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Market/Model Commentary
Currently the active model portfolio as defined by our 5-factor model remains the:
- Please click on the above magenta link to review the suggested allocations if required.
- The 5-factor model reverted to YELLOW on 16 October, 2020 (from RED on 28 February 2020)
- The Risk Reduction Level - 1 model was initiated 04 Mar 2020.
ECAM 5-Factor Composite Model
(Valid from 28 February 2020 to Present Date)
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ECONOMIC FACTOR SUB-MODEL
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TECHNICAL FACTOR SUB-MODEL
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VALUATION FACTOR SUB-MODEL
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SENTIMENT FACTOR SUB-MODEL
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LIQUIDITY (Stress) FACTOR SUB-MODEL
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"Slow and Steady wins the race"
The Hare and the Tortoise
Aesop (Greek slave & fable author 620 BC - 560 BC)
"Technical Analysis is a windsock, not a crystal ball"
Carl Swenlin (Technical Analyst)
"Investing is the intersection of economics and psychology"
Seth Klarman (Hedge fund Manager, Baupost Group)
"Everyone's got a plan ..... until they get punched in the face"
Mike Tyson (Former World Heavyweight Boxing Champion)
The Hare and the Tortoise
Aesop (Greek slave & fable author 620 BC - 560 BC)
"Technical Analysis is a windsock, not a crystal ball"
Carl Swenlin (Technical Analyst)
"Investing is the intersection of economics and psychology"
Seth Klarman (Hedge fund Manager, Baupost Group)
"Everyone's got a plan ..... until they get punched in the face"
Mike Tyson (Former World Heavyweight Boxing Champion)
Perspective
It’s not hyperbole today to use “depression” to describe the recent deep global economic downturn as upon look-back this is expected to be the most serious global macroeconomic shock since 1929. Whether it was/was not a wise decision by global governments to shut down their economies to combat this virus, the economic fallout to individuals/families/businesses will be immense and long lasting.
Ongoing Coronavirus cases and an unknowable rate of progress on possible treatments/vaccines makes it impossible to forecast the length and severity of the economic decline. The outbreak in Asia, Europe and the U.S. has begun to subside while cases in Central/South America are rapidly increasing as they move into their winter months. Globally the rate-of-change in active cases has reduced but we have yet to see a peak in global active cases. As South American virus cases peak will it be just-in-time for Asia/North America/Europe to experience a second wave into the fall/winter months? These remain unknowns at present.
Irrespective, the world entered this event massively over-leveraged and the unwind will likely unfold over many months. Extraordinary central bank measures will spur rallies and hopes for recovery and at times it will appear that liquidity is returning. Yet it is highly likely the Bubble will not be reflated and it will be many years before we recover to previous levels of economic activity.
We believe this crisis will unfold in 3 distinct phases over the next several years:
While it remains an open question as to whether it was wise for governments to instigate a global shutdown to combat the virus, it is now apparent governments recently crossed an important threshold as they were forced to make a very difficult decision:
It is obvious now the 2nd option has been chosen as it is politically less painful to transfer blame for future deaths from the government to the individual. Expect the new mantra from government officials to be "Don't blame us; we told you to be careful but you insisted upon going to work, restaurants/bars, malls, etc. and it was your personal choices that caused you sickness/death".
Equity markets have rallied as we expected off the 23 March lows while within the "Hope Phase" and have exceeded the levels we anticipated they would reach. It remains true decision time and the next few months will be critical. We remain very cautious until we see how the "Hope Phase" transitions into the "Reality Phase" and we can assess the damage from the first season of "Hurricane Covid". We think we are in the eye of the storm and are bracing for the worst.
Stay safe and wash you hands.
Ongoing Coronavirus cases and an unknowable rate of progress on possible treatments/vaccines makes it impossible to forecast the length and severity of the economic decline. The outbreak in Asia, Europe and the U.S. has begun to subside while cases in Central/South America are rapidly increasing as they move into their winter months. Globally the rate-of-change in active cases has reduced but we have yet to see a peak in global active cases. As South American virus cases peak will it be just-in-time for Asia/North America/Europe to experience a second wave into the fall/winter months? These remain unknowns at present.
Irrespective, the world entered this event massively over-leveraged and the unwind will likely unfold over many months. Extraordinary central bank measures will spur rallies and hopes for recovery and at times it will appear that liquidity is returning. Yet it is highly likely the Bubble will not be reflated and it will be many years before we recover to previous levels of economic activity.
We believe this crisis will unfold in 3 distinct phases over the next several years:
- The "Panic" phase (now past). This was the initial phase where a new novel-coronavirus (thought to be non-transmissible among humans and centralized to a small part of China known as Wuhan) morphed into the current global pandemic.
- The "Hope" phase (current/ongoing). This is the phase where there is a sense of relief the worst of the pandemic has crested (there is "light at the end of the tunnel") and we are about to recover. Many believe over time the virus will be eradicated and we will recover to the level of economic activity we had previous. We doubt that is the case but this is what the equity markets are telling us is the current perception.
- The "Reality" phase (coming soon). This will be the phase when the global community realizes its assumptions about the recovery were incorrect. It will be the world with millions of global small business bankruptcies, high levels of unemployment, reduced efficiencies due to supply chain decentralization and social distancing and possible 2nd/3rd waves of the virus over the next several years (inducing further panic phases). It will become the new reality and markets will adjust to much lower levels of economic performance.
While it remains an open question as to whether it was wise for governments to instigate a global shutdown to combat the virus, it is now apparent governments recently crossed an important threshold as they were forced to make a very difficult decision:
- keep their economies closed to fully eradicate the spread of the virus and kill their people through economic collapse and civil disobedience, or
- re-open their economies with the virus still present to prevent economic collapse and have the spread of the virus kill their people in a "controlled" manner.
It is obvious now the 2nd option has been chosen as it is politically less painful to transfer blame for future deaths from the government to the individual. Expect the new mantra from government officials to be "Don't blame us; we told you to be careful but you insisted upon going to work, restaurants/bars, malls, etc. and it was your personal choices that caused you sickness/death".
Equity markets have rallied as we expected off the 23 March lows while within the "Hope Phase" and have exceeded the levels we anticipated they would reach. It remains true decision time and the next few months will be critical. We remain very cautious until we see how the "Hope Phase" transitions into the "Reality Phase" and we can assess the damage from the first season of "Hurricane Covid". We think we are in the eye of the storm and are bracing for the worst.
Stay safe and wash you hands.
Latest Updates
DOW JONES GLOBAL INDEX
(Daily Close)
(Daily Close)
As shown on the chart of the Dow Jones Global Index (daily chart), the decline in Feb/Mar took the form of 3 phases:
- the initial panic "we think this coronavirus is a major problem" swift market decline phase from 444.59 to 399.43 (-10.1%).
- the "maybe it is not so bad" market bounce phase up to 410.06 (+2.7%) into 04 March (the date when we suggested it was prudent to reduce equity exposure by 50%) shown by the GREY box.
- the large panic phase into the 23 March lows (-28.7%).
We have now retraced the entire decline with the area between the "initial panic" and the "second thought" phases shown as a grey box. We want to see this zone hold on the next pullback to ensure this is not a "dead-cat' bounce as economies experience their 2nd phase of Covid infections into the winter.
DOW JONES GLOBAL INDEX
(Weekly Close)
- Global equities were higher this past week with a return (as measured by the Dow Jones Global Index) of +0.70%. They continue to trade with an upward bias and remain above the important weekly support zone shown in shaded Blue.
Weekly Global Macro Review
U.S. Equities
The major indexes ended mixed, as good news on the coronavirus vaccine front continued to be offset by worries about the worsening of the pandemic in most parts of the country. The Dow Jones Industrial Average, the S&P MidCap 400 Index, and the small-cap Russell 2000 Index all reached new intraday highs in the first part of the week before surrendering some of their gains. Energy shares outperformed as oil prices rose on hopes for an end to the pandemic in 2021, as well as signals that OPEC and other major oil exporters would delay a global production increase planned for January. Health care and utilities shares lagged.
The major indexes ended mixed, as good news on the coronavirus vaccine front continued to be offset by worries about the worsening of the pandemic in most parts of the country. The Dow Jones Industrial Average, the S&P MidCap 400 Index, and the small-cap Russell 2000 Index all reached new intraday highs in the first part of the week before surrendering some of their gains. Energy shares outperformed as oil prices rose on hopes for an end to the pandemic in 2021, as well as signals that OPEC and other major oil exporters would delay a global production increase planned for January. Health care and utilities shares lagged.
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S&P 500:
DJIA: NASDAQ 100: S&P 400 Mid-cap: Russell 2000 Small Cap: |
-0.8%
-0.7% -0.3% +1.6% +2.4% |
Stock futures rose on the heels of two significant vaccine announcements during the week. On Monday, Moderna reported early data showing that its mRNA vaccine was 94.5% effective in preventing coronavirus infections while also appearing to prevent severe disease in the few test subjects who did contract the virus. Investors seemed further encouraged that Moderna’s vaccine confirmed the efficacy of the mRNA approach also used by Pfizer in partnership with Germany’s BioNTech. On Wednesday, the two companies announced revised data showing that their vaccine was 95% effective, a higher level than the 90%+ initially reported. On Friday morning, Pfizer announced that it had filed for emergency use authorization of the vaccine with the U.S. Food and Drug Administration.
Further evidence emerged during the week that the pandemic and its drag on the economy would get worse before the vaccines would become widely available, however. New local shutdowns and restrictions were announced across the country as case counts rose and hospital systems grew more stressed. Sentiment seemed to take a particular blow from news Wednesday that the New York City public school system, the nation’s largest, would be switching to remote learning. Meanwhile, mobility measures, credit card purchases, and other high-frequency data showed that consumers were growing more cautious and staying closer to home, whether because of mandates or personal choice. In a grim milestone, the number of U.S. fatalities attributed to the disease crossed 250,000.
It also appeared unlikely that substantial federal fiscal aid would help offset the impact of the surge in the virus, as it had in the spring. The chances for a bipartisan agreement on a new stimulus package appeared to remain slim, especially with President Donald Trump continuing to refuse to concede the election. However, the market did catch a bid late in the afternoon Thursday after rumors surfaced that Senate Majority Leader Mitch McConnell had agreed to resume negotiations with Democrats in Congress.
Around the same time, however, Treasury Secretary Steven Mnuchin announced in a letter to the Federal Reserve that he would allow several of the central bank’s emergency lending programs to expire at the end of the year. Mnuchin cited improved financial conditions in requesting the return of USD 455 billion of unused funding, but in a rare move, Fed officials quickly released a statement announcing their disagreement with the decision, citing a “still-strained and vulnerable economy.” On Friday, Mnuchin stated that he planned instead to use the money to fund direct grants to workers and small businesses, which may have muted the impact of the decision on markets.
The week’s economic data arguably provided evidence for the Fed’s continued caution. Weekly jobless claims rose for the first time in over a month, from 711,000 to 742,000. Continuing claims through state insurance programs continued to fall, from 6.8 million to 6.4 million, although the drop was mostly offset by rising claims through a federal program providing extended benefits, from around 4.1 million to 4.4 million. Retail sales excluding autos in October missed expectations and grew at the slowest pace (0.2%) since April. Industrial production rose a bit more than expected in October, but regional manufacturing gauges indicated slowing expansion. The housing sector remained the standout in the recovery, with sales and construction indicators hitting their highest levels since 2006–2007.
US Bonds
The mixed economic outlook and growing coronavirus concerns pushed the yield on the benchmark 10-year Treasury note to its lowest level in two weeks. (Bond prices and yields move in opposite directions.)
Positive coronavirus vaccine headlines led investment-grade corporate bond spreads tighter to start the week, with higher-risk energy and pandemic-sensitive issuers outpacing the broader market. The economic backdrop was dampened by the rapid rise in COVID-19 cases, but spread (the yield offered over Treasuries and an inverse measure of the sector’s relative appeal) largely held or moved tighter, supported by strong demand from Asia and healthy trading volumes.
Solid equity returns early in the week supported the performance of high yield bonds. Favorable technical conditions due to steady new issuance and positive flows were also supportive, and investors generally seemed to focus on putting money to work in new deals. Credit spreads tightened across all quality tiers.
Further evidence emerged during the week that the pandemic and its drag on the economy would get worse before the vaccines would become widely available, however. New local shutdowns and restrictions were announced across the country as case counts rose and hospital systems grew more stressed. Sentiment seemed to take a particular blow from news Wednesday that the New York City public school system, the nation’s largest, would be switching to remote learning. Meanwhile, mobility measures, credit card purchases, and other high-frequency data showed that consumers were growing more cautious and staying closer to home, whether because of mandates or personal choice. In a grim milestone, the number of U.S. fatalities attributed to the disease crossed 250,000.
It also appeared unlikely that substantial federal fiscal aid would help offset the impact of the surge in the virus, as it had in the spring. The chances for a bipartisan agreement on a new stimulus package appeared to remain slim, especially with President Donald Trump continuing to refuse to concede the election. However, the market did catch a bid late in the afternoon Thursday after rumors surfaced that Senate Majority Leader Mitch McConnell had agreed to resume negotiations with Democrats in Congress.
Around the same time, however, Treasury Secretary Steven Mnuchin announced in a letter to the Federal Reserve that he would allow several of the central bank’s emergency lending programs to expire at the end of the year. Mnuchin cited improved financial conditions in requesting the return of USD 455 billion of unused funding, but in a rare move, Fed officials quickly released a statement announcing their disagreement with the decision, citing a “still-strained and vulnerable economy.” On Friday, Mnuchin stated that he planned instead to use the money to fund direct grants to workers and small businesses, which may have muted the impact of the decision on markets.
The week’s economic data arguably provided evidence for the Fed’s continued caution. Weekly jobless claims rose for the first time in over a month, from 711,000 to 742,000. Continuing claims through state insurance programs continued to fall, from 6.8 million to 6.4 million, although the drop was mostly offset by rising claims through a federal program providing extended benefits, from around 4.1 million to 4.4 million. Retail sales excluding autos in October missed expectations and grew at the slowest pace (0.2%) since April. Industrial production rose a bit more than expected in October, but regional manufacturing gauges indicated slowing expansion. The housing sector remained the standout in the recovery, with sales and construction indicators hitting their highest levels since 2006–2007.
US Bonds
The mixed economic outlook and growing coronavirus concerns pushed the yield on the benchmark 10-year Treasury note to its lowest level in two weeks. (Bond prices and yields move in opposite directions.)
Positive coronavirus vaccine headlines led investment-grade corporate bond spreads tighter to start the week, with higher-risk energy and pandemic-sensitive issuers outpacing the broader market. The economic backdrop was dampened by the rapid rise in COVID-19 cases, but spread (the yield offered over Treasuries and an inverse measure of the sector’s relative appeal) largely held or moved tighter, supported by strong demand from Asia and healthy trading volumes.
Solid equity returns early in the week supported the performance of high yield bonds. Favorable technical conditions due to steady new issuance and positive flows were also supportive, and investors generally seemed to focus on putting money to work in new deals. Credit spreads tightened across all quality tiers.
Europe/UK
Shares in Europe rose for a third consecutive week amid optimism on potential coronavirus vaccines. However, concerns that soaring rates of infection might trigger harsher restrictions curbed gains. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 1.2% higher.
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German DAX:
French CAC: Italian MIB: Spanish IBEX: U.K. FTSE 100: |
+0.5%
+2.2% +3.8% +2.5% +0.6% |
Core Eurozone bond yields fell slightly on the week. Yields rose at the start, with the German 10-year bund yield moving from -0.55% to about -0.52%, after more positive coronavirus vaccine news spurred a sell-off in debt that the market views as a haven. Lingering concern over the high infection rate, Hungary’s and Poland’s vetoes to the European recovery fund, and orders from the U.S. Treasury to pull money from some pandemic lending programs dragged yields lower, however. UK gilts and peripheral Eurozone government debt largely tracked core markets.
Several major European countries are considering whether to extend month-long lockdowns to limit the coronavirus’ spread, even though infection rates may be showing signs of leveling off or falling in some areas. Press reports said the UK might prolong the lockdown beyond its scheduled end on December 2, while giving a five-day respite over the Christmas holiday. A French government spokesperson said that measures would not be eased anytime soon and that President Emmanuel Macron was planning to address the nation next week regarding the situation. German federal and state leaders agreed to postpone a decision on further lockdown measures until next week.
Hungary and Poland blocked the European Union’s (EU) planned EUR 1.8 trillion fiscal package, which includes a large fund to help economies weather the damage caused by the coronavirus. They oppose a mechanism that would allow the EU to block disbursements to countries violating its rule of law principles. EU leaders at their Thursday videoconference summit did not indicate how the standoff might be resolved. German Chancellor Angela Merkel said she would hold talks with the leaders of the two countries while defending the existing proposal.
Reports suggest that three main areas of contention—a level playing field for companies, fishing rights, and settling trade disputes—persist as the UK and EU negotiate a post-Brexit agreement on trade. Face-to-face talks have been suspended because a senior negotiator tested positive for COVID-19, although officials will keep working remotely, according to Reuters. France, the Netherlands, and Belgium urged the European Commission to start implementing contingency measures in case there is no deal before the Brexit transition ends on December 31.
Several major European countries are considering whether to extend month-long lockdowns to limit the coronavirus’ spread, even though infection rates may be showing signs of leveling off or falling in some areas. Press reports said the UK might prolong the lockdown beyond its scheduled end on December 2, while giving a five-day respite over the Christmas holiday. A French government spokesperson said that measures would not be eased anytime soon and that President Emmanuel Macron was planning to address the nation next week regarding the situation. German federal and state leaders agreed to postpone a decision on further lockdown measures until next week.
Hungary and Poland blocked the European Union’s (EU) planned EUR 1.8 trillion fiscal package, which includes a large fund to help economies weather the damage caused by the coronavirus. They oppose a mechanism that would allow the EU to block disbursements to countries violating its rule of law principles. EU leaders at their Thursday videoconference summit did not indicate how the standoff might be resolved. German Chancellor Angela Merkel said she would hold talks with the leaders of the two countries while defending the existing proposal.
Reports suggest that three main areas of contention—a level playing field for companies, fishing rights, and settling trade disputes—persist as the UK and EU negotiate a post-Brexit agreement on trade. Face-to-face talks have been suspended because a senior negotiator tested positive for COVID-19, although officials will keep working remotely, according to Reuters. France, the Netherlands, and Belgium urged the European Commission to start implementing contingency measures in case there is no deal before the Brexit transition ends on December 31.
Japan
Japanese stocks ended the week with relatively modest gains with the Nikkei 225 Stock Average advancing +0.6%. The large-cap TOPIX Index and the TOPIX Small Index, broader measures of Japanese stock market performance, also recorded positive returns.
Japan’s economy grew at an annualized 21.4% clip in the quarter ended September 30, which was its fastest growth rate since 1968, well ahead of the consensus estimate for 18.9% growth and the first quarter of growth in a year. The primary gross domestic product (GDP) growth driver was net external demand, which contributed more than half of the headline gain, led by a resurgence in global auto demand, strong domestic private demand, and a decline in imports. Private consumption generated a large contribution due to the government’s coronavirus stimulus efforts, but that was partially offset by weakness in business and residential investment. While encouraging—5.0% quarter-to-quarter growth—the economy is still weaker than before the onset of the pandemic, and the outlook for the economy remains guarded because of the uncertainties surrounding the recent spike in coronavirus infections and the potential for additional social distancing measures.
The Japanese government confirmed that approximately 2,400 new coronavirus cases were reported on Thursday, recording back-to-back daily all-time highs. A record-high number of new cases were recorded in Tokyo and the surrounding prefectures, due to clusters in medical facilities and nursing homes, although the latest spike in new cases is not yet a strain on hospital capacity. In response, Prime Minister Yoshihide Suga again increased Japan’s alert level to the highest of four stages. Medical experts have argued that the “To Go Travel” campaign to boost domestic spending has contributed to the rise in the infection rate, but policymakers disagreed and intend to maintain the program.
On Monday, Prime Minister Suga and International Olympic Committee President Thomas Bach agreed that the Tokyo Olympics should be held despite the latest surge in the pandemic. While details on the number of spectators permitted and possible vaccination efforts remained vague, reports suggested that all visitors to Japan would need to be vaccinated and would be exempt from the 14-day quarantine period. The Olympic games are scheduled to be held from July 23 to August 8, 2021, and the Paralympics from August 24 to September 5, 2021. At a press conference following the meeting, Prime Minister Suga expressed his determination to hold the games as “proof that humanity has defeated the virus.”
China
Chinese stocks rose strongly after solid economic data lifted investors’ risk appetite. For the week, the large-cap CSI 300 Index gained +1.8% while the benchmark Shanghai Stock Exchange Composite Index added +2.0%.
Yields on Chinese high yield bonds rose during the week after an unprecedented number of defaults among large state-owned enterprises (SOEs). After the coronavirus, some SOEs reportedly have struggled to make their bond payments, although most China investors appear to believe that Beijing would prevent the failure of a large SOE. The market tumult led to around 126 new issues being withdrawn as defaults by SOEs hit a record. Separately, a new directive banning domestic debt issuers from buying their own bonds at the time of issue weighed on sentiment. The order was issued by the National Association of Financial Market Institutional Investors, which falls under the PBOC and shares oversight of corporate bond issuance in China’s interbank market.
China and 14 other Asian countries signed the Regional Comprehensive Economic Partnership (RCEP), a trade deal that will eventually form a free trade area that includes over 30% of current global GDP and is expected to rise to about 50% of global GDP by 2030. The deal brings together China, Japan, and South Korea—the region’s top-three economies—under a regional trade pact for the first time and includes 10 Southeast Asian countries, Australia, and New Zealand. The deal calls for tariffs and quotas to be eliminated for 65% of regional trade in goods and sets a target of 90% in 20 years, with possible expansion to include other services and countries.
Weekly Performance
U.S. Indices
Dow -0.7% to 29,263. S&P 500 -0.8% to 3,558. Nasdaq +0.2% to 11,855. Russell 2000 +2.4% to 1,786. CBOE Volatility Index +2.6% to 23.7.
S&P 500 Sectors
Consumer Staples -0.8%. Utilities -4.0%. Financials +1.4%. Telecom -0.4%. Healthcare -2.8%. Industrials +2.0%. Information Technology +0.1%. Materials +1.2%. Energy +5.5%. Consumer Discretionary +0.4%.
World Indices
London +0.6% to 6,351. France +2.2% to 5,496. Germany +0.5% to 13,137. Japan +0.6% to 25,527. China +2.% to 3,378. Hong Kong +1.1% to 26,452. India +0.6% to 43,882.
Commodities and Bonds
Crude Oil WTI +5.8% to $42.44/bbl. Gold -0.9% to $1,869.8/oz. Natural Gas -11.2% to 2.661. Ten-Year Treasury Yield +0.3% to 138.52.
Forex and Cryptos
EUR/USD +0.19%. USD/JPY -0.73%. GBP/USD +0.75%. Bitcoin +17.8%. Litecoin +32.1%. Ethereum +11.9%. Ripple +28.2%.
Dow -0.7% to 29,263. S&P 500 -0.8% to 3,558. Nasdaq +0.2% to 11,855. Russell 2000 +2.4% to 1,786. CBOE Volatility Index +2.6% to 23.7.
S&P 500 Sectors
Consumer Staples -0.8%. Utilities -4.0%. Financials +1.4%. Telecom -0.4%. Healthcare -2.8%. Industrials +2.0%. Information Technology +0.1%. Materials +1.2%. Energy +5.5%. Consumer Discretionary +0.4%.
World Indices
London +0.6% to 6,351. France +2.2% to 5,496. Germany +0.5% to 13,137. Japan +0.6% to 25,527. China +2.% to 3,378. Hong Kong +1.1% to 26,452. India +0.6% to 43,882.
Commodities and Bonds
Crude Oil WTI +5.8% to $42.44/bbl. Gold -0.9% to $1,869.8/oz. Natural Gas -11.2% to 2.661. Ten-Year Treasury Yield +0.3% to 138.52.
Forex and Cryptos
EUR/USD +0.19%. USD/JPY -0.73%. GBP/USD +0.75%. Bitcoin +17.8%. Litecoin +32.1%. Ethereum +11.9%. Ripple +28.2%.
Weekly Significant Macro Events
Global Geopolitical Headlines
November 15 – Reuters (Colin Qian and Ryan Woo): “China’s commerce ministry said… the United States should stop its unreasonable suppression of Chinese firms, responding to Washington’s decision to ban U.S. investments in firms tied to the Chinese military.”
November 18 – Reuters (Jeffrey Heller and Hesham Abdul Khalek): “Israel launched air strikes against the Syrian army and Iran’s Quds Force in Syria on Wednesday after explosive devices were planted in the Israeli-held Golan Heights, the Israeli military said. The Syrian state news agency reported that three military personnel were killed and one was wounded in ‘Israeli aggression’ over Damascus. In a statement, the Israeli military said its planes hit storage facilities, military compounds and Syrian surface-to-air missile batteries.”
COVID-19 Virus Headlines:
November 16 – Reuters (Michael Erman and Julie Steenhuysen): “Moderna Inc’s experimental vaccine is 94.5% effective in preventing COVID-19 based on interim data from a late-stage trial, the company said on Monday, becoming the second U.S. drugmaker to report results that far exceed expectations.”
November 16 – Reuters (Maria Caspani and Sharon Bernstein): “Several U.S. governors, from the coastal states of New Jersey and California to the heartland of Iowa and Ohio, acted on Monday to restrict gatherings and boost face-coverings in confronting a coronavirus surge they warned is out of control.”
November 16 – Reuters (Giselda Vagnoni): “The new coronavirus was circulating in Italy in September 2019, a study by the National Cancer Institute (INT) of the Italian city of Milan shows, signaling that it might have spread beyond China earlier than thought.”
November 18 – Associated Press (Linda A. Johnson and Frank Jordans): “Pfizer said… new test results show its coronavirus vaccine is 95% effective, is safe and also protects older people most at risk of dying — the last data needed to seek emergency use of limited shot supplies as the catastrophic outbreak worsens across the globe.”
November 18 – CNBC (Will Feuer): “The United States is in the midst of an ‘absolutely dangerous situation’ as the coronavirus outbreak continues to worsen, Adm. Brett Giroir, assistant secretary of health, said… Covid-19 hospitalizations and deaths are both up 25% week over week, ‘and that is not going in the right direction,’ said Giroir, who leads the government’s Covid testing effort. ‘Right now, we are in an absolutely dangerous situation that we have to take with the utmost seriousness,’ he said… ‘This is not crying wolf. This is the worst rate of rise in cases that we’ve seen in the pandemic in the United States and right now there’s no sign of flattening.’”
November 18 – Washington Post (Joel Achenbach): “More than 3 million people in the United States have active coronavirus infections and are potentially contagious, according to a new estimate from infectious-disease experts tracking the pandemic. That number is significantly larger than the official case count, which is based solely on those who have tested positive for the virus. The vast — and rapidly growing — pool of coronavirus-infected people poses a daunting challenge to governors and mayors in hard-hit communities who are trying to arrest the surge in cases. Traditional efforts such as testing, isolation of the sick and contact tracing can be overwhelmed when a virus spreads at an exponential rate, especially when large numbers of asymptomatic people may be walking around without even knowing they are infectious.”
November 18 – Associated Press (Paul J. Weber and Sarah Rankin): “Overwhelmed hospitals are converting chapels, cafeterias, waiting rooms, hallways, even a parking garage into patient treatment areas. Staff members are desperately calling around to other medical centers in search of open beds. Fatigue and frustration are setting in among front-line workers. Conditions inside the nation’s hospitals are deteriorating by the day as the coronavirus rages across the U.S. at an unrelenting pace and the confirmed death toll surpasses 250,000. ‘We are depressed, disheartened and tired to the bone,’ said Alison Johnson, director of critical care at Johnson City Medical Center in Tennessee…”
November 18 – CNBC (Noah Higgins-Dunn): “New York City’s schools will move to remote learning only as the city tries to tamp down a growing number of coronavirus cases, Mayor Bill de Blasio announced… The shuttering of the nation’s largest school system had been anticipated for days after de Blasio told parents on Friday to have a plan in place in case the city decided to close schools for in-person learning… ‘We’re in the middle of something really tough right now,’ de Blasio said… ‘We have put health and safety first, and we will put health and safety first.’”
November 18 – Reuters (Rocky Swift and Hyonhee Shin): “Daily coronavirus cases in Tokyo and South Korea hit fresh highs on Wednesday, as pollution-cloaked New Delhi struggled with rising cases and Australia reported a highly contagious virus strain which forced a state-wide lockdown. South Korea tightened social distancing rules and Tokyo said officials would meet on Thursday to discuss if the city needs to raise its infection alert to the highest level.”
November 19 – Reuters (Maria Caspani, Gabriella Borter and Sharon Bernstein): “California’s governor… imposed a curfew on social gatherings and other non-essential activities in one of the most intrusive of the restrictions being ordered across the country to curb an alarming surge in novel coronavirus infections. The stay-at-home order will go into effect from 10 p.m. until 5 a.m. each day, starting Saturday night and ending on the morning of Dec. 21, covering 41 of California’s 58 counties and the vast majority of its population… The virus is spreading at a pace we haven’t seen since the start of this pandemic, and the next several days and weeks will be critical to stop the surge,’ Newsom… said…”
November 19 – Reuters (Patricia Zengerle and Steve Holland): “Officials working on vaccine distribution planning under President Donald Trump have no intention of briefing anyone on President-elect Joe Biden’s transition team, Democratic senators said on Thursday, as Biden warned the failure to share information would cost lives.”
COVID-19 Fallout Headlines:
November 16 – CNN (Melissa Alonso and Susannah Cullinane): “Thousands of people lined up for groceries at a food bank distribution event in Dallas, Texas, this weekend, with organizers saying the Covid-19 pandemic has increased need in the city. North Texas Food Bank (NTFB) distributed more than 600,000 pounds of food for about 25,000 people on Saturday… There were 7,280 turkeys distributed to families, Kurian told CNN.”
November 17 – CNBC (Jacob Pramuk): “Congress appeared nowhere close to passing another coronavirus relief bill… as infections surge across the country and new public health restrictions threaten businesses and jobs. Lawmakers have not passed new aid in months during the health and economic crisis. As the virus again overwhelms hospitals and forces state and local officials to restrict economic activity, Republicans and Democrats have not budged from their positions on stimulus. Senate Minority Leader Chuck Schumer and House Speaker Nancy Pelosi have not spoken with Senate Majority Leader Mitch McConnell about another relief bill since the Nov. 3 election… They appear stuck in their pre-election stances, when Democrats pushed for a package that costs at least $2.2 trillion and Republicans sought a roughly $500 billion bill.”
November 17 – Reuters (Lisa Lambert and Richard Cowan): “U.S. Senate Majority Leader Mitch McConnell said… he is open to a $500 billion package aimed at alleviating economic pain from the coronavirus pandemic, but the Republican added he has not had any private discussions with Democrats who control the House of Representatives or President-elect Joe Biden, also a Democrat.”
November 15 – Reuters (Colin Qian and Ryan Woo): “China’s commerce ministry said… the United States should stop its unreasonable suppression of Chinese firms, responding to Washington’s decision to ban U.S. investments in firms tied to the Chinese military.”
November 18 – Reuters (Jeffrey Heller and Hesham Abdul Khalek): “Israel launched air strikes against the Syrian army and Iran’s Quds Force in Syria on Wednesday after explosive devices were planted in the Israeli-held Golan Heights, the Israeli military said. The Syrian state news agency reported that three military personnel were killed and one was wounded in ‘Israeli aggression’ over Damascus. In a statement, the Israeli military said its planes hit storage facilities, military compounds and Syrian surface-to-air missile batteries.”
COVID-19 Virus Headlines:
November 16 – Reuters (Michael Erman and Julie Steenhuysen): “Moderna Inc’s experimental vaccine is 94.5% effective in preventing COVID-19 based on interim data from a late-stage trial, the company said on Monday, becoming the second U.S. drugmaker to report results that far exceed expectations.”
November 16 – Reuters (Maria Caspani and Sharon Bernstein): “Several U.S. governors, from the coastal states of New Jersey and California to the heartland of Iowa and Ohio, acted on Monday to restrict gatherings and boost face-coverings in confronting a coronavirus surge they warned is out of control.”
November 16 – Reuters (Giselda Vagnoni): “The new coronavirus was circulating in Italy in September 2019, a study by the National Cancer Institute (INT) of the Italian city of Milan shows, signaling that it might have spread beyond China earlier than thought.”
November 18 – Associated Press (Linda A. Johnson and Frank Jordans): “Pfizer said… new test results show its coronavirus vaccine is 95% effective, is safe and also protects older people most at risk of dying — the last data needed to seek emergency use of limited shot supplies as the catastrophic outbreak worsens across the globe.”
November 18 – CNBC (Will Feuer): “The United States is in the midst of an ‘absolutely dangerous situation’ as the coronavirus outbreak continues to worsen, Adm. Brett Giroir, assistant secretary of health, said… Covid-19 hospitalizations and deaths are both up 25% week over week, ‘and that is not going in the right direction,’ said Giroir, who leads the government’s Covid testing effort. ‘Right now, we are in an absolutely dangerous situation that we have to take with the utmost seriousness,’ he said… ‘This is not crying wolf. This is the worst rate of rise in cases that we’ve seen in the pandemic in the United States and right now there’s no sign of flattening.’”
November 18 – Washington Post (Joel Achenbach): “More than 3 million people in the United States have active coronavirus infections and are potentially contagious, according to a new estimate from infectious-disease experts tracking the pandemic. That number is significantly larger than the official case count, which is based solely on those who have tested positive for the virus. The vast — and rapidly growing — pool of coronavirus-infected people poses a daunting challenge to governors and mayors in hard-hit communities who are trying to arrest the surge in cases. Traditional efforts such as testing, isolation of the sick and contact tracing can be overwhelmed when a virus spreads at an exponential rate, especially when large numbers of asymptomatic people may be walking around without even knowing they are infectious.”
November 18 – Associated Press (Paul J. Weber and Sarah Rankin): “Overwhelmed hospitals are converting chapels, cafeterias, waiting rooms, hallways, even a parking garage into patient treatment areas. Staff members are desperately calling around to other medical centers in search of open beds. Fatigue and frustration are setting in among front-line workers. Conditions inside the nation’s hospitals are deteriorating by the day as the coronavirus rages across the U.S. at an unrelenting pace and the confirmed death toll surpasses 250,000. ‘We are depressed, disheartened and tired to the bone,’ said Alison Johnson, director of critical care at Johnson City Medical Center in Tennessee…”
November 18 – CNBC (Noah Higgins-Dunn): “New York City’s schools will move to remote learning only as the city tries to tamp down a growing number of coronavirus cases, Mayor Bill de Blasio announced… The shuttering of the nation’s largest school system had been anticipated for days after de Blasio told parents on Friday to have a plan in place in case the city decided to close schools for in-person learning… ‘We’re in the middle of something really tough right now,’ de Blasio said… ‘We have put health and safety first, and we will put health and safety first.’”
November 18 – Reuters (Rocky Swift and Hyonhee Shin): “Daily coronavirus cases in Tokyo and South Korea hit fresh highs on Wednesday, as pollution-cloaked New Delhi struggled with rising cases and Australia reported a highly contagious virus strain which forced a state-wide lockdown. South Korea tightened social distancing rules and Tokyo said officials would meet on Thursday to discuss if the city needs to raise its infection alert to the highest level.”
November 19 – Reuters (Maria Caspani, Gabriella Borter and Sharon Bernstein): “California’s governor… imposed a curfew on social gatherings and other non-essential activities in one of the most intrusive of the restrictions being ordered across the country to curb an alarming surge in novel coronavirus infections. The stay-at-home order will go into effect from 10 p.m. until 5 a.m. each day, starting Saturday night and ending on the morning of Dec. 21, covering 41 of California’s 58 counties and the vast majority of its population… The virus is spreading at a pace we haven’t seen since the start of this pandemic, and the next several days and weeks will be critical to stop the surge,’ Newsom… said…”
November 19 – Reuters (Patricia Zengerle and Steve Holland): “Officials working on vaccine distribution planning under President Donald Trump have no intention of briefing anyone on President-elect Joe Biden’s transition team, Democratic senators said on Thursday, as Biden warned the failure to share information would cost lives.”
COVID-19 Fallout Headlines:
November 16 – CNN (Melissa Alonso and Susannah Cullinane): “Thousands of people lined up for groceries at a food bank distribution event in Dallas, Texas, this weekend, with organizers saying the Covid-19 pandemic has increased need in the city. North Texas Food Bank (NTFB) distributed more than 600,000 pounds of food for about 25,000 people on Saturday… There were 7,280 turkeys distributed to families, Kurian told CNN.”
November 17 – CNBC (Jacob Pramuk): “Congress appeared nowhere close to passing another coronavirus relief bill… as infections surge across the country and new public health restrictions threaten businesses and jobs. Lawmakers have not passed new aid in months during the health and economic crisis. As the virus again overwhelms hospitals and forces state and local officials to restrict economic activity, Republicans and Democrats have not budged from their positions on stimulus. Senate Minority Leader Chuck Schumer and House Speaker Nancy Pelosi have not spoken with Senate Majority Leader Mitch McConnell about another relief bill since the Nov. 3 election… They appear stuck in their pre-election stances, when Democrats pushed for a package that costs at least $2.2 trillion and Republicans sought a roughly $500 billion bill.”
November 17 – Reuters (Lisa Lambert and Richard Cowan): “U.S. Senate Majority Leader Mitch McConnell said… he is open to a $500 billion package aimed at alleviating economic pain from the coronavirus pandemic, but the Republican added he has not had any private discussions with Democrats who control the House of Representatives or President-elect Joe Biden, also a Democrat.”
Covid-19 Weekly Statistics (22 November 2020 @ 1400 GMT)
|
Global Recorded Cases
58,643,152 Previous Week
54,470,461 1 Week Change
+4,172,691 Cases +7.66% (Prev Week +8.07%) |
Global Active Cases
16,651,840 Previous week
15,160,771 1 Week Change
+1,491,069 Cases +9.84% (Prev Week +12.25%) |
Global Recovered
40,602,314 Current Recovery Rate
96.69% Previous Week
Recovery Rate (96.64%) |
Global Deceased
1,388,998 Current Death Rate
3.31% Previous week
Death Rate (3.36%) |
|
Global Recorded Case Trend
Decreasing |
Global Active Case
Trend Decreasing |
Recovery Percentage Trend
Improving |
Death Percentage Trend
Improving |
Commentary
The Global Recorded Cases crossed 58 million this week with an additional 4,172,691 new Covid cases recorded globally over the past week. The weekly rate-of-change (ROC) has remained "sticky" in the +6% to +8% weekly increase since mid-August. This is concerning as it is expected as the winter months continue in the Northern hemisphere increased indoor activity will lead to a larger 2nd wave of the virus (as is currently happening).
The total number of Global Active Cases continues to rise and make new all time highs with 1,491,069 new active cases reported over the past week. It has remained on an upward trajectory since 01 June and has yet to peak, with a very large jump in global active cases over the past 6 weeks. Until the weekly global active case ROC peaks and begins to decline substantially it is premature to believe the current wave of the global pandemic has passed.
The weekly rate of change in global daily deaths (right graph below) initially peaked April 17 @ 7070 deaths per week. It declined through the lockdowns and had remained range-bound for the past 6 months, with a mid-summer peak August 11 @ 6001 per week as lockdowns were relaxed. However, the recent new wave of cases in Europe and North America has now moved the 7-day moving average death rate up to 9655 per week as of 21 November, now greatly exceeding the 1st wave peak.
The total number of Global Active Cases continues to rise and make new all time highs with 1,491,069 new active cases reported over the past week. It has remained on an upward trajectory since 01 June and has yet to peak, with a very large jump in global active cases over the past 6 weeks. Until the weekly global active case ROC peaks and begins to decline substantially it is premature to believe the current wave of the global pandemic has passed.
The weekly rate of change in global daily deaths (right graph below) initially peaked April 17 @ 7070 deaths per week. It declined through the lockdowns and had remained range-bound for the past 6 months, with a mid-summer peak August 11 @ 6001 per week as lockdowns were relaxed. However, the recent new wave of cases in Europe and North America has now moved the 7-day moving average death rate up to 9655 per week as of 21 November, now greatly exceeding the 1st wave peak.
A very worrying trend is the number of new cases in Europe since early July. Below is the 7-day average of daily new confirmed cases per million population (left chart below) where it can be seen Europe's 7-day average peaked on April 04 @ 45.59 cases/million and bottomed on 08 July @ 17.56 cases/million. Since then it has gone parabolic (exceeding all other global regions) and currently peaked @ 379.41cases/million (09 Nov) before its recent retreat associated with the latest lockdowns.
Daily confirmed deaths (right chart below) has now exceeded their previous peak (April 10 @ 5.70 deaths/million) and will continue to rise. Should Nov 9 have been the latest case peak due to lockdowns, it would be expected European deaths would continue to rise until early December as deaths lag confirmed cases by 3-4 weeks.
|
Daily New Confirmed Cases Per Million
(7-day moving average by region) |
Daily New Confirmed Deaths Per Million
(7-day moving average by region) |
|
|
Total number of confirmed COVID-19 cases/deaths per million population
Below is a graph outlining the number of confirmed cases/deaths of COVID-19 per 1 million population. We believe this a much better metric to compare the virus spread among various regions/countries.
- Select the chosen data metric (confirmed cases/confirmed deaths)
- Place cursor over individual countries to highlight individual country confirmed cases/million.
- Use the regions breakdown on the right side of the chart to isolate specific regions
- Use the "Select countries" link in the lower left corner to isolate specific countries
Website Links
(click below to view)
(click below to view)
* John Hopkins University
* World-o-Meter Statistics
*World Health Organization (WHO) Situation Reports
*The Lancet COVID-19 Resource Centre
*medRxiv COVID-19 Research Papers
* World-o-Meter Statistics
*World Health Organization (WHO) Situation Reports
*The Lancet COVID-19 Resource Centre
*medRxiv COVID-19 Research Papers
WEEKLY ASSET CLASS MONITOR
(week ending 20 November 2020)
(week ending 20 November 2020)
|
Asset Class
|
Region
|
ETF Ticker
|
Weekly
Return |
Year-to-Date
Return |
|
Equities
|
World
U.S. Europe Asia Pacific Emerging Market |
VT
VTI VGK VPL VWO |
+0.65%
-0.05% +1.12% +2.16% +1.63% |
+9.78%
+13.52% +0.18% +9.52% +9.43% |
|
Bonds
|
U.S. Bonds
International Bonds |
BND
BNDX |
+0.64%
-0.22% |
+7.42%
+4.27% |
|
Real Estate Equities
|
U.S. Real Estate
International Real Estate |
VNQ
VNQI |
-0.90%
+1.09% |
-6.48%
-10.17% |
|
Precious Metals Equities
|
Global Gold Miners
Global Junior Gold Miners |
RING
GDXJ |
-5.92%
-4.93% |
+23.36%
+22.79% |
GLOBAL EQUITY MARKET MONITOR
Global equities peaked on 12 Feb 2020 and fell dramatically (-34%) into their most recent 23 Mar lows. They have since recovered substantially and all regions except Europe have now closed above their respective pre-COVID price peaks.
As difficult as it is to understand given the current pandemic situation remains largely unconstrained, this breakout is a bullish sign the bear market is likely over (as long as the pink zones hold any pullback associated with the current Northern Hemisphere winter Covid wave).
As difficult as it is to understand given the current pandemic situation remains largely unconstrained, this breakout is a bullish sign the bear market is likely over (as long as the pink zones hold any pullback associated with the current Northern Hemisphere winter Covid wave).
Hedgeye Risk Management LLC
"I skate to where the puck is going to be; not where it has been."
Wayne Gretzky
Wayne Gretzky
As we appear to be approaching a potential turning point in global growth, we continue to utilize global macroeconomic data provided by our data partners at Hedgeye Risk Management. Their data remains one of the most accurate available when attempting to forecast future macroeconomic shifts globally so we use their data to anticipate where the "puck may go" in global macroeconomics.
The Hedgeye Growth/Inflation/Policy (GIP) model uses 90 high frequency inputs per quarter within a Bayesian Inference algorithm to adjust in real-time for the current quarter along with 24 month rate-of-change base effects for future quarters. The forecast is subject to actual economic data as it is released in real time within the quarter so we continue to monitor each economic data point as it is released.
Hedgeye classify each countries model outputs according to the following "quadrants":
Quad 1 (Dark green):
The Hedgeye Growth/Inflation/Policy (GIP) model uses 90 high frequency inputs per quarter within a Bayesian Inference algorithm to adjust in real-time for the current quarter along with 24 month rate-of-change base effects for future quarters. The forecast is subject to actual economic data as it is released in real time within the quarter so we continue to monitor each economic data point as it is released.
Hedgeye classify each countries model outputs according to the following "quadrants":
Quad 1 (Dark green):
- Growth rising/Inflation falling.
- Overweight equities/credit; underweight fixed income.
- Growth rising/Inflation rising.
- Overweight equities/credit; underweight fixed income.
- Growth falling/Inflation rising.
- Overweight fixed income; underweight equities/credit.
- Growth falling/Inflation falling.
- Overweight fixed income; underweight equities/credit.
Below is a view of the Global GIP model with their latest Quad outputs for the forward 4 quarters. The current model projects a somewhat mixed outlook in the 4th quarter (including weakness in the U.S. and areas of Europe) with all global regions forecast to experience strong growth in the 1st half of 2021. Of course data is backward looking so until we get some better information on the true economic impact COVID-19 is having the below data must be viewed as a "best-guess" scenario.
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 has now reversed below 30 as of 01 October indicating the probability of a global recession at present has reduced to 17.65% (from 93.02% probability in October).
CEO Confidence Surveys
We monitor CEO confidence survey's closely as CEO's are the single best source of insight into current and future business conditions. Below is their latest thoughts.
CEO Optimism Drops In November Amid Election Results And Covid Spike
"A new poll of more than 200 chief executives finds deep concern over the incoming Biden administration—and the dangerous direction of the pandemic".
By Melanie C. Nolen -November 16, 2020
"A new poll of more than 200 chief executives finds deep concern over the incoming Biden administration—and the dangerous direction of the pandemic".
By Melanie C. Nolen -November 16, 2020
"In the wake of Joe Biden’s election as the next president of the United States and the sharpest increase in Covid cases since the beginning of the pandemic, CEO confidence in the future of the economy fell sharply in November, even as a majority of CEOs still predict their firms will see improvements in their finances in the months to come.
Chief Executive’s most recent polling of 211 U.S. CEOs—fielded from November 10-12—shows confidence in the current business environment little changed since last month, up only 1 percent from our October reading—at 5.9 out of 10 compared to 5.8 the month prior. CEOs say business is continuing to recover, with renewed orders and sustained consumer spending.
Their outlook for the business environment 12 months from now, however, fell 6.4 percent this month, to 6.4 on our 1-10 scale. This is among the largest single-month declines of the past 5 years for the CEO Confidence Index, and the largest in 2020. The last time the Index declined by a similar margin in a single month was in December 2018, when CEOs feared the consequences of an intensifying trade war with China and the subsequent cooling of the economy. It had then dropped by 7.3 percent."
Chief Executive’s most recent polling of 211 U.S. CEOs—fielded from November 10-12—shows confidence in the current business environment little changed since last month, up only 1 percent from our October reading—at 5.9 out of 10 compared to 5.8 the month prior. CEOs say business is continuing to recover, with renewed orders and sustained consumer spending.
Their outlook for the business environment 12 months from now, however, fell 6.4 percent this month, to 6.4 on our 1-10 scale. This is among the largest single-month declines of the past 5 years for the CEO Confidence Index, and the largest in 2020. The last time the Index declined by a similar margin in a single month was in December 2018, when CEOs feared the consequences of an intensifying trade war with China and the subsequent cooling of the economy. It had then dropped by 7.3 percent."
"The results of the election seem to have had the most influence on CEOs’ outlook. Many CEOs gave the 2021 economy a negative rating, saying they fear increased taxes, regulations and renewed Covid lockdowns under President Joe Biden. For other CEOs, however, the focus isn’t so much on who’s occupying the White House but how soon we will be on the other side of the pandemic.
Our November polling looked into the impact the election results are having, if any, on various areas of corporate strategy. Unsurprisingly, a greater number of CEOs said their tax strategy is most impacted by the outcome (29 percent), followed by lobbying/regulation (21 percent) and health benefits strategies (19 percent).
Polled CEOs said that besides dealing with Covid-19 as a priority (58%), the new administration should focus its efforts on the economy and jobs (24%)—far ahead of any other issues. At the bottom of the list: everything else, from the deficit to taxes to healthcare to immigration, wages and education. None of those topics garnered more than 6 percent from those polled.
When looking at the impact of the business environment on their respective companies, fewer CEOs now forecast increases in profits and revenues for the year ahead: 54 and 64 percent, respectively, compared to 62 and 67 percent in October."
Our November polling looked into the impact the election results are having, if any, on various areas of corporate strategy. Unsurprisingly, a greater number of CEOs said their tax strategy is most impacted by the outcome (29 percent), followed by lobbying/regulation (21 percent) and health benefits strategies (19 percent).
Polled CEOs said that besides dealing with Covid-19 as a priority (58%), the new administration should focus its efforts on the economy and jobs (24%)—far ahead of any other issues. At the bottom of the list: everything else, from the deficit to taxes to healthcare to immigration, wages and education. None of those topics garnered more than 6 percent from those polled.
When looking at the impact of the business environment on their respective companies, fewer CEOs now forecast increases in profits and revenues for the year ahead: 54 and 64 percent, respectively, compared to 62 and 67 percent in October."
Asset Class Return Monitor
(for week ending 20 November 2020)
(for week ending 20 November 2020)
Equities Legend:
Bonds Legend:
Currencies Legend:
Commodities Legend:
- Vanguard Total World Stock ETF (VT): (Cyan)
- Vanguard Total U.S. Stock Market ETF (VTI): (Red)
- Vanguard FTSE Europe ETF (VGK): (Lime Green)
- Vanguard FTSE Asia Pacific ETF (VPL): (Dark Blue)
- Vanguard FTSE Emerging Markets ETF (VWO): (Pink)
Bonds Legend:
- Vanguard Total U.S. Bond Market ETF (BND): (Black)
- Vanguard Total International ex-U.S. Bond ETF (BNDX): (Green)
Currencies Legend:
- U.S. Dollar Index (Cash Settlement EOD) ($USD): (Orange)
- Euro (Philadelphia Index) ($XEU): (Maroon)
Commodities Legend:
- PowerShares DB Commodity Index Tracking Fund (DBC): (Purple)
- SPDR Gold ETF (GLD): (Sky Blue)
Past Week Asset Class returns
- Over the past week global equities (as measured by the Vanguard Total World Stock ETF (shown in CYAN) gained +0.65%
- Asia Pacific equities were the top performing equity region this past week with U.S. market equities lagging.
- U.S. bonds (Black) and International bonds (Green) were higher on the week.
- Commodities were higher on the week with the U.S. Dollar index down -0.38%.
Year-to-Date (2020) Asset Class returns
- Thus far in 2020 global equities (as measured by the Vanguard Total World Stock ETF (shown in CYAN) have gained +9.78%.
- U.S. equities have been the top performing equity region thus far in 2020 with European markets lagging.
- Bonds have shown positive returns thus far in 2020 with U.S. bonds (Black) outperforming International Bonds (Green) .
- Commodities have had substantially negative returns for 2020 with the U.S. Dollar index down -3.81%.
Typically bull/bear markets follow a cycle of investor psychology which peaks with euphoria and ends with despair. We do not think we have reached the despair level yet (we are in the "denial-pessimism" area).
It must be reemphasized a complete market cycles is composed of 2 distinct cycles/phases: a "bull 1/2 cycle" and a "bear 1/2 cycle". The 11 year bull 1/2 cycle ended in Feb 2020 with the global spread of COVID-19 and we are now within the bear 1/2 cycle.
A large part of the expected declines in bear markets hinges upon how "expensive" markets were when the bear market begins. In this measure, we have a long way to fall given the overvaluation at the market peak.
We illustrate the recent market overvaluation via 3 charts produced by Crestmont Research (as of 01 November with data from 1871-to-present). While it is not necessary to understand exactly how the data is plotted, it is important for every investor to realize where current valuations stand relative to this 149 years of history.
In the following graphs note the following:
A large part of the expected declines in bear markets hinges upon how "expensive" markets were when the bear market begins. In this measure, we have a long way to fall given the overvaluation at the market peak.
We illustrate the recent market overvaluation via 3 charts produced by Crestmont Research (as of 01 November 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 October 2020 was the most expensive market valuation in U.S. stock market history (since 1871) .
- when compared to inflation the current Crestmont P/E remains at the upper extreme portion of the bubble zone defining the 1998-2000 bubble peak as shown on the 2nd chart.
The Math of Losses
- a 20% loss requires a 25% gain to return to breakeven
- a 30% loss requires a 43% gain to return to breakeven
- a 40% loss requires a 67% gain to return to breakeven
- a 50% loss requires a 100% gain to return to breakeven
- a 60% loss requires a 150% gain to return to breakeven
This is why it is so important to not let losses continue in the face of a bear market 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 market cycle:
World Regional Equity Monitor
We use the following U.S. exchange traded funds to monitor equity performance for the various world regions:
- World Equities: Vanguard Total World ETF (Cyan)
- U.S. Equity: Vanguard Total Market ETF (Red)
- Asia Pacific Equity: Vanguard FTSE Pacific ETF (Blue)
- European Equity: Vanguard FTSE Europe ETF: (Lime Green)
- Emerging Market Equity: Vanguard FTSE Emerging Market ETF (Pink)
1 Year Rolling Regional Equity Performance
- Over the past 12 month rolling period regional equity performance has been positive for the majority of the monitored regions.
- The strongest equity region over the past 12 month has been U.S. Markets with European market equities lagging.
- Overall world equity performance (as measured by the Vanguard Total World ETF) have returned +14.41% (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 Asia Pacific markets with European markets the weakest.
- Positive regional equity returns have been evident over the past quarter (3 months) in monitored regions (global equity 3 month bullish flip occurred as of 05 June market close on post COVID-19 panic rebound).
1 Month Rolling Regional Equity Performance
- Over the past 1 month rolling period the strongest performing world equity region has been Asia Pacific markets with U.S. markets the weakest.
- Positive global equity returns are evident over the past month for all monitored regions.
Past Week Regional Equity Performance
- Over the past week major global equities were higher with Asia Pacific 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 +0.70%. As can be seen on the chart above, price remains above the 65 week moving average (blue line) and recently broke above past resistance @ 444.09-446.78. This is now support we would like to see hold on any pullback next week.
Value Line Geometric Index and Global Dow Index
(equal weighted indexes)
The Value Line Geometric Index ($XVG) is the median price performance of 1700 U.S. companies equal weighted (as opposed to most indexes which are market cap weighted) into an index. The Global Dow index ($GDOW) is a measure of the top 150 international companies equal weighted within the index.
These indexes are important as they equal-weight the price performance of all the companies held within the respective index. This removes the distortions associated with a small group of highly valued companies (which may be performing well) masking the performance of struggling companies and represents a good overview of overall internal equity strength.
These indexes are important as they equal-weight the price performance of all the companies held within the respective index. This removes the distortions associated with a small group of highly valued companies (which may be performing well) masking the performance of struggling companies and represents a good overview of overall internal equity strength.
Below charts are the daily line charts of both indexes with 50 (blue) + 200 day (green) moving averages plus their previous "pause-points" (red shaded areas) during the last decline.
If price can remain above the respective 200 DMA's + the pause-points on future pullbacks it is highly likely the bear market is over.
If price can remain above the respective 200 DMA's + the pause-points on future pullbacks it is highly likely the bear market is over.
Value Line Geometric Index ($XVG) Daily
Global Dow Index ($GDOW) Daily
Below is a 40 year daily chart of the Value Line Geometric Index which clearly shows the critical price support/resistance @ 508-523 (1st achieved in 1998). Price has been unable to regain this very important level since the March, 2020 market crash associated with Covid (but closed this week above this level; an encouraging event).
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 to near their previous consolidation box (yellow box) with support @ 78.59. They have risen dramatically and have now closed above their previous top. This is very encouraging.
For the month of November ACWI has gained +10.51%. It closed the month of October above the 12 month simple moving average keeping the long term trend bullish until month end.
For the month of November ACWI has gained +10.51%. It closed the month of October above the 12 month simple moving average keeping the long term trend bullish until month end.
ACWI Weekly Chart
This past week ACWI gained +0.41%. Price remains above the 65 week simple moving average (shown in BLUE) and the weekly support @ 80.76.
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 have transitioned into the YELLOW "Weakening" quadrant with the quantitative scoring now having turned negative. In addition, ACWI (our world equity fund benchmark) has also moved into the YELLOW"Weakening" quadrant.
The RRG trend analysis status is 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 continues to recover off its recent lows. Firm crude oil prices typically point to increasing demand on the back of world economic growth improvement but until it can regain levels prior to the COVID collapse (above $50) this remains equity bearish.
Gold
Gold was lower over the past week and closed below support @ 1886. The recent breakout to new all time highs indicates increased uncertainty in equities with a move to the safety of gold. As long as gold continues to advance it remains equity bearish.
Commodities
Commodities were higher over the past week and continue to recover over their recent 4 year lows. This remains equity bearish until prices can regain the previous pre-COVID support near $168.
U.S. 30 Year Treasury Bond
U.S. 30 year bonds were higher on the week. Rising bond prices indicate a "flight to safety" trade associated with weakening economic data and the current trading range above $172 is equity bearish.
Current 5-Factor Model Indications
The combined 5-Factor quantitative model is currently YELLOW (neutral). This indicates a moderate level of risk at present. The 5-Factor model currently has the following sub-model readings:
Economic Model
The Economic model reverted to YELLOW as the economic data associated with the COVID-19 pandemic has begun to moderate from its recent bounce post-lockdown 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
- DHL Global Trade Barometer
OECD Composite Leading Indicators
(09 November 2020)
Latest Overview (09/11/2020)
"CLIs point to a continued moderation in growth prior to the recent tightening of COVID-19 restrictions"
"Even before the recent tightening of COVID-19 restrictions in many major economies, CLIs compiled for October
2020 pointed to a continued deceleration in the pace of improvement in the OECD as a whole and across most
major economies.
Whilst some expectation of these recent measures will have been anticipated in this month’s CLI estimates,
their full impact will only be picked-up in next month’s CLI estimates.
Prior to the introduction of recent COVID-19 containment measures, CLIs for October in the United States,
Japan, Canada, Germany, Italy and the euro area continued to increase but at a slower pace. In France,
the CLI continued to stabilise, while in the United Kingdom the CLI contracted for the second straight month,
potentially reflecting heightened uncertainty over the prospect of no trade deal with the EU at the end of the
transition period. In all major OECD economies, the CLIs continued to point to below trend GDP.
Among major emerging economies, the CLIs for India and Brazil continued to increase but a slower pace. In
China, on the other hand, the CLI for October, for the manufacturing sector, continued to increase at a steady
pace, while in Russia the CLI stabilised.
As always, the magnitude of the CLI should be regarded as an indication of the strength of the signal rather
than as a direct measure of the degree of growth in economic activity."
"CLIs point to a continued moderation in growth prior to the recent tightening of COVID-19 restrictions"
"Even before the recent tightening of COVID-19 restrictions in many major economies, CLIs compiled for October
2020 pointed to a continued deceleration in the pace of improvement in the OECD as a whole and across most
major economies.
Whilst some expectation of these recent measures will have been anticipated in this month’s CLI estimates,
their full impact will only be picked-up in next month’s CLI estimates.
Prior to the introduction of recent COVID-19 containment measures, CLIs for October in the United States,
Japan, Canada, Germany, Italy and the euro area continued to increase but at a slower pace. In France,
the CLI continued to stabilise, while in the United Kingdom the CLI contracted for the second straight month,
potentially reflecting heightened uncertainty over the prospect of no trade deal with the EU at the end of the
transition period. In all major OECD economies, the CLIs continued to point to below trend GDP.
Among major emerging economies, the CLIs for India and Brazil continued to increase but a slower pace. In
China, on the other hand, the CLI for October, for the manufacturing sector, continued to increase at a steady
pace, while in Russia the CLI stabilised.
As always, the magnitude of the CLI should be regarded as an indication of the strength of the signal rather
than as a direct measure of the degree of growth in economic activity."
The OECD (Total) Composite Leading Index topped in Mar 2018 @ 100.8 and remains well below 100 (indicating below average global economic growth). Its most recent decline took it below the Feb, 2009 lows (95.70) seen during the last global recession.
Below is our latest heat-map of the Composite Leading Indicators for various monitored regions. The CLI is designed to predict business cycle changes 6-9 months in advance so the Peak/Trough dates can be used to predict turning point months for the various regions.
- Red/Green numbers indicates above/below average future projected economic growth.
- Red/Green boxes indicates CLI rate of change month/month and year/year.
As can be seen, the heat-map indicates all regions (and most countries) continue to have current CLI's < 100 (indicating below average projected economic growth over the next 6-9 months). However, there are short term signs of a potential bottoming in the rate of change in all regions on a month-over-month basis (green boxes).
Once a number of major regions turn positive on a year-over-year basis (far right column) we would feel comfortable to declare the global recession is likely over.
BlackRock Macro GPS Growth/Inflation Forecast
(12 November 2020 Data)
The BlackRock macro-GPS aims to give a forward forecast on the growth & inflation outlook for G7 economies. It combines new sources of information using new "big-data" sources – including internet searches and text mining of corporate calls - as well as traditional economic data. Other big data inputs include online job postings, inflation chatter, satellite images, e-invoicing and traffic patterns.
The BlackRock GPS forecasts the following:
The BlackRock GPS forecasts the following:
- the potential year-over-year GDP economic growth reading versus current consensus 3 months forward.
- the potential year-over-year Inflation reading versus current consensus 6 months forward.
BlackRock GDP Growth Forecast vs. Current Consensus
The BlackRock GDP growth forecast currently projects the greatest upside surprise in growth (versus current consensus) will be in Australia with the greatest downside surprise in growth (versus current consensus) in Italy. The forward G-7 economic growth forecast is -0.40% below current consensus (bearish).
BlackRock Inflation Forecast vs. Current Consensus
The BlackRock inflation forecast currently projects Canada will have the greatest upside surprise in future inflation (relative to consensus) with Japan having the furthest downside projected inflation relative to consensus (Note: there is an unusually large split between US PCE (core inflation) and CPI forecasts so use with caution).
J.P. Morgan Global Composite Purchasing Managers Index (PMI)
(04 November 2020)
(04 November 2020)
The Global Composite PMI Report is based on the results of manufacturing and service sector surveys covering over 18,000 purchasing executives in over 40 countries. Together these countries account for an estimated 89% of global gross domestic product (GDP).
Questions are asked about real events and are not opinion based. Data are presented in the form of diffusion indices, where an index reading above 50.0 indicates an increase in the variable since the previous month and below 50.0 a decrease. As such, using the PMI data gives us a real-time look at global growth.
Questions are asked about real events and are not opinion based. Data are presented in the form of diffusion indices, where an index reading above 50.0 indicates an increase in the variable since the previous month and below 50.0 a decrease. As such, using the PMI data gives us a real-time look at global growth.
- readings > 50 indicating economic expansion
- readings < 50 indicate economic contraction.
Global PMI Summary
Global Composite PMI Report Commentary
Global Manufacturing Summary 02 November:
"Global manufacturing output rose at the fastest pace in over two-and-a-half years in October, building on the return to growth seen during the third quarter of the year. New order intakes strengthened, assisted by a further upturn in international trade, while business optimism rose to its highest level since May 2018.
The J.P.Morgan Global Manufacturing PMI™ – a composite index produced by J.P.Morgan and IHS Markit in association with ISM and IFPSM – posted 53.0 in October, up from 52.4 in September, to post its best reading for 29 months (since May 2018). The headline PMI has signalled growth in each of the past four months."
Global Services Summary 04 November:
"The J.P.Morgan Global Services Business Activity Index posted a 19-month high of 52.9 in October, up from 52.0 in September. Output rose in the US, China, the UK, India and Australia. The euro area, Japan and Kazakhstan registered contractions.
Global service sector new business rose for the fourth month running and to the greatest extent since January. Employment ticked higher for the third month in a row, while backlogs of work fell slightly following recent increases. International trade in services continued to fall."
Global Composite Summary 04 November:
"October saw the fastest expansion of global economic output for over two years. Growth was underpinned by rising intakes of new work, improving business optimism and the continued stabilisation of trends in new export orders and staffing levels.
The J.P.Morgan Global Composite Output Index – which is produced by J.P.Morgan and IHS Markit in association with ISM and IFPSM – rose to a 26-month high of 53.3 in October, up from 52.5 in September, to signal expansion for the fourth consecutive month. Growth strengthened in both the manufacturing (32-month high) and services (19-month high) industries.
Five out of the six sub-sectors covered by the survey registered expansions of output at the start of the final quarter of 2020. Solid growth was seen in the business services, financial services, intermediate goods and investment goods categories. Consumer-facing industries tended to be a drag on the overall rate of increase. Growth at consumer goods producers slipped to its weakest in the current four-month upturn, while consumer services output contracted for the ninth successive month."
"Global manufacturing output rose at the fastest pace in over two-and-a-half years in October, building on the return to growth seen during the third quarter of the year. New order intakes strengthened, assisted by a further upturn in international trade, while business optimism rose to its highest level since May 2018.
The J.P.Morgan Global Manufacturing PMI™ – a composite index produced by J.P.Morgan and IHS Markit in association with ISM and IFPSM – posted 53.0 in October, up from 52.4 in September, to post its best reading for 29 months (since May 2018). The headline PMI has signalled growth in each of the past four months."
Global Services Summary 04 November:
"The J.P.Morgan Global Services Business Activity Index posted a 19-month high of 52.9 in October, up from 52.0 in September. Output rose in the US, China, the UK, India and Australia. The euro area, Japan and Kazakhstan registered contractions.
Global service sector new business rose for the fourth month running and to the greatest extent since January. Employment ticked higher for the third month in a row, while backlogs of work fell slightly following recent increases. International trade in services continued to fall."
Global Composite Summary 04 November:
"October saw the fastest expansion of global economic output for over two years. Growth was underpinned by rising intakes of new work, improving business optimism and the continued stabilisation of trends in new export orders and staffing levels.
The J.P.Morgan Global Composite Output Index – which is produced by J.P.Morgan and IHS Markit in association with ISM and IFPSM – rose to a 26-month high of 53.3 in October, up from 52.5 in September, to signal expansion for the fourth consecutive month. Growth strengthened in both the manufacturing (32-month high) and services (19-month high) industries.
Five out of the six sub-sectors covered by the survey registered expansions of output at the start of the final quarter of 2020. Solid growth was seen in the business services, financial services, intermediate goods and investment goods categories. Consumer-facing industries tended to be a drag on the overall rate of increase. Growth at consumer goods producers slipped to its weakest in the current four-month upturn, while consumer services output contracted for the ninth successive month."
Global Composite Output Index vs. Global GDP
Below is our PMI monitor for selected regions/countries.
- numerical values > 50 (GREEN) indicate economic expansion.
- numerical values < 50 (RED) indicating economic contraction.
- trend GREEN indicates improvement over the past month with RED indicating a decline over the previous month.
The latest data points to a possible end to the global economic recession if the current improvements can hold for another month (reducing the chance this is a only a "dead-cat" bounce as the next round of COVID-19 infections spread in the Northern Hemisphere winter period).
World Bank Global Monthly Outlook
(October 2020)
(October 2020)
U.S. Economic Growth & Inflation
Year-over-Year GDP growth
The Gross Domestic Product (GDP) in the United States contracted 2.90 percent in the third quarter of 2020 over the same quarter of the previous year.
Quarter-over-Quarter GDP growth
The US economy expanded by an annualized 33.1% in Q3 2020, beating forecasts of a 31% surge. It is the biggest expansion ever, following a record 31.4% plunge in Q2, as the economy rebounds from the coronavirus pandemic. Personal spending surged and was the main driver of growth, helped by checks and weekly unemployment benefits from the federal CARES Act. Growth also reflects increases in private inventory investment, exports, nonresidential fixed investment, and residential fixed investment that were partly offset by decreases in federal government spending (reflecting fewer fees paid to administer the Paycheck Protection Program loans). However, GDP is still 3.5% below its pre-pandemic level and the outlook for Q4 and 2021 remains uncertain as the pandemic is far from controlled and a vaccine is not ready yet. Also, out of more than 22 million jobs lost in March and April only around 11.3 million were recovered so far while a new stimulus bill hasn't been approved yet
Annualized Inflation
Annual inflation rate in the US fell to 1.2% in October of 2020 from 1.4% in the previous month and below market expectations of 1.3%. The rate remains well below 2.3% in February before the coronavirus pandemic hit. Cost of medical care commodities dropped (-0.8% vs 0.9% in September); and energy prices declined further (-9.2% vs -7.7%). Also, cost of transportation services continued to fall (-5.1%, the same as in August). On the other hand, inflation was steady for food (at 3.9%) and shelter (at 2%) while deflation for apparel softened (-5.5% vs -6%). In addition, prices advanced at a faster pace for cars and trucks (11.5% vs 10.3%) and new vehicles (1.5% vs 1%). On a monthly basis, consumer prices were unchanged, after increasing 0.2% in the prior month and compared with forecasts of a 0.1% gain. Annual core inflation unexpectedly slowed to 1.6% while the monthly index was down unchanged.
Eurozone Economic Growth & Inflation
Year-over-Year GDP growth
The Eurozone economy shrank by 4.4 percent year-on-year in the third quarter of 2020, easing from a record slump of 14.8 percent in the previous period and compared with early estimates of a 4.3 percent contraction.
Quarter-over-Quarter GDP growth
The Eurozone economy grew by 12.6 percent in the three months to September 2020, recovering from a record slump of 11.8 percent in the previous period and compared with early estimates of a 12.7 percent advance. It was the steepest pace of expansion since 1995, boosted by a rebound in activity and demand as lockdowns imposed to contain the spread of the coronavirus pandemic were gradually lifted. All major economies in the region posted record GDP expansion rates: France (18.2 percent vs -13.7 percent in Q2); Spain (16.7 percent vs -17.8 percent); Italy (16.1 percent vs -13.0 percent); and Germany (8.2 percent vs -9.8 percent). Year-on-year, the GDP shrank by 4.4 percent, easing from a record contraction of 14.8 percent in the second quarter.
Annualized Inflation
The Eurozone consumer prices dropped 0.3 percent from a year earlier in September 2020, the steepest decline since April 2016. Prices fell for both energy products (-8.2 percent vs -7.8 percent in August) and non-energy industrial goods (-0.3 percent vs -0.1 percent). At the same time, services inflation slowed to 0.5 percent from 0.7 percent. The annual core inflation, which excludes volatile prices of energy, food, alcohol & tobacco and at which the ECB looks in its policy decisions, eased further to 0.2 percent, the lowest on record.
Japan Economic Growth & Inflation
Year-over-Year GDP growth
The Gross Domestic Product (GDP) in Japan contracted 5.80 percent in the third quarter of 2020 over the same quarter of the previous year.
Quarter-over-Quarter GDP growth
The Japanese economy advanced 5 percent on quarter in the three months to September 2020, partially recovering from a record slump of 8.2 percent in the previous period and beating market consensus of 4.4 percent, a preliminary estimate showed. This was the first quarterly growth rate in a year, as activity and demand rebounded from the severe damage caused by the COVID-19 crisis. Private consumption rose for the first time in four quarters (4.7 percent vs -8.1 percent in Q2), while capital expenditure contracted at a softer pace (-3.4 percent vs -4.5 percent). In addition, net external demand added 2.9 percentage points to the GDP as exports grew for the first time in three quarters (7 percent vs -17.4 percent) while imports tumbled (-9.8 percent vs 2.2 percent). On an annualized basis, the economy grew at a record 21.4 percent in Q3, after a record plunge of 28.8 percent in Q2.
Annualized Inflation
Japan's consumer prices declined 0.4 percent in October year-on-year after remaining unchanged in the previous month, as the pandemic continued to drag consumption. The decline was sharper than the 0.3 percent expected by consensus and was the sharpest in more than 4 years. Food inflation declined to 1.1 percent from 1.9 percent. Prices fell for education (-2.1 percent), culture & recreation (-4 percent), medical care (-0.5 percent), and utilities (-2.9 percent). Also, prices for transport & communication declined 0.9 percent after increasing 0.4 percent in September. On a monthly basis, consumer prices edged down 0.1 percent for the third month. Core consumer prices, which exclude fresh food, dropped 0.7 percent after falling 0.3 percent in the previous month.
China Economic Growth & Inflation
Year-over-Year GDP growth
The Chinese economy advanced 4.9% yoy in Q3 2020, faster than a 3.2% expansion in Q2 but below forecasts of a 5.2% growth. Despite the lower-than-expected reading, there are signs the expansion is finally extending to consumption after a state-backed industrial recovery. Retail sales rose 3.3% yoy in September, above forecasts and the highest reading so far this year. Industrial production went up 6.9%, also higher than expected and the biggest gain in 2020. For the first nine months of the year, the economy expanded 0.7%, recovering all the ground it lost in the first half, with the primary industry increasing 2.3%, the secondary 0.9% and the services sector 0.4%. Rising global demand for medical equipment and work-from-home technology has been boosting exports while government support including more fiscal spending, tax relief and cuts in lending rates and banks' reserve requirements has also helped to boost the recovery.
Quarter-over-Quarter GDP growth
The Chinese economy grew by a seasonally adjusted 2.7 percent on quarter in the three months to September 2020, following an upwardly revised 11.7 percent advance in the previous quarter and below market expectations of a 3.2 percent expansion.
Annualized Inflation
China's annual inflation rate eased to 0.5 percent in October 2020, the lowest since October 2009 and below market expectations of 0.8 percent. There was a sharp slowdown in prices of food (2.2 percent vs 7.9 percent in September), with pork prices falling for the first time in over 1-1/2 years. Meantime, there were falls in cost of transport (-3.9 percent vs -3.6 percent); rent, fuel, and utilities (-0.7 percent vs -0.8 percent); household goods and services (-0.1 percent vs -0.1 percent); and clothing (-0.3 percent vs -0.4 percent). At the same time, prices rose for health (1.5 percent vs 1.5 percent); and education (1.1 percent vs 0.7 percent); and other goods and services (2.4 percent vs 4.3 percent). On a monthly basis, consumer prices unexpectedly fell by 0.3 percent, the first drop in four months, missing consensus of a 0.2 percent rise.
Valuation Model
The Valuation model reverted to RED on the recent equity market advance post the COVID-19 decline. Global equity valuations remain near historical highs relative to underlying fundamentals with the outlier countries as follows (Source: Star Capital as of 30 October 2020):
Best Valuations
Worst Valuations
Technical Model
The Technical model remained GREEN this past week. Global equity markets have recovered significantly off their March 2020 lows and remain at critical technical levels.
Sentiment Model
The Sentiment model remained YELLOW this week as overall sentiment has turned largely neutral (sentiment acts as an inverse 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 Bond (LQD): (Maroon)
- International Corporate Bond (PICB): (Black)
- U.S. High Yield Bond (JNK): (Purple)
- International High Yield Bond (IHY): (Green)
- U.S. Gov't Inflation Protected Bonds (TIP): (Lime Green)
- International Gov't Inflation-Protected Bond (WIP): (Cyan)
1 Year Rolling Bond Performance
- Over the past 12 months rolling period the top performing bond asset class has been U.S. Investment Grade Corporate Bonds with U.S. High Yield Bonds the worst performing.
- The U.S. Total Bond Market (RED) and the International (ex-U.S.) Total Bond Market (BLUE) have delivered positive returns over the past year.
3 Month Rolling Bond Performance
- Over the past 3 month rolling period the top performing bond asset class has been U.S. High Yield Bonds with U.S. Treasury Bonds lagging.
- U.S. Total Bond Market (RED) and International (ex-U.S.) Total Bond Market (BLUE) having delivered positive returns over the past quarter (3 months).
1 Month Rolling Bond Performance
- Over the past 1 month rolling period the top performing bond asset class has been Int'l High Yield Bonds with U.S. Treasury Inflation Protected Bonds lagging.
- The U.S. Total Bond Market (RED) and the International (ex-U.S.) Total Bond Market (BLUE) have delivered positive returns over the past month.
Past Week Bond Asset Class Performance
- Over the past week Int'l Corporate Bonds were the top performing bond class with U.S. Gov't Inflation Protected Bonds lagging.
- The U.S. Total Bond Market (RED) and the International (ex-U.S.) Total Bond Market (BLUE) delivered positive 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 at generational lows (bond prices overbought and at generational highs) and any significant economic recovery (with associated increases in inflation) has the potential to be very detrimental to bond fund returns. There is currently over $10 Trillion in negative yielding bonds globally (never before seen in 5000 years of history) so any sudden surge in global growth and/or inflation will have a devastating impact upon bond fund returns (hence the reason we place so much research into global macroeconomic conditions).
Rolling 12 month returns for bonds remain positive and we continue to monitoring closely US, German & Japanese rates to determine if (when) it may be appropriate to reduce bond positions. Our premise is these 3 bonds tend to be somewhat "tethered" due to capital flows so it would take a trend-change/breakout in all 3 key Treasuries in order to definitively state the global bull market in bonds is over.
It is best to think of bonds and equities as 2 independent brains each looking at the market from a different perspective:
- Equities: Corporate profits focused.
- Bonds: Economic growth and Inflation focused.
As such, both serve a useful purpose in a well balanced portfolio.
We are very cognizant of the fact bond yields remain at generational lows (bond prices overbought and at generational highs) and any significant economic recovery (with associated increases in inflation) has the potential to be very detrimental to bond fund returns. There is currently over $10 Trillion in negative yielding bonds globally (never before seen in 5000 years of history) so any sudden surge in global growth and/or inflation will have a devastating impact upon bond fund returns (hence the reason we place so much research into global macroeconomic conditions).
Rolling 12 month returns for bonds remain positive and we continue to monitoring closely US, German & Japanese rates to determine if (when) it may be appropriate to reduce bond positions. Our premise is these 3 bonds tend to be somewhat "tethered" due to capital flows so it would take a trend-change/breakout in all 3 key Treasuries in order to definitively state the global bull market in bonds is over.
ETF Bond Proxies
The current very strong short-term bond bull market began 08 Nov 2018. Below is the performance of the 3 ETF's we use as "bond proxies" to monitor global bond performance:
- BNDW: Vanguard Total World Bond market ETF (BLUE)
- BND: Vanguard Total U.S. Bond market ETF (GREEN)
- BNDX: Vanguard Total International (ex-U.S.) Bond market ETF (RED)
Global bonds were higher over the past week. There remains a divergence between U.S. bonds (green) which continue to outperform International bonds (red), although the differential has begun to narrow since late-July.
U.S. 10 year Treasury Yield
After rates bottomed in mid-2016 at all time lows (bond prices peaked as they are inversely correlated), they rapidly rose to resistance on the hope of future economic growth + inflation from mid-2016 to the 3rd quarter of 2018. However, disappointing economic data out of the U.S. has allowed rates to plunge once gain and they recently set new record all-time yield lows.
German 10 year Bund Yield
German 10 year treasury yields peaked in early 2018 and plunged over the past 2 years to record all-time-lows of -0.72% on the back of recessionary economic conditions within the German economy. They have since rebounded but remain below resistance @ -0.19%.
Japanese 10 year Treasury Yield
Japan has been fighting deflation for decades and only recent unprecedented monetary policy by the BOJ appears to be having some effect upon deflation (and yields).
After bottoming at near -0.28% in mid-2016, yields rose to a peak of 0.16% before they once again plunged in 2019 to once again retest -0.28%. They have since bounced dramatically on the back of renewed hope the worst of Japan's economic woes may be behind it.
After bottoming at near -0.28% in mid-2016, yields rose to a peak of 0.16% before they once again plunged in 2019 to once again retest -0.28%. They have since bounced dramatically on the back of renewed hope the worst of Japan's economic woes may be behind it.
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 Gold with the U.S. Dollar Index the worst performing.
3 Month Rolling Currency Performance
- Over the past 3 month rolling period the top performing currency has been the Japanese Yen with Gold lagging.
1 Month Rolling Currency Performance
- Over the past 1 month rolling period the top performing currency has been the Australian Dollar with Gold lagging.
Past Week Currency Performance
- Over the past week the top performing major currency was the Swedish Krona with Gold lagging.
U.S. Dollar: (Bearish Bias)
Commentary:
The USD index was down -0.38% over the past week. It has 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.
Support / Resistance Levels (based upon close):
Weekly: 91.33 / 94.86
Monthly: 92.63 / 98.66
Support / Resistance Levels (based upon close):
Weekly: 91.33 / 94.86
Monthly: 92.63 / 98.66
US Dollar Index Daily charts
The 1 year daily chart (above) shows the range-bound chop between 95-99 for the past year before the recent pop-and-drop volatility began in March 2020. This past week the USD moved to the bottom of its previous 2 month range-bound zone (red shaded box).
The 4 year daily chart (above) clearly shows the uptrend channel from the 2018 lows. A break of the lower trendline occurred in mid-July. Daily support remains 91.33 with resistance @ 94.79-94.87.
Over the past week the USD closed below its short term trend 50 and 200 day moving averages.
(Short Term Bearish)
(Short Term Bearish)
US Dollar Index Weekly charts
The weekly chart shows the steady -15% decline the USD index experienced from late Dec 2016-early Jan 2018 (from 103.82 to 88.15). It remained in a consolidation zone (88.89-90.33) for 3 months and then in late April 2018 it broke out of its weekly consolidation box to highs in early 2020. It has now reversed in line with weak economic performance out of the U.S. as it attempts to tackle the Covid situation.
Price ended the week below support @ 93.80 and closed the week below the intermediate term trend 20 and 65 week moving averages.
(Intermediate Term Bearish)
Price ended the week below support @ 93.80 and closed the week below the intermediate term trend 20 and 65 week moving averages.
(Intermediate Term Bearish)
A longer term 20 year look-back at the USD shows the 91.66-92.33 weekly close area (thick RED line) has been a very significant bull/bear battle zone over the past 21 years (since 1998).
A break of the support would confirm a "Double-Top" pattern with a target near 80 on the USD index.
A break of the support would confirm a "Double-Top" pattern with a target near 80 on the USD index.
US Dollar Index Monthly chart
For the month of November the U.S. Dollar index has lost -1.75%. Since bottoming in late 2011 the USD has been on a roller-coaster ride. It experienced:
Price closed October below the long term trend 10 month moving average maintaining the long term bias to Bearish until months end. Major support remains 92.63-93.03 on a monthly closing basis.
(Long Term Bearish)
- a large acceleration in 2014-2015 (+27%),
- a consolidation in 2015-2017,
- a large drop in 2017-2018 (-15%) back to support and its uptrend line from 2011, and
- its recent rise back to the top of its previous consolidation zone.
- its most recent decline to retest the bottom of the consolidation zone + uptrend line.
Price closed October below the long term trend 10 month moving average maintaining the long term bias to Bearish until months end. Major support remains 92.63-93.03 on a monthly closing basis.
(Long Term Bearish)
Euro (Bullish Bias)
The Euro gained +0.22% over the past week. It had shown remarkable longer-term resilience given ongoing European political uncertainty (Brexit, Spain, Germany, Italy) and has strengthened considerably off the March 2020 lows as the Covid situation has dramatically improved in the Eurozone relative to the U.S. response.
Support / Resistance Levels (based upon close):
Weekly: 114.47 / 121.58
Monthly: 113.81 /123.02
Support / Resistance Levels (based upon close):
Weekly: 114.47 / 121.58
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. It has since risen dramatically and has now achieved a bullish breakout.
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 broke above this key resistance level recently and closed the week above the short term trend 50 and 200 day moving averages.
(Short Term Bullish)
On the 2nd daily chart price it can be seen how important the yellow band daily resistance zone @ 114.61-116.04 is going back to 2015. It broke above this key resistance level recently and closed the week above the short term trend 50 and 200 day moving averages.
(Short Term Bullish)
Euro Weekly Chart
The weekly chart shows the Euro's steady decline from its early 2018 peak. It found support @ 107.99-108.46, and recently broke resistance @ 114.47-114.62.
This past week the Euro closed the week above the intermediate trend 20 week + 65 week moving averages.
(Intermediate Term Bullish)
This past week the Euro closed the week above the intermediate trend 20 week + 65 week moving averages.
(Intermediate Term Bullish)
Euro Monthly
For the month of November the Euro has gained +1.73%. On a monthly closing basis it closed the month of October above the long term trend 10 month moving average keeping the long term outlook to bullish until months end.
(Long Term Bullish)
(Long Term Bullish)
UK Pound (Bullish Bias)
U.K. Pound Daily Charts
U.K. Pound Weekly Chart
U.K. Pound Monthly Chart
The British Pound gained +0.60% over the past week. Clearly the ongoing Brexit saga will continue to weigh heavily upon cable's performance over the next several years but it has provided strong returns over the past 3 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 above its short term trend daily 50 +200 day moving averages and above the intermediate term trend 20 + 65 week moving averages. For the month of November it has gained +2.53% and closed the month of October above its long term 10 month moving average (which technically keeps the long term bullish until months end).
(Short Term Bullish)
(Intermediate Term Bullish)
(Long Term Bullish)
Support / Resistance Levels (based upon close):
Weekly: 129.19 /132.94
Monthly: 121.33 /133.09
Critical levels to watch on the Pound remain the respective weekly and monthly reactionary closing prices following the Brexit vote in June 2016:
- 136.76 weekly close (weekly close 20 June 2016 following vote results)
- 133.09 monthly close (monthly close 30 June 2016 following vote results)
This past week the Pound closed the week above its short term trend daily 50 +200 day moving averages and above the intermediate term trend 20 + 65 week moving averages. For the month of November it has gained +2.53% and closed the month of October above its long term 10 month moving average (which technically keeps the long term bullish until months end).
(Short Term Bullish)
(Intermediate Term Bullish)
(Long Term Bullish)
Support / Resistance Levels (based upon close):
Weekly: 129.19 /132.94
Monthly: 121.33 /133.09
Australian Dollar (Bullish Bias)
Australian Dollar Daily Chart
Australian Dollar Weekly Chart(s)
Australian Dollar Monthly Chart
The Australian Dollar gained +0.48% over the past week and continues to strongly recover off its recent lows (it lost -44% from its 2011 peak to its recent lows).
For the month of November the Aussie dollar has gained +3.91%. It closed the week above the short term trend 50 + 200 day moving averages and above the intermediate term trend 20 + 65 week moving averages. It closed the month of October above the long term trend 10 month moving average keeping the long term outlook bullish until months end.
(Short Term Bullish)
(Intermediate Term Bullish)
(Long Term Bullish)
Support / Resistance Levels (based upon close):
Weekly: 71.71 / 73.40
Monthly: 70.17 / 76.59
For the month of November the Aussie dollar has gained +3.91%. It closed the week above the short term trend 50 + 200 day moving averages and above the intermediate term trend 20 + 65 week moving averages. It closed the month of October above the long term trend 10 month moving average keeping the long term outlook bullish until months end.
(Short Term Bullish)
(Intermediate Term Bullish)
(Long Term Bullish)
Support / Resistance Levels (based upon close):
Weekly: 71.71 / 73.40
Monthly: 70.17 / 76.59
Canadian Dollar (Bullish Bias)
Canadian Dollar Daily Chart
Canadian Dollar Weekly Chart
Canadian Dollar Monthly Chart
The Canadian dollar gained +0.32% 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 above the intermediate term trend 20 + 65 week moving averages. For the month of November the Loonie has gained +1.69%. It continues to advance and closed the month of October above the long term trend 10 month moving average keeping the long term bullish until months end.
(Short Term Bullish)
(Intermediate Term Bullish)
(Long Term Bullish)
Support / Resistance Levels (based upon close)
Weekly: 73.83 / 76.98
Monthly: 73.20 / 77.09
The Loonie closed the week above the short term trend 50 + 200 day moving averages and above the intermediate term trend 20 + 65 week moving averages. For the month of November the Loonie has gained +1.69%. It continues to advance and closed the month of October above the long term trend 10 month moving average keeping the long term bullish until months end.
(Short Term Bullish)
(Intermediate Term Bullish)
(Long Term Bullish)
Support / Resistance Levels (based upon close)
Weekly: 73.83 / 76.98
Monthly: 73.20 / 77.09
Key Weekly Returns (week ending 20 November 2020):
|
Countries/Regions
World Equities ACWI (iShares MSCI ACWI Index Fund) North American Equities SPY (S&P 500 SPDRs) QQQ (PowerShares QQQ Trust) IWM (Russell 2000 iShares) EWC (Canada iShares) |
Characteristics
World Equity Fund U.S. Large Cap S&P 500 Index U.S. NASDAQ 100 Fund U.S. Russell 2000 Small Cap Fund Canada |
Week % Change
+0.41% -0.77% -0.19% +2.31% +2.88% |
Non-North America Equities
|
VGK (Vanguard European VIPERs) EPP (iShares MSCI Pacific ex-Japan ) EWJ (Japan iShares) EEM (iShares MSCI Emerging Markets) ILF (Latin America 40 Index iShares) Bonds
BND (Vanguard Total U.S. Bond Market) BNDX (Vanguard International Bond ETF) TIP (iShares Barclays TIPS Bond Fund) PCY (PowerShares Emerging Markets Debt Portfolio) |
Europe/U.K Pacific ex-Japan (inc. Australia + NZ) Japan Emerging Markets Latin America US Total Bond (44% Gov't Tsy, 56%Corp) World Investment Grade Bonds ex-US Inflation Protected Gov't Bonds Emerging Market Sovereign Debt |
+1.12% +2.75% +2.15% +1.51% +3.44% +0.64% +0.39% +0.39% +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 |
+1.87% +2.46% -0.83% -1.79% +4.05% +4.05% |
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 |
-0.40%
+0.51% +0.73% +0.41% +0.20% +0.79% |
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 somewhat but remain below the pre-covid consolidation zone (amber box on chart). In order to confirm world growth is firming we would like to see commodities moving back above their pre-Covid collapse.
This past week price closed the week below the strong support @ 167.74-168.61 but has moved considerably above its near 40 year lows in March 2020.
They have since recovered somewhat but remain below the pre-covid consolidation zone (amber box on chart). In order to confirm world growth is firming we would like to see commodities moving back above their pre-Covid collapse.
This past week price closed the week below the strong support @ 167.74-168.61 but has moved considerably above its near 40 year lows in March 2020.
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 remain concerned about European financial stocks (represented below using the iShares MSCI European Financials ETF).
Of particular concern is Deutsche Bank which remains near 12 year lows (down over 95% from its 2007 peak!) DB has a massive derivatives exposure (currently estimated at $40T notional with net exposure near $100B) and should they be put forced into a position whereby they need to restructure it could potentially lead to a catastrophic ripple effects worldwide.
They announced a significant restructuring effort in the 2nd week of July, 2019 so we continue to keenly monitoring their price performance.
Chinese Equities
The Shanghai Composite index was higher this past week and was able to hold above support @ 3050-3147. Resistance remains @ 3317-3412.
Chinese growth remains key to both Emerging market performance as well as an indication of Developed markets demand. From its peak in mid-2015, the Shanghai index lost more than -50% to its recent lows. We would like to see significant strength return to China further indicating world economic growth has positively turned the corner.
Chinese growth remains key to both Emerging market performance as well as an indication of Developed markets demand. From its peak in mid-2015, the Shanghai index lost more than -50% to its recent lows. We would like to see significant strength return to China further indicating world economic growth has positively turned the corner.
PRECIOUS METALS
Precious metals (and their respective producers) remain an area we recommend all investors have at least a small position within at present. Precious metals perform well during times when real (inflation adjusted) interest rates are falling and/or when the USD is weak. Real global rates continue to fall (acting as a tailwind to PM's) while the USD had until recently been strong (acting as a headwind to PM's). As such, PM's have risen but not at the rate they will once the USD reverses direction (which it has now done).
Below is a ratio price chart of gold stocks (HUI; the "Gold Bugs" Index) to gold bullion going back to 1996 when the HUI first came into existence. As can be seen, whenever the HUI:GOLD ratio dips to below approximately 0.14 (the GREEN zone on the chart) has been a low-risk opportunity to purchase gold stocks.
Gold stocks recently exceeded their 1st target. They remain in the lower end of the "low-risk vs. high-reward" range and until recently remain near their cheapest valuations in 22 years. Historically purchases of gold equities when within the green-zone have been a very good long term buying opportunities and it now appears gold stocks are attempting to play "catch-up" to the price of bullion (with a lot of room to rise further).
Gold stocks recently exceeded their 1st target. They remain in the lower end of the "low-risk vs. high-reward" range and until recently remain near their cheapest valuations in 22 years. Historically purchases of gold equities when within the green-zone have been a very good long term buying opportunities and it now appears gold stocks are attempting to play "catch-up" to the price of bullion (with a lot of room to rise further).
Even more 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 as we expected but remains still fairly cheap relative to gold. There still appears to be room to run.
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 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 well below 0.85 (red line on the chart below).
- A Platinum/Gold ratio < 0.85 has only occurred 4.7% of the time back to 1971.
- Prior to recent lows, the lowest Platinum:Gold ratio since August 1971 (when the USD was removed from the gold standard) was hit on 20 Sept 1982 when it hit a ratio low of 0.689 (Platinum $300.40/Gold $436.00).
- If Platinum were to return to its most common ratio relative to Gold (1.0x-1.25x which has been common 35% of the time) it would imply a price rise of approximately 50-90% from recent levels.
Platinum now sits on a price support extending back to 2004 and, combined with its ratio relative to the price of gold, represents a compelling long term buy point.
The following charts and commentary (in italics; bold print is our emphasis) are sourced from Kitco from commentary sourced in Feb 2017 when the ratio was near 0.85 (Platinum has become even cheaper on a relative basis since the data was published):
Platinum to gold ratios show wide variance over the 46 year period ranging from highs above 2.5 before and soon after Nixon began taking the United States off the gold standard to periodic lows below 1.0:
Platinum to gold ratios show wide variance over the 46 year period ranging from highs above 2.5 before and soon after Nixon began taking the United States off the gold standard to periodic lows below 1.0:
Our data set covers 553 months beginning in January 1971. The distribution of ratios in both tabular and chart format follows:
Platinum/Gold Ratio: % of Months
Platinum/Gold Ratio: % of Months
- < 0.85: 4.7%
- .85-1.01: 5.0%
- 1.0-1.25: 34.7%
- 1.25-1.5: 19.3%
- 1.5-2.0: 15.4%
- 2.0-2.5: 8.9%
- > 2.5: 2.0%
From our data set and the distributions of monthly average platinum-gold ratios from January 1971 thru January 2017, I glean the following:
From a compendium of sources, the average crustal abundance of both metals is around 4 ppb. Based solely on this fact, platinum and gold should trade at about the same price.
And indeed, our compilation shows that for nearly 50% of the time since gold was decoupled from the world’s reserve currency and allowed to trade freely on exchanges, the price ratio has ranged from 0.85 to 1.25. That said, since January 1971, the average price of platinum has been $637/oz and gold has been $518/oz for an overall ratio of 1.23:1. Clearly there are other factors other than the nearly equal crustal abundances that account for this historic price relationship.
A variety of supply and demand factors cause platinum to trade at a premium to gold:
Fluctuations in the relative prices of platinum and gold are largely driven by:
Platinum functions both as a precious and industrial metal. It is usually tied to the price of gold in both short- and long-term trading patterns. In times of financial distress and economic turmoil, platinum tends to behave more like gold with widespread hoarding.
The platinum-gold ratio can be used to ascertain whether one metal is over- or undervalued with respect to the other. The current monthly average ratio below 0.85 is unusual and indicates that platinum is severely undervalued with respect to gold *
* The ratio recently hit 0.55 and remains near a record low.
- A ratio of less than 0.75 is a single outlier that occurred once during the second half of 1982 when overall ratios averaged 0.81.
- Ratios <0.85 are quite unusual at 4.7%. They occurred for two months in the first quarter of 1975, the aforementioned six months in 1982, in June-July of 1985, and for an ongoing run of 16 months that commenced in October 2015.
- Ratios from 0.85 to 1.0 constitute 15.0% of the record.
- Pt:Au from 1.0 to 1.25 is the most common range and comprises 34.7% of ratios since 1971.
- The ratios between 1.25 and 1.5 occur 19.3% of the time.
- Ratios from 1.5 to 2.0 make up 15.4% of the record.
- The 2.0-2.5 interval covers 8.9% of the months in our compendium.
- The 11 monthly outliers at >2.5 comprise 2.0% of the total record and have not occurred since 1971.
From a compendium of sources, the average crustal abundance of both metals is around 4 ppb. Based solely on this fact, platinum and gold should trade at about the same price.
And indeed, our compilation shows that for nearly 50% of the time since gold was decoupled from the world’s reserve currency and allowed to trade freely on exchanges, the price ratio has ranged from 0.85 to 1.25. That said, since January 1971, the average price of platinum has been $637/oz and gold has been $518/oz for an overall ratio of 1.23:1. Clearly there are other factors other than the nearly equal crustal abundances that account for this historic price relationship.
A variety of supply and demand factors cause platinum to trade at a premium to gold:
- Platinum is a much smaller market. Cumulative world production of platinum is estimated to be about 5% of gold (9400 tonnes versus 182,000 tonnes). From 1994-2014, 3700 tonnes of platinum were mined versus 52,600 tonnes of gold or about 7% (source: USGS).
- Platinum is largely an industrial metal. Catalytic converters, electronics, petroleum and chemical catalysts, medical technologies, and many minor uses constitute over 60% of its annual demand. Around 30% is used in jewelry and 10% for investment demand. Also, 30% of the annual platinum supply now comes from recycling, mostly from catalytic converters. Some demand is consumed and lost to the marketplace.
- Gold is overwhelmingly a precious metal; 90% is used in jewelry and investments and only 10% in industrial applications. An estimated 98% of all the gold ever mined in the world remains available and held in jewelry, by central banks, in private hoards, and as fabricated products (source: USGS).
- About 70% of yearly platinum mine supply comes from South Africa, a geopolitically risky country. Much new platinum is a by-product of nickel-copper mining and smelting; therefore, annual platinum production is dependent on the supply-demand fundamentals and prices of these primary metals.
Fluctuations in the relative prices of platinum and gold are largely driven by:
- the overall growth and health of the world’s economy and in the case of platinum, the automotive industry;
- labor, power, currency, and political issues in South Africa that cause major perturbations in the platinum supply;
- safe haven hoarding of gold and to a much lesser extent, platinum, in times of economic uncertainty and major geopolitical events; speculators moving in and out of paper markets of both metals (bullion exchanges, ETFs, and derivatives) and to a lesser extent, central bank trading of physical gold.
Platinum functions both as a precious and industrial metal. It is usually tied to the price of gold in both short- and long-term trading patterns. In times of financial distress and economic turmoil, platinum tends to behave more like gold with widespread hoarding.
The platinum-gold ratio can be used to ascertain whether one metal is over- or undervalued with respect to the other. The current monthly average ratio below 0.85 is unusual and indicates that platinum is severely undervalued with respect to gold *
* The ratio recently hit 0.55 and remains near a record low.
Elliott Wave
We use Elliott Wave theory in conjunction with cycle analysis to attempt to "crystal ball" what to expect going forward. We have included some basic information below for those who might be interested followed by our current interpretation/analysis.
The Elliott wave principle is a form of technical analysis that some traders use to analyze financial market cycles and forecast market trends by identifying extremes in investor psychology, highs and lows in prices, and other collective factors. Ralph Nelson Elliott (1871–1948), a professional accountant, discovered the underlying social principles and developed the analytical tools in the 1930s. He proposed that market prices unfold in specific patterns, which practitioners today call Elliott waves, or simply waves. Elliott published his theory of market behavior in the book The Wave Principle in 1938, summarized it in a series of articles in Financial World magazine in 1939, and covered it most comprehensively in his final major work, Nature’s Laws: The Secret of the Universe in 1946. Elliott stated that "because man is subject to rhythmical procedure, calculations having to do with his activities can be projected far into the future with a justification and certainty heretofore unattainable."
The Elliott Wave Principle posits that collective investor psychology, or crowd psychology, moves between optimism and pessimism in natural sequences. These mood swings create patterns evidenced in the price movements of markets at every degree of trend or time scale.
In Elliott's model, market prices alternate between an impulsive, or motive phase, and a corrective phase on all time scales of trend, as the illustration shows. Impulses are always subdivided into a set of 5 lower-degree waves, alternating again between motive and corrective character, so that waves 1, 3, and 5 are impulses, and waves 2 and 4 are smaller retraces of waves 1 and 3. Corrective waves subdivide into 3 smaller-degree waves starting with a five-wave counter-trend impulse, a retrace, and another impulse.
In a bear market the dominant trend is downward, so the pattern is reversed—five waves down and three up. Motive waves always move with the trend, while corrective waves move against it.
In Elliott's model, market prices alternate between an impulsive, or motive phase, and a corrective phase on all time scales of trend, as the illustration shows. Impulses are always subdivided into a set of 5 lower-degree waves, alternating again between motive and corrective character, so that waves 1, 3, and 5 are impulses, and waves 2 and 4 are smaller retraces of waves 1 and 3. Corrective waves subdivide into 3 smaller-degree waves starting with a five-wave counter-trend impulse, a retrace, and another impulse.
In a bear market the dominant trend is downward, so the pattern is reversed—five waves down and three up. Motive waves always move with the trend, while corrective waves move against it.
Wave 1 (I): Wave one is rarely obvious at its inception. When the first wave of a new bull market begins, the fundamental news is almost universally negative. The previous trend is considered still strongly in force. Fundamental analysts continue to revise their earnings estimates lower; the economy probably does not look strong. Sentiment surveys are decidedly bearish, put options are in vogue, and implied volatility in the options market is high. Volume might increase a bit as prices rise, but not by enough to alert many technical analysts.
Wave 2 (II): Wave two corrects wave one, but can never extend beyond the starting point of wave one. Typically, the news is still bad. As prices retest the prior low, bearish sentiment quickly builds, and "the crowd" haughtily reminds all that the bear market is still deeply ensconced. Still, some positive signs appear for those who are looking: volume should be lower during wave two than during wave one, prices usually do not retrace more than 61.8% (see Fibonacci section below) of the wave one gains, and prices should fall in a three wave pattern.
Wave 3 (III): Wave three is usually the largest and most powerful wave in a trend (although some research suggests that in commodity markets, wave five is the largest). The news is now positive and fundamental analysts start to raise earnings estimates. Prices rise quickly, corrections are short-lived and shallow. Anyone looking to "get in on a pullback" will likely miss the boat. As wave three starts, the news is probably still bearish, and most market players remain negative; but by wave three's midpoint, "the crowd" will often join the new bullish trend. Wave three often extends wave one by a ratio of 1.618:1.
Wave 4 (IV): Wave four is typically clearly corrective. Prices may meander sideways for an extended period, and wave four typically retraces less than 38.2% of wave three (see Fibonacci relationships below). Volume is well below than that of wave three. This is a good place to buy a pull back if you understand the potential ahead for wave 5. Still, fourth waves are often frustrating because of their lack of progress in the larger trend.
Wave 5 (V): Wave five is the final leg in the direction of the dominant trend. The news is almost universally positive and everyone is bullish. Unfortunately, this is when many average investors finally buy in, right before the top. Volume is often lower in wave five than in wave three, and many momentum indicators start to show divergences (prices reach a new high but the indicators do not reach a new peak). At the end of a major bull market, bears may very well be ridiculed (recall how forecasts for a top in the stock market during 2000 were received).
Wave A: Corrections are typically harder to identify than impulse moves. In wave A of a bear market, the fundamental news is usually still positive. Most analysts see the drop as a correction in a still-active bull market. Some technical indicators that accompany wave A include increased volume, rising implied volatility in the options markets and possibly a turn higher in open interest in related futures markets.
Wave B: Prices reverse higher, which many see as a resumption of the now long-gone bull market. Those familiar with classical technical analysis may see the peak as the right shoulder of a head and shoulders reversal pattern. The volume during wave B should be lower than in wave A. By this point, fundamentals are probably no longer improving, but they most likely have not yet turned negative.
Wave C: Prices move impulsively lower in five waves. Volume picks up, and by the third leg of wave C, almost everyone realizes that a bear market is firmly entrenched. Wave C is typically at least as large as wave A and often extends to 1.618 times wave A or beyond.
Wave 2 (II): Wave two corrects wave one, but can never extend beyond the starting point of wave one. Typically, the news is still bad. As prices retest the prior low, bearish sentiment quickly builds, and "the crowd" haughtily reminds all that the bear market is still deeply ensconced. Still, some positive signs appear for those who are looking: volume should be lower during wave two than during wave one, prices usually do not retrace more than 61.8% (see Fibonacci section below) of the wave one gains, and prices should fall in a three wave pattern.
Wave 3 (III): Wave three is usually the largest and most powerful wave in a trend (although some research suggests that in commodity markets, wave five is the largest). The news is now positive and fundamental analysts start to raise earnings estimates. Prices rise quickly, corrections are short-lived and shallow. Anyone looking to "get in on a pullback" will likely miss the boat. As wave three starts, the news is probably still bearish, and most market players remain negative; but by wave three's midpoint, "the crowd" will often join the new bullish trend. Wave three often extends wave one by a ratio of 1.618:1.
Wave 4 (IV): Wave four is typically clearly corrective. Prices may meander sideways for an extended period, and wave four typically retraces less than 38.2% of wave three (see Fibonacci relationships below). Volume is well below than that of wave three. This is a good place to buy a pull back if you understand the potential ahead for wave 5. Still, fourth waves are often frustrating because of their lack of progress in the larger trend.
Wave 5 (V): Wave five is the final leg in the direction of the dominant trend. The news is almost universally positive and everyone is bullish. Unfortunately, this is when many average investors finally buy in, right before the top. Volume is often lower in wave five than in wave three, and many momentum indicators start to show divergences (prices reach a new high but the indicators do not reach a new peak). At the end of a major bull market, bears may very well be ridiculed (recall how forecasts for a top in the stock market during 2000 were received).
Wave A: Corrections are typically harder to identify than impulse moves. In wave A of a bear market, the fundamental news is usually still positive. Most analysts see the drop as a correction in a still-active bull market. Some technical indicators that accompany wave A include increased volume, rising implied volatility in the options markets and possibly a turn higher in open interest in related futures markets.
Wave B: Prices reverse higher, which many see as a resumption of the now long-gone bull market. Those familiar with classical technical analysis may see the peak as the right shoulder of a head and shoulders reversal pattern. The volume during wave B should be lower than in wave A. By this point, fundamentals are probably no longer improving, but they most likely have not yet turned negative.
Wave C: Prices move impulsively lower in five waves. Volume picks up, and by the third leg of wave C, almost everyone realizes that a bear market is firmly entrenched. Wave C is typically at least as large as wave A and often extends to 1.618 times wave A or beyond.
S&P 500 Weekly Elliott Wave Chart
For those who are new to Elliott wave, it is essential to understand as market participant psychology changes (and, as a consequence, the various waves unfold in specific patterns) objective analysis requires readjustment of counts as the waves unfold. Elliott wave is not a "crystal ball" but more a quantitative tool to analyze changes in market psychology as market conditions evolve. Elliott wave analysis can be quite confusing and intricate but in our experience we find it is best used as a "road map" towards the bigger picture.
Below is the current long term view of the equity market from 1929-Present. Clearly the 2008-2009 market decline was of such stature as to be historic (as "historic" as the 1929-1932 market crash). Given such, we have begun to think out of the box with respect to Elliott Wave as it has recently progressed.
In broadest terms markets cycle through 65-80 year "Grand Super-Cycles" (generally coinciding with generational demographic expansion/contraction). If one were to use the end of the 1929-1932 market crash/depression as the beginning point for a new Grand Super-Cycle, it could be argued a complete 77 year Grand Super-Cycle began in 1932 and ended in 2009. A 5 wave Super-Cycle advance (SC-1, SC-2, SC-3, SC-4, SC-5) occurred between 1932 and 2000 (68 years in length) followed by a 9 year Super-Cycle decline (SC-A, SC-B, SC-C) from 2000-2009 (culminating in the 2007-2009 market decline; the worst since the great depression). If this is the case we would have completed a full 77 year Elliott Wave Grand Super-Cycle pattern from 1932-2009 (5 wave Super-Cycle advance with a 3 wave Super-Cycle decline) and have embarked on a new 65-80 year Grand Super-Cycle beginning in March 2009.
We have marked this Grand Super-Cycle on the below chart with the 68 year SC-1 through to the SC-5 advance (1932-2000) followed by the 9 year SC-A, SC-B, and SC-C decline (2000-2009). If this is the case, an argument can be made the period from 2009-to-Present is unfolding as follows:
Below is the current long term view of the equity market from 1929-Present. Clearly the 2008-2009 market decline was of such stature as to be historic (as "historic" as the 1929-1932 market crash). Given such, we have begun to think out of the box with respect to Elliott Wave as it has recently progressed.
In broadest terms markets cycle through 65-80 year "Grand Super-Cycles" (generally coinciding with generational demographic expansion/contraction). If one were to use the end of the 1929-1932 market crash/depression as the beginning point for a new Grand Super-Cycle, it could be argued a complete 77 year Grand Super-Cycle began in 1932 and ended in 2009. A 5 wave Super-Cycle advance (SC-1, SC-2, SC-3, SC-4, SC-5) occurred between 1932 and 2000 (68 years in length) followed by a 9 year Super-Cycle decline (SC-A, SC-B, SC-C) from 2000-2009 (culminating in the 2007-2009 market decline; the worst since the great depression). If this is the case we would have completed a full 77 year Elliott Wave Grand Super-Cycle pattern from 1932-2009 (5 wave Super-Cycle advance with a 3 wave Super-Cycle decline) and have embarked on a new 65-80 year Grand Super-Cycle beginning in March 2009.
We have marked this Grand Super-Cycle on the below chart with the 68 year SC-1 through to the SC-5 advance (1932-2000) followed by the 9 year SC-A, SC-B, and SC-C decline (2000-2009). If this is the case, an argument can be made the period from 2009-to-Present is unfolding as follows:
- The market is currently within the early stages of Primary Wave III implying a long-term upwards trend for many more years.
- The market is currently within Major Wave ((3)) projecting upwards towards new all time highs.
- Intermediate wave ii wave completed in May 2019 and we are currently within intermediate wave iii expecting new all time highs.
Alternately, our original EWT weekly chart (shown below and our preferred count) we have been following since 2009 is annotated with "classic" Elliott Wave indications projecting we are within the ending stages of the 2009-present bull market (near the top of intermediate wave b of a wave IV decline to be followed by a final wave V advance to new all-time highs to end the bull market from 2009).
At present we remained torn between 2 possible Elliott Wave counts:
- If the market is within Major Wave 3 as per the 1st chart, we would expect a large multi-year advance in Major wave 3. This would project much higher equity prices into the future.
- Alternately, if the have completed Primary Wave III of the entire bull market advance from 2009-2018, a Primary Wave IV is currently in process (a-b-c). At its conclusion (target near 1800); we would project a Primary Wave 5 advance to new all-time highs to end the bull market.
The difference between the 2 counts is either a continued "new" bull market (scenario 1) or the last stages of a 11 year bull market with a large bear market on the horizon (scenario 2).
Below are the Elliott Wave counts for ES (the S&P 500 mini continuous futures contract) from 2009. This chart confirms we should expect a Wave V advance once this current decline ends to new all time highs (projections in orange box).
S&P 500 Futures Contract (Weekly chart)
Market Valuation
U.S. (NYSE) Margin Debt
We have been studying with interest the current margin debt on US markets. For those who are unfamiliar, margin debt is the amount of "loans" taken out by market speculators to leverage up their equity positions. During normal bull markets margin debt will increase as the market continues to climb. This increased margin debt amplifies equity market prices. However, at some point speculators become nervous and begin to reduce their margin positions. This reduction in margin is like letting the air out of a balloon and deflates equity asset prices.
As can be seen on the below graphic, both the 2000 and 2007 market tops were signaled in advance by tops in margin debt (margin debt not inflation adjusted on this chart):
As can be seen on the below graphic, both the 2000 and 2007 market tops were signaled in advance by tops in margin debt (margin debt not inflation adjusted on this chart):
The following chart (source: Doug Short) shows US equity margin debt adjusted for inflation. As can be seen, in both 2000 and 2007 inflation-adjusted margin debt peaked and then began to decline leading to the tops in the S&P 500 index. As such, margin debt rollovers acts as a good lead indicator of possible future market weakness.
Since peaking in early 2018 margin debt has shown a significant decline. A similar decline occurred in 2015 (and did not derail the bull market) but the recent decline is a concern given how late we are in the market cycle combined with the extreme levels of margin debt relative to past market cycles.
U.S. Equity market Valuation Models
(Source: D. Short)
Below is a graph representing 4 different long-term valuation measures plotted back to 1900 (118 years):
As of 31 October the average of these 4 measures places the U.S. stock market (S&P 500 index) as being 162% overvalued relative to its long term geometric mean. This remains near the 2nd highest valuation in the history of the stock market going back to 1900. This level remains over 2 standard deviations above the mean and above the market peaks in both 2007 and 1929. It is only surpassed by the 2000 dotcom bubble peak.
- The Crestmont Research P/E Ratio
- The cyclical P/E ratio using the trailing 10-year earnings as the divisor
- The Q Ratio, which is the total price of the market divided by its replacement cost
- The relationship of the S&P Composite price to a regression trendline
As of 31 October the average of these 4 measures places the U.S. stock market (S&P 500 index) as being 162% overvalued relative to its long term geometric mean. This remains near the 2nd highest valuation in the history of the stock market going back to 1900. This level remains over 2 standard deviations above the mean and above the market peaks in both 2007 and 1929. It is only surpassed by the 2000 dotcom bubble peak.
Another popular valuation metric is know as the "Buffett-Indicator". In an interview with Fortune magazine back in 2001 Warren Buffett remarked "it is probably the best single measure of where valuations stand at any given moment."
The indicator measures the price of Corporate Equities (Mkt Cap) to Gross Domestic Product (GDP) as a ratio going back to the 1950's. As can be seen below, the ratio of equity prices relative to last reported GDP currently stands at 181.4%. It recently exceeded the recent 2015 peak of 128.9% and the 2000 equity peak of 159.2% in terms of equity overvaluation relative to economic output.
The de-trended graph indicates it would take a -73% market decline to return valuations back to the long term de-trended regression line (shown in red on the 2nd chart).
7-Year Asset Class Real Return Forecast
(Source: GMO LLC)
(Source: GMO LLC)
Each month GMO (Grantham, Mayo, Van Otterloo & Co.) publishes a forward forecast for expected annual real rates of return (i.e. inflation adjusted) for a number of different asset classes with a 7 year forward outlook. They have historically had a very good track record (0.97 correlation) of estimating forward 7 year asset class returns based primarily upon current valuations combined with mean reversion. Charts are published following analysis of the previous months data.
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.
12-Year US Equity Real Return Forecast
(Source: Hussman Funds)
(Source: Hussman Funds)
Margin-Adjusted Price/Earnings (MAPE) Ratio
Non-financial Market Capitalization to Corporate Gross-Value Added (Market Cap/GVA)
S&P 500 12 year forward projected annual returns (Mkt Cap-GVA)
S&P 500 12 year forward projected annual returns (margin-adjusted MAPE)
Balanced Portfolio 12 year forward projected annual returns
(60% in the S&P 500, 30% in Treasury bonds, and 10% in Treasury bills)
(60% in the S&P 500, 30% in Treasury bonds, and 10% in Treasury bills)
Dr. John Hussman uses a unique measure of estimating future equity returns over a 12 year period based upon market capitalization relative to gross corporate value added. He claims the measure has a 91.9% correlation to actual S&P 500 future returns over a 12 year horizon. As per his previous explanations:
"Across the scores of measures I’ve evaluated or created over three decades of research, the ratio of non-financial market capitalization to corporate gross value added (essentially corporate revenues, including estimated foreign revenues, excluding double-counting of intermediate inputs) is best correlated to actual subsequent market returns over a 10-12 year horizon".
As can be seen on the above chart, since 1950 his approach has correlated quite closely with future returns (blue line is his estimates and the red line the subsequent returns 12 years later). Currently his calculations project a "buy and hold" rate of return on the S&P 500 index of -0.6% nominal per year out to 2028 should one employ a "buy and hold" strategy. Clearly tactical asset allocation will be required as we transition to the back half of the current market cycle.
His recent conclusion:
" At present, the valuation measures that we find best correlated with actual subsequent S&P 500 total returns are at the most offensive levels in history, matching or eclipsing the 1929 and 2000 extremes. Even considering the level of interest rates, economic growth, and other factors, the S&P 500 currently stands about 2.8 times the level that we believe the index will revisit over the completion of the current market cycle, implying an interim market loss something on the order of -64%. Moreover, the most reliable valuation measures uniformly imply the likelihood of negative total returns in the S&P 500 over the coming 10-12 year period."
Clearly the high level of current market valuations does not bode well for the "buy and hope" investor.
"Across the scores of measures I’ve evaluated or created over three decades of research, the ratio of non-financial market capitalization to corporate gross value added (essentially corporate revenues, including estimated foreign revenues, excluding double-counting of intermediate inputs) is best correlated to actual subsequent market returns over a 10-12 year horizon".
As can be seen on the above chart, since 1950 his approach has correlated quite closely with future returns (blue line is his estimates and the red line the subsequent returns 12 years later). Currently his calculations project a "buy and hold" rate of return on the S&P 500 index of -0.6% nominal per year out to 2028 should one employ a "buy and hold" strategy. Clearly tactical asset allocation will be required as we transition to the back half of the current market cycle.
His recent conclusion:
" At present, the valuation measures that we find best correlated with actual subsequent S&P 500 total returns are at the most offensive levels in history, matching or eclipsing the 1929 and 2000 extremes. Even considering the level of interest rates, economic growth, and other factors, the S&P 500 currently stands about 2.8 times the level that we believe the index will revisit over the completion of the current market cycle, implying an interim market loss something on the order of -64%. Moreover, the most reliable valuation measures uniformly imply the likelihood of negative total returns in the S&P 500 over the coming 10-12 year period."
Clearly the high level of current market valuations does not bode well for the "buy and hope" investor.
Global Asset Class 10-year Expected Nominal Return Forecast
(data as of 30 September 2020)
(Source: Research Affiliates)
(data as of 30 September 2020)
(Source: Research Affiliates)
Below is the projected 10 year nominal (not inflation adjusted) returns for the majority of global assets.
Data continues to point to Emerging Market and EAFE (Europe, Africa and Far East) equities as providing the greatest returns over the next 10 years with 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
At left is a 20 year chart of the seasonal monthly performance of the Dow Jones Global Index.
The number at the top of the column is the percentage of time the month is positive and at the bottom is the average % gain/loss for the month.
As can be seen, over the past 20 years the period October-April yearly offers the highest potential global equity market returns (cumulative +5.5% average return) while the period May-September offers little in total return (-2.1% cumulative average return).
The number at the top of the column is the percentage of time the month is positive and at the bottom is the average % gain/loss for the month.
As can be seen, over the past 20 years the period October-April yearly offers the highest potential global equity market returns (cumulative +5.5% average return) while the period May-September offers little in total return (-2.1% cumulative average return).
In the interest of moving more towards more recent market action broken down by region, below is the past 10 years seasonal returns for our selected benchmark ETF's:
- Global Equities (VT)
- U.S. Equities (VTI)
- European Equities (VGK)
- Asia Pacific Equities (VPL)
- Emerging Market Equities (VWO)
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It is interesting to note over the past 10 years the month of September has begun to perform better than it has in the past. Also it is interesting to note the exceptionally poor equity returns in Europe during the month of June with very strong returns in July. This is an interesting phenomenon that can be used to potentially time regional equity exposure.
S&P 500 Seasonality (historical 50 year look-back annual seasonality)
"Turning to the months ahead, the performance for January and February is rather lacklustre compared to the months that bookend this start of year period. The S&P 500 Index has gained an average of 0.8% and 0.2%, respectively in the first two months of the year, based on the past 50 periods. These months are easily the weakest of the best six month trend for stocks. The large-cap benchmark has closed positive just over half of the time (56%) in January and February, making this winter lull little better than a flip of a coin in terms of the frequency of success.. Returns for January have ranged from a loss of 8.6% in 2009 to a gain of 13.2% in 1987. Performance tends to gyrate in the middle of January with the majority of the strength achieved in the first few days and last few days of the period".
Ned Davis Research 2020 Composite Model
The following is the composite directional model forecast for the S&P 500 index for 2020 based upon the following parameters (each equal weighted within the composite model) for data from 1928-2019:
- 10 year Decennial Market Cycle (Year ending in 0 = Last Year of Decade)
- 4 year Presidential Market Cycle (Year 4 = U.S. Election Year)
- 1 year Annual Seasonal Market Cycle
The 2020 composite model indicates:
- a strong open to the year in January with a pullback into end Jan/early Feb.
- generally strong equity markets from early February into late March/early April.
- a quick reversal into late May (typically associated with the political conventions to choose the candidate to run for president).
- a run-up into September associated with the U.S. presidential campaigns.
- a quick fall into the election associated with uncertainty.
- a rise into year end once the election has passed.
U.S. 4 Year Presidential Election Cycle
*2020 is Year 4 (Election Year)
As can be seen on the chart above, historically since 1928 the 2nd year of the 4 year Presidential Cycle tends to provide the worst returns of the 4 year cycle.
While we do not make investment decisions strictly based upon cycle analysis, we are cognizant of the historical nature of these cycles and tend to be a bit more wary as they approach.
While we do not make investment decisions strictly based upon cycle analysis, we are cognizant of the historical nature of these cycles and tend to be a bit more wary as they approach.
Presidential Cycle S&P 500 returns (inc. dividends):
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1988-Year 4: +12.40%
1989-Year1: +27.25% 1990-Year 2: -6.56% 1991-Year 3: +26.31% 1992-Year 4: +4.46% 1993-Year 1: +7.06% 1994-Year 2: -1.54% 1995-Year 3: +34.11% 1996-Year 4: +20.26% 1997-Year 1: +31.01% 1998-Year 2: +26.67% 1999-Year 3: +19.53% 2000-Year 4: -10.14% |
2001-Year 1: -13.04%
2002-Year 2: -23.37% 2003-Year 3: +26.38% 2004-Year 4: +8.99% 2005-Year 1: +3.00% 2006-Year 2: +13.62% 2007-Year 3: +3.53% 2008-Year 4: -38.49% 2009-Year 1: +23.45% 2010-Year 2: +12.78% 2011-Year 3: +0.00% 2012-Year 4: +13.41% 2013-Year 1: +29.60% |
2014-Year 2: +11.39%
2015-Year 3: -0.73% 2016-Year 4: +11.96% 2017-Year 1: +21.83% 2018-Year 2: -4.38% 2019-Year 3: +31.49% 2020-Year 4: |
U.S. Recessions and Equity Performance
Since 1929 there have been 14 recessions in the U.S. as follows:
Below is the equity performance during each of these periods:
