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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)
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 (as measured by the Dow Jones Global Index) returned -1.01% over the past trading week and closed near all-time daily/weekly closing highs. They remain substantially overbought and a pullback should be expected.
- Global composite bonds had positive returns over the past week with a global benchmark return of +0.73%. Bonds have continued to perform very well in this slowing global macro environment over the past year but remain at a critical point where it may be appropriate to take some profits on the past year of strong returns (bonds are substantially over-valued). We continue to monitor them very closely.
- All equity regions have experienced substantial returns from the 24 Dec 2018 bottom. U.S. equities continue to lead with Emerging markets regions lagging. This is likely a function of the ongoing tariff wars over the past year and any global resolution (beyond the current "phase-1" trade deal between the U.S. & China) would be very positive for ex-U.S. regions. Conversely, any negative news on further tariffs globally would be a substantial headwind to further global equity gains into 2020.
- Global economic growth remains near 3 year lows with stagnant movement in global services offsetting contraction in global manufacturing. However, the latest data has given hope the worst may be over in both the Eurozone as well as China (barring negative developments associated with the new coronavirus outbreak).
DOW JONES GLOBAL INDEX
(DAILY CLOSE)
DOW JONES GLOBAL INDEX
(WEEKLY CLOSE)
Weekly Global Macro Review
Global equity funds closed lower on the week with a benchmark global equity ETF return (the Vanguard Total World Stock ETF) of -1.40%. The top performing equity region on the week was U.S. markets (-0.99%) with Emerging markets significantly under-performing (-3.53%) on the back of the recent coronavirus breakout (more below).
U.S. Equities
Stocks closed lower for the holiday-shortened week, as more quarterly earnings reports rolled in and investors worried about the coronavirus outbreak in China. The large-cap benchmarks S&P 500 index lost -1.0% with the technology-heavy Nasdaq Composite Index outperformed and down -0.8% on the week. Markets were closed Monday in observance of Martin Luther King Jr. Day.
Utilities shares outperformed, helped by a steep decline in longer-term bond yields, which heightens the appeal of utilities’ relatively attractive dividends. Energy shares lagged as oil prices continued the decline they began on January 6. Expectations for a drop-off in global tourism in the wake of the coronavirus appeared to play a role in driving concerns over oil demand.
The outbreak in China dominated sentiment as the U.S. trading week began on Tuesday with tourism, airline, and gaming stocks bearing the brunt of the selling. News of a confirmed case in the Seattle area appeared to particularly worry markets. Renewed trade fears may also have weighed on sentiment after President Donald Trump told The Wall Street Journal that he was prepared to implement tariffs on European auto imports.
Some favorable economic reports may have helped calm investors’ fears at midweek. On Wednesday, news arrived that existing home sales in December had risen more than expected and reached their highest level since February 2018. The number of previously owned homes for sale also reached a record low, which bodes well for future construction activity. On Thursday, the Labor Department reported that weekly jobless claims rose a bit, but less than anticipated. Good news on European manufacturing appeared to help stocks off to a good start on Friday morning before reports of a second U.S. case of coronavirus—as well as the first coronavirus death of a young, apparently healthy victim in China—appeared to derail the rally.
US Bonds
Fears over the coronavirus outbreak clearly eclipsed economic data in the fixed income markets, as investors sought the safe haven of Treasuries. The yield on the benchmark 10-year Treasury note plunged to its lowest level in about three months on Friday. (Bond prices and yields move in opposite directions.)
Within the investment-grade corporate bond segment, energy issues under-performed for much of the week, partly due to a decline in natural gas prices. The high yield market was mostly focused on strong new issuance but was also weak due to the decline in natural gas and oil prices.
Europe
European stocks finished lower on the week, recovering from earlier weakness after economic data showed the German economy might be picking up steam and the World Health Organization stopped short of declaring the coronavirus outbreak in China a global health emergency. On the week Germany’s DAX Index rose 0.4%, the French CAC fell -1.3%, Italy's MIB lost -0.7% and the Spanish IBEX was down -1.2%.
The French and German economies, the largest in the Eurozone, posted a positive start to the year, with combined output growth at a five-month high in January. In Germany, overall output rose for the second successive month, with new orders increasing for the first time since June 2019. A stronger expansion in services activity and a less marked decline in manufacturing output contributed to the improving picture. The French economy continued its solid performance, as both output and new orders rose for the 10th month running. The rest of the euro area showed signs of weakness. Output growth slowed to a six-and-a-half year low, signaling near stagnation in business activity outside Germany and France.
UK
The UK’s FTSE 100 Index fell -1.2% on the week in line with the European market performance.
On Brexit news UK Chancellor of the Exchequer Sajid Javid said in an interview with the Financial Times (FT) that the UK would not seek regulatory alignment with European Union (EU) rules and intends to be out of the single market and customs union by the end of the year. He said the government would not support big manufacturers that favor alignment with EU rules. Javid’s comments represent a shift in the UK’s negotiating stance. The change in stance caused dismay in the UK auto industry and in Brussels, where officials were quoted by the FT as saying a divergence from EU rules would be economically damaging. Javid then sought to reassure businesses that there would be no wholesale dumping of EU regulations. He also said that the government would always protect British business interests and maintain high standards.
UK business activity expanded in January for the first time in five months, rising above the 50.0 level that separates growth from contraction, an IHS Markit survey of purchasing managers showed. Manufacturing output was still below the 50.0 level but stabilized compared with the end of 2019.
U.S. officials gave notice at the World Economic Forum meeting at Davos, Switzerland, that they now plan to tackle trade relations with the European Union. President Trump again threatened to impose “very high tariffs” on European cars if the two sides cannot reach a trade agreement soon. The White House quoted Trump as saying he expects “tangible progress” on a trade agreement in the near future. Separately, U.S. Treasury Secretary Steven Mnuchin said the administration expects to conclude a U.S. UK trade deal this year.
Japan
Japanese stocks declined for the week. The Nikkei 225 Stock Average fell -0.9%. The large-cap TOPIX Index and the TOPIX Small Index also edged lower for the week.
Japan’s exports fell a more-than-expected 6.3% in December compared with a year earlier, extending the longest stretch of monthly contractions (13) since 2016. The fall-off in exports, as reported by the Ministry of Finance on Thursday, was larger than most economists had forecast. November’s export data were revised lower as the Japanese economy continued to suffer from the global slowdown caused by the U.S.-China trade war. Although the “phase one” trade deal has been signed, most economy watchers believe the decline in exports will persist for a few more months.
The Bank of Japan (BoJ) left its interest rate and asset purchase targets unchanged at the central bank meeting that ended on Tuesday. Although economic growth in the fourth quarter of 2019 is expected to show a contraction, due to natural disasters and the negative impact on consumption from the October 1 sales tax hike, most economists believe that the decline in overseas demand has bottomed. Looking ahead, the central bankers exuded a more positive outlook for Japan’s economy and raised their economic growth projection for fiscal 2020 (which begins April 1) to 0.9%, up from October’s 0.7% forecast.
China
The sudden appearance of a new coronavirus in Wuhan, a city of 11 million people in central China, shook Chinese markets. Reminiscent of the SARS outbreak in 2003, the Shanghai Composite Index suffered its biggest one-day fall (2.8%) in over eight months on January 23, the last day of trading before the Chinese New Year (CNY) lunar holiday. From Monday’s close through Thursday’s close, the Shanghai Composite Index lost -3.2%, and the CSI 300 large-cap index declined by -4.3%.
When compared with the SARS (severe acute respiratory syndrome) outbreak in 2003, there are obvious similarities but also some key differences. Today's Chinese economy is more consumer-oriented and, arguably, more vulnerable. Since China's economic growth slowed significantly before the Wuhan coronavirus outbreak, there is growing market speculation about a possible short-term stimulus. The biggest economic casualties are likely to be retail sales (online sales could benefit), restaurants, and airlines and travel, as consumers take steps to lower the chances of infection by staying home more.
It would appear the Chinese government’s initial response to this new coronavirus may be somewhat more proactive and transparent compared to the previous SARs outbreak. The previous SARS epidemic began in Guangdong Province in November 2002 where the patient, a farmer from Shunde, Forshan, Guangdong, was treated in the First People's Hospital of Foshan and died soon after. No definite diagnosis was made on his cause of death a the time and, despite taking some action to control it, Chinese government officials did not inform the World Health Organization of the outbreak until February 2003. This lack of openness caused delays in efforts to control the epidemic, resulting in criticism of the People's Republic of China from the international community. In contrast, the most recent outbreak was reported to the WHO on 31 December 2019 when they were alerted to several cases of pneumonia in Wuhan City, Hubei Province of China. The virus did not match any other known virus, was confirmed as a new coronavirus on 07 January 2020 and the 1st patient died on 09 January.
Notwithstanding prompt action by Chinese authorities—including the lock-down of Wuhan and neighboring cities over the Chinese holiday, halting public transport, and checking private cars—the disease has spread quickly, with cases reported in 23 provinces, Hong Kong, Macau, and six other countries. The big holiday migration in China typically gets under way well before the official start of the Chinese New Year. The number of reported cases was 800 as of January 24, with 25 deaths, compared with only 77 cases on January 21.
U.S. Equities
Stocks closed lower for the holiday-shortened week, as more quarterly earnings reports rolled in and investors worried about the coronavirus outbreak in China. The large-cap benchmarks S&P 500 index lost -1.0% with the technology-heavy Nasdaq Composite Index outperformed and down -0.8% on the week. Markets were closed Monday in observance of Martin Luther King Jr. Day.
Utilities shares outperformed, helped by a steep decline in longer-term bond yields, which heightens the appeal of utilities’ relatively attractive dividends. Energy shares lagged as oil prices continued the decline they began on January 6. Expectations for a drop-off in global tourism in the wake of the coronavirus appeared to play a role in driving concerns over oil demand.
The outbreak in China dominated sentiment as the U.S. trading week began on Tuesday with tourism, airline, and gaming stocks bearing the brunt of the selling. News of a confirmed case in the Seattle area appeared to particularly worry markets. Renewed trade fears may also have weighed on sentiment after President Donald Trump told The Wall Street Journal that he was prepared to implement tariffs on European auto imports.
Some favorable economic reports may have helped calm investors’ fears at midweek. On Wednesday, news arrived that existing home sales in December had risen more than expected and reached their highest level since February 2018. The number of previously owned homes for sale also reached a record low, which bodes well for future construction activity. On Thursday, the Labor Department reported that weekly jobless claims rose a bit, but less than anticipated. Good news on European manufacturing appeared to help stocks off to a good start on Friday morning before reports of a second U.S. case of coronavirus—as well as the first coronavirus death of a young, apparently healthy victim in China—appeared to derail the rally.
US Bonds
Fears over the coronavirus outbreak clearly eclipsed economic data in the fixed income markets, as investors sought the safe haven of Treasuries. The yield on the benchmark 10-year Treasury note plunged to its lowest level in about three months on Friday. (Bond prices and yields move in opposite directions.)
Within the investment-grade corporate bond segment, energy issues under-performed for much of the week, partly due to a decline in natural gas prices. The high yield market was mostly focused on strong new issuance but was also weak due to the decline in natural gas and oil prices.
Europe
European stocks finished lower on the week, recovering from earlier weakness after economic data showed the German economy might be picking up steam and the World Health Organization stopped short of declaring the coronavirus outbreak in China a global health emergency. On the week Germany’s DAX Index rose 0.4%, the French CAC fell -1.3%, Italy's MIB lost -0.7% and the Spanish IBEX was down -1.2%.
The French and German economies, the largest in the Eurozone, posted a positive start to the year, with combined output growth at a five-month high in January. In Germany, overall output rose for the second successive month, with new orders increasing for the first time since June 2019. A stronger expansion in services activity and a less marked decline in manufacturing output contributed to the improving picture. The French economy continued its solid performance, as both output and new orders rose for the 10th month running. The rest of the euro area showed signs of weakness. Output growth slowed to a six-and-a-half year low, signaling near stagnation in business activity outside Germany and France.
UK
The UK’s FTSE 100 Index fell -1.2% on the week in line with the European market performance.
On Brexit news UK Chancellor of the Exchequer Sajid Javid said in an interview with the Financial Times (FT) that the UK would not seek regulatory alignment with European Union (EU) rules and intends to be out of the single market and customs union by the end of the year. He said the government would not support big manufacturers that favor alignment with EU rules. Javid’s comments represent a shift in the UK’s negotiating stance. The change in stance caused dismay in the UK auto industry and in Brussels, where officials were quoted by the FT as saying a divergence from EU rules would be economically damaging. Javid then sought to reassure businesses that there would be no wholesale dumping of EU regulations. He also said that the government would always protect British business interests and maintain high standards.
UK business activity expanded in January for the first time in five months, rising above the 50.0 level that separates growth from contraction, an IHS Markit survey of purchasing managers showed. Manufacturing output was still below the 50.0 level but stabilized compared with the end of 2019.
U.S. officials gave notice at the World Economic Forum meeting at Davos, Switzerland, that they now plan to tackle trade relations with the European Union. President Trump again threatened to impose “very high tariffs” on European cars if the two sides cannot reach a trade agreement soon. The White House quoted Trump as saying he expects “tangible progress” on a trade agreement in the near future. Separately, U.S. Treasury Secretary Steven Mnuchin said the administration expects to conclude a U.S. UK trade deal this year.
Japan
Japanese stocks declined for the week. The Nikkei 225 Stock Average fell -0.9%. The large-cap TOPIX Index and the TOPIX Small Index also edged lower for the week.
Japan’s exports fell a more-than-expected 6.3% in December compared with a year earlier, extending the longest stretch of monthly contractions (13) since 2016. The fall-off in exports, as reported by the Ministry of Finance on Thursday, was larger than most economists had forecast. November’s export data were revised lower as the Japanese economy continued to suffer from the global slowdown caused by the U.S.-China trade war. Although the “phase one” trade deal has been signed, most economy watchers believe the decline in exports will persist for a few more months.
The Bank of Japan (BoJ) left its interest rate and asset purchase targets unchanged at the central bank meeting that ended on Tuesday. Although economic growth in the fourth quarter of 2019 is expected to show a contraction, due to natural disasters and the negative impact on consumption from the October 1 sales tax hike, most economists believe that the decline in overseas demand has bottomed. Looking ahead, the central bankers exuded a more positive outlook for Japan’s economy and raised their economic growth projection for fiscal 2020 (which begins April 1) to 0.9%, up from October’s 0.7% forecast.
China
The sudden appearance of a new coronavirus in Wuhan, a city of 11 million people in central China, shook Chinese markets. Reminiscent of the SARS outbreak in 2003, the Shanghai Composite Index suffered its biggest one-day fall (2.8%) in over eight months on January 23, the last day of trading before the Chinese New Year (CNY) lunar holiday. From Monday’s close through Thursday’s close, the Shanghai Composite Index lost -3.2%, and the CSI 300 large-cap index declined by -4.3%.
When compared with the SARS (severe acute respiratory syndrome) outbreak in 2003, there are obvious similarities but also some key differences. Today's Chinese economy is more consumer-oriented and, arguably, more vulnerable. Since China's economic growth slowed significantly before the Wuhan coronavirus outbreak, there is growing market speculation about a possible short-term stimulus. The biggest economic casualties are likely to be retail sales (online sales could benefit), restaurants, and airlines and travel, as consumers take steps to lower the chances of infection by staying home more.
It would appear the Chinese government’s initial response to this new coronavirus may be somewhat more proactive and transparent compared to the previous SARs outbreak. The previous SARS epidemic began in Guangdong Province in November 2002 where the patient, a farmer from Shunde, Forshan, Guangdong, was treated in the First People's Hospital of Foshan and died soon after. No definite diagnosis was made on his cause of death a the time and, despite taking some action to control it, Chinese government officials did not inform the World Health Organization of the outbreak until February 2003. This lack of openness caused delays in efforts to control the epidemic, resulting in criticism of the People's Republic of China from the international community. In contrast, the most recent outbreak was reported to the WHO on 31 December 2019 when they were alerted to several cases of pneumonia in Wuhan City, Hubei Province of China. The virus did not match any other known virus, was confirmed as a new coronavirus on 07 January 2020 and the 1st patient died on 09 January.
Notwithstanding prompt action by Chinese authorities—including the lock-down of Wuhan and neighboring cities over the Chinese holiday, halting public transport, and checking private cars—the disease has spread quickly, with cases reported in 23 provinces, Hong Kong, Macau, and six other countries. The big holiday migration in China typically gets under way well before the official start of the Chinese New Year. The number of reported cases was 800 as of January 24, with 25 deaths, compared with only 77 cases on January 21.
Weekly Significant Macro Events
Coronavirus Outbreak
January 20 – Bloomberg: “Most of China’s provinces are expecting slower economic growth in 2020, underlining the nationwide trend which is expected to result in a tweaking of the formal goal when the legislature meets in March. Twenty-two of 31 major cities, provinces and autonomous regions have so far cut their 2020 target for gross domestic product expansion… Twelve provinces, which made up 42% of China’s economic output at the end of September last year, expect growth at around 6% or lower this year. Another nine provinces forecast their economy would expand between 6%-6.5% this year.”
January 21 – Associated Press (Elaine Kurtenbach): “News that a new virus that has afflicted hundreds of people in central China can spread between humans has rattled financial markets and raised concern it might wallop the economy just as it might be regaining momentum. Health authorities across Asia have been stepping up surveillance and other precautions to prevent a repeat of the disruptions and deaths during the 2003 SARS crisis, which caused $40 billion to $50 billion in losses from reduced travel and spending.”
January 22 – Bloomberg (Jeanny Yu): “From a gas supplier to a shopping mall operator, stocks with ties to the Chinese city at the heart of a virus outbreak are falling. Wuhan Department Store Group Co., which operates several malls in Wuhan, lost 3.1% to head for a weekly drop of 16%. Hubei Heyuan Gas Co., which generates all of its revenue from Hubei province, extended its two-day drop to 10%, the biggest on record.”
January 23 – Bloomberg: “China is struggling to contain rising public anger over its response to a spreading coronavirus even as it took unprecedented steps to slow the outbreak, restricting travel for 40 million people on the eve of Lunar New Year.”
January 24 – Reuters (Judy Hua and Cate Cadell): “China shut part of the Great Wall and suspended public transport in 10 cities, stranding millions of people at the start of the Lunar New Year holiday… as authorities rush to contain a virus that has killed 26 people and infected more than 800. The World Health Organization (WHO) has declared the new coronavirus an “emergency in China” but stopped short of declaring it of international concern.”
January 20 – Bloomberg: “Most of China’s provinces are expecting slower economic growth in 2020, underlining the nationwide trend which is expected to result in a tweaking of the formal goal when the legislature meets in March. Twenty-two of 31 major cities, provinces and autonomous regions have so far cut their 2020 target for gross domestic product expansion… Twelve provinces, which made up 42% of China’s economic output at the end of September last year, expect growth at around 6% or lower this year. Another nine provinces forecast their economy would expand between 6%-6.5% this year.”
January 21 – Associated Press (Elaine Kurtenbach): “News that a new virus that has afflicted hundreds of people in central China can spread between humans has rattled financial markets and raised concern it might wallop the economy just as it might be regaining momentum. Health authorities across Asia have been stepping up surveillance and other precautions to prevent a repeat of the disruptions and deaths during the 2003 SARS crisis, which caused $40 billion to $50 billion in losses from reduced travel and spending.”
January 22 – Bloomberg (Jeanny Yu): “From a gas supplier to a shopping mall operator, stocks with ties to the Chinese city at the heart of a virus outbreak are falling. Wuhan Department Store Group Co., which operates several malls in Wuhan, lost 3.1% to head for a weekly drop of 16%. Hubei Heyuan Gas Co., which generates all of its revenue from Hubei province, extended its two-day drop to 10%, the biggest on record.”
January 23 – Bloomberg: “China is struggling to contain rising public anger over its response to a spreading coronavirus even as it took unprecedented steps to slow the outbreak, restricting travel for 40 million people on the eve of Lunar New Year.”
January 24 – Reuters (Judy Hua and Cate Cadell): “China shut part of the Great Wall and suspended public transport in 10 cities, stranding millions of people at the start of the Lunar New Year holiday… as authorities rush to contain a virus that has killed 26 people and infected more than 800. The World Health Organization (WHO) has declared the new coronavirus an “emergency in China” but stopped short of declaring it of international concern.”
Coronavirus (2019-nCov) Updates
With the new Coronavirus (2019-nCov) now becoming an active threat to global equity markets, we have begun to monitor daily updates from the World Health Organization (latest update shown below).
At right is the statistical data for the 2002-2003 SARS outbreak. As can be seen, the fatality rate in China was approximately 6.6% and it is unclear at this early stage whether the recent Coronavirus outbreak is as serious (or perhaps it may be more serious).
A very important point to make is the SARS outbreak occurred near the end of the 2000-2003 global equity bear market (global markets had already dropped 50% and were attempting to bottom when SARS began). As such, by the time the virus was actively spreading much of the global equity market decline was already completed. It is dramatically different at present as global equity markets have recently reached new all-time highs. As such, there is a potential for much further declines to global equities this time compared to the SARS outbreak.
In addition, in 2002-2003 China contributed much less to global GDP than it does currently. As the worlds 2nd largest economy (after the U.S.), this outbreak has the potential to seriously affect global growth should the virus not be contained quickly.
This has now become probably the most critical data point to monitor over the next several months.
At right is the statistical data for the 2002-2003 SARS outbreak. As can be seen, the fatality rate in China was approximately 6.6% and it is unclear at this early stage whether the recent Coronavirus outbreak is as serious (or perhaps it may be more serious).
A very important point to make is the SARS outbreak occurred near the end of the 2000-2003 global equity bear market (global markets had already dropped 50% and were attempting to bottom when SARS began). As such, by the time the virus was actively spreading much of the global equity market decline was already completed. It is dramatically different at present as global equity markets have recently reached new all-time highs. As such, there is a potential for much further declines to global equities this time compared to the SARS outbreak.
In addition, in 2002-2003 China contributed much less to global GDP than it does currently. As the worlds 2nd largest economy (after the U.S.), this outbreak has the potential to seriously affect global growth should the virus not be contained quickly.
This has now become probably the most critical data point to monitor over the next several months.
Global Equity Performance 2000-2003 (SARS Nov 2002-Jul 2003)
Weekly Market Monitor
U.S. Indices
Dow -1.2% to 28,990. S&P 500 -1.0% to 3,295. Nasdaq -0.8% to 9,315. Russell 2000 -2.4% to 1,659. CBOE Volatility Index +20.3% to 14.56.
S&P 500 Sectors
Consumer Staples +0.2%. Utilities +2.1%. Financials -0.8%. Telecom -0.3%. Healthcare -0.3%. Industrials -0.6%. Information Technology +0.8%. Materials -1.6%. Energy -3.1%. Consumer Discretionary -0.2%.
World Indices
London -1.2% to 7,586. France -1.3% to 6,024. Germany +0.4% to 13,577. Japan -0.9% to 23,827. China -3.2% to 2,977. Hong Kong -3.8% to 27,950. India -0.8% to 41,613.
Commodities and Bonds
Crude Oil WTI -7.2% to $54.31/bbl. Gold +0.6% to $1,570./oz. Natural Gas -5.7% to 1.889. Ten-Year Treasury Yield +0.9% to 130.23.
Forex and Cryptos
EUR/USD -0.58%. USD/JPY -0.81%. GBP/USD +0.51%. Bitcoin -4.2%. Litecoin -10.2%. Ethereum -3.6%. Ripple -6.7%. Bitcoin-Cash flat.
Dow -1.2% to 28,990. S&P 500 -1.0% to 3,295. Nasdaq -0.8% to 9,315. Russell 2000 -2.4% to 1,659. CBOE Volatility Index +20.3% to 14.56.
S&P 500 Sectors
Consumer Staples +0.2%. Utilities +2.1%. Financials -0.8%. Telecom -0.3%. Healthcare -0.3%. Industrials -0.6%. Information Technology +0.8%. Materials -1.6%. Energy -3.1%. Consumer Discretionary -0.2%.
World Indices
London -1.2% to 7,586. France -1.3% to 6,024. Germany +0.4% to 13,577. Japan -0.9% to 23,827. China -3.2% to 2,977. Hong Kong -3.8% to 27,950. India -0.8% to 41,613.
Commodities and Bonds
Crude Oil WTI -7.2% to $54.31/bbl. Gold +0.6% to $1,570./oz. Natural Gas -5.7% to 1.889. Ten-Year Treasury Yield +0.9% to 130.23.
Forex and Cryptos
EUR/USD -0.58%. USD/JPY -0.81%. GBP/USD +0.51%. Bitcoin -4.2%. Litecoin -10.2%. Ethereum -3.6%. Ripple -6.7%. 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 |
-1.40%
-0.99% -1.39% -1.06% -3.53% |
+1.15%
+2.12% -0.60% +0.76% -0.40% |
|
Bonds
|
U.S. Bonds
International Bonds |
BND
BNDX |
+0.66%
+0.79% |
+1.25%
+1.20% |
|
Real Estate Equities
|
U.S. Real Estate
International Real Estate |
VNQ
VNQI |
+0.77%
-1.54% |
+2.87%
-0.63% |
|
Precious Metals Equities
|
Global Gold Miners
Global Junior Gold Miners |
RING
GDXJ |
+2.51%
+2.30% |
-0.04%
-1.11% |
RETURNS SINCE GLOBAL EQUITY MARKET PEAK (26 JAN 2018)
As shown below, global equities first peaked 26 Jan 2018 before substantially falling into their 24 Dec 2018 lows. They have since recovered dramatically off those lows and have now exceeded the previous 2018 peak (including dividends). However, on a regional basis only U.S. equities have continued to set new all time highs with other regions still below their Jan, 2018 peaks. as such, the Jan 2018 highs remain a significant turning point we continue to monitor (until all regions recover to above their Jan 2018 highs).
A breakdown of current regional divergences in equity performance is as follows:
A breakdown of current regional divergences in equity performance is as follows:
- Global equities remain above the last significant price decline (red dotted line) which occurred in Dec 2019. Price is above the rising 200 day moving average. (Bullish)
- U.S. equities remain above the last significant price decline (red dotted line) which occurred in Dec 2019. Price is above the rising 200 day moving average. (Bullish)
- European equities remain above the last significant price decline (red dotted line) which occurred in Dec 2019. Price is above the rising 200 day moving average. (Bullish)
- Asia Pacific equities remain above the last significant price decline (red dotted line) which occurred in Dec 2019. Price is above the rising 200 day moving average. (Bullish)
- Emerging market equities remain above the last significant price decline (red dotted line) which occurred in Dec 2019. Price is above the rising 200 day moving average. (Bullish)
Below is the percentage returns for each of the previously discussed monitored equity regions since the global equity peak in 26 Jan 2018 (peak shown by horizontal thin green line on each of the regional charts).
As can be seen, since their peak 26 Jan 2018 global equities have returned modestly positive returns (inc. dividends) which is a welcome change. However, on a regional performance basis only U.S. equities have been able to exceed their Jan, 2018 peak with other regions lagging. It remains unclear if other global regions ex-U.S. can begin to play catch-up to U.S. out-performance as balanced global equity performance among all regions is preferred to only one region carrying the global equity performance burden.
RETURNS SINCE EQUITY MARKET BOTTOM (24 DEC 2018)
Below are the returns for the various monitored equity regions since the global equity market bottom on 24 Dec 2018. All regions have advanced significantly off their 24 Dec 2018 lows with the global equity benchmark up a stunning +36.62%.
Hedgeye Risk Management LLC
"I skate to where the puck is going to be; not where it has been."
Wayne Gretzky
Wayne Gretzky
As we appear to be approaching a potential turning point in global growth, we continue to utilize global macroeconomic data provided by our data partners at Hedgeye Risk Management. Their data remains one of the most accurate available when attempting to forecast future macroeconomic shifts globally so we use their data to anticipate where the "puck may go" in global macroeconomics.
The Hedgeye Growth/Inflation/Policy (GIP) model uses 90 high frequency inputs per quarter within a Bayesian Inference algorithm to adjust in real-time for the current quarter along with 24 month rate-of-change base effects for future quarters. The forecast is subject to actual economic data as it is released in real time within the quarter so we continue to monitor each economic data point as it is released.
Hedgeye classify each countries model outputs according to the following "quadrants":
Quad 1 (Dark green):
The Hedgeye Growth/Inflation/Policy (GIP) model uses 90 high frequency inputs per quarter within a Bayesian Inference algorithm to adjust in real-time for the current quarter along with 24 month rate-of-change base effects for future quarters. The forecast is subject to actual economic data as it is released in real time within the quarter so we continue to monitor each economic data point as it is released.
Hedgeye classify each countries model outputs according to the following "quadrants":
Quad 1 (Dark green):
- Growth rising/Inflation falling.
- Overweight equities/credit; underweight fixed income.
- Growth rising/Inflation rising.
- Overweight equities/credit; underweight fixed income.
- Growth falling/Inflation rising.
- Overweight fixed income; underweight equities/credit.
- Growth falling/Inflation falling.
- Overweight fixed income; underweight equities/credit.
Below is a view of the top 20 largest countries/regions with their latest Quad outputs for the current quarter (4Q19) and subsequent 3 future quarters. The current data points to a potential strengthening in several European countries (green Quads 1 or 2) during the current quarter with the U.S. forecast to be in Quad 3 or 4 over the next 6 months.
Should the algorithmic data forecasts prove accurate, it would indicate Eurozone and EM equities may begin to close the U.S. equity out-performance gap into 2020.
Recession Warning Indicators
Below we continue to show the latest Ned Davis Research Global Recession Probability model which triggered a "high risk" global recession warning in the 3rd quarter of 2018. This remains a seriously negative indication which drastically increases the probability (92.77%) a global recession is either currently occurring or forthcoming.
Until we see this model fall below 70 we continue to remain watchfully cautious with respect to global equity performance.
Until we see this model fall below 70 we continue to remain watchfully cautious with respect to global equity performance.
Adding to our concern about potential recession concerns, below is the US recession probability model published by the New York Federal Reserve. The reading at the end of June 2019 rose above 30% for the 1st time since 2007; the threshold that has accurately predicted a pending recession within the US in the following 12 months since 1960. The forecast has fallen since its late-summer peak and now is well below the 30% threshold; a pattern very similar to the 2001 and 2007 recession warning. This remains on our radar.
Below is a study for each occurrence when the New York FED Recession Probabilities model has been above 30 for 2 consecutive months (end of July 2019). As can be seen, at 6 month and later intervals the market returns (S&P 500 index) are mixed.
CEO Confidence Surveys
While U.S. stock market performance has been strong (leading global equities higher), a growing concern we have is the lack of "enthusiasm" from Chief Executive Officers (CEO's). We monitor CEO confidence survey's closely as CEO's are the single best source of insight into current and future business conditions.
The latest quarterly Conference Board CEO Confidence survey (published 07 January 2020 reflecting end Q419 outlooks) improved modestly:
The latest quarterly Conference Board CEO Confidence survey (published 07 January 2020 reflecting end Q419 outlooks) improved modestly:
- The Conference Board Measure of CEO Confidence, which declined to 34 in the third quarter of 2019, rebounded to a reading of 43 in the fourth quarter (a reading of more than 50 points reflects more positive than negative responses).
- "“CEO Confidence improved in the final quarter of 2019, after having declined to its lowest level in a decade in Q3,” said Lynn Franco, Senior Director of Economic Indicators at The Conference Board. “While the abatement of trade and tariff issues has helped improved confidence, CEOs still remain apprehensive about global growth prospects in early 2020.”
- CEOs are less pessimistic about current economic conditions, with 15 percent saying conditions are better compared to six months ago, up from just 8 percent last quarter. Now, 52 percent say conditions are worse, down from 73 percent in Q3. CEOs are also more positive about current conditions in their own industries. Currently, 25 percent say conditions are better compared to six months ago, up from about 15 percent last quarter. Regarding conditions in their own industry, about 42 percent say conditions are worse, down from 63 percent last quarter.
- Looking ahead, CEOs’ expectations regarding the economic outlook is less pessimistic. Now, 12 percent anticipate economic conditions will improve over the next six months, up from just 4 percent in the third quarter. Meanwhile, 44 percent expect economic conditions will worsen, down from 67 percent last quarter. CEOs’ expectations regarding short-term prospects in their own industries over the next six months were also more positive. Now, 23 percent anticipate an improvement in conditions, up from 13 percent last quarter. Those expecting conditions will worsen in the short term declined to 40 percent from 56 percent in Q3.
- CEOs’ assessment of current global conditions improved, but overall levels remain weak. CEO sentiment increased for the majority of markets, with the exception of India, which declined further. Despite the uptick, on balance CEOs remain pessimistic.
- Looking ahead, CEOs are moderately more optimistic about short-term growth prospects globally, with improvements across the board. While the outlook for Europe and China is still quite negative, recent developments in the U.K and China may improve confidence levels in early 2020.
- The majority of chief executives expect marginal changes in their firms’ selling prices in 2020. About 41 percent of CEOs anticipate price increases of less than 4 percent, and only about 12 percent expect increases in excess of 4 percent. On average, firms plan to hike prices by 0.4 percent, down from 1.6 percent last year, based on a supplementary question asked annually. About 26 percent plan decreases in selling prices, and 21 percent foresee no change.
However, another more frequent (monthly) CEO Business Confidence survey published by the magazine "Chief Executive" suggests we may have begun a reversal off the very low levels of CEO confidence seen in August. This is encouraging and an indication the economic "soft-spot" may have passed.
CEOs Find Renewed Optimism Amid Disruption in Washington
(By Melanie C. Nolen - November 25, 2019)
(By Melanie C. Nolen - November 25, 2019)
"Chief Executive’s November polling of 260 CEOs finds renewed confidence in the 2020 business landscape, as business leaders say the strength of the U.S. economy and stock market, alongside another rate cut by the Fed, are now eclipsing concerns about disruption in Washington.
After three months of stagnation at multi-year lows, CEOs’ confidence in business conditions over the coming year has rebounded to January levels, at 6.6 on our 1-10 rating scale. That is a 4 percent increase since the month prior and 7 percent higher than its August low, when confidence fell sharply due to the then-latest round of tariffs on Chinese goods.
In November, only 35 percent of CEOs cite tariffs as worrisome, as they say trade disputes have now become the new normal. Many also believe the upcoming election will put pressure on the current administration to bring a resolution to the trade conflict with China and to ensure both the economy and the markets remain strong—a backdrop they, however, fear will deteriorate rapidly if the Republican party does not keep the White House next November."
* Note: Chief Executive’s CEO Confidence Index is measured on a scale of 1-10. November poll had 260 responses collected between Nov 5-10.
After three months of stagnation at multi-year lows, CEOs’ confidence in business conditions over the coming year has rebounded to January levels, at 6.6 on our 1-10 rating scale. That is a 4 percent increase since the month prior and 7 percent higher than its August low, when confidence fell sharply due to the then-latest round of tariffs on Chinese goods.
In November, only 35 percent of CEOs cite tariffs as worrisome, as they say trade disputes have now become the new normal. Many also believe the upcoming election will put pressure on the current administration to bring a resolution to the trade conflict with China and to ensure both the economy and the markets remain strong—a backdrop they, however, fear will deteriorate rapidly if the Republican party does not keep the White House next November."
* Note: Chief Executive’s CEO Confidence Index is measured on a scale of 1-10. November poll had 260 responses collected between Nov 5-10.
In general, CEO's tend to remain confident until they see signs of business deterioration which may lead to forthcoming economic recession. Stocks tend to perform below average in the year leading up to and during a recession and perform above average in the 1, 3, and 5 years following the end of a recession. 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 24 January 2020)
(for week ending 24 January 2020)
Equities Legend:
Bonds Legend:
Currencies Legend:
Commodities Legend:
- Vanguard Total World Stock ETF (VT): (Cyan)
- Vanguard Total U.S. Stock Market ETF (VTI): (Red)
- Vanguard FTSE Europe ETF (VGK): (Lime Green)
- Vanguard FTSE Asia Pacific ETF (VPL): (Dark Blue)
- Vanguard FTSE Emerging Markets ETF (VWO): (Pink)
Bonds Legend:
- Vanguard Total U.S. Bond Market ETF (BND): (Black)
- Vanguard Total International ex-U.S. Bond ETF (BNDX): (Green)
Currencies Legend:
- U.S. Dollar Index (Cash Settlement EOD) ($USD): (Orange)
- Euro (Philadelphia Index) ($XEU): (Maroon)
Commodities Legend:
- PowerShares DB Commodity Index Tracking Fund (DBC): (Purple)
- SPDR Gold ETF (GLD): (Sky Blue)
Past Week Asset Class returns
- Over the past week world equities (as measured by the Vanguard Total World Stock ETF (shown in CYAN) lost -1.40%.
- U.S. market equities were the top performing equity region this past week with Emerging market equities lagging.
- U.S. bonds (Black) and International bonds (Green) were higher on the week.
- Commodities were significantly lower on the week with the USD fractionally higher.
Year-to-Date (2020) Asset Class returns
- Thus far in 2020 global equities (as measured by the Vanguard Total World Stock ETF (shown in CYAN) have gained +1.15%.
- U.S. equities have been the top performing equity region thus far in 2020 with Emerging markets lagging.
- Bonds have shown positive returns thus far in 2020 with International Bonds (Green) modestly under-performing U.S. bonds (Black).
- Commodities have had negative returns for 2020 with the USD index higher.
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 our 6 Horsemen of the Apocalypse) could quickly bring on a recession and a rapid reduction (40%+) in equity prices:
- a central bank policy mistake (slow to respond to slowing growth through interest rate reductions)
- a major disruption to international trade (trade wars or tariffs) *
- a surge in inflation
- a surge in yields
- significant US dollar appreciation
- a geopolitical shock (region military conflict, war)*
* Note currently we have 2 of our 6 factors triggering concern:
- potential trade disruption due to trade tariffs (ongoing globally), and
- a geopolitical shock (potential military conflict triggered by the U.S. assassination of Iran's top general)
Typically bull/bear markets follow a cycle of investor psychology which peaks with euphoria.
In the big picture, it is apparent we may have seen signs of investor exhilaration/euphoria into late 2019/early 2020 on the back of the enthusiasm associated with the "phase-1" trade deal between the U.S. and China. It remain unclear as to the significance of this trade deal relative to overall global trade so may be misplaced.
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 January 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:
What would it take for us to become extremely bearish on equities? It is a rise or fall in inflation. As can be seen on the 2nd chart below, historically higher valuations can be supported as long as U.S. inflation remains within a 0%-3% inflation corridor. Should inflation move outside this corridor we believe this would be the trigger for a massive repricing of equities lower. This is why our model so closely monitors inflation data (which currently remains benign but forecast to move higher over the next 6 months).
We illustrate current market overvaluation via 3 charts produced by Crestmont Research (as of 01 January 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 34.5 and is now 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 157% above its geometric mean; well above the 2000 peak (151%) and 1929 peak (96%) as shown on the 3rd chart.
What would it take for us to become extremely bearish on equities? It is a rise or fall in inflation. As can be seen on the 2nd chart below, historically higher valuations can be supported as long as U.S. inflation remains within a 0%-3% inflation corridor. Should inflation move outside this corridor we believe this would be the trigger for a massive repricing of equities lower. This is why our model so closely monitors inflation data (which currently remains benign but forecast to move higher over the next 6 months).
Outside of inflation concerns, 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 has been positive for the various monitored regions.
- The strongest equity region over the past 12 month has been U.S. Markets with Emerging market equities lagging.
- Overall world equity performance (as measured by the Vanguard Total World ETF) have returned +21.57% (including dividends) over the past 12 month rolling period.
3 Month Rolling Regional Equity Performance
- Over the past 3 month rolling period the strongest performing world equity region has been U.S. markets with Asia Pacific markets the weakest.
- Strong regional equity returns have been evident over the past quarter (3 months) in all regions.
1 Month Rolling Regional Equity Performance
- Over the past 1 month rolling period the strongest performing world equity region has been U.S. markets with Emerging markets the weakest.
- Positive global equity returns are evident over the past month for all monitored regions.
Past Week Regional Equity Performance
- Over the past week major equity regions were lower with U.S. markets outperforming other regions.
Latest Global Equity "Big Picture"
World equity market returns are monitored via the following index and ETF equity charts:
Dow Jones Global Market Index
(market cap weighted index)
For the week the Dow Jones Global Index has a loss of -1.01%. As can be seen on the 1st line chart above chart, price remains above the 65 week moving average and closed above the previous price resistance zone (which must now act as support on any pullback).
On the 2nd weekly "zoomed-in" candlestick chart it can be seen there are 2 significant levels of support; 425.30 & 406-408. This level must now hold on any pullback as support to keep the bullish momentum.
On the 2nd weekly "zoomed-in" candlestick chart it can be seen there are 2 significant levels of support; 425.30 & 406-408. This level must now hold on any pullback as support to keep the bullish momentum.
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 ($GDOW) is a measure of the top 150 international companies equal weighted within the index.
These indexes are important as they equal-weight the price performance of all the companies held within the respective index. This removes the distortions associated with a small group of highly valued companies (which may be performing well) masking the performance of struggling companies and represents a good overview of overall equity performance.
These indexes are important as they equal-weight the price performance of all the companies held within the respective index. This removes the distortions associated with a small group of highly valued companies (which may be performing well) masking the performance of struggling companies and represents a good overview of overall equity performance.
The below charts are the daily line charts of both indexes. As can be seen, now both the Value Line Geometric Index (upper chart) and the Global Dow Index (lower chart) have now broken out of their 2 year trading ranges and looks to want to test the all-time highs. We would like to see these breakouts hold to feel comfortable the ongoing bull market in equities has breadth strength.
Value Line Geometric Index -$XVG- (Daily)
Global Dow Index -$GDOW- (daily)
Below is a 38 year daily chart of $XVG which clearly shows the critical price support/resistance @ 508-523 (1st achieved in 1998!) which now needs to hold any pullbacks. Price remains below the trend-line from the 2009 bottom until a daily close > 593.57 so technically this remains within a consolidation patter. 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:
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 below the Jan, 2018 monthly closing price for almost 2 years until the breakout at the end of Oct, 2019. This is a potentially significant development but this breakout must hold over the next several months (there is always the possibility of a "bull-trap" which reverses quickly so the next few months are critical to the continued bull market).
For the month of January ACWI has gained +1.29%. It closed the month of December above the 12 month simple moving average (bullish) and at new all-time highs.
For the month of January ACWI has gained +1.29%. It closed the month of December above the 12 month simple moving average (bullish) and at new all-time highs.
ACWI Weekly Chart
This past week ACWI lost -1.28%. Price closed above the 65 week simple moving average (shown in BLUE), above the up-trend line from the Dec 2018 lows, and above the previous resistance (now support) @ 73.39-74.15 (RED dotted line). This area must now hold as support on any future pullbacks.
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, a large number of the monitored countries remain within the GREEN "Leading" quadrant. In addition, ACWI (our world equity fund benchmark) remained within the GREEN "Leading" quadrant this week. This remains a positive sign for global equities.
The RRG trend analysis status is BULLISH for world equities:
- ACWI price Relative Strength (horizontal axis): POSITIVE
- ACWI price Momentum (vertical axis): POSITIVE
Coincident Equity Market Indicators
Crude Oil
Crude oil was substantially lower over the past week and remained below the important $60 level within the rising price channel. Firm crude oil prices typically point to increasing demand on the back of world economic growth improvement and the current uptrend remains equity bullish. A close below the ascending price channel from the 2016 lows would be concerning.
Gold
Gold was modestly higherover the past week and continues to consolidate its recent gains. The summer 2019 breakout above $1400 indicates increased uncertainty in equities with a move to the safety of gold. As long as gold continues to advance it remains equity bearish.
Commodities
Commodities were sharply lower over the past week. Since topping in May 2018 commodities have been on a steady (but not overly steep) decline indicating decreased demand (and thus decreased world growth). This remains equity neutral until the downtrend reverses (a weekly close above 188.36 would be bullish).
U.S. 30 Year Treasury Bond
U.S. 30 year bonds were strongly higher on the week and remains above the 3 year long support (near $146-$148) but below their recent peak @ 165.19. Rising bond prices indicate a "flight to quality" trade associated with weakening economic data and the current trend reversal is equity bullish.
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 move towards year-end. Any deterioration in the model will shift to a reduced risk recommendation.
The 5-Factor model currently has the following sub-model readings:
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 data from the following sources:
Forward Forecast Data:
Current Data:
Forward Forecast Data:
- OECD Composite Leading Indicators (CLI)
- BlackRock Macro GPS Growth/Inflation forecast monitor
Current Data:
- J.P. Morgan Global Purchasing Managers (PMI) Index
- World Bank Monthly Global Economic Report
- DHL Global Trade Barometer
OECD Composite Leading Indicators (13 January 2020)
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 continued stabilization at below average global economic growth in a number of regions. This is an encourage 1st step but it is too soon to declare the worst of the global slowdown is over.
Latest Overview:
13/01/2020 - "Composite leading indicators (CLIs), designed to anticipate turning points in economic activity relative to trend six to nine months ahead, point to growth stabilizing, albeit below long-term trends, in most advanced economies.
The CLIs continue to point to stable growth momentum in Japan, Canada and the euro area as a whole,
including France and Italy. In the United States, Germany and the United Kingdom the signs of
stabilization, flagged in last month’s assessment, have been confirmed.
Among major emerging economies, stable growth momentum remains the assessment for Russia and China
(for the industrial sector). Growth is expected to gain momentum in Brazil but the CLI for India continues to
point to easing growth momentum."
The latest readings suggest continued stabilization at below average global economic growth in a number of regions. This is an encourage 1st step but it is too soon to declare the worst of the global slowdown is over.
Latest Overview:
13/01/2020 - "Composite leading indicators (CLIs), designed to anticipate turning points in economic activity relative to trend six to nine months ahead, point to growth stabilizing, albeit below long-term trends, in most advanced economies.
The CLIs continue to point to stable growth momentum in Japan, Canada and the euro area as a whole,
including France and Italy. In the United States, Germany and the United Kingdom the signs of
stabilization, flagged in last month’s assessment, have been confirmed.
Among major emerging economies, stable growth momentum remains the assessment for Russia and China
(for the industrial sector). Growth is expected to gain momentum in Brazil but the CLI for India continues to
point to easing growth momentum."
The OECD (Total) Composite Leading Index topped in Dec 2017 @ 100.76 and is now well below 100 (indicating global economic growth below average). It remains below the previous correction lows of 2012 and 2016 but as of the most recent readings it appears to have bottomed (a potentially bullish development for future global growth).
Below is our latest heat-map of the Composite Leading Indicators for various monitored regions. The CLI is designed to predict business cycle changes 6-9 months in advance so the Peak/Trough dates can be used to predict turning point months for the various regions.
- Red/Green numbers indicates above/below average future projected economic growth.
- Red/Green boxes indicates CLI rate of change month/month and year/year.
As can be seen, the heat-map indicates all regions (and most countries) continue to have CLI's < 100 (indicating below average projected economic growth over the next 6-9 months). However, there are signs of a potential bottoming in the rate of change in all regions on a month/month basis (green boxes).
Should a number of major regions turn positive on a year/year basis (far right column) we would feel more comfortable to declare the global growth slowdown is over.
BlackRock Macro GPS Growth/Inflation Forecast (16 January 2020)
The BlackRock macro-GPS aims to give a forward forecast on the growth & inflation outlook for G7 economies. It combines new sources of information using new "big-data" sources – including internet searches and text mining of corporate calls - as well as traditional economic data. Other big data inputs include online job postings, inflation chatter, satellite images, e-invoicing and traffic patterns.
The BlackRock GPS forecasts the following:
The BlackRock GPS forecasts the following:
- the potential year-over-year GDP economic growth reading versus current consensus 3 months forward.
- the potential year-over-year Inflation reading versus current consensus 6 months forward.
BlackRock GDP Growth Forecast vs. Current Consensus
The BlackRock GDP growth forecast projects the greatest upside surprise in growth (versus current consensus) will be in Japan and Canada with the greatest downside surprise in growth (versus current consensus) in Spain and the U.K. The forward forecast for G7 economic growth remains slightly above current consensus (very encouraging).
BlackRock Inflation Forecast vs. Current Consensus
The BlackRock inflation forecast projects the U.K. will have the greatest upside surprise in future inflation (relative to consensus) with Japan having the furthest downside projected inflation relative to consensus.
J.P. Morgan Global Composite Purchasing Managers Index (06 January 2020)
The Global Composite PMI Report is based on the results of manufacturing and service sector surveys covering over 18,000 purchasing executives in over 40 countries. Together these countries account for an estimated 89% of global gross domestic product (GDP).
Questions are asked about real events and are not opinion based. Data are presented in the form of diffusion indices, where an index reading above 50.0 indicates an increase in the variable since the previous month and below 50.0 a decrease. As such, using the PMI data gives us a real-time look at global growth.
Questions are asked about real events and are not opinion based. Data are presented in the form of diffusion indices, where an index reading above 50.0 indicates an increase in the variable since the previous month and below 50.0 a decrease. As such, using the PMI data gives us a real-time look at global growth.
- readings > 50 indicating economic expansion
- readings < 50 indicate economic contraction.
Latest Updates
Global Manufacturing 02 Jan: (current 50.1/previous month 50.3)
"Global manufacturing remained lacklustre at the end of 2019. Growth of production and new orders were both marginal, as weak international trade flows stymied hopes of a stronger recovery from the mid-year downturn in the sector. Subdued business confidence led to cutbacks in staffing, purchasing and inventory holdings."
Global Services 06 Jan: (current 52.1/previous month 51.6)
"The J.P.Morgan Global Services Business Activity Index rose to 52.1 in December, up from 51.6 in November. Growth of output, new orders and employment all accelerated to five month highs. There was also a marginal increase in new export business for the first time since July. Inflation of input costs and output prices edged higher".
Global Composite 06 Jan: (current 51.7/previous month 51.4)
“The rate of global economic expansion accelerated for the second successive month in December, hitting its highest level since April 2019. The uptick was underpinned by stronger inflows of new work, rising employment and improved business optimism. International trade remained a drag on growth, however, as new export orders contracted for the thirteenth successive month.”
"Global manufacturing remained lacklustre at the end of 2019. Growth of production and new orders were both marginal, as weak international trade flows stymied hopes of a stronger recovery from the mid-year downturn in the sector. Subdued business confidence led to cutbacks in staffing, purchasing and inventory holdings."
Global Services 06 Jan: (current 52.1/previous month 51.6)
"The J.P.Morgan Global Services Business Activity Index rose to 52.1 in December, up from 51.6 in November. Growth of output, new orders and employment all accelerated to five month highs. There was also a marginal increase in new export business for the first time since July. Inflation of input costs and output prices edged higher".
Global Composite 06 Jan: (current 51.7/previous month 51.4)
“The rate of global economic expansion accelerated for the second successive month in December, hitting its highest level since April 2019. The uptick was underpinned by stronger inflows of new work, rising employment and improved business optimism. International trade remained a drag on growth, however, as new export orders contracted for the thirteenth successive month.”
The Global Composite Output Index is shown below (darker thick blue line). As can be seen, global manufacturing (thin red line) has lead the global economic weakness while global services (thin light blue line) continue to show modest strength. However, the latest report indicates global manufacturing data has begun to improve and indicates the worst may be over. The next few reports will be critical to confirm this is not just a "one-off" improvement.
Global Output Index (Composite/Manufacturing/Services)
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Global Composite Output Index vs. Global GDP
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 weak economic output globally (especially in manufacturing). However, we have noted a subtle improvement in trend in a number of regions (note the Green boxes) so it is possible the worst may be over as far as global economic contraction (RED numbers indicate economic contraction).
World Bank Global Yearly Outlook (January 2020)
• "Global growth is expected to edge up to 2.5 percent in 2020—up slightly from the post-crisis
low of 2.4 percent registered last year—as trade and investment gradually recover."
• "The recovery in global growth will reflect an expected pickup in emerging market and
developing economies (EMDEs), which are projected to grow 4.1 percent this year. However,
this will largely depend on a rebound in a small number of large EMDEs, most of which are
emerging from deep recessions or sharp slowdowns."
• "While growth could be stronger if reduced trade tensions lead to a sustained reduction in
uncertainty, the balance of risks is to the downside."
• "In an environment of limited macroeconomic policy space compounded by high debt levels,
EMDEs need to foster inclusive and sustainable growth by undertaking reforms to bolster
governance and business climates, improve tax policy, promote trade integration, and rekindle
productivity growth, while protecting vulnerable groups."
low of 2.4 percent registered last year—as trade and investment gradually recover."
• "The recovery in global growth will reflect an expected pickup in emerging market and
developing economies (EMDEs), which are projected to grow 4.1 percent this year. However,
this will largely depend on a rebound in a small number of large EMDEs, most of which are
emerging from deep recessions or sharp slowdowns."
• "While growth could be stronger if reduced trade tensions lead to a sustained reduction in
uncertainty, the balance of risks is to the downside."
• "In an environment of limited macroeconomic policy space compounded by high debt levels,
EMDEs need to foster inclusive and sustainable growth by undertaking reforms to bolster
governance and business climates, improve tax policy, promote trade integration, and rekindle
productivity growth, while protecting vulnerable groups."
DHL Global Trade Barometer (December 2019)
U.S. Economic Growth & Inflation
Year-over-Year GDP growth
The Gross Domestic Product (GDP) in the United States expanded 2.10 percent in the third 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 grew by an annualized 2.1 percent in the third quarter of 2019, compared to an advance estimate of 1.9 percent and following a 2.0 percent expansion in the previous three-month period. Upward revisions to private inventory investment, nonresidential fixed investment, and personal consumption expenditures (PCE) were partially offset by a downward revision to state and local government spending. GDP Growth Rate in the United States averaged 3.21 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 consumer price inflation rate climbed to 2.3 percent year-on-year in December 2019 from 2.1 percent in the previous month and in line with market consensus. That was the highest rate since October 2018, boosted by a sharp rebound in energy costs (3.4 percent vs -0.6 percent in November). Food inflation, however, eased to 1.8 percent from 2.0 percent. Additional price increases were recorded for medical care commodities, medical care services and shelter. The core inflation rate, which excludes volatile items such as food and energy, was unchanged at 2.3 percent, also in line with market forecasts. Inflation Rate in the United States averaged 3.25 percent from 1914 until 2019, reaching an all time high of 23.70 percent in June of 1920 and a record low of -15.80 percent in June of 1921.
Eurozone Economic Growth & Inflation
Year-over-Year GDP growth
The Eurozone annual economic growth was revised slightly higher to 1.2 percent in the third quarter of 2019 from a preliminary reading of 1.1 percent, a second estimate showed. 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 -5.70 percent in the first quarter of 2009.
Quarter-over-Quarter GDP growth
The Eurozone quarterly economic growth was confirmed at 0.2 percent in the third quarter of 2019, the same as in the previous three-month period, a second estimate showed. Among the bloc's largest economies, Germany avoided entering a recession in the third quarter, largely driven by public and private consumption, while GDP growth rates were unchanged in France, Italy and Spain. 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 -3.20 percent in the first quarter of 2009.
Annualized Inflation
Eurozone inflation rate was confirmed at 1.3 percent year-on-year in December 2019, the highest level since June and compared to November's 1.0 percent. Energy prices rebounded from a sharp decline (0.2 percent vs -3.2 percent), while faster increases were seen in costs of non-energy industrial goods (0.5 percent vs 0.4 percent) and unprocessed food (2.1 percent vs 1.8 percent). Meanwhile, services prices were 1.8 percent higher, compared to November's 1.9 percent. The annual core inflation, which excludes volatile prices of energy, food, alcohol & tobacco and at which the ECB looks in its policy decisions, was also confirmed at 1.3 percent. On a monthly basis, consumer prices rose 0.3 percent, reversing a 0.3 percent drop in November and in line with market consensus. Inflation Rate in the Euro Area averaged 1.98 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 1.70 percent in the third quarter of 2019 over the same quarter of the previous year. GDP Annual Growth Rate in Japan averaged 1.96 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
Japan's quarterly economic growth was revised higher to 0.4 percent in the third quarter of 2019 from a preliminary estimate of 0.1 percent and above market expectations of 0.2 percent. Private consumption and capital expenditure increased faster than initially thought while net external demand contributed negatively to the expansion. 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 rose to 0.8 percent year-on-year in December 2019 from 0.5 percent in the previous month, above market consensus of 0.4 percent. This was the highest rate since April, as food prices rose the most in 14 months (1.9 percent vs 1.5 percent in November) and housing inflation stood at the highest level for over two decades (at 0.8 percent). In addition, transport cost increased for the first time in 13 months (0.8 percent vs -0.5 percent) and culture & recreation inflation hit a near five-year high (2.8 percent vs 2.3 percent). Meantime, annual core consumer inflation, which excludes fresh food, rose to 0.7 percent in December, the highest since May, but below the Bank of Japan's 2 percent target. The so-called core-core inflation index, which excludes fresh food and energy prices, grew 0.9 percent, the fastest pace since March 2016. Considering 2019 full year, inflation rate averaged 0.5 percent, down from 1 percent in 2018.
China Economic Growth & Inflation
Year-over-Year GDP growth
The Chinese economy advanced 6.0 percent year-on-year in the September quarter of 2019, slowing from a 6.2 percent expansion in the previous quarter and compared with market expectations of 6.1 percent. It was the weakest growth rate since the first quarter of 1992, amid persistent trade tensions with the US, weakening global demand and alarming off-balance-sheet borrowings by local governments. GDP Annual Growth Rate in China averaged 9.39 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 expanded by a seasonally adjusted 1.5 percent on quarter in the three months to September 2019, following a 1.6 percent growth in the previous period and matching market consensus. GDP Growth Rate in China averaged 1.77 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 annual inflation rate unexpectedly steadied at 4.5 percent in December 2019, the same as in the previous month and less than market expectations of 4.7 percent. Still, it remained the highest inflation rate since January 2012, as pork prices surged 97 percent on the back of a prolonged African swine fever epidemic. The government previously said it will use its reserves to provide sufficient pork supply to meet higher demand ahead of the Lunar New Year holidays later in January. Food inflation eased to 17.1 percent from 19.1 percent while non food cost rose at a faster 1.3 percent (1 percent). For full 2019, consumer inflation was at 2.9 percent, in line with the government target of 3 percent. On a monthly basis, consumer prices were flat in December, compared to market estimates of a 0.3 percent advance and following a 0.4 percent gain in November. Inflation Rate in China averaged 5.13 percent from 1986 until 2019, reaching an all time high of 28.40 percent in February of 1989 and a record low of -2.20 percent in April of 1999.
Valuation Model
The Valuation model remains RED/negative due to overvaluation of equity markets at current prices relative to historical data. We continue to update forecasts from a number of historically reliable sources (see section titled "Market Valuation"). Long term equity returns vary inversely with market valuation and at current price levels forward returns will be much lower than historical average returns (projected to be approximately 2% per year ex-inflation over the next 10 years).
Technical Model
The Technical model remained GREEN this past week. World Equity markets continue to remain near their most recent peak with with most technical indicators and market breadth now positive.
Sentiment Model
The Sentiment model remained RED this week on the back of a overly bullish 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)
- U.S. Gov't Treasury Bonds (GOVT): (Orange)
- Foreign Developed Market Gov't Treasury Bonds (BWX): (Pink)
- U.S. Corporate Bond (LQD): (Maroon)
- International Corporate Bond (PICB): (Black)
- U.S. High Yield Bond (JNK): (Purple)
- International High Yield Bond (IHY): (Green)
- U.S. Gov't Inflation Protected Bonds (TIP): (Lime Green)
- International Gov't Inflation-Protected Bond (WIP): (Cyan)
1 Year Rolling Bond Performance
- Over the past 12 months rolling period the top performing bond asset class has been U.S. Corporate Bonds with Int'l Gov't Treasury Bonds the worst performing.
- The U.S. Total Bond Market (RED) and the International (ex-U.S.) Total Bond Market (BLUE) have delivered positive returns over the past year.
3 Month Rolling Bond Performance
- Over the past 3 month rolling period the top performing bond asset class has been Int'l High Yield Bonds with Int'l Treasury Bonds lagging.
- U.S. Total Bond Market (RED) and International (ex-U.S.) Total Bond Market (BLUE) having delivered positive returns over the past quarter (3 months).
1 Month Rolling Bond Performance
- Over the past 1 month rolling period the top performing bond asset class has been U.S. Corporate Bonds Bonds with U.S. High YieldBonds 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. Gov't Treasury Bonds were the top performing bond class with U.S. High Yield bonds lagging.
- The U.S. Total Bond Market (RED) and the International (ex-U.S.) Total Bond Market (BLUE) delivered higher returns over the past week.
Commentary:
It has been shown in repeated studies over many years a balanced portfolio consisting of both equities and bonds (with percentage holdings in each adjusted according to personal risk tolerances) remains the best methodology in managing a long term retirement portfolio (due to the independent/low correlated function each takes when navigating though various market cycles and economic conditions).
It is best to think of bonds and equities as 2 independent brains each looking at the market from a different perspective:
As such, both serve a useful purpose in a well balanced portfolio.
Bonds delivered 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 throughout all of 2019 and into early 2020.
We are very cognizant of the fact bond yields are at generational lows (bond prices overbought and at generational highs) and any significant economic recovery (with associated increases in inflation) has the potential to be very detrimental to bond fund returns. There is currently over $12 Trillion in negative yielding bonds globally (never before seen in 5000 years of history) so any sudden surge in global growth and/or inflation will have a devastating impact upon bond fund returns (hence the reason we place so much research into global macroeconomic conditions).
Rolling 12 month returns for bonds remain positive and we continue to monitoring closely US, German & Japanese rates to determine if (when) it may be appropriate to reduce bond positions. Our premise is these 3 bonds tend to be somewhat "tethered" due to capital flows so it would take a trend-change/breakout in all 3 key Treasuries in order to definitively state the global bull market in bonds is over.
It is best to think of bonds and equities as 2 independent brains each looking at the market from a different perspective:
- Equities: Corporate profits focused.
- Bonds: Economic growth and Inflation focused.
As such, both serve a useful purpose in a well balanced portfolio.
Bonds delivered 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 throughout all of 2019 and into early 2020.
We are very cognizant of the fact bond yields are at generational lows (bond prices overbought and at generational highs) and any significant economic recovery (with associated increases in inflation) has the potential to be very detrimental to bond fund returns. There is currently over $12 Trillion in negative yielding bonds globally (never before seen in 5000 years of history) so any sudden surge in global growth and/or inflation will have a devastating impact upon bond fund returns (hence the reason we place so much research into global macroeconomic conditions).
Rolling 12 month returns for bonds remain positive and we continue to monitoring closely US, German & Japanese rates to determine if (when) it may be appropriate to reduce bond positions. Our premise is these 3 bonds tend to be somewhat "tethered" due to capital flows so it would take a trend-change/breakout in all 3 key Treasuries in order to definitively state the global bull market in bonds is over.
ETF Bond Proxies
The current very strong bond bull market began 08 Nov 2018. Below is the performance of the 3 ETF's we use as "bond proxies" to monitor global bond performance:
- BNDW: Vanguard Total World Bond market ETF (BLUE)
- BND: Vanguard Total U.S. Bond market ETF (GREEN)
- BNDX: Vanguard Total International (ex-U.S.) Bond market ETF (RED)
Global bonds gained +0.73% over the past week and have been consolidating since their peak in August. As can be seen above, U.S. bonds (GREEN) have remained very strong while International ex-US bonds (RED) have under-performed since September (dragging net global bond returns lower).
The recent lows achieved in early September remain the support we want to continue to hold. Bonds remain severely over-priced and, while we remain fully invested within our model portfolios, we are keen to somewhat reduce exposure (due to valuations) on any signs of a change in the current bullish trend.
The recent lows achieved in early September remain the support we want to continue to hold. Bonds remain severely over-priced and, while we remain fully invested within our model portfolios, we are keen to somewhat reduce exposure (due to valuations) on any signs of a change in the current bullish trend.
U.S. 10 year Treasury Yield
After rates bottomed in mid-2016 at all time lows (bond prices peaked as they are inversely correlated), they rapidly rose to resistance on the hope of future economic growth + inflation from mid-2016 to the 3rd quarter of 2018. However, disappointing economic data out of the U.S. allowed rates to plunge once gain throughout 2019 back near all time lows. They have since risen modestly but remain below 2%.
German 10 year Bund Yield
German 10 year treasury yields peaked in early 2018 and plunged over the past 2 years to record all-time-lows of -0.72% on the back of recessionary economic conditions within the German economy. They have since rebounded but remain below resistance @ -0.19%.
Japanese 10 year Treasury Yield
Japan has been fighting deflation for decades and only recent unprecedented monetary policy by the BOJ appears to be having some effect upon deflation (and yields).
After bottoming at near -0.28% in mid-2016, yields rose to a peak of 0.16% before they once again plunged in 2019 to once again retest -0.28%. They have since bounced dramatically on the back of renewed hope the worst of Japan's economic woes may be behind it.
After bottoming at near -0.28% in mid-2016, yields rose to a peak of 0.16% before they once again plunged in 2019 to once again retest -0.28%. They have since bounced dramatically on the back of renewed hope the worst of Japan's economic woes may be behind it.
U.S. 30 year Treasury Yield
An extremely important longer-term chart we continue to watch is the yield on the U.S. 30 year treasury relative to its 100 month exponential moving average (red dotted line on the below chart going back to 1980) as well as the yield on the 10 year treasury with its 115 month EMA. As can be seen below, since the mid 1980's these moving average have acted as a cap on each attempted increase in yields.
Should any given month close with a yield higher than their respective moving average it would be strong confirmation the 35 year bull market in bonds is likely over.
* Note as of the end of Nov 2018 both the 30 year Treasury (top chart) and 10 year yield (bottom chart) closed above its long term moving average but have been unable to hold the breakout. We will continue to monitor this through 2020.
Should any given month close with a yield higher than their respective moving average it would be strong confirmation the 35 year bull market in bonds is likely over.
* Note as of the end of Nov 2018 both the 30 year Treasury (top chart) and 10 year yield (bottom chart) closed above its long term moving average but have been unable to hold the breakout. We will continue to monitor this through 2020.
Currencies
Below is the 12/3/1 month and weekly rolling returns for the 6 currencies that make up the U.S. Dollar index. The U.S. Dollar index is a weighted geometric mean of the dollar's value relative to the 6 currencies in the following list:
In addition, we also include the following for comparison purposes:
- Euro (EUR), 57.6% weight.
- Japanese yen (JPY) 13.6% weight.
- U.K. Pound sterling (GBP), 11.9% weight.
- Canadian dollar (CAD), 9.1% weight.
- Swedish krona (SEK), 4.2% weight.
- Swiss franc (CHF) 3.6% weight.
In addition, we also include the following for comparison purposes:
- The U.S. Dollar Index to allow comparison to its constituents.
- The Australian Dollar (not a part of the USD Index) as it is a popular commodity currency.
- Gold (priced in USD) as it typically acts more like a currency void of fiat printing.
1 Year Rolling Currency Performance
- Over the past 12 months rolling period the top performing major currency has been Gold with the 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 Euro lagging.
1 Month Rolling Currency Performance
- Over the past 1 month rolling period the top performing currency has been Gold with the Swedish Krona lagging.
Past Week Currency Performance
- Over the past week the top performing major currency was the Japanese Yen with the Australian Dollar lagging.
U.S. Dollar: (Neutral Bias)
Commentary:
The USD index was up +0.30% 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: 94.25 / 98.18
Monthly: 94.58 / 100.21
Support / Resistance Levels (based upon close):
Weekly: 94.25 / 98.18
Monthly: 94.58 / 100.21
US Dollar Index Daily charts
The 1 year daily chart (above) shows the range-bound chop between 95-99 for all of 2019. At weeks end the USD closed above the short term daily support @ 96.90 and remains within the mid-point of its 1 year trading range.
The 4 year daily chart (above) clearly shows the important daily close resistance for the USD over the past 3 years @ @ 97.21-98.43. Major daily support remains @ 95.07-95.28.
Over the past week the USD closed above its short term trend 50 and 200 day moving averages.
(Short Term Bullish)
(Short Term Bullish)
US Dollar Index Weekly charts
The weekly chart shows the steady -15% decline the USD index experienced from late Dec 2016-early Jan 2018 (from 103.82 to 88.15). It remained in a consolidation zone (88.89-90.33) for 3 months and then in late April 2018 it broke out of its weekly consolidation box into its current uptrend.
Price ended the week below the latest consolidation area @ 97.01-98.86 and closed the week between the intermediate term trend 20 and 65 week moving averages.
(Intermediate Term Neutral)
Price ended the week below the latest consolidation area @ 97.01-98.86 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 91.66-92.33 weekly close area (thick RED line) has been a very significant bull/bear battle zone over the past 21 years (since 1998). It continues to hold the uptrend line from the 2011 bottom and appears to be within a large multi-year bullish ascending price channel.
US Dollar Index Monthly chart
For the month of January the U.S. Dollar index has gained +1.66%. Since bottoming in late 2011 the USD has been on a roller-coaster ride. It experienced:
Price closed December below the long term trend 10 month moving average switching 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 @ 92.63-93.03 and resistance @ 98.66-100.21.
(Long Term Bearish)
- a large acceleration in 2014-2015 (+27%),
- a consolidation in 2015-2017,
- a large drop in 2017-2018 (-15%) back to support and its uptrend line from 2011, and
- its recent rise back to the top of its previous consolidation zone (+12%).
Price closed December below the long term trend 10 month moving average switching 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 @ 92.63-93.03 and resistance @ 98.66-100.21.
(Long Term Bearish)
Euro (Neutral Bias)
The Euro lost -0.54% over the past week. It has shown remarkable longer-term resilience given ongoing European political uncertainty (Brexit, Spain, Germany, Italy) but has weakened since early 2018 due to eroding economic growth metrics out of the EU.
Support / Resistance Levels (based upon close):
Weekly: 107.99 / 114.62
Monthly: 105.25 /112.20
Support / Resistance Levels (based upon close):
Weekly: 107.99 / 114.62
Monthly: 105.25 /112.20
Euro Daily Charts
The Euro topped out in early 2018 @ 125.10 and has been on a steady decline since. It remained confined to a down-trending price channel established in late 2018 but appears to want to commence a bullish break of the downtrend..
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 below the short term trend 50 and 200 day moving averages. It is now approaching daily support @ 108.24-108.66.
(Short Term Bearish)
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 below the short term trend 50 and 200 day moving averages. It is now approaching daily support @ 108.24-108.66.
(Short Term Bearish)
Euro Weekly Chart
The weekly chart shows the Euro had remained range bound for 2 1/2 years (January 2015-July 2017) between 104.96-105.95 and 114.47-114.62. A significant breakout occurred in the 2nd week of July 2017 when a weekly close above the trading range was established. However, this was lost in Oct 2018 and the Euro has remained weak since.
This past week the Euro closed at the recent price support as shown on the chart. It closed the week below the intermediate trend 20 week + 65 week moving averages and above weekly support @ 107.99-108.46.
(Intermediate Term Bearish)
This past week the Euro closed at the recent price support as shown on the chart. It closed the week below the intermediate trend 20 week + 65 week moving averages and above weekly support @ 107.99-108.46.
(Intermediate Term Bearish)
Euro Monthly
For the month of January the Euro has lost -1.67%. On a monthly closing basis it closed the month of December above the long term trend 10 month moving average switching the long term outlook to bullish until months end. It remains below monthly resistance @ 112.12-112.20.
(Long Term Bullish)
(Long Term Bullish)
UK Pound (Bullish Bias)
U.K. Pound Daily Charts
U.K. Pound Weekly Chart
U.K. Pound Monthly Chart
The British Pound gained +0.47% 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 extremely volatile.
Critical levels to watch on the Pound remain the respective weekly and monthly reactionary closing prices following the Brexit vote in June 2016:
This past week the Pound closed the week above its short term trend daily 50 +200 day moving averages and above the intermediate term trend 20 + 65 week moving averages. For the month of January it has lost -1.83% and closed the month of December above its long term 10 month moving average.
(Short Term Bullish)
(Intermediate Term Bullish)
(Long Term Bullish)
Support / Resistance Levels (based upon close):
Weekly: 129.19 /132.94
Monthly: 125.09 /133.09
Critical levels to watch on the Pound remain the respective weekly and monthly reactionary closing prices following the Brexit vote in June 2016:
- 136.76 weekly close (weekly close 20 June 2016 following vote results)
- 133.09 monthly close (monthly close 30 June 2016 following vote results)
This past week the Pound closed the week above its short term trend daily 50 +200 day moving averages and above the intermediate term trend 20 + 65 week moving averages. For the month of January it has lost -1.83% and closed the month of December above its long term 10 month moving average.
(Short Term Bullish)
(Intermediate Term Bullish)
(Long Term Bullish)
Support / Resistance Levels (based upon close):
Weekly: 129.19 /132.94
Monthly: 125.09 /133.09
Australian Dollar (Neutral Bias)
Australian Dollar Daily Chart
Australian Dollar Weekly Chart(s)
Australian Dollar Monthly Chart
The Australian Dollar lost -0.70% over the past week. Price this past week remained below the critical 2 year weekly price level @ 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). It remains in a firmly established downtrend and near 10 year lows.
For the month of January the Aussie dollar has lost -2.01%. It closed the week between the short term trend 50 + 200 day moving averages and between the intermediate term trend 20 + 65 week moving averages. It closed the month of December above the long term trend 10 month moving average (for the 1st time in almost 2 years) changing the long term outlook to bullish until months end.
(Short Term Bearish)
(Intermediate Term Bearish)
(Long Term Bullish)
Support / Resistance Levels (based upon close):
Weekly: 67.35 / 68.64
Monthly: 63.58 / 70.17
For the month of January the Aussie dollar has lost -2.01%. It closed the week between the short term trend 50 + 200 day moving averages and between the intermediate term trend 20 + 65 week moving averages. It closed the month of December above the long term trend 10 month moving average (for the 1st time in almost 2 years) changing the long term outlook to bullish until months end.
(Short Term Bearish)
(Intermediate Term Bearish)
(Long Term Bullish)
Support / Resistance Levels (based upon close):
Weekly: 67.35 / 68.64
Monthly: 63.58 / 70.17
Canadian Dollar (Bullish Bias)
Canadian Dollar Daily Chart
Canadian Dollar Weekly Chart
Canadian Dollar Monthly Chart
The Canadian dollar lost -0.04% over the past week. After topping in Aug, 2017, the Canadian Dollar had remained within a firmly established downtrend and has gradually returned to price levels last seen in early 2017. However, it has been attempting to base and remained range-bound until Dec 2018 where it broke out of its 15 month consolidation zone.
The Loonie closed the week above the short term trend 50 + 200 day moving averages and above the intermediate term trend 20 + 65 week moving averages. For the month of January the Loonie has lost -0.70%. It continues to attempt to consolidate near recent lows and closed the month of December above the long term trend 10 month moving average switching the long term to bullish until months end.
(Short Term Bullish)
(Intermediate Term Bullish)
(Long Term Bullish)
Support / Resistance Levels (based upon close)
Weekly: 76.26 / 78.13
Monthly: 74.42 / 78.49
The Loonie closed the week above the short term trend 50 + 200 day moving averages and above the intermediate term trend 20 + 65 week moving averages. For the month of January the Loonie has lost -0.70%. It continues to attempt to consolidate near recent lows and closed the month of December above the long term trend 10 month moving average switching the long term to bullish until months end.
(Short Term Bullish)
(Intermediate Term Bullish)
(Long Term Bullish)
Support / Resistance Levels (based upon close)
Weekly: 76.26 / 78.13
Monthly: 74.42 / 78.49
Key Weekly Returns (week ending 24 January 2020):
|
Countries/Regions
World Equities ACWI (iShares MSCI ACWI Index Fund) North American Equities SPY (S&P 500 SPDRs) QQQ (PowerShares QQQ Trust) IWM (Russell 2000 iShares) EWC (Canada iShares) |
Characteristics
World Equity Fund U.S. Large Cap S&P 500 Index U.S. NASDAQ 100 Fund U.S. Russell 2000 Small Cap Fund Canada |
Week % Change
-1.28% -0.96% -0.30% -2.18% -0.56% |
Non-North America Equities
|
VGK (Vanguard European VIPERs) EPP (iShares MSCI Pacific ex-Japan ) EWJ (Japan iShares) EEM (iShares MSCI Emerging Markets) ILF (Latin America 40 Index iShares) Bonds
BND (Vanguard Total U.S. Bond Market) BNDX (Vanguard International Bond ETF) TIP (iShares Barclays TIPS Bond Fund) PCY (PowerShares Emerging Markets Debt Portfolio) |
Europe/U.K Pacific ex-Japan (inc. Australia + NZ) Japan Emerging Markets Latin America US Total Bond (44% Gov't Tsy, 56%Corp) World Investment Grade Bonds ex-US Inflation Protected Gov't Bonds Emerging Market Sovereign Debt |
-1.39% -2.31% -0.35% -3.53% -2.13% +0.66% +0.79% +0.68% -0.41% |
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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 |
-4.19% -1.64% +0.96% +0.54% -3.38% -7.30% |
Currencies
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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 |
+0.27%
-0.80% +0.47% -0.56% -0.63% +0.77% |
Important Charts to Watch
Commodity Basket Index
For the past 4 years the deflationary debt overhang has gripped world economies and equity markets have run up on the "hope" a return to world growth would begin soon. This would typically be reflected in a rise in commodity prices.
Commodities (as measured by the Reuters/Jefferies CRB index, a basket of 19 commodities) bottomed in early 2016 (along with equities) and 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 support @ 167.74-168.61 and within the price channel from the 2016 lows.
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 support @ 167.74-168.61 and within the price channel from the 2016 lows.
Equity Market Volatility
The Volatility Index (VIX) is a measure of expected price fluctuations of options on the S&P 500 index options over the next 30 days (technically the VIX is quoted in percentage points and represents the expected range of movement in the S&P 500 index over the next year, at a 68% confidence level i.e. one standard deviation of the normal probability curve). For example, if the VIX is 15, this represents an expected annualized change, with a 68% probability, of less than 15% up or down.
The VXV uses the same calculation but looks forward 3 months. When the VIX is greater than the VXV ($VIX:$VXV ratio > 1.0) the volatility structure is termed to be in "contango". It indicates traders are much more concerned about short term volatility than they are about longer term volatility and when that ratio returns to "normal" (< 0.93) it is typically a good sign market stress is easing (and a good time to add to equity positions).
As of this weeks market close volatility closed below the "VIX Trigger Event" area with the VIX below 16. The volatility structure is currently bullish for equities but it is important to note the VIX is now at the same levels (11-12) which have triggered market tops over the past 18 months (as noted on the chart below).
The VXV uses the same calculation but looks forward 3 months. When the VIX is greater than the VXV ($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. The volatility structure is currently bullish for equities but it is important to note the VIX is now at the same levels (11-12) which have triggered market tops over the past 18 months (as noted on the chart below).
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 remained well below this level. Contrarily, the French CAC has shown greater strength and exceeded its early 2018 peak.
This past week the DAX closed fractionally above its 2018 peak @13434-13478 (a potentially bullish development).
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 remained well below this level. Contrarily, the French CAC has shown greater strength and exceeded its early 2018 peak.
This past week the DAX closed fractionally above its 2018 peak @13434-13478 (a potentially bullish development).
We remain 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 32% from their January 2018 highs to late 2018 lows and still remain well below their Jan 2018 peak. This is a significant concern as European banks are among the weakest globally and could be a focal point for global systematic risk. The support @ 15.76-16.11 must hold on any further pullbacks but the recent breakout is encouraging.
Of particular concern is Deutsche Bank which remains near 12 year lows (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 2020 (which has been consolidating for all of 2019).
Chinese Equities
The Shanghai Composite index was lower this past week and remains below the downtrend line from the most recent 2019 market peak (red dotted line). It continues to test resistance @ 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) remain an area we recommend all investors have at least a small position within at present. Precious metals perform well during times when real (inflation adjusted) interest rates are falling and/or when the USD is weak. Real global rates continue to fall (acting as a tailwind to PM's) while the USD has been strong (acting as a headwind to PM's). As such, PM's have risen but not at the rate they might once the USD reverses direction (something we expect may be forthcoming soon).
Below is a ratio price chart of gold stocks (HUI; the "Gold Bugs" Index) to gold bullion going back to 1996 when the HUI first came into existence. As can be seen, whenever the HUI:GOLD ratio dips to below approximately 0.14 (the GREEN zone on the chart) has been a low-risk opportunity to purchase gold stocks.
This past week gold stocks remained near the deep "low-risk vs. high-reward" range and remain near their cheapest valuations in 22 years. Historically purchases of gold equities when within this range have been a very good long term buying opportunities and it now appears gold stocks are attempting to play "catch-up" to the price of bullion.
This past week gold stocks remained near the deep "low-risk vs. high-reward" range and remain near their cheapest valuations in 22 years. Historically purchases of gold equities when within this range have been a very good long term buying opportunities and it now appears gold stocks are attempting to play "catch-up" to the price of bullion.
Even more bullish is Silver (chart below) which remains at a price ratio relative to 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 on the chart below) 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:
Platinum to gold ratios show wide variance over the 46 year period ranging from highs above 2.5 before and soon after Nixon began taking the United States off the gold standard to periodic lows below 1.0:
Our data set covers 553 months beginning in January 1971. The distribution of ratios in both tabular and chart format follows:
Platinum/Gold Ratio: % of Months
Platinum/Gold Ratio: % of Months
- < 0.85: 4.7%
- .85-1.01: 5.0%
- 1.0-1.25: 34.7%
- 1.25-1.5: 19.3%
- 1.5-2.0: 15.4%
- 2.0-2.5: 8.9%
- > 2.5: 2.0%
From our data set and the distributions of monthly average platinum-gold ratios from January 1971 thru January 2017, I glean the following:
From a compendium of sources, the average crustal abundance of both metals is around 4 ppb. Based solely on this fact, platinum and gold should trade at about the same price.
And indeed, our compilation shows that for nearly 50% of the time since gold was decoupled from the world’s reserve currency and allowed to trade freely on exchanges, the price ratio has ranged from 0.85 to 1.25. That said, since January 1971, the average price of platinum has been $637/oz and gold has been $518/oz for an overall ratio of 1.23:1. Clearly there are other factors other than the nearly equal crustal abundances that account for this historic price relationship.
A variety of supply and demand factors cause platinum to trade at a premium to gold:
Fluctuations in the relative prices of platinum and gold are largely driven by:
Platinum functions both as a precious and industrial metal. It is usually tied to the price of gold in both short- and long-term trading patterns. In times of financial distress and economic turmoil, platinum tends to behave more like gold with widespread hoarding.
The platinum-gold ratio can be used to ascertain whether one metal is over- or undervalued with respect to the other. The current monthly average ratio below 0.85 is unusual and indicates that platinum is severely undervalued with respect to gold *
* The ratio recently hit 0.55 and remains near a record low.
- A ratio of less than 0.75 is a single outlier that occurred once during the second half of 1982 when overall ratios averaged 0.81.
- Ratios <0.85 are quite unusual at 4.7%. They occurred for two months in the first quarter of 1975, the aforementioned six months in 1982, in June-July of 1985, and for an ongoing run of 16 months that commenced in October 2015.
- Ratios from 0.85 to 1.0 constitute 15.0% of the record.
- Pt:Au from 1.0 to 1.25 is the most common range and comprises 34.7% of ratios since 1971.
- The ratios between 1.25 and 1.5 occur 19.3% of the time.
- Ratios from 1.5 to 2.0 make up 15.4% of the record.
- The 2.0-2.5 interval covers 8.9% of the months in our compendium.
- The 11 monthly outliers at >2.5 comprise 2.0% of the total record and have not occurred since 1971.
From a compendium of sources, the average crustal abundance of both metals is around 4 ppb. Based solely on this fact, platinum and gold should trade at about the same price.
And indeed, our compilation shows that for nearly 50% of the time since gold was decoupled from the world’s reserve currency and allowed to trade freely on exchanges, the price ratio has ranged from 0.85 to 1.25. That said, since January 1971, the average price of platinum has been $637/oz and gold has been $518/oz for an overall ratio of 1.23:1. Clearly there are other factors other than the nearly equal crustal abundances that account for this historic price relationship.
A variety of supply and demand factors cause platinum to trade at a premium to gold:
- Platinum is a much smaller market. Cumulative world production of platinum is estimated to be about 5% of gold (9400 tonnes versus 182,000 tonnes). From 1994-2014, 3700 tonnes of platinum were mined versus 52,600 tonnes of gold or about 7% (source: USGS).
- Platinum is largely an industrial metal. Catalytic converters, electronics, petroleum and chemical catalysts, medical technologies, and many minor uses constitute over 60% of its annual demand. Around 30% is used in jewelry and 10% for investment demand. Also, 30% of the annual platinum supply now comes from recycling, mostly from catalytic converters. Some demand is consumed and lost to the marketplace.
- Gold is overwhelmingly a precious metal; 90% is used in jewelry and investments and only 10% in industrial applications. An estimated 98% of all the gold ever mined in the world remains available and held in jewelry, by central banks, in private hoards, and as fabricated products (source: USGS).
- About 70% of yearly platinum mine supply comes from South Africa, a geopolitically risky country. Much new platinum is a by-product of nickel-copper mining and smelting; therefore, annual platinum production is dependent on the supply-demand fundamentals and prices of these primary metals.
Fluctuations in the relative prices of platinum and gold are largely driven by:
- the overall growth and health of the world’s economy and in the case of platinum, the automotive industry;
- labor, power, currency, and political issues in South Africa that cause major perturbations in the platinum supply;
- safe haven hoarding of gold and to a much lesser extent, platinum, in times of economic uncertainty and major geopolitical events; speculators moving in and out of paper markets of both metals (bullion exchanges, ETFs, and derivatives) and to a lesser extent, central bank trading of physical gold.
Platinum functions both as a precious and industrial metal. It is usually tied to the price of gold in both short- and long-term trading patterns. In times of financial distress and economic turmoil, platinum tends to behave more like gold with widespread hoarding.
The platinum-gold ratio can be used to ascertain whether one metal is over- or undervalued with respect to the other. The current monthly average ratio below 0.85 is unusual and indicates that platinum is severely undervalued with respect to gold *
* The ratio recently hit 0.55 and remains near a record low.
Elliott Wave
We use Elliott Wave theory in conjunction with cycle analysis to attempt to "crystal ball" what to expect going forward. We have included some basic information below for those who might be interested followed by our current interpretation/analysis.
The Elliott wave principle is a form of technical analysis that some traders use to analyze financial market cycles and forecast market trends by identifying extremes in investor psychology, highs and lows in prices, and other collective factors. Ralph Nelson Elliott (1871–1948), a professional accountant, discovered the underlying social principles and developed the analytical tools in the 1930s. He proposed that market prices unfold in specific patterns, which practitioners today call Elliott waves, or simply waves. Elliott published his theory of market behavior in the book The Wave Principle in 1938, summarized it in a series of articles in Financial World magazine in 1939, and covered it most comprehensively in his final major work, Nature’s Laws: The Secret of the Universe in 1946. Elliott stated that "because man is subject to rhythmical procedure, calculations having to do with his activities can be projected far into the future with a justification and certainty heretofore unattainable."
The Elliott Wave Principle posits that collective investor psychology, or crowd psychology, moves between optimism and pessimism in natural sequences. These mood swings create patterns evidenced in the price movements of markets at every degree of trend or time scale.
In Elliott's model, market prices alternate between an impulsive, or motive phase, and a corrective phase on all time scales of trend, as the illustration shows. Impulses are always subdivided into a set of 5 lower-degree waves, alternating again between motive and corrective character, so that waves 1, 3, and 5 are impulses, and waves 2 and 4 are smaller retraces of waves 1 and 3. Corrective waves subdivide into 3 smaller-degree waves starting with a five-wave counter-trend impulse, a retrace, and another impulse.
In a bear market the dominant trend is downward, so the pattern is reversed—five waves down and three up. Motive waves always move with the trend, while corrective waves move against it.
In Elliott's model, market prices alternate between an impulsive, or motive phase, and a corrective phase on all time scales of trend, as the illustration shows. Impulses are always subdivided into a set of 5 lower-degree waves, alternating again between motive and corrective character, so that waves 1, 3, and 5 are impulses, and waves 2 and 4 are smaller retraces of waves 1 and 3. Corrective waves subdivide into 3 smaller-degree waves starting with a five-wave counter-trend impulse, a retrace, and another impulse.
In a bear market the dominant trend is downward, so the pattern is reversed—five waves down and three up. Motive waves always move with the trend, while corrective waves move against it.
Wave 1 (I): Wave one is rarely obvious at its inception. When the first wave of a new bull market begins, the fundamental news is almost universally negative. The previous trend is considered still strongly in force. Fundamental analysts continue to revise their earnings estimates lower; the economy probably does not look strong. Sentiment surveys are decidedly bearish, put options are in vogue, and implied volatility in the options market is high. Volume might increase a bit as prices rise, but not by enough to alert many technical analysts.
Wave 2 (II): Wave two corrects wave one, but can never extend beyond the starting point of wave one. Typically, the news is still bad. As prices retest the prior low, bearish sentiment quickly builds, and "the crowd" haughtily reminds all that the bear market is still deeply ensconced. Still, some positive signs appear for those who are looking: volume should be lower during wave two than during wave one, prices usually do not retrace more than 61.8% (see Fibonacci section below) of the wave one gains, and prices should fall in a three wave pattern.
Wave 3 (III): Wave three is usually the largest and most powerful wave in a trend (although some research suggests that in commodity markets, wave five is the largest). The news is now positive and fundamental analysts start to raise earnings estimates. Prices rise quickly, corrections are short-lived and shallow. Anyone looking to "get in on a pullback" will likely miss the boat. As wave three starts, the news is probably still bearish, and most market players remain negative; but by wave three's midpoint, "the crowd" will often join the new bullish trend. Wave three often extends wave one by a ratio of 1.618:1.
Wave 4 (IV): Wave four is typically clearly corrective. Prices may meander sideways for an extended period, and wave four typically retraces less than 38.2% of wave three (see Fibonacci relationships below). Volume is well below than that of wave three. This is a good place to buy a pull back if you understand the potential ahead for wave 5. Still, fourth waves are often frustrating because of their lack of progress in the larger trend.
Wave 5 (V): Wave five is the final leg in the direction of the dominant trend. The news is almost universally positive and everyone is bullish. Unfortunately, this is when many average investors finally buy in, right before the top. Volume is often lower in wave five than in wave three, and many momentum indicators start to show divergences (prices reach a new high but the indicators do not reach a new peak). At the end of a major bull market, bears may very well be ridiculed (recall how forecasts for a top in the stock market during 2000 were received).
Wave A: Corrections are typically harder to identify than impulse moves. In wave A of a bear market, the fundamental news is usually still positive. Most analysts see the drop as a correction in a still-active bull market. Some technical indicators that accompany wave A include increased volume, rising implied volatility in the options markets and possibly a turn higher in open interest in related futures markets.
Wave B: Prices reverse higher, which many see as a resumption of the now long-gone bull market. Those familiar with classical technical analysis may see the peak as the right shoulder of a head and shoulders reversal pattern. The volume during wave B should be lower than in wave A. By this point, fundamentals are probably no longer improving, but they most likely have not yet turned negative.
Wave C: Prices move impulsively lower in five waves. Volume picks up, and by the third leg of wave C, almost everyone realizes that a bear market is firmly entrenched. Wave C is typically at least as large as wave A and often extends to 1.618 times wave A or beyond.
Wave 2 (II): Wave two corrects wave one, but can never extend beyond the starting point of wave one. Typically, the news is still bad. As prices retest the prior low, bearish sentiment quickly builds, and "the crowd" haughtily reminds all that the bear market is still deeply ensconced. Still, some positive signs appear for those who are looking: volume should be lower during wave two than during wave one, prices usually do not retrace more than 61.8% (see Fibonacci section below) of the wave one gains, and prices should fall in a three wave pattern.
Wave 3 (III): Wave three is usually the largest and most powerful wave in a trend (although some research suggests that in commodity markets, wave five is the largest). The news is now positive and fundamental analysts start to raise earnings estimates. Prices rise quickly, corrections are short-lived and shallow. Anyone looking to "get in on a pullback" will likely miss the boat. As wave three starts, the news is probably still bearish, and most market players remain negative; but by wave three's midpoint, "the crowd" will often join the new bullish trend. Wave three often extends wave one by a ratio of 1.618:1.
Wave 4 (IV): Wave four is typically clearly corrective. Prices may meander sideways for an extended period, and wave four typically retraces less than 38.2% of wave three (see Fibonacci relationships below). Volume is well below than that of wave three. This is a good place to buy a pull back if you understand the potential ahead for wave 5. Still, fourth waves are often frustrating because of their lack of progress in the larger trend.
Wave 5 (V): Wave five is the final leg in the direction of the dominant trend. The news is almost universally positive and everyone is bullish. Unfortunately, this is when many average investors finally buy in, right before the top. Volume is often lower in wave five than in wave three, and many momentum indicators start to show divergences (prices reach a new high but the indicators do not reach a new peak). At the end of a major bull market, bears may very well be ridiculed (recall how forecasts for a top in the stock market during 2000 were received).
Wave A: Corrections are typically harder to identify than impulse moves. In wave A of a bear market, the fundamental news is usually still positive. Most analysts see the drop as a correction in a still-active bull market. Some technical indicators that accompany wave A include increased volume, rising implied volatility in the options markets and possibly a turn higher in open interest in related futures markets.
Wave B: Prices reverse higher, which many see as a resumption of the now long-gone bull market. Those familiar with classical technical analysis may see the peak as the right shoulder of a head and shoulders reversal pattern. The volume during wave B should be lower than in wave A. By this point, fundamentals are probably no longer improving, but they most likely have not yet turned negative.
Wave C: Prices move impulsively lower in five waves. Volume picks up, and by the third leg of wave C, almost everyone realizes that a bear market is firmly entrenched. Wave C is typically at least as large as wave A and often extends to 1.618 times wave A or beyond.
S&P 500 Weekly Elliott Wave Chart
For those who are new to Elliott wave, it is essential to understand as market participant psychology changes (and, as a consequence, the various waves unfold in specific patterns) objective analysis requires readjustment of counts as the waves unfold. Elliott wave is not a "crystal ball" but more a quantitative tool to analyze changes in market psychology as market conditions evolve. Elliott wave analysis can be quite confusing and intricate but in our experience we find it is best used as a "road map" towards the bigger picture.
Below is the current long term view of the equity market from 1929-Present. Clearly the 2008-2009 market decline was of such stature as to be historic (as "historic" as the 1929-1932 market crash). Given such, we have begun to think out of the box with respect to Elliott Wave as it has recently progressed.
In broadest terms markets cycle through 65-80 year "Grand Super-Cycles" (generally coinciding with generational demographic expansion/contraction). If one were to use the end of the 1929-1932 market crash/depression as the beginning point for a new Grand Super-Cycle, it could be argued a complete 77 year Grand Super-Cycle began in 1932 and ended in 2009. A 5 wave Super-Cycle advance (SC-1, SC-2, SC-3, SC-4, SC-5) occurred between 1932 and 2000 (68 years in length) followed by a 9 year Super-Cycle decline (SC-A, SC-B, SC-C) from 2000-2009 (culminating in the 2007-2009 market decline; the worst since the great depression). If this is the case we would have completed a full 77 year Elliott Wave Grand Super-Cycle pattern from 1932-2009 (5 wave Super-Cycle advance with a 3 wave Super-Cycle decline) and have embarked on a new 65-80 year Grand Super-Cycle beginning in March 2009.
We have marked this Grand Super-Cycle on the below chart with the 68 year SC-1 through to the SC-5 advance (1932-2000) followed by the 9 year SC-A, SC-B, and SC-C decline (2000-2009). If this is the case, an argument can be made the period from 2009-to-Present is unfolding as follows:
Below is the current long term view of the equity market from 1929-Present. Clearly the 2008-2009 market decline was of such stature as to be historic (as "historic" as the 1929-1932 market crash). Given such, we have begun to think out of the box with respect to Elliott Wave as it has recently progressed.
In broadest terms markets cycle through 65-80 year "Grand Super-Cycles" (generally coinciding with generational demographic expansion/contraction). If one were to use the end of the 1929-1932 market crash/depression as the beginning point for a new Grand Super-Cycle, it could be argued a complete 77 year Grand Super-Cycle began in 1932 and ended in 2009. A 5 wave Super-Cycle advance (SC-1, SC-2, SC-3, SC-4, SC-5) occurred between 1932 and 2000 (68 years in length) followed by a 9 year Super-Cycle decline (SC-A, SC-B, SC-C) from 2000-2009 (culminating in the 2007-2009 market decline; the worst since the great depression). If this is the case we would have completed a full 77 year Elliott Wave Grand Super-Cycle pattern from 1932-2009 (5 wave Super-Cycle advance with a 3 wave Super-Cycle decline) and have embarked on a new 65-80 year Grand Super-Cycle beginning in March 2009.
We have marked this Grand Super-Cycle on the below chart with the 68 year SC-1 through to the SC-5 advance (1932-2000) followed by the 9 year SC-A, SC-B, and SC-C decline (2000-2009). If this is the case, an argument can be made the period from 2009-to-Present is unfolding as follows:
- The market is currently within the early stages of Primary Wave III implying a long-term upwards trend for many more years.
- The market is currently within Major Wave ((3)) projecting upwards towards new all time highs.
- Intermediate wave ii wave completed in May 2019 and we are currently within intermediate wave iii expecting new all time highs.
Alternately, our original EWT weekly chart (shown below and our preferred count) we have been following since 2009 is annotated with "classic" Elliott Wave indications projecting we are within the ending stages of the 2009-present bull market (near the top of intermediate wave b of a wave IV 30% decline to be followed by a final wave V advance to new all-time highs to end the bull market from 2009).
At present we remained torn between 2 possible Elliott Wave counts:
- If the market is within Major Wave 3 as per the 1st chart, we would expect a large multi-year advance in Major wave 3. This would project much higher equity prices into the future.
- Alternately, if the have completed Primary Wave III of the entire bull market advance from 2009-2018, a Primary Wave IV is currently in process (a-b-c). At its conclusion (target near 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):
As can be seen on the below graphic, both the 2000 and 2007 market tops were signaled in advance by tops in margin debt (margin debt not inflation adjusted on this chart):
The following chart (source: Doug Short) shows US equity margin debt adjusted for inflation. As can be seen, in both 2000 and 2007 inflation-adjusted margin debt peaked and then began to decline leading to the tops in the S&P 500 index. As such, margin debt rollovers acts as a good lead indicator of possible future market weakness.
Since peaking in early 2018 margin debt has shown a significant decline. A similar decline occurred in 2015 (and did not derail the bull market) but the recent decline is a concern given how late we are in the market cycle combined with the extreme levels of margin debt relative to past market cycles.
U.S. Equity market Valuation Models
(Source: D. Short)
Below is a graph representing 4 different long-term valuation measures plotted back to 1900 (118 years):
As of 30 November 2019 the average of these 4 measures places the U.S. stock market (S&P 500 index) as being 139% 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.
- 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 November 2019 the average of these 4 measures places the U.S. stock market (S&P 500 index) as being 139% 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 144.6%. 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 -40% market decline to return valuations back to the long term de-trended regression line (shown in red on the 2nd chart).
7-Year Asset Class Real Return Forecast
(Source: GMO LLC)
(Source: GMO LLC)
Each month GMO (Grantham, Mayo, Van Otterloo & Co.) publishes a forward forecast for expected annual real rates of return (i.e. inflation adjusted) for a number of different asset classes with a 7 year forward outlook. They have historically had a very good track record (0.97 correlation) of estimating forward 7 year asset class returns based primarily upon current valuations combined with mean reversion. Charts are published following analysis of the previous months data.
I have followed GMO's methodology with interest for many years. In my experience I have found them to be conservative over the shorter term with a tenancy to make calls too early. HOWEVER, similar to Dr. John Hussman of Hussman Funds, they also tend to be right over the longer term. As such, we use their outlook as part of the valuation model within the ECAM 5 Factor model.
Above is their current forecast of expected real returns (after inflation) for the next 7 years broken down by asset class. It is clear based upon current market valuations GMO forecasts well below average annual investment returns in all asset classes with a 7 year forward time horizon (the dotted line is the historical real return of U.S. equities of +6.5% per year). This is important for those who may be soon retiring and expecting "average" returns on their equity and bond investments over the next 7 years. Current high market valuations make it a certainty forward returns over the next 7-10 years will be well below historical averages.
I have followed GMO's methodology with interest for many years. In my experience I have found them to be conservative over the shorter term with a tenancy to make calls too early. HOWEVER, similar to Dr. John Hussman of Hussman Funds, they also tend to be right over the longer term. As such, we use their outlook as part of the valuation model within the ECAM 5 Factor model.
Above is their current forecast of expected real returns (after inflation) for the next 7 years broken down by asset class. It is clear based upon current market valuations GMO forecasts well below average annual investment returns in all asset classes with a 7 year forward time horizon (the dotted line is the historical real return of U.S. equities of +6.5% per year). This is important for those who may be soon retiring and expecting "average" returns on their equity and bond investments over the next 7 years. Current high market valuations make it a certainty forward returns over the next 7-10 years will be well below historical averages.
12-Year US Equity Real Return Forecast
(Source: Hussman Funds)
(Source: Hussman Funds)
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)
(60% in the S&P 500, 30% in Treasury bonds, and 10% in Treasury bills)
Dr. John Hussman uses a unique measure of estimating future equity returns over a 12 year period based upon market capitalization relative to gross corporate value added. He claims the measure has a 91.9% correlation to actual S&P 500 future returns over a 12 year horizon. As per his previous explanations:
"Across the scores of measures I’ve evaluated or created over three decades of research, the ratio of non-financial market capitalization to corporate gross value added (essentially corporate revenues, including estimated foreign revenues, excluding double-counting of intermediate inputs) is best correlated to actual subsequent market returns over a 10-12 year horizon".
As can be seen on the above chart, since 1950 his approach has correlated quite closely with future returns (blue line is his estimates and the red line the subsequent returns 12 years later). Currently his calculations project a "buy and hold" rate of return on the S&P 500 index of -0.6% nominal per year out to 2028 should one employ a "buy and hold" strategy. Clearly tactical asset allocation will be required as we transition to the back half of the current market cycle.
His recent conclusion:
" At present, the valuation measures that we find best correlated with actual subsequent S&P 500 total returns are at the most offensive levels in history, matching or eclipsing the 1929 and 2000 extremes. Even considering the level of interest rates, economic growth, and other factors, the S&P 500 currently stands about 2.8 times the level that we believe the index will revisit over the completion of the current market cycle, implying an interim market loss something on the order of -64%. Moreover, the most reliable valuation measures uniformly imply the likelihood of negative total returns in the S&P 500 over the coming 10-12 year period."
Clearly the high level of current market valuations does not bode well for the "buy and hope" investor.
"Across the scores of measures I’ve evaluated or created over three decades of research, the ratio of non-financial market capitalization to corporate gross value added (essentially corporate revenues, including estimated foreign revenues, excluding double-counting of intermediate inputs) is best correlated to actual subsequent market returns over a 10-12 year horizon".
As can be seen on the above chart, since 1950 his approach has correlated quite closely with future returns (blue line is his estimates and the red line the subsequent returns 12 years later). Currently his calculations project a "buy and hold" rate of return on the S&P 500 index of -0.6% nominal per year out to 2028 should one employ a "buy and hold" strategy. Clearly tactical asset allocation will be required as we transition to the back half of the current market cycle.
His recent conclusion:
" At present, the valuation measures that we find best correlated with actual subsequent S&P 500 total returns are at the most offensive levels in history, matching or eclipsing the 1929 and 2000 extremes. Even considering the level of interest rates, economic growth, and other factors, the S&P 500 currently stands about 2.8 times the level that we believe the index will revisit over the completion of the current market cycle, implying an interim market loss something on the order of -64%. Moreover, the most reliable valuation measures uniformly imply the likelihood of negative total returns in the S&P 500 over the coming 10-12 year period."
Clearly the high level of current market valuations does not bode well for the "buy and hope" investor.
Global Asset Class 10-year Expected Nominal Return Forecast
(data as of 31 December 2019)
(Source: Research Affiliates)
(data as of 31 December 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 and EAFE (Europe, Africa and Far East) equities as providing the greatest returns over the next 10 years with Government Treasury bonds (worldwide) showing minimal returns due to low global interest rates.
Data continues to point to Emerging Market and EAFE (Europe, Africa and Far East) equities as providing the greatest returns over the next 10 years with Government Treasury bonds (worldwide) showing minimal returns due to low global interest rates.
Cycle Commentary
At left is a 20 year chart of the seasonal monthly performance of the Dow Jones Global Index.
The number at the top of the column is the percentage of time the month is positive and at the bottom is the average % gain/loss for the month.
As can be seen, over the past 20 years the period October-April yearly offers the highest potential global equity market returns (cumulative +5.5% average return) while the period May-September offers little in total return (-2.1% cumulative average return).
The number at the top of the column is the percentage of time the month is positive and at the bottom is the average % gain/loss for the month.
As can be seen, over the past 20 years the period October-April yearly offers the highest potential global equity market returns (cumulative +5.5% average return) while the period May-September offers little in total return (-2.1% cumulative average return).
In the interest of moving more towards more recent market action broken down by region, below is the past 10 years seasonal returns for our selected benchmark ETF's:
- Global Equities (VT)
- U.S. Equities (VTI)
- European Equities (VGK)
- Asia Pacific Equities (VPL)
- Emerging Market Equities (VWO)
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It is interesting to note over the past 10 years the month of September has begun to perform better than it has in the past. Also it is interesting to note the exceptionally poor equity returns in Europe during the month of June with very strong returns in July. This is an interesting phenomenon that can be used to potentially time regional equity exposure.
S&P 500 Seasonality (historical 50 year look-back annual seasonality)
"Turning to the months ahead, the performance for January and February is rather lacklustre compared to the months that bookend this start of year period. The S&P 500 Index has gained an average of 0.8% and 0.2%, respectively in the first two months of the year, based on the past 50 periods. These months are easily the weakest of the best six month trend for stocks. The large-cap benchmark has closed positive just over half of the time (56%) in January and February, making this winter lull little better than a flip of a coin in terms of the frequency of success.. Returns for January have ranged from a loss of 8.6% in 2009 to a gain of 13.2% in 1987. Performance tends to gyrate in the middle of January with the majority of the strength achieved in the first few days and last few days of the period".
Ned Davis Research 2020 Composite Model
The following is the composite directional model forecast for the S&P 500 index for 2020 based upon the following parameters (each equal weighted within the composite model) for data from 1928-2019:
- 10 year Decennial Market Cycle (Year ending in 0 = Last Year of Decade)
- 4 year Presidential Market Cycle (Year 4 = U.S. Election Year)
- 1 year Annual Seasonal Market Cycle
The 2020 composite model indicates:
- a strong open to the year in January with a pullback into end Jan/early Feb.
- generally strong equity markets from early February into late March/early April.
- a quick reversal into late May (typically associated with the political conventions to choose the candidate to run for president).
- a run-up into September associated with the U.S. presidential campaigns.
- a quick fall into the election associated with uncertainty.
- a rise into year end once the election has passed.
U.S. 4 Year Presidential Election Cycle
*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.
While we do not make investment decisions strictly based upon cycle analysis, we are cognizant of the historical nature of these cycles and tend to be a bit more wary as they approach.
Presidential Cycle S&P 500 returns (inc. dividends):
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1988-Year 4: +12.40%
1989-Year1: +27.25% 1990-Year 2: -6.56% 1991-Year 3: +26.31% 1992-Year 4: +4.46% 1993-Year 1: +7.06% 1994-Year 2: -1.54% 1995-Year 3: +34.11% 1996-Year 4: +20.26% 1997-Year 1: +31.01% 1998-Year 2: +26.67% 1999-Year 3: +19.53% 2000-Year 4: -10.14% |
2001-Year 1: -13.04%
2002-Year 2: -23.37% 2003-Year 3: +26.38% 2004-Year 4: +8.99% 2005-Year 1: +3.00% 2006-Year 2: +13.62% 2007-Year 3: +3.53% 2008-Year 4: -38.49% 2009-Year 1: +23.45% 2010-Year 2: +12.78% 2011-Year 3: +0.00% 2012-Year 4: +13.41% 2013-Year 1: +29.60% |
2014-Year 2: +11.39%
2015-Year 3: -0.73% 2016-Year 4: +11.96% 2017-Year 1: +21.83% 2018-Year 2: -4.38% 2019-Year 3: TBD |
U.S. Recessions and Equity Performance
Since 1929 there have been 14 recessions in the U.S. as follows:
Below is the equity performance during each of these periods:
