1-31-2022 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 36.61, up from the prior week’s 36.33. 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 50.50, down from the prior week’s 53.19.
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 2, down from the prior week’s 8.
In the Markets:
U.S. Markets: Strong gains going into Friday’s market close lifted the large-cap benchmarks higher for the week, but not before most of the major indexes had moved temporarily into “correction” territory (down more than 10% from recent highs). The Dow Jones Industrial Average rallied 460 points finishing the week at 34,725, a gain of 1.3%. The technology-heavy NASDAQ Composite ticked up 2 points to 13,771, essentially unchanged for the week. By market cap, the large cap S&P 500 rose 0.8%, but the mid cap S&P 400 index fell -0.6% and the small cap Russell 2000 index brought up the rear at -1.0%. The Russell 2000 is nearly -20% from its November peak—just shy of an official bear market.
International Markets: The majority of major international markets were awash in a sea of red. Canada’s TSX was the lone market to finish up last week rising 0.6%. The United Kingdom’s FTSE 100 shed -0.4%, while France’s CAC 40 declined -1.5% and Germany’s DAX retreated -1.8%. China’s Shanghai Composite plunged -4.6%, while Japan’s Nikkei dropped -2.9%–the fourth consecutive week of declines for that market. As grouped by Morgan Stanley Capital International, developed markets declined -2.1% while emerging markets ended down -3.5%.
Commodities: Precious metals pulled back last week as Gold declined -2.5% to $1786.60 an ounce. Silver plunged ‑8.3% to $22.30 per ounce. The industrial metal copper, viewed by some analysts as a barometer of world economic health due to its wide variety of uses, ended the week down -4.7%. Energy rose for a sixth consecutive week. West Texas Intermediate crude oil added 2% closing at $86.82 per barrel.
U.S. Economic News: The number of Americans filing for first-time unemployment benefits fell last week, signaling that disruptions in the labor market tied to the omicron-variant may be starting to fade. The Labor Department reported initial jobless claims fell by 30,000 to 260,000. Economists had expected new claims to total 265,000. The monthly average of new claims, which smooths out the volatile weekly readings, totaled 247,000. Claims fell the most in Pennsylvania, New York, New Jersey and Illinois— all are states that experienced big coronavirus surges in December and early January. Meanwhile, continuing claims, which counts the number of people already receiving unemployment, rose by 51,000 to 1.68 million.
The exponential pace of home-price growth may finally be beginning to ease, according to the latest data from S&P CoreLogic. Their Case-Shiller 20-city home price index posted an 18.3% annual gain in November, down slightly from the previous month. On a monthly basis, the index increased 0.9% between October and November. Once again, Phoenix recorded the highest rate of home-price growth in the country in November with a 32.2% year-over-year increase. Two Florida cities, Tampa and Miami, rounded out the top 3 with a 29% uptick and 26.6% annual gain. Overall, the Case-Shiller index noted that price increases were larger in November for 11 of the 20 major cities surveyed each month. Similarly, the separate Case-Shiller national home price index demonstrated 18.8% annual growth in November—also down from the previous month.
The number of home sales in which a contract has been signed, but not yet closed dropped in December, according to the latest report from the National Association of Realtors (NAR). Analysts frequently look to these “pending” home sales data as an early indicator for the direction of the housing market. Compared to the same time last year, pending home sales were down 6.9%. On a regional basis, pending sales dropped by 10% or more in both the Northeast and the West. All areas of the country experienced slowdowns. Lawrence Yun, chief economist for the NAR wrote in the release, “Pending home sales faded toward the end of 2021, as a diminished housing supply offered consumers very few options. Mortgage rates have climbed steadily the last several weeks, which unfortunately will ultimately push aside marginal buyers.”
Sales of new homes increased almost 12% to an annual rate of 811,000 last month, the government reported. However, compared to the same time a year earlier, sales were actually down 14%. For all of 2021, new home sales totaled 762,000, according to preliminary figures in the Census Bureau’s latest report. That’s down from 822,000 in 2020. Economists had expected new home sales to rise to an annual rate of 757,000. The median sales price of new houses sold last month was $377,700—down significantly from November, but higher than the median price of homes a year earlier. The supply of new homes for sale fell more than 9% between November and December, translating to a 6‑month supply of new homes in the market. Six months of supply is generally considered a ‘balanced’ housing market.
The U.S. economy grew 6.9% in the fourth quarter as consumers spent more and businesses restocked inventories. Economists had expected gross domestic product to rise by 5.5%. GDP got a big lift at the end of last year from frantic efforts by businesses to restock barren shelves and warehouses in time for the holiday season. Setting aside the inventory buildup the economy grew much more slowly. Aided by the massive government stimulus spending, GDP increased by 5.7% for the full year. That’s the biggest gain since 1984. Before the pandemic, the economy was growing around 2.3% per year. For the most part economists expect the economy to continue to grow this year. Sal Guatieri at BMO Capital Markets wrote in a note, “While omicron will lead to weaker growth in the first quarter, activity is expected to rebound nicely once the latest pandemic wave abates and supply-chain glitches ease.” And Robert Frick, corporate economist at Navy Federal Credit Union stated, “With the omicron wave falling quickly, shelves restocked and consumer demand generally strong, we should see the economy continue its healthy recovery this quarter.”
Federal Reserve Chairman Jerome Powell said the central bank “is of a mind” to raise interest rates in March as part of an effort to combat the highest inflation in decades. In the press conference after the Fed’s two-day strategy meeting Powell stated, “I would say the committee is of a mind to raise the federal funds rate at the March meeting assuming that conditions are appropriate for doing so.” With inflation now running at a 7% annual rate (per the government), the Fed wants to scale back its “easy money” stance. However, Powell was less clear when the Fed will begin reducing its balance sheet. He added the reduction could start “later this year” and that it would take place “sooner and faster” than it has in the past. In response to the pandemic, the Fed has held its benchmark short-term interest rate at zero and bought trillions of dollars of securities to support the economy and financial markets.
Orders for goods expected to last at least three years, so-called “durable goods”, fell sharply in December—its biggest decline since the pandemic began. Orders for capital goods pulled back -0.9% in December. Economists had expected a smaller -0.6% decline. However, “core” capital goods orders, which exclude the often-volatile sectors like transportation and defense, remained unchanged. Orders for transportation equipment drove the decline. Orders for cars and planes fell 3.9% and have fallen in three of the last four months. Excluding transportation, orders for durable goods actually rose 0.4% in December.
The confidence of the nation’s consumers slipped this month as the spread of Omicron and higher prices for just about everything weighed on consumer sentiment. The Conference Board reported its Consumer Confidence Survey fell 1.4 points to 113.8 this month. Economists had forecast the index to pullback to 111.7. During the pandemic, the index reached a high of 128.9 last summer during a lull in the pandemic to a low of 85.7 at the onset. Lately the index has drifted lower due to the back-to-back outbreaks of the delta and omicron coronavirus variants and a surge in inflation. Business leaders say there’s plenty of demand for their goods and services and they expect the economy to speed up again. The confidence survey found the percentage of people saying they plan to buy a home, new car or major appliance in the next six months all increased.
The latest consumer confidence report was confirmed by consumer spending data. Consumer spending pulled back ‑0.6% in December reflecting a weakening of the economy at the end of last year. It was the first decline in 10 months. Economists had expected a -0.7% decline. When adjusted for inflation, consumer spending shrank an even sharper -1.0%. Furthermore, prices rose 5.8% last year based on the Federal Reserve’s “preferred” inflation gauge, the Personal Consumption Expenditures Index (PCE). Sal Guatieri, chief economist at BMO Capital Markets expects consumer spending to remain robust throughout the rest of the year writing, “Consumer spending growth will remain solid throughout 2022. An improving labor market and strong wage gains will support income growth.”
International Economic News: The Bank of Canada Governor Tiff Macklem announced the BoC would soon start hiking interest rates from its record lows to combat rising inflation. The comments were made after the central bank surprised some analysts by leaving rates unchanged at 0.25%. Rates have been at a record low since March 2020, when the bank slashed the cost of borrowing three times. “The message is pretty clear. We’re on a rising path,” Macklem said. He later said several increases would be needed, but the bank could take a few steps and then pause to assess progress. The next scheduled rate announcement is March 2.
Across the Atlantic, the International Monetary Fund forecast the United Kingdom’s economy would grow more slowly than expected this year as it recovers from the Covid pandemic. The forecast for U.K. growth in 2022 was cut to 4.7% from 5.0% in the IMF’s latest world economic outlook. Nonetheless, that remains the fastest rate of growth in the G7 industrialized nations. It partly reflects the rebound from sharp falls the UK suffered during initial pandemic lockdowns two years ago, the IMF said. Still, rising energy costs may force a sharp increase in the cost of living. Surging food and energy prices drove inflation to an annual rate of 5.4% in December, up from 5.1% the month before.
On Europe’s mainland, France recorded its strongest economic growth figures in over five decades last year, hitting 7%. The Eurozone’s second-biggest economy bounced back from the COVID-19 crisis faster than expected, data showed. Consumers helped the recovery, with household spending rising by 0.4% in the quarter following the relaxation of restrictions earlier in 2021. French statistics agency INSEE says France’s economy has now expanded ‘significantly’ past its pre-crisis levels, having returned to its pre-pandemic level of gross domestic product in the third quarter. The strongest boom in a generation is a boost to Emmanuel Macron’s economic credentials, ahead of April’s presidential election in which he is widely expected to run for a second term.
The German government cut its growth forecast for this year but stated Europe’s biggest economy remains “robust” and will return to its pre-pandemic size this year. Germany’s Economy Ministry predicted that gross domestic product will grow by 3.6%, down from the 4.1% the German government forecast in late October. Since that time the spread of the ‘omicron’-variant of the coronavirus weighed on forecasts. Overall, GDP grew 2.7% last year, according to preliminary official figures, rebounding from a plunge of -4.6% in 2020 when pandemic lockdowns were at their most severe. Economy Minister Robert Habeck said in a statement, “The consequences of the corona pandemic are still noticeable, and many companies still have to struggle with them. Nevertheless, our economy is still robust.”
In Asia, the International Monetary Fund recommended China increase its government spending to support its economy, weighed down by Covid lockdowns and a downturn in its property sector. The policy suggestions came after the fund cut this year’s growth forecast for China to 4.8%, with the report saying that risks to that forecast were “predominately on the downside.” The economic recovery “lacks balance and momentum has slowed, reflecting the rapid withdrawal of fiscal support, lagging consumption amid recurrent COVID-19 outbreaks despite a successful vaccination campaign, and slowing real estate investment,” the fund said in its annual report on the country’s economy. Although more than 80% of China’s population is vaccinated, “it remains unclear whether it will allow for lockdowns to be phased out,” the report said.
The IMF sent Japan a contrary message than the one sent to China. The IMF urged Japan to scale back its emergency pandemic support and consider raising taxes on property and capital income once the country’s economy is on firm footing. In its statement the IMF wrote, “Given the large uncertainty surrounding the pandemic, fiscal policy should be nimble and flexible, adjusting the scale and the composition of support in response to epidemiological and economic developments.” Raising the consumption tax rate from the current 10%, as well as hiking property and capital income taxes, could also be among options, the IMF said.
Finally: Super Bowl 56 will kick off on February 13th at SoFi Stadium in Los Angeles, California. And while it’s safe to say the majority of viewers will be football fans, there are also a significant number that tune in just for the commercials. This year, the average price for a 30-second Super Bowl ad slot is up over 18% to $6.5 million! Most veteran viewers would guess that Budweiser is a top advertiser, and perhaps that Coca-Cola was up there, too. But many of the other top-10 advertisers over the last 20 years would be a surprise. Doritos, anyone? (Data from Wall St Journal, chart from TheHustle.co)
(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.