Market/Model Commentary

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Market/Model Commentary

At the end of the trading week the "Full Risk" model portfolio remained active as defined by our
5-factor model. Please click on the below link to review the suggested allocations if required.

"Full Risk" Model Portfolio
(clink the above link to review if required)

"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)

Market Overview

Global equities had another week of gains with a benchmark global equity return of +0.25%. However, the breadth of returns was troubling as gains were only seen in U.S. equities with losses experienced in all other monitored regions.

Global bonds had a down week with International ex-U.S. bonds outpacing the declines in U.S. bonds (International bonds had their worst week since 05 Oct 2018). Bonds continue to perform well in this slowing global macro environment highlighting the importance of a diversified portfolio.

Most regions have either exceeded or remain near their recent 2019 equity price peaks set 03 May (with the exception of Emerging markets which are somewhat lower). At their peak in early May all global equities were overbought so a pullback was expected.

Global economic growth remains near 3 year lows with marginal expansion in global services offsetting contraction in global manufacturing (for the 1st time since Oct 2012). It would appear the ongoing trade war between the U.S. and its major trading partners continues to have an effect upon global economic growth (see the latest reports in the Economics section for further).

Global equities remain at important price resistance this past week (see below updated graphs for the Dow Jones Global Index daily/weekly line charts).

DOW JONES GLOBAL INDEX (DAILY CLOSE)

DOW JONES GLOBAL INDEX (WEEKLY CLOSE)

ECAM 5-Factor Model

(as of market close 12 July 2019)

Economic Model

Valuation Model

Technical Model

Sentiment Model

Financial Stress Model

YELLOW

RED

GREEN

YELLOW

GREEN

YELLOW

Weekly Review

The past week delivered mixed returns in all monitored equity regions with U.S. equities advancing and all other regions declining on the week. Volume remains low due to summer holiday trading with many market participants on vacation.

In the U.S. stocks had an uneventful week in terms of volatility, with major indexes gaining less than one percent. The Dow Jones Industrial Average closed above 27,000 for the first time in history, while the S&P 500 Index and Nasdaq Composite also reached fresh highs. It took the Dow Jones Industrial Average about 18 months to climb from 26,000 to 27,000 (a less than 4% move), showing how rocky the past two years have been for large-cap, diversified U.S. companies

Next week begins the 2nd quarter earnings reporting period so we expect volatility to increase. US earnings are now about to begin to lap the very strong 3Q18 & 4Q18 comps associated with the US tax cuts so we expect earnings reports to be considerably lower on a year-over-year basis. We are keen to see how market participants react to this outcome (with the potential for downside increased).

The main economic story of the week was US Federal Reserve (Fed) Chair Jerome Powell’s testimony in front of Congress, in which he noted uncertainty from crosscurrents signal a likely lowering of the US Fed Funds rate later this month. He noted growing worries about the state of the global economy and muted inflation pressures have continued to weigh on the domestic outlook and his comments further bolstered expectations of a July rate cut, despite data showing consumer price inflation (CPI) data increased moderately in June.

Outside the US, probably the biggest news item was the announcement of a massive Deutsche Bank restructuring. While Deutsche Bank had once sought to compete with America's big banks on Wall Street, the German lender has been pummeled by scandals, probes and massive fines stemming from the financial crisis and other issues in recent years. An overhaul on Monday saw Deutsche Bank exit the global equities business and shed 18,000 jobs (booking charges of €7.4B through 2022) while saying it won't pay a dividend this year or next. The German bank also expects to report a net loss of €2.8B for the second quarter, before it narrows its focus on serving European companies and retail-banking customers. We have highlighted our concern with DB as a potential “black swan” catalyst to equity declines so will continue to closely monitor the next few weeks to see how markets react to the news (the sequence of events is eerily similar to the Bear Stearns collapse in 2007-2008 that led to the global financial crisis).

Weekly Market Movement Wrap

U.S. Indices
Dow +1.5% to 27,332. S&P 500 +0.8% to 3,014. Nasdaq +1.% to 8,244. Russell 2000 -0.4% to 1,570. CBOE Volatility Index -6.7% to 12.39.

S&P 500 Sectors
Consumer Staples +0.6%. Utilities +0.5%. Financials -0.2%. Telecom +0.6%. Healthcare -0.3%. Industrials -0.5%. Information Technology +0.7%. Materials -1.8%. Energy +1.8%. Consumer Discretionary +1.1%.

World Indices
London -0.6% to 7,506. France -0.4% to 5,573. Germany -2.% to 12,323. Japan -0.3% to 21,686. China -2.7% to 2,931. Hong Kong -1.1% to 28,472. India -2.% to 38,736.

Commodities and Bonds
Crude Oil WTI +5.% to $60.37/bbl. Gold +1.2% to $1,417.7/oz. Natural Gas +1.7% to 2.458. Ten-Year Treasury Yield -0.4% to 126.98.

Forex and Cryptos
EUR/USD +0.4%. USD/JPY -0.51%. GBP/USD +0.37%. Bitcoin +7.1%. Litecoin -11.4%. Ethereum -4.5%. Ripple -9.5%. Bitcoin-Cash flat.

WEEKLY ASSET CLASS MONITOR

Asset Class

Region

ETF Ticker

Weekly
Return

Year-to-Date
Return

Equities

World
U.S.
Europe
Asia Pacific
Emerging Market

VT
VTI
VGK
VPL
VWO

+0.25%
+0.69%
-0.60%
-0.60%
-0.21%

+17.89%
+21.46%
+15.29%
+10.59%
+13.17%

Bonds

U.S. Bonds
International Bonds

BND
BNDX

-0.30%
-0.59%

+5.71%
+6.07%

Real Estate Equities

U.S. Real Estate
International Real Estate

VNQ
VNQI

-0.18%
-0.10%

+21.99%
+15.46%

Precious Metals Equites

Global Gold Miners
Global Junior Gold Miners

RING
GDXJ

+3.25%
+3.35%

+30.30%
+18.50%

RETURNS SINCE GLOBAL EQUITY MARKET PEAK (26 JAN 2018)

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

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

Global equities have broken back above the consolidation zone they had been trapped within for the first 3 quarters of 2018 (Nov 2017-Oct 2018). Price is above the rising 200 day moving average. (Bullish)

U.S. equities have broken back above the consolidation zone they had been trapped within for the 3rd quarter of 2018 (Jul-Oct 2018). Price is above the rising 200 day moving average. (Bullish)

European equities remain near the consolidation zone they had been trapped within for the first 3 quarters of 2018. Price is above the flat 200 day moving average. (Neutral)

Asia Pacific equities remain below the consolidation zone they had been trapped within for the 3rd quarter of 2018. Price is below the flat 200 day moving average. (Neutral)

Emerging market equities remain below the consolidation zone they had been trapped within for the first 2 quarters of 2018. Price is above the rising 200 day moving average. (Neutral)

RETURNS SINCE RECENT EQUITY MARKET PEAK (03 May 2019)

Below is the percentage returns for each of the monitored equity regions since the most recent global market peak closing price on 03 May 2019 and subsequent correction. All regions except Asia Pacific and Emerging markets have recovered all their losses from the May 2019 market pullback and are near 2019 all time highs.

RETURNS SINCE EQUITY MARKET BOTTOM (24 DEC 2018)

Below are the returns for the various monitored equity regions since the U.S. market bottom on 24 Dec 2018. All regions have advanced significantly off their 24 Dec 2018 lows with global equities up +23.81%.

Hedgeye Risk Management LLC

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

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

Their latest global macro growth/inflation/policy (GIP) model continues to show projected slowing growth with rising inflation (stagflation) in the U.S. through to the end of 2019 (their model uses 90 high frequency inputs per quarter within a Bayesian Inference model to adjust in real-time for the current quarter along with 24 month rate-of-change base effects for future quarters). This projected weakness is offset by projected relative strength in selected regions in Europe, Central America and Asia Pacific into the 2nd half of 2019 due to base effect comparisons.

It is highly likely such a macro environment in the U.S. (decelerating growth with risking inflation) will result in corporate margin compression as a result of reduced profits combined with increased costs (materials + labor). The potential for an "earnings recession" in the U.S. is a concern into the later half of 2019 (which would not be conducive to supporting over-valued equities).

Index

Quad 1 (Dark green): Growth rising/Inflation falling. Overweight equites/credit; underweight fixed income.
Quad 2 (Light green): Growth rising/Inflation rising. Overweight equites/credit; underweight fixed income.
Quad 3 (Yellow): Growth falling/Inflation rising. Overweight fixed income; underweight equites/credit.
Quad 4 (Red): Growth falling/Inflation falling. Overweight fixed income; underweight equites/credit.

* Use the "+" symbol at the bottom of the viewer to magnify the quad data for each country.

Below we continue to show the latest Ned Davis Research Global Recession Probability model which triggered a "high risk" global recession warning in the 3rd quarter of 2018. This is a seriously negative indication which drastically increases the probability (91.82%) a global recession is either occurring or forthcoming (recessions are officially registered only by OECD assessment of backdated data and shown in shaded blue).

Adding to our concern about potential recession concerns, below is the latest US recession probability model published by the New York Federal Reserve. The reading at the end of June 2019 rose above 30%; the threshold that has accurately predicted a pending recession within the US in the following 12 months since 1960 (chart notations are ours; official US recessions are shown in shaded blue).

The greatest equity losses occur during economic recessions. As such, we are keenly monitoring our 5-factor model to begin reducing equity exposure in the face of this potential catalyst. Our high frequency recession models have yet to signal pending recession so we remain vigilant.

Asset Class Return Monitor
(for week ending 12 July 2019)

Equities Legend:

Vanguard Total World Stock ETF (VT): (Cyan)
Vanguard Total U.S. Stock Market ETF (VTI): (Red)
Vanguard FTSE Europe ETF (VGK): (Lime Green)
Vanguard FTSE Asia Pacific ETF (VPL): (Dark Blue)
Vanguard FTSE Emerging Markets ETF (VWO): (Pink)

Bonds Legend:

Vanguard Total U.S. Bond Market ETF (BND): (Black)
Vanguard Total International ex-U.S. Bond ETF (BNDX): (Green)

Currencies Legend:

U.S. Dollar Index (Cash Settlement EOD) ($USD): (Orange)
Euro (Philadelphia Index) ($XEU): (Maroon)

Commodities Legend:

PowerShares DB Commodity Index Tracking Fund (DBC): (Purple)
SPDR Gold ETF (GLD): (Light Blue)

Past Week Asset Class returns

Over the past week world equities (as measured by the Vanguard Total World Stock ETF (shown in CYAN) gained +0.25%.
U.S. equities 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 strongly higher with the USD modestly lower on the week.

Year-to-Date (2019) Asset Class returns

Thus far in 2019 global equities (as measured by the Vanguard Total World Stock ETF (shown in CYAN) have gained +17.89%.
US equities have been the top performing equity region thus far in 2019 with Asia Pacific markets lagging.
Bonds have shown positive returns thus far in 2018 with International Bonds (Green) out-performing U.S. bonds (Black).
Commodities have had positive returns with the USD index modestly higher for 2019.

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

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

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

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

In the big picture, it is apparent we saw signs of investor exhilaration/euphoria in early Jan 2018 and have now since retreated towards the "unease" zone.

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

We illustrate current market overvaluation via 3 charts produced by Crestmont Research (as of 01 July with data from 1871-to-present). While it is not necessary to understand exactly how the data is plotted, it is important for every investor to realize where current valuations stand relative to this 149 years of history.

In the following graphs note the following:

the Crestmont Price/Earnings (P/E) ratio is at 32.1 and remains near the most expensive market valuation in U.S. stock market history (since 1871). It peaked well above both the 2007 peak (24.7) and 1929 peak (26.4) as shown on the 1st chart.

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

the current Crestmont P/E is 140% above its geometric mean; well above the 2007 peak (89%) and 1929 peak (99%) as shown on the 3rd chart. In Sept 2018 it reached the level as the 2000 bubble peak at 153% (the absolute maximum in history).

Clearly it can be seen equities remain very richly valued relative to 149 years of historical data.

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

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

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

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

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

World Regional Equity Monitor

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

World Equities: Vanguard Total World ETF (Cyan)
U.S. Equity: Vanguard Total Market ETF (Red)
Asia Pacific Equity: Vanguard FTSE Pacific ETF (Blue)
European Equity: Vanguard FTSE Europe ETF: (Lime Green)
Emerging Market Equity: Vanguard FTSE Emerging Market ETF (Pink)

1 Year Rolling Regional Equity Performance

Over the past 12 month rolling period regional equity performance remains mixed for the various equity regions.
The strongest equity region over the past 12 month has been U.S. Markets with Asia Pacific market equities lagging.
Overall world equity performance (as measured by the Vanguard Total World ETF) have returned +4.60% (including dividends) over the past 12 month rolling period.

3 Month Rolling Regional Equity Performance

Over the past 3 month rolling period the strongest performing world equity region has been U.S. markets with Emerging markets the weakest.
Positive regional equity returns have been evident over all regions except EM over the past quarter (3 months).

1 Month Rolling Regional Equity Performance

Over the past 1 month rolling period the strongest performing world equity region has been US markets with European markets the weakest.
Positive global equity returns are evident over the past month for all regions.

Past Week Regional Equity Performance

Over the past week major equity regions were mixed with U.S. markets leading.

Latest Global Equity "Big Picture"

World equity market returns are monitored via the following charts:

Dow Jones Global Market Index
(market cap weighted index)

For the week the Dow Jones Global Index gained +0.16%. As can be seen on the 1st line chart above chart, price closed above the 65 week moving average and above the important support @ 386-392 and continues to challenge the strong resistance @ 404-407.

On the 2nd weekly candlestick chart it can be seen the recent rise erased 4 weeks of losses in May. This is a bullish development but price must remain above support @ 386-392.

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

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

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

-$XVG: 529-535 (closed above this level this past week) and above the 200 day moving average. (Bullish)
-$GDOW: 2985-3018 (closed above this level this past week) and above the 200 day moving average. (Bullish)

Below are weekly charts of the same indexes. As can be seen, the Value Line index closed above the very important 510-520 area and remains below the trendline from the 2009 bottom while the Global Dow remains above the trendline from the 2009 lows.

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

Price remains below the trendline from the 2009 bottom until a daily close > 593.57. As such, the current technical trend remains mixed.

iShares MSCI ACWI ETF
(market cap weighted ETF)

The iShares MSCI ACWI (All Country World Index) ETF is used as a benchmark to compare the performance of the various broad-based equity funds available in the Emirates Group Provident Scheme (EGPS) A/B/C accounts. It serves as a benchmark to determine how equity markets are performing on a worldwide basis. This assists in determining 2 parameters; whether to be invested in equities and also which funds within the EGPS offer the best performance relative to the benchmark.

The ETF is composed of the following regional components/weightings:

ACWI Monthly Chart (since 2009)

As shown on the monthly chart above, world equity markets remained range bound for most of 2018 with a breakdown in the month of October. Price has since moved back into the previous consolidation zone.

For the month of July ACWI has gained +1.55%. It closed the month of June above the 12 month simple moving average (a potentially bullish development) but closed near the resistance that held for all of 2018 @ 74.63.

ACWI Weekly Chart

This past week ACWI gained +0.35%. Price closed above the 65 week simple moving average (which acted as support throughout the 2014-2015 topping process) and closed above the key support @ 68.64. This area must now hold as support on any future pullbacks.

Of note is the potential for a bearish descending wedge pattern (shown in RED). This past week price was able to break above the upper trend-line of the wedge pattern but needs to hold above this trendline over the next several weeks. Should it reverse below it opens the door to a decline back to the lower trend-line. Something to monitor closely into the summer.

World Equity Market Regional Relative Rotation Graphs

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

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

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

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

As can be seen on the above table, the majority of the monitored countries have transitioned into the "weakening" YELLOW quadrant. ACWI (our world equity fund benchmark) remains within the YELLOW "weakening" quadrant this past week.

The RRG trend analysis status remains Neutral for world equities:

ACWI price Relative Strength: Positive
ACWI price Momentum: Negative

Coincident Equity Market Indicators

Crude Oil

Crude oil was higher over the past week and is attempting to regain the important $60 level. Firm crude oil prices typically point to increasing demand on the back of world economic growth improvement and the recent breakdown remains equity neutral. A close below the ascending price channel from the 2016 lows would be very concerning.

Gold

Gold was modestly higher over the past week. It was broadly lower through 2018 but began to turn bullish in late October as the global equity decline occurred. It remains above the support (ex-resistance) @ $1382-$1396 this past week.

Since bottoming in April the advance in Gold indicates increased market concern in equities with a move to the safety of gold. As long as gold continues to advance it remains equity bearish.

Commodities

Commodities were higher over the past week. Since bottoming in late 2018 commodities have been on a steady (but not overly steep) rise indicating increased demand (and thus increased world growth). However, it has not been able to regain the resistance near 188. This remains equity neutral.

U.S. 30 Year Treasury Bond

U.S. 30 year bonds were fractionally lower on the week and remain above the 3 year long support (near $146-$148). They broke above the downtrend line from their June 2016 peak in late 2018 changing their trend to bullish but have been stopped by the previous resistance. Rising bond prices indicate a "flight to quality" trade associated with weakening economic data and the current trend is equity bearish.

Current 5-Factor Model Indications

The combined 5-Factor quantitative model is currently YELLOW (neutral). This indicates a balanced level of risk at present. However, the continued decline in global macroeconomic indications remains a worry as we remain within the summer (a seasonally weak period for equities). Any deterioration in the model will shift to a reduced risk recommendation.

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

Economic Model

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

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

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

OECD Composite Leading Indicators (08 July 2019)

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

The latest readings suggest subtle stabilization in economic activity but the lack of a large number of country readings over 100 indicates below average economic growth is forecast to continue over the next 6-9 months.

Latest Overview:
08/07/2019 - Composite leading indicators (CLIs), designed to anticipate turning points in economic activity relative to trend six to nine months ahead, now point to stabilising growth momentum in the OECD area as a whole following last month’s assessment of easing growth momentum.

Among large OECD economies, only Japan and Canada have seen a change in assessment this month (to stabilising growth momentum from easing growth momentum last month) while in the United Kingdom last month’s tentative signals of stable growth momentum have now been confirmed, although large margins of error exist due to continuing Brexit uncertainty.

Among other major OECD economies, the CLIs continue to anticipate stable growth momentum in France and easing growth momentum in the United States and the euro area as a whole, particularly in Germany and Italy.

Among major emerging economies, the CLIs continue to anticipate stable growth momentum in China (in the industrial sector), India and Russia, and now also in Brazil.

The OECD (Total) CLI topped in Nov/Dec 2017 @ 100.67 and is now well below 100 (indicating global economic contraction). Critically, it is now below the previous correction lows of 2012 and 2016 and continues lower as of the last reading. This continues to be a major concern until it can bottom and reverse course.

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

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

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

ly

J.P. Morgan Global Composite Purchasing Managers Index (03 July 2019)

The Global Composite PMI Report is based on the results of manufacturing and service sector surveys covering over 18,000 purchasing executives in over 40 countries. Together these countries account for an estimated 89% of global gross domestic product (GDP).

Questions are asked about real events and are not opinion based. Data are presented in the form of diffusion indices, where an index reading above 50.0 indicates an increase in the variable since the previous month and below 50.0 a decrease. As such, using the PMI data gives us a real-time look at global growth with readings > 50 indicating economic expansion and readings < 50 indicate economic contraction.

Below is our PMI monitor for selected regions/countries.

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

The latest data continues to point to contracting global manufacturing data in most countries being offset by stable or expanding services data. This dichotomy has allowed composite indexes to hover near the expansion/contraction line for the past several months.

We wold like to see the global manufacturing data to begin to improve in order to feel confident we are not on the cusp of a global recession.

G-20 Manufacturing PMI

World Bank Global Economic Prospects Overview (June 2019)

World Bank Global Monthly Outlook (June 2019)

IMF World Economic Outlook Update (April 2019)

OECD Interim Economic Outlook (March 2019)

RecessionAlert World Recession Report (21 Jun 2019)

Key Data Metrics:

World 1Q 2019 GDP Growth (41 countries): Expansion 35, Negative 6
World Forward Projected Growth (41 countries): Expansion 6, Contraction 35

U.S. Economic Growth & Inflation

Year-over-Year GDP growth

The Gross Domestic Product (GDP) in the United States expanded 3.20 percent in the first quarter of 2019 over the same quarter of the previous year. GDP Annual Growth Rate in the United States averaged 3.20 percent from 1948 until 2019, reaching an all time high of 13.40 percent in the fourth quarter of 1950 and a record low of -3.90 percent in the second quarter of 2009.

Quarter-over-Quarter GDP growth

The US economy advanced an annualized 3.1 percent in the first quarter of 2019, slightly below earlier figures of a 3.2 percent expansion and in line with market expectations, the second estimate showed. It follows a 2.2 percent growth in the previous three-month period. Nonresidential fixed investment and private inventory investment were revised lower and while upward revisions were seen exports and personal consumption expenditures. GDP Growth Rate in the United States averaged 3.22 percent from 1947 until 2019, reaching an all time high of 16.70 percent in the first quarter of 1950 and a record low of -10 percent in the first quarter of 1958.

Annualized Inflation

The US annual inflation rate fell to 1.6 percent in June 2019 from 1.8 percent in the previous month, as food prices rose at a softer pace while energy cost continued to decline. The core inflation rate, which excludes volatile items such as food and energy, edged up to 2.1 percent, beating forecast of 2 percent. On a monthly basis, the core index increased 0.3 percent, the most since January 2018. Inflation Rate in the United States averaged 3.26 percent from 1914 until 2019, reaching an all time high of 23.70 percent in June of 1920 and a record low of -15.80 percent in June of 1921.

Eurozone Economic Growth & Inflation

Year-over-Year GDP growth

The gross domestic product in the Euro Area expanded 1.2 percent year-on-year in the first quarter of 2019, the same pace as in the previous period and in line with early estimates. GDP Annual Growth Rate in the Euro Area averaged 1.69 percent from 1995 until 2019, reaching an all time high of 5 percent in the first quarter of 1995 and a record low of -5.50 percent in the first quarter of 2009.

Quarter-over-Quarter GDP growth

The Eurozone quarterly economic growth was confirmed at 0.4 percent in the first quarter of 2019, above the previous three-month period's expansion of 0.2 percent. Among the bloc's largest economies, Germany and Italy returned to growth and Spain's economy advanced at faster pace, while France's expansion was unchanged. GDP Growth Rate in the Euro Area averaged 0.39 percent from 1995 until 2019, reaching an all time high of 1.30 percent in the second quarter of 1997 and a record low of -3 percent in the first quarter of 2009.

Annualized Inflation

The annual inflation rate in the Euro Area stood at 1.2 percent in June 2019, unchanged from the previous month and in line with market expectations, a preliminary estimate showed. It remained the lowest inflation rate since April last year, due to a slowdown in cost of energy. Inflation Rate in the Euro Area averaged 2 percent from 1991 until 2019, reaching an all time high of 5 percent in July of 1991 and a record low of -0.60 percent in July of 2009.

Japan Economic Growth & Inflation

Year-over-Year GDP growth

The Gross Domestic Product (GDP) in Japan expanded 0.90 percent in the first quarter of 2019 over the same quarter of the previous year. GDP Annual Growth Rate in Japan averaged 1.98 percent from 1981 until 2019, reaching an all time high of 9.40 percent in the first quarter of 1988 and a record low of -8.80 percent in the first quarter of 2009.

Quarter-over-Quarter GDP growth

The Japanese economy advanced 0.6 percent quarter-on-quarter in the first quarter of 2019, stronger than a preliminary estimate of 0.5 percent and after an upwardly revised 0.5 percent growth in the previous period. Net exports contributed positively to the GDP growth for the first time in four quarters, while there was a substantial upward revision to capital expenditure. On an annualized basis, the economy grew 2.2 percent in the first quarter, better than a preliminary figure of 2.1 percent and following an upwardly revised 1.8 percent advance in the previous quarter. GDP Growth Rate in Japan averaged 0.49 percent from 1980 until 2019, reaching an all time high of 3.20 percent in the second quarter of 1990 and a record low of -4.80 percent in the first quarter of 2009.

Annualized Inflation

Japan's consumer price inflation fell to 0.7 percent year-on-year in May 2019 from a six month-high of 0.9 percent in the prior month and in line with market consensus. The slowdown in headline inflation was mainly led by electricity, transportation & communication and housing. Meanwhile, prices of food rose for the second straight month. On a seasonally adjusted monthly basis, consumer prices were unchanged in May, after a 0.1 percent gain in April. Inflation Rate in Japan averaged 2.97 percent from 1958 until 2019, reaching an all time high of 24.90 percent in February of 1974 and a record low of -2.50 percent in October of 2009.

China Economic Growth & Inflation

Year-over-Year GDP growth

The Chinese economy advanced 6.4 percent year-on-year in the March quarter of 2019, the same pace as in the previous quarter but slightly above market expectations of a 6.3 percent expansion. Industrial output growth accelerated markedly and consumer demand strengthened amid government's pro-growth policies, which helped stabilize sentiments rattled by trade dispute with the US. On a quarter-on-quarter basis, the economy grew 1.4 percent in the first quarter, compared to a 1.5 percent expansion in the previous period and matching market estimates. It was the weakest quarterly growth rate since the first quarter of 2016. GDP Annual Growth Rate in China averaged 9.52 percent from 1989 until 2019, reaching an all time high of 15.40 percent in the first quarter of 1993 and a record low of 3.80 percent in the fourth quarter of 1990.

Quarter-over-Quarter GDP growth

The Chinese economy grew by 1.4 percent quarter-on-quarter in the three months to March 2019, compared to a 1.5 percent expansion in the previous period and in line with market estimates. It was the weakest quarterly growth rate since the first quarter of 2016. GDP Growth Rate in China averaged 1.78 percent from 2010 until 2019, reaching an all time high of 2.40 percent in the first quarter of 2011 and a record low of 1.40 percent in the first quarter of 2016.

Annualized Inflation

China's consumer price inflation rose to 2.7 percent year-on-year in May 2019 from 2.5 percent in the previous month and matching market consensus. It was the highest inflation rate since February last year, as food cost increased the most since January 2012, with pork prices being persistently high following an outbreak of African swine fever. On a monthly basis, consumer prices were unchanged in May, after a 0.1 percent gain in April, in line with expectations. Inflation Rate in China averaged 5.16 percent from 1986 until 2019, reaching an all time high of 28.40 percent in February of 1989 and a record low of -2.20 percent in April of 1999.

Valuation Model

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

Technical Model

The Technical model reverted to GREEN this past week. World Equity markets continue to remain near their most recent peak with with most technical indicators and market breadth improving.

Sentiment Model

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

Economic Stress Model

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

World Bond Asset Class Return Monitor

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

Total Market Bond Basket:

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

Government Bonds:

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

Corporate Bonds:

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

High Yield Bonds:

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

Inflation Protected Bonds:

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

1 Year Rolling Bond Performance

Over the past 12 months rolling period the top performing bond asset class has been U.S. Corporate Bonds with Int'l Corporate Bonds the worst performing.
The U.S. Total Bond Market (RED) and the International (ex-U.S.) Total Bond Market (BLUE) have delivered positive returns over the past year.

3 Month Rolling Bond Performance

Over the past 3 month rolling period the top performing bond asset class has been U.S. Corporate Bonds with U.S. high yield Bonds lagging.
U.S. Total Bond Market (RED) and International (ex-U.S.) Total Bond Market (BLUE) having delivered positive returns over the past quarter (3 months).

1 Month Rolling Bond Performance

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

Past Week Bond Asset Class Performance

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

Commentary:

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

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

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

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

Bonds delivered flat returns throughout 2018 as rising inflation and strong growth persisted. However, recent economic weakness and subdued inflation has been favorable for both U.S. and International bonds.

We are very cognizant of the fact bond yields are potentially at generational lows (prices overbought and at generational highs) and any significant economic recovery (with associated increases in inflation) has the potential to be very detrimental to bond fund returns.

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

U.S. 10 year Treasury Yield

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

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

German 10 year Bund Yield

German 10 year treasury yields have remained confined below 0.92% since 2014 with a bottom of -0.19% achieved in June 2016 (broken lower in June 2019). Yields continue to fall from their early 2018 and this past week fell to all time lows.

A weekly close above 0.93% and it is likely the bull market in German bonds is over. There is no indication at present to suggest such will occur anytime in the foreseeable future but we are monitoring for such an event.

Japanese 10 year Treasury Yield

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

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

U.S. 30 year Treasury Yield

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

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

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

Currencies

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

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

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

The U.S. Dollar Index to allow comparison to its constituents.
The Australian Dollar (not a part of the USD Index) as it is a popular commodity currency.
Gold (priced in USD) as it typically acts more like a currency void of fiat printing.

1 Year Rolling Currency Performance

Over the past 12 months rolling period the top performing major currency has been Gold with the Swedish Krona the worst performing.

3 Month Rolling Currency Performance

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

1 Month Rolling Currency Performance

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

Past Week Currency Performance

Over the past week the top performing major currency was Gold with the Swedish Krona lagging.

U.S. Dollar: (Neutral Bias)

Commentary:

The USD index was down -0.48% over the past week. The USD struggled throughout 2017 and into early 2018 as growth indicators had remained stagnant, U.S. officials complained about their "overvalued U.S. dollar", and rate expectation differentials between Central Banks began to narrow on gradual improvements in the Euro area economic data. However, since early 2018 this process has reversed with the USD remaining very bullish as weakening economic data out of the Eurozone have been offset by strengthening data (and rising relative interest rates) out of the U.S.

Support / Resistance Levels (based upon close):

Weekly: 94.82 / 98.18
Monthly: 94.58 / 98.66

US Dollar Index Daily charts

The 1 year daily chart above shows the steady rise in the USD from late April 2018 to present. Over 2018 it remained very strong but has recently struggled with a triple top @ 97.52-97.67. It has tested and held the short term uptrend line 6 times before the recent break.

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

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

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

US Dollar Index Weekly charts

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

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

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

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

US Dollar Index Monthly chart

For the month of July the US Dollar index has gained +0.79%.

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

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

Euro (Neutral Bias)

The Euro gained +0.37% over the past week. It has shown remarkable longer-term resilience given European political uncertainty (Brexit, Spain, Germany, Italy) but has weakened since early 2018 due to eroding economic growth metrics out of the EU.

Support / Resistance Levels (based upon close):

Weekly: 107.99 / 114.62
Monthly: 112.12 /114.47

Euro Daily Charts

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

On the 2nd daily chart price it can be seen how important the yellow band daily resistance zone @ 114.61-116.04 is going back to 2015. It remains below this key resistance level and closed the week between the short term trend 50 and 200 day moving averages.
(Short Term Neutral)

Euro Weekly Chart

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

This past week the Euro closed below the resistance @ 114.47-114.62 and remains range-bound as shown on the chart. It closed the week between the intermediate trend 20 week + 65 week moving averages.
(Intermediate Term Neutral)

Euro Monthly

For the month of July the Euro has lost -0.89%. On a monthly closing basis it closed the month of June above the long term trend 10 month moving average turning long term bullish until months end. It continues to test monthly support @ 112.12-112.20.
(Long Term Bullish)

UK Pound (Bearish Bias)

U.K. Pound Daily Chart

U.K. Pound Weekly Chart

U.K. Pound Monthly Chart

The British Pound gained +0.38% over the past week. Clearly the ongoing Brexit saga will continue to weigh heavily upon cable's performance over the next several years so it remains very volatile.

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

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

This past week the Pound closed the week below its short term trend daily 50 +200 day moving averages and below the intermediate term trend 20 + 65 week moving averages. For the month of July it has lost -0.97% and closed the month of June below its long term 10 month moving average.

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

Support / Resistance Levels (based upon close):

Weekly: 121.78 / 125.87
Monthly: 125.09 / 133.09

Australian Dollar (Bearish Bias)

Australian Dollar Daily Chart

Australian Dollar Weekly Chart (s)

Australian Dollar Monthly Chart

The Australian Dollar gained +0.39% over the past week. Price this past week remained below the critical 2 year weekly support @ 71.71-71.87 established as a consequence of the surprise RBA interest rate cut in late April, 2016 which led to a substantial 5 week decline of -8% and a subsequent 18 month consolidation (as shown in the blue box on the weekly chart).

For the month of July the Aussie dollar has lost -0.02%. It closed the week between 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 June below the long term trend 10 month moving average.

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

Support / Resistance Levels (based upon close):

Weekly: 68.60 / 70.55
Monthly: 70.17 / 76.59

Canadian Dollar (Bullish Bias)

Canadian Dollar Daily Chart

Canadian Dollar Weekly Chart

Canadian Dollar Monthly Chart

The Canadian dollar gained +0.27% over the past week. After topping in Aug, 2017, the Canadian Dollar has remained within a firmly established downtrend and has gradually returned to price levels last seen in early 2017.

The Loonie closed the week above the short term trend 50 + 200 day moving averages and above the intermediate term trend 20 + 65 week moving averages. It has broken our of the down-sloping weekly price channel from its mid-2017 peak.

For the month of July the Loonie has gained +0.35%. It continues to attempt to consolidate near recent lows and closed the month of June above the long term trend 10 month moving average.

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

Support / Resistance Levels (based upon close)

Weekly: 76.26 / 78.13
Monthly: 71.55 / 78.49

Key Weekly Returns (week ending 12 July 2019):

Countries/Regions

World Equities

ACWI (iShares MSCI ACWI Index Fund)

North American Equities

SPY (S&P 500 SPDRs)

QQQ (PowerShares QQQ Trust)

IWM (Russell 2000 iShares)

EWC (Canada iShares)

Characteristics

World Equity Fund

U.S. Large Cap S&P 500 Index

U.S. NASDAQ 100 Fund

U.S. Russell 2000 Small Cap Fund

Canada

Week % Change

+0.35%

+0.73%

+1.30%

-0.36%

+0.10%

Non-North America Equities

VGK (Vanguard European VIPERs)

EPP (iShares MSCI Pacific ex-Japan )

EWJ (Japan iShares)

EEM (iShares MSCI Emerging Markets)

ILF (Latin America 40 Index iShares)

Bonds

BND (Vanguard Total U.S. Bond Market)

BNDX (Vanguard International Bond ETF)

TIP (iShares Barclays TIPS Bond Fund)

PCY (PowerShares Emerging Markets Debt Portfolio)

Europe/U.K

Pacific ex-Japan (inc. Australia + NZ)

Japan

Emerging Markets

Latin America

US Total Bond (44% Gov't Tsy, 56%Corp)

World Investment Grade Bonds ex-US

Inflation Protected Gov't Bonds

Emerging Market Sovereign Debt

-0.60%

-0.61%

-0.65%

-0.19%

+1.04%

-0.30%

-0.59%

+0.16%

-0.44%

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

+2.69%

+1.81%

+1.05%

+1.42%

+0.98%

+4.77%

Currencies

UUP (PowerShares DB US Dollar Bullish Fund)

FXA (Currency Shares Australian Dollar Trust)

FXB (Currency Shares British Pound Sterling Trust)

FXC (Currency Shares Canadian Dollar Trust)

FXE (Currency Shares Euro Trust)

FXY (Currency Shares Japanese Yen Trust)

U.S. Dollar

Australian Dollar

U.K. Sterling

Canadian Dollar

Euro

Japanese Yen

-0.34%

+0.56%

+0.39%

+0.30%

+0.40%

+0.60%

Charts to Watch

Commodity Basket Index

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

Commodities (as measured by the Reuters/Jefferies CRB index, a basket of 19 commodities) bottomed in early 2016 (along with equities) and have been on a gradual rise. In order to confirm world growth is firming we would like to see commodities moving higher but they have broken down in late 2018.

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

Equity Market Volatility

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

The VXV uses the same calculation but looks forward 3 months. When the VIX is greater than the VXV ($VIX:$VXV ratio > 1.0) the volatility structure is termed to be in "contango". It indicates traders are much more concerned about short term volatility than they are about longer term volatility and when that ratio returns to "normal" (< 0.93) it is typically a good sign market stress is easing (and a good time to add to equity positions).

As of this weeks market close volatility closed below the "VIX Trigger Event" area with the VIX below 16. Volatility remains bullish for equities.

European Equities

Since the 2009 market bottom Europe has been the weakest major equity growth region. As such, we continue to monitor the German DAX index and French CAC index for indications of improving performance out of Europe.

For most of 2015-2016 Europe remained within a deflationary environment with poor stock performance. This changed in late 2016 when both the DAX and CAC were able to break above their respective trading ranges. The DAX topped out in Jan 2018 and remains well below this level. Contrarily, the French CAC has shown greater strength and has returned to near its early 2018 peak.

The recent strength in the DAX is encouraging but we want to see the support @ 11787-11945 hold on any retest.

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

Of particular concern is Deutsche Bank which continues to decline (down over 94% from its 2007 peak!) DB has a massive derivatives exposure (currently estimated at $40T notional with net exposure near $100B) and should they be put forced into a position whereby they need to restructure it could potentially lead to a catastrophic ripple effects worldwide.

They announced a significant restructuring effort in the 2nd week of July, 2019 so we are keenly monitoring their price performance into the end of the year.

Chinese Equities

The Shanghai Composite index was modestly lower this past week. It has broken its downtrend line from the recent top and now appears to want to test support @ 2715-2820.

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 continues to increase and the recent strength is encouraging.

PRECIOUS METALS

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

This past week gold stocks moved out of the deep "low-risk vs. high-reward" range but remain near their cheapest valuations in 22 years. Historically purchases of gold equities when within this range have been a very good long term buying opportunities and it now appears gold stocks are attempting to play "catch-up" to the price of bullion.

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

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

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

The current Gold:Silver ratio remains above 80 (Green line) and near 26 year highs. It can be seen each instance in the past 40 years where the ratio has crossed above 80 has resulted in very good long term gains in silver.

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

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

The current Platinum:Gold ratio remains well below 0.85 (red line on the chart below).
A Platinum/Gold ratio < 0.85 has only occurred 4.7% of the time back to 1971.
Prior to recent lows, the lowest Platinum:Gold ratio since August 1971 (when the USD was removed from the gold standard) was hit on 20 Sept 1982 when it hit a ratio low of 0.689 (Platinum $300.40/Gold $436.00).
If Platinum were to return to its most common ratio relative to Gold (1.0x-1.25x which has been common 35% of the time) it would imply a price rise of approximately 50-90% from recent levels.

Platinum now sits on a price support extending back to 2004 and, combined with its ratio relative to the price of gold, represents a compelling long term buy point.

The following charts and commentary (in italics; bold print is our emphasis) are sourced from Kitco from commentary sourced in Feb 2017 when the ratio was near 0.85 (Platinum has become even cheaper on a relative basis since the data was published):

Platinum to gold ratios show wide variance over the 46 year period ranging from highs above 2.5 before and soon after Nixon began taking the United States off the gold standard to periodic lows below 1.0:

Our data set covers 553 months beginning in January 1971. The distribution of ratios in both tabular and chart format follows:

Platinum/Gold Ratio: % of Months

< 0.85: 4.7%
.85-1.01: 5.0%
1.0-1.25: 34.7%
1.25-1.5: 19.3%
1.5-2.0: 15.4%
2.0-2.5: 8.9%
> 2.5: 2.0%

From our data set and the distributions of monthly average platinum-gold ratios from January 1971 thru January 2017, I glean the following:

A ratio of less than 0.75 is a single outlier that occurred once during the second half of 1982 when overall ratios averaged 0.81.
Ratios <0.85 are quite unusual at 4.7%. They occurred for two months in the first quarter of 1975, the aforementioned six months in 1982, in June-July of 1985, and for an ongoing run of 16 months that commenced in October 2015.
Ratios from 0.85 to 1.0 constitute 15.0% of the record.
Pt:Au from 1.0 to 1.25 is the most common range and comprises 34.7% of ratios since 1971.
The ratios between 1.25 and 1.5 occur 19.3% of the time.
Ratios from 1.5 to 2.0 make up 15.4% of the record.
The 2.0-2.5 interval covers 8.9% of the months in our compendium.
The 11 monthly outliers at >2.5 comprise 2.0% of the total record and have not occurred since 1971.

From a compendium of sources, the average crustal abundance of both metals is around 4 ppb. Based solely on this fact, platinum and gold should trade at about the same price.

And indeed, our compilation shows that for nearly 50% of the time since gold was decoupled from the world’s reserve currency and allowed to trade freely on exchanges, the price ratio has ranged from 0.85 to 1.25. That said, since January 1971, the average price of platinum has been $637/oz and gold has been $518/oz for an overall ratio of 1.23:1. Clearly there are other factors other than the nearly equal crustal abundances that account for this historic price relationship.

A variety of supply and demand factors cause platinum to trade at a premium to gold:

Platinum is a much smaller market. Cumulative world production of platinum is estimated to be about 5% of gold (9400 tonnes versus 182,000 tonnes). From 1994-2014, 3700 tonnes of platinum were mined versus 52,600 tonnes of gold or about 7% (source: USGS).
Platinum is largely an industrial metal. Catalytic converters, electronics, petroleum and chemical catalysts, medical technologies, and many minor uses constitute over 60% of its annual demand. Around 30% is used in jewelry and 10% for investment demand. Also, 30% of the annual platinum supply now comes from recycling, mostly from catalytic converters. Some demand is consumed and lost to the marketplace.
Gold is overwhelmingly a precious metal; 90% is used in jewelry and investments and only 10% in industrial applications. An estimated 98% of all the gold ever mined in the world remains available and held in jewelry, by central banks, in private hoards, and as fabricated products (source: USGS).
About 70% of yearly platinum mine supply comes from South Africa, a geopolitically risky country. Much new platinum is a by-product of nickel-copper mining and smelting; therefore, annual platinum production is dependent on the supply-demand fundamentals and prices of these primary metals.

Fluctuations in the relative prices of platinum and gold are largely driven by:

the overall growth and health of the world’s economy and in the case of platinum, the automotive industry;
labor, power, currency, and political issues in South Africa that cause major perturbations in the platinum supply;
safe haven hoarding of gold and to a much lesser extent, platinum, in times of economic uncertainty and major geopolitical events; speculators moving in and out of paper markets of both metals (bullion exchanges, ETFs, and derivatives) and to a lesser extent, central bank trading of physical gold.

Platinum functions both as a precious and industrial metal. It is usually tied to the price of gold in both short- and long-term trading patterns. In times of financial distress and economic turmoil, platinum tends to behave more like gold with widespread hoarding.

The platinum-gold ratio can be used to ascertain whether one metal is over- or undervalued with respect to the other. The current monthly average ratio below 0.85 is unusual and indicates that platinum is severely undervalued with respect to gold *

* The ratio recently hit 0.60 and remains near a record low.

Elliott Wave

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

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

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

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

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

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

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

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

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

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

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

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

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

S&P 500 Weekly Elliott Wave Chart

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

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

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

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

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

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

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

If the market is within Major Wave 3 as per the 1st chart, we would expect a large multi-year advance in Major wave 3. This would project much higher equity prices into the future.

Alternately, if the have completed Primary Wave III of the entire bull market advance from 2009-2018, a Primary Wave IV is currently in process (a-b-c). At its conclusion (target near 2100); we would project a Primary Wave 5 advance to new all-time highs to end the bull market.

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

Market Valuation

U.S. (NYSE) Margin Debt

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

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

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

As of the end of 2018 U.S. margin debt has shown a significant decline from its early 2018 peak. A similar decline occurred in 2015 (and did not derail the bull market) but the recent decline is a concern given how late we are in the market cycle combined with the extreme levels of margin debt relative to past market cycles.

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

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

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

As of 30 June 2019 the average of these 4 measures places the U.S. stock market (S&P 500 index) as being 110% overvalued relative to its long term geometric mean. This remains the 2nd highest valuation in the history of the stock market going back to 1900. This level is well over 2 standard deviations above the mean and above the market peaks in both 2007 and 1929. It is only surpassed by the 2000 dotcom bubble peak.

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

The indicator measures the price of Corporate Equities (Mkt Cap) to Gross Domestic Product (GDP) as a ratio going back to the 1950's. As can be seen below, the ratio of equity prices relative to GDP currently stands at 139.7%. It recently exceeded the recent 2015 peak of 128.9% and is second only to the 2000 equity peak of 161.1% in terms of equity overvaluation relative to economic output.

The de-trended graph indicates it would take a -36% market decline to return valuations back to the long term detrended regression line (shown in red on the 2nd chart).

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

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

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

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

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

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

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

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

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

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

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

His recent conclusion:

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

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

Global Asset Class 10-year Expected Nominal Return Forecast
(data as of 30 June 2019)
(Source: Research Affiliates)

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

Data continues to point to Emerging Market/EAFE equities (ex-U.S.) as providing the greatest returns over the next 10 years with Government Treasury bonds (worldwide) showing minimal returns due to low global interest rates.

Cycle Commentary

At left is a 20 year chart of the seasonal monthly performance of the Dow Jones Global Index.

The number at the top of the column is the percentage of time the month is positive and at the bottom is the average % gain/loss for the month.

As can be seen, over the past 20 years the period October-April yearly offers the highest potential global equity market returns (cumulative +5.5% average return) while the period May-September offers little in total return (-2.1% cumulative average return).

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

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

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

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

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

Ned Davis Research 2019 Composite Model

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

10 year Decennial Market Cycle (Year 9)
4 year Presidential Market Cycle (Year 3)
1 year Annual Seasonal Market Cycle

U.S. 4 Year Presidential Election Cycle

*2019 is Year 3

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

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

Presidential Cycle S&P 500 returns (inc. dividends):

1988-Year 4: +12.40%
1989-Year1: +27.25%
1990-Year 2: -6.56%
1991-Year 3: +26.31%
1992-Year 4: +4.46%
1993-Year 1: +7.06%
1994-Year 2: -1.54%
1995-Year 3: +34.11%
1996-Year 4: +20.26%
1997-Year 1: +31.01%
1998-Year 2: +26.67%
1999-Year 3: +19.53%
2000-Year 4: -10.14%

2001-Year 1: -13.04%
2002-Year 2: -23.37%
2003-Year 3: +26.38%
2004-Year 4: +8.99%
2005-Year 1: +3.00%
2006-Year 2: +13.62%
2007-Year 3: +3.53%
2008-Year 4: -38.49%
2009-Year 1: +23.45%
2010-Year 2: +12.78%
2011-Year 3: +0.00%
2012-Year 4: +13.41%
2013-Year 1: +29.60%

2014-Year 2: +11.39%
2015-Year 3: -0.73%
2016-Year 4: +11.96%
2017-Year 1: +21.83%
2018-Year 2: -4.38%
2019-Year 3: TBD