NOTE: Areas with blue text show the most recent market updates since the November Capital Highlights email.
We are introducing “Dynamic Wealth Management” in 2014.
~ Dick Blakeley
The very big picture:
In the “decades” timeframe, we are in a Secular Bear Market which began in 2000 when the P/E ratio (using Shiller’s Cyclically-Adjusted P/E) peaked at about 44. The job of Secular Bear markets is to burn off outrageously high P/E ratios over one or two decades, until finally the P/E ratio arrives back at a single-digit level, from which another Secular Bull Market can emerge. See Fig. 1 for the 100-year view.
If history is a guide, we are not yet near the end of this Secular Bear Market. The Shiller P/E was unchanged from the prior week at 25.4, and is at its highest since December, 2007. Even though P/E’s are now half what they were at their crazy peak in 2000, they are nonetheless at the high end of the normal range and leave little if any room for expansion. This means that the stock market is unlikely to make gains greater than corporate profit growth percentage, if that. (note: all P/E references are to the Shiller P/E values, sometimes called PE10 or CAPE, which are calculated so as to remove shorter-term fluctuations; see RobertShiller.com for details).
In fact, since 1881, the average annual returns for all ten year periods that began with a CAPE at this level have been just 3%/yr (see Fig. 2).
This further means that above-average returns will be much more likely to come from the active management of portfolios than from passive buy-and-hold. Although a mania could come along and cause P/E’s to shoot upward from current levels (such as happened in the late 1920’s and the late 1990’s), in the absence of such a mania, buy-and-hold investors will likely have a long wait until the arrival of the next Secular Bull Market.
In the big picture:
The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate. The US Bull-Bear Indicator (see Fig. 3) is at at 78.4, up again from last week’s 76.7, and still solidly in cyclical Bull territory. Early in the year, the US Bull-Bear Indicator pushed further into Bull territory than other global asset classes, reflecting the higher strength of the US relative to the rest of the world. The current Cyclical Bull has taken the US to new all-time highs, finally exceeding the highs of 2007, but most of the world’s major indices have barely matched 2011’s highs, let alone approach 2007’s levels.
In the intermediate picture:
The intermediate (weeks to months) indicator (see Fig. 4) is in positive status and ticked up to 34 from the prior week’s 35. Separately, the quarter-by-quarter indicator – based on domestic and international stock trend status at the start of each quarter – gave a positive indication for the third quarter of 2013.
In the Secular (years to decades) timeframe (Figs. 1 & 2), the Secular Bear still is in force as the long-term valuation of the market is too high to sustain a new rip-roaring Secular Bull. In the Cyclical (months to years) timeframe (Fig. 3), all major equity markets are in Cyclical Bull territory, with the US being far stronger than any other major market. The Bond market is in Cyclical Bear territory as of June 7th. In the Intermediate (weeks to months) timeframe (Fig. 4), US equity markets remain in positive status. The quarter-by-quarter indicator gave a positive signal for the 4th quarter: both US and International equities were in uptrends at the start of Q4, which signals a higher likelihood of an up quarter than a down quarter.
In the markets:
In November, US markets continued their Q4 run by tacking on another +3.0% on average for the month. However, international markets did not keep pace with the US, only advancing +0.2% on average while the Emerging Markets portion of the International markets had a slightly losing month at -0.3%. Canada’s TSX logged a slight gain for the month at +0.3%.
For the week, both US and International markets gained less than a percent, while Canada fell by less than a percent. A wide gulf continues to exist between the US market indices and all others, particularly the Emerging Market segment, which is still down -3.2% for the year to date. It was the Dow and S&P’s 8th consecutive up week.
US economic news was mostly positive during the week. The Markit Business Activity Index posted 57.1 in November, indicating a strong monthly increase in services output, and up sharply from October. Jobless claims fell another 10,000 to 316,000. Pending home sales fell in October, decreasing 0.6%, but building permits rose strongly, up 6.2% to an annual pace of 1.03 million and the most since June 2008. The S&P/Case-Shiller 20-City Home Price Index accelerated to 13.3% growth from a year ago, the fastest since February 2006. However, October durable goods came in at -2.0%. Newly-released unemployment data from North Dakota, the heart of the shale oil and gas boom, showed Williams County with the astounding unemployment rate of 0.6% – and the state’s highest per-capita personal income of $116,978! Sixteen other North Dakota counties reported unemployment rates of less than 2%.
Canada’s gross domestic product rose at a 2.7 percent annualized pace to C$1.70 trillion in the 3rd quarter, following a revised 1.6 percent advance in the 2nd quarter, Statistics Canada reported. Economists had forecast a 2.5 percent growth rate. The Canadian dollar sank versus 12 of its 16 most-traded peers. Goldman Sachs revealed that its analysts are recommending a bet against the Canadian dollar versus the U.S. dollar as a “top trade” recommendation for 2014.
European central bankers want some inflation, but are having a very tough time generating any. The data for November as reported by Eurostat, the statistical office of the European Union, continues to be much lower than desired. The inflation rate was reported at +0.9% annualized, which is up from +0.7% in October but still less than half the European Central Bank’s target of 2.0%. The feared effect of no inflation – or even disinflation – is that it acts as a weight on retail sales, current spending of all sorts, and employment. The unemployment data for October, also reported by Eurostat, showed the Eurozone jobless rate ticking down to 12.1% from the record high 12.2% in September. It was the first decline since February 2011. The disparity among nations within the Eurozone remains startling. Eurostat pegs Germany’s unemployment rate at just 5.2% (4.8% in Austria), but remains at 27.3% in Greece and 26.7% in Spain. The rate in Italy is 12.5% (unchanged from September) and 10.9% in France (down from 11.1%). The youth rate in some of the countries remains astoundingly high: 58% in Greece, 57.4% in Spain, 41.2% in Italy and 36.5% in Portugal.
The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market.
The average ranking of Defensive SHUT sectors remained at 16 for the week, while the average ranking of Offensive DIME sectors fell to 7.8 from the prior week’s 5.5. The Offensive DIME sectors maintained their lead over the Defensive SHUT sectors.
Note: these are “ranks”, not “scores”, so smaller numbers are higher and larger numbers are lower.
The US led the recovery from 2011’s travails, and is the strongest among all global markets. However, the over-arching Secular Bear Market remains in place even as prior all-time highs are reached.
Because we are still in a Secular Bear, we have no expectations of runs of multiple double-digit consecutive years, and we expect poor market conditions to be a frequent occurrence. Nonetheless, we remain completely open to any eventuality that the market brings, and our strategies, tactics and tools will help us to successfully navigate whatever happens.
About The Blakeley Group, Inc.:
At The Blakeley Group, we understand that every client has unique needs for wealth management. The same systematic approach will not work for everyone. That’s why we pride ourselves on taking a customized, solution-focused approach to each client’s financial situation.
Call us today to discuss your wealth management options.
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