SITREP (Week ending June 23, 2017)
SITREP: n. a report on the current stock market situation; a military abbreviation; from “situation report”.
Summary of the Stock Market
In the Secular (years to decades) time frame, whether we are in a new Secular Bull or still in the Secular Bear, the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns.
The Bull-Bear Indicator (months to years) is positive, indicating a potential uptrend in the longer timeframe.
In the intermediate time frame, the Quarterly Trend Indicator (months to quarters) is positive for Q1, and the shorter (weeks to months) time frame is negative. Therefore, with two of three indicators positive, the U.S. equity markets are rated as Neutral.
The Very Big Picture for the Stock Market
In the “decades” timeframe, the question of whether we are in a continuing Secular Bear Market that began in 2000 or in a new Secular Bull Market has been the subject of hot debate among economists and market watchers since 2013, when the Dow and S&P 500 exceeded their 2000 and 2007 highs.
The Bear proponents point out that the long-term PE ratio (called “CAPE”, for Cyclically-Adjusted Price to Earnings ratio), which has done a historically great job of marking tops and bottoms of Secular Bulls and Secular Bears, did not get down to the single-digit range that has marked the end of Bear Markets for a hundred years, but the Bull proponents say that significantly higher new highs are de-facto evidence of a Secular Bull, regardless of the CAPE.
Further confusing the question, the CAPE now has risen to levels that have marked the end of Bull Markets except for times of full-blown market manias. See below for the 100-year view of Secular Bulls and Bears.
Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best.
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 the CAPE 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 returns more typical of a rip-snorting Secular Bull Market.
In the Big Picture for the Stock Market (months to years timeframe)
The “big picture” is the months-to-years time frame – the time frame in which Cyclical Bulls and Bears operate. The U.S. Bull-Bear Indicator is in Cyclical Bull territory.
In the intermediate and Shorter-term picture for Stock Market
The Shorter-term (weeks to months) Indicator turned negative on March 24th. Separately, the Intermediate-term Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – was positive entering April, indicating positive prospects for equities in the second quarter of 2017.
In the Stock Market
Below you will find a recap for the week of various markets. They include U.S. Markets, International Markets, Commodities, U.S. Economic news and finally International Economic news.
This information is detailed and can be lengthy but it is here for your reading should you be curious in what we are monitoring on a daily basis.
U.S. Markets: U.S. stocks were mixed for the week, although the large cap S&P 500 index and Dow Jones Industrial Averages managed to reach new highs on Monday before retreating slightly.
Trading got off to a slow start early in the week, but volumes picked up as the week wore on. The Dow Jones Industrial Average managed its fifth consecutive week of gains rising a bar 10 points to 21,394. The technology-heavy Nasdaq Composite reversed last week’s loss by rising 113 points to 6,265, a gain of 1.84%. By market cap, returns were mixed. The S&P 500 large cap index rose 0.21% and the small cap Russell 2000 added 0.57%, while the S&P 400 mid cap index fell -0.54%.
International Markets: Canada’s TSX rose 0.84%, retracing some of last week’s losses. The United Kingdom’s FTSE retreated a fourth straight week, giving up -0.5%, while on Europe’s mainland markets were mixed.
France’s CAC 40 gained a slight 0.05%, while Germany’s DAX fell -0.15, and Italy’s Milan FTSE retreated -0.5%. In Asia, China’s Shanghai Composite rose 1.1% along with Japan’s Nikkei, which added 0.9%. Hong Kong’s Hang Seng Index managed a 0.2% gain. As grouped by Morgan Stanley Capital International, emerging markets rose 0.7% while developed markets retreated -1.9%.
Commodities: Gold ended the week down a negligible -0.01% to $1256.40 an ounce for the yellow metal. Silver similarly lost only a penny to close at $16.65 an ounce.
The story continued to be oil where prices fell for a fifth consecutive week. West Texas Intermediate crude retreated -4.4% to $43.01 a barrel. Copper – used by some analysts as an indicator for worldwide economic health – rose 2.34%, partially reversing last week’s down week.
U.S. Economic News: Initial claims for new unemployment benefits rose 3,000 to 241,000 as the still record-low number underscored the strength of the U.S. jobs market.
The Labor Department readings almost matched economists’ forecast of 240,000. Initial claims count people who apply for benefits after losing their jobs. New applications for benefits have registered less than 300,000 for 120 straight weeks—the longest streak since the early 1970’s.
The less-volatile smoothed four-week average of new claims remained essentially the same at 244,750, near a 44-year low. The number of people already receiving unemployment checks, so-called continuing claims, came in at 1.94 million. Continuing claims have registered less than 2 million for the 10th straight week. The last time continuing claims were under 2 million for that long was in 1973.
It continued to be a seller’s market in housing, according to the latest data from the National Association of Realtors (NAHB). Sales of previously owned homes rebounded in May on the heels of tighter supply and rising prices. Existing-home sales were at a seasonally-adjusted 5.62 million annual rate in May, up 1.1% from April’s sales pace.
Economists had expected only a 5.51 million annual pace. The median number of days an existing property spent on the market reached a fresh low of just 27 days, said the NAHB. There were 1.96 million homes for sale at the end of May, 8.4% less than the same time last year. The dwindling supply pushed prices higher again. The median home sales price in May was $252,800—a new all-time high and 5.8% higher than the same time last year. May was the 63rd consecutive month of annualized home price gains. First-time buyers made up 33% of all sales, down 1% from April.
According to the Commerce Department, new single-family home sales rose in May to a seasonally-adjusted rate of 610,000 units, an increase of 2.9%. In addition, April’s sales pace was revised sharply higher to 593,000 units from 569,000. Economists had forecast that new home sales, which make up about 10% of all home sales, would rise 5.4% to 597,000. Year over year, sales were up 8.9% last month. Michael Feroli, economist with J.P. Morgan said,
“The general picture from this report and the existing home sales report is one of solid housing demand in the important spring selling season.”
The median house price rose to a record high of $345,800 in May, from $310,200 in the prior month. The average sales price last month was $406,400, also a record high. At May’s sales rate, it would take 5.3 months to clear inventory, unchanged from April. A six-month supply is seen as a healthy balance between supply and demand.
The Conference Board’s index of leading economic indicators (LEI) climbed 0.3% last month offering further evidence of steady growth. Ataman Ozyildirim, director of business cycles at the board said, “The U.S. LEI continued on its upward trend in May, suggesting the economy is likely to remain on, or perhaps even moderately above, its long-term trend of about 2% growth for the remainder of the year.” The Leading Economic Indicators gauge is a weighting of 10 indicators designed to signal peaks and valleys in the business cycle.
In manufacturing, Markit’s preliminary Purchasing Managers Index (PMI) for June was 52.1, down 0.6 point from April’s 52.7. Economists had expected a reading of 53.0. The reading reflected the slowest rebound in overall business conditions since September 2016. Still, readings above 50 indicate improving conditions. Overall, private sector companies continued to see modest growth according to the latest reading. For companies providing services, the Markit flash services PMI fell to a 3-month low of 53, down 0.6 point in May. The flash readings are an early indication based on gathering 85-90% of survey responses.
International Economic News: Canadians’ ballooning household debt has concerned the nation’s policymakers for a while, but now another type of private-sector debt is raising concerns.
Since 2011, Canadian companies have racked up over $1 trillion in debt according to the Canadian Centre for Policy Alternatives (CCPA). Canada now leads advanced economies in private-debt accumulation, according to CCPA economist David Macdonald, who points out that excessive private debt is one of the best predictors of economic crises.
The risk to both Canadian households and companies is that the price of what they bought using credit will start to decline, leaving them with a debt load that’s bigger than the value of the assets they purchased, Macdonald said. “The priority then becomes to reduce your debt,” he said. For everyday Canadians, that will probably mean trimming back on expenses, corporations could decide to pull back on hiring or cut jobs. Together, the two could deliver a powerful blow to the Canadian economy.
In the United Kingdom, it’s been one year since the Brexit vote.
So where does Brexit stand now?
For one, Prime Minister Theresa May attempted to bolster her authority before negotiations by calling a snap parliamentary election. Instead, she inadvertently sent the pending negotiations into turmoil by losing her majority in parliament. Economic growth following the vote remained strong, but only for a time. In February, Germany overtook Britain as the G-7’s fastest growing member, and in May, the U.K.’s growth was tied with Italy for dead last. Inflation is on the rise as the value of the British pound continues to drop. In June of last year, inflation was at 0.5%. Last month, it hit an annualized 2.9% -its highest rate in four years.
On Europe’s mainland, official figures from the INSEE statistics agency show that France’s economy expanded by 0.5% in the first quarter of 2017, an increase of 0.1% over the previous estimate. The Eurozone’s second-largest economy saw a sharp rise in capital investment from private companies and households. In the details of the report, foreign trade was less of a drag than previously estimated, while wages remained stable and firms saw productivity gains. Employment in the private sector grew at its fastest pace in nearly a decade. The improving labor market is a benefit to new French President Emmanuel Macron as he embarks on a series of overdue changes to the country’s hiring and wage bargaining laws.
In Germany, the economic research institute Ifo raised its forecast for GDP expansion in the country for this year and the next. The think tank predicts Germany’s labor market will remain solid and its trade surplus should increase. For the current year, it now expects 1.8% GDP growth, a 0.3% increase over its previous forecast. Ifo’s head of economic forecasting Timo Wollmerhauser said in its statement, “The German economy is strong and stable. We are currently experiencing such a strong first half-year that the momentum will carry us into the coming year.” The institute also revised its 2018 forecast to 2.0%, a 0.2% rise over its earlier prediction.
In Italy, two banks–Veneto Banca and Banca Popolare di Vicenza were shut down by the European Central Bank because the two banks breached supervisory capital requirements. In a tersely worded statement, the ECB’s office of Banking Supervision ordered the banks to be shuttered because they were “failing or likely to fail”. That phrase is the key phrase that banking supervisors use for banks that “should be put in resolution or wound up under normal insolvency proceedings,” the statement said.
In Asia, China will again host the World Economic Forum’s annual June meeting, often called the Summer Davos, highlighting its continued growth in the technology sector. The world’s second-largest economy is gaining prominence is an innovator in the tech space, shedding its old image of a copycat China. Jenny Lee of GGV Capital said, “Technology and China — these two words actually go together now. It used to be in the past, people would ask me if there was real technology in China, if there’s innovation … but now the whole market has changed.” Home to international tech giants Alibaba, Baidu, and Tencent, China is also home to over 50 so-called “unicorns”—private companies that are worth more than $1 billion, according to venture capital database CB Insights.
In Japan, the Japanese government upgraded its assessment of the economy in its monthly report for the first time since December of 2016. The Cabinet Office said in its June report that the economy is on a path of “moderate recovery.” Analysts viewed the new statement as an upgrade because a cautionary clause that had appeared in May’s statement had been omitted. The cautionary clause had said some parts of the economy were suffering from “delayed improvement.” The latest report said the economy continued to grow primarily due to increased consumer spending and capital investment.
Japan recorded annualized growth of 1.0% in the first quarter of 2017. It was the fifth straight quarter of growth—its longest stretch in 11 years.