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Market/Model Commentary
Currently the active model portfolio as defined by our 5-factor model is:
- Please click on the above magenta link to review the suggested allocations if required.
- The Risk-Reduction Level 1 model was initiated 18 March 2022.
ECAM 5-Factor Composite Model
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ECONOMIC FACTOR SUB-MODEL
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TECHNICAL FACTOR SUB-MODEL
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VALUATION FACTOR SUB-MODEL
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SENTIMENT FACTOR SUB-MODEL
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LIQUIDITY (Stress) FACTOR SUB-MODEL
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"Slow and Steady wins the race"
The Hare and the Tortoise
Aesop (Greek slave & fable author 620 BC - 560 BC)
"Technical Analysis is a windsock, not a crystal ball"
Carl Swenlin (Technical Analyst)
"Investing is the intersection of economics and psychology"
Seth Klarman (Hedge fund Manager, Baupost Group)
"Everyone's got a plan ..... until they get punched in the face"
Mike Tyson (Former World Heavyweight Boxing Champion)
The Hare and the Tortoise
Aesop (Greek slave & fable author 620 BC - 560 BC)
"Technical Analysis is a windsock, not a crystal ball"
Carl Swenlin (Technical Analyst)
"Investing is the intersection of economics and psychology"
Seth Klarman (Hedge fund Manager, Baupost Group)
"Everyone's got a plan ..... until they get punched in the face"
Mike Tyson (Former World Heavyweight Boxing Champion)
Latest Updates
DOW JONES GLOBAL INDEX
(26 May 2023)
Global equities were lower this past week with a percentage return (as measured by the Dow Jones Global Index) of -0.64%. This week price closed above the 40 week moving average and above the uptrend line from the Oct/22 bottom. It remains at significant price resistance @ 492-505.
Technical Analysis Summary (Dow Jones Global Index)
Click to set custom HTML
Dow Jones Global Index Historical Monthly Returns
The month of April closed with a gain of +1.2% as we conclude the seasonally strong period for global markets. We are now within May which has historically been a modestly weak month within the seasonal cycle:
- -5.6% cumulative percentage return over the past 23 years.
- 43.5% win percentage.
- greatest gain +9.5% (2009)
- greatest loss -9.9% (2010)
Global Macro "GRID" Matrix Roadmap
(source: 42 Macro)
(source: 42 Macro)
"I skate to where the puck is going to be; not where it has been."
Wayne Gretzky
Wayne Gretzky
- Globally (median conditional probabilities of each regime are shown at the bottom of the table) the current bottom-up global macro roadmap model indicates we are about to rotation into a period of global "Deflation" (where both global growth and inflation are decelerating simultaneously) as we proceed through 2023. This suggests potential weakness in equities/strength in bonds could be expected into 2023.
Growth Reflation Inflation Deflation
(Weekly update as of 19 May 2023. Source: 42 Macro)
(Weekly update as of 19 May 2023. Source: 42 Macro)
Full Global Data-set
Zoomed-in Global Data-set
Conditional Probabilities of Regime Occurrence
Asset Class Over/Under Performance Per Quadrant
(20-year backtest using Bloomberg data)
Weekly Global Macro Review
U.S. Equities
The major US benchmarks ended mixed as investors watched carefully for signs of progress in negotiations over raising the federal debt ceiling. The technology-heavy Nasdaq Composite outperformed and ended the week up 23.97% for the year-to-date period—a stark contrast to the 0.16% decline of the narrowly focused Dow Jones Industrial Average over the period. Similarly, the Russell 1000 Growth Index ended up 20.75% over the period, while the Russell 1000 Value Index—heavily weighted in the struggling financials sector—was down 1.64%. Markets were scheduled to be closed on Monday, May 29, in observance of Memorial Day.
The major US benchmarks ended mixed as investors watched carefully for signs of progress in negotiations over raising the federal debt ceiling. The technology-heavy Nasdaq Composite outperformed and ended the week up 23.97% for the year-to-date period—a stark contrast to the 0.16% decline of the narrowly focused Dow Jones Industrial Average over the period. Similarly, the Russell 1000 Growth Index ended up 20.75% over the period, while the Russell 1000 Value Index—heavily weighted in the struggling financials sector—was down 1.64%. Markets were scheduled to be closed on Monday, May 29, in observance of Memorial Day.
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S&P 500:
DJIA: NASDAQ 100: S&P 400 Mid-cap: Russell 2000 Small Cap: |
+0.3%
-1.0% +3.6% -0.5% +0.0% |
Relatedly, alongside the debt ceiling negotiations, the signal event in the week may have been Thursday’s 24% jump in the shares in chipmaker NVIDIA, which took the company’s market capitalization to roughly USD 963 billion by the end of the week and made it the sixth most highly valued public company in the world. Shares rose after the company beat consensus first-quarter earnings expectations by a wide margin and raised its profit outlook. The large move in such a heavily weighted stock reverberated throughout the major benchmarks and was among the most remarkable sessions witnessed in the last 25 years.
Debt ceiling negotiations resumed after President Joe Biden returned from Japan at the start of the week, but markets headed downward as signs emerged that little progress was being made. The S&P 500 Index fell 1.1% on Tuesday, its biggest drop since the start of the month, following reports that some Republicans in the House of Representatives were questioning the urgency of the deadline set by U.S. Treasury Secretary Janet Yellen for when the government would become unable to meet its obligations—the so-called x-date. On Thursday, the Federal Reserve released revised data showing that the Treasury’s General Account had dwindled to USD 49.5 billion by Wednesday—USD 18.9 billion less than a week before and USD 752.2 billion below its level a year ago.
Signs of renewed momentum in the talks seemed to spur a market rally on Friday, however. The Wall Street Journal reported that the two sides were nearing a two-year spending deal that also extended the debt ceiling over the same period. Republican House Speaker Kevin McCarthy also told reporters that his White House counterparts were being “very professional, very knowledgeable.”
Friday’s gains may have been capped by some discouraging inflation data. The core (less food and energy) personal consumption expenditures (PCE) price index, considered the Federal Reserve’s preferred inflation gauge, rose by 0.4% in April, a tick above expectations. On a year-over-year basis, the index rose by a notch to 4.7%, indicating no progress in bringing inflation down since the start of the year. Meanwhile, the Commerce Department reported that personal spending had jumped 0.8% in April, roughly double consensus expectations and supported by increases in spending on both goods and services.
US Bonds
The signs of a resilient consumer and persistent inflation pressures led to a jump in short-term U.S. Treasury yields, with the yield on the two-year note hitting its highest level in over two months. Reflecting debt ceiling worries, the yield on the one-month Treasury bill hit 6.02% at the end of the week, its highest level since its introduction in 2001.
The high yield market saw lower-than-average volumes throughout the week. Commercial mortgage-backed securities outperformed other types of credit, Treasuries, and the broad U.S. high-grade aggregate index.
Debt ceiling negotiations resumed after President Joe Biden returned from Japan at the start of the week, but markets headed downward as signs emerged that little progress was being made. The S&P 500 Index fell 1.1% on Tuesday, its biggest drop since the start of the month, following reports that some Republicans in the House of Representatives were questioning the urgency of the deadline set by U.S. Treasury Secretary Janet Yellen for when the government would become unable to meet its obligations—the so-called x-date. On Thursday, the Federal Reserve released revised data showing that the Treasury’s General Account had dwindled to USD 49.5 billion by Wednesday—USD 18.9 billion less than a week before and USD 752.2 billion below its level a year ago.
Signs of renewed momentum in the talks seemed to spur a market rally on Friday, however. The Wall Street Journal reported that the two sides were nearing a two-year spending deal that also extended the debt ceiling over the same period. Republican House Speaker Kevin McCarthy also told reporters that his White House counterparts were being “very professional, very knowledgeable.”
Friday’s gains may have been capped by some discouraging inflation data. The core (less food and energy) personal consumption expenditures (PCE) price index, considered the Federal Reserve’s preferred inflation gauge, rose by 0.4% in April, a tick above expectations. On a year-over-year basis, the index rose by a notch to 4.7%, indicating no progress in bringing inflation down since the start of the year. Meanwhile, the Commerce Department reported that personal spending had jumped 0.8% in April, roughly double consensus expectations and supported by increases in spending on both goods and services.
US Bonds
The signs of a resilient consumer and persistent inflation pressures led to a jump in short-term U.S. Treasury yields, with the yield on the two-year note hitting its highest level in over two months. Reflecting debt ceiling worries, the yield on the one-month Treasury bill hit 6.02% at the end of the week, its highest level since its introduction in 2001.
The high yield market saw lower-than-average volumes throughout the week. Commercial mortgage-backed securities outperformed other types of credit, Treasuries, and the broad U.S. high-grade aggregate index.
Europe/UK Equities
Shares in Europe fell on signs that the economic outlook may be worsening and continued uncertainty over U.S. debt ceiling talks. In local currency terms, the pan-European STOXX Europe 600 Index slid -1.6%.
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German DAX:
French CAC: Italian MIB: Spanish IBEX: U.K. FTSE 100: |
-1.8%
-2.3% -2.9% -0.7% -1.7% |
The German economy lapsed into recession in the first quarter, according to official figures. Gross domestic product shrank 0.3% in the three months through March, a downward revision from an early estimate of zero growth that reflected a sizable drop in household consumption. Germany’s economy contracted 0.5% in the final three months of last year. Meanwhile, German companies became more uncertain about the year ahead, with the Ifo Institute’s business confidence index falling in May for the first time in seven months.
A survey of purchasing managers compiled by S&P Global showed that business output in the Eurozone grew for the fifth month running in May, although the pace slackened somewhat as weakness in manufacturing offset another strong month of services activity. Optimism about the economic outlook slipped further from February’s 12-month high amid increasing concern about weaker customer demand and higher interest rates.
European Central Bank (ECB) policymakers echoed ECB President Christine Lagarde’s view that interest rates would need to rise further and stay high to curb inflation in the medium term. Bank of Spain Governor Pablo Hernandez de Cos said policy tightening still had “some way to go” and that “interest rates will have to remain in restrictive territory for an extended period of time to achieve our objective in a sustained manner over time.” Banque de France Governor Francois Villeroy de Galhau said: “I expect today that we will be at the terminal rate not later than by summer.”
Inflation slowed in April to an annual rate of 8.7% from 10.1% in March, as the surge in energy prices that occurred last year fell out of the annual comparison. However, core inflation, which excludes volatile energy, food, alcohol, and tobacco prices, rose to a 21-year high of 6.8% from 6.2%. The result fueled market expectations for a 13th consecutive interest rate hike in June.
The International Monetary Fund (IMF) revised its forecast for the UK economy, predicting that resilient demand and falling energy costs would help it to grow 0.4%. Its projection from April had called for UK gross domestic product to shrink 0.3%.
Euro/UK Bonds
European government bond yields broadly climbed on concern that central bank policymakers would extend their policy tightening to cope with persistent inflationary pressures. The yield on the benchmark 10-year German government bond settled above 2.5%. Spain’s and Italy’s sovereign bond yields also rose. In the UK, robust core inflation data fueled a broad sell-off in the bond markets, with the yield on the benchmark 10-year UK government bond heading toward 4.3%.
A survey of purchasing managers compiled by S&P Global showed that business output in the Eurozone grew for the fifth month running in May, although the pace slackened somewhat as weakness in manufacturing offset another strong month of services activity. Optimism about the economic outlook slipped further from February’s 12-month high amid increasing concern about weaker customer demand and higher interest rates.
European Central Bank (ECB) policymakers echoed ECB President Christine Lagarde’s view that interest rates would need to rise further and stay high to curb inflation in the medium term. Bank of Spain Governor Pablo Hernandez de Cos said policy tightening still had “some way to go” and that “interest rates will have to remain in restrictive territory for an extended period of time to achieve our objective in a sustained manner over time.” Banque de France Governor Francois Villeroy de Galhau said: “I expect today that we will be at the terminal rate not later than by summer.”
Inflation slowed in April to an annual rate of 8.7% from 10.1% in March, as the surge in energy prices that occurred last year fell out of the annual comparison. However, core inflation, which excludes volatile energy, food, alcohol, and tobacco prices, rose to a 21-year high of 6.8% from 6.2%. The result fueled market expectations for a 13th consecutive interest rate hike in June.
The International Monetary Fund (IMF) revised its forecast for the UK economy, predicting that resilient demand and falling energy costs would help it to grow 0.4%. Its projection from April had called for UK gross domestic product to shrink 0.3%.
Euro/UK Bonds
European government bond yields broadly climbed on concern that central bank policymakers would extend their policy tightening to cope with persistent inflationary pressures. The yield on the benchmark 10-year German government bond settled above 2.5%. Spain’s and Italy’s sovereign bond yields also rose. In the UK, robust core inflation data fueled a broad sell-off in the bond markets, with the yield on the benchmark 10-year UK government bond heading toward 4.3%.
Japan
The Nikkei 225 benchmark touched a 33-year high early in the week before finishing just below the 31,000 mark. Upbeat economic data and encouraging signals regarding the U.S. debt ceiling helped propel the Nikkei 225 to its highest close since July 1990. The broader TOPIX index finished the period slightly lower.
Japanese manufacturing activity expanded for the first time in seven months in May. The services sector also reported robust growth, as the return of domestic and international tourism fueled a record rise in business activity. In the afterglow of such strong purchasing managers’ index (PMI) numbers, investors shrugged off data showing that Japan’s core machinery orders fell for a second straight month in March.
Hawkish comments from the Fed during the week added to speculation that U.S. rates will remain higher for longer. Meanwhile, Governor Kazuo Ueda reconfirmed the Bank of Japan’s ultra-loose monetary policy stance until inflation sustainably hits its 2% target. These divergent paths pushed the U.S. dollar to a six-month peak against the Japanese currency, trading in the higher JPY 139 range by Friday’s close.
Japanese sovereign bond yields drifted higher for most of the week but were limited by the knowledge that the central bank has no imminent plans to tweak its yield curve control policy. Benchmark yields did spike noticeably on Friday, moving above 0.45% on news that U.S. lawmakers were getting closer to an agreement to raise the debt ceiling. By Friday’s close, 10-year government bond yields had settled around 0.41%.
China
Chinese stocks fell after a batch of disappointing indicators in recent weeks pointed to a flagging economic recovery. The benchmark CSI 300 Index fell -2.4%, its biggest weekly drop since the five days ended March 10 and erasing all its gains this year, according to Bloomberg. In Hong Kong, the benchmark Hang Seng Index fell below the psychologically key 19,000-point level to its lowest close since December in a holiday-shortened trading week.
No major indicators or policy measures were released in China during the week. But mounting evidence that the country’s post-pandemic recovery is losing momentum has raised concerns about the economic outlook. Most recently, industrial output, retail sales, and fixed asset investment all grew at a weaker-than-expected pace in April, while weak credit growth indicators also pointed to sluggish domestic demand.
Chinese banks kept their one- and five-year loan prime rates steady for the ninth straight month, as expected, after the People’s Bank of China (PBOC) left its one-year policy loan rate unchanged earlier in May. However, speculation is growing that the central bank will ease policy to shore up the economy. The yield on China’s 10-year government bond dropped to a six-month low of 2.70% last week, according to Bloomberg, as traders increased their bets on monetary easing by the PBOC in the near term.
Geopolitical risks also dampened risk appetite after Beijing said it would ban Chinese companies from buying products from Micron Technology, citing security risks it uncovered in a review of the U.S. chipmaker’s products. The ban announced on May 21 applies to domestic telecom firms, state-owned banks, and other companies behind China’s information infrastructure. The Chinese ban on Micron was seen as China’s most significant retaliation to date in response to U.S. controls on certain technology exports.
Weekly Performance
U.S. Indices
Dow -0.3% to 33,093. S&P 500 +0.3% to 4,205. Nasdaq +2.5% to 12,976. Russell 2000 flat at 1,773. CBOE Volatility Index +6.8% to 17.95.
S&P 500 Sectors
Consumer Staples -3.2%. Utilities -2.4%. Financials -1.5%. Telecom +1.2%. Healthcare -2.9%. Industrials -1.4%. Information Technology +5.1%. Materials -3.1%. Energy -1.1%. Consumer Discretionary +0.4%. Real Estate -1.4%.
World Indices
London -1.7% to 7,627. France -2.3% to 7,319. Germany -1.8% to 15,984. Japan +0.4% to 30,916. China -2.2% to 3,213. Hong Kong -3.6% to 18,747. India +1.3% to 62,502.
Commodities and Bonds
Crude Oil WTI +1.8% to $72.87/bbl. Gold -1.8% to $1,946.1/oz. Natural Gas -10.7% to 2.418. Ten-Year Bond Yield -0.2 bps to 3.795.
Forex and Cryptos
EUR/USD -0.69%. USD/JPY +1.92%. GBP/USD -0.76%. Bitcoin -1.6%. Litecoin -5.7%. Ethereum +0.5%. XRP -0.2%.
Dow -0.3% to 33,093. S&P 500 +0.3% to 4,205. Nasdaq +2.5% to 12,976. Russell 2000 flat at 1,773. CBOE Volatility Index +6.8% to 17.95.
S&P 500 Sectors
Consumer Staples -3.2%. Utilities -2.4%. Financials -1.5%. Telecom +1.2%. Healthcare -2.9%. Industrials -1.4%. Information Technology +5.1%. Materials -3.1%. Energy -1.1%. Consumer Discretionary +0.4%. Real Estate -1.4%.
World Indices
London -1.7% to 7,627. France -2.3% to 7,319. Germany -1.8% to 15,984. Japan +0.4% to 30,916. China -2.2% to 3,213. Hong Kong -3.6% to 18,747. India +1.3% to 62,502.
Commodities and Bonds
Crude Oil WTI +1.8% to $72.87/bbl. Gold -1.8% to $1,946.1/oz. Natural Gas -10.7% to 2.418. Ten-Year Bond Yield -0.2 bps to 3.795.
Forex and Cryptos
EUR/USD -0.69%. USD/JPY +1.92%. GBP/USD -0.76%. Bitcoin -1.6%. Litecoin -5.7%. Ethereum +0.5%. XRP -0.2%.
Covid-19 Weekly Statistics (28 May 2023)
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Global Recorded Cases
689,433,946 Previous
688,961,970 1-Week Change
+471,976 1 Week Rate-of-Change +0.07 (Prev Week +0.10%) |
Global Active Cases
20,660,811 Previous
20,738,271 1-Week Change
-77,460 1 Week Rate-of-Change -0.37 (Prev Week +0.20%) |
Global Recovered
661,889,358 Previous
661,343,722 1-Weekly Change
+545,636 Current Recovery Rate 98.97% (Prev Week 98.97%) |
Global Deceased
6,883,777 Previous
6,879,977 1-Weekly Change
+3,800 Current Mortality Rate 1.03% (Prev Week 1.03%) |
Weekly Trend Summary
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Global Recorded Cases
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Global Active Cases
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Global Covid Survivability Rate
Trend Steady |
Commentary
The total number of Global Recorded Cases since the pandemic began crossed 689 million this week with an additional +471,976 (+0.07%) new Covid cases recorded globally over the past week.
Global Daily New Confirmed Cases (7-Day moving average)
The total number of Global Recorded New Active Cases currently stands at 20,660,811 active cases. There was a decrease of -77,460 global active cases (-0.37%) over the past week.
2023 Regional Daily New Confirmed Cases (7-day moving average)
The Oceania region current leads with the highest number of daily new confirmed cases per million population over the past week. However, all regions remain well below their latest peaks and are in steady trends this past week.
Global Daily New Confirmed Deaths (7-Day Moving Average)
The global Covid mortality rate (chance of dying from contracting Covid) peaked 08 April 2020 @ 21.25%. It has since fallen in a steady manner to its most recent lows @ 1.03% mortality rate this past week. We have noted a significant reduction in mortality rates since Covid Omicron became the dominant strain (a very encouraging development).
The current mortality rate remains higher than initial estimates indicated the mortality rate from Covid-19 would be (< 1.0% was the expected Covid mortality rate and for comparison it is estimated the mortality rate from global seasonal flu is 0.1% to 0.5%).
The current mortality rate remains higher than initial estimates indicated the mortality rate from Covid-19 would be (< 1.0% was the expected Covid mortality rate and for comparison it is estimated the mortality rate from global seasonal flu is 0.1% to 0.5%).
2023 Regional Daily New Confirmed Deaths Per Capita (7-day moving average)
Europe leads in terms of number of daily new confirmed deaths per million population over the past week. All global regions remain below their worst death rates due to a combination of reduced COVID-Omicron lethality, vaccinations and improved treatment protocols.
Top 10 Countries with the largest number of Covid Cases in the last 7-days
Top 10 Countries with the largest number of Covid Cases per 1M Population in the last 7-days
WEEKLY ASSET CLASS MONITOR
(week ending 26 May 2023)
(week ending 26 May 2023)
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Asset Class
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Region
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ETF Ticker
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Weekly
Return |
Year-to-Date
Return |
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Equities
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World
U.S. Europe Asia Pacific Emerging Market |
VT
VTI VGK VPL VWO |
-0.49%
+0.32% -2.32% -1.27% -0.10% |
+8.59%
+9.42% +11.36% +6.75% +2.31% |
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Bonds
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U.S. Bonds
International Bonds |
BND
BNDX |
-0.48%
-0.39% |
+1.64%
+2.56% |
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Real Estate Equities
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U.S. Real Estate
International Real Estate |
VNQ
VNQI |
-1.37%
-1.97% |
-2.89%
-3.87% |
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Precious Metals Equities
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Global Gold Miners
Global Junior Gold Miners |
RING
GDXJ |
-5.40%
-5.17% |
+5.15%
+1.88% |
GLOBAL EQUITY MARKET MONITOR
The past 3 years have been very challenging for global equities. They had a wicked roller-coaster ride in 2020 on the back of the Covid pandemic where they peaked on 12 Feb 2020 and fell dramatically (-34%) into their 23 Mar lows. They then rebounded and regained their losses by year-end.
For most of 2021 they remained largely in a "holding pattern" digesting their gains but declined considerably throughout 2022 before bottoming in October. Key support levels for all regions remains the Feb, 2020 pre-covid closing highs (blue solid line on the below charts).
The strongest regional area remains Europe but all regions remain below late 2021 peaks on the back of the Russian invasion of Ukraine and subsequent rapid rise in global inflation. A break above the respective Feb/23 highs (green dotted lines on each region) would be a very encouraging sign the bear market may have likely concluded.
For most of 2021 they remained largely in a "holding pattern" digesting their gains but declined considerably throughout 2022 before bottoming in October. Key support levels for all regions remains the Feb, 2020 pre-covid closing highs (blue solid line on the below charts).
The strongest regional area remains Europe but all regions remain below late 2021 peaks on the back of the Russian invasion of Ukraine and subsequent rapid rise in global inflation. A break above the respective Feb/23 highs (green dotted lines on each region) would be a very encouraging sign the bear market may have likely concluded.
Global Recession Probability Indicator
(High Risk)
(High Risk)
Below we show the latest Ned Davis Research Global Recession Probability model which measures a composite of leading indicators across 35 countries (weighing a number of economic indicators such as money supply, yield curve, building permits, consumer and business sentiment, share prices, and manufacturing production). The model uses a logistic regression method incorporating both the overall composite of leading indicators level and trend data of all 35 countries to predict the likelihood of a global recession. A score above 70 indicates high recession risks while a score below 30 means low risks.
As can be seen, the model registered a "high recession risk" warning (model crossing > 70) in Feb 2022. It is interesting to note that when the recession probability model has peaked and begun to decline (as currently appears to be the case), Global equities tend to perform quite well with an annualized return of +19.06% (far right statistics on the below chart).
As can be seen, the model registered a "high recession risk" warning (model crossing > 70) in Feb 2022. It is interesting to note that when the recession probability model has peaked and begun to decline (as currently appears to be the case), Global equities tend to perform quite well with an annualized return of +19.06% (far right statistics on the below chart).
Asset Class Return Monitor
(for week ending 26 May 2023)
(for week ending 26 May 2023)
Equities Legend:
Bonds Legend:
Currencies Legend:
Commodities Legend:
- Vanguard Total World Stock ETF (VT): (Cyan)
- Vanguard Total U.S. Stock Market ETF (VTI): (Red)
- Vanguard FTSE Europe ETF (VGK): (Lime Green)
- Vanguard FTSE Asia Pacific ETF (VPL): (Dark Blue)
- Vanguard FTSE Emerging Markets ETF (VWO): (Pink)
Bonds Legend:
- Vanguard Total U.S. Bond Market ETF (BND): (Black)
- Vanguard Total International ex-U.S. Bond ETF (BNDX): (Green)
Currencies Legend:
- U.S. Dollar Index (Cash Settlement EOD) ($USD): (Orange)
- Euro (Philadelphia Index) ($XEU): (Maroon)
Commodities Legend:
- PowerShares DB Commodity Index Tracking Fund (DBC): (Purple)
- SPDR Gold ETF (GLD): (Sky Blue)
Past Week Asset Class returns
- Over the past week global equities (as measured by the Vanguard Total World Stock ETF (shown in CYAN) lost -0.49%.
- US markets were the top performing equity region this past week with European markets lagging.
- U.S. bonds (Black) and International bonds (Green) were lower on the week.
- Commodities were higher on the week with the U.S. Dollar index up +1.03%.
Year-to-Date (2023) Asset Class returns
- In 2023 global equities (as measured by the Vanguard Total World Stock ETF shown in CYAN) have gained +8.59%.
- European market equities are the top performing equity region in 2022 with Emerging markets lagging.
- Bonds have had positive returns thus far in 2023 with U.S. bonds (Black) under-performing International Bonds (Green).
- The US Dollar index has gained +0.84% year-to-date.
The stock market is driven by a combination of corporate profits, trends, economic data, fund flows, expectations, greed, fear, opinions, analysis, geopolitical events and human nature. These variables are often in conflict with one another (especially in the short run) and form a sine-wave cycle of investor psychology which begins with optimism, peaks with euphoria, bottoms with despair and returns to optimism.
It must be reemphasized a complete market cycles is composed of 2 distinct cycles/phases: a "bull 1/2 cycle" and a "bear 1/2 cycle". We now have transitioned into the Bear-market 1/2 cycle as of 03 January 2022.
The Math of Losses
- a 20% loss requires a 25% gain to return to breakeven
- a 30% loss requires a 43% gain to return to breakeven
- a 40% loss requires a 67% gain to return to breakeven
- a 50% loss requires a 100% gain to return to breakeven
- a 60% loss requires a 150% gain to return to breakeven
This is why it is so important to not let losses continue in the face of a bear market decline and why we advocate phased movements into cash as our 5-factor model reverts towards Red. The below graphic represents how we move within equity markets through a complete sine-wave market cycle:
World Regional Equity Monitor
We use the following U.S. exchange traded funds to monitor equity performance for the various world regions:
- World Equities: Vanguard Total World ETF (Cyan)
- U.S. Equity: Vanguard Total Market ETF (Red)
- European Equity: Vanguard FTSE Europe ETF: (Lime Green)
- Japan Equity: iShares Japan ETF (Black)
- Asia Pacific ex-Japan Equity: iShares MSCI Asia Pacific ex-Japan ETF (Blue)
- 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 monitored regions.
- The strongest equity regions over the past 12 month have been European/Japan/US markets with Asia Pacific/Emerging market equities lagging.
- Overall world equity performance (as measured by the Vanguard Total World ETF) have returned +3.54% (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 Japan markets with Asia Pacific ex-Japan markets the weakest.
- Positive equity returns have been evident over the past quarter (3 months) in most monitored regions.
1 Month Rolling Regional Equity Performance
- Over the past 1 month rolling period the strongest performing world equity region has been US markets with European markets the weakest.
- Mixed equity returns have been achieved over the past month for monitored regions.
Past Week Regional Equity Performance
- Over the past week the major global equities were mixed with US markets outperforming other regions.
Latest Global Equity "Big Picture"
World equity market returns are monitored via the following index and ETF equity charts:
- Dow Jones Global Market Index (cap-weighted)
- Value Line Geometric U.S. Index (equal-weighted)
- Global Dow Index (equal-weighted)
- MSCI ACWI ETF (cap-weighted)
Dow Jones Global Market Index
(market cap weighted index)
For the week the Dow Jones Global Index had a loss of -0.64%. As can be seen on the chart above, price remains above the 52 week moving average (green line) and below resistance @ 492-511. Support zone is currently @ 444-447 (the pre-covid peak in Feb 2020).
Value Line Geometric Index and Global Dow Index
(equal weighted indexes)
The Value Line Geometric Index ($XVG) is the median price performance of 1700 U.S. companies equal weighted (as opposed to most indexes which are market cap weighted) into an index. The Global Dow index ($GDOW) is a measure of the top 150 international companies equal weighted within the index.
These indexes are important as they equal-weight the price performance of all the companies held within the respective index. This removes the distortions associated with a small group of highly valued companies (which may be performing well) masking the performance of struggling companies and represents a good overview of overall internal equity breadth/strength.
These indexes are important as they equal-weight the price performance of all the companies held within the respective index. This removes the distortions associated with a small group of highly valued companies (which may be performing well) masking the performance of struggling companies and represents a good overview of overall internal equity breadth/strength.
Value Line Geometric Index ($XVG) Weekly
Global Dow Index ($GDOW) Weekly
iShares MSCI ACWI ETF
(market cap weighted ETF)
The iShares MSCI ACWI (All Country World Index) ETF is used as a benchmark to compare the performance of the various broad-based equity funds available in the Emirates Group Provident Scheme (EGPS) A/B/C accounts. It serves as a benchmark to determine how equity markets are performing on a worldwide basis. This assists in determining 2 parameters; whether to be invested in equities and also which funds within the EGPS offer the best performance relative to the benchmark.
The ETF is composed of the following regional components/weightings:
The ETF is composed of the following regional components/weightings:
ACWI Monthly Chart
Global equity markets peaked in Nov 2021 and declined through to Oct 2022. Price closed Apr 2023 above the range for the 1st time since Apr, 2022.
For the month of May ACWI has gained +0.08%. It closed the month of April above the 12 month simple moving average (blue moving average on the chart above) keeping the long term trend BULLISH until month end.
For the month of May ACWI has gained +0.08%. It closed the month of April above the 12 month simple moving average (blue moving average on the chart above) keeping the long term trend BULLISH until month end.
ACWI Weekly Chart
This past week ACWI lost -0.33%. It had remained rangebound within a wide 16% trading range (red box on the above chart) since April 2022 but closed fractionally above support this past week.
Price remains above the 30 week simple moving average (shown in GREEN) and above support @ 91.00. Weekly closing resistance is now 97.85.
Price remains above the 30 week simple moving average (shown in GREEN) and above support @ 91.00. Weekly closing resistance is now 97.85.
World Equity Market Regional Relative Rotation Graphs
Below is a graph of 24 major regional equity market ETF's + ACWI (our world equity benchmark) shown on a Relative Rotation chart measured weekly with a 10 week look-back period (which forms the "tail" of the ETF). This graph allows us to observe over time how various regional ETF's are moving relative to both each other and also relative to cash.
- Leading (Green): (Momentum Positive + Price Relative Strength Positive)
- Weakening (Yellow): (Momentum Negative + Price Relative Strength Positive)
- Lagging (Red): (Momentum Negative + Price Relative Strength Negative)
- Improving (Blue): (Momentum Positive + Price Relative Strength Negative)
Given the cyclical nature of momentum and price within equity markets, in general the RRG charts will cycle in a clockwise manner (though not necessarily will each pass through all 4 quadrants as it is possible to rotate through an adjacent quadrant only).
Weekly Regional (Country) Relative Rotation Graphs (long term)
The RRG trend analysis status is currently neutral for world equities:
- ACWI Weekly Quadrant: "WEAKENING" Quadrant
- 24 Country Net Score: NEGATIVE
- ACWI price Relative Strength (horizontal axis): POSITIVE
- ACWI price Momentum (vertical axis): NEGATIVE
Coincident Equity Market Indicators
Crude Oil
Crude oil was higher over the past week. Firm (but not excessive) crude oil prices typically point to increasing demand on the back of world economic growth improvement. Its recent break back into the trading range has changed the bias to equity neutral.
Gold
Gold was lower over the past week and closed above support @ 1886-1905. Gold acts as a "safe haven" and the the recent range is equity neutral.
Commodities
Commodities were lower over the past week. They remain above pre-Covid levels but are well off their peak seen in mid-2022. The recent range breakdown has shifted commodities to equity neutral.
U.S. 30 Year Treasury Bond
U.S. 30 year bond prices were lower on the week. Rising bond prices typically indicate a "flight to safety" trade and historically have a negative correlation to equities. However, currently global inflation has reversed the correlation (stocks/bonds now positively correlated) and the current bond downtrend remains equity bearish.
Current 5-Factor Model Indications
The combined 5-Factor quantitative model is currently YELLOW (neutral). This indicates an elevated level of risk at present. The 5-Factor model currently has the following sub-model readings:
Economic Model
The Economic model is currently YELLOW. The 1-year rate-of-change in global economic data had moved towards contraction but has stabilized over the past several weeks. The model is composed of numerous inputs including data from the following sources:
Forward Forecast Data:
Current Data:
Forward Forecast Data:
- OECD Composite Leading Indicators (CLI)
- BlackRock Macro GPS Growth/Inflation forecast monitor
Current Data:
- J.P. Morgan Global Purchasing Managers (PMI) Index
- World Bank Monthly Global Economic Report
OECD Composite Leading Indicators
(30 April 2023)
The OECD Composite Leading Indicator (CLI) is designed to predict business cycle changes 6-9 months in advance. It provides early signals of turning points in business cycles showing fluctuation of the economic activity around its long term potential level.
Long-Term View (G-20 Total)
Zoomed-In View (G-20 Total)
Below is our latest heat-map of the Composite Leading Indicators for various monitored regions.
- Red/Green numbers indicates above/below average future projected economic growth.
- Red/Green boxes indicates CLI rate of change month/month and year/year.
Click to set custom HTML
J.P. Morgan Global Composite Purchasing Managers Index (PMI)
(05 May 2023)
(05 May 2023)
The Global Composite PMI Report is based on the results of manufacturing and service sector surveys covering over 18,000 purchasing executives in over 40 countries. Together these countries account for an estimated 89% of global gross domestic product (GDP).
Questions are asked about real events and are not opinion based. Data are presented in the form of diffusion indices, where an index reading above 50.0 indicates an increase in the variable since the previous month and below 50.0 a decrease. As such, using the PMI data gives us a real-time look at global growth.
Questions are asked about real events and are not opinion based. Data are presented in the form of diffusion indices, where an index reading above 50.0 indicates an increase in the variable since the previous month and below 50.0 a decrease. As such, using the PMI data gives us a real-time look at global growth.
- readings > 50 indicating economic expansion
- readings < 50 indicate economic contraction.
Latest Key Findings:
05 May 2023: "The start of the second quarter saw a further acceleration in the rate of global economic expansion. Growth of output and new orders hit their highest levels since December 2021 and March 2022 respectively, as job creation and business optimism also strengthened. The upturn in output was again heavily skewed towards the service sector, as conditions remained sluggish in manufacturing.
The J.P.Morgan Global Composite Output Index – produced by J.P.Morgan and S&P Global in association with ISM and IFPSM – rose to 54.2 in April, up from 53.4 in March. The headline index has remained above the neutral 50.0 mark –signalling expansion – in each of the past three months.
Services activity rose at the quickest pace since November 2021, as growth of new business picked up to a 13-month high. Activity increased at faster rates in the business, consumer and financial service sectors, with all three also seeing gains in new business.
The upturn was relatively subdued in manufacturing, however. Production expanded for the third successive month, but the pace of increase remained only mild. Growth in the consumer and investment goods industries was offset by a downturn in the intermediate goods category.
Higher manufacturing output reflected improving supply chains and companies working through backlogs. However, weaker intakes of new work raised the likelihood of manufacturing growth staying soft in the coming months.
All of the 14 nations for which April composite PMI data were available registered an expansion of combined manufacturing and service sector output, the first time concurrent growth has been recorded since June 2022.
India, Spain and Italy topped the growth league table. The three largest national economies covered (the US, China and Japan) all performed below the global average."
- Global Composite Output Index at 16-month high of 54.2
- Service sector remains prime growth engine
- Job creation strengthens
05 May 2023: "The start of the second quarter saw a further acceleration in the rate of global economic expansion. Growth of output and new orders hit their highest levels since December 2021 and March 2022 respectively, as job creation and business optimism also strengthened. The upturn in output was again heavily skewed towards the service sector, as conditions remained sluggish in manufacturing.
The J.P.Morgan Global Composite Output Index – produced by J.P.Morgan and S&P Global in association with ISM and IFPSM – rose to 54.2 in April, up from 53.4 in March. The headline index has remained above the neutral 50.0 mark –signalling expansion – in each of the past three months.
Services activity rose at the quickest pace since November 2021, as growth of new business picked up to a 13-month high. Activity increased at faster rates in the business, consumer and financial service sectors, with all three also seeing gains in new business.
The upturn was relatively subdued in manufacturing, however. Production expanded for the third successive month, but the pace of increase remained only mild. Growth in the consumer and investment goods industries was offset by a downturn in the intermediate goods category.
Higher manufacturing output reflected improving supply chains and companies working through backlogs. However, weaker intakes of new work raised the likelihood of manufacturing growth staying soft in the coming months.
All of the 14 nations for which April composite PMI data were available registered an expansion of combined manufacturing and service sector output, the first time concurrent growth has been recorded since June 2022.
India, Spain and Italy topped the growth league table. The three largest national economies covered (the US, China and Japan) all performed below the global average."
Global Composite Output Index vs. Global GDP
There tends to be a reasonably tight correlation between the Global Composite Output Index and subsequent global GDP. The current Composite Output Index implies a forward global GDP reading approaching 4.0%.
Below is our PMI monitor for selected regions/countries.
- numerical values > 50 (GREEN) indicate economic expansion in progress.
- numerical values < 50 (RED) indicating economic contraction in progress.
- trend box GREEN indicates improvement over the past month with RED indicating a decline over the previous month.
The latest data points to a possible bottoming of the global growth decline in Jan/23. The Global Composite Index has moved to expansion (reading above 50). This is an encouraging sign after the past year of continued continued global economic contraction but we would like to see global manufacturing return to expansion.
World Bank Global Monthly Outlook
(April 2023)
(April 2023)
U.S. Economic Growth & Inflation
Year-over-Year GDP growth
The US economic growth accelerated to 1.6 percent year-on-year during the first quarter of 2023, up from 0.9 percent in the previous period, and in line with the second estimate. Consumer spending rose at a faster pace (2.3 percent vs 1.7 percent in Q4), despite the stubbornly high inflation, due to a rebound in goods purchases (0.8 percent vs -0.8 percent) and a solid increase in services consumption (3.1 percent vs 3 percent). In addition, public spending increased 2.7 percent and net external demand contributed positively to the GDP as exports rose and imports fell. Meanwhile, nonresidential fixed investment growth slowed to 2.9 percent (vs 4.5 percent in Q4) and residential fixed investment tumbled 19.3 percent, a sixth period of contraction, as rising borrowing costs continued to hurt the housing market.
Quarter-over-Quarter GDP growth
The US economy grew by an annualized 1.3% on quarter in Q1 2023, slightly higher than 1.1% in the advance estimate and market forecasts of 1.1%. Private inventory investment subtracted 2.1 pp from the GDP, slightly less than a 2.3 pp drag in the advance estimate. Also, consumer spending growth accelerated more than expected to 3.8% (vs 3.7% in the advance estimate) despite stubbornly high inflation. Upward revisions were also seen for nonresidential fixed investment growth (1.4% vs 0.7%) and public spending (5.2% vs 4.7%). On the other hand, residential fixed investment shrank at a faster pace (-5.4% vs -4.2% in the advance estimate). Net external demand has also contributed positively to the GDP as exports rose more than imports. Despite the upward revision, Q1 2023 GDP growth remains the weakest since Q2 2022.
Annualized Inflation
The annual inflation rate in the US fell to 4.9% in April 2023, the lowest since April 2021, and below market forecasts of 5%. Food prices grew at a slower rate (7.7% vs 8.5% in March) while energy costs fell further (-5.1% vs -6.4%) including gasoline (-12.2%) and fuel oil (-20.2%). Also, shelter cost which accounts for over 30% of the total CPI basket, slowed for the first time in two years (8.1% vs 8.2%) and prices for used cars and trucks declined once again (-6.6% vs -11.6%). Compared to the previous month, the CPI rose 0.4%, much higher than 0.1% in March but matching market expectations. The shelter was the largest contributor to the monthly all-items increase, followed by used cars and trucks and gasoline.
Eurozone Economic Growth & Inflation
Year-over-Year GDP growth
The Euro Area economy expanded 1.3% year-on-year in the first quarter of 2023, slightly less than market expectations of 1.4% and below a 1.8% growth in Q4 2022.
Quarter-over-Quarter GDP growth
The Eurozone economy grew slightly by 0.1 percent in the first quarter of 2023 after a flat fourth quarter, but missed market consensus of a 0.2 percent expansion, a preliminary estimate showed. The surge in consumer prices due to the higher cost of energy and food, alongside the fastest pace of policy tightening by the European Central Bank in over 20 years and weakening confidence have taken a toll on the bloc's economy. Amongst the Eurozone's largest economies, Germany registered no growth in the first quarter, while the economies of France, Italy, and Spain did expand.
Annualized Inflation
The consumer price inflation rate in the Euro Area slightly increased to 7.0 percent in April 2023, from March's 13-month low of 6.9 percent, a preliminary estimate showed. Energy prices rebounded 2.5 percent (vs -0.9 percent in March) and the cost of services rose at a faster 5.2 percent (vs 5.1 percent in March). On the other hand, inflation slowed for food, alcohol & tobacco (13.6 percent vs 15.5 percent) and non-energy industrial goods (6.2 percent vs 6.6 percent). On a monthly basis, consumer prices rose 0.7 percent, a third straight month of increase. Meanwhile, the core index eased to 5.6 percent, but it remained close to the all-time high of 5.7 percent hit in March. This suggests that the bloc's central bank is likely to continue its efforts to combat inflation.
Japan Economic Growth & Inflation
Year-over-Year GDP growth
The Gross Domestic Product (GDP) in Japan expanded 1.30 percent in the first quarter of 2023 over the same quarter of the previous year.
Quarter-over-Quarter GDP growth
The Japanese economy grew by 0.4% qoq in Q1 of 2023 after showing no growth in Q4, exceeding market estimates of a 0.1% increase, preliminary data showed. This was the fastest pace of expansion since Q2 of 2022, with private consumption rising the most in three quarters (0.6% vs 0.2% in Q4) after tough border controls were fully lifted. Also, business investment unexpectedly increased by 0.9%, rebounding strongly from a 0.7% fall previously. Meantime, government spending stagnated for the third quarter in a row, while net trade contributed negatively as exports (-4.2% vs 2.0%) fell more than imports (-2.3% vs flat reading). The economy advanced 1.1% last year, slowing from a 2.1% rise in 2021 due to lingering global headwinds.
Annualized Inflation
The annual inflation rate in Japan rose to 3.5% in April 2023 from March's 6-month low of 3.2%, as food prices increased the most since August 1976 (8.4% vs 7.8% in March). Also, cost accelerated for transport (1.8% vs 1.6%), clothes (3.8% vs 3.6%), furniture & household utensils (10.0% vs 9.4%), medical care (1.7% vs 1.3%), and education (1.3% vs 0.9%). Meanwhile, inflation eased slightly for both housing (1.2% vs 1.3%) and miscellaneous (1.2% vs 1.3%). At the same time, prices of fuel, light, and water charges declined further (-3.8% vs -2.8%), mainly due to electricity (-9.3% vs -8.5%). Core inflation increased to a 3-month high of 3.4% in April from 3.1% in the previous two months, matching market forecasts while staying above the Bank of Japan's 2% target for the 13th month.
China Economic Growth & Inflation
Year-over-Year GDP growth
The Chinese economy advanced 4.5% yoy in Q1 of 2023, accelerating from a 2.9% growth in Q4 and topping market estimates of 4%. It was the strongest pace of expansion since Q1 of 2022, amid efforts from Beijing to spur the post-pandemic recovery. Retail sales growth was at a near 2-year high in March, industrial output rose the most in 5 months, and the surveyed jobless rate fell to its lowest in 7 months. Data released earlier showed exports from China unexpectedly rebounded in March, and the trade surplus came larger due to efforts to deepen trade with developed countries and explore new possibilities with emerging economies. However, the statistics agency mentioned in a statement that a complex global environment and insufficient domestic demand mean the foundation for the country's recovery is "not yet solid." China set a modest GDP target of around 5% for 2023. Last year, the economy added 3%, missing the government's goal of about 5.5%.
Quarter-over-Quarter GDP growth
The Chinese economy grew by 2.2 percent on a seasonally adjusted basis in the three months to March of 2023, picking up from an upwardly revised 0.6 percent growth in the fourth quarter and matching market forecasts. This was the third straight quarterly expansion, coming after Beijing lifted COVID curbs last December and eased a three-year crackdown on tech firms and property. That said, recent data showed the recovery remains uneven, with consumption, services, and infrastructure spending perking up but slowing inflation and soaring bank savings raising doubts about demand. Meantime, the central bank cut lenders' reserve requirements for the first time this year in March while Beijing pledged to launch more fiscal stimulus.
Annualized Inflation
China's annual inflation rate fell to 0.1% in April 2023 from 0.7% in the previous month, missing market estimates of 0.4%. This was the lowest print since a deflation in February 2021 amid an uneven economic recovery after the removal of a zero-COVID policy, with prices of both food and non-food easing further. Food inflation dropped to a 13-month low (0.4% vs 2.4% in March), due to a notable slowdown in prices of pork and a steeper drop in cost of fresh vegetables. Also, non-food prices continued to ease (0.1% vs 0.3%), owing to further falls in prices of transport (-3.3% vs -1.9%) and housing (-0.3% vs -0.2%). By contrast, inflation was unchanged for health (at 1.0%) while cost quickened for education (1.9% vs 1.4%). Core consumer prices, excluding the volatile prices of food and energy, went up 0.7% yoy, the same pace as in March. On a monthly basis, consumer prices unexpectedly dropped 0.1%, the third straight month of fall, missing estimates of a flat reading.
Valuation Model
The Valuation model is currently YELLOW. Equity valuations are currently near the upper region of "fair value" relative to underlying current global economic fundamentals. Distortions associated with the global Covid shutdown and subsequent reopening continue to cloud the valuation model.
Technical Model
The Technical model is currently YELLOW. Global equity markets have been in a trending advance since Oct 2022.
Sentiment Model
The Sentiment model is currently YELLOW. Overall sentiment has turned neutral (sentiment acts as an inverse shorter-term trading indicator).
Liquidity/Economic Stress Model
The Liquidity/Economic Stress model is currently YELLOW. Unprecedented global central bank liquidity injections to combat the Covid shutdowns have begun to be reversed.
World Bond Asset Class Return Monitor
We use the following U.S. exchange traded funds to monitor bond performance for the various bond asset classes:
Total Market Bond Basket:
- U.S. Total Bond Market (BND): (Red)
- International (ex-U.S.) Total Bond Market (BNDX): (Blue)
- U.S. Gov't Treasury Bonds (GOVT): (Orange)
- Foreign Developed Market Gov't Treasury Bonds (BWX): (Pink)
- U.S. Corporate Bonds (LQD): (Maroon)
- International Corporate Bonds (PICB): (Black)
- U.S. High Yield Bonds (JNK): (Purple)
- International High Yield Bonds (IHY): (Green)
- U.S. Gov't Inflation Protected Bonds (TIP): (Lime Green)
- International Gov't Inflation-Protected Bonds (WIP): (Cyan)
1 Year Rolling Bond Performance
- Over the past 12 months rolling period the top performing bond asset class has been Int'l High Yield Bonds with Int'l Gov't Inflation Protected Bonds the worst performing.
- The U.S. Total Bond Market (RED) and the International (ex-U.S.) Total Bond Market (BLUE) have delivered lower returns over the past year.
3 Month Rolling Bond Performance
- Over the past 3 month rolling period the top performing bond asset class has been Int'l Corporate Bonds with Int'l High Yield Bonds lagging.
- U.S. Total Bond Market (RED) and International (ex-U.S.) Total Bond Market (BLUE) have delivered positive returns over the past quarter (3 months).
1 Month Rolling Bond Performance
- Over the past 1 month rolling period the top performing bond asset class has been U.S. High Yield Bonds 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) have delivered lower returns over the past month.
Past Week Bond Asset Class Performance
- Over the past week US Corporate Bonds were the top performing bond class with Int' Gov't Treasury Bonds lagging.
- The U.S. Total Bond Market (RED) and the International (ex-U.S.) Total Bond Market (BLUE) posted lower returns over the past week.
Commentary:
It has been shown in repeated studies over many years a balanced portfolio consisting of both equities and bonds (with percentage holdings in each adjusted according to personal risk tolerances) remains the best methodology in managing a long term retirement portfolio (due to the independent/low correlated function each takes when navigating though various market cycles and economic conditions).
It is best to think of bonds and equities as 2 independent brains each looking at the market from a different perspective:
As such, both serve a useful purpose in a well balanced portfolio.
It is best to think of bonds and equities as 2 independent brains each looking at the market from a different perspective:
- Equities: Corporate profits focused.
- Bonds: Economic growth and Inflation focused.
As such, both serve a useful purpose in a well balanced portfolio.
ETF Bond Proxies
Global aggregate bonds were lower over the past week with a loss of -0.43%. They reached their lows in mid-October and staged a strong move into December before entering the recent trading range.
The current bond bear market began 31 Dec 2020. Below is the performance of the 3 ETF's we use as "bond proxies" from that date to monitor global bond performance:
- BNDW: Vanguard Total World Bond market ETF (BLUE)
- BND: Vanguard Total U.S. Bond market ETF (GREEN)
- BNDX: Vanguard Total International (ex-U.S.) Bond market ETF (RED)
U.S. 10 year Treasury Yield
The most recent global bull market in bonds began in mid-1981 when the US Federal Reserve pushed interest rates to > 20% to combat inflation. Below is the downtrends in the various US Treasury yields from their peak (bond prices move inverse to yields so falling treasury yields are bullish for bond prices).
A weekly close above the respective trend-lines and previous peaks would be a technical breakout and define the end of the 42-year bull market in bonds.
A weekly close above the respective trend-lines and previous peaks would be a technical breakout and define the end of the 42-year bull market in bonds.
U.S. treasury yields have risen in a parabolic manner since the covid lows of July, 2020. That has led to the largest losses in government bonds in history. They have now exceeded previous highs @ 3.036%-3.248% that have remained as strong resistance since 2011.
German 10 year Bund Yield
German 10 year treasury yields bottomed in early 2020 during the depths of the European Covid shutdowns. They have rebounded strongly on inflation concerns and have now exceeded 2011 highs.
Japanese 10 year Treasury Yield
Japan has been fighting deflation for decades and only recent unprecedented monetary policy by the BOJ appears to be having some effect upon deflation (and yields).
After bottoming at near -0.28% in mid-2016, yields have risen and were able to finally break above 0.15% in early 2022. They are currently employing yield curve control (YCC) to keep rates pegged below 0.50% (increased from 0.25% in late Dec 2022). The Yen has massively declined as a result of YCC greatly increasing Japanese import prices.
After bottoming at near -0.28% in mid-2016, yields have risen and were able to finally break above 0.15% in early 2022. They are currently employing yield curve control (YCC) to keep rates pegged below 0.50% (increased from 0.25% in late Dec 2022). The Yen has massively declined as a result of YCC greatly increasing Japanese import prices.
Currencies
Below is the 12/3/1 month and weekly rolling returns for the 6 currencies that make up the U.S. Dollar index. The U.S. Dollar index is composed of a weighted geometric mean of the dollar's value relative to the 6 currencies in the following list:
In addition, we also include the following for comparison purposes:
- Euro (EUR), 57.6% weight.
- Japanese yen (JPY) 13.6% weight.
- U.K. Pound sterling (GBP), 11.9% weight.
- Canadian dollar (CAD), 9.1% weight.
- Swedish krona (SEK), 4.2% weight.
- Swiss franc (CHF) 3.6% weight.
In addition, we also include the following for comparison purposes:
- The Australian Dollar (not a part of the USD Index) as it is a popular commodity currency.
- Gold (priced in USD) as it typically acts more like a currency void of fiat printing.
1 Year Rolling Currency Performance
- Over the past 12 months rolling period the top performing major currency has been the Swiss Franc with the Japanese Yen the worst performing.
3 Month Rolling Currency Performance
- Over the past 3 month rolling period the top performing currency has been Gold with the Australian Dollar lagging.
1 Month Rolling Currency Performance
- Over the past 1 month rolling period the top performing currency has been the US Dollar Index with the Japanese Yen lagging.
Past Week Currency Performance
- Over the past week the top performing major currency was the US Dollar Index with the Swedish Krona lagging.
U.S. Dollar: (Bullish Bias)
Commentary:
The USD index up +1.03% over the past week. It had been within a steady uptrend since mid-2021 and recently reached 21 year highs in October, 2022 before its recent pullback.
Support / Resistance Levels (based upon respective time period closing price):
Weekly: 100.63 / 104.32
Monthly: 98.66 / 102.29
Support / Resistance Levels (based upon respective time period closing price):
Weekly: 100.63 / 104.32
Monthly: 98.66 / 102.29
US Dollar Index Daily charts
The 2 year daily chart (above) shows the steady up-trend starting from its May 2021 lows into Oct 2022. It experienced a sharp decline into Feb 2023 and has remained rangebound.
The 10 year daily chart (above) shows the price break below 103.29-103.61 which was daily support on pullbacks. Support is now 100.04-100.21.
Over the past week the USD closed between its short term trend 50 and 200 day moving averages.
(Short Term Neutral)
(Short Term Neutral)
US Dollar Index Weekly charts
The weekly chart shows the steady uptrend channel which was broken this week as well as support @ 102.95-103.50. The next weekly support is 98.86-99.19
Price closed the week between the intermediate term trend 20 and 65 week moving averages.
(Intermediate Term Neutral)
Price closed the week between the intermediate term trend 20 and 65 week moving averages.
(Intermediate Term Neutral)
A longer term 20 year look-back at the USD shows the 79.05-104.32 weekly close (yellow) area has been a very significant bull/bear battle zone since 1986. The recent close below 104.32 is a significant technical breakdown given the bottom of the price channel would target a price near $95.
US Dollar Index Monthly chart
For the month of May the U.S. Dollar index has gained +2.70%. Price remains confined to the rising price channel from the 2011 lows and is now back to multi-decade support @ 101.37-102.98.
Price closed April below the long term trend 10 month moving average keeping the long term bias Bearish until months end.
(Long Term Bearish)
Price closed April below the long term trend 10 month moving average keeping the long term bias Bearish until months end.
(Long Term Bearish)
Euro (Neutral Bias)
The Euro was down -0.80% over the past week. It had remained largely range bound between 116-123 over the past year before its most recent breakdown.
Support / Resistance Levels (based upon respective time period closing price):
Weekly: 104.52 / 108.46
Monthly: 105.25 /112.20
Support / Resistance Levels (based upon respective time period closing price):
Weekly: 104.52 / 108.46
Monthly: 105.25 /112.20
Euro Daily Charts
The Euro topped out in early 2018 @ 125.10 and had been on a steady decline until March 2020. It rose dramatically into the end of 2020 had remained range bound in 2021 until its recent breakdown.
On the 2nd daily chart price it can be seen how important the yellow band daily resistance zone @ 114.61-116.04 is going back to 2015. Other areas of daily support/resistance are seen at 108.24-108.66 and 103.90-105.69.
The Euro closed the week between the short term trend 50 and 200 day moving averages.
(Short Term Neutral)
On the 2nd daily chart price it can be seen how important the yellow band daily resistance zone @ 114.61-116.04 is going back to 2015. Other areas of daily support/resistance are seen at 108.24-108.66 and 103.90-105.69.
The Euro closed the week between the short term trend 50 and 200 day moving averages.
(Short Term Neutral)
Euro Weekly Chart
The weekly chart shows the Euro's steady rise from its Covid lows in March 2020 to the end of 2020. It has been on a steady decline but recently broke above important resistance @ 104.51-104.96.
This past week the Euro closed the week between the intermediate trend 20 week + 65 week moving averages.
(Intermediate Term Neutral)
This past week the Euro closed the week between the intermediate trend 20 week + 65 week moving averages.
(Intermediate Term Neutral)
Euro Monthly
For the month of May the Euro has lost -2.70%. On a monthly closing basis it closed the month of April above the long term trend 10 month moving average keeping the long term outlook bullish until months end.
(Long Term Bullish)
(Long Term Bullish)
UK Pound (Neutral Bias)
U.K. Pound Daily Charts
U.K. Pound Weekly Charts
U.K. Pound Monthly Charts
The British Pound was down -0.83% over the past week. It continues to recover from lows last seen 37 years ago. Historically since 1987 the Pound has traded within a range of 1.40 to 2.00 with brief excursions above/below this range. The previous all-time low over the past 200 years was 1.0520 (daily low @ 1.0438) seen in the 1st quarter of 1985 which was revisited in September 2022 (close 1.0696 27 Sep 2022).
This past week the Pound closed the week between its short term trend daily 50 +200 day moving averages and above the intermediate term trend 20 + 65 week moving averages. For the month of May it has lost -1.78% and closed the month of April above its long term 10 month moving average (which technically keeps the long term bullish until months end).
(Short Term Neutral)
(Intermediate Term Bullish)
(Long Term Bullish)
Support / Resistance Levels (based upon respective time period closing price):
Weekly: 120.36/127.34
Monthly: 121.33 /133.09
This past week the Pound closed the week between its short term trend daily 50 +200 day moving averages and above the intermediate term trend 20 + 65 week moving averages. For the month of May it has lost -1.78% and closed the month of April above its long term 10 month moving average (which technically keeps the long term bullish until months end).
(Short Term Neutral)
(Intermediate Term Bullish)
(Long Term Bullish)
Support / Resistance Levels (based upon respective time period closing price):
Weekly: 120.36/127.34
Monthly: 121.33 /133.09
Australian Dollar (Bearish Bias)
Australian Dollar Daily Chart
Australian Dollar Weekly Charts
Australian Dollar Monthly Chart
The Australian Dollar was down -1.98% over the past week. It topped in Apr/2021 and has been on a steady downtrend to present.
For the month of May the Aussie dollar has lost -1.35%. It closed the week below the short term trend 50 + 200 day moving averages and below the intermediate term trend 20 + 65 week moving averages. It closed the month of April below the long term trend 10 month moving average keeping the long term outlook to bearish until months end.
(Short Term Bearish)
(Intermediate Term Bearish)
(Long Term Bearish)
Support / Resistance Levels (based upon respective time period closing price):
Weekly: 61.99 / 69.11
Monthly: 63.58 / 70.17
For the month of May the Aussie dollar has lost -1.35%. It closed the week below the short term trend 50 + 200 day moving averages and below the intermediate term trend 20 + 65 week moving averages. It closed the month of April below the long term trend 10 month moving average keeping the long term outlook to bearish until months end.
(Short Term Bearish)
(Intermediate Term Bearish)
(Long Term Bearish)
Support / Resistance Levels (based upon respective time period closing price):
Weekly: 61.99 / 69.11
Monthly: 63.58 / 70.17
Canadian Dollar (Bearish Bias)
Canadian Dollar Daily Chart
Canadian Dollar Weekly Chart
Canadian Dollar Monthly Chart
The Canadian dollar was down -0.81% over the past week and continues to recover off its Covid-lows of late March 2020 (it is largely tied to the price of commodities so the anticipated global recovery has benefited CAD).
The Loonie closed the week below the short term trend 50 + 200 day moving averages and below the intermediate term trend 20 + 65 week moving averages. For the month of May the Loonie has lost -0.64%. It continues to recover off its 2020 lows but closed the month of April below the long term trend 10 month moving average keeping the long term bearish until months end.
(Short Term Bearish)
(Intermediate Term Bearish)
(Long Term Bearish)
Support / Resistance Levels (based upon respective time period closing price)
Weekly: 72.96 / 77.51
Monthly: 73.20 / 78.49
The Loonie closed the week below the short term trend 50 + 200 day moving averages and below the intermediate term trend 20 + 65 week moving averages. For the month of May the Loonie has lost -0.64%. It continues to recover off its 2020 lows but closed the month of April below the long term trend 10 month moving average keeping the long term bearish until months end.
(Short Term Bearish)
(Intermediate Term Bearish)
(Long Term Bearish)
Support / Resistance Levels (based upon respective time period closing price)
Weekly: 72.96 / 77.51
Monthly: 73.20 / 78.49
Key Weekly Returns (week ending 26 May 2023):
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Countries/Regions
World Equities ACWI (iShares MSCI ACWI Index Fund) North American Equities SPY (S&P 500 SPDRs) QQQ (PowerShares QQQ Trust) IWM (Russell 2000 iShares) EWC (Canada iShares) |
Characteristics
Global Equity Fund U.S. Large Cap S&P 500 Index U.S. NASDAQ 100 Fund U.S. Russell 2000 Small Cap Fund Canada |
Week % Change
-0.33% +0.33% +3.53% +0.02% -2.88% |
Non-North America Equities
|
VGK (Vanguard European VIPERs) EPP (iShares MSCI Pacific ex-Japan ) EWJ (Japan iShares) EEM (iShares MSCI Emerging Markets) ILF (Latin America 40 Index iShares) Bonds
BND (Vanguard Total U.S. Bond Market) BNDX (Vanguard International Bond ETF) TIP (iShares Barclays TIPS Bond Fund) PCY (PowerShares Emerging Markets Debt Portfolio) |
Europe/U.K Pacific ex-Japan (inc. Australia + NZ) Japan Emerging Markets Latin America US Total Bond (44% Gov't Tsy, 56%Corp) World Investment Grade Bonds ex-US Inflation Protected Gov't Bonds Emerging Market Sovereign Debt |
-2.32% -2.37% -1.16% +0.05% +0.28% -0.48% -0.39% -0.53% +0.16% |
|
Commodities
DBC (DB Commodities Tracking Index Fund) DBA (PowerShares DB Agriculture Fund) GLD (SPDR Gold Trust Shares) SLV (iShares Silver Trust) DBB (PowerShares Metals Fund) USO (United States Oil Fund) |
Commodity Basket Soft Commodity Basket Gold Bullion Silver Bullion Industrial Metals Light Crude Oil |
+0.53% -01.01% -1.48% -2.20% -2.55% +1.41% |
Currencies
|
UUP (PowerShares DB US Dollar Bullish Fund)
FXA (Currency Shares Australian Dollar Trust) FXB (Currency Shares British Pound Sterling Trust) FXC (Currency Shares Canadian Dollar Trust) FXE (Currency Shares Euro Trust) FXY (Currency Shares Japanese Yen Trust) |
U.S. Dollar
Australian Dollar U.K. Sterling Canadian Dollar Euro Japanese Yen |
+1.13%
-1.93% -0.77% -0.75% -0.71% -1.90% |
Important Charts to Watch
Commodity Basket Index
Commodities (as measured by the Reuters/Jefferies CRB index, a basket of 19 commodities) bottomed in April, 2020 and peaked in June, 2022. They have been in a trading range near 8 year highs but broke this range last week.
Resistance remains the early-March weekly close @ 292.25.
Resistance remains the early-March weekly close @ 292.25.
Equity Market Volatility
The Volatility Index (VIX) is a measure of expected price fluctuations of options on the S&P 500 index options over the next 30 days (technically the VIX is quoted in percentage points and represents the expected range of movement in the S&P 500 index over the next year, at a 68% confidence level i.e. one standard deviation of the normal probability curve). For example, if the VIX is 15, this represents an expected annualized change, with a 68% probability, of less than 15% up or down.
The VXV uses the same calculation as the VIX but looks forward 3 months. When the VIX is greater than the VXV ($VIX:$VXV ratio > 1.0) the volatility structure is termed to be in "contango". It indicates traders are much more concerned about short term volatility than they are about longer term volatility and when that ratio returns to "normal" (< 0.93) it is typically a good sign market stress is easing (and a good time to add to equity positions).
As of this weeks market close volatility closed below the "VIX Event End Line" area with the VIX below 25. The volatility structure is currently BULLISH for equities.
The VXV uses the same calculation as the VIX but looks forward 3 months. When the VIX is greater than the VXV ($VIX:$VXV ratio > 1.0) the volatility structure is termed to be in "contango". It indicates traders are much more concerned about short term volatility than they are about longer term volatility and when that ratio returns to "normal" (< 0.93) it is typically a good sign market stress is easing (and a good time to add to equity positions).
As of this weeks market close volatility closed below the "VIX Event End Line" area with the VIX below 25. The volatility structure is currently BULLISH for equities.
Global Banks
Up until recently US banks were thought to be quite stable. However, several recent failures have now brought US banks into focus. Below is a chart of the KBE (US Bank ETF) and KRE (US Regional Bank ETF). We are watching closely for further signs of stress following the recent declines.
Since the 2009 market bottom Europe has been the weakest major equity growth region. As such, we continue to monitor European financial stocks (represented below using the iShares MSCI European Financials ETF).
European financials bottomed in March, 2022 and have been very strong until the recent US bank crisis.
European financials bottomed in March, 2022 and have been very strong until the recent US bank crisis.
Of particular concern is Deutsche Bank and Credit Suisse (which has now been taken over by UBS). Deutsche Bank began a restructuring in July 2019 and remains above its March 2020 covid lows. However, Credit Suisse was forced into being taken over by UBS. At present this is the #1 market risk to watch.
Chinese Equities
The Shanghai Composite index was lower over the past week and remained above support @ 3050-3147.
Chinese growth remains key to both Emerging market performance as well as an indication of Developed markets demand. From its peak in mid-2015, the Shanghai index lost more than -50% to its recent lows. We would like to see significant strength return to China further indicating world economic growth has positively turned the corner.
Chinese growth remains key to both Emerging market performance as well as an indication of Developed markets demand. From its peak in mid-2015, the Shanghai index lost more than -50% to its recent lows. We would like to see significant strength return to China further indicating world economic growth has positively turned the corner.
PRECIOUS METALS
Precious metals (and their respective producers) are an area we recommend all investors consider having a small position within. Precious metals perform well during times when real (inflation adjusted) interest rates are falling and/or when the USD is weak (not the case at present). The following charts can be utilized to determine when the risk/reward is favorable.
Below is a ratio price chart of gold stocks (HUI; the "Gold Bugs" Index) to gold bullion going back to 1996 when the Gold Bugs Index first came into existence. As can be seen, whenever the HUI:GOLD ratio dips to below approximately 0.14 (the GREEN zone on the chart) has been a low-risk opportunity to acquire gold stocks.
Gold stocks remain in the "low-risk vs. high-reward" range and until recently remain near their cheapest valuations in 22 years. Historically purchases of gold equities when within the green-zone have been a very good long term buy-and-hold opportunities.
Gold stocks remain in the "low-risk vs. high-reward" range and until recently remain near their cheapest valuations in 22 years. Historically purchases of gold equities when within the green-zone have been a very good long term buy-and-hold opportunities.
Equally bullish is Silver (chart below) which remains at a price ratio relative to the price of gold (GREEN zone on the chart) which has historically been a low risk entry point over the past 40 years.
Silver remains cheap relative to gold.
To put the valuation into a longer term perspective, below is a chart of the Gold/Silver ratio (the opposite ratio to Silver/Gold) going back to 1687. Clearly it can be seen a gold:silver ratio > 80 has historically been an outlier over the past 100+ years (and greater than 100 is historic):
The current Gold:Silver ratio recently exceeded 120 for the 1st time in history and remains near the top end of 40 year highs. It can be seen each instance in the past 40 years where the ratio has crossed above 80 has resulted in very good long term gains in silver.
The move in Silver we have been anticipating appears to have begun but there remains plenty of room to allow the ratio to fall to the "sell" level near 45.
EVEN MORE BULLISH is the price of Platinum (chart below) which has exceeded the "buy zone" last seen in 1982! Platinum is 15-20 times rarer than gold and has rarely in history traded at a price below the price of gold (only 9.7% of the time going back to 1971). It is now the cheapest it has been GOING BACK TO AUGUST 1971 WHEN THE U.S. LEFT THE GOLD STANDARD on a relative basis:
- The current Platinum:Gold ratio remains below 0.85 (red line on the chart below).
- A Platinum/Gold ratio < 0.85 has only occurred 4.7% of the time back to 1971.
- Prior to recent lows, the lowest Platinum:Gold ratio since August 1971 (when the USD was removed from the gold standard) was hit on 20 Sept 1982 when it hit a ratio low of 0.689 (Platinum $300.40/Gold $436.00).
- If Platinum were to return to its most common ratio relative to Gold (1.0x-1.25x which has been common 35% of the time) it would imply a price rise of approximately 50-90% from recent levels.
Platinum now sits on a price support extending back to 2004 and, combined with its ratio relative to the price of gold, represents a compelling long term buy point.
The following charts and commentary (in italics; bold print is our emphasis) are sourced from Kitco from commentary sourced in Feb 2017 when the ratio was near 0.85 (Platinum has become even cheaper on a relative basis since the data was published):
Platinum to gold ratios show wide variance over the 46 year period ranging from highs above 2.5 before and soon after Nixon began taking the United States off the gold standard to periodic lows below 1.0:
Platinum to gold ratios show wide variance over the 46 year period ranging from highs above 2.5 before and soon after Nixon began taking the United States off the gold standard to periodic lows below 1.0:
Our data set covers 553 months beginning in January 1971. The distribution of ratios in both tabular and chart format follows:
Platinum/Gold Ratio: % of Months
Platinum/Gold Ratio: % of Months
- < 0.85: 4.7%
- .85-1.01: 5.0%
- 1.0-1.25: 34.7%
- 1.25-1.5: 19.3%
- 1.5-2.0: 15.4%
- 2.0-2.5: 8.9%
- > 2.5: 2.0%
From our data set and the distributions of monthly average platinum-gold ratios from January 1971 thru January 2017, I glean the following:
From a compendium of sources, the average crustal abundance of both metals is around 4 ppb. Based solely on this fact, platinum and gold should trade at about the same price.
And indeed, our compilation shows that for nearly 50% of the time since gold was decoupled from the world’s reserve currency and allowed to trade freely on exchanges, the price ratio has ranged from 0.85 to 1.25. That said, since January 1971, the average price of platinum has been $637/oz and gold has been $518/oz for an overall ratio of 1.23:1. Clearly there are other factors other than the nearly equal crustal abundances that account for this historic price relationship.
A variety of supply and demand factors cause platinum to trade at a premium to gold:
Fluctuations in the relative prices of platinum and gold are largely driven by:
Platinum functions both as a precious and industrial metal. It is usually tied to the price of gold in both short- and long-term trading patterns. In times of financial distress and economic turmoil, platinum tends to behave more like gold with widespread hoarding.
The platinum-gold ratio can be used to ascertain whether one metal is over- or undervalued with respect to the other. The current monthly average ratio below 0.85 is unusual and indicates that platinum is severely undervalued with respect to gold *
* The ratio recently hit 0.55 and remains near a record low.
- A ratio of less than 0.75 is a single outlier that occurred once during the second half of 1982 when overall ratios averaged 0.81.
- Ratios <0.85 are quite unusual at 4.7%. They occurred for two months in the first quarter of 1975, the aforementioned six months in 1982, in June-July of 1985, and for an ongoing run of 16 months that commenced in October 2015.
- Ratios from 0.85 to 1.0 constitute 15.0% of the record.
- Pt:Au from 1.0 to 1.25 is the most common range and comprises 34.7% of ratios since 1971.
- The ratios between 1.25 and 1.5 occur 19.3% of the time.
- Ratios from 1.5 to 2.0 make up 15.4% of the record.
- The 2.0-2.5 interval covers 8.9% of the months in our compendium.
- The 11 monthly outliers at >2.5 comprise 2.0% of the total record and have not occurred since 1971.
From a compendium of sources, the average crustal abundance of both metals is around 4 ppb. Based solely on this fact, platinum and gold should trade at about the same price.
And indeed, our compilation shows that for nearly 50% of the time since gold was decoupled from the world’s reserve currency and allowed to trade freely on exchanges, the price ratio has ranged from 0.85 to 1.25. That said, since January 1971, the average price of platinum has been $637/oz and gold has been $518/oz for an overall ratio of 1.23:1. Clearly there are other factors other than the nearly equal crustal abundances that account for this historic price relationship.
A variety of supply and demand factors cause platinum to trade at a premium to gold:
- Platinum is a much smaller market. Cumulative world production of platinum is estimated to be about 5% of gold (9400 tonnes versus 182,000 tonnes). From 1994-2014, 3700 tonnes of platinum were mined versus 52,600 tonnes of gold or about 7% (source: USGS).
- Platinum is largely an industrial metal. Catalytic converters, electronics, petroleum and chemical catalysts, medical technologies, and many minor uses constitute over 60% of its annual demand. Around 30% is used in jewelry and 10% for investment demand. Also, 30% of the annual platinum supply now comes from recycling, mostly from catalytic converters. Some demand is consumed and lost to the marketplace.
- Gold is overwhelmingly a precious metal; 90% is used in jewelry and investments and only 10% in industrial applications. An estimated 98% of all the gold ever mined in the world remains available and held in jewelry, by central banks, in private hoards, and as fabricated products (source: USGS).
- About 70% of yearly platinum mine supply comes from South Africa, a geopolitically risky country. Much new platinum is a by-product of nickel-copper mining and smelting; therefore, annual platinum production is dependent on the supply-demand fundamentals and prices of these primary metals.
Fluctuations in the relative prices of platinum and gold are largely driven by:
- the overall growth and health of the world’s economy and in the case of platinum, the automotive industry;
- labor, power, currency, and political issues in South Africa that cause major perturbations in the platinum supply;
- safe haven hoarding of gold and to a much lesser extent, platinum, in times of economic uncertainty and major geopolitical events; speculators moving in and out of paper markets of both metals (bullion exchanges, ETFs, and derivatives) and to a lesser extent, central bank trading of physical gold.
Platinum functions both as a precious and industrial metal. It is usually tied to the price of gold in both short- and long-term trading patterns. In times of financial distress and economic turmoil, platinum tends to behave more like gold with widespread hoarding.
The platinum-gold ratio can be used to ascertain whether one metal is over- or undervalued with respect to the other. The current monthly average ratio below 0.85 is unusual and indicates that platinum is severely undervalued with respect to gold *
* The ratio recently hit 0.55 and remains near a record low.
U.S. Equity Market Valuation
Crestmont Price/Earnings Ratio
(Source: Crestmont Research)
(Source: Crestmont Research)
A large part of the expected declines in bear markets hinges upon how "expensive" markets were when the bear market begins. In this measure, we have a long way to fall given the overvaluation at the market peak.
We illustrate the recent market overvaluation via 3 charts produced by Crestmont Research (as of 01 May 2023 with data from 1871-to-Present). While it is not necessary to understand exactly how the data is plotted, it is important for every investor to realize where current valuations stand relative to this 149 years of history.
In the following graphs note the following:
We illustrate the recent market overvaluation via 3 charts produced by Crestmont Research (as of 01 May 2023 with data from 1871-to-Present). While it is not necessary to understand exactly how the data is plotted, it is important for every investor to realize where current valuations stand relative to this 149 years of history.
In the following graphs note the following:
- the Crestmont Price/Earnings (P/E) ratio at the end of April 2023 remained near the most expensive market valuation in U.S. stock market history (but well off its most recent peak) .
- when compared to inflation the current Crestmont P/E has now exceeded the upper extreme portion of the bubble zone defining the 1998-2000 bubble peak as shown on the 2nd chart.
- pay particular attention to chart #2 where it can be seen high equity valuations are historically supported by inflation in the 0-3% range. Inflation remains well outside this corridor (which occurred as of the end of April, 2021) and is concerning. Overvalued equities combined with high inflation tend be be a very dangerous combination.
U.S. (NYSE) Margin Debt
(Source: Advisor Perspectives)
We have been studying with interest the current margin debt on US markets. For those who are unfamiliar, margin debt is the amount of "loans" taken out by market speculators to leverage up their equity positions. During normal bull markets margin debt will increase as the market continues to climb. This increased margin debt amplifies equity market prices. However, at some point speculators become nervous and begin to reduce their margin positions. This reduction in margin is like letting the air out of a balloon and deflates equity asset prices.
As can be seen on the below graphic, both the 2000 and 2007 market tops were signaled in advance by tops in margin debt (margin debt not inflation adjusted on this chart):
As can be seen on the below graphic, both the 2000 and 2007 market tops were signaled in advance by tops in margin debt (margin debt not inflation adjusted on this chart):
The following chart (source: D. Short) shows US equity margin debt adjusted for inflation. As can be seen, in both 2000 and 2007 inflation-adjusted margin debt peaked and then began to decline leading to the tops in the S&P 500 index. As such, margin debt rollovers acts as a good lead indicator of possible future market weakness.
A year-over-year contraction in margin debt tends to be negative for stocks as liquidity is removed from equity markets. Below is the latest YoY rate of change in margin debt (source: Yardini). Note in both the 2000 and 2007 bear markets margin debt bottomed below -40%.
U.S. Equity market Valuation Models
(Source: D. Short)
Below is a graph representing 4 different long-term valuation measures plotted back to 1900 (120 years):
As of 01 May 2023 the average of these 4 measures places the U.S. stock market (S&P 500 index) as being 102% above its long term geometric mean. This remains near the highest valuation in the history of the stock market going back to 1900 (2 standard deviations above the mean).
- The Crestmont Research P/E Ratio
- The cyclical P/E ratio using the trailing 10-year earnings as the divisor
- The Q Ratio, which is the total price of the market divided by its replacement cost
- The relationship of the S&P Composite price to a regression trendline
As of 01 May 2023 the average of these 4 measures places the U.S. stock market (S&P 500 index) as being 102% above its long term geometric mean. This remains near the highest valuation in the history of the stock market going back to 1900 (2 standard deviations above the mean).
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 1950. As can be seen below, the ratio of equity prices relative to last reported GDP has now moved well below its recent peak and is currently in the "overvalued" zone (> 33.3% above the detrended regression line)..
7-Year Asset Class Real Return Forecast
(Source: GMO LLC)
Each month GMO (Grantham, Mayo, Van Otterloo & Co.) publishes a forward forecast for expected annual real rates of return (i.e. inflation adjusted) for a number of different asset classes with a 7 year forward outlook. They have historically had a very good track record (0.97 correlation) of estimating forward 7 year asset class returns based primarily upon current valuations combined with mean reversion. Charts are published following analysis of the previous months data.
We have followed GMO's methodology with interest for many years. In our experience we have found them to be conservative over the shorter term with a tenancy to make calls too early. HOWEVER, similar to Dr. John Hussman of Hussman Funds, they also tend to be right over the longer term. As such, we use their outlook as part of the valuation model within the ECAM 5 Factor model.
Above is their current forecast of expected real returns (after inflation) for the next 7 years broken down by asset class. It is clear based upon current market valuations GMO forecasts well below average annual investment returns in all asset classes with a 7 year forward time horizon (the dotted line is the historical real return of U.S. equities of +6.5% per year). This is important for those who may be soon retiring and expecting "average" returns on their equity and bond investments over the next 7 years. Current high market valuations make it a certainty forward returns over the next 7-10 years will be well below historical averages.
We have followed GMO's methodology with interest for many years. In our experience we have found them to be conservative over the shorter term with a tenancy to make calls too early. HOWEVER, similar to Dr. John Hussman of Hussman Funds, they also tend to be right over the longer term. As such, we use their outlook as part of the valuation model within the ECAM 5 Factor model.
Above is their current forecast of expected real returns (after inflation) for the next 7 years broken down by asset class. It is clear based upon current market valuations GMO forecasts well below average annual investment returns in all asset classes with a 7 year forward time horizon (the dotted line is the historical real return of U.S. equities of +6.5% per year). This is important for those who may be soon retiring and expecting "average" returns on their equity and bond investments over the next 7 years. Current high market valuations make it a certainty forward returns over the next 7-10 years will be well below historical averages.
Global Asset Class 10-year Expected Nominal Return Forecast
(data as of 31 March 2023)
(Source: Research Affiliates)
(data as of 31 March 2023)
(Source: Research Affiliates)
Below is the projected 10 year nominal (non-inflation adjusted) returns for the majority of global asset classes.
Data continues to point to Emerging Market and EAFE (Europe, Africa and Far East) equities as providing the greatest equity returns over the next 10 years.
Data continues to point to Emerging Market and EAFE (Europe, Africa and Far East) equities as providing the greatest equity returns over the next 10 years.
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Legend
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Cycle Commentary
Below is a 20 year chart of the seasonal monthly performance of the Dow Jones Global Index. The number at the top of the column is the percentage of time the month had a positive return and at the bottom is the average percentage gain/loss for the month.
Dow Jones Global Index Market ($DJW)
As can be seen, over the past 20 years (2003-2022) the period October-April yearly offers the highest potential global equity market returns (cumulative +6.7% average return) while the period May-September offers little in total return relative to risk (+0.7% cumulative average return). The month of April remains the strongest month with an 80% success rate and an average +2.5% return.
In the interest of moving more towards more recent market action broken down by region, below is the seasonal returns for our each of our selected ETF benchmarks going back to the start of the bull market in 2009:
|
Region
|
October-April
|
May-September
|
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Global Equities (VT)
U.S. Equities (VTI) European Equities (VGK) Asia Pacific Equities (VPL) Emerging Market Equities (VWO) |
+8.9%
+10.9% +7.6% +6.0% +8.6% |
+1.8%
+3.0% +0.5% +0.9% -0.5% |
|
Vanguard Total World Market (VT)
Vanguard FTSE European Total Market (VGK)
|
Vanguard U.S. Total Market (VTI)
Vanguard FTSE Pacific Total Market (VPL)
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Vanguard FTSE Emerging Total Market (VWO)
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S&P 500 Seasonality (historical 50 year look-back annual seasonality)
"Turning to the months ahead, the performance for January and February is rather lacklustre compared to the months that bookend this start of year period. The S&P 500 Index has gained an average of 0.8% and 0.2%, respectively in the first two months of the year, based on the past 50 periods. These months are easily the weakest of the best six month trend for stocks. The large-cap benchmark has closed positive just over half of the time (56%) in January and February, making this winter lull little better than a flip of a coin in terms of the frequency of success.. Returns for January have ranged from a loss of 8.6% in 2009 to a gain of 13.2% in 1987. Performance tends to gyrate in the middle of January with the majority of the strength achieved in the first few days and last few days of the period".
Ned Davis Research 2023 Composite Model
The following is the composite directional model forecast for the S&P 500 index for 2022 based upon the following parameters (each equal weighted within the composite model) for data from 1928-2022:
- 10-year Decennial Market Cycle
- 4-year Presidential Market Cycle
- 1-year Annual Seasonal Market Cycle
The levels are not as important as the general trends as indicated by the Composite model.
The 2023 composite model indicates the following historical "glidepath" based upon cycles from 1928-2022:
- a consistent trending market advance into mid-July
- a choppy pullback to lows in late-November
- a strong rise into year-end.
U.S. 4-Year Presidential Election Cycle
* 2023 is Year-3 ("Pre-Election") of the 4-year cycle
As can be seen on the chart above, historically since 1900 the 3rd year (pre-election year ) of the 4 year Presidential Cycle tends to provide the best returns of the 4-year cycle.
While we do not make investment decisions strictly based upon cycle analysis, we are cognizant of the historical nature of these cycles as they tend to define the political environment's influence upon stock market returns.
Of the 4-year cycle, the strongest quarters are the 4th quarter of Year 2 (Oct-Dec 2022) and the 1st 2 quarters of Year-3 (Jan-Jun 2023).
While we do not make investment decisions strictly based upon cycle analysis, we are cognizant of the historical nature of these cycles as they tend to define the political environment's influence upon stock market returns.
Of the 4-year cycle, the strongest quarters are the 4th quarter of Year 2 (Oct-Dec 2022) and the 1st 2 quarters of Year-3 (Jan-Jun 2023).
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: +16.26% 2021-Year 1: +26.89% 2022-Year 2: -19.44% 2023-Year 3: TBD |
U.S. S&P 500 Index Bear Markets
(source: Ben Carlson, CFA)
(source: Ben Carlson, CFA)
Recessionary Bear Markets (1928-2022):
Non-Recessionary Bear Markets (1928-2022):
Recessionary vs Non-Recessionary Bear Market Returns (1928-2022):
