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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
(20 May 2022)
Global equities were lower this past week with a percentage return (as measured by the Dow Jones Global Index) of -1.02%. They remain below the descending 40 week moving average (shown in red) for the 1st time since the "Covid-crash" of March 2020.
Dow Jones Global Index Historical Monthly Returns
The month of April closed with the largest monthly loss since the "Covid-crash" of March 2020. It was also the weakest April performance in the past 23 years (April is historically the strongest month of the yearly seasonal cycle).
We remain within May which has historically been the start of the seasonally weak period (May-Sep yearly).
We remain within May which has historically been the start of the seasonally weak period (May-Sep yearly).
- -5.5% cumulative percentage return over the past 22 years.
- 45.5% win percentage.
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 approach the middle of 2022. This suggests potential weakness in equities/strength in bonds could be expected through the 2nd half of 2022.
Growth Reflation Inflation Deflation
(weekly update as of 16 May 2022)
(weekly update as of 16 May 2022)
Full Global Data-set
Zoomed-in Global Data-set
Asset Class Over/Under Performance Per Quadrant
(20-year backtest using Bloomberg data)
Weekly Global Macro Review
U.S. Equities
US equity markets continued their weekly losing streak (now 7 weeks in a row) as fears grew that inflation was causing consumers to pull back on discretionary spending, setting the stage for a coming recession. At its low point on Friday, the S&P 500 Index was down roughly -20.9% from its January intraday high, exceeding the -20% threshold for a bear market and placing it back at levels last seen in February 2021. The index’s biggest declines came on Wednesday, when it suffered its biggest daily loss since June 2020. Market activity was surprisingly subdued, however, with trading volumes more than 10% below recent 20-day averages and below every day of the previous week.
US equity markets continued their weekly losing streak (now 7 weeks in a row) as fears grew that inflation was causing consumers to pull back on discretionary spending, setting the stage for a coming recession. At its low point on Friday, the S&P 500 Index was down roughly -20.9% from its January intraday high, exceeding the -20% threshold for a bear market and placing it back at levels last seen in February 2021. The index’s biggest declines came on Wednesday, when it suffered its biggest daily loss since June 2020. Market activity was surprisingly subdued, however, with trading volumes more than 10% below recent 20-day averages and below every day of the previous week.
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S&P 500:
DJIA: NASDAQ 100: S&P 400 Mid-cap: Russell 2000 Small Cap: |
-3.0%
-2.9% -4.5% -1.9% -1.1% |
Disappointing earnings and revenue results from several of the nation’s major retailers appeared to spill over into negative broader sentiment. Most dramatically, shares in Target fell roughly 25% after earnings fell short of estimates by nearly a third, which the company attributed to a combination of reduced sales of discretionary items, such as televisions, and higher costs. Results from Walmart, Lowe’s, and Home Depot also fell short of expectations. Aside from the hit to profit margins, investors seemed to worry that major retailers would be forced to pass on more of their higher input costs to customers in coming months, keeping inflation elevated.
Comments from Federal Reserve officials during the week did little to calm inflation and interest rate fears. On Wednesday, Fed Chair Jerome Powell told The Wall Street Journal that taming inflation was an “unconditional need” and that policymakers wouldn’t hesitate to raise rates as much as necessary, even if it meant “some pain was involved.” On Thursday, Kansas City Fed President Esther George acknowledged to CNBC the “rough week” in equity markets but seemed to welcome it as “one of the avenues through which tighter financial conditions will emerge.”
The week’s economic data offered mixed signals about whether a recession was imminent. On Tuesday, investors seemed to welcome news that retail sales, excluding the volatile auto segment, had risen more than expected in April (0.6% versus roughly 0.4%), while March’s gain was revised upward to 2.1%. Industrial production, manufacturing production, and capacity utilization figures in April also surprised on the upside.
On Thursday, however, a gauge of manufacturing activity in the Mid-Atlantic region fell short of expectations by a wide margin, and weekly jobless claims rose more than expected. Housing starts and existing home sales also came in lower than expected, reflecting the pressure from higher mortgage rates. The downside surprises appeared to spark brief rallies in stock prices, however, perhaps because they drove a sharp decline in longer-term interest rate expectations.
US Bonds
The yield on the benchmark 10-year U.S. Treasury note fell as low as 2.77% in intraday trading on Thursday, its lowest level in nearly a month. (Bond prices and yields move in opposite directions.)
Investment-grade corporate bonds weakened as an active primary calendar weighed on market technicals. Also, the earnings misses from some prominent retailers resulted in growing fundamental concerns across the market. Despite these concerns, newly issued bonds performed well in general as attractive concessions bolstered demand.
Conversely, high yield bond performance marginally improved early in the week as the earnings season progressed. However, the market later retraced the gains with CCC rated names faring worse than higher-quality bonds. The recent acceleration of outflows industrywide contributed to the unwinding of the significant inflows the asset class experienced in 2020, while the primary market remained quiet with minimal issuance.
Comments from Federal Reserve officials during the week did little to calm inflation and interest rate fears. On Wednesday, Fed Chair Jerome Powell told The Wall Street Journal that taming inflation was an “unconditional need” and that policymakers wouldn’t hesitate to raise rates as much as necessary, even if it meant “some pain was involved.” On Thursday, Kansas City Fed President Esther George acknowledged to CNBC the “rough week” in equity markets but seemed to welcome it as “one of the avenues through which tighter financial conditions will emerge.”
The week’s economic data offered mixed signals about whether a recession was imminent. On Tuesday, investors seemed to welcome news that retail sales, excluding the volatile auto segment, had risen more than expected in April (0.6% versus roughly 0.4%), while March’s gain was revised upward to 2.1%. Industrial production, manufacturing production, and capacity utilization figures in April also surprised on the upside.
On Thursday, however, a gauge of manufacturing activity in the Mid-Atlantic region fell short of expectations by a wide margin, and weekly jobless claims rose more than expected. Housing starts and existing home sales also came in lower than expected, reflecting the pressure from higher mortgage rates. The downside surprises appeared to spark brief rallies in stock prices, however, perhaps because they drove a sharp decline in longer-term interest rate expectations.
US Bonds
The yield on the benchmark 10-year U.S. Treasury note fell as low as 2.77% in intraday trading on Thursday, its lowest level in nearly a month. (Bond prices and yields move in opposite directions.)
Investment-grade corporate bonds weakened as an active primary calendar weighed on market technicals. Also, the earnings misses from some prominent retailers resulted in growing fundamental concerns across the market. Despite these concerns, newly issued bonds performed well in general as attractive concessions bolstered demand.
Conversely, high yield bond performance marginally improved early in the week as the earnings season progressed. However, the market later retraced the gains with CCC rated names faring worse than higher-quality bonds. The recent acceleration of outflows industrywide contributed to the unwinding of the significant inflows the asset class experienced in 2020, while the primary market remained quiet with minimal issuance.
Europe/UK Equities
Shares in Europe pulled back amid fears of slowing economic growth and faster interest rate increases. In local currency terms, the pan-European STOXX Europe 600 Index slipped -0.5%.
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German DAX:
French CAC: Italian MIB: Spanish IBEX: U.K. FTSE 100: |
-0.3%
-1.2% +0.2% +1.8% -0.4% |
The latest macro data provided more evidence that the UK economy may be on the brink of stagnation. Inflation accelerated in April to the highest level since 1982, hitting 9.0% on surging electricity and gas prices, according to the Office for National Statistics. The unemployment rate in the three months ended March 31 fell to 3.7%—the lowest level since 1974—with job vacancies exceeding the number of jobless for the first time on record. Weekly earnings growth (including bonuses) rose by 7.0% sequentially over this period.
Meanwhile, retail sales volumes in April unexpectedly increased 1.4% month over month. However, a survey conducted by research company GfK showed that UK consumer confidence dropped to its lowest level in nearly 50 years in May.
The Eurozone economy was more resilient than previously thought in the first quarter. Gross domestic product (GDP) growth was revised higher to 0.3% sequentially from the previous estimate of 0.2%. Even so, the European Commission (EC) cut its forecast for 2022 GDP growth to 2.7% from 4.0% and raised its estimate for inflation to 6.1% from 3.5% to reflect higher energy prices.
German producer prices rose by a record amount in April, surging 33.5% year over year. Energy prices increased 87.3% over this period due mainly to soaring prices for natural gas.
The EC announced a EUR 300 billion plan called REPowerEU that aims to end the European Union’s (EU’s) dependence on Russian energy imports before 2030. It is based on four pillars: saving energy, substituting Russian energy with other fossil fuels, boosting green energy, and financing new pipelines and liquefied natural gas terminals. Unused loans from the pandemic recovery program will provide most of the cash for the plan.
Europe + U.K. Bonds
Core Eurozone government bond yields fluctuated, ending roughly unchanged. Hawkish signals from several European Central Bank (ECB) officials caused yields to rise early in the week. ECB Governing Council member Klaas Knot, for example, appeared to suggest the possibility of a 50-basis-point interest rate increase in July. Yields subsequently pulled back, as weak retail earnings in the U.S. worsened fears of an economic slowdown.
Peripheral Eurozone bond yields, which broadly tracked core markets over the week, ended slightly higher. UK gilt yields rose on inflation reaching its highest level in 40 years, better-than-expected employment data, and hawkish comments from Bank of England Chief Economist Huw Pill.
Meanwhile, retail sales volumes in April unexpectedly increased 1.4% month over month. However, a survey conducted by research company GfK showed that UK consumer confidence dropped to its lowest level in nearly 50 years in May.
The Eurozone economy was more resilient than previously thought in the first quarter. Gross domestic product (GDP) growth was revised higher to 0.3% sequentially from the previous estimate of 0.2%. Even so, the European Commission (EC) cut its forecast for 2022 GDP growth to 2.7% from 4.0% and raised its estimate for inflation to 6.1% from 3.5% to reflect higher energy prices.
German producer prices rose by a record amount in April, surging 33.5% year over year. Energy prices increased 87.3% over this period due mainly to soaring prices for natural gas.
The EC announced a EUR 300 billion plan called REPowerEU that aims to end the European Union’s (EU’s) dependence on Russian energy imports before 2030. It is based on four pillars: saving energy, substituting Russian energy with other fossil fuels, boosting green energy, and financing new pipelines and liquefied natural gas terminals. Unused loans from the pandemic recovery program will provide most of the cash for the plan.
Europe + U.K. Bonds
Core Eurozone government bond yields fluctuated, ending roughly unchanged. Hawkish signals from several European Central Bank (ECB) officials caused yields to rise early in the week. ECB Governing Council member Klaas Knot, for example, appeared to suggest the possibility of a 50-basis-point interest rate increase in July. Yields subsequently pulled back, as weak retail earnings in the U.S. worsened fears of an economic slowdown.
Peripheral Eurozone bond yields, which broadly tracked core markets over the week, ended slightly higher. UK gilt yields rose on inflation reaching its highest level in 40 years, better-than-expected employment data, and hawkish comments from Bank of England Chief Economist Huw Pill.
Japan
Japan’s stock market returns were positive for the week, with the Nikkei 225 Index gaining +1.2% and the broader TOPIX Index up +0.7%. Regional sentiment toward the end of the week was boosted by China’s action to support its property sector, the latest in a series of monetary easing measures aimed at boosting an economy weighed down by coronavirus lockdowns. An announcement by Japan’s government that the country’s strict border control measures would be eased further also lent some support.
Japan’s economic recovery lagged that of its global peers, with the country’s GDP contracting by an annualized 1% quarter on quarter during the first three months of 2022. Factors behind the contraction included deteriorating trade as import prices soared and sluggish consumer spending due to the coronavirus restrictions that had been in place. The Bank of Japan (BoJ) has repeatedly said that it will continue with its massive monetary stimulus to support the post-pandemic recovery—the relatively weak GDP data are likely to reinforce this stance. Inflation exceeded the BoJ’s 2.0% target in April, as the core consumer price index rose 2.1% from a year earlier. However, consumer price pressures remained far weaker in Japan than elsewhere in the world, also supporting the case for continued easing.
Separate data showed that Japan’s exports rose 12.5% year on year in April, led by U.S.-bound shipments of cars, while shipments to China fell sharply as the economic slowdown caused by the country’s coronavirus lockdowns weighed on demand. Imports increased by 28.2% after energy prices soared due to the war in Ukraine.
Starting in June, the cap on overseas arrivals to Japan will be doubled to 20,000 per day, as the government announced its latest steps to ease the strict border control measures that have been in place to contain the spread of the coronavirus. COVID-19 testing and quarantine rules will also be relaxed for travelers from countries with the lowest infection rate. Prime Minister Fumio Kishida previously promised to align Japan’s border control measures with those of the other Group of Seven developed nations in June.
China
Chinese stocks rose as the central bank cut interest rates to support the country’s flagging property sector even as disappointing economic data weighed on sentiment. The broad, capitalization-weighted Shanghai Composite Index advanced +2.0% and the blue chip CSI 300 Index, which tracks the largest listed companies in Shanghai and Shenzhen, climbed +2.2%.
The previous Friday, the People’s Bank of China (PBOC) cut the five-year loan prime rate (LPR), a reference for home mortgages, by an unexpectedly large 15 basis points to 4.45%. That rate cut came after the central bank cut the lower limit of mortgage rates for first-time homebuyers the previous Sunday. The PBOC’s rate cuts followed data showing a plunge in home sales in April. (China’s five-year and one-year LPRs are based on interest rates that 18 banks offer to their best customers. Banks use the five-year LPR to price mortgages, while most other loans are based on the one-year rate.)
The reduction in the five-year LPR signals that China’s government is trying to bolster homebuying demand. Given that the rate cut was done at a national rather than a regional level makes the PBOC’s move more significant. Local-level rate cuts have so far failed to spur much demand after China’s government has stepped up efforts to regulate the housing market in recent years, which has affected how people view housing as an investment. China’s policymakers are trying to strike a balance between supporting first-time homebuyers and discouraging speculation.
Economic data released last week pointed to slowing growth. Retail sales and industrial output data for April lagged estimates amid continued pandemic lockdowns reflecting China’s zero-COVID approach. Fixed asset investment rose 6.8% from January to April from a year ago but also missed the consensus forecast. Home prices in China fell in April for the eighth straight month, declining 0.3% from March, marking the fastest decline in five months.
Japan’s stock market returns were positive for the week, with the Nikkei 225 Index gaining +1.2% and the broader TOPIX Index up +0.7%. Regional sentiment toward the end of the week was boosted by China’s action to support its property sector, the latest in a series of monetary easing measures aimed at boosting an economy weighed down by coronavirus lockdowns. An announcement by Japan’s government that the country’s strict border control measures would be eased further also lent some support.
Japan’s economic recovery lagged that of its global peers, with the country’s GDP contracting by an annualized 1% quarter on quarter during the first three months of 2022. Factors behind the contraction included deteriorating trade as import prices soared and sluggish consumer spending due to the coronavirus restrictions that had been in place. The Bank of Japan (BoJ) has repeatedly said that it will continue with its massive monetary stimulus to support the post-pandemic recovery—the relatively weak GDP data are likely to reinforce this stance. Inflation exceeded the BoJ’s 2.0% target in April, as the core consumer price index rose 2.1% from a year earlier. However, consumer price pressures remained far weaker in Japan than elsewhere in the world, also supporting the case for continued easing.
Separate data showed that Japan’s exports rose 12.5% year on year in April, led by U.S.-bound shipments of cars, while shipments to China fell sharply as the economic slowdown caused by the country’s coronavirus lockdowns weighed on demand. Imports increased by 28.2% after energy prices soared due to the war in Ukraine.
Starting in June, the cap on overseas arrivals to Japan will be doubled to 20,000 per day, as the government announced its latest steps to ease the strict border control measures that have been in place to contain the spread of the coronavirus. COVID-19 testing and quarantine rules will also be relaxed for travelers from countries with the lowest infection rate. Prime Minister Fumio Kishida previously promised to align Japan’s border control measures with those of the other Group of Seven developed nations in June.
China
Chinese stocks rose as the central bank cut interest rates to support the country’s flagging property sector even as disappointing economic data weighed on sentiment. The broad, capitalization-weighted Shanghai Composite Index advanced +2.0% and the blue chip CSI 300 Index, which tracks the largest listed companies in Shanghai and Shenzhen, climbed +2.2%.
The previous Friday, the People’s Bank of China (PBOC) cut the five-year loan prime rate (LPR), a reference for home mortgages, by an unexpectedly large 15 basis points to 4.45%. That rate cut came after the central bank cut the lower limit of mortgage rates for first-time homebuyers the previous Sunday. The PBOC’s rate cuts followed data showing a plunge in home sales in April. (China’s five-year and one-year LPRs are based on interest rates that 18 banks offer to their best customers. Banks use the five-year LPR to price mortgages, while most other loans are based on the one-year rate.)
The reduction in the five-year LPR signals that China’s government is trying to bolster homebuying demand. Given that the rate cut was done at a national rather than a regional level makes the PBOC’s move more significant. Local-level rate cuts have so far failed to spur much demand after China’s government has stepped up efforts to regulate the housing market in recent years, which has affected how people view housing as an investment. China’s policymakers are trying to strike a balance between supporting first-time homebuyers and discouraging speculation.
Economic data released last week pointed to slowing growth. Retail sales and industrial output data for April lagged estimates amid continued pandemic lockdowns reflecting China’s zero-COVID approach. Fixed asset investment rose 6.8% from January to April from a year ago but also missed the consensus forecast. Home prices in China fell in April for the eighth straight month, declining 0.3% from March, marking the fastest decline in five months.
Weekly Performance
U.S. Indices
Dow -2.9% to 31,262. S&P 500 -3.1% to 3,901. Nasdaq -3.8% to 11,355. Russell 2000 -1.4% to 1,768. CBOE Volatility Index +1.9% to 29.43.
S&P 500 Sectors
Consumer Staples -7.0%. Utilities +0.3%. Financials -1.0%. Telecom -2.2%. Healthcare -0.6%. Industrials -1.7%. Information Technology -2.9%. Materials -0.6%. Energy +0.9%. Consumer Discretionary -6.1%.
World Indices
London -0.4% to 7,390. France -1.2% to 6,285. Germany -0.3% to 13,982. Japan +1.2% to 26,739. China +2.0% to 3,147. Hong Kong +4.1% to 20,717. India +2.9% to 54,326.
Commodities and Bonds
Crude Oil WTI -0.1% to $110.35/bbl. Gold +2.% to $1,845.1/oz. Natural Gas +5.2% to 8.058. Ten-Year Treasury Yield -4.8% to 2.79.
Forex and Cryptos
EUR/USD +1.45%. USD/JPY -1.03%. GBP/USD +1.86%. Bitcoin +0.0%. Litecoin +2.2%. Ethereum -1.9%. XRP -1.9%.
Dow -2.9% to 31,262. S&P 500 -3.1% to 3,901. Nasdaq -3.8% to 11,355. Russell 2000 -1.4% to 1,768. CBOE Volatility Index +1.9% to 29.43.
S&P 500 Sectors
Consumer Staples -7.0%. Utilities +0.3%. Financials -1.0%. Telecom -2.2%. Healthcare -0.6%. Industrials -1.7%. Information Technology -2.9%. Materials -0.6%. Energy +0.9%. Consumer Discretionary -6.1%.
World Indices
London -0.4% to 7,390. France -1.2% to 6,285. Germany -0.3% to 13,982. Japan +1.2% to 26,739. China +2.0% to 3,147. Hong Kong +4.1% to 20,717. India +2.9% to 54,326.
Commodities and Bonds
Crude Oil WTI -0.1% to $110.35/bbl. Gold +2.% to $1,845.1/oz. Natural Gas +5.2% to 8.058. Ten-Year Treasury Yield -4.8% to 2.79.
Forex and Cryptos
EUR/USD +1.45%. USD/JPY -1.03%. GBP/USD +1.86%. Bitcoin +0.0%. Litecoin +2.2%. Ethereum -1.9%. XRP -1.9%.
Covid-19 Weekly Statistics (22 May 2022 @ 1300 GMT)
|
Global Recorded Cases
527,374,568 Previous Week
521,011,797 1-Week Change
+6,362,771 1 Week Rate-of-Change +1.22% (Prev Week +0.76%) |
Global Active Cases
23,740,555 Previous week
39,311,830 1-Week Change
-15,571,275 1 Week Rate-of-Change -39.61% (Prev Week +0.72%) |
Global Recovered
497,333,942 Previous week
475,411,972 1-Weekly Change
+21,921,970 Current Recovery Rate 98.75% (Prev Week 98.69%) |
Global Deceased
6,300,071 Previous week
6,287,995 1-Weekly Change
+12,076 Current Mortality Rate 1.25% (Prev Week 1.31%) |
Weekly Trend Summary
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Global Recorded Cases
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Global Active Cases
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Global Covid Recovery Rate
Trend Improving |
Commentary
The total number of Global Recorded Cases since the pandemic began crossed 527 million this week with an additional 6,362,771 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 23,740,555 active cases. There was a decrease of -15,571,275 global active cases (-39.61%) over the past week (this is clearly an unexplained statistical anomaly in the John Hopkins University CSSE COVID-19 Data so we expect the data to smooth next week).
Regional Daily New Confirmed Cases (7-day moving average)
The Oceania region (mostly Australia + New Zealand) continues to lead with the highest daily new confirmed cases per million population over the past week (although below its most recent recent peak). Europe continues to decline but it appears North America has now bottomed and is now trending upwards once again.
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 @ 1.25% 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).
However, the current mortality rate remains significantly 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%).
However, the current mortality rate remains significantly 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
Oceania 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 and are declining due to a combination of reduced 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 (84%) as well as being fully vaccinated (75%).
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Top 5 Countries with the largest number of New Cases over the past 7 days
Top 5 Countries with largest per-capita number of New Cases over the past 7 days
WEEKLY ASSET CLASS MONITOR
(week ending 20 May 2022)
(week ending 20 May 2022)
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Asset Class
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Region
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ETF Ticker
|
Weekly
Return |
Year-to-Date
Return |
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Equities
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World
U.S. Europe Asia Pacific Emerging Market |
VT
VTI VGK VPL VWO |
-1.12%
-2.78% +1.22% +1.60% +1.69% |
-16.62%
-18.85% -15.86% -11.78% -14.47% |
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Bonds
|
U.S. Bonds
International Bonds |
BND
BNDX |
+0.50%
-0.24% |
-9.26%
-7.78% |
|
Real Estate Equities
|
U.S. Real Estate
International Real Estate |
VNQ
VNQI |
-2.01%
+1.18% |
-17.81%
-12.55% |
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Precious Metals Equities
|
Global Gold Miners
Global Junior Gold Miners |
RING
GDXJ |
+3.90%
+5.36% |
-4.15%
-6.77% |
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 since the beginning of 2022. Key support for all regions remains the Feb, 2020 pre-covid closing highs.
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 since the beginning of 2022. Key support for all regions remains the Feb, 2020 pre-covid closing highs.
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 at 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 87.57% 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 87.57% of the time.
Asset Class Return Monitor
(for week ending 20 May 2022)
(for week ending 20 May 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 -1.12%.
- Emerging markets were the top performing equity region this past week with US markets lagging.
- U.S. bonds (Black) and International bonds (Green) were mixed on the week.
- Commodities were lower on the week with the U.S. Dollar index down -1.38%.
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 -16.62%.
- Asia Pacific equities remain the top performing equity region in 2022 with US 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 with the U.S. Dollar index up +7.93%.
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". The 11 year bull 1/2 cycle ended in Feb 2020 with the global spread of COVID-19 resulting in a rapid bear 1/2 cycle. We now appear to have transitioned into the Bear-market 1/2 cycle as of March 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 -10.31% (including dividends) over the past 12 month rolling period.
3 Month Rolling Regional Equity Performance
- Over the past 3 month rolling period the strongest performing world equity region has been Asia Pacific markets with Emerging markets the weakest.
- Negative 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 Asia Pacific markets with US markets the weakest.
- Negative equity returns have been achieved over the past month for the monitored regions.
Past Week Regional Equity Performance
- Over the past week the major global equities were mixed 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 -1.02%. As can be seen on the chart above, price remained below the 65 week moving average (blue line) and below previous support @ 492-505.
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 have remained in consolidation above support @ 98.89. Price closed the month of Feb 2022 below both support and the 12 month simple moving average (blue line) increasing the probability a new bear market has begun with the next level of strong support @ 76.19-76.63.
For the month of May ACWI has lost -2.82%. It closed the month of April below the 12 month simple moving average keeping the long term trend BEARISH until month end.
For the month of May ACWI has lost -2.82%. It closed the month of April below the 12 month simple moving average keeping the long term trend BEARISH until month end.
ACWI Weekly Chart
This past week ACWI lost -1.33%. Price remains below the 65 week simple moving average (shown in BLUE) and above support @ 88.87-90.90.
World Equity Market Regional Relative Rotation Graphs
Below is a graph of 25 major regional equity market ETF's + ACWI (our world equity benchmark) shown on a Relative Rotation chart measured weekly with a 10 week look-back period (which forms the "tail" of the ETF). This graph allows us to observe over time how various regional ETF's are moving relative to both each other and also relative to cash.
- Leading (Green): (Momentum Positive + Price Relative Strength Positive)
- Weakening (Yellow): (Momentum Negative + Price Relative Strength Positive)
- Lagging (Red): (Momentum Negative + Price Relative Strength Negative)
- Improving (Blue): (Momentum Positive + Price Relative Strength Negative)
Given the cyclical nature of momentum and price within equity markets, in general the RRG charts will cycle in a clockwise manner (though not necessarily will each pass through all 4 quadrants as it is possible to rotate through an adjacent quadrant only).
Weekly Regional (Country) Relative Rotation Graphs (long term)
As can be seen on the above table, monitored countries remain evenly distributed at present. ACWI (our world equity fund benchmark) has moved into the "Lagging" quadrant.
The RRG trend analysis status is currently BEARISH for world equities:
- ACWI Weekly Quadrant: NEGATIVE (lagging quadrant)
- 25 Country Net Score: NEGATIVE
- ACWI price Relative Strength (horizontal axis): NEGATIVE
- ACWI price Momentum (vertical axis): NEGATIVE
Coincident Equity Market Indicators
Crude Oil
Crude oil was flat 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, its reading has shifted to equity bearish.
Gold
Gold was higher over the past week and closed below support @ 1886. Gold acts as a "safe haven" and the move below support is equity neutral.
Commodities
Commodities were higher 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 break above the boxed area has greatly increased the global inflation narrative. This has shifted commodities to equity bearish.
U.S. 30 Year Treasury Bond
U.S. 30 year bonds were higher on the week. Rising bond prices indicate a "flight to safety" trade associated with weakening economic data and the break back near pre-covid yields is equity bullish.
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
(10 May 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. CLIs show short-term economic movements in qualitative rather than quantitative terms.
The global CLI peaked in July 2021 and remains in decline. However, it remains >100 indicating the current positive business cycle is forecast to remain in place over the next 6-9 months.
The global CLI peaked in July 2021 and remains in decline. However, it remains >100 indicating the current positive business cycle is forecast to remain in place over the next 6-9 months.
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
(28 April 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 the US with the greatest downside surprise in growth (versus current consensus) in Spain. The growth GPS continues to project continued lower future growth projections globally relative to consensus 3-months forward with a G-7 economic growth forecast -0.17% below current consensus.
(3-month forward GPS global growth forecast is currently lower than consensus forecasts)
(3-month forward GPS global growth forecast is currently lower 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 the US having the furthest downside projected inflation relative to consensus. The inflation GPS projects generally lower inflationary pressures globally relative to current consensus.
(6-month forward GPS global inflation forecast 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)
(05 May 2022)
(05 May 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 05 May 2022:
Key Findings:
"The rate of global economic expansion eased to its weakest during the current 22-month sequence of increase in April, as slower growth of new orders and declining international trade flows stymied the upturn. Inflationary pressures built,as a near-record increase in input costs drove up output charges to the greatest extent in the survey history.
The J.P.Morgan Global Composite Output Index – produced by J.P.Morgan and S&P Global in association with ISM and IFPSM – posted 51.0 in April, down from 52.7 in March. The outlook also became more subdued, with business optimism slipping to a 19-month low.
Growth of service sector business activity eased to a three month low, as slower upturns in the business and financial services sectors more than offset an acceleration at consumer service providers. Global manufacturing production fell for the first time since June 2020, reflecting decreases across the consumer, intermediate and investment goods industries (the first concurrent contraction since June 2020)."
- Rates of output and new order growth ease
- Average output prices rise at record pace following near-record increase in costs
- Back-to-back falls in new export business
"The rate of global economic expansion eased to its weakest during the current 22-month sequence of increase in April, as slower growth of new orders and declining international trade flows stymied the upturn. Inflationary pressures built,as a near-record increase in input costs drove up output charges to the greatest extent in the survey history.
The J.P.Morgan Global Composite Output Index – produced by J.P.Morgan and S&P Global in association with ISM and IFPSM – posted 51.0 in April, down from 52.7 in March. The outlook also became more subdued, with business optimism slipping to a 19-month low.
Growth of service sector business activity eased to a three month low, as slower upturns in the business and financial services sectors more than offset an acceleration at consumer service providers. Global manufacturing production fell for the first time since June 2020, reflecting decreases across the consumer, intermediate and investment goods industries (the first concurrent contraction since June 2020)."
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 future global GDP reading approaching 2.5% and still indicates declining future global growth.
The current Composite Output Index implies a future global GDP reading approaching 2.5% and still indicates declining future global growth.
Below is our PMI monitor for selected regions/countries.
- numerical values > 50 (BLACK) indicate economic expansion in progress.
- numerical values < 50 (RED) indicating economic contraction in progress.
- trend box GREEN indicates improvement over the past month with RED indicating a decline over the previous month.
The latest data points to a continuation of global economic expansion with a continued downward trend from record highs.
World Bank Global Monthly Outlook
(April 2022)
(April 2022)
U.S. Economic Growth & Inflation
Year-over-Year GDP growth
The Gross Domestic Product (GDP) in the United States expanded 3.40 percent in the first quarter of 2022 over the same quarter of the previous year.
Quarter-over-Quarter GDP growth
The American economy contracted an annualized 1.4% on quarter in the first three months of 2022, well below market forecasts of a 1.1% expansion and following a 6.9% growth in Q4 2021, primarily due to a record trade deficit and a decline in inventory investment. Exports dropped 5.9% (from 22.4% in Q4), while imports surged 17.7% (from 17.9% in Q4). Meantime, gross private domestic investment growth slowed sharply (2.3% vs 36.7%). On top of that, government spending declined further (-2.7% vs -2.6%). On the flip side, consumer spending (2.7% vs 2.5%) and fixed investment (7.3% vs 2.7%), particularly nonresidential, contributed positively to GDP.
Annualized Inflation
Annual inflation rate in the US slowed to 8.3% in April from a 41-year high of 8.5% in March, but less than market forecasts of 8.1%. Energy prices increased 30.3%, below 32% in March namely gasoline (43.6% vs 48%) while fuel oil increased more (80.5% vs 70.1%). On the other hand, food prices jumped 9.4%, the most since April 1981 and prices also rose faster for shelter (5.1% vs 5%) and new vehicles (13.2% vs 12.5%). On a monthly basis, consumer prices were up 0.3%, slightly more than expectations of 0.2% but below a 16-year high of 1.2% in March. The index for gasoline fell 6.1%, offsetting increases in the indexes for natural gas (3.1%) and electricity (0.7%). Despite the slowdown in April which suggests that inflation has probably peaked, the inflation is unlikely to fall to pre-pandemic levels any time soon and will remain above the Fed's 2% target for a long time as supply disruptions persist and energy and food prices remain elevated.
Eurozone Economic Growth & Inflation
Year-over-Year GDP growth
The Gross Domestic Product in the Euro Area expanded 5.1% year-on-year in the first quarter of 2022, slightly higher than initial estimates of 5% and above 4.7% in the previous period, as countries emerged from a wave of Covid-19 infections in the end of last year. Still, the economic outlook for the Euro Area is subdued as the war in Ukraine is far from over and continues to exert further upward pressures on commodity prices, causing renewed supply disruptions and increasing uncertainty. The European Commission expects the Euro Area GDP growth at 2.7% for 2022.
Quarter-over-Quarter GDP growth
The Euro Area economy expanded 0.3% on quarter in the first three months of 2022, slightly higher than initial estimates of a 0.2% rise, and matching the growth of the previous quarter. Among the biggest economies, Germany expanded 0.2% and Spain 0.3% while France GDP growth stalled and Italy shrank 0.2%. Compared to the previous year, the GDP grew 5.1%, also above 5% in the preliminary estimate and 4.7% in Q4. Still, the economic outlook for the Euro Area is subdued as the war in Ukraine is far from over and continues to exert further upward pressures on commodity prices, causing renewed supply disruptions and increasing uncertainty. The European Commission expects the Euro Area GDP growth at 2.7% for 2022.
Annualized Inflation
Annual inflation rate in the Euro Area was revised slightly lower to 7.4% in April of 2022 from a preliminary of 7.5%, but remaining at a record high level. It compares with a 7.4% rate in March. The highest increase continues to come from energy (37.5% vs 44.3% in March), followed by services (3.3% vs 2.7%), food, alcohol & tobacco (6.3% vs 5%) and non-energy industrial goods (3.8% vs 3.4%). The inflation is now more than three times above the ECB target of 2% and is not expected to get back to the target soon as the energy crisis was exacerbated by the Russian invasion of Ukraine while rising demand and persistent supply and logistics constraints due to the coronavirus pandemic led to a generalised rise in consumer prices. The European Commission sees inflation at 6.1% in 2022, before falling to 2.7% in 2023.
Japan Economic Growth & Inflation
Year-over-Year GDP growth
The Gross Domestic Product (GDP) in Japan expanded 0.20 percent in the first quarter of 2022 over the same quarter of the previous year.
Quarter-over-Quarter GDP growth
The Japanese economy shrank 0.2% qoq in Q1 of 2022, compared with market consensus of a 0.4% fall and after a downwardly revised 0.9% growth in Q4, preliminary data showed. This was the second contraction in the past three quarters, amid a resurgence in COVID-19 cases and multiple headwinds from abroad. Household consumption fell for the second time in three quarters 0.1% (vs 2.5% in Q4) and public investment dropped for the fifth straight quarter (-3.6% vs -4.7%). At the same time, net external demand contributed negatively to the GDP, as exports rose 1.1% (vs 0.9% in Q4) while imports increased faster by 3.4% (vs 0.3%). Meanwhile, business investment grew for the second consecutive quarter (0.5% vs 0.4%) while government spending rebounded (0.6% vs -0.3%).
Annualized Inflation
Japan's consumer prices rose by 2.5% yoy in April 2022, the most since October 2014, after a 1.2% gain a month earlier. The latest figure also marked the 8th straight month of annual inflation, with food prices rising at the fastest pace in 7 years (4% vs 3.4% in March). Additional upward pressures also came from cost of fuel, light and water charges (15.7% vs 16.4%), clothes & footwear (0.8% vs 0.7%), culture & recreation (1.3% vs 1.3%), housing (0.4% vs 0.3%), furniture (2.3% vs 0.4%), education (0.9% vs 1.4%), and miscellaneous (1.2% vs 1%). At the same time, cost of transport fell by 0.2%, much softer than a 7% drop in March. Meanwhile, prices of medical care dropped further(-0.7% vs -0.4%). Core consumer prices went up 2.1% yoy, the 8th consecutive month of rises and the most since March 2015, matching forecasts and beating the BoJ’s 2% target for the first time in seven years. On a monthly basis, consumer prices went up 0.4% in April, the same pace as in the prior two months.
China Economic Growth & Inflation
Year-over-Year GDP growth
The Chinese economy expanded 4.8% yoy in Q1 of 2022, above market consensus of 4.4% and faster than a 4.0% growth in the previous period. However, the risk of a sharp slowdown in the coming months heightened, amid widespread COVID-19 lockdowns, a prolonged downturn in the property sector and uncertainty from the war in Ukraine. Meantime, separate data on March activity showed retail sales fell 3.5% yoy, down for the 1st time since July 2020, and worse than market expectations. Analysts say that April data will likely weaken further, dragging down by strict restrictions in the financial hub of Shanghai. In addition, the job market is already showing signs of stress, with China's nationwide survey-based jobless rate at 5.8%, the highest since May 2020, and up from 5.5% in February. For 2022, Beijing has targeted the economy to grow around 5.5% as headwinds gather, slowing from a 8.1% expansion last year, which was the steepest pace in nearly a decade, and after a 2.2% growth in 2020.
Quarter-over-Quarter GDP growth
The Chinese economy grew by a seasonally adjusted 1.3 percent on quarter in the three months to March 2022, surpassing market estimates of 0.6 percent and following a marginally revised 1.5 percent advance in the previous quarter. China's statistics agency said in an online statement that the economy continued its recovery despite multiple headwinds at home and abroad, adding that overall activities were within a reasonable range. So far this year, Beijing has launched more fiscal stimulus, including stepping up local bond issuance to fund infrastructure projects while slashing taxes for businesses. Meantime, the PBoC last week said it would cut bank's reserve requirement ratio for the first time this year, releasing about CNY 530 billion in long-term liquidity to spur the economy.
Annualized Inflation
China's annual inflation rate accelerated to 2.1% in April 2022 from 1.5% in March, above market forecasts of 1.8%. This was the highest reading since last November, amid logistic disruptions caused by strict COVID-19 measures. Prices of food rose for the first time in five months, with the rate of inflation (1.9%) being the highest since October 2020. Meanwhile, cost of non-food increased 2.2% (vs 2.2% in March), lifted by housing (1.2% vs 1.3%), transportation & communication (6.5% vs 5.8%), education, culture (2.0% vs 2.6%), clothing (0.5% vs 0.6%), household goods and services (1.2% vs 2.2%), and healthcare (0.7% vs 0.7%). China has set a target of CPI at around 3% for this year, the same as in 2021. On a monthly basis, consumer prices were up 0.4% in April, topping consensus of a 0.2% rise and after a flat reading in March.
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 YELLOW. Global equity markets remained largely range-bound since early 2021 as they continue to assess whether the global inflation impulse is truly "transitory".
Sentiment Model
The Sentiment model is currently GREEN. Overall sentiment has turned bearish (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 Int'l Gov't Inflation-Protected Bonds with Int'l Corporate Bonds lagging.
- U.S. Total Bond Market (RED) and International (ex-U.S.) Total Bond Market (BLUE) having delivered negative returns over the past quarter (3 months).
1 Month Rolling Bond Performance
- Over the past 1 month rolling period the top performing bond asset class has been U.S. Gov't Treasury Protected Bonds with Int'l Gov't Inflation Protected Bonds lagging.
- The U.S. Total Bond Market (RED) and the International (ex-U.S.) Total Bond Market (BLUE) have delivered negative returns over the past month.
Past Week Bond Asset Class Performance
- Over the past week Int'l Corporate Bonds were the top performing bond class with US High Yield Bonds lagging.
- The U.S. Total Bond Market (RED) and the International (ex-U.S.) Total Bond Market (BLUE) posted mixed returns over the past week.
Commentary:
It has been shown in repeated studies over many years a balanced portfolio consisting of both equities and bonds (with percentage holdings in each adjusted according to personal risk tolerances) remains the best methodology in managing a long term retirement portfolio (due to the independent/low correlated function each takes when navigating though various market cycles and economic conditions).
It is best to think of bonds and equities as 2 independent brains each looking at the market from a different perspective:
As such, both serve a useful purpose in a well balanced portfolio.
We are very cognizant of the fact bond yields remain near generational lows (bond prices overbought and at generational highs) and any significant economic recovery (with associated increases in inflation) has the potential to be very detrimental to bond fund returns. There is currently over $10 Trillion in negative yielding bonds globally (never before seen in 5000 years of history) so any sudden surge in global growth and/or inflation (as we have recently seen) will have a devastating impact upon bond fund returns.
It is best to think of bonds and equities as 2 independent brains each looking at the market from a different perspective:
- Equities: Corporate profits focused.
- Bonds: Economic growth and Inflation focused.
As such, both serve a useful purpose in a well balanced portfolio.
We are very cognizant of the fact bond yields remain near generational lows (bond prices overbought and at generational highs) and any significant economic recovery (with associated increases in inflation) has the potential to be very detrimental to bond fund returns. There is currently over $10 Trillion in negative yielding bonds globally (never before seen in 5000 years of history) so any sudden surge in global growth and/or inflation (as we have recently seen) will have a devastating impact upon bond fund returns.
ETF Bond Proxies
The current bond bull market began 01 Oct 2018. Below is the performance of the 3 ETF's we use as "bond proxies" 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)
Global aggregate bonds (blue line above) gained +0.14% over the past week. They remain below their March 2020 "Covid" lows @ 73.63 and continue lower as global inflation remains an ongoing concern.
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 reached previous highs @ 3.036%-3.248%. This level may serve as strong resistance.
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 and have now returned to 7 year 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.
After bottoming at near -0.28% in mid-2016, yields have risen and were able to finally break above 0.15% in early 2022.
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 Japanese Yen lagging.
1 Month Rolling Currency Performance
- Over the past 1 month rolling period the top performing currency has been the US Dollar Index with Gold lagging.
Past Week Currency Performance
- Over the past week the top performing major currency was the Swiss Franc with the US Dollar Index lagging.
U.S. Dollar: (Bullish Bias)
Commentary:
The USD index was down -1.38% over the past week and has been within a steady uptrend since mid-2021.
Support / Resistance Levels (based upon close):
Weekly: 102.95 / 108.42
Monthly: 102.29 / 106.84
Support / Resistance Levels (based upon close):
Weekly: 102.95 / 108.42
Monthly: 102.29 / 106.84
US Dollar Index Daily charts
The 2 year daily chart (above) shows the range-bound chop between 92-95 from Jul-Nov 2020 (red shaded box) before the drop to its recent lows at the beginning of 2021 @ 89.41. It has fully recovered and this week remained within a strong up-trending price channel.
The 10 year daily chart (above) shows price has now broken above 103.29-103.61 which now becomes daily price 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 ended the week above weekly resistance @ 102.95-103.50 and closed the week above the intermediate term trend 20 and 65 week moving averages.
(Intermediate Term Bullish)
Price ended the week above weekly resistance @ 102.95-103.50 and closed the week above the intermediate term trend 20 and 65 week moving averages.
(Intermediate Term Bullish)
A longer term 20 year look-back at the USD shows the 79.05-104.32 weekly close (yellow) area has been a very significant bull/bear battle zone since 1986. A weekly close above 104.32 would be a significant technical breakout given the top of the price channel would target a price of $120 last seen in 2001.
US Dollar Index Monthly chart
For the month of May the U.S. Dollar index has gained +0.20%. Since 2014 it has 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 April above the long term trend 10 month moving average keeping the long term bias Bullish until months end. Monthly support is now @ 102.29 with resistance @ 106.84 on a monthly closing basis.
(Long Term Bullish)
Price closed April above the long term trend 10 month moving average keeping the long term bias Bullish until months end. Monthly support is now @ 102.29 with resistance @ 106.84 on a monthly closing basis.
(Long Term Bullish)
Euro (Bearish Bias)
The Euro was up +1.44% over the past week. It had remained largely range bound between 116-123 over the past year before its most recent breakdown.
Support / Resistance Levels (based upon close):
Weekly: 104.52 / 108.46
Monthly: 94.00 /105.69
Support / Resistance Levels (based upon close):
Weekly: 104.52 / 108.46
Monthly: 94.00 /105.69
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. The Euro closed the week below the short term trend 50 and 200 day moving averages and is approaching important daily price support @ 103.90-105.69.
(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. The Euro closed the week below the short term trend 50 and 200 day moving averages and is approaching important daily price support @ 103.90-105.69.
(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 May the Euro has gained +0.14%. On a monthly closing basis it closed the month of April 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
The British Pound gained +1.83% over the past week. Clearly the fallout from Brexit will continue to influence cable's performance over the next several years and has remained rangebound between 121-142 since the Brexit vote.
Critical levels to watch on the Pound remain the respective weekly and monthly reactionary closing prices following the Brexit vote in June 2016:
This past week the Pound closed the week 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 May it has lost -0.70% and closed the month of April 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 close):
Weekly: 120.35 /127.34
Monthly: 121.33 /133.09
Critical levels to watch on the Pound remain the respective weekly and monthly reactionary closing prices following the Brexit vote in June 2016:
- 136.76 weekly close (weekly close 20 June 2016 following vote results)
- 133.09 monthly close (monthly close 30 June 2016 following vote results)
This past week the Pound closed the week 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 May it has lost -0.70% and closed the month of April 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 close):
Weekly: 120.35 /127.34
Monthly: 121.33 /133.09
Australian Dollar (Bearish Bias)
Australian Dollar Daily Chart
Australian Dollar Weekly Chart(s)
Australian Dollar Monthly Chart
The Australian Dollar was up +1.46% over the past week. It continues to be rangebound between 68.60-81.07 since 2015.
For the month of May the Aussie dollar has lost -0.27%. 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 April below the long term trend 10 month moving average switching the long term outlook to bearish until months end.
(Short Term Bearish)
(Intermediate Term Bearish)
(Long Term Bearish)
Support / Resistance Levels (based upon close):
Weekly: 67.35 / 70.55
Monthly: 66.97 / 70.17
For the month of May the Aussie dollar has lost -0.27%. 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 April below the long term trend 10 month moving average switching the long term outlook to bearish until months end.
(Short Term Bearish)
(Intermediate Term Bearish)
(Long Term Bearish)
Support / Resistance Levels (based upon close):
Weekly: 67.35 / 70.55
Monthly: 66.97 / 70.17
Canadian Dollar (Bearish Bias)
Canadian Dollar Daily Chart
Canadian Dollar Weekly Chart
Canadian Dollar Monthly Chart
The Canadian dollar was up +0.63% 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 May the Loonie has lost -0.13%. It continues to recover off its 2020 lows but closed the month of April below the long term trend 10 month moving average switching the long term bearish until months end.
(Short Term Bearish)
(Intermediate Term Bearish)
(Long Term Bearish)
Support / Resistance Levels (based upon close)
Weekly: 76.82 / 79.67
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 May the Loonie has lost -0.13%. It continues to recover off its 2020 lows but closed the month of April below the long term trend 10 month moving average switching the long term bearish until months end.
(Short Term Bearish)
(Intermediate Term Bearish)
(Long Term Bearish)
Support / Resistance Levels (based upon close)
Weekly: 76.82 / 79.67
Monthly: 73.20 / 79.67
Key Weekly Returns (week ending 20 May 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
-1.33% -3.01% -4.39% -1.12% +0.86% |
Non-North America Equities
|
VGK (Vanguard European VIPERs) EPP (iShares MSCI Pacific ex-Japan ) EWJ (Japan iShares) EEM (iShares MSCI Emerging Markets) ILF (Latin America 40 Index iShares) Bonds
BND (Vanguard Total U.S. Bond Market) BNDX (Vanguard International Bond ETF) TIP (iShares Barclays TIPS Bond Fund) PCY (PowerShares Emerging Markets Debt Portfolio) |
Europe/U.K Pacific ex-Japan (inc. Australia + NZ) Japan Emerging Markets Latin America US Total Bond (44% Gov't Tsy, 56%Corp) World Investment Grade Bonds ex-US Inflation Protected Gov't Bonds Emerging Market Sovereign Debt |
+1.22% +2.26% +1.37% +1.61% +5.61% +0.50% -0.24% -0.09% -0.10% |
|
Commodities
DBC (DB Commodities Tracking Index Fund) DBA (PowerShares DB Agriculture Fund) GLD (SPDR Gold Trust Shares) SLV (iShares Silver Trust) DBB (PowerShares Metals Fund) USO (United States Oil Fund) |
Commodity Basket Soft Commodity Basket Gold Bullion Silver Bullion Industrial Metals Light Crude Oil |
-0.25% +0.27% +1.92% +3.35% +3.57% +0.46% |
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 |
-1.54%
+1.53% +1.98% +0.68% +1.45% +1.16% |
Important Charts to Watch
Commodity Basket Index
Commodities (as measured by the Reuters/Jefferies CRB index, a basket of 19 commodities) peaked in late 2007 and have have been in a steady deflationary decline since. They attempted to base in 2015-2020 but the Covid virus drastically pushed them lower to 40 year lows.
They have since recovered on the back of a large rise in global inflation and recently broke above 7 year price resistance @233.53.
They have since recovered on the back of a large rise in global inflation and recently broke above 7 year price resistance @233.53.
Equity Market Volatility
The Volatility Index (VIX) is a measure of expected price fluctuations of options on the S&P 500 index options over the next 30 days (technically the VIX is quoted in percentage points and represents the expected range of movement in the S&P 500 index over the next year, at a 68% confidence level i.e. one standard deviation of the normal probability curve). For example, if the VIX is 15, this represents an expected annualized change, with a 68% probability, of less than 15% up or down.
The VXV uses the same calculation as the VIX but looks forward 3 months. When the VIX is greater than the VXV ($VIX:$VXV ratio > 1.0) the volatility structure is termed to be in "contango". It indicates traders are much more concerned about short term volatility than they are about longer term volatility and when that ratio returns to "normal" (< 0.93) it is typically a good sign market stress is easing (and a good time to add to equity positions).
As of this weeks market close volatility closed above the "VIX Event End Line" area with the VIX above 25. The volatility structure currently is BEARISH for equities.
The VXV uses the same calculation as the VIX but looks forward 3 months. When the VIX is greater than the VXV ($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 above the "VIX Event End Line" area with the VIX above 25. The volatility structure currently is BEARISH for equities.
European Banks
Since the 2009 market bottom Europe has been the weakest major equity growth region. As such, we continue to monitor European financial stocks (represented below using the iShares MSCI European Financials ETF).
Of particular concern is Deutsche Bank which in 2020 hit 13 year lows (down over 95% from its 2007 peak!) DB has a massive derivatives exposure (currently estimated at $40T notional with net exposure near $100B) and should they be put forced into a position whereby they need to restructure it could potentially lead to a catastrophic ripple effects worldwide.
They announced a significant restructuring effort in the 2nd week of July, 2019 so we continue to keenly monitoring their price performance.
Chinese Equities
The Shanghai Composite index was higher this past week and 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 have a small position within. Precious metals perform well during times when real (inflation adjusted) interest rates are falling and/or when the USD is weak.
Below is a ratio price chart of gold stocks (HUI; the "Gold Bugs" Index) to gold bullion going back to 1996 when the Gold Bugs Index first came into existence. As can be seen, whenever the HUI:GOLD ratio dips to below approximately 0.14 (the GREEN zone on the chart) has been a low-risk opportunity to acquire gold stocks.
Gold stocks remain in the "low-risk vs. high-reward" range and until recently remain near their cheapest valuations in 22 years. Historically purchases of gold equities when within the green-zone have been a very good long term buy-and-hold opportunities.
Gold stocks remain in the "low-risk vs. high-reward" range and until recently remain near their cheapest valuations in 22 years. Historically purchases of gold equities when within the green-zone have been a very good long term buy-and-hold opportunities.
Equally bullish is Silver (chart below) which remains at a price ratio relative to the price of gold (GREEN zone on the chart) which has historically been a low risk entry point over the past 40 years.
Silver has recently moved up dramatically but remains still fairly cheap relative to gold.
To put the valuation into a longer term perspective, below is a chart of the Gold/Silver ratio (the opposite ratio to Silver/Gold) going back to 1687. Clearly it can be seen a gold:silver ratio > 80 has historically been an outlier over the past 100+ years (and greater than 100 is historic):
The current Gold:Silver ratio recently exceeded 120 for the 1st time in history and remains near the top end of 40 year highs. It can be seen each instance in the past 40 years where the ratio has crossed above 80 has resulted in very good long term gains in silver.
The move in Silver we have been anticipating appears to have begun but there remains plenty of room to allow the ratio to fall to the "sell" level near 45.
EVEN MORE BULLISH is the price of Platinum (chart below) which has exceeded the "buy zone" last seen in 1982! Platinum is 15-20 times rarer than gold and has rarely in history traded at a price below the price of gold (only 9.7% of the time going back to 1971). It is now the cheapest it has been GOING BACK TO AUGUST 1971 WHEN THE U.S. LEFT THE GOLD STANDARD on a relative basis:
- The current Platinum:Gold ratio remains below 0.85 (red line on the chart below).
- A Platinum/Gold ratio < 0.85 has only occurred 4.7% of the time back to 1971.
- Prior to recent lows, the lowest Platinum:Gold ratio since August 1971 (when the USD was removed from the gold standard) was hit on 20 Sept 1982 when it hit a ratio low of 0.689 (Platinum $300.40/Gold $436.00).
- If Platinum were to return to its most common ratio relative to Gold (1.0x-1.25x which has been common 35% of the time) it would imply a price rise of approximately 50-90% from recent levels.
Platinum now sits on a price support extending back to 2004 and, combined with its ratio relative to the price of gold, represents a compelling long term buy point.
The following charts and commentary (in italics; bold print is our emphasis) are sourced from Kitco from commentary sourced in Feb 2017 when the ratio was near 0.85 (Platinum has become even cheaper on a relative basis since the data was published):
Platinum to gold ratios show wide variance over the 46 year period ranging from highs above 2.5 before and soon after Nixon began taking the United States off the gold standard to periodic lows below 1.0:
Platinum to gold ratios show wide variance over the 46 year period ranging from highs above 2.5 before and soon after Nixon began taking the United States off the gold standard to periodic lows below 1.0:
Our data set covers 553 months beginning in January 1971. The distribution of ratios in both tabular and chart format follows:
Platinum/Gold Ratio: % of Months
Platinum/Gold Ratio: % of Months
- < 0.85: 4.7%
- .85-1.01: 5.0%
- 1.0-1.25: 34.7%
- 1.25-1.5: 19.3%
- 1.5-2.0: 15.4%
- 2.0-2.5: 8.9%
- > 2.5: 2.0%
From our data set and the distributions of monthly average platinum-gold ratios from January 1971 thru January 2017, I glean the following:
From a compendium of sources, the average crustal abundance of both metals is around 4 ppb. Based solely on this fact, platinum and gold should trade at about the same price.
And indeed, our compilation shows that for nearly 50% of the time since gold was decoupled from the world’s reserve currency and allowed to trade freely on exchanges, the price ratio has ranged from 0.85 to 1.25. That said, since January 1971, the average price of platinum has been $637/oz and gold has been $518/oz for an overall ratio of 1.23:1. Clearly there are other factors other than the nearly equal crustal abundances that account for this historic price relationship.
A variety of supply and demand factors cause platinum to trade at a premium to gold:
Fluctuations in the relative prices of platinum and gold are largely driven by:
Platinum functions both as a precious and industrial metal. It is usually tied to the price of gold in both short- and long-term trading patterns. In times of financial distress and economic turmoil, platinum tends to behave more like gold with widespread hoarding.
The platinum-gold ratio can be used to ascertain whether one metal is over- or undervalued with respect to the other. The current monthly average ratio below 0.85 is unusual and indicates that platinum is severely undervalued with respect to gold *
* The ratio recently hit 0.55 and remains near a record low.
- A ratio of less than 0.75 is a single outlier that occurred once during the second half of 1982 when overall ratios averaged 0.81.
- Ratios <0.85 are quite unusual at 4.7%. They occurred for two months in the first quarter of 1975, the aforementioned six months in 1982, in June-July of 1985, and for an ongoing run of 16 months that commenced in October 2015.
- Ratios from 0.85 to 1.0 constitute 15.0% of the record.
- Pt:Au from 1.0 to 1.25 is the most common range and comprises 34.7% of ratios since 1971.
- The ratios between 1.25 and 1.5 occur 19.3% of the time.
- Ratios from 1.5 to 2.0 make up 15.4% of the record.
- The 2.0-2.5 interval covers 8.9% of the months in our compendium.
- The 11 monthly outliers at >2.5 comprise 2.0% of the total record and have not occurred since 1971.
From a compendium of sources, the average crustal abundance of both metals is around 4 ppb. Based solely on this fact, platinum and gold should trade at about the same price.
And indeed, our compilation shows that for nearly 50% of the time since gold was decoupled from the world’s reserve currency and allowed to trade freely on exchanges, the price ratio has ranged from 0.85 to 1.25. That said, since January 1971, the average price of platinum has been $637/oz and gold has been $518/oz for an overall ratio of 1.23:1. Clearly there are other factors other than the nearly equal crustal abundances that account for this historic price relationship.
A variety of supply and demand factors cause platinum to trade at a premium to gold:
- Platinum is a much smaller market. Cumulative world production of platinum is estimated to be about 5% of gold (9400 tonnes versus 182,000 tonnes). From 1994-2014, 3700 tonnes of platinum were mined versus 52,600 tonnes of gold or about 7% (source: USGS).
- Platinum is largely an industrial metal. Catalytic converters, electronics, petroleum and chemical catalysts, medical technologies, and many minor uses constitute over 60% of its annual demand. Around 30% is used in jewelry and 10% for investment demand. Also, 30% of the annual platinum supply now comes from recycling, mostly from catalytic converters. Some demand is consumed and lost to the marketplace.
- Gold is overwhelmingly a precious metal; 90% is used in jewelry and investments and only 10% in industrial applications. An estimated 98% of all the gold ever mined in the world remains available and held in jewelry, by central banks, in private hoards, and as fabricated products (source: USGS).
- About 70% of yearly platinum mine supply comes from South Africa, a geopolitically risky country. Much new platinum is a by-product of nickel-copper mining and smelting; therefore, annual platinum production is dependent on the supply-demand fundamentals and prices of these primary metals.
Fluctuations in the relative prices of platinum and gold are largely driven by:
- the overall growth and health of the world’s economy and in the case of platinum, the automotive industry;
- labor, power, currency, and political issues in South Africa that cause major perturbations in the platinum supply;
- safe haven hoarding of gold and to a much lesser extent, platinum, in times of economic uncertainty and major geopolitical events; speculators moving in and out of paper markets of both metals (bullion exchanges, ETFs, and derivatives) and to a lesser extent, central bank trading of physical gold.
Platinum functions both as a precious and industrial metal. It is usually tied to the price of gold in both short- and long-term trading patterns. In times of financial distress and economic turmoil, platinum tends to behave more like gold with widespread hoarding.
The platinum-gold ratio can be used to ascertain whether one metal is over- or undervalued with respect to the other. The current monthly average ratio below 0.85 is unusual and indicates that platinum is severely undervalued with respect to gold *
* The ratio recently hit 0.55 and remains near a record low.
U.S. Equity Market Valuation
Crestmont Price/Earnings Ratio
(Source: Crestmont Research)
(Source: Crestmont Research)
A large part of the expected declines in bear markets hinges upon how "expensive" markets were when the bear market begins. In this measure, we have a long way to fall given the overvaluation at the market peak.
We illustrate the recent market overvaluation via 3 charts produced by Crestmont Research (as of 01 April 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 April 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 March 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 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 percent change in margin debt tends to be negative for equities. Below is the latest YoY rate of change (source: Yardini):
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 April 2022 the average of these 4 measures places the U.S. stock market (S&P 500 index) as being 154% 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 April 2022 the average of these 4 measures places the U.S. stock market (S&P 500 index) as being 154% 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 92% above its de-trended regression. It remains near peak overvaluation relative to economic output (note previous bear markets have historically reverted back below the de-trended 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
As can be seen on the chart above, historically since 1928 the 2nd year of the 4 year Presidential Cycle tends to provide the worst returns of the 4 year cycle.
While we do not make investment decisions strictly based upon cycle analysis, we are cognizant of the historical nature of these cycles and tend to be a bit more wary as they approach.
While we do not make investment decisions strictly based upon cycle analysis, we are cognizant of the historical nature of these cycles and tend to be a bit more wary as they approach.
Presidential Cycle S&P 500 returns (inc. dividends):
|
1988-Year 4: +12.40%
1989-Year1: +27.25% 1990-Year 2: -6.56% 1991-Year 3: +26.31% 1992-Year 4: +4.46% 1993-Year 1: +7.06% 1994-Year 2: -1.54% 1995-Year 3: +34.11% 1996-Year 4: +20.26% 1997-Year 1: +31.01% 1998-Year 2: +26.67% 1999-Year 3: +19.53% 2000-Year 4: -10.14% |
2001-Year 1: -13.04%
2002-Year 2: -23.37% 2003-Year 3: +26.38% 2004-Year 4: +8.99% 2005-Year 1: +3.00% 2006-Year 2: +13.62% 2007-Year 3: +3.53% 2008-Year 4: -38.49% 2009-Year 1: +23.45% 2010-Year 2: +12.78% 2011-Year 3: +0.00% 2012-Year 4: +13.41% 2013-Year 1: +29.60% |
2014-Year 2: +11.39%
2015-Year 3: -0.73% 2016-Year 4: +11.96% 2017-Year 1: +21.83% 2018-Year 2: -4.38% 2019-Year 3: +31.49% 2020-Year 4: +16.26% 2021-Year 1: +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):
