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Market/Model Commentary
Currently the active model portfolio as defined by our 5-factor model is:
- Please click on the above magenta link to review the suggested allocations if required.
- The Risk-Reduction Level 1 model was initiated 18 March 2022.
ECAM 5-Factor Composite Model
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ECONOMIC FACTOR SUB-MODEL
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TECHNICAL FACTOR SUB-MODEL
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VALUATION FACTOR SUB-MODEL
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SENTIMENT FACTOR SUB-MODEL
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LIQUIDITY (Stress) FACTOR SUB-MODEL
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"Slow and Steady wins the race"
The Hare and the Tortoise
Aesop (Greek slave & fable author 620 BC - 560 BC)
"Technical Analysis is a windsock, not a crystal ball"
Carl Swenlin (Technical Analyst)
"Investing is the intersection of economics and psychology"
Seth Klarman (Hedge fund Manager, Baupost Group)
"Everyone's got a plan ..... until they get punched in the face"
Mike Tyson (Former World Heavyweight Boxing Champion)
The Hare and the Tortoise
Aesop (Greek slave & fable author 620 BC - 560 BC)
"Technical Analysis is a windsock, not a crystal ball"
Carl Swenlin (Technical Analyst)
"Investing is the intersection of economics and psychology"
Seth Klarman (Hedge fund Manager, Baupost Group)
"Everyone's got a plan ..... until they get punched in the face"
Mike Tyson (Former World Heavyweight Boxing Champion)
Latest Updates
DOW JONES GLOBAL INDEX
(23 September 2022)
Global equities were substantially lower this past week with a percentage return (as measured by the Dow Jones Global Index) of -5.07%. They remain within an established downtrend below the descending trendline (white dotted line) and 40 week moving average. They closed this week below the pre-Covid closing price levels @ 444-447 and are now within the shaded support zone.
Dow Jones Global Index Historical Monthly Returns
The month of August closed with a loss of -4.89%. We remain within September which has historically been the worst month for global equities since 2000:
- -27.2% cumulative percentage return over the past 22 years.
- 59.1% win percentage.
- greatest gain +9.5% (2010)
- greatest loss -12.8% (2008)
Global Macro "GRID" Matrix Roadmap
(source: 42 Macro)
(source: 42 Macro)
"I skate to where the puck is going to be; not where it has been."
Wayne Gretzky
Wayne Gretzky
- Globally (median conditional probabilities of each regime are shown at the bottom of the table) the current bottom-up global macro roadmap model indicates we are about to rotation into a period of global "Deflation" (where both global growth and inflation are decelerating simultaneously) as we proceed through to the end of 2022. This suggests potential weakness in equities/strength in bonds could be expected into year-end.
- China/Indonesia remain the only major country where positive macro conditions are expected into the end of the year (this is highly subject to the "zero-covid" lockdowns in China which override growth/inflation dynamics).
Growth Reflation Inflation Deflation
(weekly update as of 23 September 2022)
(weekly update as of 23 September 2022)
Full Global Data-set
Zoomed-in Global Data-set
Conditional Probabilities of Regime Occurrence
Asset Class Over/Under Performance Per Quadrant
(20-year backtest using Bloomberg data)
Weekly Global Macro Review
U.S. Equities
US stocks recorded a second week of pronounced losses after Federal Reserve policymakers revealed that they expected official short-term interest rates to continue going sharply higher over the next several months. The Dow Jones Industrial Average and S&P 400 Midcap Index fell to new intraday lows since late 2020, while the S&P 500 Index, small-cap Russell 2000 Index, and Nasdaq Composite managed to stay slightly above their bottoms in mid-June 2022.
US stocks recorded a second week of pronounced losses after Federal Reserve policymakers revealed that they expected official short-term interest rates to continue going sharply higher over the next several months. The Dow Jones Industrial Average and S&P 400 Midcap Index fell to new intraday lows since late 2020, while the S&P 500 Index, small-cap Russell 2000 Index, and Nasdaq Composite managed to stay slightly above their bottoms in mid-June 2022.
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S&P 500:
DJIA: NASDAQ 100: S&P 400 Mid-cap: Russell 2000 Small Cap: |
-4.6%
-4.0% -4.6% -5.9% -6.6% |
Trading was relatively subdued at the start of the week, as all eyes were on the Fed policy meeting that concluded Wednesday. Stocks fell sharply at 2 p.m. on Wednesday after policymakers announced a 75-basis-point (0.75%) hike in the federal funds rate, bringing it to a target range of 3.00% to 3.25%, its highest since March 2008—when the Fed was in the process of cutting rates.
What really seemed to concern investors more than the interest rate increase (which was widely expected) was the survey of Fed policymakers’ individual expectations for future rate increases (the so-called “dot-plot”), which showed that many voting members of the Fed expect rates to reach 4.50% by the end of the year and stay near there for much of 2023.
Federal Reserve Chair Jerome Powell’s post-meeting press conference initially seemed to reassure investors, sending stocks back higher. The Fed Chair acknowledged that Americans’ longer-term inflation expectations “appear to remain well anchored” and noted that policymakers expected their preferred measure of inflation, the year-over-year change in the personal consumption expenditures index, to ease significantly in 2023, from a median of 5.4% to 2.8%. But stocks then headed back lower after Powell acknowledged that “no one knows whether this process [of raising rates] will lead to a recession or, if so, how significant that recession would be.”
The selling accelerated Friday, seemingly fed by troubling developments in Europe and despite some modestly encouraging economic data. S&P Global reported measures of current manufacturing and services activity that both surprised on the upside. Manufacturing activity continued to expand and even accelerated a bit (51.8 versus 51.5, with levels above 50 indicating expansion) from August’s reading, while services sector activity continued to contract but at a much more modest pace (49.2 versus 43.7). Weekly jobless claims, reported Thursday, rose a bit to 213,000 but would have been flat if the previous week’s number had not been revised down; the four-week moving claims average fell to its lowest point in three months.
US Bonds
Short-term yields briefly jumped in response to the Fed’s latest projections, but the week’s sharpest yield increases occurred on Thursday amid elevated futures market activity. These moves pushed the two-year U.S. Treasury note yield above 4.10%—its highest level since October 2007—and the benchmark 10-year U.S. Treasury note yield briefly to 3.77%—its highest mark since November 2008. (Bond prices and yields move in opposite directions).
Investment-grade corporate bonds held up relatively well ahead of the Fed meeting as higher-than-average trading volumes and muted primary issuance formed a supportive technical backdrop. However, after the meeting, the asset class weakened alongside moves lower in the equity market and rising U.S. Treasury yields.
The high yield bond market saw lower-than-average volumes during the first part of the week as investors seemed to focus on positioning ahead of the Fed meeting. Below investment-grade bonds experienced weakness following the Fed’s rate decision.
What really seemed to concern investors more than the interest rate increase (which was widely expected) was the survey of Fed policymakers’ individual expectations for future rate increases (the so-called “dot-plot”), which showed that many voting members of the Fed expect rates to reach 4.50% by the end of the year and stay near there for much of 2023.
Federal Reserve Chair Jerome Powell’s post-meeting press conference initially seemed to reassure investors, sending stocks back higher. The Fed Chair acknowledged that Americans’ longer-term inflation expectations “appear to remain well anchored” and noted that policymakers expected their preferred measure of inflation, the year-over-year change in the personal consumption expenditures index, to ease significantly in 2023, from a median of 5.4% to 2.8%. But stocks then headed back lower after Powell acknowledged that “no one knows whether this process [of raising rates] will lead to a recession or, if so, how significant that recession would be.”
The selling accelerated Friday, seemingly fed by troubling developments in Europe and despite some modestly encouraging economic data. S&P Global reported measures of current manufacturing and services activity that both surprised on the upside. Manufacturing activity continued to expand and even accelerated a bit (51.8 versus 51.5, with levels above 50 indicating expansion) from August’s reading, while services sector activity continued to contract but at a much more modest pace (49.2 versus 43.7). Weekly jobless claims, reported Thursday, rose a bit to 213,000 but would have been flat if the previous week’s number had not been revised down; the four-week moving claims average fell to its lowest point in three months.
US Bonds
Short-term yields briefly jumped in response to the Fed’s latest projections, but the week’s sharpest yield increases occurred on Thursday amid elevated futures market activity. These moves pushed the two-year U.S. Treasury note yield above 4.10%—its highest level since October 2007—and the benchmark 10-year U.S. Treasury note yield briefly to 3.77%—its highest mark since November 2008. (Bond prices and yields move in opposite directions).
Investment-grade corporate bonds held up relatively well ahead of the Fed meeting as higher-than-average trading volumes and muted primary issuance formed a supportive technical backdrop. However, after the meeting, the asset class weakened alongside moves lower in the equity market and rising U.S. Treasury yields.
The high yield bond market saw lower-than-average volumes during the first part of the week as investors seemed to focus on positioning ahead of the Fed meeting. Below investment-grade bonds experienced weakness following the Fed’s rate decision.
Europe/UK Equities
European shares fell sharply for a second week, as central banks raised interest rates sharply, intensifying fears of a prolonged economic slowdown. The pan-European STOXX Europe 600 Index ended the week down -4.4%, dropping to the lowest levels in more than a year.
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German DAX:
French CAC: Italian MIB: Spanish IBEX: U.K. FTSE 100: |
-3.6%
-4.8% -4.7% -5.0% -3.0% |
Sweden’s central bank kicked off a spate of large interest rate increases in Europe and indicated policy may have to be tightened further to bring inflation under control, a judgment echoed by other central banks. The Riksbank raised its benchmark rate by one percentage point to 1.75%, which was more than expected. Switzerland’s central bank lifted borrowing costs by 0.75 percentage point, taking its benchmark rate to 0.5% and shifting into positive territory for the first time since 2015. In Norway, policymakers hiked rates by 50 basis points for the third time in a row to 2.25%. The Bank of England (BoE) lifted its key rate to 2.25% as well, hiking by 0.5 percentage point for the second month running. Markets had been pricing in the probability of a three-quarter-point increase in line with the U.S. Federal Reserve.
Eurozone business activity contracted for a third consecutive month in September as the economic downturn deepened, according to purchasing managers’ surveys. Preliminary data showed the S&P Global Eurozone purchasing managers index composite Index fell to 48.2 in September—the lowest level since June 2020—from 48.9 in August (a level below 50 signals a contraction.)
UK Chancellor of the Exchequer Kwasi Kwarteng unveiled a tax-cutting budget that also included supply-side reforms and a GBP 60 billion energy support package for households and businesses aimed at achieving 2.5% annual growth. The package includes reductions in the top and basic rates of income tax and the cancellation of increases in national insurance contributions (a payroll tax) and corporation tax.
Europe + U.K. Bonds
Yields on German 10-year government bonds rose to fresh decade highs as central bank rate hikes boosted market expectations for monetary policy tightening at the European Central Bank. That was echoed across European markets with Italian, Spanish, and French yields also rising across the board.
UK gilt yields jumped sharply on the prospect of escalating public debt and a sharp increase in interest rates after the government slashed taxes by the most since 1972 to support the economy. The UK pound fell to USD 1.09—a 37-year low.
Eurozone business activity contracted for a third consecutive month in September as the economic downturn deepened, according to purchasing managers’ surveys. Preliminary data showed the S&P Global Eurozone purchasing managers index composite Index fell to 48.2 in September—the lowest level since June 2020—from 48.9 in August (a level below 50 signals a contraction.)
UK Chancellor of the Exchequer Kwasi Kwarteng unveiled a tax-cutting budget that also included supply-side reforms and a GBP 60 billion energy support package for households and businesses aimed at achieving 2.5% annual growth. The package includes reductions in the top and basic rates of income tax and the cancellation of increases in national insurance contributions (a payroll tax) and corporation tax.
Europe + U.K. Bonds
Yields on German 10-year government bonds rose to fresh decade highs as central bank rate hikes boosted market expectations for monetary policy tightening at the European Central Bank. That was echoed across European markets with Italian, Spanish, and French yields also rising across the board.
UK gilt yields jumped sharply on the prospect of escalating public debt and a sharp increase in interest rates after the government slashed taxes by the most since 1972 to support the economy. The UK pound fell to USD 1.09—a 37-year low.
Japan
Japan’s stock markets closed at their lowest levels in more than two months in a holiday-shortened week. The Nikkei 225 Index fell -1.5%, dipping at one point below the 27,000-mark for the first time since July 19. The Nikkei tracked losses on Wall Street as a large interest rate hike by the Fed further widened the U.S.-Japan rate differential. The government intervened in the foreign exchange market to support the yen after the Bank of Japan (BoJ) maintained its ultra-loose monetary policy.
Japan intervened in the currency market to support the yen for the first time since 1998 after it fell below JPY 145 to the U.S. dollar. Finance Minister Shunichi Suzuki said at a press conference afterward: “In principle, exchange rates should be decided in the markets, but we cannot tolerate repeated rapid fluctuations by speculative moves.” He said that the government will closely monitor the situation and will take necessary actions against excessive rate swings. He did not reveal the size of the intervention, nor whether the move was coordinated with other countries.
As expected, the BoJ maintained its ultra-easy monetary policy that includes setting a short-term interest rate at -0.1% and purchasing Japanese government bonds (JGB) to defend the 0.25% cap for 10-year JGB yields. Governor Haruhiko Kuroda said after the meeting: “I believe we won’t be introducing a rate hike anytime soon.” The central bank also said in a statement that the coronavirus pandemic funding program would be extended for another six months. The statement reiterated the need to monitor the impact of the coronavirus on the economy and maintain stability in financial markets.
Japan’s core consumer price inflation, which excludes volatile food prices, accelerated to an annual 2.8% in August, the fastest increase since October 2014, the Ministry of Internal Affairs and Communications said. The reading exceeded forecasts for an increase of 2.7% and was up from 2.4% in July. Higher utility bills and prices for food and groceries, along with the waning effect from cuts to mobile phone tariffs drove the increase.
Prime Minister Fumio Kishida said during a U.S. tour that Japan will remove the 50,000 daily cap on foreign arrivals from October 11, further relaxing border controls. Foreign visitors will no longer need a visa or to be part of a tour group to enter the country.
China
China’s stock markets fell as global growth slowdown fears gripped investors. The broad, capitalization-weighted Shanghai Composite Index slipped -1.2%, and the blue chip CSI 300 Index, which tracks the largest listed companies in Shanghai and Shenzhen, dropped -1.9%, Reuters reported.
On Friday, the yuan currency fell to a near 28-month low and traded at 7.1066 per U.S. dollar versus 7.0185 a week earlier. The People’s Bank of China (PBOC), which sets a reference rate each trading day for the onshore yuan versus the U.S. dollar, set the so-called fixing at its lowest level since early August 2020. The onshore yuan can trade up to 2% on either side of the fixing. However, the central bank has set the fixing stronger than market expectations in every single session for almost a month, indicating China’s efforts to slow the pace of depreciation.
Analysts regard any significant discrepancy between the market’s expectations of the fixing and where the PBOC sets the midpoint as a signal of how Beijing wants to influence the currency. The Fed’s aggressive tightening has boosted the dollar at the expense of the yuan and other emerging markets currencies this year. China’s surprise decision to lower key interest rates in August has also fueled the yuan’s slide.
An increasing number of economists have dialed back their growth forecasts for China, where the economy faces persistent headwinds from a property market downturn and continued coronavirus outbreaks. The Asian Development Bank was the latest to downgrade its growth estimate for China to 3.3% this year from a prior 4.0% estimate. It also forecast that China’s economic growth would lag that of developing Asia for the first time in more than three decades. Beijing’s official growth target this year is about 5.5%, a level that many economists believe is unattainable.
On the monetary policy front, the PBOC kept its benchmark lending rates unchanged at a monthly meeting. The central bank left the one-year and five-year loan prime rates unchanged after unexpectedly cutting both rates in August. The 10-year Chinese government bond yield rose to 2.713% from 2.692% the prior week as U.S. Treasury yields hit 11-year highs. The yield gap between the benchmark 10-year U.S. Treasury bond and its Chinese counterpart widened to the highest since 2007, Reuters reported.
Japan’s stock markets closed at their lowest levels in more than two months in a holiday-shortened week. The Nikkei 225 Index fell -1.5%, dipping at one point below the 27,000-mark for the first time since July 19. The Nikkei tracked losses on Wall Street as a large interest rate hike by the Fed further widened the U.S.-Japan rate differential. The government intervened in the foreign exchange market to support the yen after the Bank of Japan (BoJ) maintained its ultra-loose monetary policy.
Japan intervened in the currency market to support the yen for the first time since 1998 after it fell below JPY 145 to the U.S. dollar. Finance Minister Shunichi Suzuki said at a press conference afterward: “In principle, exchange rates should be decided in the markets, but we cannot tolerate repeated rapid fluctuations by speculative moves.” He said that the government will closely monitor the situation and will take necessary actions against excessive rate swings. He did not reveal the size of the intervention, nor whether the move was coordinated with other countries.
As expected, the BoJ maintained its ultra-easy monetary policy that includes setting a short-term interest rate at -0.1% and purchasing Japanese government bonds (JGB) to defend the 0.25% cap for 10-year JGB yields. Governor Haruhiko Kuroda said after the meeting: “I believe we won’t be introducing a rate hike anytime soon.” The central bank also said in a statement that the coronavirus pandemic funding program would be extended for another six months. The statement reiterated the need to monitor the impact of the coronavirus on the economy and maintain stability in financial markets.
Japan’s core consumer price inflation, which excludes volatile food prices, accelerated to an annual 2.8% in August, the fastest increase since October 2014, the Ministry of Internal Affairs and Communications said. The reading exceeded forecasts for an increase of 2.7% and was up from 2.4% in July. Higher utility bills and prices for food and groceries, along with the waning effect from cuts to mobile phone tariffs drove the increase.
Prime Minister Fumio Kishida said during a U.S. tour that Japan will remove the 50,000 daily cap on foreign arrivals from October 11, further relaxing border controls. Foreign visitors will no longer need a visa or to be part of a tour group to enter the country.
China
China’s stock markets fell as global growth slowdown fears gripped investors. The broad, capitalization-weighted Shanghai Composite Index slipped -1.2%, and the blue chip CSI 300 Index, which tracks the largest listed companies in Shanghai and Shenzhen, dropped -1.9%, Reuters reported.
On Friday, the yuan currency fell to a near 28-month low and traded at 7.1066 per U.S. dollar versus 7.0185 a week earlier. The People’s Bank of China (PBOC), which sets a reference rate each trading day for the onshore yuan versus the U.S. dollar, set the so-called fixing at its lowest level since early August 2020. The onshore yuan can trade up to 2% on either side of the fixing. However, the central bank has set the fixing stronger than market expectations in every single session for almost a month, indicating China’s efforts to slow the pace of depreciation.
Analysts regard any significant discrepancy between the market’s expectations of the fixing and where the PBOC sets the midpoint as a signal of how Beijing wants to influence the currency. The Fed’s aggressive tightening has boosted the dollar at the expense of the yuan and other emerging markets currencies this year. China’s surprise decision to lower key interest rates in August has also fueled the yuan’s slide.
An increasing number of economists have dialed back their growth forecasts for China, where the economy faces persistent headwinds from a property market downturn and continued coronavirus outbreaks. The Asian Development Bank was the latest to downgrade its growth estimate for China to 3.3% this year from a prior 4.0% estimate. It also forecast that China’s economic growth would lag that of developing Asia for the first time in more than three decades. Beijing’s official growth target this year is about 5.5%, a level that many economists believe is unattainable.
On the monetary policy front, the PBOC kept its benchmark lending rates unchanged at a monthly meeting. The central bank left the one-year and five-year loan prime rates unchanged after unexpectedly cutting both rates in August. The 10-year Chinese government bond yield rose to 2.713% from 2.692% the prior week as U.S. Treasury yields hit 11-year highs. The yield gap between the benchmark 10-year U.S. Treasury bond and its Chinese counterpart widened to the highest since 2007, Reuters reported.
Weekly Performance
U.S. Indices
Dow -4.0% to 29,590. S&P 500 -4.7% to 3,693. Nasdaq -5.1% to 10,868. Russell 2000 -6.6% to 1,676. CBOE Volatility Index +13.8% to 29.92.
S&P 500 Sectors
Consumer Staples -0.4%. Utilities -1.9%. Financials -4.1%. Telecom -3.4%. Healthcare -2.9%. Industrials -2.7%. Information Technology -2.3%. Materials -3.7%. Energy -2.4%. Consumer Discretionary -4.8%.
World Indices
London -3.0% to 7,019. France -4.8% to 5,783. Germany -3.6% to 12,284. Japan -1.5% to 27,154. China -1.2% to 3,088. Hong Kong -4.4% to 17,933. India -1.3% to 58,099.
Commodities and Bonds
Crude Oil WTI -6.7% to $79.43/bbl. Gold -1.9% to $1,651.7/oz. Natural Gas -11.9% to 6.841. Ten-Year Bond Yield -0.2 bps to 3.687.
Forex and Cryptos
EUR/USD -3.25%. USD/JPY +0.3%. GBP/USD -4.85%. Bitcoin -5.0%. Litecoin -5.1%. Ethereum -9.8%. XRP +34.3%.
Dow -4.0% to 29,590. S&P 500 -4.7% to 3,693. Nasdaq -5.1% to 10,868. Russell 2000 -6.6% to 1,676. CBOE Volatility Index +13.8% to 29.92.
S&P 500 Sectors
Consumer Staples -0.4%. Utilities -1.9%. Financials -4.1%. Telecom -3.4%. Healthcare -2.9%. Industrials -2.7%. Information Technology -2.3%. Materials -3.7%. Energy -2.4%. Consumer Discretionary -4.8%.
World Indices
London -3.0% to 7,019. France -4.8% to 5,783. Germany -3.6% to 12,284. Japan -1.5% to 27,154. China -1.2% to 3,088. Hong Kong -4.4% to 17,933. India -1.3% to 58,099.
Commodities and Bonds
Crude Oil WTI -6.7% to $79.43/bbl. Gold -1.9% to $1,651.7/oz. Natural Gas -11.9% to 6.841. Ten-Year Bond Yield -0.2 bps to 3.687.
Forex and Cryptos
EUR/USD -3.25%. USD/JPY +0.3%. GBP/USD -4.85%. Bitcoin -5.0%. Litecoin -5.1%. Ethereum -9.8%. XRP +34.3%.
Covid-19 Weekly Statistics (25 September @ 1300 GMT)
|
Global Recorded Cases
620,154,009 Previous
617,086,444 1-Week Change
+3,067,565 1 Week Rate-of-Change +0.50% (Prev Week +0.56%) |
Global Active Cases
13,420,111 Previous
13,952,947 1-Week Change
-532,836 1 Week Rate-of-Change -3.82% (Prev Week -6.44%) |
Global Recovered
600,193,720 Previous
596,602,941 1-Weekly Change
+3,590,779 Current Recovery Rate 98.92% (Prev Week 98.92%) |
Global Deceased
6,540,178 Previous
6,530,556 1-Weekly Change
+9,622 Current Mortality Rate 1.08% (Prev Week 1.08%) |
Weekly Trend Summary
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Global Recorded Cases
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Global Active Cases
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Global Covid Survivability Rate
Trend Improving |
Commentary
The total number of Global Recorded Cases since the pandemic began crossed 620 million this week with an additional +3,067,565 (+0.50%) new Covid cases recorded globally over the past week.
Global Daily New Confirmed Cases (7-Day moving average)
The total number of Global Recorded New Active Cases currently stands at 13,420,111 active cases. There was a decrease of -532,836 global active cases (-3.82%) over the past week.
Regional Daily New Confirmed Cases (7-day moving average)
Europe leads with the highest number of daily new confirmed cases per million population over the past week. Both Europe and North America appear to have bottomed and appear to be trending up once again as we head into fall/winter.
Global Daily New Confirmed Deaths (7-Day Moving Average)
The global Covid mortality rate (chance of dying from contracting Covid) peaked 08 April 2020 @ 21.25%. It has since fallen in a steady manner to its most recent lows @ 1.08% mortality rate this past week. We have noted a significant reduction in mortality rates since Covid Omicron became the dominant strain (a very encouraging development).
The current mortality rate remains higher than initial estimates indicated the mortality rate from Covid-19 would be (< 1.0% was the expected Covid mortality rate and for comparison it is estimated the mortality rate from global seasonal flu is 0.1% to 0.5%).
The current mortality rate remains higher than initial estimates indicated the mortality rate from Covid-19 would be (< 1.0% was the expected Covid mortality rate and for comparison it is estimated the mortality rate from global seasonal flu is 0.1% to 0.5%).
Regional Daily New Confirmed Deaths Per Capita
North America leads in terms of number of daily new confirmed deaths per million population over the past week. All global regions remain below their worst death rates due to a combination of reduced COVID-Omicron lethality, vaccinations and improved treatment protocols.
Global Regional Per-Capita Vaccination Against COVID-19
South America leads other regions in terms of the percentage of its population to have received at least 1 vaccine dose (86%) as well as being fully vaccinated (77%). They also lead in the number of booster vaccines administered per 100 people (population).
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Top 10 Countries with the largest number of Covid Cases in the last 7 -days
Top 10 Countries with the largest number of Covid Cases/1M Population in the last 7 -days
At present the most populated countries with the highest number of per-capita Covid cases are:
- Japan
- South Korea
- Taiwan
WEEKLY ASSET CLASS MONITOR
(week ending 23 September 2022)
(week ending 23 September 2022)
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Asset Class
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Region
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ETF Ticker
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Weekly
Return |
Year-to-Date
Return |
|
Equities
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World
U.S. Europe Asia Pacific Emerging Market |
VT
VTI VGK VPL VWO |
-5.25%
-4.93% -7.67% -4.30% -4.14% |
-23.67%
-22.81% -30.02% -23.26% -22.32% |
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Bonds
|
U.S. Bonds
International Bonds |
BND
BNDX |
-1.59%
-1.54% |
-13.71%
-12.29% |
|
Real Estate Equities
|
U.S. Real Estate
International Real Estate |
VNQ
VNQI |
-6.59%
-6.89% |
-26.43%
-27.06% |
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Precious Metals Equities
|
Global Gold Miners
Global Junior Gold Miners |
RING
GDXJ |
-6.73%
-7.78% |
-34.65%
-35.58% |
GLOBAL EQUITY MARKET MONITOR
Global equities had a wicked roller-coaster ride in 2020 on the back of the Covid pandemic. They peaked on 12 Feb 2020 and fell dramatically (-34%) into their 23 Mar lows.
For most of 2021 global equities had largely been in a "holding pattern" digesting their gains but have declined considerably since the beginning of 2022. Key levels for all regions remains the Feb, 2020 pre-covid closing highs (blue solid line on the below charts).
The strongest regional area remains the US markets but all regions have declined on the back of the Russian invasion of Ukraine and subsequent rapid rise in global inflation.
For most of 2021 global equities had largely been in a "holding pattern" digesting their gains but have declined considerably since the beginning of 2022. Key levels for all regions remains the Feb, 2020 pre-covid closing highs (blue solid line on the below charts).
The strongest regional area remains the US markets but all regions have declined on the back of the Russian invasion of Ukraine and subsequent rapid rise in global inflation.
Global Recession Probability Indicator
(High Risk)
(High Risk)
Below we show the latest Ned Davis Research Global Recession Probability model which measures a composite of leading indicators across 35 countries (weighing a number of economic indicators such as money supply, yield curve, building permits, consumer and business sentiment, share prices, and manufacturing production). The model uses a logistic regression method incorporating both the overall composite of leading indicators level and trend data of all 35 countries to predict the likelihood of a global recession. A score above 70 indicates high recession risks while a score below 30 means low risks.
As can be seen, the model has now registered a "high recession risk" warning (model crossing > 70). Since March 31, 1970 when the probability model has exceeded 70 it has resulted in a global recession 86.11% of the time.
As can be seen, the model has now registered a "high recession risk" warning (model crossing > 70). Since March 31, 1970 when the probability model has exceeded 70 it has resulted in a global recession 86.11% of the time.
Asset Class Return Monitor
(for week ending 16 September 2022)
(for week ending 16 September 2022)
Equities Legend:
Bonds Legend:
Currencies Legend:
Commodities Legend:
- Vanguard Total World Stock ETF (VT): (Cyan)
- Vanguard Total U.S. Stock Market ETF (VTI): (Red)
- Vanguard FTSE Europe ETF (VGK): (Lime Green)
- Vanguard FTSE Asia Pacific ETF (VPL): (Dark Blue)
- Vanguard FTSE Emerging Markets ETF (VWO): (Pink)
Bonds Legend:
- Vanguard Total U.S. Bond Market ETF (BND): (Black)
- Vanguard Total International ex-U.S. Bond ETF (BNDX): (Green)
Currencies Legend:
- U.S. Dollar Index (Cash Settlement EOD) ($USD): (Orange)
- Euro (Philadelphia Index) ($XEU): (Maroon)
Commodities Legend:
- PowerShares DB Commodity Index Tracking Fund (DBC): (Purple)
- SPDR Gold ETF (GLD): (Sky Blue)
Past Week Asset Class returns
- Over the past week global equities (as measured by the Vanguard Total World Stock ETF (shown in CYAN) lost -5.25%.
- Emerging markets were the top performing equity region this past week with European markets lagging.
- U.S. bonds (Black) and International bonds (Green) were lower on the week.
- Commodities were lower on the week with the U.S. Dollar index up +2.94%.
Year-to-Date (2022) Asset Class returns
- In 2022 global equities (as measured by the Vanguard Total World Stock ETF shown in CYAN) have lost -23.67%.
- Emerging market equities are the top performing equity region in 2022 with European markets lagging.
- Bonds have had negative returns thus far in 2022 with U.S. bonds (Black) under-performing International Bonds (Green).
- Commodities have had very strong returns for 2022 despite the U.S. Dollar index being up +18.17%.
The stock market is driven by a combination of corporate profits, trends, economic data, fund flows, expectations, greed, fear, opinions, analysis, geopolitical events and human nature. These variables are often in conflict with one another (especially in the short run) and form a sine-wave cycle of investor psychology which begins with optimism, peaks with euphoria, bottoms with despair and returns to optimism.
It must be reemphasized a complete market cycles is composed of 2 distinct cycles/phases: a "bull 1/2 cycle" and a "bear 1/2 cycle". We now have transitioned into the Bear-market 1/2 cycle as of 04 January 2022.
The Math of Losses
- a 20% loss requires a 25% gain to return to breakeven
- a 30% loss requires a 43% gain to return to breakeven
- a 40% loss requires a 67% gain to return to breakeven
- a 50% loss requires a 100% gain to return to breakeven
- a 60% loss requires a 150% gain to return to breakeven
This is why it is so important to not let losses continue in the face of a bear market decline and why we advocate phased movements into cash as our 5-factor model reverts towards Red. The below graphic represents how we move within equity markets through a complete sine-wave market cycle:
World Regional Equity Monitor
We use the following U.S. exchange traded funds to monitor equity performance for the various world regions:
- World Equities: Vanguard Total World ETF (Cyan)
- U.S. Equity: Vanguard Total Market ETF (Red)
- Asia Pacific Equity: Vanguard FTSE Pacific ETF (Blue)
- European Equity: Vanguard FTSE Europe ETF: (Lime Green)
- Emerging Market Equity: Vanguard FTSE Emerging Market ETF (Pink)
1 Year Rolling Regional Equity Performance
- Over the past 12 month rolling period regional equity performance has been negative for monitored regions.
- The strongest equity regions over the past 12 month have been US markets with Europe, Asia Pacific + Emerging market equities lagging.
- Overall world equity performance (as measured by the Vanguard Total World ETF) have returned -21.52% (including dividends) over the past 12 month rolling period.
3 Month Rolling Regional Equity Performance
- Over the past 3 month rolling period the strongest performing world equity region has been US markets with European markets the weakest.
- Mixed equity returns have been evident over the past quarter (3 months) in monitored regions.
1 Month Rolling Regional Equity Performance
- Over the past 1 month rolling period the strongest performing world equity region has been Emerging markets with Emerging markets the weakest.
- Negative equity returns have been achieved over the past month for all monitored regions.
Past Week Regional Equity Performance
- Over the past week the major global equities were lower with Emerging markets outperforming other regions.
Latest Global Equity "Big Picture"
World equity market returns are monitored via the following index and ETF equity charts:
- Dow Jones Global Market Index (cap-weighted)
- Value Line Geometric U.S. Index (equal-weighted)
- Global Dow Index (equal-weighted)
- MSCI ACWI ETF (cap-weighted)
Dow Jones Global Market Index
(market cap weighted index)
For the week the Dow Jones Global Index had a loss of -5.07%. As can be seen on the chart above, price remains below the 65 week moving average (blue line) and below resistance @ 444-447. Support zone is currently @ 420-425 followed by 404-407.
Value Line Geometric Index and Global Dow Index
(equal weighted indexes)
The Value Line Geometric Index ($XVG) is the median price performance of 1700 U.S. companies equal weighted (as opposed to most indexes which are market cap weighted) into an index. The Global Dow index ($GDOW) is a measure of the top 150 international companies equal weighted within the index.
These indexes are important as they equal-weight the price performance of all the companies held within the respective index. This removes the distortions associated with a small group of highly valued companies (which may be performing well) masking the performance of struggling companies and represents a good overview of overall internal equity breadth/strength.
These indexes are important as they equal-weight the price performance of all the companies held within the respective index. This removes the distortions associated with a small group of highly valued companies (which may be performing well) masking the performance of struggling companies and represents a good overview of overall internal equity breadth/strength.
Value Line Geometric Index ($XVG) Weekly
Global Dow Index ($GDOW) Weekly
iShares MSCI ACWI ETF
(market cap weighted ETF)
The iShares MSCI ACWI (All Country World Index) ETF is used as a benchmark to compare the performance of the various broad-based equity funds available in the Emirates Group Provident Scheme (EGPS) A/B/C accounts. It serves as a benchmark to determine how equity markets are performing on a worldwide basis. This assists in determining 2 parameters; whether to be invested in equities and also which funds within the EGPS offer the best performance relative to the benchmark.
The ETF is composed of the following regional components/weightings:
The ETF is composed of the following regional components/weightings:
ACWI Monthly Chart
Global equity markets peaked in November 2021 and closed the month of Feb 2022 below both support @ 98.89 and the 12 month simple moving average (blue line). A new bear market has begun with the next level of strong support @ 76.19-76.63.
For the month of September ACWI has lost -2.22%. It closed the month of August below the 12 month simple moving average keeping the long term trend BEARISH until month end.
For the month of September ACWI has lost -2.22%. It closed the month of August below the 12 month simple moving average keeping the long term trend BEARISH until month end.
ACWI Weekly Chart
This past week ACWI lost -4.26%. Price remains below the 65 week simple moving average (shown in BLUE) and between support @ 75.49-78.02.
World Equity Market Regional Relative Rotation Graphs
Below is a graph of 24 major regional equity market ETF's + ACWI (our world equity benchmark) shown on a Relative Rotation chart measured weekly with a 10 week look-back period (which forms the "tail" of the ETF). This graph allows us to observe over time how various regional ETF's are moving relative to both each other and also relative to cash.
- Leading (Green): (Momentum Positive + Price Relative Strength Positive)
- Weakening (Yellow): (Momentum Negative + Price Relative Strength Positive)
- Lagging (Red): (Momentum Negative + Price Relative Strength Negative)
- Improving (Blue): (Momentum Positive + Price Relative Strength Negative)
Given the cyclical nature of momentum and price within equity markets, in general the RRG charts will cycle in a clockwise manner (though not necessarily will each pass through all 4 quadrants as it is possible to rotate through an adjacent quadrant only).
Weekly Regional (Country) Relative Rotation Graphs (long term)
As can be seen on the above table, most monitored countries remain predominantly in the "Improving" quadrant at present. ACWI (our world equity fund benchmark) has transitioned into the "Improving" quadrant.
The RRG trend analysis status is currently NEUTRAL for world equities:
- ACWI Weekly Quadrant: Improving quadrant
- 24 Country Net Score: POSITIVE
- ACWI price Relative Strength (horizontal axis): NEGATIVE
- ACWI price Momentum (vertical axis): POSITIVE
Coincident Equity Market Indicators
Crude Oil
Crude oil was lower over the past week . Firm (but not excessive) crude oil prices typically point to increasing demand on the back of world economic growth improvement. However, its recent break of resistance above $75 has led to increased global inflationary concerns. As such, it's reading is currently equity bearish.
Gold
Gold was lower over the past week and closed below support @ 1698. Gold acts as a "safe haven" and the move below the recent range is equity neutral.
Commodities
Commodities were lower over the past week and remain near 8 year highs. They have exceeded pre-Covid levels on both demand increase and supply constraints and and recent strong increase has greatly increased the global inflation narrative. This has shifted commodities to equity bearish.
U.S. 30 Year Treasury Bond
U.S. 30 year bond prices were lower on the week. Rising bond prices typically indicate a "flight to safety" trade and historically have a negative correlation to equities. However, currently global inflation has reversed the correlation (stocks/bonds now positively correlated) and the current bond downtrend remains equity bearish.
Current 5-Factor Model Indications
The combined 5-Factor quantitative model is currently YELLOW (neutral). This indicates a neutral level of risk at present. The 5-Factor model currently has the following sub-model readings:
Economic Model
The Economic model is currently YELLOW. The 1 year rate-of-change in global economic data has begun to moderate into a steady-state low growth condition. The model is composed of numerous inputs including data from the following sources:
Forward Forecast Data:
Current Data:
Forward Forecast Data:
- OECD Composite Leading Indicators (CLI)
- BlackRock Macro GPS Growth/Inflation forecast monitor
Current Data:
- J.P. Morgan Global Purchasing Managers (PMI) Index
- World Bank Monthly Global Economic Report
OECD Composite Leading Indicators
(12 September 2022)
The OECD composite leading indicator (CLI) is designed to provide early signals of turning points in business cycles showing fluctuation of the economic activity around its long term potential level. The latest reading has now moved below 100 for the 1st time since early in 2021.
12 Sept 2022 - "The OECD Composite Leading Indicators (CLIs), designed to anticipate turning points in economic activity over the next six to nine months, continue to signal a slowdown in most major economies and in the OECD area as a whole.
Among large OECD economies, the CLIs continue to anticipate a loss of growth momentum in Canada, the United Kingdom and the United States, as well as in the euro area as a whole including France, Germany and Italy. Stable growth continues to be expected in Japan.
Among major emerging-market economies, the CLI for China (industrial sector) now points to a loss in growth momentum. In India, the CLI continues to indicate stable growth whereas in Brazil it signals growth losing momentum."
12 Sept 2022 - "The OECD Composite Leading Indicators (CLIs), designed to anticipate turning points in economic activity over the next six to nine months, continue to signal a slowdown in most major economies and in the OECD area as a whole.
Among large OECD economies, the CLIs continue to anticipate a loss of growth momentum in Canada, the United Kingdom and the United States, as well as in the euro area as a whole including France, Germany and Italy. Stable growth continues to be expected in Japan.
Among major emerging-market economies, the CLI for China (industrial sector) now points to a loss in growth momentum. In India, the CLI continues to indicate stable growth whereas in Brazil it signals growth losing momentum."
Long-Term View (OECD Total)
Zoomed-In View (OECD Total)
Below is our latest heat-map of the Composite Leading Indicators for various monitored regions. The CLI is designed to predict business cycle changes 6-9 months in advance so the Peak/Trough dates can be used to predict turning point months for the various regions.
- Red/Green numbers indicates above/below average future projected economic growth.
- Red/Green boxes indicates CLI rate of change month/month and year/year.
BlackRock Macro GPS Growth/Inflation Forecast
(25 August 2022 Data)
The BlackRock macro-GPS aims to give a forward forecast on the growth & inflation outlook for G7 economies. It combines new sources of information using new "big-data" sources – including internet searches and text mining of corporate calls - as well as traditional economic data. Other big data inputs include online job postings, inflation chatter, satellite images, e-invoicing and traffic patterns.
The BlackRock GPS forecasts the following:
The BlackRock GPS forecasts the following:
- the potential year-over-year GDP economic growth reading versus current consensus 3 months forward.
- the potential year-over-year Inflation reading versus current consensus 6 months forward.
BlackRock GDP Growth Forecast vs. Current Consensus
The BlackRock GDP growth forecast currently projects the greatest upside surprise in growth (versus current consensus) 3 months from now will be in the U.S. with the greatest downside surprise in growth (versus current consensus) in Italy. The growth GPS now projects modestly high future global growth relative to consensus 3-months forward with a G-7 economic growth forecast +0.20% above current consensus.
(3-month forward GPS global growth forecast is currently higher than consensus forecasts)
(3-month forward GPS global growth forecast is currently higher than consensus forecasts)
BlackRock Inflation Forecast vs. Current Consensus
The BlackRock inflation forecast currently projects Japan will have the greatest upside surprise in future inflation (relative to consensus) 6 months from now with Switzerland having the furthest downside projected inflation relative to consensus. The inflation GPS projects generally lower inflationary pressures globally relative to current consensus.
(6-month forward GPS global inflation forecast is currently lower than consensus forecasts)
(6-month forward GPS global inflation forecast is currently lower than consensus forecasts)
J.P. Morgan Global Composite Purchasing Managers Index (PMI)
(06 September 2022)
(06 September 2022)
The Global Composite PMI Report is based on the results of manufacturing and service sector surveys covering over 18,000 purchasing executives in over 40 countries. Together these countries account for an estimated 89% of global gross domestic product (GDP).
Questions are asked about real events and are not opinion based. Data are presented in the form of diffusion indices, where an index reading above 50.0 indicates an increase in the variable since the previous month and below 50.0 a decrease. As such, using the PMI data gives us a real-time look at global growth.
Questions are asked about real events and are not opinion based. Data are presented in the form of diffusion indices, where an index reading above 50.0 indicates an increase in the variable since the previous month and below 50.0 a decrease. As such, using the PMI data gives us a real-time look at global growth.
- readings > 50 indicating economic expansion
- readings < 50 indicate economic contraction.
Global Composite PMI Summary
Key Findings:
"August saw global economic activity contract for the first time since June 2020, as new order inflows declined,
international trade volumes fell and signs of excess capacity grew. There was better news on the price front, however, with rates of input cost and output charge inflation both easing.
The J.P.Morgan Global Composite Output Index – produced by J.P.Morgan and S&P Global in association with ISM and IFPSM – fell to 49.3 in August, from 50.8 in July. Output contracted in both the manufacturing and service sectors, the first time both categories have been in concurrent downturns since June 2020.
August data signalled that weaknesses in the global economy were becoming more widespread. Five out of the six subindustries covered saw downturns – business services, consumer goods, consumer services, intermediate goods and investment goods. In contrast, the financial services sector saw a mild upturn following July's contraction.
The downturn was centred on developed markets (DM), with output contracting across both the DM manufacturing and service sectors.
National PMI data indicated that business activity decreased in five out of the 14 nations covered, all advanced economies. The performance of the US was especially weak, with its rate of decline the steepest since May 2020. Japan, Germany, the UK and Italy also saw contractions. Manufacturing output and services activity both continued to rise (on average) across emerging markets, led by solid expansions in India, Brazil and China."
- US drops to bottom of national PMI rankings
- Downturns signaled in all sectors except financial services
- Signs of excess capacity as backlogs fall and jobs growth slows
"August saw global economic activity contract for the first time since June 2020, as new order inflows declined,
international trade volumes fell and signs of excess capacity grew. There was better news on the price front, however, with rates of input cost and output charge inflation both easing.
The J.P.Morgan Global Composite Output Index – produced by J.P.Morgan and S&P Global in association with ISM and IFPSM – fell to 49.3 in August, from 50.8 in July. Output contracted in both the manufacturing and service sectors, the first time both categories have been in concurrent downturns since June 2020.
August data signalled that weaknesses in the global economy were becoming more widespread. Five out of the six subindustries covered saw downturns – business services, consumer goods, consumer services, intermediate goods and investment goods. In contrast, the financial services sector saw a mild upturn following July's contraction.
The downturn was centred on developed markets (DM), with output contracting across both the DM manufacturing and service sectors.
National PMI data indicated that business activity decreased in five out of the 14 nations covered, all advanced economies. The performance of the US was especially weak, with its rate of decline the steepest since May 2020. Japan, Germany, the UK and Italy also saw contractions. Manufacturing output and services activity both continued to rise (on average) across emerging markets, led by solid expansions in India, Brazil and China."
Global Composite Output Index vs. Global GDP
There tends to be a reasonably tight correlation between the Global Composite Output Index and subsequent global GDP. The current Composite Output Index implies a deteriorating future global GDP reading approaching 2.5% .
Below is our PMI monitor for selected regions/countries.
- numerical values > 50 (BLACK) indicate economic expansion in progress.
- numerical values < 50 (RED) indicating economic contraction in progress.
- trend box GREEN indicates improvement over the past month with RED indicating a decline over the previous month.
World Bank Global Monthly Outlook
(July 2022)
(July 2022)
U.S. Economic Growth & Inflation
Year-over-Year GDP growth
The Gross Domestic Product (GDP) in the United States expanded 1.70 percent in the second quarter of 2022 over the same quarter of the previous year.
Quarter-over-Quarter GDP growth
The US economy contracted an annualized 0.6% on quarter in Q2 2022, less than a 0.9% fall in the advance estimate, due to upward revisions to consumer spending and inventories. Still, the economy technically entered a recession, following a 1.6% drop in Q1. PCE grew 1.5%, higher than 1% in the advance estimate, led by food services and accommodations while spending on goods went down 2.4% (vs -4.4% in the advance estimate), namely food and beverages. Also, private inventory investment was revised higher though remained a drag mainly due to retail trade. Also, net trade made a positive contribution for the first time in 2 years, as exports jumped 17.6% (vs 18%), led by industrial supplies, materials and travel while imports were up 2.8% (vs 3.1%). Meanwhile, residential investment sank 16.2% (vs -14% in the advance estimate), mainly due to real estate brokers' commissions. Investment also fell for structures (-13.2% vs -11.7%) and equipment (-2.7%, the same as in the advance estimate).
Annualized Inflation
The annual inflation rate in the US eased for a second straight month to 8.3% in August of 2022, the lowest in 4 months, from 8.5% in July but above market forecasts of 8.1%. The energy index increased 23.8%, below 32.9% in July. Smaller increases were reported for gasoline costs (25.6% vs 44%) and fuel oil (68.8% vs 75.6%) while inflation sped up for natural gas (33% vs 30.5%) and electricity (15.8%, the highest since August 1981). On the other hand, inflation rose for food (11.4%, the most since 1979), shelter (6.2%, the most since 1984), and used cars and trucks (7.8%). Compared to the previous month, consumer prices were up 0.1%, following a flat reading in July and compared to forecasts of a 0.1% drop. Meanwhile, core CPI, which excludes volatile energy and food prices, increased 6.3% on a year, the most since March, and up markedly from 5.9% hit in both June and July.
Eurozone Economic Growth & Inflation
Year-over-Year GDP growth
The Euro Area economy expanded 4.1% year-on-year in the second quarter of 2022, higher than 3.9% in the second estimate, but still pointing to the slowest growth in three quarter.
Quarter-over-Quarter GDP growth
The Euro Area economy expanded 0.8% on quarter in the second quarter of 2022, higher than a 0.6% rise in the second estimate, and the strongest growth rate in three quarters. Household spending was the main driver of the expansion (1.3%), prompted by the easing of covid restrictions and the summer tourism season, specially in southern countries. Also, government spending was up 0.6% and gross fixed capital formation 0.9%. Meanwhile, the contribution from external trade was negative, as exports went up 1.3% and imports 1.8%. Considering the bloc's biggest economies, Germany grew a meagre 0.1% while France expanded 0.5%, and Italy and Spain 1.1% each. Compared to the same quarter last year, the Eurozone GDP grew 4.1%, also higher than 3.9% in the previous estimate.
Annualized Inflation
Annual inflation rate in the Euro Area accelerated to 9.1% in August of 2022 from 8.9% in July, above market forecasts of 9%, preliminary estimates showed. The inflation rate broke a new record high, as energy cost remains elevated (38.3% vs 39.6%) and food prices continue to accelerate (10.6% vs 9.8%). Prices also rose faster for services (3.8% vs 3.7%) and non-energy industrial goods (5% vs 45.%). Excluding energy, inflation increased to 5.8% (vs 5.4% in July) and excluding energy, food, alcohol and tobacco, inflation also increased to 4.3% (vs 4%). Compared to the previous month, the CPI went up 0.5%.
Japan Economic Growth & Inflation
Year-over-Year GDP growth
The Gross Domestic Product (GDP) in Japan expanded 1.60 percent in the second quarter of 2022 over the same quarter of the previous year.
Quarter-over-Quarter GDP growth
The Japanese economy expanded 0.9% qoq in Q2 of 2022, compared with the flash data of a 0.5% rise and after an upwardly revised 0.1% growth in Q1. The latest figure was above market consensus of a 0.7% increase, growing for the third straight quarter, amid an upward revision of private consumption (1.2% vs 1.1% in the first estimate and after a 0.3% rise in Q1) following a lifting of all COVID curbs, as did government spending (0.7% vs 0.5% in flash data and after a 0.4% rise previously). Also, business sentiment grew 2.0%, faster than initially thought of 1.4%, which was a reversal from a 0.1% drop in Q1. Net trade also contributed positively, with growth in exports stable (at 0.9%) while imports went up at a softer rate (0.7% vs 3.5%). In the longer term, however, the economic outlook remains uncertain as the global economy weakens amid a new wave of infections in some countries, persistent supply chain issues, and high raw material prices that are boosting households' living costs.
Annualized Inflation
The annual inflation rate in Japan rose to 3.0% in August 2022, the highest level since September 2014, on the back of rising prices of food and raw materials as well as yen weakness. Main upward pressure came from food (4.7% vs 4.4% in July); fuel, light and water charges (15.6% vs 14.7%), mainly electricity (21.5% vs 19.6%) and gas (20.1% vs 18.8%); transport & communication (0.6% vs -0.2%); housing (0.6%, the same as in July); furniture & household utensils (4.4% vs 3.9%); culture & recreation (1.6% vs 0.7%), and miscellaneous (1.2%, the same as in July). Core consumer prices increased by 2.8% year-on-year, the most since October 2014. The figure came in above forecasts of 2.7% as well as the Bank of Japan's 2% target for a fifth straight month. On a monthly basis, consumer prices went up 0.4% in August, after a 0.5% increase in July.
China Economic Growth & Inflation
Year-over-Year GDP growth
The Chinese economy advanced 0.4% yoy in Q2 of 2022, missing market consensus of 1.0% and slowing sharply from a 4.8% growth in Q1. The latest figure was the softest pace of expansion since a contraction in Q1 2020, when the initial coronavirus outbreak emerged in Wuhan. China's statistics agency described the result for Q1 as “hard-earned achievements” and warned about the lingering impact of outbreaks and “shrinking demand” at home. It also noted the rising “risk of stagflation in the world economy” and tightening monetary policy overseas. For the first half of the year, the economy grew 2.5%. Beijing has targeted the country's GDP to grow around 5.5% this year, after a 8.1% expansion in 2021 which was the steepest pace in nearly a decade, and following a 2.2% growth in 2020. Meantime, activity data for June showed some improvement, as the Chinese government has rolled out a raft of measures, cutting taxes for businesses and channeling more money into infrastructure projects.
Quarter-over-Quarter GDP growth
The Chinese economy shrank by a seasonally adjusted 2.6% on quarter in the three months to June 2022, compared with market estimates of 1.5% drop and after an upwardly revised 1.4% growth in the previous quarter. This was the first quarterly contraction since the first quarter of 2020, when an outbreak of COVID-19 in Wuhan, first detected in late 2019, turned into a full blown epidemic. Full or partial lockdowns were imposed in major Chinese cities from March through May of 2022, including the financial and commerce hub of Shanghai. China's statistics agency highlighted that the downward pressure on the economy has increased significantly from the June quarter onwards, with severe impacts from unforeseen factors. “The foundation of sustained economic recovery is not stable,” it said, amid rising inflation risks globally, tightening monetary policies in major economies, and the impact of domestic virus outbreaks.
Annualized Inflation
China's annual inflation unexpectedly fell to 2.5% yoy in August 2022 from July's 2-year high of 2.7%, less than market forecasts of 2.8%. Prices of both food and non-food eased amid strict COVID curbs and adverse weather. Cost of of food rose by 6.1%, slowing from a 6.3% rise in July which was the steepest pace in 22 months. Also, cost of non-food went up 1.7%, moderating from a 1.9% gain, due to a slowdown in transport & communication (4.9% vs 6.1%), housing (0.6% vs 0.7%), household goods and services (1.3% vs 1.4%), and clothing (0.6% vs 0.7%); while inflation of healthcare was stable (at 0.7%) and that of education, culture quickened slightly (1.6% vs 1.5%). China has set a target of CPI at around 3% for 2022, the same as in 2021. On a monthly basis, consumer prices unexpectedly fell 0.1% in August, the first monthly decline in three months, missing consensus of a 0.2% rise, after a 0.5% gain in July.
Valuation Model
The Valuation model is currently YELLOW. Equity valuations are currently near the upper region of "fair value" relative to underlying current global economic fundamentals. Distortions associated with the global Covid shutdown and subsequent reopening continue to cloud the valuation model.
Technical Model
The Technical model is currently RED. Global equity markets have been in a trending decline since Jan 2022 as they continue to assess whether the global inflation impulse is truly "transitory".
Sentiment Model
The Sentiment model is currently YELLOW. Overall sentiment has turned neutral (sentiment acts as an inverse shorter-term trading indicator).
Liquidity/Economic Stress Model
The Liquidity/Economic Stress model is currently YELLOW. Unprecedented global central bank liquidity injections to combat the Covid shutdowns have begun to be reversed.
World Bond Asset Class Return Monitor
We use the following U.S. exchange traded funds to monitor bond performance for the various bond asset classes:
Total Market Bond Basket:
- U.S. Total Bond Market (BND): (Red)
- International (ex-U.S.) Total Bond Market (BNDX): (Blue)
- U.S. Gov't Treasury Bonds (GOVT): (Orange)
- Foreign Developed Market Gov't Treasury Bonds (BWX): (Pink)
- U.S. Corporate Bonds (LQD): (Maroon)
- International Corporate Bonds (PICB): (Black)
- U.S. High Yield Bonds (JNK): (Purple)
- International High Yield Bonds (IHY): (Green)
- U.S. Gov't Inflation Protected Bonds (TIP): (Lime Green)
- International Gov't Inflation-Protected Bonds (WIP): (Cyan)
1 Year Rolling Bond Performance
- Over the past 12 months rolling period the top performing bond asset class has been U.S. Gov't Inflation Protected Bonds with Int'l Corporate Bonds the worst performing.
- The U.S. Total Bond Market (RED) and the International (ex-U.S.) Total Bond Market (BLUE) have delivered negative returns over the past year.
3 Month Rolling Bond Performance
- Over the past 3 month rolling period the top performing bond asset class has been U.S. High Yield Bonds with Int'l Corporate Bonds lagging.
- U.S. Total Bond Market (RED) and International (ex-U.S.) Total Bond Market (BLUE) having delivered mixed returns over the past quarter (3 months).
1 Month Rolling Bond Performance
- Over the past 1 month rolling period the top performing bond asset class has been US Gov't Treasury Bonds with Int'l Corporate Bonds lagging.
- The U.S. Total Bond Market (RED) and the International (ex-U.S.) Total Bond Market (BLUE) have delivered negative returns over the past month.
Past Week Bond Asset Class Performance
- Over the past week US Gov't Treasury Bonds were the top performing bond class with Int'l Corporate Bonds lagging.
- The U.S. Total Bond Market (RED) and the International (ex-U.S.) Total Bond Market (BLUE) posted lower returns over the past week.
Commentary:
It has been shown in repeated studies over many years a balanced portfolio consisting of both equities and bonds (with percentage holdings in each adjusted according to personal risk tolerances) remains the best methodology in managing a long term retirement portfolio (due to the independent/low correlated function each takes when navigating though various market cycles and economic conditions).
It is best to think of bonds and equities as 2 independent brains each looking at the market from a different perspective:
As such, both serve a useful purpose in a well balanced portfolio.
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.
ETF Bond Proxies
Global aggregate bonds lost -1.59% over the past week. They have been rangebound since April 2022 but broke below recent lows this week.
The current bond bull market began 01 Oct 2018. Below is the performance of the 3 ETF's we use as "bond proxies" from that date to monitor global bond performance:
- BNDW: Vanguard Total World Bond market ETF (BLUE)
- BND: Vanguard Total U.S. Bond market ETF (GREEN)
- BNDX: Vanguard Total International (ex-U.S.) Bond market ETF (RED)
U.S. 10 year Treasury Yield
The most recent global bull market in bonds began in mid-1981 when the US Federal Reserve pushed interest rates to > 20% to combat inflation. Below is the downtrends in the various US Treasury yields from their peak (bond prices move inverse to yields so falling treasury yields are bullish for bond prices).
A weekly close above the respective trend-lines and previous peaks would be a technical breakout and define the end of the 42-year bull market in bonds.
A weekly close above the respective trend-lines and previous peaks would be a technical breakout and define the end of the 42-year bull market in bonds.
U.S. treasury yields have risen in a parabolic manner since the covid lows of July, 2020. That has led to the largest losses in government bonds in history. They have now exceeded previous highs @ 3.036%-3.248% that have remained as strong resistance since 2011.
German 10 year Bund Yield
German 10 year treasury yields bottomed in early 2020 during the depths of the European Covid shutdowns. They have rebounded strongly on inflation concerns and are now challenging 2013 highs.
Japanese 10 year Treasury Yield
Japan has been fighting deflation for decades and only recent unprecedented monetary policy by the BOJ appears to be having some effect upon deflation (and yields).
After bottoming at near -0.28% in mid-2016, yields have risen and were able to finally break above 0.15% in early 2022. They are currently employing yield curve control (YCC) to keep rates pegged at 0.25%. The Yen has massively declined as a result of YCC greatly increasing Japanese import prices. How long can the BOJ maintain this policy?
After bottoming at near -0.28% in mid-2016, yields have risen and were able to finally break above 0.15% in early 2022. They are currently employing yield curve control (YCC) to keep rates pegged at 0.25%. The Yen has massively declined as a result of YCC greatly increasing Japanese import prices. How long can the BOJ maintain this policy?
Currencies
Below is the 12/3/1 month and weekly rolling returns for the 6 currencies that make up the U.S. Dollar index. The U.S. Dollar index is composed of a weighted geometric mean of the dollar's value relative to the 6 currencies in the following list:
In addition, we also include the following for comparison purposes:
- Euro (EUR), 57.6% weight.
- Japanese yen (JPY) 13.6% weight.
- U.K. Pound sterling (GBP), 11.9% weight.
- Canadian dollar (CAD), 9.1% weight.
- Swedish krona (SEK), 4.2% weight.
- Swiss franc (CHF) 3.6% weight.
In addition, we also include the following for comparison purposes:
- The Australian Dollar (not a part of the USD Index) as it is a popular commodity currency.
- Gold (priced in USD) as it typically acts more like a currency void of fiat printing.
1 Year Rolling Currency Performance
- Over the past 12 months rolling period the top performing major currency has been the US Dollar Index 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 US Dollar Index with the British Pound lagging.
1 Month Rolling Currency Performance
- Over the past 1 month rolling period the top performing currency has been the US Dollar Index with the British Pound lagging.
Past Week Currency Performance
- Over the past week the top performing major currency was the US Dollar Index with the British Pound lagging.
U.S. Dollar: (Bullish Bias)
Commentary:
The USD index was up +2.94% over the past week. It has been within a steady uptrend since mid-2021 and has recently reached 21 year highs.
Support / Resistance Levels (based upon respective time period closing price):
Weekly: 108.42 / 112.84
Monthly: 109.28 / 113.42
Support / Resistance Levels (based upon respective time period closing price):
Weekly: 108.42 / 112.84
Monthly: 109.28 / 113.42
US Dollar Index Daily charts
The 2 year daily chart (above) shows the steady up-trending price channel starting from its May 2021 lows. It recently went parabolic above the price channel into the new red uptrend channel.
The 10 year daily chart (above) shows the price break above 103.29-103.61 which remains daily support on any pullbacks.
Over the past week the USD closed above its short term trend 50 and 200 day moving averages.
(Short Term Bullish)
(Short Term Bullish)
US Dollar Index Weekly charts
The weekly chart shows the steady -14% decline the USD index experienced from the start of the Covid crisis in March 2020 to its recent lows in early Jan 2021. It has now reversed in line with improving economic performance post-Covid panic.
Price closed the week above the intermediate term trend 20 and 65 week moving averages.
(Intermediate Term Bullish)
Price closed the week above the intermediate term trend 20 and 65 week moving averages.
(Intermediate Term Bullish)
A longer term 20 year look-back at the USD shows the 79.05-104.32 weekly close (yellow) area has been a very significant bull/bear battle zone since 1986. The recent close above 104.32 is a significant technical breakout given the top of the price channel would target a price of $119.90 last seen in 2001.
US Dollar Index Monthly chart
For the month of September the U.S. Dollar index has gained +3.95%. Since 2014 it had been confined between 88-102 (monthly close) so the April 2022 closing breakout is significant as there is little price resistance up to the 120.24 monthly close in 2001.
Price closed August above the long term trend 10 month moving average keeping the long term bias Bullish until months end.
(Long Term Bullish)
Price closed August above the long term trend 10 month moving average keeping the long term bias Bullish until months end.
(Long Term Bullish)
Euro (Bearish Bias)
The Euro was down -3.22% over the past week. It had remained largely range bound between 116-123 over the past year before its most recent breakdown and is now at 20 year lows.
Support / Resistance Levels (based upon respective time period closing price):
Weekly: 95.69 / 104.52
Monthly: 94.00 /105.70
Support / Resistance Levels (based upon respective time period closing price):
Weekly: 95.69 / 104.52
Monthly: 94.00 /105.70
Euro Daily Charts
The Euro topped out in early 2018 @ 125.10 and had been on a steady decline until March 2020. It rose dramatically into the end of 2020 had remained range bound in 2021 until its recent breakdown.
On the 2nd daily chart price it can be seen how important the yellow band daily resistance zone @ 114.61-116.04 is going back to 2015. Once broken support has been seen at 103.90-105.69 (which it has now broken below).
The Euro closed the week below the short term trend 50 and 200 day moving averages.
(Short Term Bearish)
On the 2nd daily chart price it can be seen how important the yellow band daily resistance zone @ 114.61-116.04 is going back to 2015. Once broken support has been seen at 103.90-105.69 (which it has now broken below).
The Euro closed the week below the short term trend 50 and 200 day moving averages.
(Short Term Bearish)
Euro Weekly Chart
The weekly chart shows the Euro's steady rise from its Covid lows in March 2020 to the end of 2020. It has been on a steady decline since and recently broke important support @ 104.51-104.96.
This past week the Euro closed the week below the intermediate trend 20 week + 65 week moving averages.
(Intermediate Term Bearish)
This past week the Euro closed the week below the intermediate trend 20 week + 65 week moving averages.
(Intermediate Term Bearish)
Euro Monthly
For the month of September the Euro has lost -3.55%. On a monthly closing basis it closed the month of August below the long term trend 10 month moving average keeping the long term outlook bearish until months end.
(Long Term Bearish)
(Long Term Bearish)
UK Pound (Bearish Bias)
U.K. Pound Daily Charts
U.K. Pound Weekly Chart
U.K. Pound Monthly Chart
GDP/USD 1965 to 2022
The British Pound was down -5.02% over the past week. It continues to come under pressure due to very high inflation, political uncertainty associated with the replacement of the Prime Minister Boris Johnson and USD strength. It is now approaching 37 year lows.
Historically since 1987 the Pound has traded within a range of 1.4 to 2.0 with brief excursions above/below this range. The all-time low over the past 200 years was 1.0520 (daily low @ 1.0438) seen in the 1st quarter of 1985 as the US Federal Reserve hiked interest rates to nearly 20% to combat inflation. This led to significant USD strength relative to other currencies. Five years of bullish US Dollar momentum were reversed in the late 80s following a concerted effort between the US, France, Japan, West Germany and the UK to devalue the USD in an effort to combat the US’ current account and trade balance deficits. The resultant effect saw the Pound Sterling appreciate by around 80% back into its previous trading range.
This past week the Pound closed the week below its short term trend daily 50 +200 day moving averages and below the intermediate term trend 20 + 65 week moving averages. For the month of September it is down -1.71% and closed the month of August below its long term 10 month moving average (which technically keeps the long term bearish until months end).
(Short Term Bearish)
(Intermediate Term Bearish)
(Long Term Bearish)
Support / Resistance Levels (based upon respective time period closing price):
Weekly: 105.20 /114.25
Monthly: 107.90 /122.43
Historically since 1987 the Pound has traded within a range of 1.4 to 2.0 with brief excursions above/below this range. The all-time low over the past 200 years was 1.0520 (daily low @ 1.0438) seen in the 1st quarter of 1985 as the US Federal Reserve hiked interest rates to nearly 20% to combat inflation. This led to significant USD strength relative to other currencies. Five years of bullish US Dollar momentum were reversed in the late 80s following a concerted effort between the US, France, Japan, West Germany and the UK to devalue the USD in an effort to combat the US’ current account and trade balance deficits. The resultant effect saw the Pound Sterling appreciate by around 80% back into its previous trading range.
This past week the Pound closed the week below its short term trend daily 50 +200 day moving averages and below the intermediate term trend 20 + 65 week moving averages. For the month of September it is down -1.71% and closed the month of August below its long term 10 month moving average (which technically keeps the long term bearish until months end).
(Short Term Bearish)
(Intermediate Term Bearish)
(Long Term Bearish)
Support / Resistance Levels (based upon respective time period closing price):
Weekly: 105.20 /114.25
Monthly: 107.90 /122.43
Australian Dollar (Bearish Bias)
Australian Dollar Daily Chart
Australian Dollar Weekly Chart(s)
Australian Dollar Monthly Chart
The Australian Dollar was down -2.83% over the past week. It continues to be in a steady downtrend since March 2021.
For the month of September the Aussie dollar has lost -4.66%. 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 keeping the long term outlook to bearish until months end.
(Short Term Bearish)
(Intermediate Term Bearish)
(Long Term Bearish)
Support / Resistance Levels (based upon respective time period closing price):
Weekly: 61.99 / 67.35
Monthly: 63.58 / 66.97
For the month of September the Aussie dollar has lost -4.66%. 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 keeping the long term outlook to bearish until months end.
(Short Term Bearish)
(Intermediate Term Bearish)
(Long Term Bearish)
Support / Resistance Levels (based upon respective time period closing price):
Weekly: 61.99 / 67.35
Monthly: 63.58 / 66.97
Canadian Dollar (Bearish Bias)
Canadian Dollar Daily Chart
Canadian Dollar Weekly Chart
Canadian Dollar Monthly Chart
The Canadian dollar was down -2.38% over the past week and continues to recover off its Covid-lows of late March 2020 (it is largely tied to the price of commodities so the anticipated global recovery has benefited CAD).
The Loonie closed the week below the short term trend 50 + 200 day moving averages and below the intermediate term trend 20 + 65 week moving averages. For the month of September the Loonie has lost -3.56%. It continues to recover off its 2020 lows but closed the month of August below the long term trend 10 month moving average keeping the long term bearish until months end.
(Short Term Bearish)
(Intermediate Term Bearish)
(Long Term Bearish)
Support / Resistance Levels (based upon respective time period closing price)
Weekly: 72.96 / 77.51
Monthly: 73.20 / 79.67
The Loonie closed the week below the short term trend 50 + 200 day moving averages and below the intermediate term trend 20 + 65 week moving averages. For the month of September the Loonie has lost -3.56%. It continues to recover off its 2020 lows but closed the month of August below the long term trend 10 month moving average keeping the long term bearish until months end.
(Short Term Bearish)
(Intermediate Term Bearish)
(Long Term Bearish)
Support / Resistance Levels (based upon respective time period closing price)
Weekly: 72.96 / 77.51
Monthly: 73.20 / 79.67
Key Weekly Returns (week ending 23 September 2022):
|
Countries/Regions
World Equities ACWI (iShares MSCI ACWI Index Fund) North American Equities SPY (S&P 500 SPDRs) QQQ (PowerShares QQQ Trust) IWM (Russell 2000 iShares) EWC (Canada iShares) |
Characteristics
Global Equity Fund U.S. Large Cap S&P 500 Index U.S. NASDAQ 100 Fund U.S. Russell 2000 Small Cap Fund Canada |
Week % Change
-4.98% -4.57% -4.60% -6.53% -6.73% |
Non-North America Equities
|
VGK (Vanguard European VIPERs) EPP (iShares MSCI Pacific ex-Japan ) EWJ (Japan iShares) EEM (iShares MSCI Emerging Markets) ILF (Latin America 40 Index iShares) Bonds
BND (Vanguard Total U.S. Bond Market) BNDX (Vanguard International Bond ETF) TIP (iShares Barclays TIPS Bond Fund) PCY (PowerShares Emerging Markets Debt Portfolio) |
Europe/U.K Pacific ex-Japan (inc. Australia + NZ) Japan Emerging Markets Latin America US Total Bond (44% Gov't Tsy, 56%Corp) World Investment Grade Bonds ex-US Inflation Protected Gov't Bonds Emerging Market Sovereign Debt |
-7.67% -5.14% -3.08% -4.79% +0.04% -1.59% -1.54% -1.97% -2.68% |
|
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 |
-3.50% -1.27% -1.82% -3.50% -4.27% -6.55% |
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 |
+3.13%
-2.83% -4.83% -2.36% -3.19% -0.34% |
Important Charts to Watch
Commodity Basket Index
Commodities (as measured by the Reuters/Jefferies CRB index, a basket of 19 commodities) bottomed in April, 2020. They have since recovered on the back of a large rise in global inflation and remain near 8 year highs.
Support remains the early-March weekly close @ 292.25 which was broken recently.
Support remains the early-March weekly close @ 292.25 which was broken recently.
Equity Market Volatility
The Volatility Index (VIX) is a measure of expected price fluctuations of options on the S&P 500 index options over the next 30 days (technically the VIX is quoted in percentage points and represents the expected range of movement in the S&P 500 index over the next year, at a 68% confidence level i.e. one standard deviation of the normal probability curve). For example, if the VIX is 15, this represents an expected annualized change, with a 68% probability, of less than 15% up or down.
The VXV uses the same calculation as the VIX but looks forward 3 months. When the VIX is greater than the VXV ($VIX:$VXV ratio > 1.0) the volatility structure is termed to be in "contango". It indicates traders are much more concerned about short term volatility than they are about longer term volatility and when that ratio returns to "normal" (< 0.93) it is typically a good sign market stress is easing (and a good time to add to equity positions).
As of this weeks market close volatility closed below the "VIX Event End Line" area with the VIX above 25. The volatility structure currently is NEUTRAL for equities.
The VXV uses the same calculation as the VIX but looks forward 3 months. When the VIX is greater than the VXV ($VIX:$VXV ratio > 1.0) the volatility structure is termed to be in "contango". It indicates traders are much more concerned about short term volatility than they are about longer term volatility and when that ratio returns to "normal" (< 0.93) it is typically a good sign market stress is easing (and a good time to add to equity positions).
As of this weeks market close volatility closed below the "VIX Event End Line" area with the VIX above 25. The volatility structure currently is NEUTRAL for equities.
European Banks
Since the 2009 market bottom Europe has been the weakest major equity growth region. As such, we continue to monitor European financial stocks (represented below using the iShares MSCI European Financials ETF).
Of particular concern is Deutsche Bank which in 2020 hit 13 year lows (down over 95% from its 2007 peak!) DB has a massive derivatives exposure (currently estimated at $40T notional with net exposure near $100B) and should they be put forced into a position whereby they need to restructure it could potentially lead to a catastrophic ripple effects worldwide.
They announced a significant restructuring effort in the 2nd week of July, 2019 so we continue to keenly monitor their price performance.
Chinese Equities
The Shanghai Composite index was lower this past week and is approaching support @ 3050-3147.
Chinese growth remains key to both Emerging market performance as well as an indication of Developed markets demand. From its peak in mid-2015, the Shanghai index lost more than -50% to its recent lows. We would like to see significant strength return to China further indicating world economic growth has positively turned the corner.
Chinese growth remains key to both Emerging market performance as well as an indication of Developed markets demand. From its peak in mid-2015, the Shanghai index lost more than -50% to its recent lows. We would like to see significant strength return to China further indicating world economic growth has positively turned the corner.
PRECIOUS METALS
Precious metals (and their respective producers) are an area we recommend all investors consider having a small position within. Precious metals perform well during times when real (inflation adjusted) interest rates are falling and/or when the USD is weak (not the case at present). The following charts can be utilized to determine when the risk/reward is favorable.
Below is a ratio price chart of gold stocks (HUI; the "Gold Bugs" Index) to gold bullion going back to 1996 when the Gold Bugs Index first came into existence. As can be seen, whenever the HUI:GOLD ratio dips to below approximately 0.14 (the GREEN zone on the chart) has been a low-risk opportunity to acquire gold stocks.
Gold stocks remain in the "low-risk vs. high-reward" range and until recently remain near their cheapest valuations in 22 years. Historically purchases of gold equities when within the green-zone have been a very good long term buy-and-hold opportunities.
Gold stocks remain in the "low-risk vs. high-reward" range and until recently remain near their cheapest valuations in 22 years. Historically purchases of gold equities when within the green-zone have been a very good long term buy-and-hold opportunities.
Equally bullish is Silver (chart below) which remains at a price ratio relative to the price of gold (GREEN zone on the chart) which has historically been a low risk entry point over the past 40 years.
Silver remains cheap relative to gold.
To put the valuation into a longer term perspective, below is a chart of the Gold/Silver ratio (the opposite ratio to Silver/Gold) going back to 1687. Clearly it can be seen a gold:silver ratio > 80 has historically been an outlier over the past 100+ years (and greater than 100 is historic):
The current Gold:Silver ratio recently exceeded 120 for the 1st time in history and remains near the top end of 40 year highs. It can be seen each instance in the past 40 years where the ratio has crossed above 80 has resulted in very good long term gains in silver.
The move in Silver we have been anticipating appears to have begun but there remains plenty of room to allow the ratio to fall to the "sell" level near 45.
EVEN MORE BULLISH is the price of Platinum (chart below) which has exceeded the "buy zone" last seen in 1982! Platinum is 15-20 times rarer than gold and has rarely in history traded at a price below the price of gold (only 9.7% of the time going back to 1971). It is now the cheapest it has been GOING BACK TO AUGUST 1971 WHEN THE U.S. LEFT THE GOLD STANDARD on a relative basis:
- The current Platinum:Gold ratio remains below 0.85 (red line on the chart below).
- A Platinum/Gold ratio < 0.85 has only occurred 4.7% of the time back to 1971.
- Prior to recent lows, the lowest Platinum:Gold ratio since August 1971 (when the USD was removed from the gold standard) was hit on 20 Sept 1982 when it hit a ratio low of 0.689 (Platinum $300.40/Gold $436.00).
- If Platinum were to return to its most common ratio relative to Gold (1.0x-1.25x which has been common 35% of the time) it would imply a price rise of approximately 50-90% from recent levels.
Platinum now sits on a price support extending back to 2004 and, combined with its ratio relative to the price of gold, represents a compelling long term buy point.
The following charts and commentary (in italics; bold print is our emphasis) are sourced from Kitco from commentary sourced in Feb 2017 when the ratio was near 0.85 (Platinum has become even cheaper on a relative basis since the data was published):
Platinum to gold ratios show wide variance over the 46 year period ranging from highs above 2.5 before and soon after Nixon began taking the United States off the gold standard to periodic lows below 1.0:
Platinum to gold ratios show wide variance over the 46 year period ranging from highs above 2.5 before and soon after Nixon began taking the United States off the gold standard to periodic lows below 1.0:
Our data set covers 553 months beginning in January 1971. The distribution of ratios in both tabular and chart format follows:
Platinum/Gold Ratio: % of Months
Platinum/Gold Ratio: % of Months
- < 0.85: 4.7%
- .85-1.01: 5.0%
- 1.0-1.25: 34.7%
- 1.25-1.5: 19.3%
- 1.5-2.0: 15.4%
- 2.0-2.5: 8.9%
- > 2.5: 2.0%
From our data set and the distributions of monthly average platinum-gold ratios from January 1971 thru January 2017, I glean the following:
From a compendium of sources, the average crustal abundance of both metals is around 4 ppb. Based solely on this fact, platinum and gold should trade at about the same price.
And indeed, our compilation shows that for nearly 50% of the time since gold was decoupled from the world’s reserve currency and allowed to trade freely on exchanges, the price ratio has ranged from 0.85 to 1.25. That said, since January 1971, the average price of platinum has been $637/oz and gold has been $518/oz for an overall ratio of 1.23:1. Clearly there are other factors other than the nearly equal crustal abundances that account for this historic price relationship.
A variety of supply and demand factors cause platinum to trade at a premium to gold:
Fluctuations in the relative prices of platinum and gold are largely driven by:
Platinum functions both as a precious and industrial metal. It is usually tied to the price of gold in both short- and long-term trading patterns. In times of financial distress and economic turmoil, platinum tends to behave more like gold with widespread hoarding.
The platinum-gold ratio can be used to ascertain whether one metal is over- or undervalued with respect to the other. The current monthly average ratio below 0.85 is unusual and indicates that platinum is severely undervalued with respect to gold *
* The ratio recently hit 0.55 and remains near a record low.
- A ratio of less than 0.75 is a single outlier that occurred once during the second half of 1982 when overall ratios averaged 0.81.
- Ratios <0.85 are quite unusual at 4.7%. They occurred for two months in the first quarter of 1975, the aforementioned six months in 1982, in June-July of 1985, and for an ongoing run of 16 months that commenced in October 2015.
- Ratios from 0.85 to 1.0 constitute 15.0% of the record.
- Pt:Au from 1.0 to 1.25 is the most common range and comprises 34.7% of ratios since 1971.
- The ratios between 1.25 and 1.5 occur 19.3% of the time.
- Ratios from 1.5 to 2.0 make up 15.4% of the record.
- The 2.0-2.5 interval covers 8.9% of the months in our compendium.
- The 11 monthly outliers at >2.5 comprise 2.0% of the total record and have not occurred since 1971.
From a compendium of sources, the average crustal abundance of both metals is around 4 ppb. Based solely on this fact, platinum and gold should trade at about the same price.
And indeed, our compilation shows that for nearly 50% of the time since gold was decoupled from the world’s reserve currency and allowed to trade freely on exchanges, the price ratio has ranged from 0.85 to 1.25. That said, since January 1971, the average price of platinum has been $637/oz and gold has been $518/oz for an overall ratio of 1.23:1. Clearly there are other factors other than the nearly equal crustal abundances that account for this historic price relationship.
A variety of supply and demand factors cause platinum to trade at a premium to gold:
- Platinum is a much smaller market. Cumulative world production of platinum is estimated to be about 5% of gold (9400 tonnes versus 182,000 tonnes). From 1994-2014, 3700 tonnes of platinum were mined versus 52,600 tonnes of gold or about 7% (source: USGS).
- Platinum is largely an industrial metal. Catalytic converters, electronics, petroleum and chemical catalysts, medical technologies, and many minor uses constitute over 60% of its annual demand. Around 30% is used in jewelry and 10% for investment demand. Also, 30% of the annual platinum supply now comes from recycling, mostly from catalytic converters. Some demand is consumed and lost to the marketplace.
- Gold is overwhelmingly a precious metal; 90% is used in jewelry and investments and only 10% in industrial applications. An estimated 98% of all the gold ever mined in the world remains available and held in jewelry, by central banks, in private hoards, and as fabricated products (source: USGS).
- About 70% of yearly platinum mine supply comes from South Africa, a geopolitically risky country. Much new platinum is a by-product of nickel-copper mining and smelting; therefore, annual platinum production is dependent on the supply-demand fundamentals and prices of these primary metals.
Fluctuations in the relative prices of platinum and gold are largely driven by:
- the overall growth and health of the world’s economy and in the case of platinum, the automotive industry;
- labor, power, currency, and political issues in South Africa that cause major perturbations in the platinum supply;
- safe haven hoarding of gold and to a much lesser extent, platinum, in times of economic uncertainty and major geopolitical events; speculators moving in and out of paper markets of both metals (bullion exchanges, ETFs, and derivatives) and to a lesser extent, central bank trading of physical gold.
Platinum functions both as a precious and industrial metal. It is usually tied to the price of gold in both short- and long-term trading patterns. In times of financial distress and economic turmoil, platinum tends to behave more like gold with widespread hoarding.
The platinum-gold ratio can be used to ascertain whether one metal is over- or undervalued with respect to the other. The current monthly average ratio below 0.85 is unusual and indicates that platinum is severely undervalued with respect to gold *
* The ratio recently hit 0.55 and remains near a record low.
U.S. Equity Market Valuation
Crestmont Price/Earnings Ratio
(Source: Crestmont Research)
(Source: Crestmont Research)
A large part of the expected declines in bear markets hinges upon how "expensive" markets were when the bear market begins. In this measure, we have a long way to fall given the overvaluation at the market peak.
We illustrate the recent market overvaluation via 3 charts produced by Crestmont Research (as of 01 September 2022 with data from 1871-to-present). While it is not necessary to understand exactly how the data is plotted, it is important for every investor to realize where current valuations stand relative to this 149 years of history.
In the following graphs note the following:
We illustrate the recent market overvaluation via 3 charts produced by Crestmont Research (as of 01 September 2022 with data from 1871-to-present). While it is not necessary to understand exactly how the data is plotted, it is important for every investor to realize where current valuations stand relative to this 149 years of history.
In the following graphs note the following:
- the Crestmont Price/Earnings (P/E) ratio at the end of August 2022 remained near the most expensive market valuation in U.S. stock market history (since 1871) .
- when compared to inflation the current Crestmont P/E has now exceeded the upper extreme portion of the bubble zone defining the 1998-2000 bubble peak as shown on the 2nd chart.
- pay particular attention to chart #2 where it can be seen high equity valuations are historically supported by inflation in the 0-3% range. Inflation is currently well outside this corridor (which occurred as of the end of April, 2021) and remains very concerning. Overvalued equities combined with high inflation tend be be a very dangerous combination.
U.S. (NYSE) Margin Debt
(Source: Advisor Perspectives)
We have been studying with interest the current margin debt on US markets. For those who are unfamiliar, margin debt is the amount of "loans" taken out by market speculators to leverage up their equity positions. During normal bull markets margin debt will increase as the market continues to climb. This increased margin debt amplifies equity market prices. However, at some point speculators become nervous and begin to reduce their margin positions. This reduction in margin is like letting the air out of a balloon and deflates equity asset prices.
As can be seen on the below graphic, both the 2000 and 2007 market tops were signaled in advance by tops in margin debt (margin debt not inflation adjusted on this chart):
As can be seen on the below graphic, both the 2000 and 2007 market tops were signaled in advance by tops in margin debt (margin debt not inflation adjusted on this chart):
The following chart (source: D. 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.
A year-over-year contraction in margin debt tends to be negative for stocks as liquidity is removed from equity markets. Below is the latest YoY rate of change in margin debt (source: Yardini). Note in both the 2000 and 2007 bear markets margin debt bottomed below -40%.
U.S. Equity market Valuation Models
(Source: D. Short)
Below is a graph representing 4 different long-term valuation measures plotted back to 1900 (120 years):
As of 01 September 2022 the average of these 4 measures places the U.S. stock market (S&P 500 index) as being 125% above its long term geometric mean. This remains the highest valuation in the history of the stock market going back to 1900 (now well over 3 standard deviations above the mean and well above the market peaks in 2007, 2000 and 1929).
- The Crestmont Research P/E Ratio
- The cyclical P/E ratio using the trailing 10-year earnings as the divisor
- The Q Ratio, which is the total price of the market divided by its replacement cost
- The relationship of the S&P Composite price to a regression trendline
As of 01 September 2022 the average of these 4 measures places the U.S. stock market (S&P 500 index) as being 125% above its long term geometric mean. This remains the highest valuation in the history of the stock market going back to 1900 (now well over 3 standard deviations above the mean and well above the market peaks in 2007, 2000 and 1929).
Another popular valuation metric is know as the "Buffett-Indicator". In an interview with Fortune magazine back in 2001 Warren Buffett remarked "it is probably the best single measure of where valuations stand at any given moment."
The indicator measures the price of Corporate Equities (Mkt Cap) to Gross Domestic Product (GDP) as a ratio going back to the 1950's. As can be seen below, the ratio of equity prices relative to last reported GDP currently stands well above its de-trended regression. It remains near peak overvaluation relative to economic output (note previous bear markets have historically reverted back below the regression line).
7-Year Asset Class Real Return Forecast
(Source: GMO LLC)
Each month GMO (Grantham, Mayo, Van Otterloo & Co.) publishes a forward forecast for expected annual real rates of return (i.e. inflation adjusted) for a number of different asset classes with a 7 year forward outlook. They have historically had a very good track record (0.97 correlation) of estimating forward 7 year asset class returns based primarily upon current valuations combined with mean reversion. Charts are published following analysis of the previous months data.
We have followed GMO's methodology with interest for many years. In our experience we have found them to be conservative over the shorter term with a tenancy to make calls too early. HOWEVER, similar to Dr. John Hussman of Hussman Funds, they also tend to be right over the longer term. As such, we use their outlook as part of the valuation model within the ECAM 5 Factor model.
Above is their current forecast of expected real returns (after inflation) for the next 7 years broken down by asset class. It is clear based upon current market valuations GMO forecasts well below average annual investment returns in all asset classes with a 7 year forward time horizon (the dotted line is the historical real return of U.S. equities of +6.5% per year). This is important for those who may be soon retiring and expecting "average" returns on their equity and bond investments over the next 7 years. Current high market valuations make it a certainty forward returns over the next 7-10 years will be well below historical averages.
We have followed GMO's methodology with interest for many years. In our experience we have found them to be conservative over the shorter term with a tenancy to make calls too early. HOWEVER, similar to Dr. John Hussman of Hussman Funds, they also tend to be right over the longer term. As such, we use their outlook as part of the valuation model within the ECAM 5 Factor model.
Above is their current forecast of expected real returns (after inflation) for the next 7 years broken down by asset class. It is clear based upon current market valuations GMO forecasts well below average annual investment returns in all asset classes with a 7 year forward time horizon (the dotted line is the historical real return of U.S. equities of +6.5% per year). This is important for those who may be soon retiring and expecting "average" returns on their equity and bond investments over the next 7 years. Current high market valuations make it a certainty forward returns over the next 7-10 years will be well below historical averages.
Global Asset Class 10-year Expected Nominal Return Forecast
(data as of 30 April 2022)
(Source: Research Affiliates)
(data as of 30 April 2022)
(Source: Research Affiliates)
Below is the projected 10 year nominal (non-inflation adjusted) returns for the majority of global asset classes.
Data continues to point to Emerging Market and EAFE (Europe, Africa and Far East) equities as providing the greatest returns over the next 10 years with Global Government Treasury bonds (especially U.S. Long Term Treasuries) showing minimal returns due to low global interest rates.
Data continues to point to Emerging Market and EAFE (Europe, Africa and Far East) equities as providing the greatest returns over the next 10 years with Global Government Treasury bonds (especially U.S. Long Term Treasuries) showing minimal returns due to low global interest rates.
Cycle Commentary
Below is a 20 year chart of the seasonal monthly performance of the Dow Jones Global Index. The number at the top of the column is the percentage of time the month had a positive return and at the bottom is the average percentage gain/loss for the month.
As can be seen, over the past 20 years (2002-2021) the period September-April yearly offers the highest potential global equity market returns (cumulative +6.4% average return) while the period May-August offers little in total return relative to risk (+0.4% cumulative average return). The month of April remains the strongest month with an 80% success rate and an average +2.5% return.
In the interest of moving more towards more recent market action broken down by region, below is the seasonal returns for our each of our selected ETF benchmark going back to the start of the bull market in 2009:
|
Region
|
September-April
|
May-August
|
|
Global Equities (VT)
U.S. Equities (VTI) European Equities (VGK) Asia Pacific Equities (VPL) Emerging Market Equities (VWO) |
+9.9%
+12.0% +8.0% +7.9% +10.2% |
+2.5%
+2.6% +1.4% +1.3% +0.5% |
|
Vanguard Total World Market (VT)
Vanguard FTSE European Total Market (VGK)
|
Vanguard U.S. Total Market (VTI)
Vanguard FTSE Pacific Total Market (VPL)
|
Vanguard FTSE Emerging Total Market (VWO)
|
|
S&P 500 Seasonality (historical 50 year look-back annual seasonality)
"Turning to the months ahead, the performance for January and February is rather lacklustre compared to the months that bookend this start of year period. The S&P 500 Index has gained an average of 0.8% and 0.2%, respectively in the first two months of the year, based on the past 50 periods. These months are easily the weakest of the best six month trend for stocks. The large-cap benchmark has closed positive just over half of the time (56%) in January and February, making this winter lull little better than a flip of a coin in terms of the frequency of success.. Returns for January have ranged from a loss of 8.6% in 2009 to a gain of 13.2% in 1987. Performance tends to gyrate in the middle of January with the majority of the strength achieved in the first few days and last few days of the period".
Ned Davis Research 2022 Composite Model
The following is the composite directional model forecast for the S&P 500 index for 2022 based upon the following parameters (each equal weighted within the composite model) for data from 1928-2021:
- 10-year Decennial Market Cycle
- 4-year Presidential Market Cycle
- 1-year Annual Seasonal Market Cycle
The 2022 composite model indicates the following historical "glidepath" based upon cycles from 1928-2021:
- a rangebound choppy 1st quarter.
- a market decline from mid-March to the end of June.
- a summer market bounce into August with a correction into late Sept.
- strong market performance from late Sept into year-end.
U.S. 4-Year Presidential Election Cycle
* 2022 is Year-2 (midterm year) of the 4-year cycle
As can be seen on the chart above, historically since 1900 the 2nd year of the 4 year Presidential Cycle (midterm) tends to provide the worst returns of the 4-year cycle. Alternately, year-3 of the cycle (2023) has historically provided the strongest 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 as they tend to define the political environment's influence upon stock market returns.
While we do not make investment decisions strictly based upon cycle analysis, we are cognizant of the historical nature of these cycles as they tend to define the political environment's influence upon stock market returns.
S&P 500 Index Year-2 Monthly Returns
Presidential Cycle S&P 500 returns (inc. dividends):
|
1988-Year 4: +12.40%
1989-Year1: +27.25% 1990-Year 2: -6.56% 1991-Year 3: +26.31% 1992-Year 4: +4.46% 1993-Year 1: +7.06% 1994-Year 2: -1.54% 1995-Year 3: +34.11% 1996-Year 4: +20.26% 1997-Year 1: +31.01% 1998-Year 2: +26.67% 1999-Year 3: +19.53% 2000-Year 4: -10.14% |
2001-Year 1: -13.04%
2002-Year 2: -23.37% 2003-Year 3: +26.38% 2004-Year 4: +8.99% 2005-Year 1: +3.00% 2006-Year 2: +13.62% 2007-Year 3: +3.53% 2008-Year 4: -38.49% 2009-Year 1: +23.45% 2010-Year 2: +12.78% 2011-Year 3: +0.00% 2012-Year 4: +13.41% 2013-Year 1: +29.60% |
2014-Year 2: +11.39%
2015-Year 3: -0.73% 2016-Year 4: +11.96% 2017-Year 1: +21.83% 2018-Year 2: -4.38% 2019-Year 3: +31.49% 2020-Year 4: +16.26% 2021-Year 1: +26.89% 2022-Year 2: TBA |
U.S. S&P 500 Index Bear Markets
(source: Ben Carlson, CFA)
(source: Ben Carlson, CFA)
Recessionary Bear Markets (1928-2022):
Non-Recessionary Bear Markets (1928-2022):
Recessionary vs Non-Recessionary Bear Market Returns (1928-2022):
