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Market/Model Commentary
Currently the active model portfolio as defined by our 5-factor model is the:
- Please click on the above magenta link to review the suggested allocations if required.
- The 5-factor model reverted to YELLOW on 16 October, 2020 (from RED on 28 February 2020)
- The Full risk model was initiated 04 Dec 2020.
ECAM 5-Factor Composite Model
(Valid from 16 October 2020 to Present Date)
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ECONOMIC FACTOR SUB-MODEL
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TECHNICAL FACTOR SUB-MODEL
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VALUATION FACTOR SUB-MODEL
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SENTIMENT FACTOR SUB-MODEL
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LIQUIDITY (Stress) FACTOR SUB-MODEL
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"Slow and Steady wins the race"
The Hare and the Tortoise
Aesop (Greek slave & fable author 620 BC - 560 BC)
"Technical Analysis is a windsock, not a crystal ball"
Carl Swenlin (Technical Analyst)
"Investing is the intersection of economics and psychology"
Seth Klarman (Hedge fund Manager, Baupost Group)
"Everyone's got a plan ..... until they get punched in the face"
Mike Tyson (Former World Heavyweight Boxing Champion)
The Hare and the Tortoise
Aesop (Greek slave & fable author 620 BC - 560 BC)
"Technical Analysis is a windsock, not a crystal ball"
Carl Swenlin (Technical Analyst)
"Investing is the intersection of economics and psychology"
Seth Klarman (Hedge fund Manager, Baupost Group)
"Everyone's got a plan ..... until they get punched in the face"
Mike Tyson (Former World Heavyweight Boxing Champion)
Latest Updates
DOW JONES GLOBAL INDEX
(22 October 2021)
Global equities were higher this past week with a percentage return (as measured by the Dow Jones Global Index) of +1.20%. They remain in a bullish trend and above the upward sloping 40 week moving average (shown in red).
Dow Jones Global Index Historical Monthly Returns
We remain within October which has historically been a modestly positive month annually over the past 21 years:
- #5 out of 12 for monthly returns.
- 61.9% win rate.
Global Macro Matrix Roadmap
(source: 42 Macro)
(source: 42 Macro)
- Globally (bottom of the table) the roadmap model indicates we are about to rotation into the "Inflation" Global Macro Quadrant. This suggests potential weakness in equities/strength in bonds could be expected into year-end.
Latest Global Quadrant Data
(weekly refresh as of 22 October 2021)
(weekly refresh as of 22 October 2021)
Asset Class Over/Under Performance Per Quadrant
(20-year backtest using Bloomberg data)
(20-year backtest using Bloomberg data)
Weekly Global Macro Review
U.S. Equities
In the US the S&P 500 Index, Dow Jones Industrial Average, and S&P MidCap 400 Index all moved to record highs, helped by a series of positive earnings surprises. Further reflecting the strong investor sentiment, the CBOE Volatility Index (VIX) also fell to its lowest level since the beginning of the pandemic. Along with real estate and utilities stocks, health care shares led the gains within the S&P 500.
In the US the S&P 500 Index, Dow Jones Industrial Average, and S&P MidCap 400 Index all moved to record highs, helped by a series of positive earnings surprises. Further reflecting the strong investor sentiment, the CBOE Volatility Index (VIX) also fell to its lowest level since the beginning of the pandemic. Along with real estate and utilities stocks, health care shares led the gains within the S&P 500.
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S&P 500:
DJIA: NASDAQ 100: S&P 400 Mid-cap: Russell 2000 Small Cap: |
+1.6%
+1.1% +1.1% +1.8% +1.1% |
Stocks traded higher throughout much of the week. Investors appeared to be paying close attention to how higher energy and raw materials prices were affecting both third-quarter profits and future guidance, but favorable earnings momentum helped counter elevated inflation concerns. As of the end of the week, analysts polled by FactSet were expecting overall third-quarter earnings for the S&P 500 to have risen 33% versus the year before. This would be down considerably from the second quarter’s pace of 89% but still the third-fastest growth rate since 2010. The percentage of companies beating revenue estimates was also near record levels.
Hopes for additional fiscal stimulus also appeared to bolster sentiment. Negotiations continued between Democrats in the U.S. Senate over the size of the Biden administration’s proposed social infrastructure bill. Rumors circulated at midweek that West Virginia’s Senator Joe Manchin might even leave the party if the cost of the legislation wasn’t trimmed from roughly USD 3 trillion to under USD 2 trillion. But investors seemed cheered by reports that the Democratic leaders were also prepared to scrap tax rate increases to spare the deal. At a CNN town hall event on Thursday evening, President Biden said that his party was close to striking a deal and that increased corporate taxes were unlikely to be included in the legislation.
The week’s economic data were mixed. This was especially true in the housing sector, where both housing starts and building permits came in well below expectations on Tuesday, while existing home sales, reported Thursday, jumped unexpectedly to their highest level since January. Industrial production fell 1.3% in September, but the miss appeared to be explained away by disruptions from Hurricane Ida and ongoing supply chain issues in the auto industry. Weekly and continuing jobless claims fell more than consensus expectations and reached new pandemic-era lows.
US Bonds
U.S. Treasury yields increased through most of the week, with the 10-year U.S. Treasury note yield briefly trading around 1.69% Friday morning—up from 1.59% the previous week and a five-month high. (Bond prices and yields move in opposite directions.) With monetary policy remaining in focus, five-year notes experienced the most meaningful yield increases and served as the fulcrum for the Treasury yield curve, which pivoted between a steeper and flatter slope throughout the week. Weak demand for the Treasury Department’s 20-year bond auction added upward pressure on long-term rates.
Trading volumes in the investment-grade corporate bond market were relatively light amid an active primary calendar. Early in the week, market sentiment was strengthened by a rally in U.S. equities, strong overnight demand from Asia, and the healthy performance of recent new deals.
The high yield market was flat despite the strong performance of equities. Broader risk markets rallied due to positive earnings results that appeared to offset concerns about inflation, Fed asset purchase tapering, and supply chain constraints. While high yield issuance subsided as the week progressed, below-investment-grade funds saw the largest weekly inflow since early April.
Hopes for additional fiscal stimulus also appeared to bolster sentiment. Negotiations continued between Democrats in the U.S. Senate over the size of the Biden administration’s proposed social infrastructure bill. Rumors circulated at midweek that West Virginia’s Senator Joe Manchin might even leave the party if the cost of the legislation wasn’t trimmed from roughly USD 3 trillion to under USD 2 trillion. But investors seemed cheered by reports that the Democratic leaders were also prepared to scrap tax rate increases to spare the deal. At a CNN town hall event on Thursday evening, President Biden said that his party was close to striking a deal and that increased corporate taxes were unlikely to be included in the legislation.
The week’s economic data were mixed. This was especially true in the housing sector, where both housing starts and building permits came in well below expectations on Tuesday, while existing home sales, reported Thursday, jumped unexpectedly to their highest level since January. Industrial production fell 1.3% in September, but the miss appeared to be explained away by disruptions from Hurricane Ida and ongoing supply chain issues in the auto industry. Weekly and continuing jobless claims fell more than consensus expectations and reached new pandemic-era lows.
US Bonds
U.S. Treasury yields increased through most of the week, with the 10-year U.S. Treasury note yield briefly trading around 1.69% Friday morning—up from 1.59% the previous week and a five-month high. (Bond prices and yields move in opposite directions.) With monetary policy remaining in focus, five-year notes experienced the most meaningful yield increases and served as the fulcrum for the Treasury yield curve, which pivoted between a steeper and flatter slope throughout the week. Weak demand for the Treasury Department’s 20-year bond auction added upward pressure on long-term rates.
Trading volumes in the investment-grade corporate bond market were relatively light amid an active primary calendar. Early in the week, market sentiment was strengthened by a rally in U.S. equities, strong overnight demand from Asia, and the healthy performance of recent new deals.
The high yield market was flat despite the strong performance of equities. Broader risk markets rallied due to positive earnings results that appeared to offset concerns about inflation, Fed asset purchase tapering, and supply chain constraints. While high yield issuance subsided as the week progressed, below-investment-grade funds saw the largest weekly inflow since early April.
Europe/UK Equities
Shares in Europe rose as optimism about corporate earnings season overcame worries about the potential risks if central banks tighten monetary policy as economic growth loses momentum. In local currency terms, the pan-European STOXX Europe 600 Index ended +0.5% higher.
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German DAX:
French CAC: Italian MIB: Spanish IBEX: U.K. FTSE 100: |
-0.3%
-0.0% +0.3% -1.0% -0.4% |
UK inflation unexpectedly slowed to 3.1% year over year in September—down from the 3.2% registered in August but still well above the BoE’s 2% target. BoE chief economist Huw Pill said in an interview with the Financial Times that he would not be shocked to see UK inflation hit or exceed 5% in the coming months. Either scenario would involve a higher inflation rate than the BoE’s official forecast, which calls this metric to peak at about 4% this year or in early 2022. Pill said a rate decision at the November 4 meeting “is finely balanced,” adding “I think November is live.”
Eurozone business activity slowed for a third consecutive month in October, amid increasing supply-chain bottlenecks and ongoing coronavirus-related disruptions, according to early data for IHS Markit’s Purchasing Managers’ Index (PMI). The Eurozone PMI Composite Output Index fell to 54.3 from 56.2 in September. Activity in the manufacturing and services sectors remained above 50—the level denoting expansion—but average selling prices rose to the highest level since the survey began in 1998. The UK PMI Composite Output Index unexpectedly rose to a three-month high of 56.8, driven by a pickup in services. However, manufacturing barely grew amid severe shortages of staff and materials.
Jens Weidmann said he would quit as president of Germany’s Bundesbank for personal reasons at year-end—more than five years before his latest contract expires. A strong critic of the European Central Bank’s ultra-loose monetary policy during his 10 years at the helm, Weidmann announced his resignation almost a month after the center-left Social Democratic Party (SPD) defeated the center-right Christian Democratic Union-led government of outgoing Chancellor Angela Merkel in national elections. It is expected an SPD coalition would likely appoint a more dovish Bundesbank president once in power.
Europe/UK Bonds
Core Eurozone bond yields climbed as continued hawkishness among some major central banks spurred concerns that rate increases might come sooner than previously expected. Peripheral Eurozone bond yields tracked core markets.
UK gilt yields also jumped after Governor Andrew Bailey said that the Bank of England (BoE) would “have to act” if inflationary pressures prove persistent, raising expectations of a rate increase as early as next month. Yields climbed further after a Reuters poll of economists indicated that the BoE could be the first major central bank to begin raising rates.
Eurozone business activity slowed for a third consecutive month in October, amid increasing supply-chain bottlenecks and ongoing coronavirus-related disruptions, according to early data for IHS Markit’s Purchasing Managers’ Index (PMI). The Eurozone PMI Composite Output Index fell to 54.3 from 56.2 in September. Activity in the manufacturing and services sectors remained above 50—the level denoting expansion—but average selling prices rose to the highest level since the survey began in 1998. The UK PMI Composite Output Index unexpectedly rose to a three-month high of 56.8, driven by a pickup in services. However, manufacturing barely grew amid severe shortages of staff and materials.
Jens Weidmann said he would quit as president of Germany’s Bundesbank for personal reasons at year-end—more than five years before his latest contract expires. A strong critic of the European Central Bank’s ultra-loose monetary policy during his 10 years at the helm, Weidmann announced his resignation almost a month after the center-left Social Democratic Party (SPD) defeated the center-right Christian Democratic Union-led government of outgoing Chancellor Angela Merkel in national elections. It is expected an SPD coalition would likely appoint a more dovish Bundesbank president once in power.
Europe/UK Bonds
Core Eurozone bond yields climbed as continued hawkishness among some major central banks spurred concerns that rate increases might come sooner than previously expected. Peripheral Eurozone bond yields tracked core markets.
UK gilt yields also jumped after Governor Andrew Bailey said that the Bank of England (BoE) would “have to act” if inflationary pressures prove persistent, raising expectations of a rate increase as early as next month. Yields climbed further after a Reuters poll of economists indicated that the BoE could be the first major central bank to begin raising rates.
Japan
As campaigning for the October 31 general election began, with the ruling Liberal Democratic Party well ahead in the polls, Japan’s stock markets registered losses for the week, with the Nikkei 225 Index down -0.9% and the broader TOPIX Index falling -1.1%.
Takayuki Kobayashi, who assumed the newly created post of economic security minister in the cabinet formed by Prime Minister Fumio Kishida, expressed his resolve to strengthen supply chains for strategic goods such as semiconductors and rare earth minerals. Part of Japan’s new growth strategy under Kishida’s leadership focuses on building a self-sufficient semiconductor supply chain that can survive disruptions such as the coronavirus pandemic.
According to provisional data from Japan’s Ministry of Finance, the country’s export growth decelerated sharply in September, falling to -13.0% year on year from the previous month’s +26.2%. Positive contributors were steel, coking coal, and tech, while car shipments tumbled as supply chain disruptions in Southeast Asia caused by the coronavirus pandemic and a global semiconductor shortage forced automakers to cut production. On the other hand, imports rose for the eighth consecutive month, growing 38.6% year on year, having expanded 44.7% the prior month. Growth was driven by strong demand for oil, coal, and medicines.
According to the latest flash purchasing managers’ index (PMI) data, private sector output rose for the first time since April 2021 in October. The au Jibun Bank Flash Japan Composite PMI rose to 50.7, from 47.9 in September (a reading above 50 indicates an overall increase compared to the previous month). The dominant services sector registered an increase in activity for the first time since January 2020, while the manufacturing sector continued to expand, and at a faster pace. The slight recovery was commonly attributed to a reduction in COVID-19 cases and looser pandemic restrictions, but firms continued to highlight sustained supply chain pressures and material shortages.
Separate data showed that the core consumer price index (CPI) rose 0.1% year on year in September, a sign that rising energy and raw material costs are gradually pushing up inflation. The rise in the CPI was the first since the early stages of the coronavirus pandemic in March 2020; the uptick is modest compared with other advanced economies, however, and unlikely to affect the Bank of Japan’s monetary easing stance as it is still far off from achieving its 2% inflation target.
China
China’s stock markets advanced as the large-cap CSI 300 benchmark rose +0.6% and the Shanghai Composite Index added +0.3% after officials sought to calm fears about the property sector and China Evergrande Group made a delayed coupon payment, sparking a rally in the cash-strapped developer’s bonds and shares. Chinese stocks got off to a weak start after data released Monday showed that the country’s gross domestic product (GDP) rose a lower-than-expected 4.9% in the third quarter from a year ago as power shortages and property sector curbs reined in expansion. The latest quarterly growth was the weakest since the third quarter of 2020 and considerably slower than the second quarter’s 7.9% pace.
Other data released in the week showed that new home prices stalled in September for the first time in six years, raising expectations of policy support after the property sector endured more negative headlines. China’s property sector is critical since it accounts for as much as one-third of the country’s GDP, according to some estimates, once construction and other property-related goods and services are included.
Credit agencies continued to downgrade ratings on several developers amid fears of a liquidity crunch resulting from a property sector slowdown and slower economic growth. Moody’s Investors Service, Fitch, and S&P Global Ratings each took rating actions as the outlook for the sector grew more uncertain. Meanwhile, China’s President Xi Jinping called upon the country to “vigorously and steadily advance” legislation for a nationwide property tax. Most analysts believe that such a levy would curb rampant housing market speculation, but the idea has reportedly run into widespread pushback from ruling Communist Party members.
On the energy front, Chinese authorities sought to allay a growing energy crunch with state planner National Development and Reform Commission (NDRC), saying that it would “guide coal prices back to a reasonable level.” The NDRC’s assurances sent coal prices plummeting, with some key benchmarks falling by as much as 15% in a single session. However, prices are still up 170% over a year ago after they hit record highs earlier in the week. China is the world’s biggest producer and consumer of coal, viewed as a leading economic indicator since it is used to power about 60% of the country’s power plants.
As campaigning for the October 31 general election began, with the ruling Liberal Democratic Party well ahead in the polls, Japan’s stock markets registered losses for the week, with the Nikkei 225 Index down -0.9% and the broader TOPIX Index falling -1.1%.
Takayuki Kobayashi, who assumed the newly created post of economic security minister in the cabinet formed by Prime Minister Fumio Kishida, expressed his resolve to strengthen supply chains for strategic goods such as semiconductors and rare earth minerals. Part of Japan’s new growth strategy under Kishida’s leadership focuses on building a self-sufficient semiconductor supply chain that can survive disruptions such as the coronavirus pandemic.
According to provisional data from Japan’s Ministry of Finance, the country’s export growth decelerated sharply in September, falling to -13.0% year on year from the previous month’s +26.2%. Positive contributors were steel, coking coal, and tech, while car shipments tumbled as supply chain disruptions in Southeast Asia caused by the coronavirus pandemic and a global semiconductor shortage forced automakers to cut production. On the other hand, imports rose for the eighth consecutive month, growing 38.6% year on year, having expanded 44.7% the prior month. Growth was driven by strong demand for oil, coal, and medicines.
According to the latest flash purchasing managers’ index (PMI) data, private sector output rose for the first time since April 2021 in October. The au Jibun Bank Flash Japan Composite PMI rose to 50.7, from 47.9 in September (a reading above 50 indicates an overall increase compared to the previous month). The dominant services sector registered an increase in activity for the first time since January 2020, while the manufacturing sector continued to expand, and at a faster pace. The slight recovery was commonly attributed to a reduction in COVID-19 cases and looser pandemic restrictions, but firms continued to highlight sustained supply chain pressures and material shortages.
Separate data showed that the core consumer price index (CPI) rose 0.1% year on year in September, a sign that rising energy and raw material costs are gradually pushing up inflation. The rise in the CPI was the first since the early stages of the coronavirus pandemic in March 2020; the uptick is modest compared with other advanced economies, however, and unlikely to affect the Bank of Japan’s monetary easing stance as it is still far off from achieving its 2% inflation target.
China
China’s stock markets advanced as the large-cap CSI 300 benchmark rose +0.6% and the Shanghai Composite Index added +0.3% after officials sought to calm fears about the property sector and China Evergrande Group made a delayed coupon payment, sparking a rally in the cash-strapped developer’s bonds and shares. Chinese stocks got off to a weak start after data released Monday showed that the country’s gross domestic product (GDP) rose a lower-than-expected 4.9% in the third quarter from a year ago as power shortages and property sector curbs reined in expansion. The latest quarterly growth was the weakest since the third quarter of 2020 and considerably slower than the second quarter’s 7.9% pace.
Other data released in the week showed that new home prices stalled in September for the first time in six years, raising expectations of policy support after the property sector endured more negative headlines. China’s property sector is critical since it accounts for as much as one-third of the country’s GDP, according to some estimates, once construction and other property-related goods and services are included.
Credit agencies continued to downgrade ratings on several developers amid fears of a liquidity crunch resulting from a property sector slowdown and slower economic growth. Moody’s Investors Service, Fitch, and S&P Global Ratings each took rating actions as the outlook for the sector grew more uncertain. Meanwhile, China’s President Xi Jinping called upon the country to “vigorously and steadily advance” legislation for a nationwide property tax. Most analysts believe that such a levy would curb rampant housing market speculation, but the idea has reportedly run into widespread pushback from ruling Communist Party members.
On the energy front, Chinese authorities sought to allay a growing energy crunch with state planner National Development and Reform Commission (NDRC), saying that it would “guide coal prices back to a reasonable level.” The NDRC’s assurances sent coal prices plummeting, with some key benchmarks falling by as much as 15% in a single session. However, prices are still up 170% over a year ago after they hit record highs earlier in the week. China is the world’s biggest producer and consumer of coal, viewed as a leading economic indicator since it is used to power about 60% of the country’s power plants.
Weekly Performance
U.S. Indices
Dow +1.1% to 35,677. S&P 500 +1.6% to 4,545. Nasdaq +1.3% to 15,090. Russell 2000 +1.0% to 2,289. CBOE Volatility Index -5.3% to 15.43.
S&P 500 Sectors
Consumer Staples +0.8%. Utilities +2.4%. Financials +2.8%. Telecom -0.6%. Healthcare +2.9%. Industrials +1.8%. Information Technology +1.6%. Materials +0.9%. Energy +1.2%. Consumer Discretionary +1.5%.
World Indices
London -0.4% to 7,205. France +0.1% to 6,734. Germany -0.3% to 15,543. Japan -0.9% to 28,805. China +0.3% to 3,583. Hong Kong +3.1% to 26,127. India -0.8% to 60,822.
Commodities and Bonds
Crude Oil WTI +2.1% to $83.98/bbl. Gold +1.4% to $1,793.4/oz. Natural Gas -1.9% to 5.306. Ten-Year Treasury Yield -0.4% to 130.48.
Forex and Cryptos
EUR/USD +0.36%. USD/JPY -0.64%. GBP/USD +0.04%. Bitcoin +0.5%. Litecoin +4.2%. Ethereum +5.3%. Ripple -3.7%.
Dow +1.1% to 35,677. S&P 500 +1.6% to 4,545. Nasdaq +1.3% to 15,090. Russell 2000 +1.0% to 2,289. CBOE Volatility Index -5.3% to 15.43.
S&P 500 Sectors
Consumer Staples +0.8%. Utilities +2.4%. Financials +2.8%. Telecom -0.6%. Healthcare +2.9%. Industrials +1.8%. Information Technology +1.6%. Materials +0.9%. Energy +1.2%. Consumer Discretionary +1.5%.
World Indices
London -0.4% to 7,205. France +0.1% to 6,734. Germany -0.3% to 15,543. Japan -0.9% to 28,805. China +0.3% to 3,583. Hong Kong +3.1% to 26,127. India -0.8% to 60,822.
Commodities and Bonds
Crude Oil WTI +2.1% to $83.98/bbl. Gold +1.4% to $1,793.4/oz. Natural Gas -1.9% to 5.306. Ten-Year Treasury Yield -0.4% to 130.48.
Forex and Cryptos
EUR/USD +0.36%. USD/JPY -0.64%. GBP/USD +0.04%. Bitcoin +0.5%. Litecoin +4.2%. Ethereum +5.3%. Ripple -3.7%.
Covid-19 Weekly Statistics (24 October 2021 @ 1300 GMT)
|
Global Recorded Cases
244,252,886 Previous Week
241,301,340 1-Week Change
+2,951,546 1 Week Rate-of-Change +1.22% (Prev Week +1.19%) |
Global Active Cases
17,998,612 Previous week
17,856,205 1-Week Change
+142,407 1 Week Rate-of-Change +0.80% (Prev Week -0.68%) |
Global Recovered
221,292,316 Previous week
218,532,658 1-Weekly Change
+2,759,658 Current Recovery Rate 97.81% (Previous 97.80%) |
Global Deceased
4,961,958 Previous week
4,912,477 1-Weekly Change
+49,481 Current Mortality Rate 2.19% (Previous 2.20%) |
Weekly Trend Summary
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Global Recorded Cases
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Global Active Cases
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Global Covid Recovery Rate
Recovery Rate Trend Improving |
Commentary
The total number of Global Recorded Cases since the pandemic began crossed 244 million this week with an additional 2,951,546 new Covid cases recorded globally over the past week. In 2021 the weekly rate of change in new cases (ROC) bottomed 20 Feb @ +2.32% weekly ROC. It then rose in the 2nd global virus wave to a peak 30 Apr @ +4.08% before declining steadily to 23 Jun to 1.42% before the current 3rd wave began. The current 3rd wave topped 15 Aug @ 2.24% ROC and bottomed 18 Oct @ 1.19%. It now appears a new rising wave has begun as Europe and North America enter fall/winter.
Global Daily New Confirmed Cases (7-Day moving average)
The total number of Global Active Cases currently stands at 17,998,612 active cases (an increase of +142,407 global active cases over the past week). At present this is 31.14% below the peak of 24,032,321 global active cases set on 14 April, 2021.
Regional Daily New Confirmed Cases (7-day moving average)
Regionally Europe (including the UK) has now taken over as the worst global per-capita region. Over the past week the countries in Europe with the largest number of new cases were the UK (+16%), Russia (+17%) and Ukraine (+33%).
Global Daily New Confirmed Deaths (7-Day Moving Average)
The global Covid mortality rate (chance of dying from contracting Covid) peaked 08 April 2020 @ 21.25%. It has since fallen in a steady manner to its most recent lows @ 2.19% mortality rate this past week. Note this remains much higher than initial estimates indicated the mortality rate from Covid-19 would be (< 1.0% was the expected Covid mortality rate and for comparison it is estimated the mortality rate from global seasonal flu is 0.1% to 0.5%).
Regional Daily New Confirmed Deaths (Total and Per Capita)
Regionally North America (steady) and Europe (rising) are now equal in terms of number of daily new confirmed deaths per million population over the past week. South America remained steady over the past week .
Global Regional Per-Capita Vaccination Against COVID-19
South America has now taken the lead for the % of population to have received at least 1 vaccine dose. Europe leads other regions in terms of % of population fully vaccinated.
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Top 3 Countries with the Largest number of New Cases over the past 7 days
Top 3 Countries with Largest per-capita number of New Cases over the past 7 days
WEEKLY ASSET CLASS MONITOR
(week ending 22 October 2021)
(week ending 22 October 2021)
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Asset Class
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Region
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ETF Ticker
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Weekly
Return |
Year-to-Date
Return |
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Equities
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World
U.S. Europe Asia Pacific Emerging Market |
VT
VTI VGK VPL VWO |
+1.20%
+1.57% +0.98% -0.21% -0.04% |
+16.57%
+21.56% +16.76% +2.86% +4.97% |
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Bonds
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U.S. Bonds
International Bonds |
BND
BNDX |
-0.39%
-0.32% |
-2.25%
-2.60% |
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Real Estate Equities
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U.S. Real Estate
International Real Estate |
VNQ
VNQI |
+2.50%
+0.97% |
+30.86%
+8.06% |
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Precious Metals Equities
|
Global Gold Miners
Global Junior Gold Miners |
RING
GDXJ |
+1.63%
+1.97% |
-7.17%
-18.07% |
GLOBAL EQUITY MARKET MONITOR
Global equities had a wicked roller-coaster ride in 2020 on the back of the Covid pandemic. They peaked on 12 Feb 2020 and fell dramatically (-34%) into their 23 Mar lows. They have since recovered completely and all regions remain above their respective pre-COVID price peaks with a pattern of higher highs/higher lows.
Since July 2021 global equities have been in a "holding pattern" as shown on the chart. The strongest regional performance remains the US and Europe with Asia Pacific and Emerging markets range bound for all of 2021.
Since July 2021 global equities have been in a "holding pattern" as shown on the chart. The strongest regional performance remains the US and Europe with Asia Pacific and Emerging markets range bound for all of 2021.
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 have reached a turning point in global growth, we continue to utilize global macroeconomic data provided by our data partners at Hedgeye Risk Management. Their data remains one of the most accurate available when attempting to forecast future macroeconomic shifts globally so we use their data to anticipate where the "puck may go" in global macroeconomics.
The Hedgeye Growth/Inflation/Policy (GIP) model uses 90 high frequency inputs per quarter within a Bayesian Inference algorithm to adjust in real-time for the current quarter along with 24 month rate-of-change base effects for future quarters. The forecast is subject to actual economic data as it is released in real time within the quarter so we continue to monitor each economic data point as it is released.
Hedgeye classify each countries model outputs according to the following "quadrants":
Quad 1 (Dark green):
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.
- Asset class overweight equities/credit
- Asset class underweight fixed income
- Growth rising/Inflation rising.
- Asset class overweight equities/credit
- Asset class underweight fixed income
- Growth falling/Inflation rising.
- Asset class overweight fixed income
- Asset class underweight equities/credit
- Growth falling/Inflation falling.
- Asset class overweight fixed income
- Asset class underweight equities/credit
Below is a view of the Global GIP model with their latest Quad outputs for the past quarter (2Q21E) and the 3 forward quarters. The current model projects the vast majority of global regions to experience weakening growth in the 3rd quarter of 2021 (Europe is an exception) with significant headwinds into year-end.
G-20 GIP Model Data
Emerging Market GIP Model Data
Recession Warning Indicators
Below we continue to show the latest Ned Davis Research Global Recession Probability model which triggered a "high risk" global recession warning in the 3rd quarter of 2018. This model reversed below 30 as of 01 October 2020 indicating the probability of a global recession risk at present remains low.
Asset Class Return Monitor
(for week ending 22 October 2021)
(for week ending 22 October 2021)
Equities Legend:
Bonds Legend:
Currencies Legend:
Commodities Legend:
- Vanguard Total World Stock ETF (VT): (Cyan)
- Vanguard Total U.S. Stock Market ETF (VTI): (Red)
- Vanguard FTSE Europe ETF (VGK): (Lime Green)
- Vanguard FTSE Asia Pacific ETF (VPL): (Dark Blue)
- Vanguard FTSE Emerging Markets ETF (VWO): (Pink)
Bonds Legend:
- Vanguard Total U.S. Bond Market ETF (BND): (Black)
- Vanguard Total International ex-U.S. Bond ETF (BNDX): (Green)
Currencies Legend:
- U.S. Dollar Index (Cash Settlement EOD) ($USD): (Orange)
- Euro (Philadelphia Index) ($XEU): (Maroon)
Commodities Legend:
- PowerShares DB Commodity Index Tracking Fund (DBC): (Purple)
- SPDR Gold ETF (GLD): (Sky Blue)
Past Week Asset Class returns
- Over the past week global equities (as measured by the Vanguard Total World Stock ETF (shown in CYAN) gained +1.20%.
- US markets were the top performing equity region this past week with Asia Pacific market equities lagging.
- U.S. bonds (Black) and International bonds (Green) were lower on the week.
- Commodities were lower on the week with the U.S. Dollar index down -0.33%.
Year-to-Date (2021) Asset Class returns
- Thus far in 2021 global equities (as measured by the Vanguard Total World Stock ETF (shown in CYAN) have gained +16.57%.
- US equities are the top performing equity region in 2021 thus far with Asia Pacific markets lagging.
- Bonds have shown negative returns thus far in 2021 with U.S. bonds (Black) out-performing International Bonds (Green).
- Commodities have had very strong returns for 2021 with the U.S. Dollar index up +4.15%.
Typically bull/bear markets follow a sine-wave cycle of investor psychology which begins with optimism, peaks with euphoria, bottoms with despair and returns to optimism.
It must be reemphasized a complete market cycles is composed of 2 distinct cycles/phases: a "bull 1/2 cycle" and a "bear 1/2 cycle". The 11 year bull 1/2 cycle ended in Feb 2020 with the global spread of COVID-19 resulting in a rapid bear 1/2 cycle. We have now returned to the bull 1/2 cycle as of March 2020.
The Math of Losses
- a 20% loss requires a 25% gain to return to breakeven
- a 30% loss requires a 43% gain to return to breakeven
- a 40% loss requires a 67% gain to return to breakeven
- a 50% loss requires a 100% gain to return to breakeven
- a 60% loss requires a 150% gain to return to breakeven
This is why it is so important to not let losses continue in the face of a bear market decline and why we advocate phased movements into cash as our 5-factor model reverts towards Red. The below graphic represents how we move within equity markets through a complete sine-wave market cycle:
World Regional Equity Monitor
We use the following U.S. exchange traded funds to monitor equity performance for the various world regions:
- World Equities: Vanguard Total World ETF (Cyan)
- U.S. Equity: Vanguard Total Market ETF (Red)
- Asia Pacific Equity: Vanguard FTSE Pacific ETF (Blue)
- European Equity: Vanguard FTSE Europe ETF: (Lime Green)
- Emerging Market Equity: Vanguard FTSE Emerging Market ETF (Pink)
1 Year Rolling Regional Equity Performance
- Over the past 12 month rolling period regional equity performance has been positive for all monitored regions.
- The strongest equity region over the past 12 month has been US Markets with Emerging market equities lagging.
- Overall world equity performance (as measured by the Vanguard Total World ETF) have returned +30.70% (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 US markets with Emerging markets the weakest.
- Mixed regional equity returns have been evident over the past quarter (3 months) in monitored regions.
1 Month Rolling Regional Equity Performance
- Over the past 1 month rolling period the strongest performing world equity region has been US markets with Asia Pacific markets the weakest.
- Mixed equity returns have been achieved over the past month for the monitored regions.
Past Week Regional Equity Performance
- Over the past week major global equities were mixed with US markets outperforming other regions.
Latest Global Equity "Big Picture"
World equity market returns are monitored via the following index and ETF equity charts:
- Dow Jones Global Market Index (cap-weighted)
- Value Line Geometric U.S. Index (equal-weighted)
- Global Dow Index (equal-weighted)
- MSCI ACWI ETF (cap-weighted)
Dow Jones Global Market Index
(market cap weighted index)
For the week the Dow Jones Global Index had a gain of +1.20%. As can be seen on the chart above, price remains above the 65 week moving average (blue line) and above the last major pullback in Mar/2021.
Value Line Geometric Index and Global Dow Index
(equal weighted indexes)
The Value Line Geometric Index ($XVG) is the median price performance of 1700 U.S. companies equal weighted (as opposed to most indexes which are market cap weighted) into an index. The Global Dow index ($GDOW) is a measure of the top 150 international companies equal weighted within the index.
These indexes are important as they equal-weight the price performance of all the companies held within the respective index. This removes the distortions associated with a small group of highly valued companies (which may be performing well) masking the performance of struggling companies and represents a good overview of overall internal equity breadth/strength.
These indexes are important as they equal-weight the price performance of all the companies held within the respective index. This removes the distortions associated with a small group of highly valued companies (which may be performing well) masking the performance of struggling companies and represents a good overview of overall internal equity breadth/strength.
Value Line Geometric Index ($XVG) Weekly
Global Dow Index ($GDOW) Weekly
iShares MSCI ACWI ETF
(market cap weighted ETF)
The iShares MSCI ACWI (All Country World Index) ETF is used as a benchmark to compare the performance of the various broad-based equity funds available in the Emirates Group Provident Scheme (EGPS) A/B/C accounts. It serves as a benchmark to determine how equity markets are performing on a worldwide basis. This assists in determining 2 parameters; whether to be invested in equities and also which funds within the EGPS offer the best performance relative to the benchmark.
The ETF is composed of the following regional components/weightings:
The ETF is composed of the following regional components/weightings:
ACWI Monthly Chart (since 2009)
Global equity markets fell substantially from their Feb 2020 peak due to the Covid crisis to near their previous consolidation box lows (yellow box) @ 62.68. They have risen dramatically and have now closed above their previous top. This is a continued encouraging sign a new bull market is in progress.
For the month of October ACWI has gained +4.99%. It closed the month of September above the 12 month simple moving average keeping the long term trend bullish until month end.
For the month of October ACWI has gained +4.99%. It closed the month of September above the 12 month simple moving average keeping the long term trend bullish until month end.
ACWI Weekly Chart
This past week ACWI gained +1.24%. Price remains above the 65 week simple moving average (shown in BLUE) and the weekly support @ 90.44-92.51.
World Equity Market Regional Relative Rotation Graphs
Below is a graph of 25 major regional equity market ETF's + ACWI (our world equity benchmark) shown on a Relative Rotation chart measured weekly with a 10 week look-back period (which forms the "tail" of the ETF). This graph allows us to observe over time how various regional ETF's are moving relative to both each other and also relative to cash.
- Leading (Green): (Momentum Positive + Price Relative Strength Positive)
- Weakening (Yellow): (Momentum Negative + Price Relative Strength Positive)
- Lagging (Red): (Momentum Negative + Price Relative Strength Negative)
- Improving (Blue): (Momentum Positive + Price Relative Strength Negative)
Given the cyclical nature of momentum and price within equity markets, in general the RRG charts will cycle in a clockwise manner (though not necessarily will each pass through all 4 quadrants as it is possible to rotate through an adjacent quadrant only).
Weekly Regional (Country) Relative Rotation Graphs (long term)
As can be seen on the above table, the majority of monitored countries remain within the "Weakening" quadrant with the quantitative scoring negative. ACWI (our world equity fund benchmark) also remains within the YELLOW "Weakening" quadrant.
The RRG trend analysis status is currently NEUTRAL for world equities:
- ACWI price Relative Strength (horizontal axis): POSITIVE
- ACWI price Momentum (vertical axis): NEGATIVE
Coincident Equity Market Indicators
Crude Oil
Crude oil was higher over the past week and remains off its recent lows. Firm crude oil prices typically point to increasing demand on the back of world economic growth improvement. Its break of resistance shifts its reading to equity bullish.
Gold
Gold was higher over the past week and closed below resistance @ 1886. Gold acts as a "safe haven" and the recent decline below 1886 is equity bullish.
Commodities
Commodities were lower over the past week and have now pushed to 6 year highs. They have regained pre-Covid levels and remain equity bullish above $199.
U.S. 30 Year Treasury Bond
U.S. 30 year bonds were lower on the week. Rising bond prices indicate a "flight to safety" trade associated with weakening economic data and the break back near pre-covid yields remains equity neutral.
Current 5-Factor Model Indications
The combined 5-Factor quantitative model is currently YELLOW (neutral). This indicates a neutral level of risk at present. The 5-Factor model currently has the following sub-model readings:
Economic Model
The Economic model has reverted to YELLOW as the 1 year rate-of-change in global economic data has begun to moderate into a steady-state low growth condition. The model is composed of numerous inputs including data from the following sources:
Forward Forecast Data:
Current Data:
Forward Forecast Data:
- OECD Composite Leading Indicators (CLI)
- BlackRock Macro GPS Growth/Inflation forecast monitor
Current Data:
- J.P. Morgan Global Purchasing Managers (PMI) Index
- World Bank Monthly Global Economic Report
OECD Composite Leading Indicators
(12 October 2021)
The OECD composite leading indicator (CLI) is designed to provide early signals of turning points in business cycles showing fluctuation of the economic activity around its long term potential level. CLIs show short-term economic movements in qualitative rather than quantitative terms.
12 Oct. 2021 - "The pace of expansion in economic activity in the OECD area as a whole looks set to continue to moderate after the post-pandemic rebound, according to the latest OECD Composite Leading Indicators.
The CLIs continue to anticipate a moderating pace of expansion at above trend level in Canada, the euro area as a whole and the United Kingdom, as reported last month. Similar indications have now emerged in the United States and Japan. In France, the CLI expects real GDP levels to remain below the long-term trend and also suggests that growth is likely to moderate. One factor pulling down the CLIs is the persistent rise in consumer prices in recent months, driven by surging energy prices.
Among major emerging-market economies, the CLI for China, weighed down by the contraction of steel production, is now pointing towards stable growth rather than a steady increase, as reported last month. In India the CLI indicates stable growth, but real GDP levels are expected to remain below the long-term growth trend. Slowing growth continues to be anticipated in Brazil. The CLI for Russia is still pointing to a steady increase in growth above the long-term GDP growth trend."
The CLIs continue to anticipate a moderating pace of expansion at above trend level in Canada, the euro area as a whole and the United Kingdom, as reported last month. Similar indications have now emerged in the United States and Japan. In France, the CLI expects real GDP levels to remain below the long-term trend and also suggests that growth is likely to moderate. One factor pulling down the CLIs is the persistent rise in consumer prices in recent months, driven by surging energy prices.
Among major emerging-market economies, the CLI for China, weighed down by the contraction of steel production, is now pointing towards stable growth rather than a steady increase, as reported last month. In India the CLI indicates stable growth, but real GDP levels are expected to remain below the long-term growth trend. Slowing growth continues to be anticipated in Brazil. The CLI for Russia is still pointing to a steady increase in growth above the long-term GDP growth trend."
Long-Term View (OECD Total)
Zoomed-In View (OECD Total)
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.
BlackRock Macro GPS Growth/Inflation Forecast
(14 October 2021 Data)
The BlackRock macro-GPS aims to give a forward forecast on the growth & inflation outlook for G7 economies. It combines new sources of information using new "big-data" sources – including internet searches and text mining of corporate calls - as well as traditional economic data. Other big data inputs include online job postings, inflation chatter, satellite images, e-invoicing and traffic patterns.
The BlackRock GPS forecasts the following:
The BlackRock GPS forecasts the following:
- the potential year-over-year GDP economic growth reading versus current consensus 3 months forward.
- the potential year-over-year Inflation reading versus current consensus 6 months forward.
BlackRock GDP Growth Forecast vs. Current Consensus
The BlackRock GDP growth forecast currently projects the greatest upside surprise in growth (versus current consensus) 3 months from now will be Australia with the greatest downside surprise in growth (versus current consensus) in Italy. The growth GPS continues to project continued downward future growth projections globally relative to consensus 3-months forward with a G-7 economic growth forecast -0.75% below current consensus.
(3-month forward GPS global growth forecast lower than current consensus)
(3-month forward GPS global growth forecast lower than current consensus)
BlackRock Inflation Forecast vs. Current Consensus
The BlackRock inflation forecast currently projects Japan will have the greatest upside surprise in future inflation (relative to consensus) 6 months from now with the US having the furthest downside projected inflation relative to consensus. The inflation GPS projects generally lower inflationary pressures globally relative to current consensus.
(6-month forward GPS global inflation forecast lower than current consensus)
(6-month forward GPS global inflation forecast lower than current consensus)
J.P. Morgan Global Composite Purchasing Managers Index (PMI)
(05 October 2021)
(05 October 2021)
The Global Composite PMI Report is based on the results of manufacturing and service sector surveys covering over 18,000 purchasing executives in over 40 countries. Together these countries account for an estimated 89% of global gross domestic product (GDP).
Questions are asked about real events and are not opinion based. Data are presented in the form of diffusion indices, where an index reading above 50.0 indicates an increase in the variable since the previous month and below 50.0 a decrease. As such, using the PMI data gives us a real-time look at global growth.
Questions are asked about real events and are not opinion based. Data are presented in the form of diffusion indices, where an index reading above 50.0 indicates an increase in the variable since the previous month and below 50.0 a decrease. As such, using the PMI data gives us a real-time look at global growth.
- readings > 50 indicating economic expansion
- readings < 50 indicate economic contraction.
Global Composite PMI Summary 05 October:
- J. P. Morgan Global PMI Composite Output Index at 53.0 in September
- Growth of output and new orders remain subdued
- Input cost and output price inflation accelerate
Global Composite Output Index vs. Global GDP
There tends to be a reasonably tight correlation between the Global Composite Output Index and subsequent global GDP.
The current Composite Output Index has now exceeded its historical highs last set in 2010 and implies a future global GDP reading approaching 5%; erasing all GDP losses associated with the Covid outbreak.
The current Composite Output Index has now exceeded its historical highs last set in 2010 and implies a future global GDP reading approaching 5%; erasing all GDP losses associated with the Covid outbreak.
Below is our PMI monitor for selected regions/countries.
- numerical values > 50 (BLACK) indicate economic expansion in progress.
- numerical values < 50 (RED) indicating economic contraction in progress.
- trend box GREEN indicates improvement over the past month with RED indicating a decline over the previous month.
The latest data points to a continuation of global economic expansion (at a reduced rate from record highs). Areas of contraction remain Japan and Australia.
World Bank Global Monthly Outlook
(September 2021)
(September 2021)
U.S. Economic Growth & Inflation
Year-over-Year GDP growth
The Gross Domestic Product (GDP) in the United States expanded 12.20 percent in the second quarter of 2021 over the same quarter of the previous year.
Quarter-over-Quarter GDP growth
The American economy advanced an annual 6.7% on quarter in the second quarter of 2021, slightly higher than early estimates of 6.6%. Upward revisions to personal consumption expenditures (12% vs 11.9% in the second estimate), exports (7.6% vs 6.6%), and private inventory investment were partly offset by an upward revision to imports (7.1% vs 6.7%). The rapid spread of the coronavirus delta variant, supply-chain disruptions, shortage of workers and a cooling housing market are seen weighing on the growth for the rest of the year. The Fed recently cut its growth projections for 2021 to 5.9% but revised higher for 2022 (3.8%) and 2023 (2.5%).
Annualized Inflation
The annual inflation rate in the US edged up to a 13-year high of 5.4% in September of 2021 from 5.3% in August and above market expectations of 5.3%. Main upward pressure came from cost of shelter (3.2% vs 2.8% in August); food (4.6% vs 3.7%, the highest since December of 2011), namely food at home (4.5% vs 3%); new vehicles (8.7% vs 7.6%); and energy (24.8% vs 25%). On the other hand, prices eased for used cars and trucks (24.4% percent vs 31.9%); transportation services (4.4% vs 4.6%); apparel (3.4% vs 4.2%); and medical care services (0.9% vs 1%). On a monthly basis, consumer prices advanced 0.4%, above forecasts of 0.3%, with the indexes for food and shelter contributing more than half of the monthly increase. The core index which excludes food and energy went up 0.2% mom and 4% yoy, the same as in August and in line with forecasts.
Eurozone Economic Growth & Inflation
Year-over-Year GDP growth
The Eurozone annual economic growth was revised higher to 14.3 percent in the second quarter of 2021 from a preliminary estimate of 13.6 percent, ending a five-quarter period of contraction. It was the fastest pace of expansion on record, reflecting a low base year triggered by the pandemic and a recovery in activity and demand following the reopening of the economy.
Quarter-over-Quarter GDP growth
The Eurozone quarterly economic growth was revised higher to 2.2 percent in the second quarter of 2021, a solid rebound following two consecutive periods of contraction, amid a recovery in activity and domestic demand due to the reopening of the bloc's economies, helped by the rapid pace of COVID-19 vaccination. Household consumption jumped 3.7 percent (vs -2.1 percent in Q1) and fixed investment rose 1.1 percent (vs -0.2 percent in Q1). In addition, public spending advanced 1.2 percent (vs -0.5 percent in Q1), while net trade made no contribution to the GDP growth as exports grew nearly at the same pace as imports. Changes in inventories, however, subtracted 0.2 percentage points from the GDP. On a yearly basis, the economy expanded 14.3 percent, the most on record, reflecting a low base year due to the pandemic
Annualized Inflation
The Eurozone annual inflation rate is expected to accelerate to 3.4 percent in September 2021, from 3.0 percent in the previous month and slightly above market expectations of 3.3 percent, a preliminary estimate showed. That would match the highest rate of inflation since before the global financial crisis in September 2008, raising concerns about the ECB's narrative that recent price spikes are seen as temporary and the economy requires depressed borrowing costs. Energy cost is seen accounting for much of the increase, rising by 17.4 percent in September after a 15.4 percent advance in August. Additional upward pressure should come from services (1.7 percent vs 1.1 percent) and food (2.1 percent vs 2.0 percent). Cost for non-energy industrial goods likely rose at a slower pace (2.1 percent vs 2.6 percent). The annual core inflation, which excludes volatile prices of energy, food, alcohol & tobacco, climbed to 1.9 percent, the highest rate since December 2008.
Japan Economic Growth & Inflation
Year-over-Year GDP growth
The Gross Domestic Product (GDP) in Japan expanded 7.60 percent in the second quarter of 2021 over the same quarter of the previous year.
Quarter-over-Quarter GDP growth
The Japanese economy advanced 0.5 percent on quarter in the three months to June 2021, compared with a preliminary estimate of 0.3 percent growth and market expectations of 0.4 percent. It also followed a revised 1.1 percent fall in the first quarter, as domestic demand and activity rebounded from steep declines triggered by the coronavirus pandemic. Household consumption advanced 0.9 percent (vs -1.3 percent in Q1) and fixed investment rose 2.3 percent (vs -1.3 percent in Q1). Also, government consumption increased 1.3 percent (vs -1.7 percent in Q1), while public investment shrank 1.7 percent (vs -1.1 percent in Q1). Net external demand contributed negatively to the GDP as exports rose 2.8 percent and imports were up at a faster 5 percent. On an annualized basis, the economy expanded 1.9 percent in the second quarter, compared with a preliminary reading of 1.3 percent and market forecasts of 1.6 percent.
Annualized Inflation
Japan's consumer prices rose by 0.2 percent year-on-year in September 2021, rebounding from a 0.4 percent drop a month earlier and posting the first annual gain since August 2020. There were rises in cost of food (0.9 percent vs -1.1 percent in August), housing (0.7 percent, the same as in August), fuel, light and water charges (4.4 percent vs 2.5 percent), furniture and household utensils (1.7 percent vs 2.9 percent), culture & recreation (3.3 percent vs 3.7 percent), and miscellaneous (1.2 percent, the same as in August). On the other hand, prices continued to fall for both transportation & communication (-6.4 percent vs -6.6 percent) and medical care (-0.2 percent vs -0.1 percent). Core consumer prices, which exclude fresh food, edged up 0.1 percent, the first month of increase since March 2020 on the back of rising fuel prices. On a seasonally adjusted monthly basis, consumer prices went up 0.4 percent in September, the most since January.
China Economic Growth & Inflation
Year-over-Year GDP growth
The Chinese economy expanded 4.9 percent year-on-year in the third quarter of 2021, easing sharply from a 7.9 percent growth in the previous period and slightly missing market consensus of 5.2 percent. It was the slowest pace of expansion since the third quarter last year, amid several headwinds including power shortages, supply chain bottlenecks, a persistent property bubble and COVID-19 outbreaks. Considering the first three quarters of the year, the economy grew 9.8 percent from a year earlier, with final consumption accounting for 64.8 percent of GDP growth. For 2021, China has set an economic growth target of above 6% after growing the least in over four decades in 2020.
Quarter-over-Quarter GDP growth
The Chinese economy grew by a seasonally adjusted 0.2 percent on quarter in the three months to September 2021, compared with market estimates of a 0.5 percent expansion and following a marginally revised 1.2 percent advance in the previous quarter. This was the weakest quarterly growth since a contraction in the January-March 2020, amid power shortages, supply chain bottlenecks, growing concerns over the property sector, and COVID-19 outbreaks.
Annualized Inflation
China's annual inflation rate unexpectedly edged lower to 0.7% in September 2021 from 0.8% a month earlier and compared with market estimates of 0.9%. This was the lowest reading since March, mainly due to a steeper decline in cost of food (-5.2%) with pork prices falling faster (-46.9%). Meantime, prices of non-food were little changed (2% vs 1.9% in August), as cost rose further for transportation & communication (5.8% vs 5.9%), fuel & utilities (1.3% vs 1.1%), household goods and services (0.5% vs 0.6%), and education, culture (3.2% vs 3%); while inflation was flat for both clothing (at 0.5%) and health (at 0.4%). Beijing has set a 2021 CPI growth target of around 3%, compared with 3.5% last year. On a monthly basis, consumer prices were flat in September, missing forecasts of a 0.3% gain and after a 0.1% rise in August.
Valuation Model
The Valuation model remained RED this week. Global equity valuations remain near historical highs relative to underlying current global economic fundamentals (GDP output). Distortions associated with the global Covid shutdown and subsequent reopening continue to cloud the valuation model.
Technical Model
The Technical model remained YELLOW. Global equity markets have begun to question whether the global inflation impulse is truly "transitory".
Sentiment Model
The Sentiment model remained YELLOW this week as overall sentiment has turned neutral (sentiment acts as an inverse shorter-term trading indicator).
Liquidity/Economic Stress Model
The Liquidity/Economic Stress model remained GREEN this week with recent global financial stress associated with COVID-19 offset by unprecedented global central bank liquidity injections.
World Bond Asset Class Return Monitor
We use the following U.S. exchange traded funds to monitor bond performance for the various bond asset classes:
Total Market Bond Basket:
- U.S. Total Bond Market (BND): (Red)
- International (ex-U.S.) Total Bond Market (BNDX): (Blue)
- U.S. Gov't Treasury Bonds (GOVT): (Orange)
- Foreign Developed Market Gov't Treasury Bonds (BWX): (Pink)
- U.S. Corporate Bonds (LQD): (Maroon)
- International Corporate Bonds (PICB): (Black)
- U.S. High Yield Bonds (JNK): (Purple)
- International High Yield Bonds (IHY): (Green)
- U.S. Gov't Inflation Protected Bonds (TIP): (Lime Green)
- International Gov't Inflation-Protected Bonds (WIP): (Cyan)
1 Year Rolling Bond Performance
- Over the past 12 months rolling period the top performing bond asset class has been US High Yield 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 negative returns over the past year.
3 Month Rolling Bond Performance
- Over the past 3 month rolling period the top performing bond asset class has been U.S. Gov't Inflation Protected Bonds with International Gov't Treasury Bonds lagging.
- U.S. Total Bond Market (RED) and International (ex-U.S.) Total Bond Market (BLUE) having delivered negative returns over the past quarter (3 months).
1 Month Rolling Bond Performance
- Over the past 1 month rolling period the top performing bond asset class has been US Gov't Inflation Protected Bonds with US Corporate Bonds lagging.
- The U.S. Total Bond Market (RED) and the International (ex-U.S.) Total Bond Market (BLUE) have delivered negative returns over the past month.
Past Week Bond Asset Class Performance
- Over the past week Int'l Gov't Inflation Protected Bonds were the top performing bond class with US Corporate Bonds lagging.
- The U.S. Total Bond Market (RED) and the International (ex-U.S.) Total Bond Market (BLUE) posted lower returns over the past week.
Commentary:
It has been shown in repeated studies over many years a balanced portfolio consisting of both equities and bonds (with percentage holdings in each adjusted according to personal risk tolerances) remains the best methodology in managing a long term retirement portfolio (due to the independent/low correlated function each takes when navigating though various market cycles and economic conditions).
It is best to think of bonds and equities as 2 independent brains each looking at the market from a different perspective:
As such, both serve a useful purpose in a well balanced portfolio.
We are very cognizant of the fact bond yields remain near generational lows (bond prices overbought and at generational highs) and any significant economic recovery (with associated increases in inflation) has the potential to be very detrimental to bond fund returns. There is currently over $10 Trillion in negative yielding bonds globally (never before seen in 5000 years of history) so any sudden surge in global growth and/or inflation will have a devastating impact upon bond fund returns (hence the reason we place so much research into global macroeconomic conditions).
Rolling 12 month returns for bonds have now turned negative 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.
We are very cognizant of the fact bond yields remain near generational lows (bond prices overbought and at generational highs) and any significant economic recovery (with associated increases in inflation) has the potential to be very detrimental to bond fund returns. There is currently over $10 Trillion in negative yielding bonds globally (never before seen in 5000 years of history) so any sudden surge in global growth and/or inflation will have a devastating impact upon bond fund returns (hence the reason we place so much research into global macroeconomic conditions).
Rolling 12 month returns for bonds have now turned negative 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 bond bull market began 01 Oct 2018. Below is the performance of the 3 ETF's we use as "bond proxies" to monitor global bond performance:
- BNDW: Vanguard Total World Bond market ETF (BLUE)
- BND: Vanguard Total U.S. Bond market ETF (GREEN)
- BNDX: Vanguard Total International (ex-U.S.) Bond market ETF (RED)
Global aggregate bonds lost -0.45% over the past week. They remain above their march 2021 lows and continue to seek direction as global inflation remains a concern.
U.S. 10 year Treasury Yield
Rates in the U.S. peaked in Oct 2018 above 3% and commenced a gradual decline through 2019 to 1.5% on weak economic performance. The remained stable in the 1.5-2.0% area until Covid where they collapsed to record lows. The remained range-bound through 2020 but have now risen back to their pre-covid levels in 2021 on the improving U.S. economic recovery.
Yield support remains 1.336%-1.429% with resistance near 2%.
Yield support remains 1.336%-1.429% with resistance near 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 -0.84% on the back of recessionary economic conditions within the German economy. They had remained range bound since May 2019 but are now attempting a breakout above resistance @ -0.1890%.
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.
Currencies
Below is the 12/3/1 month and weekly rolling returns for the 6 currencies that make up the U.S. Dollar index. The U.S. Dollar index is composed of a weighted geometric mean of the dollar's value relative to the 6 currencies in the following list:
In addition, we also include the following for comparison purposes:
- Euro (EUR), 57.6% weight.
- Japanese yen (JPY) 13.6% weight.
- U.K. Pound sterling (GBP), 11.9% weight.
- Canadian dollar (CAD), 9.1% weight.
- Swedish krona (SEK), 4.2% weight.
- Swiss franc (CHF) 3.6% weight.
In addition, we also include the following for comparison purposes:
- The Australian Dollar (not a part of the USD Index) as it is a popular commodity currency.
- Gold (priced in USD) as it typically acts more like a currency void of fiat printing.
1 Year Rolling Currency Performance
- Over the past 12 months rolling period the top performing major currency has been the Canadian Dollar with the Japanese Yen the worst performing.
3 Month Rolling Currency Performance
- Over the past 3 month rolling period the top performing currency has been the Canadian Dollar with the Japanese Yen lagging.
1 Month Rolling Currency Performance
- Over the past 1 month rolling period the top performing currency has been the Canadian Dollar with the Japanese Yen lagging.
Past Week Currency Performance
- Over the past week the top performing major currency was Gold with the US Dollar Index lagging.
U.S. Dollar: (Bullish Bias)
Commentary:
The USD index was down -0.33% over the past week. It had been in a steady decline since March 2020 as global liquidity through Central Bank printing has reduced the shortage of US dollar demand which occurred during the worst of the COVID crisis in Asia and Europe. However, stronger US economic performance relative the rest of the world post-Covid reopening has turned the dollar bullish.
Support / Resistance Levels (based upon close):
Weekly: 92.95 / 94.86
Monthly: 92.63 / 98.66
Support / Resistance Levels (based upon close):
Weekly: 92.95 / 94.86
Monthly: 92.63 / 98.66
US Dollar Index Daily charts
The 1 year daily chart (above) shows the range-bound chop between 92-95 from Jul-Nov 2020 (red shaded box) before the drop to its recent lows at the beginning of 2021 @ 89.41. It has substantially recovered and this week closed above the daily support @ 93.32 with resistance @ 94.68-94.87.
The 4 year daily chart (above) clearly shows the 94.79-94.87 level as a critical weekly support/resistance line over the past 4 years.
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 -14% decline the USD index experienced from the start of the Covid crisis in March 2020 to its recent lows in early Jan 2021. It has now reversed in line with improving economic performance post-Covid panic.
Price ended the week above support @ 91.33 and closed the week above the intermediate term trend 20 and 65 week moving averages.
(Intermediate Term Bullish)
Price ended the week above support @ 91.33 and closed the week above the intermediate term trend 20 and 65 week moving averages.
(Intermediate Term Bullish)
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 23 years (since 1997).
US Dollar Index Monthly chart
For the month of October the U.S. Dollar index is down -0.65%. Since 2011 it has been confined between 88-102. More recently, it has been consolidating within a narrow range since mid-2020 but this past month closed above the consolidation box resistance @ 93.93.
Price closed September above the long term trend 10 month moving average keeping the long term bias Bullish until months end. Monthly support is now @ 88.95 with resistance @ 93.03 on a monthly closing basis.
(Long Term Bullish)
Price closed September above the long term trend 10 month moving average keeping the long term bias Bullish until months end. Monthly support is now @ 88.95 with resistance @ 93.03 on a monthly closing basis.
(Long Term Bullish)
Euro (Bearish Bias)
The Euro was up +0.37% over the past week. It has remained largely range bound between 116-123 over the past year.
Support / Resistance Levels (based upon close):
Weekly: 116.33 / 119.41
Monthly: 113.81 /123.02
Support / Resistance Levels (based upon close):
Weekly: 116.33 / 119.41
Monthly: 113.81 /123.02
Euro Daily Charts
The Euro topped out in early 2018 @ 125.10 and had been on a steady decline until March 2020. It rose dramatically into the end of 2020 has has remained range bound thus far in 2021.
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 The Euro closed the week below the short term trend 50 and 200 day moving averages keeping the short term bias bearish.
(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 The Euro closed the week below the short term trend 50 and 200 day moving averages keeping the short term bias bearish.
(Short Term Bearish)
Euro Weekly Chart
The weekly chart shows the Euro's steady rise from its Covid lows in March 2020 to the end of 2020. It has been largely rangebound since then but has broken below the support @ 116.33.
This past week the Euro closed the week below the intermediate trend 20 week + 65 week moving averages.
(Intermediate Term Bearish)
This past week the Euro closed the week below the intermediate trend 20 week + 65 week moving averages.
(Intermediate Term Bearish)
Euro Monthly
For the month of October the Euro has gained +0.56%. On a monthly closing basis it closed the month of September below the long term trend 10 month moving average keeping the long term outlook bearish until months end.
(Long Term Bearish)
(Long Term Bearish)
UK Pound (Neutral Bias)
U.K. Pound Daily Charts
U.K. Pound Weekly Chart
U.K. Pound Monthly Chart
The British Pound gained +0.61% over the past week. Clearly the fallout from Brexit will continue to influence cable's performance over the next several years but it has provided strong returns over the past 12 months.
Critical levels to watch on the Pound remain the respective weekly and monthly reactionary closing prices following the Brexit vote in June 2016:
This past week the Pound closed the week between its short term trend daily 50 +200 day moving averages and between the intermediate term trend 20 + 65 week moving averages. For the month of October it has gained +2.40% and closed the month of September below its long term 10 month moving average (which technically keeps the long term bearish until months end).
(Short Term Neutral)
(Intermediate Term Neutral)
(Long Term Bearish)
Support / Resistance Levels (based upon close):
Weekly: 136.76 /138.73
Monthly: 132.64 /139.17
Critical levels to watch on the Pound remain the respective weekly and monthly reactionary closing prices following the Brexit vote in June 2016:
- 136.76 weekly close (weekly close 20 June 2016 following vote results)
- 133.09 monthly close (monthly close 30 June 2016 following vote results)
This past week the Pound closed the week between its short term trend daily 50 +200 day moving averages and between the intermediate term trend 20 + 65 week moving averages. For the month of October it has gained +2.40% and closed the month of September below its long term 10 month moving average (which technically keeps the long term bearish until months end).
(Short Term Neutral)
(Intermediate Term Neutral)
(Long Term Bearish)
Support / Resistance Levels (based upon close):
Weekly: 136.76 /138.73
Monthly: 132.64 /139.17
Australian Dollar (Bearish Bias)
Australian Dollar Daily Chart
Australian Dollar Weekly Chart(s)
Australian Dollar Monthly Chart
The Australian Dollar was up +0.62% over the past week and continues to strongly recover off its recent lows (it lost -44% from its 2011 peak to its recent lows in March 2020). It has been range-bound between 68-81 since 2015.
For the month of October the Aussie dollar has gained +3.27%. 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 September below the long term trend 10 month moving average keeping the long term outlook to bearish until months end.
(Short Term Neutral)
(Intermediate Term Neutral)
(Long Term Bearish)
Support / Resistance Levels (based upon close):
Weekly: 73.35 / 77.26
Monthly: 72.04 / 76.59
For the month of October the Aussie dollar has gained +3.27%. 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 September below the long term trend 10 month moving average keeping the long term outlook to bearish until months end.
(Short Term Neutral)
(Intermediate Term Neutral)
(Long Term Bearish)
Support / Resistance Levels (based upon close):
Weekly: 73.35 / 77.26
Monthly: 72.04 / 76.59
Canadian Dollar (Neutral Bias)
Canadian Dollar Daily Chart
Canadian Dollar Weekly Chart
Canadian Dollar Monthly Chart
The Canadian dollar was up +0.14% over the past week and continues to recover off its Covid-lows of late March 2020 (it is largely tied to the price of commodities so the anticipated global recovery has benefited CAD).
The Loonie closed the week above the short term trend 50 + 200 day moving averages and between the intermediate term trend 20 + 65 week moving averages. For the month of October the Loonie has gained +2.37%. It continues to decline from its spring highs and closed the month of September below the long term trend 10 month moving average keeping the long term bearish until months end.
(Short Term Bullish)
(Intermediate Term Bullish)
(Long Term Bearish)
Support / Resistance Levels (based upon close)
Weekly: 79.39 / 82.38
Monthly: 78.49 / 81.33
The Loonie closed the week above the short term trend 50 + 200 day moving averages and between the intermediate term trend 20 + 65 week moving averages. For the month of October the Loonie has gained +2.37%. It continues to decline from its spring highs and closed the month of September below the long term trend 10 month moving average keeping the long term bearish until months end.
(Short Term Bullish)
(Intermediate Term Bullish)
(Long Term Bearish)
Support / Resistance Levels (based upon close)
Weekly: 79.39 / 82.38
Monthly: 78.49 / 81.33
Key Weekly Returns (week ending 22 October 2021):
|
Countries/Regions
World Equities ACWI (iShares MSCI ACWI Index Fund) North American Equities SPY (S&P 500 SPDRs) QQQ (PowerShares QQQ Trust) IWM (Russell 2000 iShares) EWC (Canada iShares) |
Characteristics
Global Equity Fund U.S. Large Cap S&P 500 Index U.S. NASDAQ 100 Fund U.S. Russell 2000 Small Cap Fund Canada |
Week % Change
+1.24% +1.63% +1.40% +1.00% +1.46% |
Non-North America Equities
|
VGK (Vanguard European VIPERs) EPP (iShares MSCI Pacific ex-Japan ) EWJ (Japan iShares) EEM (iShares MSCI Emerging Markets) ILF (Latin America 40 Index iShares) Bonds
BND (Vanguard Total U.S. Bond Market) BNDX (Vanguard International Bond ETF) TIP (iShares Barclays TIPS Bond Fund) PCY (PowerShares Emerging Markets Debt Portfolio) |
Europe/U.K Pacific ex-Japan (inc. Australia + NZ) Japan Emerging Markets Latin America US Total Bond (44% Gov't Tsy, 56%Corp) World Investment Grade Bonds ex-US Inflation Protected Gov't Bonds Emerging Market Sovereign Debt |
+0.98% +1.24% -0.90% +0.19% -5.71% -0.39% -0.32% +0.16% -0.39% |
|
Commodities
DBC (DB Commodities Tracking Index Fund) DBA (PowerShares DB Agriculture Fund) GLD (SPDR Gold Trust Shares) SLV (iShares Silver Trust) DBB (PowerShares Metals Fund) USO (United States Oil Fund) |
Commodity Basket Soft Commodity Basket Gold Bullion Silver Bullion Industrial Metals Light Crude Oil |
-0.32% -1.15% +1.48% +4.45% -8.11% +1.54% |
Currencies
|
UUP (PowerShares DB US Dollar Bullish Fund)
FXA (Currency Shares Australian Dollar Trust) FXB (Currency Shares British Pound Sterling Trust) FXC (Currency Shares Canadian Dollar Trust) FXE (Currency Shares Euro Trust) FXY (Currency Shares Japanese Yen Trust) |
U.S. Dollar
Australian Dollar U.K. Sterling Canadian Dollar Euro Japanese Yen |
-0.32%
+0.59% +0.08% +0.05% +0.36% +0.64% |
Important Charts to Watch
Commodity Basket Index
Commodities (as measured by the Reuters/Jefferies CRB index, a basket of 19 commodities) peaked in late 2007 and have have been in a steady deflationary decline since. They attempted to base in 2015-2020 but the Covid virus drastically pushed them lower to 40 year lows.
They have since recovered on the back of a large rise in global inflation and recently broke above 7 year price resistance @233.53.
They have since recovered on the back of a large rise in global inflation and recently broke above 7 year price resistance @233.53.
Equity Market Volatility
The Volatility Index (VIX) is a measure of expected price fluctuations of options on the S&P 500 index options over the next 30 days (technically the VIX is quoted in percentage points and represents the expected range of movement in the S&P 500 index over the next year, at a 68% confidence level i.e. one standard deviation of the normal probability curve). For example, if the VIX is 15, this represents an expected annualized change, with a 68% probability, of less than 15% up or down.
The VXV uses the same calculation as the VIX but looks forward 3 months. When the VIX is greater than the VXV ($VIX:$VXV ratio > 1.0) the volatility structure is termed to be in "contango". It indicates traders are much more concerned about short term volatility than they are about longer term volatility and when that ratio returns to "normal" (< 0.93) it is typically a good sign market stress is easing (and a good time to add to equity positions).
As of this weeks market close volatility closed below the "VIX Event End Line" area with the VIX below 25. The volatility structure currently is BULLISH for equities.
The VXV uses the same calculation as the VIX but looks forward 3 months. When the VIX is greater than the VXV ($VIX:$VXV ratio > 1.0) the volatility structure is termed to be in "contango". It indicates traders are much more concerned about short term volatility than they are about longer term volatility and when that ratio returns to "normal" (< 0.93) it is typically a good sign market stress is easing (and a good time to add to equity positions).
As of this weeks market close volatility closed below the "VIX Event End Line" area with the VIX below 25. The volatility structure currently is BULLISH for equities.
European Banks
Since the 2009 market bottom Europe has been the weakest major equity growth region. As such, we continue to monitor European financial stocks (represented below using the iShares MSCI European Financials ETF).
Of particular concern is Deutsche Bank which in 2020 hit 13 year lows (down over 95% from its 2007 peak!) DB has a massive derivatives exposure (currently estimated at $40T notional with net exposure near $100B) and should they be put forced into a position whereby they need to restructure it could potentially lead to a catastrophic ripple effects worldwide.
They announced a significant restructuring effort in the 2nd week of July, 2019 so we continue to keenly monitoring their price performance.
Chinese Equities
The Shanghai Composite index was higher this past week and held support @ 3558-3630.
Chinese growth remains key to both Emerging market performance as well as an indication of Developed markets demand. From its peak in mid-2015, the Shanghai index lost more than -50% to its recent lows. We would like to see significant strength return to China further indicating world economic growth has positively turned the corner.
Chinese growth remains key to both Emerging market performance as well as an indication of Developed markets demand. From its peak in mid-2015, the Shanghai index lost more than -50% to its recent lows. We would like to see significant strength return to China further indicating world economic growth has positively turned the corner.
PRECIOUS METALS
Precious metals (and their respective producers) are an area we recommend all investors have a small position within. Precious metals perform well during times when real (inflation adjusted) interest rates are falling and/or when the USD is weak.
Below is a ratio price chart of gold stocks (HUI; the "Gold Bugs" Index) to gold bullion going back to 1996 when the Gold Bugs Index first came into existence. As can be seen, whenever the HUI:GOLD ratio dips to below approximately 0.14 (the GREEN zone on the chart) has been a low-risk opportunity to acquire gold stocks.
Gold stocks remain in the "low-risk vs. high-reward" range and until recently remain near their cheapest valuations in 22 years. Historically purchases of gold equities when within the green-zone have been a very good long term buy-and-hold opportunities.
Gold stocks remain in the "low-risk vs. high-reward" range and until recently remain near their cheapest valuations in 22 years. Historically purchases of gold equities when within the green-zone have been a very good long term buy-and-hold opportunities.
Equally bullish is Silver (chart below) which remains at a price ratio relative to the price of gold (GREEN zone on the chart) which has historically been a low risk entry point over the past 40 years.
Silver has recently moved up dramatically but remains still fairly cheap relative to gold.
To put the valuation into a longer term perspective, below is a chart of the Gold/Silver ratio (the opposite ratio to Silver/Gold) going back to 1687. Clearly it can be seen a gold:silver ratio > 80 has historically been an outlier over the past 100+ years (and greater than 100 is historic):
The current Gold:Silver ratio recently exceeded 120 for the 1st time in history and remains near the top end of 40 year highs. It can be seen each instance in the past 40 years where the ratio has crossed above 80 has resulted in very good long term gains in silver.
The move in Silver we have been anticipating appears to have begun but there remains plenty of room to allow the ratio to fall to the "sell" level near 45.
EVEN MORE BULLISH is the price of Platinum (chart below) which has exceeded the "buy zone" last seen in 1982! Platinum is 15-20 times rarer than gold and has rarely in history traded at a price below the price of gold (only 9.7% of the time going back to 1971). It is now the cheapest it has been GOING BACK TO AUGUST 1971 WHEN THE U.S. LEFT THE GOLD STANDARD on a relative basis:
- The current Platinum:Gold ratio remains below 0.85 (red line on the chart below).
- A Platinum/Gold ratio < 0.85 has only occurred 4.7% of the time back to 1971.
- Prior to recent lows, the lowest Platinum:Gold ratio since August 1971 (when the USD was removed from the gold standard) was hit on 20 Sept 1982 when it hit a ratio low of 0.689 (Platinum $300.40/Gold $436.00).
- If Platinum were to return to its most common ratio relative to Gold (1.0x-1.25x which has been common 35% of the time) it would imply a price rise of approximately 50-90% from recent levels.
Platinum now sits on a price support extending back to 2004 and, combined with its ratio relative to the price of gold, represents a compelling long term buy point.
The following charts and commentary (in italics; bold print is our emphasis) are sourced from Kitco from commentary sourced in Feb 2017 when the ratio was near 0.85 (Platinum has become even cheaper on a relative basis since the data was published):
Platinum to gold ratios show wide variance over the 46 year period ranging from highs above 2.5 before and soon after Nixon began taking the United States off the gold standard to periodic lows below 1.0:
Platinum to gold ratios show wide variance over the 46 year period ranging from highs above 2.5 before and soon after Nixon began taking the United States off the gold standard to periodic lows below 1.0:
Our data set covers 553 months beginning in January 1971. The distribution of ratios in both tabular and chart format follows:
Platinum/Gold Ratio: % of Months
Platinum/Gold Ratio: % of Months
- < 0.85: 4.7%
- .85-1.01: 5.0%
- 1.0-1.25: 34.7%
- 1.25-1.5: 19.3%
- 1.5-2.0: 15.4%
- 2.0-2.5: 8.9%
- > 2.5: 2.0%
From our data set and the distributions of monthly average platinum-gold ratios from January 1971 thru January 2017, I glean the following:
From a compendium of sources, the average crustal abundance of both metals is around 4 ppb. Based solely on this fact, platinum and gold should trade at about the same price.
And indeed, our compilation shows that for nearly 50% of the time since gold was decoupled from the world’s reserve currency and allowed to trade freely on exchanges, the price ratio has ranged from 0.85 to 1.25. That said, since January 1971, the average price of platinum has been $637/oz and gold has been $518/oz for an overall ratio of 1.23:1. Clearly there are other factors other than the nearly equal crustal abundances that account for this historic price relationship.
A variety of supply and demand factors cause platinum to trade at a premium to gold:
Fluctuations in the relative prices of platinum and gold are largely driven by:
Platinum functions both as a precious and industrial metal. It is usually tied to the price of gold in both short- and long-term trading patterns. In times of financial distress and economic turmoil, platinum tends to behave more like gold with widespread hoarding.
The platinum-gold ratio can be used to ascertain whether one metal is over- or undervalued with respect to the other. The current monthly average ratio below 0.85 is unusual and indicates that platinum is severely undervalued with respect to gold *
* The ratio recently hit 0.55 and remains near a record low.
- A ratio of less than 0.75 is a single outlier that occurred once during the second half of 1982 when overall ratios averaged 0.81.
- Ratios <0.85 are quite unusual at 4.7%. They occurred for two months in the first quarter of 1975, the aforementioned six months in 1982, in June-July of 1985, and for an ongoing run of 16 months that commenced in October 2015.
- Ratios from 0.85 to 1.0 constitute 15.0% of the record.
- Pt:Au from 1.0 to 1.25 is the most common range and comprises 34.7% of ratios since 1971.
- The ratios between 1.25 and 1.5 occur 19.3% of the time.
- Ratios from 1.5 to 2.0 make up 15.4% of the record.
- The 2.0-2.5 interval covers 8.9% of the months in our compendium.
- The 11 monthly outliers at >2.5 comprise 2.0% of the total record and have not occurred since 1971.
From a compendium of sources, the average crustal abundance of both metals is around 4 ppb. Based solely on this fact, platinum and gold should trade at about the same price.
And indeed, our compilation shows that for nearly 50% of the time since gold was decoupled from the world’s reserve currency and allowed to trade freely on exchanges, the price ratio has ranged from 0.85 to 1.25. That said, since January 1971, the average price of platinum has been $637/oz and gold has been $518/oz for an overall ratio of 1.23:1. Clearly there are other factors other than the nearly equal crustal abundances that account for this historic price relationship.
A variety of supply and demand factors cause platinum to trade at a premium to gold:
- Platinum is a much smaller market. Cumulative world production of platinum is estimated to be about 5% of gold (9400 tonnes versus 182,000 tonnes). From 1994-2014, 3700 tonnes of platinum were mined versus 52,600 tonnes of gold or about 7% (source: USGS).
- Platinum is largely an industrial metal. Catalytic converters, electronics, petroleum and chemical catalysts, medical technologies, and many minor uses constitute over 60% of its annual demand. Around 30% is used in jewelry and 10% for investment demand. Also, 30% of the annual platinum supply now comes from recycling, mostly from catalytic converters. Some demand is consumed and lost to the marketplace.
- Gold is overwhelmingly a precious metal; 90% is used in jewelry and investments and only 10% in industrial applications. An estimated 98% of all the gold ever mined in the world remains available and held in jewelry, by central banks, in private hoards, and as fabricated products (source: USGS).
- About 70% of yearly platinum mine supply comes from South Africa, a geopolitically risky country. Much new platinum is a by-product of nickel-copper mining and smelting; therefore, annual platinum production is dependent on the supply-demand fundamentals and prices of these primary metals.
Fluctuations in the relative prices of platinum and gold are largely driven by:
- the overall growth and health of the world’s economy and in the case of platinum, the automotive industry;
- labor, power, currency, and political issues in South Africa that cause major perturbations in the platinum supply;
- safe haven hoarding of gold and to a much lesser extent, platinum, in times of economic uncertainty and major geopolitical events; speculators moving in and out of paper markets of both metals (bullion exchanges, ETFs, and derivatives) and to a lesser extent, central bank trading of physical gold.
Platinum functions both as a precious and industrial metal. It is usually tied to the price of gold in both short- and long-term trading patterns. In times of financial distress and economic turmoil, platinum tends to behave more like gold with widespread hoarding.
The platinum-gold ratio can be used to ascertain whether one metal is over- or undervalued with respect to the other. The current monthly average ratio below 0.85 is unusual and indicates that platinum is severely undervalued with respect to gold *
* The ratio recently hit 0.55 and remains near a record low.
U.S. Equity Market Valuation
Crestmont Price/Earnings Ratio
(Source: Crestmont Research)
(Source: Crestmont Research)
A large part of the expected declines in bear markets hinges upon how "expensive" markets were when the bear market begins. In this measure, we have a long way to fall given the overvaluation at the market peak.
We illustrate the recent market overvaluation via 3 charts produced by Crestmont Research (as of 01 October 2021 with data from 1871-to-present). While it is not necessary to understand exactly how the data is plotted, it is important for every investor to realize where current valuations stand relative to this 149 years of history.
In the following graphs note the following:
We illustrate the recent market overvaluation via 3 charts produced by Crestmont Research (as of 01 October 2021 with data from 1871-to-present). While it is not necessary to understand exactly how the data is plotted, it is important for every investor to realize where current valuations stand relative to this 149 years of history.
In the following graphs note the following:
- the Crestmont Price/Earnings (P/E) ratio at the end of September 2021 was the most expensive market valuation in U.S. stock market history (since 1871) .
- when compared to inflation the current Crestmont P/E has now exceeded the upper extreme portion of the bubble zone defining the 1998-2000 bubble peak as shown on the 2nd chart.
- pay particular attention to chart #2 where it can be seen high equity valuations are historically supported by inflation in the 0-3% range. Inflation is currently outside this corridor (which has occurred as of the end of April) so this is now very concerning. Overvalued equities combined with high inflation tend be be a very dangerous combination.
U.S. (NYSE) Margin Debt
(Source: Advisor Perspectives)
We have been studying with interest the current margin debt on US markets. For those who are unfamiliar, margin debt is the amount of "loans" taken out by market speculators to leverage up their equity positions. During normal bull markets margin debt will increase as the market continues to climb. This increased margin debt amplifies equity market prices. However, at some point speculators become nervous and begin to reduce their margin positions. This reduction in margin is like letting the air out of a balloon and deflates equity asset prices.
As can be seen on the below graphic, both the 2000 and 2007 market tops were signaled in advance by tops in margin debt (margin debt not inflation adjusted on this chart):
As can be seen on the below graphic, both the 2000 and 2007 market tops were signaled in advance by tops in margin debt (margin debt not inflation adjusted on this chart):
The following chart (source: Doug Short) shows US equity margin debt adjusted for inflation. As can be seen, in both 2000 and 2007 inflation-adjusted margin debt peaked and then began to decline leading to the tops in the S&P 500 index. As such, margin debt rollovers acts as a good lead indicator of possible future market weakness.
U.S. Equity market Valuation Models
(Source: D. Short)
Below is a graph representing 4 different long-term valuation measures plotted back to 1900 (120 years):
As of 01 October 2021 the average of these 4 measures places the U.S. stock market (S&P 500 index) as being 181% above its long term geometric mean. This remains the highest valuation in the history of the stock market going back to 1900 (now well over 3 standard deviations above the mean and well above the market peaks in 2007, 2000 and 1929).
- The Crestmont Research P/E Ratio
- The cyclical P/E ratio using the trailing 10-year earnings as the divisor
- The Q Ratio, which is the total price of the market divided by its replacement cost
- The relationship of the S&P Composite price to a regression trendline
As of 01 October 2021 the average of these 4 measures places the U.S. stock market (S&P 500 index) as being 181% above its long term geometric mean. This remains the highest valuation in the history of the stock market going back to 1900 (now well over 3 standard deviations above the mean and well above the market peaks in 2007, 2000 and 1929).
Another popular valuation metric is know as the "Buffett-Indicator". In an interview with Fortune magazine back in 2001 Warren Buffett remarked "it is probably the best single measure of where valuations stand at any given moment."
The indicator measures the price of Corporate Equities (Mkt Cap) to Gross Domestic Product (GDP) as a ratio going back to the 1950's. As can be seen below, the ratio of equity prices relative to last reported GDP currently stands at 213.2%. It recently exceeded the 2000 equity bubble peak of 159.2% in terms of equity overvaluation relative to economic output.
7-Year Asset Class Real Return Forecast
(Source: GMO LLC)
Each month GMO (Grantham, Mayo, Van Otterloo & Co.) publishes a forward forecast for expected annual real rates of return (i.e. inflation adjusted) for a number of different asset classes with a 7 year forward outlook. They have historically had a very good track record (0.97 correlation) of estimating forward 7 year asset class returns based primarily upon current valuations combined with mean reversion. Charts are published following analysis of the previous months data.
We have followed GMO's methodology with interest for many years. In our experience we have found them to be conservative over the shorter term with a tenancy to make calls too early. HOWEVER, similar to Dr. John Hussman of Hussman Funds, they also tend to be right over the longer term. As such, we use their outlook as part of the valuation model within the ECAM 5 Factor model.
Above is their current forecast of expected real returns (after inflation) for the next 7 years broken down by asset class. It is clear based upon current market valuations GMO forecasts well below average annual investment returns in all asset classes with a 7 year forward time horizon (the dotted line is the historical real return of U.S. equities of +6.5% per year). This is important for those who may be soon retiring and expecting "average" returns on their equity and bond investments over the next 7 years. Current high market valuations make it a certainty forward returns over the next 7-10 years will be well below historical averages.
We have followed GMO's methodology with interest for many years. In our experience we have found them to be conservative over the shorter term with a tenancy to make calls too early. HOWEVER, similar to Dr. John Hussman of Hussman Funds, they also tend to be right over the longer term. As such, we use their outlook as part of the valuation model within the ECAM 5 Factor model.
Above is their current forecast of expected real returns (after inflation) for the next 7 years broken down by asset class. It is clear based upon current market valuations GMO forecasts well below average annual investment returns in all asset classes with a 7 year forward time horizon (the dotted line is the historical real return of U.S. equities of +6.5% per year). This is important for those who may be soon retiring and expecting "average" returns on their equity and bond investments over the next 7 years. Current high market valuations make it a certainty forward returns over the next 7-10 years will be well below historical averages.
Global Asset Class 10-year Expected Nominal Return Forecast
(data as of 31 August 2021)
(Source: Research Affiliates)
(data as of 31 August 2021)
(Source: Research Affiliates)
Below is the projected 10 year nominal (not inflation adjusted) returns for the majority of global assets.
Data continues to point to Emerging Market and EAFE (Europe, Africa and Far East) equities as providing the greatest returns over the next 10 years with Global Government Treasury bonds (especially U.S. Long Term Treasuries) showing minimal returns due to low global interest rates.
Data continues to point to Emerging Market and EAFE (Europe, Africa and Far East) equities as providing the greatest returns over the next 10 years with Global Government Treasury bonds (especially U.S. Long Term Treasuries) showing minimal returns due to low global interest rates.
Cycle Commentary
Below is a 20 year chart of the seasonal monthly performance of the Dow Jones Global Index. The number at the top of the column is the percentage of time the month had a positive return and at the bottom is the average percentage gain/loss for the month.
As can be seen, over the past 20 years (2002-2021) the period September-April yearly offers the highest potential global equity market returns (cumulative +6.4% average return) while the period May-August offers little in total return relative to risk (+0.4% cumulative average return). The month of April remains the strongest month with an 80% success rate and an average +2.5% return.
In the interest of moving more towards more recent market action broken down by region, below is the seasonal returns for our each of our selected ETF benchmark going back to the start of the bull market in 2009:
|
Region
|
September-April
|
May-August
|
|
Global Equities (VT)
U.S. Equities (VTI) European Equities (VGK) Asia Pacific Equities (VPL) Emerging Market Equities (VWO) |
+9.9%
+12.0% +8.0% +7.9% +10.2% |
+2.5%
+2.6% +1.4% +1.3% +0.5% |
|
Vanguard Total World Market (VT)
Vanguard FTSE European Total Market (VGK)
|
Vanguard U.S. Total Market (VTI)
Vanguard FTSE Pacific Total Market (VPL)
|
Vanguard FTSE Emerging Total Market (VWO)
|
|
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 2021 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 1928-2020:
In general, the historical Composite roadmap points to strong market performance throughout the 1st 1/2 of the year, a period of consolidation throughout the summer, a very week Sept followed by choppy consolidation through Oct-Dec.
- 10 year Decennial Market Cycle
- 4 year Presidential Market Cycle
- 1 year Annual Seasonal Market Cycle
In general, the historical Composite roadmap points to strong market performance throughout the 1st 1/2 of the year, a period of consolidation throughout the summer, a very week Sept followed by choppy consolidation through Oct-Dec.
The 2021 composite model indicates the following historical "glidepath" based upon cycles from 1928-2020:
- a strong 1st half of the year into mid-July.
- consolidation in mid-July to mid-August.
- weak performance from mid-August to mid-September.
- choppy markets mid-September to year-end.
U.S. 4 Year Presidential Election Cycle
*2021 is Year 1 (Election Year)
As can be seen on the chart above, historically since 1928 the 2nd year of the 4 year Presidential Cycle tends to provide the worst returns of the 4 year cycle.
While we do not make investment decisions strictly based upon cycle analysis, we are cognizant of the historical nature of these cycles and tend to be a bit more wary as they approach.
While we do not make investment decisions strictly based upon cycle analysis, we are cognizant of the historical nature of these cycles and tend to be a bit more wary as they approach.
Presidential Cycle S&P 500 returns (inc. dividends):
|
1988-Year 4: +12.40%
1989-Year1: +27.25% 1990-Year 2: -6.56% 1991-Year 3: +26.31% 1992-Year 4: +4.46% 1993-Year 1: +7.06% 1994-Year 2: -1.54% 1995-Year 3: +34.11% 1996-Year 4: +20.26% 1997-Year 1: +31.01% 1998-Year 2: +26.67% 1999-Year 3: +19.53% 2000-Year 4: -10.14% |
2001-Year 1: -13.04%
2002-Year 2: -23.37% 2003-Year 3: +26.38% 2004-Year 4: +8.99% 2005-Year 1: +3.00% 2006-Year 2: +13.62% 2007-Year 3: +3.53% 2008-Year 4: -38.49% 2009-Year 1: +23.45% 2010-Year 2: +12.78% 2011-Year 3: +0.00% 2012-Year 4: +13.41% 2013-Year 1: +29.60% |
2014-Year 2: +11.39%
2015-Year 3: -0.73% 2016-Year 4: +11.96% 2017-Year 1: +21.83% 2018-Year 2: -4.38% 2019-Year 3: +31.49% 2020-Year 4: +16.26% 2021-Year 1: |
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:
