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Market/Model Commentary
The ECAM Composite 5-Factor model remains GREEN and no changes are indicated (exceptions as annotated below).
- There have been substantial negative changes to several sub-components within our 5-Factor model over the past several weeks. While this does not immediately change our short term outlook, this model shift has the potential to lead to a major shift in our long term model (and model fund allocations).
- We continue to monitor global macroeconomic indicators on a real time basis to indicate when a model shift is appropriate. As of today no action is warranted (but we remain very close).
ECAM 5-Factor Model
(as of market close 21 September 2018)
|
Economic Model
Valuation Model Technical Model Sentiment Model Financial Stress Model |
YELLOW
RED GREEN YELLOW GREEN |
|
GREEN |
"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
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
Weekly Summary
Another week of equity market gains as traders pushed both the S&P 500 and Dow Jones Industrial indexes to new all-time highs despite another round of tariff announcements in the U.S.-China trade spat ($200 billion @ 10% tariff), no progress in NAFTA negotiations between the U.S. and Canada, and mixed economic data.
On the U.S. economic front, housing data continued to provide mixed signals as building permits and existing home sales declined year over year, while new housing starts were up nearly 10% from a year ago. Business manufacturing indexes out of the Philadelphia and New York Federal Reserve banks moved in opposite directions, though both readings were consistent with continued economic growth. The Leading Economic Index, a gauge of 10 forward-looking business cycle indicators, dipped from the prior reading but suggested 3% economic growth over the balance of the year remains likely.
In the bond markets, the yield on the U.S. 10-year Treasury note held above 3% with near record short positions continuing to be held by speculators. U.S. bond markets were lower on the week on the strong rise in yields while International bond markets were overall flat.
Outside the U.S., equity indexes outperformed despite continued political tensions and lackluster economic data that included worse-than-expected flash PMI manufacturing reports out of several countries, including Germany, France, the Eurozone, and Japan. The U.S.-China trade headlines were in focus, though regional politics also garnered the spotlight in Europe with a series of Brexit negotiations failing to move the UK closer to succession from the European Union. Italy, also in the midst of political turbulence, continued to seek compromise within its government ranks as officials attempted to reassure markets that the country intends to reign in government spending with the forthcoming budget. In Asia, China’s Shanghai Composite surged more than 4% this week after investors viewed the new tariffs as less drastic than initially feared. Comments from Chinese officials that the government would not resort to devaluing the yuan also helped pacify markets. Japanese stocks also outperformed in the region as the Nikkei rose every day this week, getting a boost from Prime Minister Shinzo Abe’s re-election victory that solidifies his role until 2021, as well as the status-quo outcome of the Bank of Japan’s monetary policy meeting.
At weeks end global equities closed within their recent range defined by the Feb-Mar 2018 lows and the subsequent rebound levels. There remains significant divergence between U.S. equity market performance and other global regional equity returns and any significant movement towards resolution of the ongoing trade issues would rapidly close the gap between U.S. and ex-U.S. equity returns.
No immediate changes to portfolio positions are indicated according to our model outputs. Global equities continue range-bound on U.S. equity strength however we continue to closely monitoring Europe, Asia Pacific and Emerging markets as the recent economic data and growth prospects have slipped over the past 3 months and they have begun to under-perform US equities.
On the U.S. economic front, housing data continued to provide mixed signals as building permits and existing home sales declined year over year, while new housing starts were up nearly 10% from a year ago. Business manufacturing indexes out of the Philadelphia and New York Federal Reserve banks moved in opposite directions, though both readings were consistent with continued economic growth. The Leading Economic Index, a gauge of 10 forward-looking business cycle indicators, dipped from the prior reading but suggested 3% economic growth over the balance of the year remains likely.
In the bond markets, the yield on the U.S. 10-year Treasury note held above 3% with near record short positions continuing to be held by speculators. U.S. bond markets were lower on the week on the strong rise in yields while International bond markets were overall flat.
Outside the U.S., equity indexes outperformed despite continued political tensions and lackluster economic data that included worse-than-expected flash PMI manufacturing reports out of several countries, including Germany, France, the Eurozone, and Japan. The U.S.-China trade headlines were in focus, though regional politics also garnered the spotlight in Europe with a series of Brexit negotiations failing to move the UK closer to succession from the European Union. Italy, also in the midst of political turbulence, continued to seek compromise within its government ranks as officials attempted to reassure markets that the country intends to reign in government spending with the forthcoming budget. In Asia, China’s Shanghai Composite surged more than 4% this week after investors viewed the new tariffs as less drastic than initially feared. Comments from Chinese officials that the government would not resort to devaluing the yuan also helped pacify markets. Japanese stocks also outperformed in the region as the Nikkei rose every day this week, getting a boost from Prime Minister Shinzo Abe’s re-election victory that solidifies his role until 2021, as well as the status-quo outcome of the Bank of Japan’s monetary policy meeting.
At weeks end global equities closed within their recent range defined by the Feb-Mar 2018 lows and the subsequent rebound levels. There remains significant divergence between U.S. equity market performance and other global regional equity returns and any significant movement towards resolution of the ongoing trade issues would rapidly close the gap between U.S. and ex-U.S. equity returns.
No immediate changes to portfolio positions are indicated according to our model outputs. Global equities continue range-bound on U.S. equity strength however we continue to closely monitoring Europe, Asia Pacific and Emerging markets as the recent economic data and growth prospects have slipped over the past 3 months and they have begun to under-perform US equities.
WEEKLY ASSET CLASS MONITOR
|
Asset Class
|
Region
|
ETF Ticker
|
Weekly
Return |
Year-to-Date
Return |
|
Equities
|
World
U.S. Europe Asia Pacific Emerging Market |
VT
VTI VGK VPL EEM |
+1.51%
+0.59% +2.56% +2.88% +3.03% |
+4.54%
+11.05% -0.59% -1.50% -7.66% |
|
Bonds
|
U.S. Bonds
International Bonds |
BND
BNDX |
-0.20%
-0.04% |
-1.85%
+1.13% |
|
Real Estate Equities
|
U.S. Real Estate
International Real Estate |
VNQ
VNQI |
-0.43%
+1.64% |
+1.66%
-3.53% |
|
Precious Metals Equites
|
Global Gold Miners
Global Silver Miners Gold Bullion ETF Silver Bullion ETF Platinum Bullion ETF |
RING
SIL GLD SLV PPLT |
+4.02%
+4.62% +0.42% +1.59% +3.98% |
-22.56%
-24.36% -8.22% -15.95% -11.15% |
As shown below, global equites had remained range-bound for 29 weeks (as defined by the 08 Feb closing lows and the 26 Feb subsequent market closing high) before the recent breakout attempts. Global equites closed the week slightly above their previous range-bound price zone with a slight bullish bias at present (entirely due to positive U.S. regional equity performance).
A breakdown of current regional divergences in equity performance is as follows:
Global equites remain overall bullish at present wholly due to the strong performance within U.S. equities lifting global equites higher. This is a concern as we like to see each of the specific regions contributing their respective portion to global equity returns. Emerging markets are becoming a concern as equity weakness in China (the largest emerging market component) is dragging down the sectors overall performance. It is unclear at present how much of this is associated with the potential for a trade war (which can change on the whim of a tweet from President Trump) and how much is a legitimate slowdown in Chinese economic performance. It remains on our radar screen for now until more data emerges but we note the Chinese have made several adjustments over the past several weeks to support the Yuan. Similar previous efforts resulted in bullish movement in currencies ex-USD and Emerging Market equity gains.
A breakdown of current regional divergences in equity performance is as follows:
- Global equites are attempting to break out of their consolidation zone (as defined by the market crash in late Jan-early Feb 2018 and subsequent rebound rally in late Feb 2018). Price remains above the ascending 200 day moving average. (Bullish)
- U.S. equities have broken to new all-time highs and total U.S. market index remains above the ascending 200 day moving average. (Bullish)
- European equites have been unable to break above their trading range. They remain below the now-flat 200 day moving average. (Bearish)
- Asia Pacific equities have been unable to break above their trading range and remain below the descending 200 day moving average. (Bearish)
- Emerging market equities have broken below the lows of their recent trading range and remain below the descending 200 day moving average. (Bearish)
Global equites remain overall bullish at present wholly due to the strong performance within U.S. equities lifting global equites higher. This is a concern as we like to see each of the specific regions contributing their respective portion to global equity returns. Emerging markets are becoming a concern as equity weakness in China (the largest emerging market component) is dragging down the sectors overall performance. It is unclear at present how much of this is associated with the potential for a trade war (which can change on the whim of a tweet from President Trump) and how much is a legitimate slowdown in Chinese economic performance. It remains on our radar screen for now until more data emerges but we note the Chinese have made several adjustments over the past several weeks to support the Yuan. Similar previous efforts resulted in bullish movement in currencies ex-USD and Emerging Market equity gains.
Below is the year-to-date returns for each of the monitored equity regions. As can be seen, as of Fridays market close only the U.S. equity region remain positive thus far in 2018 (with Europe, Asia Pacific & Emerging Markets having fallen to negative year-to-date returns). Overall global equities have delivered modestly positive returns thus far in 2018 (+4.54%) on the back of the U.S. market strength.
Below is our monitor of the top 6 U.S. technology companies and their recent market performance. Most mutual funds hold large positions in the following companies and should U.S. Large-cap technology companies begin to falter it would likely signal an end to the bull market (we consider these "Big 6" to be the the "canary in the coal mine" stocks):
- Alphabet (Google)
- Apple
- Amazon
- Microsoft
- Netflix
On July 25 Facebook was crushed on earnings outlooks. We have noted the event with a red vertical dotted line and one can note it appears this may have been the "high-watermark" for large cap tech companies. If so, this has the potential to begin to unwind quickly into the start of a bear market decline.
It is premature to say so as of this week close, but of immediate concern is Facebook and Google which have both drop below their 26 July respective lows (shown as a blue dashed horizontal line on each of the charts). It would appear now only Apple/Amazon/Microsoft are holding up U.S. equity markets .......
As mentioned previous, we continue to monitor the divergence between US equity market performance vs. the rest of the world. This is reflected below in the stark divergence between the U.S. Wiltshire 5000 index (BLUE) vs. the MSCI World ex-US Index (RED) year-to-date. Clearly trade war potentiality has made investors much more U.S. equity oriented since 03 May 2018.
The dichotomy in performance by region is further reflected in the following chart which shows the percentage return for each of the equity geographic regions since the market top on 26 January 2018:
As can be seen above, each of the equity regions experienced an approximate -10% decline from 26 Jan-03 Feb (dotted BLUE line). Since that time ongoing trade tensions have allowed U.S. markets to move above the 26 Jan 18 peak (approx. +4%) while other regions continue to struggle to regain their footing (Europe/Asia Pacific approx. 7%, EM approx -17% below their Jan 2018 peaks).
The End of Global Quantitative Easing
The #1 concern that remains on our mind as we move towards the end of 2018 is how equity markets will react to the steady decline in global liquidity associated with Central Bank balance sheet normalization.
As is well documented, since the global financial crisis of 2008 central banks have injected trillions of dollars into the world's financial system by way of an untried/unproven financial engineering experiment known as "Quantitative Easing" (purchase of assets by way of printing money to support the equity/bond markets) . However, central banks are determined to shrink their balance sheets as per the below graph. At the current pace, it is projected in the 1st quarter of 2019 net liquidity will begin to be removed from the global financial system.
Below we have noted the various movements in QE since 2007. Each boxed area shows where central banks expanded their balance sheets and the subsequent global equity market gains. Of particular note is the short period in early 2015 (circled) where central bank liquidity reverted to "Quantitative Tightening" (net balance sheet reduction on a 12 month rate of change). This short period of reduction led to the largest equity market declines (-20%) of the current bull market.
As 2019 approaches we are mindful a repeat of 2015 (or worse) is highly likely.
As is well documented, since the global financial crisis of 2008 central banks have injected trillions of dollars into the world's financial system by way of an untried/unproven financial engineering experiment known as "Quantitative Easing" (purchase of assets by way of printing money to support the equity/bond markets) . However, central banks are determined to shrink their balance sheets as per the below graph. At the current pace, it is projected in the 1st quarter of 2019 net liquidity will begin to be removed from the global financial system.
Below we have noted the various movements in QE since 2007. Each boxed area shows where central banks expanded their balance sheets and the subsequent global equity market gains. Of particular note is the short period in early 2015 (circled) where central bank liquidity reverted to "Quantitative Tightening" (net balance sheet reduction on a 12 month rate of change). This short period of reduction led to the largest equity market declines (-20%) of the current bull market.
As 2019 approaches we are mindful a repeat of 2015 (or worse) is highly likely.
Hedgeye Risk Management LLC
As we appear to be approaching a potential turning point in global growth, we continue to utilize global macroeconomic data from Hedgeye Risk Management LLC to supplement our own macroeconomic model. Hedgeye is a U.S. based company which monitors 100's of global macro data points and uses a predictive tracking algorithm to attempt to forecast growth, inflation and policy (GIP) for 50 countries. Using the algorithm, they attempt to "crystal ball" where markets may go up to 4 quarters in advance.
Below is their current projections for a number of major world regions (as of 19 September 2018).
Below is their current projections for a number of major world regions (as of 19 September 2018).
It can be seen their algorithm current projects the U.S. to enter Quad 4 (slowing growth, falling inflation) in 4Q18-1Q19 while pockets of strength are currently indicated during the same time frame for Europe (Germany/Spain) and the UK. Should there model be correct, it would be expected European equities would outperform both U.S. and Asia Pacific equities into early 2019.
Below is their suggest asset exposure for each of Quadrants:
Below is their suggest asset exposure for each of Quadrants:
As can be seen, once in Quad 3 or Quad 4 the top performing asset class is fixed income (long duration bonds) and defensive equities (REITs, utilities, healthcare, consumer staples) with equities favorable in Quad1 or Quad 2.
Overall Summary:
- Equity markets pulled back from severe overbought conditions from late Jan-early Feb 2018. Since then they have remained range bound as they assess ongoing geopolitical and trade war considerations.
- Typically such extreme volatility that occurred early in 2018 takes a period of several months to work itself out. Volatility has reduced considerably over the past several months.
- U.S. equities have begun to significantly outperform other regions since early May 2018. This may be due to the escalating trade war rhetoric combined with early signs of reduced growth in Europe and China.
- Global macro economic data is beginning to rollover into decline (with the U.S. still showing the strongest economic data at present).
- Bonds have delivered mixed returns year-to-date but have shown recent signs of life given the slowing economic data.
- World growth still remains slow/steady and there is no indications of pending recession.
- The equity markets are "late-stage". We still believe this bull market in equities has room to run but are on watch for a market top.
- Monthly ongoing contributions are never modified and remain as per the Monthly Allocation model to take advantage of lower unit prices on pullbacks.
- The 5-Factor model remains GREEN. The Economic portion of the model has reverted to YELLOW but the price technical indicators remain range-bound. It does not indicate a need to de-risk (yet) but it has us now on careful watch. Risk averse investors may wish to wait to fully reinvest until each of the world equity regions establish new short term technical uptrends.
Asset Class Return Monitor
(for week ending 21 September 2018)
(for week ending 21 September 2018)
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): (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)
Past Week Asset Class returns
- Over the past week world equites (as measured by the Vanguard Total World Stock ETF (shown in CYAN) gained +1.51%.
- Asia Pacific equities were the top performing equity region this past week with U.S. markets lagging.
- U.S. bonds (Black) and International bonds (Green) were modestly lower on the week.
- Commodities were up modestly over the past week with the USD slightly negative.
Year-to-Date (2018) Asset Class returns
- Thus far in 2018 world equites (as measured by the Vanguard Total World Stock ETF (shown in CYAN) have gained +4.54%.
- U.S. equities have been the top performing equity region thus far in 2018 with Emerging markets lagging.
- Bonds have shown mixed returns thus far in 2018 with International Bonds (Green) outperforming U.S. bonds (Black).
- Commodities remain positive but have declined substantially over the past month. The USD index remains positive for 2018.
While we remain positive on equity markets over the next quarter, we remain concerned about excessive equity valuation (especially in the U.S.) relative to historical values. Markets continue to be priced for perfection and and any one of the following events (which we refer to as the 6 Horsemen of the Apocalypse) could quickly bring on a recession and a rapid reduction (40%+) in equity prices:
* Note for the 1st time one of our major event triggers (potential trade disruption due to trade tariffs) has triggered with the recent introduction of the US imposing $50B in trade tariffs on China (with another further $200B proposed) along with steel/aluminum tariffs on Canada and the Eurozone. This has the potential to escalate rapidly into international trade wars which NEVER result in increased equity prices. This is a major concern we continue to monitor over the near term.
- a central bank policy mistake (excessive balance sheet reduction and/or interest rate increases)
- a major disruption to international trade (trade wars or tariffs)
- a surge in inflation
- a surge in yields (which may be occurring currently)
- significant US dollar appreciation
- a geopolitical shock (region military conflict, war)
* Note for the 1st time one of our major event triggers (potential trade disruption due to trade tariffs) has triggered with the recent introduction of the US imposing $50B in trade tariffs on China (with another further $200B proposed) along with steel/aluminum tariffs on Canada and the Eurozone. This has the potential to escalate rapidly into international trade wars which NEVER result in increased equity prices. This is a major concern we continue to monitor over the near term.
Typically bull/bear markets follow a cycle of investor psychology which peaks with euphoria.
In the big picture, it is apparent we had begun to see signs of investor exhilaration/euphoria in early Jan 2018. As such, now we have entered the stage where fundamentals have been overridden by greed pushing market valuations to extremes.
Typically bull market bubbles end in 3 distinct phases:
- a period of exponential rising prices,
- a consolidation period (which we are currently within), and
- a final blow-off phase into extreme over-valuation before a massive market crash.
It must be reemphasized a complete market cycles is composed of 2 distinct cycles/phases: a Bull phase and a Bear phase. We are currently within the the final innings of the "bull 1/2 cycle" and the "bear 1/2 cycle" is yet to come. The key to long term investment success is to protect the majority of those bull 1/2 cycle gains when the bear market comes calling.
We illustrate current market overvaluation via 3 charts produced by Crestmont Research (as of 01 September 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 147 years of history.
In the following graphs note the following:
We illustrate current market overvaluation via 3 charts produced by Crestmont Research (as of 01 September 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 147 years of history.
In the following graphs note the following:
- the Crestmont Price/Earnings (P/E) ratio is at 33.4 and remains the 2nd most expensive market valuation in history (since 1871); only exceeded by the dot com market bubble in 2000. It has now greatly exceeded both the 2007 peak (24.7) and 1929 peak (26.4) as shown on the 1st chart.
- when compared to inflation the current Crestmont P/E is now well within the very top region of the bubble zone defining the 1998-2000 bubble peak as shown on the 2nd chart.
- the current Crestmont P/E is 151% above its geometric mean (topped @ 152% in Jan 2018); well above the 2007 peak (89%) and 1929 peak (99%) as shown on the 3rd chart. Only the 2000 peak at 153% has been higher since 1871.
This does not mean a market crash is imminent but it does mean we are (on a valuation basis) well within the last innings of this bull market. We have entered the dangerous period near the end of bull markets where only a minor change in either investor risk appetite or economic performance would be all it takes to "upset the apple cart". We expect the catalyst will be an increase in inflation > 3% (which one can see on chart #2 does not allow for such high valuations for more than a few months). We are very close to this threshold (headline year-over-year CPI in the U.S. as of August was 2.7%).
Unfortunately valuation measures are a "blunt instrument" when it comes to market timing. Each bull market is different in character and market sentiment can remain bullish long past metrics of reasonable valuation. However, from a risk-reward perspective it is essential to understand risk is now highly elevated and long term equity returns (on a buy-and-hold basis) are extremely low.
It cannot be overstated how important it is to protect the bulk of one's market gains during the bear market half-cycle. As can be seen below, as the percentage losses increase the required returns to get back to breakeven move in an exponential manner:
Unfortunately valuation measures are a "blunt instrument" when it comes to market timing. Each bull market is different in character and market sentiment can remain bullish long past metrics of reasonable valuation. However, from a risk-reward perspective it is essential to understand risk is now highly elevated and long term equity returns (on a buy-and-hold basis) are extremely low.
It cannot be overstated how important it is to protect the bulk of one's market gains during the bear market half-cycle. As can be seen below, as the percentage losses increase the required returns to get back to breakeven move in an exponential manner:
- a 20% loss requires a 25% gain
- a 30% loss requires a 43% gain
- a 40% loss requires a 67% gain
- a 50% loss requires a 100% gain
This is why it is so important to not let losses continue in the face of a bear market and why we advocate phased movements into cash as our 5-factor model reverts towards Red. The below graphic represents how we move within equity markets through a complete market cycle:
Given current market valuations and our expectation of a -50% or greater decline during the next bear market, "careful and cautious" remains our game plan. When we enter this sort of environment we can play the game on the long side but carefully eye the door for when the music stops. We have no intention in participating in the substantial downside yet to come to complete this current market cycle.
World Regional Equity Monitor
We use the following U.S. exchange traded funds to monitor equity performance for the various world regions:
- World Equities: Vanguard Total World ETF (Cyan)
- U.S. Equity: Vanguard Total Market ETF (Red)
- Pacific Equity: Vanguard FTSE Pacific ETF (Blue)
- European Equity: Vanguard FTSE Europe ETF: (Lime Green)
- Emerging Market Equity: Vanguard FTSE Emerging Market ETF (Pink)
1 Year Rolling Regional Equity Performance
- Over the past 12 month rolling period regional equity performance remains positive for all regions.
- The strongest equity region over the past 12 month has been U.S. Markets with Emerging Market equities continuing to lag.
- Overall world equity performance (as measured by the Vanguard Total World ETF) remains positive with a return of +9.75% (including dividends) over the past 12 month rolling period.
3 Month Rolling Regional Equity Performance
- Over the past 3 month rolling period the strongest performing world equity region has been U.S. markets with Emerging markets the weakest.
- Mixed regional equity performance has been evident over the past quarter (3 months) with Global equity returns fractionally higher.
1 Month Rolling Regional Equity Performance
- Over the past 1 month rolling period the strongest performing world equity region has been US markets with Emerging markets the weakest.
- Modestly positive global equity returns are evident over the past month.
Past Week Regional Equity Performance
- Over the past week Asia Pacific equity markets were the strongest performing equity region with Emerging markets lagging.
Latest Global Equity "Big Picture"
World equity market returns are monitored via the following charts:
Dow Jones Global Market Index
(market cap weighted index)
For the week the Dow Jones Global Index had a gain of +1.60%. As can be seen on the 1st above chart, price remains above the 65 week moving average and above its recent market lows. This is encouraging but this level must hold on any near term pullback.
A closer weekly view on the 2nd chart using candles clearly shows 386.98-387.58 remains a critical support area (on a weekly close basis). This past week the index closed fractionally above this level (a very bearish development). This level now needs to hold.
A closer weekly view on the 2nd chart using candles clearly shows 386.98-387.58 remains a critical support area (on a weekly close basis). This past week the index closed fractionally above this level (a very bearish development). This level now needs to hold.
Value Line Geometric Index and Global Dow Index
(equal weighted indexes)
(equal weighted indexes)
The Value Line Geometric Index (top panel) is the median price performance of 1700 U.S. companies equal weighted (as opposed to most indexes which are market cap weighted) into an index. Below that is the Global Dow index (bottom panel). It is a measure of the top 150 international companies equal weighted within the index and represents a good overview of equity performance worldwide.
As can be seen on the daily chart above, the Global Dow (bottom panel) remains within a narrow trading range while the US. based Value Line Geometric Index (top panel) remains strongly bullish. This shows the clear divergence that is beginning to manifest between U.S. equities and other world regions.
As can be seen on the daily chart above, the Global Dow (bottom panel) remains within a narrow trading range while the US. based Value Line Geometric Index (top panel) remains strongly bullish. This shows the clear divergence that is beginning to manifest between U.S. equities and other world regions.
Below are 2 weekly charts of the same indexes. The 1st chart goes back to the beginning of 2009 while the 2nd zooms in over the past 2 years using candles. As can be seen, the Global Dow (2nd chart, bottom panel) closed the week above the support but has yet to close above the Feb highs. Until this happens caution is still warranted.
iShares MSCI ACWI ETF
(market cap weighted ETF)
(market cap weighted ETF)
The iShares MSCI ACWI (All Country World Index) ETF is used as a benchmark to compare the performance of the various broad-based equity funds available in the Emirates Group Provident Scheme (EGPS) A/B/C accounts. It serves as a benchmark to determine how equity markets are performing on a worldwide basis. This assists in determining 2 parameters; whether to be invested in equities and also which funds within the EGPS offer the best performance relative to the benchmark.
The ETF is composed of the following regional components/weightings:
The ETF is composed of the following regional components/weightings:
ACWI Monthly Chart (since 2009)
As shown on the monthly chart above, world equity markets had been stuck in a fairly narrow trading range (shown as the yellow band) from October 2013-December 2016. Only once world growth began to reappear in late 2016 did world equity markets begin to react with a breakout of the range. This remains long term bullish for world equities but similar range-bound market action has reasserted itself once again.
For the month of September ACWI has gained +1.19%. It remains above its Feb 2018 closing lows as well as the 12 month price moving average and trendline from the 2009 market lows. This remains a bullish but this support must hold on any market pullbacks.
For the month of September ACWI has gained +1.19%. It remains above its Feb 2018 closing lows as well as the 12 month price moving average and trendline from the 2009 market lows. This remains a bullish but this support must hold on any market pullbacks.
ACWI Weekly Chart
This past week ACWI gained +1.65%. Price continues to hold above the 65 week simple moving average (which acted as support throughout the 2014-2015 topping process with a break below in Aug 2015 leading to the price declines into Feb 2016). It remains above the recent market lows (69.87-70.92) and closed the week fractionally above the recent range (above 73.52).
World Equity Market Regional Relative Rotation Graphs
Below is a graph of 23 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)
Over the past week the RRG quantitative relative scoring improved fractionally to a +5 quantitative net score. The net scoring had remained below zero since 16 March 2018 (indicating the majority of the 23 monitored countries continued to struggle to advance) but this past weeks improvement is encouraging.
ACWI (our world equity fund benchmark) remained fractionally within the GREEN "Leading" quadrant this past week (as shown on the above RRG chart above with the other countries blanked out to focus upon only ACWI). This is very encouraging but one can see how this minor movement could easily be reversed next week.
The RRG trend analysis status is Bullish for world equities:
- Price Relative Strength: Positive
- Price Momentum: Positive
Coincident Equity Market Indicators
Crude Oil
Crude oil was moderately higher over the past week. There is very little weekly-close price resistance up to $80.00 with support near $60.00. Firm crude oil prices continue to point to gradually increasing demand on the back of world economic growth improvement. This remains bullish for global equities at current prices but a large rise towards $100 (or a drop below $55) would be concerning (rate of change is more important than levels at this point).
Gold
Gold was unchanged over the past week. It broke the trendline from the Dec 2015 bottom several weeks ago and recently broke below price support near $1202-$1215. It currently indicates little risk of serious economic market stress or inflation. This remains bullish for global equities.
Futures short interest remains near a 3 year high so any slight increase in the price of gold could quickly turn into a bullish price reversal fueled by a short-covering rally. Gold stocks look very compelling on a relative basis to the underlying commodity at present levels.
Futures short interest remains near a 3 year high so any slight increase in the price of gold could quickly turn into a bullish price reversal fueled by a short-covering rally. Gold stocks look very compelling on a relative basis to the underlying commodity at present levels.
Commodities
Commodities were modestly higher over the past week but remain below the important price resistance of 200-204.
Since bottoming in early 2016, commodities have been on a steady (but not overly steep) rise indicating increased demand (and thus increased world growth). This remains overall bullish for global equites but the recent price break is confirmation world growth is faltering. A break of $180 + the uptrend line from the Feb 2016 bottom would be a very negative development.
Since bottoming in early 2016, commodities have been on a steady (but not overly steep) rise indicating increased demand (and thus increased world growth). This remains overall bullish for global equites but the recent price break is confirmation world growth is faltering. A break of $180 + the uptrend line from the Feb 2016 bottom would be a very negative development.
U.S. 30 Year Treasury Bond
U.S. 30 year bonds were moderately lower on the week and remain below their 3 year long support (near $146-$148) as well as the downtrend line from their June 2016 peak. This is somewhat concerning as rising yields (which move inverse to bond prices) will weigh on corporate borrowing and may hinder the equity advance if rates move too quickly (especially in the high yield market). This is currently equity market neutral but should they continue to fall this will eventually put yield pressure on equities.
Current 5-Factor Model Indications
The combined 5-Factor quantitative model remains GREEN at present with several of the sub-models now either YELLOW or RED. This indicates a certain level of caution and close monitoring is warranted at present. However, the technical portion of the model (price trend and market breadth) continues to support equities so no changes in current positions are indicated.
Click the following link to access current model positioning: "Current Model Portfolio Positions"
The 5-Factor model currently has the following sub-model readings:
Click the following link to access current model positioning: "Current Model Portfolio Positions"
The 5-Factor model currently has the following sub-model readings:
Economic Model
The Economic model switched to YELLOW in early August 2018 (GREEN from in May 2016) on the back of subtle but gradually declining world growth. It is unclear if trade tariffs are to blame or something more systemic but it is a growing concern world equities may become vulnerable.
- The latest OECD Composite Leading Indicators continue to show projected slowing economic growth through most regions over the next 6-9 months. The OECD (Total) CLI peaked in Nov 2017 and continues to decline.
- The latest JP Morgan Global Manufacturing and Services Purchasing Managers Index (PMI) continues to show positive Global growth (Composite PPI > 50) but the rate of global expansion has now fallen to a 5 month low as of the end of August (trend continues to indicate growth but rate-of-change has begun to soften).
- The latest IMF World Economic Report continues to show slow/stable world growth projections for 2018/2019 with global debt currently its main focus of worry.
OECD Composite Leading Indicators (10 Sep 2018)
OECD Composite Leading Indicators
ECAM Composite Leading Indicator Monitor
6-9 Month Business Cycle Lead Time
(color code shows respective CLI trend)
J.P. Morgan Global Composite Purchasing Managers Index (06 Sep 2018)
IMF World Economic Report Executive Summary (April 2018)
IMF World Economic Report Update July 2018
- Global growth is projected to reach 3.9 percent in 2018 and 2019, in line with the forecast of the April 2018 World Economic Outlook (WEO), but the expansion is becoming less even, and risks to the outlook are mounting. The rate of expansion appears to have peaked in some major economies and growth has become less synchronized. In the United States, near-term momentum is strengthening in line with the April WEO forecast, and the US dollar has appreciated by around 5 percent in recent weeks. Growth projections have been revised down for the euro area, Japan, and the United Kingdom, reflecting negative surprises to activity in early 2018. Among emerging market and developing economies, growth prospects are also becoming more uneven, amid rising oil prices, higher yields in the United States, escalating trade tensions, and market pressures on the currencies of some economies with weaker fundamentals. Growth projections have been revised down for Argentina, Brazil, and India, while the outlook for some oil exporters has strengthened.
- The balance of risks has shifted further to the downside, including in the short term. The recently announced and anticipated tariff increases by the United States and retaliatory measures by trading partners have increased the likelihood of escalating and sustained trade actions. These could derail the recovery and depress medium-term growth prospects, both through their direct impact on resource allocation and productivity and by raising uncertainty and taking a toll on investment. Financial market conditions remain accommodative for advanced economies—with compressed spreads, stretched valuations in some markets, and low volatility—but this could change rapidly. Possible triggers include rising trade tensions and conflicts, geopolitical concerns, and mounting political uncertainty. Higher inflation readings in the United States, where unemployment is below 4 percent but markets are pricing in a much shallower path of interest rate increases than the one in the projections of the Federal Open Market Committee, could also lead to a sudden reassessment of fundamentals and risks by investors. Tighter financial conditions could potentially cause disruptive portfolio adjustments, sharp exchange rate movements, and further reductions in capital inflows to emerging markets, particularly those with weaker fundamentals or higher political risks.
- Avoiding protectionist measures and finding a cooperative solution that promotes continued growth in goods and services trade remain essential to preserve the global expansion. Policies and reforms should aim at sustaining activity, raising medium-term growth, and enhancing its inclusiveness. But with reduced slack and downside risks mounting, many countries need to rebuild fiscal buffers to create policy space for the next downturn and strengthen financial resilience to an environment of possibly higher market volatility.
U.S. Economic Growth & Inflation
Year-over-Year GDP growth
The Gross Domestic Product (GDP) in the United States expanded 2.90 percent in the second quarter of 2018 over the same quarter of the previous year. GDP Annual Growth Rate in the United States averaged 3.20 percent from 1948 until 2018, reaching an all time high of 13.40 percent in the fourth quarter of 1950 and a record low of -3.90 percent in the second quarter of 2009.
Quarter-over-Quarter GDP growth
The US economy advanced an annualized 4.2 percent on quarter in the second quarter of 2018, slightly higher than a preliminary reading of 4.1 percent, beating market forecasts of 4 percent, the second estimate showed. The reading primarily reflects upward revisions to nonresidential fixed investment and private inventory investment that were partly offset by a downward revision to personal consumption expenditures (PCE). Imports, which are a subtraction in the calculation, were also revised down. GDP Growth Rate in the United States averaged 3.22 percent from 1947 until 2018, reaching an all time high of 16.70 percent in the first quarter of 1950 and a record low of -10 percent in the first quarter of 1958.
Annualized Inflation
Annual inflation rate in the US fell to 2.7 percent in August of 2018 from 2.9 percent in July and below market expectations of 2.8 percent. It is the lowest reading in four months amid a slowdown in cost of fuel, gasoline and shelter. Inflation Rate in the United States averaged 3.27 percent from 1914 until 2018, reaching an all time high of 23.70 percent in June of 1920 and a record low of -15.80 percent in June of 1921.
Eurozone Economic Growth & Inflation
Year-over-Year GDP growth
The Eurozone economy expanded 2.1 percent year-on-year in the second quarter of 2018, slightly below a second estimate of 2.2 percent and after a downwardly revised 2.4 percent growth in the previous period. GDP Annual Growth Rate in the Euro Area averaged 1.70 percent from 1995 until 2018, reaching an all time high of 5 percent in the first quarter of 1995 and a record low of -5.50 percent in the first quarter of 2009.
Quarter-over-Quarter GDP growth
The Eurozone economy expanded 0.4 percent on quarter in the three months to June 2018, unrevised from the second estimate and the same pace as in the previous period. Fixed investment and household consumption were the main drivers of growth, while net external demand contributed negatively to the expansion. GDP Growth Rate in the Euro Area averaged 0.39 percent from 1995 until 2018, reaching an all time high of 1.30 percent in the second quarter of 1997 and a record low of -3 percent in the first quarter of 2009.
Annualized Inflation
The annual inflation rate in the Euro Area is expected to ease to 2 percent in August 2018 from the previous month's five-and-a-half-year high of 2.1 percent, missing market expectations of 2.1 percent. Prices should rise at a softer pace for services, energy and non-energy industrial goods. Inflation Rate in the Euro Area averaged 1.97 percent from 1991 until 2018, reaching an all time high of 5 percent in July of 1991 and a record low of -0.70 percent in July of 2009.
Japan Economic Growth & Inflation
Year-over-Year GDP growth
The Gross Domestic Product (GDP) in Japan expanded 1 percent in the second quarter of 2018 over the same quarter of the previous year. GDP Annual Growth Rate in Japan averaged 2.01 percent from 1981 until 2018, reaching an all time high of 9.40 percent in the first quarter of 1988 and a record low of -8.80 percent in the first quarter of 2009.
Quarter-over-Quarter GDP growth
The Japanese economy advanced 0.7 percent quarter-on-quarter in the June quarter of 2018, stronger than the preliminary figure of a 0.5 percent growth and after a 0.2 percent contraction in the previous period. It was the highest growth rate since the first quarter of 2017, boosted by an upward revision of business spending and a strong rebound in private consumption. On an annualised basis, the economy grew by 3 percent, much faster than the preliminary estimate of a 1.9 percent expansion and easily beating consensus of a 2.6 percent growth. It followed a 0.9 percent contraction in the March quarter and marking the highest annualized figure since the first quarter 2016, due to strength in business spending and household consumption. GDP Growth Rate in Japan averaged 0.50 percent from 1980 until 2018, reaching an all time high of 3.20 percent in the second quarter of 1990 and a record low of -4.90 percent in the first quarter of 2009.
Annualized Inflation
Japan's consumer price inflation rose to 1.3 percent year-on-year in August 2018 from 0.9 percent in the previous month and above market consensus of 1.1 percent. It was the highest rate since February, due to a jump in prices of food and a faster rise in cost of transport. On a monthly basis, consumer prices went up by 0.5 percent in August, after a 0.3 percent rise in July and reaching the highest monthly figure since November 2017. Inflation Rate in Japan averaged 3 percent from 1958 until 2018, reaching an all time high of 24.90 percent in February of 1974 and a record low of -2.50 percent in October of 2009.
China Economic Growth & Inflation
Year-over-Year GDP growth
The Chinese economy advanced 6.7 percent year-on-year in the second quarter of 2018, easing from a 6.8 percent growth in the previous period and matching market consensus. It was the weakest pace of expansion since the third quarter of 2016 amid intensifying tariff battle with the US and efforts to deleverage debt and financial risks. GDP Annual Growth Rate in China averaged 9.61 percent from 1989 until 2018, reaching an all time high of 15.40 percent in the first quarter of 1993 and a record low of 3.80 percent in the fourth quarter of 1990.
Quarter-over-Quarter GDP growth
The Chinese economy grew by 1.8 percent quarter-on-quarter in the three months to June of 2018, compared to a 1.4 percent expansion in the previous period and beating market estimates of a 1.6 percent growth. It was the strongest quarterly expansion since the September quarter 2017. GDP Growth Rate in China averaged 1.81 percent from 2010 until 2018, reaching an all time high of 2.40 percent in the first quarter of 2011 and a record low of 1.30 percent in the first quarter of 2016.
Annualized Inflation
China's consumer price inflation rose to a six-month high of 2.3 percent year-on-year in August of 2018 from 2.1 percent in the previous month and slightly above market consensus of 2.2 percent. The increase was driven by higher prices of food; clothing; rent, fuel & utilities; and education, culture & recreation. Still, inflation remained well below the Chinese government’s target of around 3 percent for 2018. Inflation Rate in China averaged 5.22 percent from 1986 until 2018, reaching an all time high of 28.40 percent in February of 1989 and a record low of -2.20 percent in April of 1999.
Valuation Model
The Valuation model remains RED/negative due to overvaluation of equity markets at current prices relative to historical data. We continue to update forecasts from a number of historically reliable sources (see section titled "Market Valuation"). Long term equity returns vary inversely with market valuation and at current price levels forward returns will be much lower than historical average returns (projected to be approximately 2% per year ex-inflation over the next 10 years).
Technical Model
The Technical model remained GREEN this past week. World Equity markets remain range-bound with no clear directional bias. Market breadth remains consistent with bull market conditions.
Sentiment Model
The Sentiment model remained YELLOW this week on the back of a neutral sentiment among retail and institutional investors (sentiment acts as an inverse trading indicator).
Economic Stress Model
The U.S. Economic Stress model remains GREEN this week with very little U.S. financial stress indicated. Our 1 year forward U.S. recession indicators remained "Low Risk" but our Global ex-U.S. 1 year forward recession indicators recently moved up to "Moderate Risk".
World Bond Asset Class Return Monitor
We use the following U.S. exchange traded funds to monitor bond performance for the various bond asset classes:
Total Market Bond Basket:
- U.S. Total Bond Market (BND): (Red)
- International (ex-U.S.) Total Bond Market (BNDX): (Blue)
- U.S, Gov't Bonds (GOVT): (Orange)
- Foreign Developed Market Gov't 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. High Yield Bonds with Int'l Gov't Inflation Protected Bonds the worst performing.
- The U.S. Total Bond Market (RED) and the International (ex-U.S.) Total Bond Market (BLUE) have delivered mixed 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 Int'l Gov't Inflation Protected 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. Gov't Inflation Protected Bonds lagging.
- The U.S. Total Bond Market (RED) and the International (ex-U.S.) Total Bond Market (BLUE) have delivered modestly negative returns over the past month.
Past Week Bond Asset Class Performance
- Over the past week Int'l Gov't Inflation Protected Bonds were the strongest performing bond asset class with U.S. Corporate Bonds lagging.
- The U.S. Total Bond Market (RED) and the International (ex-U.S.) Total Bond Market (BLUE) were modestly lower over the past week.
Commentary:
It has been shown in repeated studies over many years a balanced portfolio consisting of both equities and bonds (with percentage holdings in each adjusted according to personal risk tolerances) remains the best methodology in managing a long term retirement portfolio (due to the independent/low correlated function each takes when navigating though various market cycles and economic conditions).
It is best to think of bonds and equities as 2 independent brains each looking at the market from a different perspective:
As such, both serve a useful purpose in a well balanced portfolio.
Bonds delivered positive returns throughout 2017 as low inflation and weak growth persisted. We are very cognizant of the fact bond yields are potentially at generational lows (prices overbought and at generational highs) and any significant economic recovery (with associated increases in inflation) has the potential to be very detrimental to bond fund returns.
Rolling 12 month returns for bonds remain positive but recent weakness has been noted and we are monitoring closely US, German & Japanese rates to determine if (when) it may be appropriate to reduce bond positions. Our premise is these 3 bonds tend to be somewhat "tethered" due to capital flows so it would take a breakout in all 3 key Treasuries above their respective price levels (described below) in order to definitively state the bull market in bonds is over.
As of present International bond funds have not been affected by the rise in rates as U.S. bond funds have. We are reassessing each of the bond funds within our models to determine their exposure to duration risk should rates outside the U.S. also begin to rapidly rise.
It is best to think of bonds and equities as 2 independent brains each looking at the market from a different perspective:
- Equities: Corporate profits focused.
- Bonds: Economic growth and Inflation focused.
As such, both serve a useful purpose in a well balanced portfolio.
Bonds delivered positive returns throughout 2017 as low inflation and weak growth persisted. We are very cognizant of the fact bond yields are potentially at generational lows (prices overbought and at generational highs) and any significant economic recovery (with associated increases in inflation) has the potential to be very detrimental to bond fund returns.
Rolling 12 month returns for bonds remain positive but recent weakness has been noted and we are monitoring closely US, German & Japanese rates to determine if (when) it may be appropriate to reduce bond positions. Our premise is these 3 bonds tend to be somewhat "tethered" due to capital flows so it would take a breakout in all 3 key Treasuries above their respective price levels (described below) in order to definitively state the bull market in bonds is over.
As of present International bond funds have not been affected by the rise in rates as U.S. bond funds have. We are reassessing each of the bond funds within our models to determine their exposure to duration risk should rates outside the U.S. also begin to rapidly rise.
U.S. 10 year Treasury Yield
After rates bottomed in mid-2016 (bond prices peaked as they are inversely correlated), rates rapidly rose to resistance on the perception of future economic growth + inflation. Importantly, price resistance near 2.6% (which had contained yields for almost 4 years) was broken in early 2018. A key resistance level at 3.006% - 3.036% was broken on May 15, 2018 (high 3.115%, daily close 3.109%) but was unable to hold for more than 1 trading day. A series of daily closes above and it would be an indication the bull market in U.S. bonds that began in 1981 is likely over. Conversely, a break below the uptrend line and the 2.597%-2.648% support would be very bullish for bonds.
It must be noted futures speculators are net short a record number of US gov't bonds (betting on bond yields to rise/bond prices to fall) and any significantly weak economic data out of the U.S. may lead to a massive unwind of short positions (bullish for U.S. Gov't bond prices).
It must be noted futures speculators are net short a record number of US gov't bonds (betting on bond yields to rise/bond prices to fall) and any significantly weak economic data out of the U.S. may lead to a massive unwind of short positions (bullish for U.S. Gov't bond prices).
German 10 year Bund Yield
German 10 year treasury yields have remained confined below 0.92% since 2014 with a bottom of -0.19% achieved in June 2016. Since then rates have gradually climbed within a rising channel (until recently) towards 0.92%.
Yields have pulled back since early 2018 and this past week remained below the weekly breakout level of 0.60% and just below the descending trendline. A weekly close above 0.93% and it is likely the bull market in German bonds is over. There is no indication at present to suggest such will occur but we are monitoring for such an event.
Yields have pulled back since early 2018 and this past week remained below the weekly breakout level of 0.60% and just below the descending trendline. A weekly close above 0.93% and it is likely the bull market in German bonds is over. There is no indication at present to suggest such will occur but we are monitoring for such an event.
Japanese 10 year Treasury Yield
Japan has been fighting deflation for decades and only recent unprecedented monetary policy by the BOJ appears to be having some effect upon deflation (and yields).
After bottoming at near -0.28% yields in mid 2016, a rapid rise to near 0.11% has held as resistance over the past 2 years. Yields have remained range-bound since (indicating deflation remains an ongoing problem in Japan) but a weekly close above 0.12% (which occurred this week) would likely indicate the bull market in Japanese bonds is over.
After bottoming at near -0.28% yields in mid 2016, a rapid rise to near 0.11% has held as resistance over the past 2 years. Yields have remained range-bound since (indicating deflation remains an ongoing problem in Japan) but a weekly close above 0.12% (which occurred this week) would likely indicate the bull market in Japanese bonds is over.
U.S. 30 year Treasury Yield
An extremely important longer-term chart we continue to watch is the yield on the U.S. 30 year treasury relative to its 100 month exponential moving average (red dotted line on the below chart going back to 1980) as well as the yield on the 10 year treasury with its 115 month EMA. As can be seen below, since the mid 1980's these moving average have acted as a cap on each attempted increase in yields.
Should any given month close with a yield higher than their respective moving average it would be strong confirmation the 35 year bull market in bonds is likely over.
* Note as of the end of Jan 2018 the 10 year yield (bottom chart) closed above its long term moving average. Should the 30 year Treasury (top chart) do so as well, it would be final confirmation the bull market in bonds has ended.
Should any given month close with a yield higher than their respective moving average it would be strong confirmation the 35 year bull market in bonds is likely over.
* Note as of the end of Jan 2018 the 10 year yield (bottom chart) closed above its long term moving average. Should the 30 year Treasury (top chart) do so as well, it would be final confirmation the bull market in bonds has ended.
Currencies
Below is a 12 month rolling return for the 6 currencies that make up the U.S. Dollar index. The U.S. Dollar index is a weighted geometric mean of the dollar's value relative to the 6 currencies in the following list:
Also shown in the below chart is 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.
Also shown in the below chart is the following for comparison purposes:
- The U.S. Dollar Index to allow comparison to its constituents.
- The Australian Dollar (not a part of the USD Index) as it is a popular commodity currency.
1 Year Rolling Currency Performance
- Over the past 12 months rolling period the top performing major currency has been the US Dollar with the Swedish Krona the worst performing.
3 Month Rolling Currency Performance
- Over the past 3 month rolling period the top performing currency has been the Swiss Franc with the Japanese Yen lagging.
1 Month Rolling Currency Performance
- Over the past 1 month rolling period the top performing currency has been the Swedish Krona with the Japanese Yen lagging.
Past Week Currency Performance
- Over the past week the Swedish Krona was the strongest performing major currency with the US dollar lagging.
U.S. Dollar: (Bullish Bias)
Commentary:
The USD index was down -1.19% over the past week. The USD struggled throughout 2017 and into early 2018 as growth indicators had remained stagnant, U.S. officials have complained about their "overvalued U.S. dollar", and rate expectation differentials between Central Banks began to narrow on gradual improvements in the Euro area economic data. However, since early 2018 this process has reversed as weakening economic data out of the Eurozone has been offset by strengthening data out of the U.S.
Support / Resistance Levels (based upon close):
Weekly: 93.03 / 94.59
Monthly: 94.58 / 98.66
Support / Resistance Levels (based upon close):
Weekly: 93.03 / 94.59
Monthly: 94.58 / 98.66
US Dollar Index Daily charts
The 1 year daily chart above shows the bottoming process in the USD since the beginning of 2018. In early 2018 price dropped to a close of 88.51 and retested this level on 3 separate occasions. It remained confined to a trading range for 3 months (shown in the BLUE box) but broke out in late April 2018. Over the summer it has remained very strong but his past week broke back below key support @ 93.96-94.14.
The 4 year daily chart above clearly shows the important daily close support for the USD over the past 3 years @ 91.88-93.15. Price appears to be looking to test this level once again.
Over the past week the USD closed between its short term trend 50 and 200 day moving averages.
(Short Term Neutral)
(Short Term Neutral)
US Dollar Index Weekly charts
The weekly chart shows the steady -15% decline the USD index experienced from late Dec 2016-early Jan 2018 (from 103.82 to 88.15). It remained in a consolidation zone (88.89-90.33) for 3 months and then in late April 2018 it broke out of its weekly consolidation box.
Price ended the week above the strong support @ 93.03-93.18 and closed the week between the intermediate term trend 20 and 65 week moving averages.
(Intermediate Term Neutral)
Price ended the week above the strong support @ 93.03-93.18 and closed the week between the intermediate term trend 20 and 65 week moving averages.
(Intermediate Term Neutral)
A longer term 20 year look-back at the USD shows the 91.66-92.28 weekly close area (thick RED line) has been a very significant bull/bear battle zone over the past 20 years (since 1998). As long as price continues to hold above this significant price level the longer term USD call remains bullish.
It continues to hold the uptrend line from the 2011 bottom and appears to be within a large multi-year bullish ascending price channel.
It continues to hold the uptrend line from the 2011 bottom and appears to be within a large multi-year bullish ascending price channel.
US Dollar Index Monthly chart
For the month of September the US Dollar index has lost -1.35%.
For all of 2017 the USD had been in a steady decline. It broke its critical support at 92.63-93.03 in late 2017 and rapidly fell to find support at the 86.48-88.01 level. Since the beginning of 2018 it has rebounded back into its previous consolidation zone.
Price closed August above the long term trend 10 month moving average maintaining the long term bias to bullish until months end. It remains at the bottom of the lower bounds of its past 3 year range and is range-bound between the previous monthly support @ 92.63-93.03 and resistance @ 98.66-100.21.
(Long Term Bullish)
For all of 2017 the USD had been in a steady decline. It broke its critical support at 92.63-93.03 in late 2017 and rapidly fell to find support at the 86.48-88.01 level. Since the beginning of 2018 it has rebounded back into its previous consolidation zone.
Price closed August above the long term trend 10 month moving average maintaining the long term bias to bullish until months end. It remains at the bottom of the lower bounds of its past 3 year range and is range-bound between the previous monthly support @ 92.63-93.03 and resistance @ 98.66-100.21.
(Long Term Bullish)
Euro (Bearish Bias)
The Euro was up +1.19% over the past week. It had shown remarkable longer-term resilience given European political uncertainty (Brexit, Spain, Germany, Italy) but has weakened since early 2018 due to eroding economic growth metrics out of the EU.
Support / Resistance Levels (based upon close):
Weekly: 116.07 / 121.58
Monthly: 113.81 /116.45
Support / Resistance Levels (based upon close):
Weekly: 116.07 / 121.58
Monthly: 113.81 /116.45
Euro Daily Charts
The Euro had remained confined between 115-118 since the Italian election (shown by the BLUE box on the 1st daily chart) but broke below it on 10 August on the economic concerns associated with Turkish debt. However, this past week it moved strongly into the upper portions of the consolidation box (a potentially bullish short term development).
On the daily chart price close the week above the critical daily support @ 114.61-116.04. It is now back within its previous price consolidation box and closed the week between the short term trend 50 and 200 day moving averages.
(Short Term Neutral)
On the daily chart price close the week above the critical daily support @ 114.61-116.04. It is now back within its previous price consolidation box and closed the week between the short term trend 50 and 200 day moving averages.
(Short Term Neutral)
Euro Weekly Chart
The weekly chart shows the Euro had remained range bound for 2 1/2 years (January 2015-July 2017) between 104.96-105.95 and 114.47-114.62. A significant breakout occurred in the 2nd week of July 2017 when a weekly close above the trading range was established.
This past week the Euro closed above the support @ 114.47. It closed the week between the intermediate trend 20 week + 65 week moving averages returning the intermediate term trend to neutral.
(Intermediate Term Neutral)
This past week the Euro closed above the support @ 114.47. It closed the week between the intermediate trend 20 week + 65 week moving averages returning the intermediate term trend to neutral.
(Intermediate Term Neutral)
Euro Monthly
For the month of September the Euro has gained +1.29%. On a monthly closing basis it closed the month of August below the long term trend 10 month moving average and appears to be attempting to test its previous monthly resistance @ 116.45.
(Long Term Bearish)
(Long Term Bearish)
UK Pound (Bearish Bias)
U.K. Pound Daily Chart
U.K. Pound Weekly Chart
U.K. Pound Monthly Chart
The UK Pound was up +0.02% over the past week. Clearly over the next year the ongoing Brexit transition process will dominate the movement of the Pound and the strong price action demonstrated through 2017 has almost been completely reversed thus far in 2018.
This past week the Pound closed the week between its short term trend daily 50 +200 day moving averages and below the intermediate term trend 20 + 65 week moving averages. For the month of September it has gained +0.84% and closed the month of August below its long term 10 month moving average.
(Short Term Neutral)
(Intermediate Term Bearish)
(Long Term Bearish)
Support / Resistance Levels (based upon close):
Weekly: 129.19 / 132.94
Monthly: 125.09 / 129.79
This past week the Pound closed the week between its short term trend daily 50 +200 day moving averages and below the intermediate term trend 20 + 65 week moving averages. For the month of September it has gained +0.84% and closed the month of August below its long term 10 month moving average.
(Short Term Neutral)
(Intermediate Term Bearish)
(Long Term Bearish)
Support / Resistance Levels (based upon close):
Weekly: 129.19 / 132.94
Monthly: 125.09 / 129.79
Australian Dollar (Bearish Bias)
Australian Dollar Daily Chart
Australian Dollar Weekly Chart
Australian Dollar Monthly Chart
The Australian Dollar was up +2.09% over the past week. Price this past week was able to regain the critical 2 year weekly support @ 71.71-71.87 established as a consequence of the surprise RBA interest rate cut in late April, 2016 which led to a substantial 5 week decline of -8% and a subsequent 18 month consolidation (as shown in the blue box on the weekly chart).
For the month of September the Aussie dollar has gained +1.50%. It closed the week below the short term trend 50 + 200 day moving averages and below the intermediate term trend 20 + 65 week moving averages. It closed the month of August below the long term trend 10 month moving average.
(Short Term Bearish)
(Intermediate Term Bearish)
(Long Term Bearish)
Support / Resistance Levels (based upon close):
Weekly: 71.77 / 73.40
Monthly: 70.17 / 72.32
For the month of September the Aussie dollar has gained +1.50%. It closed the week below the short term trend 50 + 200 day moving averages and below the intermediate term trend 20 + 65 week moving averages. It closed the month of August below the long term trend 10 month moving average.
(Short Term Bearish)
(Intermediate Term Bearish)
(Long Term Bearish)
Support / Resistance Levels (based upon close):
Weekly: 71.77 / 73.40
Monthly: 70.17 / 72.32
Canadian Dollar (Bearish Bias)
Canadian Dollar Daily Chart
Canadian Dollar Weekly Chart
Canadian Dollar Monthly Chart
The Canadian dollar was up +1.00% over the past week. After topping in Aug, 2017, the Canadian Dollar has remained within a firmly established downtrend and has gradually returned to price levels last seen in early 2017.
The Loonie closed the week between the short term trend 50 + 200 day moving averages and between the intermediate term trend 20 + 65 week moving averages. It remains below the weekly trendline begun at the Jan 2016 lows of 68.09 and is confined to a down-sloping price channel.
For the month of September the Loonie has gained +1.12%. It continues to attempt to consolidate near recent lows and closed the month of August below the long term trend 10 month moving average.
(Short Term Neutral)
(Intermediate Term Neutral)
(Long Term Bearish)
Support / Resistance Levels (based upon close)
Weekly: 76.26 / 78.13
Monthly: 74.42 / 78.49
The Loonie closed the week between the short term trend 50 + 200 day moving averages and between the intermediate term trend 20 + 65 week moving averages. It remains below the weekly trendline begun at the Jan 2016 lows of 68.09 and is confined to a down-sloping price channel.
For the month of September the Loonie has gained +1.12%. It continues to attempt to consolidate near recent lows and closed the month of August below the long term trend 10 month moving average.
(Short Term Neutral)
(Intermediate Term Neutral)
(Long Term Bearish)
Support / Resistance Levels (based upon close)
Weekly: 76.26 / 78.13
Monthly: 74.42 / 78.49
Key Weekly Returns (week ending 21 September 2018):
|
Countries/Regions
World Equities ACWI (iShares MSCI ACWI Index Fund) North American Equities SPY (S&P 500 SPDRs) QQQ (PowerShares QQQ Trust) IWM (Russell 2000 iShares) EWC (Canada iShares) |
Characteristics
World Equity Fund U.S. Large Cap S&P 500 Index U.S. NASDAQ 100 Fund U.S. Russell 2000 Small Cap Fund Canada |
Week % Change
+1.65% +0.84% -0.15% -0.57% +2.51% |
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) Japan Emerging Markets Latin America US Total Bond (44% Gov't Tsy, 56%Corp) World Investment Grade Bonds ex-US Inflation Protected Gov't Bonds Emerging Market Sovereign Debt |
+2.56% +2.21% +3.30% +3.03% +5.59% -0.20% -0.04% -0.15% +0.52% |
|
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 |
+1.69% +0.18% +0.42% +1.59% +6.36% +3.17% |
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 |
-0.75%
+1.74% +0.12% +0.95% +1.05% -0.49% |
Charts to Watch
Commodity Basket Index
An alarming development from Jan-Jun 2017 was the sharp decline in commodity prices. For the past 4 years the deflationary debt overhang has gripped world economies and equity markets have run up on the "hope" a return to world growth would begin soon. This would typically be reflected in a rise in commodity prices.
Commodities (as measured by the Reuters/Jefferies CRB index) bottomed in early 2016 (along with equities) and have been on a gradual rise. In order to confirm world growth is firming we would like to see commodities moving higher.
This past week price closed the week at the strong resistance (192.89-194.54) and continues to hold the 65 week moving average. A break below would be concerning as it would indicate deflation may have returned with global growth again in decline.
Commodities (as measured by the Reuters/Jefferies CRB index) bottomed in early 2016 (along with equities) and have been on a gradual rise. In order to confirm world growth is firming we would like to see commodities moving higher.
This past week price closed the week at the strong resistance (192.89-194.54) and continues to hold the 65 week moving average. A break below would be concerning as it would indicate deflation may have returned with global growth again in decline.
Equity Market Volatility
The equity market decline in late Jan 2018 is very similar to that experienced in Aug 2015. We have included our monitor chart of S&P 500 volatility for the current period with the 2015 event below (used as a potential template).
As of this weeks market close volatility remained at levels which have in the past signaled an "all-clear (VIX:VXV ratio < 1.00). It is important to note the level of volatility is significantly below the early Feb spike. This is encouraging.
This does not preclude further volatility (as was experienced in 2015) but it indicates the highest levels of volatility (and potential equity market declines) have probably ended.
As of this weeks market close volatility remained at levels which have in the past signaled an "all-clear (VIX:VXV ratio < 1.00). It is important to note the level of volatility is significantly below the early Feb spike. This is encouraging.
This does not preclude further volatility (as was experienced in 2015) but it indicates the highest levels of volatility (and potential equity market declines) have probably ended.
Volatility Event 2018
Volatility Event 2015
European Equities
Since the 2009 market bottom Europe has been the weakest major equity growth region. As such, we continue to monitor the Euro Stoxx 50 and Stoxx 600 for indications of improving performance out of Europe.
The past week the European Stoxx 50 index remained above the important support @ 2922-2977 while the Stoxx 600 index remained above the 348-351 price level. Both indexes remain key components of a continued world equity market advance and recent weakness in Europe is concerning.
The past week the European Stoxx 50 index remained above the important support @ 2922-2977 while the Stoxx 600 index remained above the 348-351 price level. Both indexes remain key components of a continued world equity market advance and recent weakness in Europe is concerning.
While the broad Stoxx 50 & 600 remain range bound, we are very concerned with European financial stocks. These are represented below using the iShares MSCI European Financials ETF. As can be seen below, European financial stocks were down over 21% from their January 2018 highs. This is a significant concern as European banks are among the weakest globally and could be a focal point for systematic risk.
Of particular concern is Deutsche Bank which continues to decline (down 91.4% 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 will lead to a catastrophic ripple effects worldwide.
Chinese Equities
The Shanghai Composite index was up strongly this past week (+4.32%) and remains at key weekly support between 2715-2820 as shown below. A break below there would be a very bearish development with the next target the weekly support @ 2432-2452.
This is a major concern as Chinese growth is key to both Emerging market performance as well as an indication of Developed markets demand. Since its peak in mid-2015, the Shanghai index has lost -48%. We would like to see significant strength return to China further indicating world economic growth continues to increase but currently there is little evidence of a significant change in China's economic performance.
This is a major concern as Chinese growth is key to both Emerging market performance as well as an indication of Developed markets demand. Since its peak in mid-2015, the Shanghai index has lost -48%. We would like to see significant strength return to China further indicating world economic growth continues to increase but currently there is little evidence of a significant change in China's economic performance.
A longer term daily chart (shown below) shows how critical the current price is relative to support (currently sitting right on daily support @ 2655). A break of current levels and a further -10% would be expected to occur until the next level of price support. This would have very negative implications for Emerging market equity funds.
PRECIOUS METALS
Below is a ratio price chart of gold stocks (HUI; the "Gold Bugs" Index) to gold bullion going back to 1996 when the HUI first came into existence. As can be seen, whenever the HUI:GOLD ratio dips to below approximately 0.14 (the GREEN zone on the chart) has been a low-risk opportunity to purchase gold stocks.
This past week gold stocks remained deep into the "low-risk vs. high-reward" range and are once again near their cheapest valuations in 22 years. Historically purchases of gold equities when within this range have been a very good long term buying opportunities.
This past week gold stocks remained deep into the "low-risk vs. high-reward" range and are once again near their cheapest valuations in 22 years. Historically purchases of gold equities when within this range have been a very good long term buying opportunities.
Even more bullish is Silver (chart below) which has entered a price ratio relative to gold (< .0130) which has historically been a low risk entry point over the past 38 years.
Sliver is now at its "cheapest" price since 2008 and 1995 (chart circles). Both previous moves to this ratio led to large silver price gains.
To put the valuation into a longer term perspective, below is a chart of the Gold/Silver ratio (the opposite ratio to Silver/Gold) going back to 1915. Clearly it can be seen a ratio > 80 has historically been an outlier.
The current Gold:Silver ratio is 83.66 (as shown below it is at the same level as 1995) and it can be seen each instance in the past has resulted in very good gains. There is no guarantee the ratio will not go higher (allowing for further silver losses or range bound trade as in 1991-1994) but it is now at a level that deserves attention (cautious traders may want to wait for a reversal < 80 to avoid a potential range bound episode as the 1990's)
EVEN MORE BULLISH is the price of Platinum (chart below) which has exceeded the "buy zone" last seen in 1982! Platinum is 15-20 times rarer than gold and has rarely in history traded at a price below the price of gold (only 9.7% of the time going back to 1971). It is now the cheapest it has been GOING BACK TO AUGUST 1971 WHEN THE U.S. LEFT THE GOLD STANDARD on a relative basis:
- Current Platinum/Gold ratio is 0.69.
- Platinum/Gold ratio < 0.85 has only occurred 4.7% of the time back to 1971.
- Lowest Platinum/Gold ratio since August 1971 when gold began to free-float (gold fix price removed) was hit on 20 Sept 1982 when it hit a ratio of 0.689 (Platinum $300.40/Gold $436.00)
Platinum now sits on a price support extending back to 2005 and, combined with its ratio relative to gold, represents a compelling 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 (since which Platinum has become even cheaper on a relative basis):
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 0.66 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 0.66 and remains near a record low.
Elliott Wave
We use Elliott Wave theory in conjunction with cycle analysis to attempt to "crystal ball" what to expect going forward. We have included some basic information below for those who might be interested followed by our current interpretation/analysis.
The Elliott wave principle is a form of technical analysis that some traders use to analyze financial market cycles and forecast market trends by identifying extremes in investor psychology, highs and lows in prices, and other collective factors. Ralph Nelson Elliott (1871–1948), a professional accountant, discovered the underlying social principles and developed the analytical tools in the 1930s. He proposed that market prices unfold in specific patterns, which practitioners today call Elliott waves, or simply waves. Elliott published his theory of market behavior in the book The Wave Principle in 1938, summarized it in a series of articles inFinancial World magazine in 1939, and covered it most comprehensively in his final major work, Nature’s Laws: The Secret of the Universe in 1946. Elliott stated that "because man is subject to rhythmical procedure, calculations having to do with his activities can be projected far into the future with a justification and certainty heretofore unattainable."
The Elliott Wave Principle posits that collective investor psychology, or crowd psychology, moves between optimism and pessimism in natural sequences. These mood swings create patterns evidenced in the price movements of markets at every degree of trend or time scale.
In Elliott's model, market prices alternate between an impulsive, or motive phase, and a corrective phase on all time scales of trend, as the illustration shows. Impulses are always subdivided into a set of 5 lower-degree waves, alternating again between motive and corrective character, so that waves 1, 3, and 5 are impulses, and waves 2 and 4 are smaller retraces of waves 1 and 3. Corrective waves subdivide into 3 smaller-degree waves starting with a five-wave counter-trend impulse, a retrace, and another impulse.
In a bear market the dominant trend is downward, so the pattern is reversed—five waves down and three up. Motive waves always move with the trend, while corrective waves move against it.
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. 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 we are currently within Intermediate wave V of Major Wave 1 of Super-Cycle 1 within a still young new 77+ year Grand Super-Cycle (expected to extend to 2085-2090).
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. 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 we are currently within Intermediate wave V of Major Wave 1 of Super-Cycle 1 within a still young new 77+ year Grand Super-Cycle (expected to extend to 2085-2090).
Our original EWT weekly chart is shown below with "classic" Elliott Wave indications projecting we are within the ending stages of the 2009-present bull market (with projected Fibonacci Wave extension targets for the Primary Wave V top as shown):
At present we remained torn between 2 possible Elliott Wave counts (which centers upon whether the market decline between mid 2015-early 2016 was a bear market or not). It "technically" did not decline 20% on the S&P 500 (but did exceed a 20% decline on other indices) so we are left with 2 possibilities:
The difference between the 2 counts is either a 10-15% pullback (in the 1st case of a P-II decline) or a 50-60% bear market decline (in the 2nd case). Only once the decline has begun will be able decipher which count is correct but in both cases it indicates we are near a market top (either a short term top or a major bull market major top).
- If the 2015-2016 decline was a bear market (ending a full 5 wave up/3 wave down Elliott Wave Pattern), we have perhaps several years to go to complete the current bull market (which would have begun in Feb 2016). If correct, we are now nearing the top of Primary Wave I of a five wave advance. We would expect a shallow Primary Wave II (down) followed by a Primary Wave III up, IV down, and V up to complete the bull market cycle. This would extend the current bull market years into the future.
- Alternately, if the 2015-2016 decline was not a bear market (and instead Wave III up/Wave IV down as indicated on the 2nd chart), we would now be competing Wave 5 up of the entire bull market advance. If this count is correct the bull market is very near its end and a Primary Wave A, B, C bear market with a projected > -40% decline is forthcoming.
The difference between the 2 counts is either a 10-15% pullback (in the 1st case of a P-II decline) or a 50-60% bear market decline (in the 2nd case). Only once the decline has begun will be able decipher which count is correct but in both cases it indicates we are near a market top (either a short term top or a major bull market major top).
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.
As of the end of July 2018 US margin debt remained near 300% and has not shown a significant decline (yet). This remains supportive for US equities until it begins to decline meaningfully.
U.S. Equity market Valuation Models (data as of 31 August 2018)
(Source: D. Short)
Below is a graph representing 4 different long-term valuation measures plotted back to 1900 (118 years):
As of 31 August 2018 the average of these 4 measures places the U.S. stock market (S&P 500 index) as being 117% overvalued relative to its long term mean. This is the 2nd highest valuation in the history of the stock market going back to 1900. This level is well over 2 standard deviations above the mean and above the market peaks in both 2007 and 1929. It is only surpassed by the 2000 dotcom bubble peak.
- The Crestmont Research P/E Ratio
- The cyclical P/E ratio using the trailing 10-year earnings as the divisor
- The Q Ratio, which is the total price of the market divided by its replacement cost
- The relationship of the S&P Composite price to a regression trendline
As of 31 August 2018 the average of these 4 measures places the U.S. stock market (S&P 500 index) as being 117% overvalued relative to its long term mean. This is the 2nd highest valuation in the history of the stock market going back to 1900. This level is well over 2 standard deviations above the mean and above the market peaks in both 2007 and 1929. It is only surpassed by the 2000 dotcom bubble peak.
Another popular valuation metric is know as the "Buffett Indicator". In an interview with Fortune magazine back in 2001 Warren Buffett remarked "it is probably the best single measure of where valuations stand at any given moment."
The indicator measures the price of Corporate Equities (Mkt Cap) to Gross Domestic Product (GDP) as a ratio going back to the 1950's. As can be seen below, the ratio of equity prices relative to GDP currently stands at 129.6%. It has exceeded the recent 2015 peak of 128.9% and is second only to the 2000 equity peak of 151.7% in terms of equity overvaluation relative to economic output.
The de-trended graph indicates it would take a 36% market decline to return valuations back to the long term detrended regression line (shown in red on the 1st chart). This would be our minimum expected decline when the next bear market begins.
7-Year Asset Class Real Return Forecast (as of 31 August 2018)
(Source: GMO LLC)
(Source: GMO LLC)
Each month GMO (Grantham, Mayo, Van Otterloo & Co.) publishes a forward forecast for expected annual real rates of return (i.e. inflation adjusted) for a number of different asset classes with a 7 year forward outlook. They have historically had a very good track record (0.97 correlation) of estimating forward 7 year asset class returns based primarily upon current valuations combined with mean reversion. Charts are published following analysis of the previous months data.
I have followed GMO's methodology with interest for many years. In my experience I have found them to be conservative over the shorter term with a tenancy to make calls too early. HOWEVER, similar to Dr. John Hussman of Hussman Funds, they also tend to be right over the longer term. As such, I use their outlook as part of the valuation model within the ECAM 5 Factor model.
Above is their current forecast of expected real returns (after inflation) for the next 7 years broken down by asset class. It is clear based upon current market valuations GMO forecasts well below average annual investment returns in all asset classes with a 7 year forward time horizon (the dotted line is the historical real return of U.S. equities of +6.5% per year). This is important for those who may be soon retiring and expecting "average" returns on their equity and bond investments over the next 7 years. Current high market valuations make it a certainty forward returns over the next 7-10 years will be well below historical averages.
I have followed GMO's methodology with interest for many years. In my experience I have found them to be conservative over the shorter term with a tenancy to make calls too early. HOWEVER, similar to Dr. John Hussman of Hussman Funds, they also tend to be right over the longer term. As such, I use their outlook as part of the valuation model within the ECAM 5 Factor model.
Above is their current forecast of expected real returns (after inflation) for the next 7 years broken down by asset class. It is clear based upon current market valuations GMO forecasts well below average annual investment returns in all asset classes with a 7 year forward time horizon (the dotted line is the historical real return of U.S. equities of +6.5% per year). This is important for those who may be soon retiring and expecting "average" returns on their equity and bond investments over the next 7 years. Current high market valuations make it a certainty forward returns over the next 7-10 years will be well below historical averages.
12-Year US Equity Real Return Forecast
(Source: Hussman Funds)
(Source: Hussman Funds)
S&P 500 12 year forward projected annual returns (Mkt Cap-GVA)
S&P 500 12 year forward projected annual returns (margin-adjusted CAPE)
Balanced Portfolio 12 year forward projected annual returns
(60% in the S&P 500, 30% in Treasury bonds, and 10% in Treasury bills)
(60% in the S&P 500, 30% in Treasury bonds, and 10% in Treasury bills)
Dr. John Hussman uses a unique measure of estimating future equity returns over a 12 year period based upon market capitalization relative to gross corporate value added. He claims the measure has a 91.9% correlation to actual S&P 500 future returns over a 12 year horizon. As per his previous explanations:
"Across the scores of measures I’ve evaluated or created over three decades of research, the ratio of non-financial market capitalization to corporate gross value added (essentially corporate revenues, including estimated foreign revenues, excluding double-counting of intermediate inputs) is best correlated to actual subsequent market returns over a 10-12 year horizon".
As can be seen on the above chart, since 1950 his approach has correlated quite closely with future returns (blue line is his estimates and the red line the subsequent returns 12 years later). Currently his calculations project a "buy and hold" rate of return on the S&P 500 index of -0.6% nominal per year out to 2028 should one employ a "buy and hold" strategy. Clearly tactical asset allocation will be required as we transition to the back half of the current market cycle.
His recent conclusion:
" At present, the valuation measures that we find best correlated with actual subsequent S&P 500 total returns are at the most offensive levels in history, matching or eclipsing the 1929 and 2000 extremes. Even considering the level of interest rates, economic growth, and other factors, the S&P 500 currently stands about 2.8 times the level that we believe the index will revisit over the completion of the current market cycle, implying an interim market loss something on the order of -64%. Moreover, the most reliable valuation measures uniformly imply the likelihood of negative total returns in the S&P 500 over the coming 10-12 year period."
Clearly the high level of current market valuations does not bode well for the "buy and hope" investor.
"Across the scores of measures I’ve evaluated or created over three decades of research, the ratio of non-financial market capitalization to corporate gross value added (essentially corporate revenues, including estimated foreign revenues, excluding double-counting of intermediate inputs) is best correlated to actual subsequent market returns over a 10-12 year horizon".
As can be seen on the above chart, since 1950 his approach has correlated quite closely with future returns (blue line is his estimates and the red line the subsequent returns 12 years later). Currently his calculations project a "buy and hold" rate of return on the S&P 500 index of -0.6% nominal per year out to 2028 should one employ a "buy and hold" strategy. Clearly tactical asset allocation will be required as we transition to the back half of the current market cycle.
His recent conclusion:
" At present, the valuation measures that we find best correlated with actual subsequent S&P 500 total returns are at the most offensive levels in history, matching or eclipsing the 1929 and 2000 extremes. Even considering the level of interest rates, economic growth, and other factors, the S&P 500 currently stands about 2.8 times the level that we believe the index will revisit over the completion of the current market cycle, implying an interim market loss something on the order of -64%. Moreover, the most reliable valuation measures uniformly imply the likelihood of negative total returns in the S&P 500 over the coming 10-12 year period."
Clearly the high level of current market valuations does not bode well for the "buy and hope" investor.
Global Asset Class 10-year Expected Return Forecast (as of 31 July 2018)
(Source: Research Affiliates)
(Source: Research Affiliates)
Cycle Commentary
At left is a 20 year chart of the monthly performance of the S&P 500 index (1998-2017) showing seasonal rates of return by month.
On the chart the top number is the percentage of months in which the market closed higher than it opened and at the bottom is the average % return by month.
As can be seen, over the past 20 years the period October-April yearly offers the highest potential return (cumulative +8.0% average return) while the period May-September offers little in total return (-2.2% cumulative average return).
On the chart the top number is the percentage of months in which the market closed higher than it opened and at the bottom is the average % return by month.
As can be seen, over the past 20 years the period October-April yearly offers the highest potential return (cumulative +8.0% average return) while the period May-September offers little in total return (-2.2% cumulative average return).
In the interest of moving more towards recent market action, below is the past 10 years monthly returns for the S&P 500 index ($SPX), the Dow Jones Industrial index ($INDU), the NASDAQ Composite index ($COMPQ) and the Dow Jones World index ($DJW).
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S&P 500 Seasonality (historical 50 year look-back annual seasonality)
"Turning to the months ahead, the performance for January and February is rather lacklustre compared to the months that bookend this start of year period. The S&P 500 Index has gained an average of 0.8% and 0.2%, respectively in the first two months of the year, based on the past 50 periods. These months are easily the weakest of the best six month trend for stocks. The large-cap benchmark has closed positive just over half of the time (56%) in January and February, making this winter lull little better than a flip of a coin in terms of the frequency of success.. Returns for January have ranged from a loss of 8.6% in 2009 to a gain of 13.2% in 1987. Performance tends to gyrate in the middle of January with the majority of the strength achieved in the first few days and last few days of the period".
Ned Davis Research 2018 Composite Model
Composite directional model forecast for the S&P 500 index based upon the following parameters equal weighted:
- 10 year Decennial Market Cycle (Year 7)
- 4 year Presidential Market Cycle (Year 2)
- 1 year Annual Seasonal Market Cycle
U.S. 4 Year Presidential Election Cycle
*2018 is Year 2 (post-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: TBD |