The Secular Advisor – October 19, 2015

 

Economy – Additions & Updates

Additions – confidence, retail sales  

Updates – employment, housing, gdp forecast  

Asset Allocation – Additions & Updates

Additions – none

Updates – us sector fundamental ranks, us sector allocations

Economic Summary

Employment – the JOLTs report revealed that in August, the number of job openings tumbled by the biggest monthly drop since March of ’09., year over year trend: advancing  

Housing – average rents are up 3.7% YoY, rising double the pace of core inflation, and at the highest pace since ’07, year over year trend: advancing  

Confidence – University of Michigan Consumer Sentiment rose from 89.0 to 92.1, bouncing after 3 straight months lower, year over year trend: advancing  

Retail Sales – retail sales (ex Autos) dropped 0.3% in September, the 2nd drop in a row, the biggest drop since January. and it’s 7th miss in the last 10 months, year over year trend: recessionary 

Q3 GDP Forecast – 0.9%, year over year trend: receding

Employment

The JOLTs report (Yellen’s favorite employment metric) revealed that in August, the number of job openings tumbled by 298k to 5.37 million, the biggest monthly drop since the 301k drop in March of 2009.

Housing

Average rents are up 3.7% YoY, rising not only double the pace of core inflation, but at the highest pace since ’07.

The real (inflation adjusted) story is that most American rent and their inflation-adjusted income has not kept up with inflation-adjusted renter housing costs.

Confidence

University of Michigan Consumer Sentiment rose from 89.0 to 92.1, bouncing after 3 straight months lower. Both current situation and futures expectations rose. The Fed’s Bill Dudley previously noted this consumer confidence data is a must-watch for The Fed in its rate-hike decision-making.

However, Gallup’s economic confidence surveys continued their downtrends.

…and the NY Fed’s Consumer Expectations Survey of household spending growth expectations have plunged.

So how comfortable are consumers? The last 4 weeks have seen Bloomberg’s Consumer Comfort index rise at thefastest pace since the move from the March ’09 low… the driver, women, whose comfort rose from 41.6 to 43.0 (as men dropped from 48.2 to 47.6).

Retail Sales

Retail Sales (ex Autos) dropped 0.3% in September, the 2nd drop in a row, the biggest drop since January, and it’s 7th miss in the last 10 months.

…the year over year trend remains recessionary,

…and the control group saw its first monthly drop since February.

Q3 GDP Forecast

The FED’s GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the third quarter of ’15 was 0.9% as of Oct. 14 (down from 1.0% on October 9).

The change reflects weaker consumer spending and retail sales which was offset by better inventory investment to GDP growth.

To learn more, visit Federal Reserve Bank of Atlanta’s website.

Asset Allocation Summary

Major Asset Class Allocations – 5% Stocks, 75% Bonds, 20% Cash

Int’l Developed Stock Allocations – 1.25% – Italy/Germany

Int’l Emerging Stock Allocations – 1.25% – Mexico/Indonesia

Int’l Emerging – BRIC Stock Allocations – 2.5% – Brazil/Russia

US Bond Allocation – 62.5%

Int’l Developed Bond Allocation – 2.5%

Int’l Emerging Bond Allocation – 10%

Asset Class Trends (for new allocation commitments)

Int’l Developed Stock Trend – bearish

Int’l Emerging Stock Trend – bearish

US Bond Trend – neutral (previously bearish)

Int’l Developed Bond Trend – neutral (previously bearish)

Int’l Emerging Bond Trend – bearish

US Dollar – neutral

Euro – neutral

Emerging Markets Currencies – bearish

OVERALL RECOMMENDATION – hold existing allocations / no new allocation commitments

 

Country Stock Fundamentals – Market Cap/GDP ratios (October)

Int’l Emerging – BRIC offers the best opportunity based on their weighted Mkt Cap/GDP value to overall GDP weights across the globe.

Int’l Developed

Int’l Emerging

Int’l Emerging – BRIC

Yields

Bond yields are falling across almost all economies.

The one major exception is Brazil which is experiencing both political and economic turmoil.

Dynamic Asset Class Expectations

Shiller’s 10 Yr. CAPE Ratio translates into a 2% 10 Yr. expected return on US stocks.

Dynamic Asset Allocation

Based on efficiency, the most attractive mix is position 1.

US + International Allocations

US Only Allocations

To see a back-test of the approach and how it works: link

US Stock Sector – Fundamentals

US Stock Sector – Allocations

To see a back-test of the approach and how it works: link

International Stock Allocations

When we look at Market Cap/GDP/Volatility (October), our most attractive countries are mostly emerging.

To see a back-test of the approach and how it works: link

Trends – Trade Execution – Utilizing Monthly Price Trends (& US Volatility)

The following cyclical tables get to the heart of timing and when the trend in prices is optimal (bull) for buying.

US Stocks and Bonds

Stocks topped in July.

Bearish price / volatility trend is currently in place.

For bonds, the trend is neutral.

To see a back-test of the approach and how it works: link

International Stocks

The trend for Developed and Emerging remains bearish.

International Bonds

Developed bonds have turned neutral and Emerging remain bearish.

Currencies

The US Dollar is neutral, the Euro is neutral and Emerging Markets currency remains bearish.