1-24-2022 Weekly Market Update
The very Big Picture
The long-term valuation of the market is commonly measured by the Cyclically Adjusted Price to Earnings ratio, or “CAPE”, which smooths-out shorter-term earnings swings in order to get a longer-term assessment of market valuation. A CAPE level of 30 is considered to be the upper end of the normal range, and the level at which further PE-ratio expansion comes to a halt (meaning that further increases in market prices only occur as a general response to earnings increases, instead of rising “just because”). The market is now above at that level.
Of course, a “mania” could come along and drive prices higher – much higher, even – and for some years to come. Manias occur when valuation no longer seems to matter, and caution is thrown completely to the wind – as buyers rush in to buy first, and ask questions later. Two manias in the last century – the “Roaring Twenties” of the 1920s, and the “Tech Bubble” of the late 1990s – show that the sky is the limit when common sense is overcome by a blind desire to buy. But, of course, the piper must be paid, and the following decade or two were spent in Secular Bear Markets, giving most or all of the mania-gains back.
See Fig. 1 for the 100-year view of Secular Bulls and Bears. The CAPE is now at 36.33, down from the prior week’s 38.52. Since 1881, the average annual return for all ten-year periods that began with a CAPE in this range has been negative (see Fig. 2).
Note: We do not use CAPE as an official input into our methods. However, if history is any guide – and history is typically ‘some’ kind of guide – it’s always good to simply know where we are on the historic continuum, where that may lead, and what sort of expectations one may wish to hold in order to craft an investment strategy that works in any market ‘season’ … whether the current one, or one that may be ‘coming soon’!
The Big Picture:
The ‘big picture’ is the (typically) years-long timeframe – the timeframe in which Cyclical Bulls and Bears operate. The U.S. Bull-Bear Indicator is in Cyclical Bull territory at 53.19, down from the prior week’s 58.84.
In the Quarterly- and Shorter-term Pictures
The Quarterly-Trend Indicator based on the combination of U.S. and International Equities trend-statuses at the start of each quarter – was Positive entering January, indicating positive prospects for equities in the fourth quarter of 2021.
Next, the short-term(weeks to months) Indicator for US Equities turned negative on January 18, and ended the week at 8, down from the prior week’s 19.
In the Markets:
U.S. Markets: Rising interest rates and concerns over slowing economic growth pushed the benchmark S&P 500 index to its biggest decline in more than 14 months. The Dow Jones Industrial Average fell for a third consecutive week shedding 1,646 points and finishing the week at 34,265—a decline of -4.6%. The technology-heavy NASDAQ Composite slumped 7.6%–its biggest weekly drop since the start of the pandemic. By market cap, the large cap S&P 500 declined -5.7%, while the mid cap S&P 400 pulled back -6.8%. The small cap Russell 2000 finished the week down ‑8.1%.
International Markets: The majority of international markets were also down for the week. Canada’s TSX declined ‑.4%, while the United Kingdom’s FTSE 100 fell -0.6%. France’s CAC 40 and Germany’s DAX pulled back ‑1.0% and -1.8%, respectively. In Asia, China’s Shanghai Composite finished flat, while Japan’s Nikkei finished the week down ‑2.1%. As grouped by Morgan Stanley Capital International, emerging markets retreated -2.2%, while developed markets ended the week down -3.4%.
Commodities: Precious metals fulfilled their often-assumed role of a “defensive asset” in times of market stress. Gold finished the week up 0.8% to $1831.80 per ounce, while Silver surged 6.1% to $24.32. Oil had its fifth consecutive week of gains rising 1.6% to $85.14 per barrel of West Texas Intermediate crude. The industrial metal copper, viewed by some analysts as a barometer of world economic health due to its wide variety of uses, finished the week up 2.3%.
U.S. Economic News: The Labor Department reported that the number of Americans filing for first-time unemployment claims surged last week, hitting a three-month high. Applications for unemployment benefits surged by 55,000 to 286,000. Economists had forecast initial claims would total a much lower 225,000. However, economists warn not to read too much into the increase last week. The government’s method of adjusting claims for seasonal swings is often skewed around the holiday season. Raw or unadjusted claims actually showed claims fell from 420,835 to 337,417. Meanwhile, the number of people already collecting benefits known as “continuing claims”, rose by 84,000 to 1.64 million.
Sales of existing homes pulled back between November and December the National Association of Realtors (NAR) reported. Compared to the same time last year, sales were down more than 7% to a seasonally-adjusted annual rate of 6.18 million. Economists had projected existing-home sales to come in at 6.48 million. The inventory of homes for sale fell to its lowest level on record. The total inventory of homes for sale dropped 18% in that time period. Expressed in months of supply, there was a 1.6 month supply of homes for sale in December. Economists generally consider 6-months of supply to indicate a “balanced” housing market. The median price for an existing home was $358,000, up 15.8% from December 2020. Homes remained on the market for 19 days on average, and 79% of the homes sold in December had been on the market for less than a month.
High inflation and persistent shortages of key building materials dimmed the optimism of the nation’s homebuilders according to a recent survey. The National Association of Homebuilders (NAHB) reported its confidence index slipped 1 point to 83. Demand for housing remains strong, but rising prices and (more recently) rising mortgage rates are starting to weigh on potential buyers. Even bigger obstacles such as the ongoing shortages of labor and building materials are also weighing on sentiment. The NAHB said the cost of building materials has surged almost 20% in the past year. A measure of customer traffic at homes for sale fell as did the survey of sales expectations six months from now. NAHB Chairman Chuck Fowke, a custom homebuilder in Florida stated, “Policymakers need to take action to fix supply chains.”
Business conditions in the New York-region deteriorated dramatically in January as ongoing supply chain issues and the spread of the Omicron-variant weighed on business activity. The New York Fed reported its Empire State survey of business conditions nosedived to -0.7 this month from 31.9 the prior month. It was the first decline since June 2020. Economists had expected a reading of 25.5. The index had been quite strong through most of 2021, even during the delta wave of the coronavirus. The index of new orders plummeted 32 points to -5.0, driving most of the decline in the overall index. Employment also softened. Chief economist Joshua Shapiro of MFR Inc. attributed most of the decline to the Omicron-variant writing that the survey suggests that the “effects of the omicron wave of the pandemic are largely responsible for January’s pause in growth, and that as this phase of the pandemic passes so will its negative economic impact.”
Unlike New York, manufacturing activity in the Philadelphia-region improved in January, showing businesses are still growing despite the Omicron outbreak and persistent labor and supply shortages. The Philadelphia Federal Reserve reported its index of manufacturing conditions rose by 8 points to 23.2. Economists had expected the index to rise to just 18.6. “Responding firms remained generally optimistic about growth over the next six months,” the Fed said. Manufacturers in the Philadelphia region said orders rose and employment held steady. Companies said they are still paying sharply higher prices for supplies, however: three-quarters of those surveyed reported paying higher prices.
International Economic News: Scotiabank Economics said in a note to clients that it expects the Bank of Canada to raise its key overnight interest rate by 25 basis points to 0.5% at its next meeting, convening on January 26th. This would be the first of multiple interest rate hikes over the course of the year, senior economist Jean-Francois Perrault forecasts, with rates hitting 2% by the end of 2022. However, Perrault noted the central bank could be forced to act sooner than anticipated after Statistics Canada reported that the annual rate of inflation hit 4.8% in December—its highest level in 30 years.
Across the Atlantic, the United Kingdom’s economy bounced back to its pre-pandemic levels in November, official figures showed. The UK’s Office for National Statistics reported GDP grew by 0.9% in the final month of 2021 making the UK economy 0.7% larger than it was before the outbreak of the coronavirus pandemic. Economists had expected an expansion of only 0.4%. However, many analysts don’t expect the surge to last. Suren Thiru, the head of economics at the British Chambers of Commerce, said “While the UK economy should rebound once plan B measures are lifted, surging inflation and persistent supply chain disruption may mean that the UK’s economic growth prospects remain under pressure for much of 2022.”
On Europe’s mainland, as the presidential election heats up current French president Emmanuel Macron is touting the increase in new foreign investment projects and France’s booming economy as proof his economic reforms have been bearing fruit. During a visit to Alsace in the east, Macron will announce a 300-million-euro ($342 million) industrial project by German chemical giant BASF, one of 21 new projects worth 4 billion euros and 10,000 jobs as part of a drive to attract foreign investors, his office said. Since 2017, Macron has pushed through a variety of supply-side economic reforms meant to boost businesses’ competitiveness, cut taxes on investors and loosen strict labor market rules. Critics say he has acted as “president of the rich” who wants to do away with France’s cherished social safety nets and has cut welfare benefits for some of the poorest.
The German government cut its economic growth forecast for this year by half a percent to 3.6% two sources familiar with the matter said. The revised forecast was due to supply bottlenecks for products such as semiconductors and a fourth wave of coronavirus infections Der Spiegel reported. Most economists expect the German economy to shrink again in the first three months of 2022, driving it into another technical recession, defined as two consecutive quarters of contraction. Germany’s BDI industry association said earlier this month it expected the German economy to grow 3.5% this year, giving a more cautious forecast than the government as it warned that companies could face another year of “stop-and-go” business due to the pandemic.
In Asia, construction and property sales in China have slowed and many small businesses have closed because of rising costs and weak sales. China’s National Bureau of Statistics reported economic output from October through December was only 4% higher than during the same time a year earlier. That was a significant slowdown from the 4.9% growth in the third quarter. The slowdown in China’s economy, the second-largest in the world, adds to analysts’ concerns that the broader world economic outlook is beginning to dim. Making matters worse, the Omicron variant of the coronavirus is now starting to spread in China, leading to more restrictions around the country and raising fears of renewed disruption of supply chains.
Japanese Prime Minister Fumio Kishida and U.S. President Joe Biden agreed their two governments would schedule talks among their foreign and economic ministers to discuss economic security, infrastructure investment, and other issues. During their 80-minute video conference, the two leaders confirmed their commitment to beefing up the deterrence power and response capability of the Japan-U.S. alliance. With China’s growing military pressure in mind, they underscored the significance of peace and stability in the Taiwan Strait. The virtual meeting marked the first full-fledged talks with the U.S. president for Kishida, who took office last autumn.
Finally: Stunningly higher shipping costs are yet another element of the nation’s supply chain problems. Shipping costs have skyrocketed as shortages of trucks, truck drivers, warehouse workers and others constrict the shipping pipeline and raise costs. The “Cass Freight Indexes”, produced by Cass Information Systems, are the go-to source for shipping data in the industry. The chart on the left shows that the total freight volume has returned to pre-pandemic levels, but…the chart on the right shows that the costs of shipping are higher by about 45% year over year, 62% from the same time two years ago, and 300% since 2010. And, of course, those costs are embedded into everything you buy or use. (Charts from Cass Information Systems)
(Sources: All index- and returns-data from Yahoo Finance; news from Reuters, Barron’s, Wall St. Journal, Bloomberg.com, ft.com, guggenheimpartners.com, zerohedge.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, stocksandnews.com, marketwatch.com, wantchinatimes.com, BBC, 361capital.com, pensionpartners.com, cnbc.com, FactSet.) Securities offered through Registered Representatives of Cambridge Investment Research Inc., a broker-dealer, member FINRA/SIPC. Advisory Services offered through Cambridge Investment Research Advisors, a Registered Investment Adviser. Strategic Investment Partners and Cambridge are not affiliated. Indices mentioned are unmanaged and cannot be invested into directly. Past performance is no guarantee of future results.