balanced portfolio.
Bonds delivered strong returns throughout 2019 but have been mixed recently. The COVID-19 outbreak has been positive for global Treasury bonds (flight to safety trade) and negative for global Corporate and High Yield bonds (default risk).
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 08 Nov 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 gained +0.22% over the past week. There remains a divergence between U.S. bonds (green) which continue to outperform International bonds (red). The lows set in early March remain the benchmark lows we continue to watch closely.
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.
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 since rebounded but remain below resistance @ -0.19%.
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.
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.
U.S. 30 year Treasury Yield
An extremely important longer-term chart we continue to watch is the yield on the U.S. 30 year treasury relative to its 100 month exponential moving average (red dotted line on the below chart going back to 1980) as well as the yield on the 10 year treasury with its 115 month EMA. As can be seen below, since the mid 1980's these moving average have acted as a cap on each attempted increase in yields.
Should any given month close with a yield higher than their respective moving average it would be strong confirmation the 35 year bull market in bonds is likely over.
* Note as of the end of Nov 2018 both the 30 year Treasury (top chart) and 10 year yield (bottom chart) closed above its long term moving average but have been unable to hold the breakout. We will continue to monitor this through 2020.
Should any given month close with a yield higher than their respective moving average it would be strong confirmation the 35 year bull market in bonds is likely over.
* Note as of the end of Nov 2018 both the 30 year Treasury (top chart) and 10 year yield (bottom chart) closed above its long term moving average but have been unable to hold the breakout. We will continue to monitor this through 2020.
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 a weighted geometric mean of the dollar's value relative to the 6 currencies in the following list:
In addition, we also include the following for comparison purposes:
- Euro (EUR), 57.6% weight.
- Japanese yen (JPY) 13.6% weight.
- U.K. Pound sterling (GBP), 11.9% weight.
- Canadian dollar (CAD), 9.1% weight.
- Swedish krona (SEK), 4.2% weight.
- Swiss franc (CHF) 3.6% weight.
In addition, we also include the following for comparison purposes:
- The U.S. Dollar Index to allow comparison to its constituents.
- The Australian Dollar (not a part of the USD Index) as it is a popular commodity currency.
- Gold (priced in USD) as it typically acts more like a currency void of fiat printing.
1 Year Rolling Currency Performance
- Over the past 12 months rolling period the top performing major currency has been Gold with the Canadian Dollar 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 the U.S. Dollar index lagging.
1 Month Rolling Currency Performance
- Over the past 1 month rolling period the top performing currency has been Gold with the Canadian Dollar lagging.
Past Week Currency Performance
- Over the past week the top performing major currency was the British Pound with the US Dollar index lagging.
U.S. Dollar: (Bearish Bias)
Commentary:
The USD index was down -0.73% over the past week. It has been very volatile in March (since the COVID-19 outbreak) as demand for dollars globally during the current deleveraging process outpaces demand in every other major currency.
Support / Resistance Levels (based upon close):
Weekly: 95.67 / 99.19
Monthly: 92.63 / 98.66
Support / Resistance Levels (based upon close):
Weekly: 95.67 / 99.19
Monthly: 92.63 / 98.66
US Dollar Index Daily charts
The 1 year daily chart (above) shows the range-bound chop between 95-99 for the past year before the recent volatility in March 2020. At weeks end the USD closed below the short term daily resistance @ 96.90.
The 4 year daily chart (above) clearly shows the uptrend channel from the 2018 lows. A break of the March 2020 price lows along with the uptrend line would likely indicate the bullish trend in the USD is over.
Over the past week the USD closed below its short term trend 50 and 200 day moving averages.
(Short Term Bearish)
(Short Term Bearish)
US Dollar Index Weekly charts
The weekly chart shows the steady -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 into its current uptrend.
Price ended the week below resistance @ 98.86-99.19 and closed the week below the intermediate term trend 20 and 65 week moving averages.
(Intermediate Term Bearish)
Price ended the week below resistance @ 98.86-99.19 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). It continues to hold the uptrend line from the 2011 bottom and appears to be within a large multi-year bullish ascending price channel.
US Dollar Index Monthly chart
For the month of July the U.S. Dollar index has lost -0.78%. Since bottoming in late 2011 the USD has been on a roller-coaster ride. It experienced:
Price closed June below the long term trend 10 month moving average switching the long term bias to Bearish until months end. It is attempting to break out of its past 3 year range (above 102.29) and remains above the previous monthly support @ 98.66-100.21.
(Long Term Bearish)
- 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.
Price closed June below the long term trend 10 month moving average switching the long term bias to Bearish until months end. It is attempting to break out of its past 3 year range (above 102.29) and remains above the previous monthly support @ 98.66-100.21.
(Long Term Bearish)
Euro (Bullish Bias)
The Euro gained +0.19% over the past week. It had shown remarkable longer-term resilience given ongoing European political uncertainty (Brexit, Spain, Germany, Italy) but has weakened since early 2018 due to eroding economic growth metrics out of the EU and the flight to USD safety trade associated with COVID-19.
Support / Resistance Levels (based upon close):
Weekly: 111.56 / 114.62
Monthly: 112.12 /114.47
Support / Resistance Levels (based upon close):
Weekly: 111.56 / 114.62
Monthly: 112.12 /114.47
Euro Daily Charts
The Euro topped out in early 2018 @ 125.10 and has been on a steady decline since. It remained confined to a down-trending price channel established in late 2018 but has become very volatile over the past several weeks associated with the pandemic outbreak.
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 remains below this key resistance level and closed the week above the short term trend 50 and 200 day moving averages.
(Short Term Bullish)
On the 2nd daily chart price it can be seen how important the yellow band daily resistance zone @ 114.61-116.04 is going back to 2015. It remains below this key resistance level and closed the week above the short term trend 50 and 200 day moving averages.
(Short Term Bullish)
Euro Weekly Chart
The weekly chart shows the Euro's steady decline from its early 2018 peak. It found support @ 107.99-108.46, recently bounced up towards resistance @ 114.47-114.62, and is now retesting support.
This past week the Euro closed the week above the intermediate trend 20 week + 65 week moving averages.
(Intermediate Term Bullish)
This past week the Euro closed the week above the intermediate trend 20 week + 65 week moving averages.
(Intermediate Term Bullish)
Euro Monthly
For the month of July the Euro has gained +0.59%. On a monthly closing basis it closed the month of June above the long term trend 10 month moving average keeping the long term outlook to bullish until months end.
(Long Term Bullish)
(Long Term Bullish)
UK Pound (Neutral Bias)
U.K. Pound Daily Charts
U.K. Pound Weekly Chart
U.K. Pound Monthly Chart
The British Pound gained +1.33% over the past week. Clearly the ongoing Brexit saga will continue to weigh heavily upon cable's performance over the next several years but now COVID-19 has added to the extreme volatility.
Critical levels to watch on the Pound remain the respective weekly and monthly reactionary closing prices following the Brexit vote in June 2016:
This past week the Pound closed the week between its short term trend daily 50 +200 day moving averages and between the intermediate term trend 20 + 65 week moving averages. For the month of July it has gained +1.92% and closed the month of June below its long term 10 month moving average (which technically keeps the long term bearish until months end).
(Short Term Neutral)
(Intermediate Term Neutral)
(Long Term Bearish)
Support / Resistance Levels (based upon close):
Weekly: 121.54 /127.34
Monthly: 121.33 /133.09
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 between its short term trend daily 50 +200 day moving averages and between the intermediate term trend 20 + 65 week moving averages. For the month of July it has gained +1.92% and closed the month of June below its long term 10 month moving average (which technically keeps the long term bearish until months end).
(Short Term Neutral)
(Intermediate Term Neutral)
(Long Term Bearish)
Support / Resistance Levels (based upon close):
Weekly: 121.54 /127.34
Monthly: 121.33 /133.09
Australian Dollar (Bullish Bias)
Australian Dollar Daily Chart
Australian Dollar Weekly Chart(s)
Australian Dollar Monthly Chart
The Australian Dollar gained +0.39% 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 July the Aussie dollar gained +0.63%. 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 June above the long term trend 10 month moving average switching the long term outlook bullish until months end.
(Short Term Bullish)
(Intermediate Term Bullish)
(Long Term Bullish)
Support / Resistance Levels (based upon close):
Weekly: 67.35 / 71.87
Monthly: 66.97 / 70.17
For the month of July the Aussie dollar gained +0.63%. 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 June above the long term trend 10 month moving average switching the long term outlook bullish until months end.
(Short Term Bullish)
(Intermediate Term Bullish)
(Long Term Bullish)
Support / Resistance Levels (based upon close):
Weekly: 67.35 / 71.87
Monthly: 66.97 / 70.17
Canadian Dollar (Neutral Bias)
Canadian Dollar Daily Chart
Canadian Dollar Weekly Chart
Canadian Dollar Monthly Chart
The Canadian dollar gained +0.03% over the past week. After topping in Aug, 2017, the Canadian Dollar had remained within a firmly established downtrend. It attempted to base throughout 2019 but the COVID-19 outbreak (its effect upon commodity prices) has threatened to alter the recent basing price action.
The Loonie closed the week between the short term trend 50 + 200 day moving averages and between the intermediate term trend 20 + 65 week moving averages. For the month of July the Loonie has lost -0.03%. It continues to attempt to consolidate near recent lows and closed the month of June below the long term trend 10 month moving average keeping the long term bearish until months end.
(Short Term Neutral)
(Intermediate Term Neutral)
(Long Term Bearish)
Support / Resistance Levels (based upon close)
Weekly: 72.96 / 73.83
Monthly: 73.20 / 77.09
The Loonie closed the week between the short term trend 50 + 200 day moving averages and between the intermediate term trend 20 + 65 week moving averages. For the month of July the Loonie has lost -0.03%. It continues to attempt to consolidate near recent lows and closed the month of June below the long term trend 10 month moving average keeping the long term bearish until months end.
(Short Term Neutral)
(Intermediate Term Neutral)
(Long Term Bearish)
Support / Resistance Levels (based upon close)
Weekly: 72.96 / 73.83
Monthly: 73.20 / 77.09
Key Weekly Returns (week ending 10 July 2020):
|
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
+1.96% +1.72% +4.67% -0.77% +0.50% |
Non-North America Equities
|
VGK (Vanguard European VIPERs) EPP (iShares MSCI Pacific ex-Japan ) EWJ (Japan iShares) EEM (iShares MSCI Emerging Markets) ILF (Latin America 40 Index iShares) Bonds
BND (Vanguard Total U.S. Bond Market) BNDX (Vanguard International Bond ETF) TIP (iShares Barclays TIPS Bond Fund) PCY (PowerShares Emerging Markets Debt Portfolio) |
Europe/U.K Pacific ex-Japan (inc. Australia + NZ) Japan Emerging Markets Latin America US Total Bond (44% Gov't Tsy, 56%Corp) World Investment Grade Bonds ex-US Inflation Protected Gov't Bonds Emerging Market Sovereign Debt |
+1.00% -0.61% +1.12% +4.55% +1.57% +0.23% +0.28% +0.19% -0.70% |
|
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 |
+1.61% -0.51% +1.32% +4.31% +5.55% +0.97% |
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 |
-0.65%
+0.38% +1.33% -0.17% +0.53% +0.53% |
Important Charts to Watch
Commodity Basket Index
For the past 4 years the deflationary debt overhang has gripped world economies and equity markets have run up on the "hope" a return to world growth would begin soon. This would typically be reflected in a rise in commodity prices.
Commodities (as measured by the Reuters/Jefferies CRB index, a basket of 19 commodities) bottomed in early 2016 (along with equities) and had been on a gradual rise. However, they have collapsed due to the COVID-19 situation. In order to confirm world growth is firming we would like to see commodities moving higher.
This past week price closed the week below the strong support @ 167.74-168.61, below the early 2016 closing lows @ 160.36 and remains near 40 year lows.
Commodities (as measured by the Reuters/Jefferies CRB index, a basket of 19 commodities) bottomed in early 2016 (along with equities) and had been on a gradual rise. However, they have collapsed due to the COVID-19 situation. In order to confirm world growth is firming we would like to see commodities moving higher.
This past week price closed the week below the strong support @ 167.74-168.61, below the early 2016 closing lows @ 160.36 and remains near 40 year lows.
Equity Market Volatility
The Volatility Index (VIX) is a measure of expected price fluctuations of options on the S&P 500 index options over the next 30 days (technically the VIX is quoted in percentage points and represents the expected range of movement in the S&P 500 index over the next year, at a 68% confidence level i.e. one standard deviation of the normal probability curve). For example, if the VIX is 15, this represents an expected annualized change, with a 68% probability, of less than 15% up or down.
The VXV uses the same calculation but looks forward 3 months. When the VIX is greater than the VXV ($VIX:$VXV ratio > 1.0) the volatility structure is termed to be in "contango". It indicates traders are much more concerned about short term volatility than they are about longer term volatility and when that ratio returns to "normal" (< 0.93) it is typically a good sign market stress is easing (and a good time to add to equity positions).
As of this weeks market close volatility closed below the "VIX Event End Line" area with the VIX remaining stubbornly above 16. The volatility structure currently is neutral for equities until the VIX can close below 16 with the ratio < 0.93.
The VXV uses the same calculation but looks forward 3 months. When the VIX is greater than the VXV ($VIX:$VXV ratio > 1.0) the volatility structure is termed to be in "contango". It indicates traders are much more concerned about short term volatility than they are about longer term volatility and when that ratio returns to "normal" (< 0.93) it is typically a good sign market stress is easing (and a good time to add to equity positions).
As of this weeks market close volatility closed below the "VIX Event End Line" area with the VIX remaining stubbornly above 16. The volatility structure currently is neutral for equities until the VIX can close below 16 with the ratio < 0.93.
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 are keenly monitoring their price performance into 2020.
Chinese Equities
The Shanghai Composite index was strongly higher this past week and was finally able to break above resistance @ 3050-3147 (which now becomes support) with resistance @ 3317-3412.
Chinese growth remains key to both Emerging market performance as well as an indication of Developed markets demand. From its peak in mid-2015, the Shanghai index lost more than -50% to its recent lows. We would like to see significant strength return to China further indicating world economic growth has positively turned the corner.
Chinese growth remains key to both Emerging market performance as well as an indication of Developed markets demand. From its peak in mid-2015, the Shanghai index lost more than -50% to its recent lows. We would like to see significant strength return to China further indicating world economic growth has positively turned the corner.
PRECIOUS METALS
Precious metals (and their respective producers) 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 continue to fall (acting as a tailwind to PM's) while the USD has been strong (acting as a headwind to PM's). As such, PM's have risen but not at the rate they might once the USD reverses direction (something we expect may be forthcoming soon).
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 recently 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.
Gold stocks recently 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.
Even more bullish is Silver (chart below) which remains at a price ratio relative to the price of gold (GREEN zone on the chart < .0130) which has historically been a low risk entry point over the past 40 years.
Silver remains as cheap as it has been over the past 40 years relative to gold. Both previous moves to this ratio led to large silver price gains.
To put the valuation into a longer term perspective, below is a chart of the Gold/Silver ratio (the opposite ratio to Silver/Gold) going back to 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 110 for the 1st time in history and remains above 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.
There is no guarantee the ratio will not go higher (allowing for further silver losses or range bound trade as in 1991-1994) but it is now at a level that deserves attention (cautious traders may want to wait for a reversal < 80 to avoid a potential range bound episode as the 1990's).
EVEN MORE BULLISH is the price of Platinum (chart below) which has exceeded the "buy zone" last seen in 1982! Platinum is 15-20 times rarer than gold and has rarely in history traded at a price below the price of gold (only 9.7% of the time going back to 1971). It is now the cheapest it has been GOING BACK TO AUGUST 1971 WHEN THE U.S. LEFT THE GOLD STANDARD on a relative basis:
- The current Platinum:Gold ratio remains well below 0.85 (red line on the chart below).
- A Platinum/Gold ratio < 0.85 has only occurred 4.7% of the time back to 1971.
- Prior to recent lows, the lowest Platinum:Gold ratio since August 1971 (when the USD was removed from the gold standard) was hit on 20 Sept 1982 when it hit a ratio low of 0.689 (Platinum $300.40/Gold $436.00).
- If Platinum were to return to its most common ratio relative to Gold (1.0x-1.25x which has been common 35% of the time) it would imply a price rise of approximately 50-90% from recent levels.
Platinum now sits on a price support extending back to 2004 and, combined with its ratio relative to the price of gold, represents a compelling long term buy point.
The following charts and commentary (in italics; bold print is our emphasis) are sourced from Kitco from commentary sourced in Feb 2017 when the ratio was near 0.85 (Platinum has become even cheaper on a relative basis since the data was published):
Platinum to gold ratios show wide variance over the 46 year period ranging from highs above 2.5 before and soon after Nixon began taking the United States off the gold standard to periodic lows below 1.0:
Platinum to gold ratios show wide variance over the 46 year period ranging from highs above 2.5 before and soon after Nixon began taking the United States off the gold standard to periodic lows below 1.0:
Our data set covers 553 months beginning in January 1971. The distribution of ratios in both tabular and chart format follows:
Platinum/Gold Ratio: % of Months
Platinum/Gold Ratio: % of Months
- < 0.85: 4.7%
- .85-1.01: 5.0%
- 1.0-1.25: 34.7%
- 1.25-1.5: 19.3%
- 1.5-2.0: 15.4%
- 2.0-2.5: 8.9%
- > 2.5: 2.0%
From our data set and the distributions of monthly average platinum-gold ratios from January 1971 thru January 2017, I glean the following:
From a compendium of sources, the average crustal abundance of both metals is around 4 ppb. Based solely on this fact, platinum and gold should trade at about the same price.
And indeed, our compilation shows that for nearly 50% of the time since gold was decoupled from the world’s reserve currency and allowed to trade freely on exchanges, the price ratio has ranged from 0.85 to 1.25. That said, since January 1971, the average price of platinum has been $637/oz and gold has been $518/oz for an overall ratio of 1.23:1. Clearly there are other factors other than the nearly equal crustal abundances that account for this historic price relationship.
A variety of supply and demand factors cause platinum to trade at a premium to gold:
Fluctuations in the relative prices of platinum and gold are largely driven by:
Platinum functions both as a precious and industrial metal. It is usually tied to the price of gold in both short- and long-term trading patterns. In times of financial distress and economic turmoil, platinum tends to behave more like gold with widespread hoarding.
The platinum-gold ratio can be used to ascertain whether one metal is over- or undervalued with respect to the other. The current monthly average ratio below 0.85 is unusual and indicates that platinum is severely undervalued with respect to gold *
* The ratio recently hit 0.55 and remains near a record low.
- A ratio of less than 0.75 is a single outlier that occurred once during the second half of 1982 when overall ratios averaged 0.81.
- Ratios <0.85 are quite unusual at 4.7%. They occurred for two months in the first quarter of 1975, the aforementioned six months in 1982, in June-July of 1985, and for an ongoing run of 16 months that commenced in October 2015.
- Ratios from 0.85 to 1.0 constitute 15.0% of the record.
- Pt:Au from 1.0 to 1.25 is the most common range and comprises 34.7% of ratios since 1971.
- The ratios between 1.25 and 1.5 occur 19.3% of the time.
- Ratios from 1.5 to 2.0 make up 15.4% of the record.
- The 2.0-2.5 interval covers 8.9% of the months in our compendium.
- The 11 monthly outliers at >2.5 comprise 2.0% of the total record and have not occurred since 1971.
From a compendium of sources, the average crustal abundance of both metals is around 4 ppb. Based solely on this fact, platinum and gold should trade at about the same price.
And indeed, our compilation shows that for nearly 50% of the time since gold was decoupled from the world’s reserve currency and allowed to trade freely on exchanges, the price ratio has ranged from 0.85 to 1.25. That said, since January 1971, the average price of platinum has been $637/oz and gold has been $518/oz for an overall ratio of 1.23:1. Clearly there are other factors other than the nearly equal crustal abundances that account for this historic price relationship.
A variety of supply and demand factors cause platinum to trade at a premium to gold:
- Platinum is a much smaller market. Cumulative world production of platinum is estimated to be about 5% of gold (9400 tonnes versus 182,000 tonnes). From 1994-2014, 3700 tonnes of platinum were mined versus 52,600 tonnes of gold or about 7% (source: USGS).
- Platinum is largely an industrial metal. Catalytic converters, electronics, petroleum and chemical catalysts, medical technologies, and many minor uses constitute over 60% of its annual demand. Around 30% is used in jewelry and 10% for investment demand. Also, 30% of the annual platinum supply now comes from recycling, mostly from catalytic converters. Some demand is consumed and lost to the marketplace.
- Gold is overwhelmingly a precious metal; 90% is used in jewelry and investments and only 10% in industrial applications. An estimated 98% of all the gold ever mined in the world remains available and held in jewelry, by central banks, in private hoards, and as fabricated products (source: USGS).
- About 70% of yearly platinum mine supply comes from South Africa, a geopolitically risky country. Much new platinum is a by-product of nickel-copper mining and smelting; therefore, annual platinum production is dependent on the supply-demand fundamentals and prices of these primary metals.
Fluctuations in the relative prices of platinum and gold are largely driven by:
- the overall growth and health of the world’s economy and in the case of platinum, the automotive industry;
- labor, power, currency, and political issues in South Africa that cause major perturbations in the platinum supply;
- safe haven hoarding of gold and to a much lesser extent, platinum, in times of economic uncertainty and major geopolitical events; speculators moving in and out of paper markets of both metals (bullion exchanges, ETFs, and derivatives) and to a lesser extent, central bank trading of physical gold.
Platinum functions both as a precious and industrial metal. It is usually tied to the price of gold in both short- and long-term trading patterns. In times of financial distress and economic turmoil, platinum tends to behave more like gold with widespread hoarding.
The platinum-gold ratio can be used to ascertain whether one metal is over- or undervalued with respect to the other. The current monthly average ratio below 0.85 is unusual and indicates that platinum is severely undervalued with respect to gold *
* The ratio recently hit 0.55 and remains near a record low.
Elliott Wave
We use Elliott Wave theory in conjunction with cycle analysis to attempt to "crystal ball" what to expect going forward. We have included some basic information below for those who might be interested followed by our current interpretation/analysis.
The Elliott wave principle is a form of technical analysis that some traders use to analyze financial market cycles and forecast market trends by identifying extremes in investor psychology, highs and lows in prices, and other collective factors. Ralph Nelson Elliott (1871–1948), a professional accountant, discovered the underlying social principles and developed the analytical tools in the 1930s. He proposed that market prices unfold in specific patterns, which practitioners today call Elliott waves, or simply waves. Elliott published his theory of market behavior in the book The Wave Principle in 1938, summarized it in a series of articles in Financial World magazine in 1939, and covered it most comprehensively in his final major work, Nature’s Laws: The Secret of the Universe in 1946. Elliott stated that "because man is subject to rhythmical procedure, calculations having to do with his activities can be projected far into the future with a justification and certainty heretofore unattainable."
The Elliott Wave Principle posits that collective investor psychology, or crowd psychology, moves between optimism and pessimism in natural sequences. These mood swings create patterns evidenced in the price movements of markets at every degree of trend or time scale.
In Elliott's model, market prices alternate between an impulsive, or motive phase, and a corrective phase on all time scales of trend, as the illustration shows. Impulses are always subdivided into a set of 5 lower-degree waves, alternating again between motive and corrective character, so that waves 1, 3, and 5 are impulses, and waves 2 and 4 are smaller retraces of waves 1 and 3. Corrective waves subdivide into 3 smaller-degree waves starting with a five-wave counter-trend impulse, a retrace, and another impulse.
In a bear market the dominant trend is downward, so the pattern is reversed—five waves down and three up. Motive waves always move with the trend, while corrective waves move against it.
In Elliott's model, market prices alternate between an impulsive, or motive phase, and a corrective phase on all time scales of trend, as the illustration shows. Impulses are always subdivided into a set of 5 lower-degree waves, alternating again between motive and corrective character, so that waves 1, 3, and 5 are impulses, and waves 2 and 4 are smaller retraces of waves 1 and 3. Corrective waves subdivide into 3 smaller-degree waves starting with a five-wave counter-trend impulse, a retrace, and another impulse.
In a bear market the dominant trend is downward, so the pattern is reversed—five waves down and three up. Motive waves always move with the trend, while corrective waves move against it.
Wave 1 (I): Wave one is rarely obvious at its inception. When the first wave of a new bull market begins, the fundamental news is almost universally negative. The previous trend is considered still strongly in force. Fundamental analysts continue to revise their earnings estimates lower; the economy probably does not look strong. Sentiment surveys are decidedly bearish, put options are in vogue, and implied volatility in the options market is high. Volume might increase a bit as prices rise, but not by enough to alert many technical analysts.
Wave 2 (II): Wave two corrects wave one, but can never extend beyond the starting point of wave one. Typically, the news is still bad. As prices retest the prior low, bearish sentiment quickly builds, and "the crowd" haughtily reminds all that the bear market is still deeply ensconced. Still, some positive signs appear for those who are looking: volume should be lower during wave two than during wave one, prices usually do not retrace more than 61.8% (see Fibonacci section below) of the wave one gains, and prices should fall in a three wave pattern.
Wave 3 (III): Wave three is usually the largest and most powerful wave in a trend (although some research suggests that in commodity markets, wave five is the largest). The news is now positive and fundamental analysts start to raise earnings estimates. Prices rise quickly, corrections are short-lived and shallow. Anyone looking to "get in on a pullback" will likely miss the boat. As wave three starts, the news is probably still bearish, and most market players remain negative; but by wave three's midpoint, "the crowd" will often join the new bullish trend. Wave three often extends wave one by a ratio of 1.618:1.
Wave 4 (IV): Wave four is typically clearly corrective. Prices may meander sideways for an extended period, and wave four typically retraces less than 38.2% of wave three (see Fibonacci relationships below). Volume is well below than that of wave three. This is a good place to buy a pull back if you understand the potential ahead for wave 5. Still, fourth waves are often frustrating because of their lack of progress in the larger trend.
Wave 5 (V): Wave five is the final leg in the direction of the dominant trend. The news is almost universally positive and everyone is bullish. Unfortunately, this is when many average investors finally buy in, right before the top. Volume is often lower in wave five than in wave three, and many momentum indicators start to show divergences (prices reach a new high but the indicators do not reach a new peak). At the end of a major bull market, bears may very well be ridiculed (recall how forecasts for a top in the stock market during 2000 were received).
Wave A: Corrections are typically harder to identify than impulse moves. In wave A of a bear market, the fundamental news is usually still positive. Most analysts see the drop as a correction in a still-active bull market. Some technical indicators that accompany wave A include increased volume, rising implied volatility in the options markets and possibly a turn higher in open interest in related futures markets.
Wave B: Prices reverse higher, which many see as a resumption of the now long-gone bull market. Those familiar with classical technical analysis may see the peak as the right shoulder of a head and shoulders reversal pattern. The volume during wave B should be lower than in wave A. By this point, fundamentals are probably no longer improving, but they most likely have not yet turned negative.
Wave C: Prices move impulsively lower in five waves. Volume picks up, and by the third leg of wave C, almost everyone realizes that a bear market is firmly entrenched. Wave C is typically at least as large as wave A and often extends to 1.618 times wave A or beyond.
Wave 2 (II): Wave two corrects wave one, but can never extend beyond the starting point of wave one. Typically, the news is still bad. As prices retest the prior low, bearish sentiment quickly builds, and "the crowd" haughtily reminds all that the bear market is still deeply ensconced. Still, some positive signs appear for those who are looking: volume should be lower during wave two than during wave one, prices usually do not retrace more than 61.8% (see Fibonacci section below) of the wave one gains, and prices should fall in a three wave pattern.
Wave 3 (III): Wave three is usually the largest and most powerful wave in a trend (although some research suggests that in commodity markets, wave five is the largest). The news is now positive and fundamental analysts start to raise earnings estimates. Prices rise quickly, corrections are short-lived and shallow. Anyone looking to "get in on a pullback" will likely miss the boat. As wave three starts, the news is probably still bearish, and most market players remain negative; but by wave three's midpoint, "the crowd" will often join the new bullish trend. Wave three often extends wave one by a ratio of 1.618:1.
Wave 4 (IV): Wave four is typically clearly corrective. Prices may meander sideways for an extended period, and wave four typically retraces less than 38.2% of wave three (see Fibonacci relationships below). Volume is well below than that of wave three. This is a good place to buy a pull back if you understand the potential ahead for wave 5. Still, fourth waves are often frustrating because of their lack of progress in the larger trend.
Wave 5 (V): Wave five is the final leg in the direction of the dominant trend. The news is almost universally positive and everyone is bullish. Unfortunately, this is when many average investors finally buy in, right before the top. Volume is often lower in wave five than in wave three, and many momentum indicators start to show divergences (prices reach a new high but the indicators do not reach a new peak). At the end of a major bull market, bears may very well be ridiculed (recall how forecasts for a top in the stock market during 2000 were received).
Wave A: Corrections are typically harder to identify than impulse moves. In wave A of a bear market, the fundamental news is usually still positive. Most analysts see the drop as a correction in a still-active bull market. Some technical indicators that accompany wave A include increased volume, rising implied volatility in the options markets and possibly a turn higher in open interest in related futures markets.
Wave B: Prices reverse higher, which many see as a resumption of the now long-gone bull market. Those familiar with classical technical analysis may see the peak as the right shoulder of a head and shoulders reversal pattern. The volume during wave B should be lower than in wave A. By this point, fundamentals are probably no longer improving, but they most likely have not yet turned negative.
Wave C: Prices move impulsively lower in five waves. Volume picks up, and by the third leg of wave C, almost everyone realizes that a bear market is firmly entrenched. Wave C is typically at least as large as wave A and often extends to 1.618 times wave A or beyond.
S&P 500 Weekly Elliott Wave Chart
For those who are new to Elliott wave, it is essential to understand as market participant psychology changes (and, as a consequence, the various waves unfold in specific patterns) objective analysis requires readjustment of counts as the waves unfold. Elliott wave is not a "crystal ball" but more a quantitative tool to analyze changes in market psychology as market conditions evolve. Elliott wave analysis can be quite confusing and intricate but in our experience we find it is best used as a "road map" towards the bigger picture.
Below is the current long term view of the equity market from 1929-Present. Clearly the 2008-2009 market decline was of such stature as to be historic (as "historic" as the 1929-1932 market crash). Given such, we have begun to think out of the box with respect to Elliott Wave as it has recently progressed.
In broadest terms markets cycle through 65-80 year "Grand Super-Cycles" (generally coinciding with generational demographic expansion/contraction). If one were to use the end of the 1929-1932 market crash/depression as the beginning point for a new Grand Super-Cycle, it could be argued a complete 77 year Grand Super-Cycle began in 1932 and ended in 2009. A 5 wave Super-Cycle advance (SC-1, SC-2, SC-3, SC-4, SC-5) occurred between 1932 and 2000 (68 years in length) followed by a 9 year Super-Cycle decline (SC-A, SC-B, SC-C) from 2000-2009 (culminating in the 2007-2009 market decline; the worst since the great depression). If this is the case we would have completed a full 77 year Elliott Wave Grand Super-Cycle pattern from 1932-2009 (5 wave Super-Cycle advance with a 3 wave Super-Cycle decline) and have embarked on a new 65-80 year Grand Super-Cycle beginning in March 2009.
We have marked this Grand Super-Cycle on the below chart with the 68 year SC-1 through to the SC-5 advance (1932-2000) followed by the 9 year SC-A, SC-B, and SC-C decline (2000-2009). If this is the case, an argument can be made the period from 2009-to-Present is unfolding as follows:
Below is the current long term view of the equity market from 1929-Present. Clearly the 2008-2009 market decline was of such stature as to be historic (as "historic" as the 1929-1932 market crash). Given such, we have begun to think out of the box with respect to Elliott Wave as it has recently progressed.
In broadest terms markets cycle through 65-80 year "Grand Super-Cycles" (generally coinciding with generational demographic expansion/contraction). If one were to use the end of the 1929-1932 market crash/depression as the beginning point for a new Grand Super-Cycle, it could be argued a complete 77 year Grand Super-Cycle began in 1932 and ended in 2009. A 5 wave Super-Cycle advance (SC-1, SC-2, SC-3, SC-4, SC-5) occurred between 1932 and 2000 (68 years in length) followed by a 9 year Super-Cycle decline (SC-A, SC-B, SC-C) from 2000-2009 (culminating in the 2007-2009 market decline; the worst since the great depression). If this is the case we would have completed a full 77 year Elliott Wave Grand Super-Cycle pattern from 1932-2009 (5 wave Super-Cycle advance with a 3 wave Super-Cycle decline) and have embarked on a new 65-80 year Grand Super-Cycle beginning in March 2009.
We have marked this Grand Super-Cycle on the below chart with the 68 year SC-1 through to the SC-5 advance (1932-2000) followed by the 9 year SC-A, SC-B, and SC-C decline (2000-2009). If this is the case, an argument can be made the period from 2009-to-Present is unfolding as follows:
- The market is currently within the early stages of Primary Wave III implying a long-term upwards trend for many more years.
- The market is currently within Major Wave ((3)) projecting upwards towards new all time highs.
- Intermediate wave ii wave completed in May 2019 and we are currently within intermediate wave iii expecting new all time highs.
Alternately, our original EWT weekly chart (shown below and our preferred count) we have been following since 2009 is annotated with "classic" Elliott Wave indications projecting we are within the ending stages of the 2009-present bull market (near the top of intermediate wave b of a wave IV decline to be followed by a final wave V advance to new all-time highs to end the bull market from 2009).
At present we remained torn between 2 possible Elliott Wave counts:
- If the market is within Major Wave 3 as per the 1st chart, we would expect a large multi-year advance in Major wave 3. This would project much higher equity prices into the future.
- Alternately, if the have completed Primary Wave III of the entire bull market advance from 2009-2018, a Primary Wave IV is currently in process (a-b-c). At its conclusion (target near 1800); we would project a Primary Wave 5 advance to new all-time highs to end the bull market.
The difference between the 2 counts is either a continued "new" bull market (scenario 1) or the last stages of a 11 year bull market with a large bear market on the horizon (scenario 2).
Below are the Elliott Wave counts for ES (the S&P 500 mini continuous futures contract) from 2009. This chart confirms we should expect a Wave V advance once this current decline ends to new all time highs (projections in orange box).
S&P 500 Futures Contract (Weekly chart)
Market Valuation
U.S. (NYSE) Margin Debt
We have been studying with interest the current margin debt on US markets. For those who are unfamiliar, margin debt is the amount of "loans" taken out by market speculators to leverage up their equity positions. During normal bull markets margin debt will increase as the market continues to climb. This increased margin debt amplifies equity market prices. However, at some point speculators become nervous and begin to reduce their margin positions. This reduction in margin is like letting the air out of a balloon and deflates equity asset prices.
As can be seen on the below graphic, both the 2000 and 2007 market tops were signaled in advance by tops in margin debt (margin debt not inflation adjusted on this chart):
As can be seen on the below graphic, both the 2000 and 2007 market tops were signaled in advance by tops in margin debt (margin debt not inflation adjusted on this chart):
The following chart (source: Doug Short) shows US equity margin debt adjusted for inflation. As can be seen, in both 2000 and 2007 inflation-adjusted margin debt peaked and then began to decline leading to the tops in the S&P 500 index. As such, margin debt rollovers acts as a good lead indicator of possible future market weakness.
Since peaking in early 2018 margin debt has shown a significant decline. A similar decline occurred in 2015 (and did not derail the bull market) but the recent decline is a concern given how late we are in the market cycle combined with the extreme levels of margin debt relative to past market cycles.
U.S. Equity market Valuation Models
(Source: D. Short)
Below is a graph representing 4 different long-term valuation measures plotted back to 1900 (118 years):
As of 30 June the average of these 4 measures places the U.S. stock market (S&P 500 index) as being 129% overvalued relative to its long term geometric mean. This remains near the 2nd highest valuation in the history of the stock market going back to 1900. This level remains over 2 standard deviations above the mean and above the market peaks in both 2007 and 1929. It is only surpassed by the 2000 dotcom bubble peak.
- The Crestmont Research P/E Ratio
- The cyclical P/E ratio using the trailing 10-year earnings as the divisor
- The Q Ratio, which is the total price of the market divided by its replacement cost
- The relationship of the S&P Composite price to a regression trendline
As of 30 June the average of these 4 measures places the U.S. stock market (S&P 500 index) as being 129% overvalued relative to its long term geometric mean. This remains near the 2nd highest valuation in the history of the stock market going back to 1900. This level remains over 2 standard deviations above the mean and above the market peaks in both 2007 and 1929. It is only surpassed by the 2000 dotcom bubble peak.
Another popular valuation metric is know as the "Buffett-Indicator". In an interview with Fortune magazine back in 2001 Warren Buffett remarked "it is probably the best single measure of where valuations stand at any given moment."
The indicator measures the price of Corporate Equities (Mkt Cap) to Gross Domestic Product (GDP) as a ratio going back to the 1950's. As can be seen below, the ratio of equity prices relative to last rreported GDP currently stands at 156.3%. It recently exceeded the recent 2015 peak of 128.9% and is second only to the 2000 equity peak of 159.2% in terms of equity overvaluation relative to economic output.
The de-trended graph indicates it would take a -18% market decline to return valuations back to the long term de-trended regression line (shown in red on the 2nd chart).
7-Year Asset Class Real Return Forecast
(Source: GMO LLC)
(Source: GMO LLC)
Each month GMO (Grantham, Mayo, Van Otterloo & Co.) publishes a forward forecast for expected annual real rates of return (i.e. inflation adjusted) for a number of different asset classes with a 7 year forward outlook. They have historically had a very good track record (0.97 correlation) of estimating forward 7 year asset class returns based primarily upon current valuations combined with mean reversion. Charts are published following analysis of the previous months data.
I have followed GMO's methodology with interest for many years. In my experience I have found them to be conservative over the shorter term with a tenancy to make calls too early. HOWEVER, similar to Dr. John Hussman of Hussman Funds, they also tend to be right over the longer term. As such, 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.
I have followed GMO's methodology with interest for many years. In my experience I have found them to be conservative over the shorter term with a tenancy to make calls too early. HOWEVER, similar to Dr. John Hussman of Hussman Funds, they also tend to be right over the longer term. As such, 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)
(Source: Hussman Funds)
Margin-Adjusted Price/Earnings (MAPE) Ratio
Non-financial Market Capitalization to Corporate Gross-Value Added (Market Cap/GVA)
S&P 500 12 year forward projected annual returns (Mkt Cap-GVA)
S&P 500 12 year forward projected annual returns (margin-adjusted MAPE)
Balanced Portfolio 12 year forward projected annual returns
(60% in the S&P 500, 30% in Treasury bonds, and 10% in Treasury bills)
(60% in the S&P 500, 30% in Treasury bonds, and 10% in Treasury bills)
Dr. John Hussman uses a unique measure of estimating future equity returns over a 12 year period based upon market capitalization relative to gross corporate value added. He claims the measure has a 91.9% correlation to actual S&P 500 future returns over a 12 year horizon. As per his previous explanations:
"Across the scores of measures I’ve evaluated or created over three decades of research, the ratio of non-financial market capitalization to corporate gross value added (essentially corporate revenues, including estimated foreign revenues, excluding double-counting of intermediate inputs) is best correlated to actual subsequent market returns over a 10-12 year horizon".
As can be seen on the above chart, since 1950 his approach has correlated quite closely with future returns (blue line is his estimates and the red line the subsequent returns 12 years later). Currently his calculations project a "buy and hold" rate of return on the S&P 500 index of -0.6% nominal per year out to 2028 should one employ a "buy and hold" strategy. Clearly tactical asset allocation will be required as we transition to the back half of the current market cycle.
His recent conclusion:
" At present, the valuation measures that we find best correlated with actual subsequent S&P 500 total returns are at the most offensive levels in history, matching or eclipsing the 1929 and 2000 extremes. Even considering the level of interest rates, economic growth, and other factors, the S&P 500 currently stands about 2.8 times the level that we believe the index will revisit over the completion of the current market cycle, implying an interim market loss something on the order of -64%. Moreover, the most reliable valuation measures uniformly imply the likelihood of negative total returns in the S&P 500 over the coming 10-12 year period."
Clearly the high level of current market valuations does not bode well for the "buy and hope" investor.
"Across the scores of measures I’ve evaluated or created over three decades of research, the ratio of non-financial market capitalization to corporate gross value added (essentially corporate revenues, including estimated foreign revenues, excluding double-counting of intermediate inputs) is best correlated to actual subsequent market returns over a 10-12 year horizon".
As can be seen on the above chart, since 1950 his approach has correlated quite closely with future returns (blue line is his estimates and the red line the subsequent returns 12 years later). Currently his calculations project a "buy and hold" rate of return on the S&P 500 index of -0.6% nominal per year out to 2028 should one employ a "buy and hold" strategy. Clearly tactical asset allocation will be required as we transition to the back half of the current market cycle.
His recent conclusion:
" At present, the valuation measures that we find best correlated with actual subsequent S&P 500 total returns are at the most offensive levels in history, matching or eclipsing the 1929 and 2000 extremes. Even considering the level of interest rates, economic growth, and other factors, the S&P 500 currently stands about 2.8 times the level that we believe the index will revisit over the completion of the current market cycle, implying an interim market loss something on the order of -64%. Moreover, the most reliable valuation measures uniformly imply the likelihood of negative total returns in the S&P 500 over the coming 10-12 year period."
Clearly the high level of current market valuations does not bode well for the "buy and hope" investor.
Global Asset Class 10-year Expected Nominal Return Forecast
(data as of 30 June 2020)
(Source: Research Affiliates)
(data as of 30 June 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 Government Treasury bonds (worldwide) showing minimal returns due to low global interest rates.
Data continues to point to Emerging Market and EAFE (Europe, Africa and Far East) equities as providing the greatest returns over the next 10 years with Government Treasury bonds (worldwide) 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).
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)
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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.
While we do not make investment decisions strictly based upon cycle analysis, we are cognizant of the historical nature of these cycles and tend to be a bit more wary as they approach.
Presidential Cycle S&P 500 returns (inc. dividends):
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1988-Year 4: +12.40%
1989-Year1: +27.25% 1990-Year 2: -6.56% 1991-Year 3: +26.31% 1992-Year 4: +4.46% 1993-Year 1: +7.06% 1994-Year 2: -1.54% 1995-Year 3: +34.11% 1996-Year 4: +20.26% 1997-Year 1: +31.01% 1998-Year 2: +26.67% 1999-Year 3: +19.53% 2000-Year 4: -10.14% |
2001-Year 1: -13.04%
2002-Year 2: -23.37% 2003-Year 3: +26.38% 2004-Year 4: +8.99% 2005-Year 1: +3.00% 2006-Year 2: +13.62% 2007-Year 3: +3.53% 2008-Year 4: -38.49% 2009-Year 1: +23.45% 2010-Year 2: +12.78% 2011-Year 3: +0.00% 2012-Year 4: +13.41% 2013-Year 1: +29.60% |
2014-Year 2: +11.39%
2015-Year 3: -0.73% 2016-Year 4: +11.96% 2017-Year 1: +21.83% 2018-Year 2: -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:
