Sun, 10/15/2017 - 7:45pm

John Davidson

Hurricanes continued to have a dampening affect on economic releases in the US this week. Yet, new highs were posted in equity indices across the globe. Bond yields were lower in North America, Germany and Switzerland, but higher elsewhere. The US dollar fell, but commodity prices rose on the week.

Perspective:

Superstitious and valuation concerns may have re-emerged this week, but the investors did not appear to react to those concerns. The week ended on Friday the 13th! October 19th will mark the 30th anniversary of the 1987 stock market crash. This past week, the S&P 500 closed at its all-time high, 2555.25 (October 11th) and the S&P 500 reached 18.0 times Factset's forward earnings, the highest P/E in 15 years (June 18, 2002); peak forward P/Es were 24.4 in 1999 and 2000 with the tech rally and run-up to Y2K.

Strong global economies and earnings and confidence in the Central Bankers may have kept the markets from reacting to those superstitious and valuation concerns. Going forward, Factset's bottom-up S&P target price is 2743.61, 7.5% above this week's close.

Economic Releases: US Employment

Hurricanes may have continued to affect the economic data. The week of October 7th Initial Claims for Unemployment Benefits dropped -15,000 to 243,000. Some of that drop may have resulted from the inability to get reliable data from Puerto Rico, where people may have difficulty filing for the benefit. The 4-week average of Claims dropped to 257,500. Continuing Claims dropped -32,000 to 1.889 million. The DOL's JOLT (Job Openings and Labor Turnover Survey) showed that Job Openings remained at 6.08 million and Hirings trailed at 5.43 million. The Openings are near the number of Seekers at 6.911 million. Either employers are not willing to pay enough to fill their spots or are having a hard time finding seekers with the right skills to fill their spots.

Economic Releases outside the US

Industrial Production (IP) in the Eurozone increased 1.4% in August; In Germany IP increased 2.6%; in France IP fell -0.3%; in the UK, IP increased +0.2% while Manufacturing Output increased +0.4%.

In Japan Machine Orders increased +3.4% in August.

Other US Releases:

Retail Sales increased 1.6%; Core Sales (less auto's) increased 1.0% in August. Post Hurricane purchases of automobiles and gas were reflected in the August surge. The University of Michigan's preliminary reading for October surged 6 points to 101.1, the highest reading in 13 years and beyond the range of expectations.

Equity and Bond Index Returns:

With the exception of the CAC, equity indices in the table gained on the week. Many of the equity indices hit new all time highs. The Global Bond Aggregate outperformed the US Bond Aggregate due to the US dollar weakness. The High Yield Index underperformed due to the widening of the credit spreads on the week. Valuations remain at a 15-year high Forward P/E of 18.0, which remained rich versus the 5- and 10-year averages of 15.6 and 14.1. Forward earnings estimates have increased +7.2% since year-end, but the S&P 500 has increased +14.0%

Equity Indices % Change	Price	% chg	QTD	YTD
	10 /13/ 17	10 /06/ 17	09 /29/ 17	12/30/16
Dow Jones Industrials	22,872	0.4%	2.1%	15.7%
S&P 500 Index	2,553	0.2%	1.3%	14.0%
Nasdaq	6,606	0.2%	1.7%	22.7%
S&P/TSX Composite	15,807	0.5%	1.1%	3.4%
FTSE 100 Index	7,535	0.2%	2.2%	5.5%
CAC 40 Index	5,352	-0.2%	0.4%	10.1%
DAX Index	12,992	0.3%	1.3%	13.2%
Swiss Market Index	9,312	0.6%	1.7%	13.3%
Nikkei 225 Index	21,155	2.2%	3.9%	10.7%
HK Hang Seng Index	28,476	0.1%	3.3%	29.4%
Shanghai CSI 300	3921	2.2%	2.2%	18.5%
Bloomberg Barclays Bond Indices
Global-Aggregate	481	0.9%	0.4%	6.7%
US-Aggregate	2045	0.5%	0.3%	3.5%
US Corp High Yield	1945	0.0%	0.2%	7.2%
S&P 500 Valuation
Factset forward Earnings	$142.02		$141.60	$132.79
% Change in Earnings			0.3%	7.0%

Price/Earnings Ratio	18.0		17.8	16.9
5-year Average	15.6
10-year Average	14.1

You will note some changes in the table this quarter. First, we have changed the bond indices presented. We have switched from the original Bloomberg indices to the former Lehman indices which were purchased, first by Barclay's and then by Bloomberg. In the equity table we show the indices: Global Aggregate, US Aggregate and US Corporate High Yield. The Global Aggregate is affected by global interest rates (not just the US) and changes in the US dollar. The US Aggregate includes Treasuries, MBS, and US investment grade corporate bonds. The High Yield Index is comprised of corporate bonds rated below investment grade. In the Bond table below, we have included the Indices of US Treasury and TIPS (Treasury Inflation Protected Securities). Finally, we have dropped the 8-year records 2008-2016.

Data Source: Bloomberg app for the Iphone; Earning Estimates from Factset

Bond Yields and Spreads:

UK, French, and Japanese Bond yields rose, but North American, Swiss, and German bond yields fell on the week. Treasury and TIPS Indices rose on the week.

Government Bonds	Bond Yields (%)	bp chg	QTD	YTD
	10 /13/ 17	10 /06/ 17	09 /29/ 17	12/30/16
UST 2-Year	1.49	-1	1	30
UST 10-Year	2.27	-9	-6	-17
US TIP 10-Year	0.41	-6	-4	-6
UST 30-Year	2.81	-8	-5	-26
Canadian 10-Year	2.03	-9	-7	32
UK 10-Year	1.37	1	1	14
French 10-Year	0.81	8	7	13
German 10-Year	0.40	-6	-6	20
Swiss 10-Year	-0.10	-2	-2	16
Japan 10-Year	0.05	1	0	1
Bloomberg Barclays Indices	Index:	% chg	QTD	YTD
US Treasury	2204	0.5%	0.3%	2.5%
US TIPS	294	0.6%	0.5%	2.2%
Rates		bp chg	QTD	YTD
US Mort 30-yr %	3.82	-9	2	-27
Spreads
10-Year TIPS Spread	1.86	-3	-2	-12
Yield Curve (2's to 10's)	0.78	-8	-7	-47
Yield Curve (10's to 30's)	0.54	1	1	-9
Yield Curve (2's to 30's)	1.32	-7	-6	-56

You will note that this Bond table includes total return indices for US Treasuries and TIPS. The table no longer includes spreads and changes in spreads.

Data Source: Bloomberg app for the Iphone

Currency and Commodity Markets:

The US dollar fell and commodity prices rose on the week.

Currencies vs $	Closing	% chg	QTD	YTD
	10 /13/ 17	10 /06/ 17	09 /29/ 17	12 /30/ 16
Yen	89.43	0.7%	0.6%	4.6%
British Pound	1.33	1.6%	-0.8%	7.8%
Euro	1.18	0.8%	0.1%	12.4%
Canadian Dollar	80.21	0.5%	0.0%	7.7%
China Renminbi	15.20	1.1%	1.1%	5.6%
Commodities
WTI	$51.38	4.2%	-0.6%	-4.6%
Brent Crude	$57.18	2.8%	0.7%	0.6%
Natural Gas	$3.00	4.9%	-0.1%	-19.7%
Spot Gold	$1304	2.1%	1.9%	13.2%
Spot Silver	$17.42	3.5%	4.6%	9.3%
CBOT Corn	$352.75	0.8%	-0.7%	0.2%
Spreads
Brent-WTI	$5.80	$6.33	$5.12	$2.98


South African Rand	7.54	3.6%	2.2%	3.6%

Data Source: Bloomberg app for the Iphone

Equity Index Gains in US dollar terms:

The equity table above shows the percent change of different stock indices in terms of its local currency. To calculate the return to the US dollar investor one must combine the change of each index with the change in the applicable currency. The following table shows the 5-day, quarter-to-date and year-to-date results of investments made in each index in US dollar terms:

Return to USD Investor		% Chg	QTD	YTD
10 /13/ 17	since:	10 /06/ 17	09 /29/ 17	12/30/16
S&P 500 Index:	USD	0.2%	1.3%	14.0%
Nikkei 225 Index:	Yen	3.0%	4.6%	15.8%
FTSE 100 Index:	Pound	1.8%	1.4%	13.7%
DAX Index:	Euro	1.1%	1.3%	27.2%
CAC 40 Index:	Euro	0.6%	0.5%	23.7%
S&P/TSX Composite:	CAD	1.0%	1.1%	11.4%
Shanghai CSI 300:	Yuan	3.3%	3.3%	25.0%

For US dollar investors, the weak US dollar made the the S&P 500 the worst performing of the indices in the table for a US dollar investor to have been invested.

Disclaimer:

The views discussed herein are exclusively those of John W. Davidson. These views are not meant as investment advice, and are subject to change. Information contained herein is derived from sources believed to be reliable, however, Mr. Davidson does not represent that the information is complete or accurate and therefore, should not be relied upon as such. All opinions expressed herein are subject to change without notice. This information is prepared for general information purposes only, and does not pertain to specific investment objectives, the financial situation or the particular needs of any specific person or investor who might receive this report. Investors should seek financial advice regarding the appropriateness of investing in any security or utilizing any investment strategy discussed or recommended in this report, and should understand that statements regarding future investment prospects may not be realized.