Just another quick update on the outlook for the Us economy. Sorry to return to this again but I think this is important as what happens in the US pretty much drives everything else in the investing world.
Just read a very detailed and interesting / worrying piece from the always thoughtful Ambrose Evans Pritchard. Apologies if you have read it already but if not I would urge you to take a look at it here and think about how your portfolio might fare if we do see a US recession next year.
Came across a great post today which I thought I'd share as it helps to explain why we are seeing such a sluggish recovery. It also touches on momentum and trend following strategies which is also relevant given what the timing indicators and the US recession indicator have been doing. The image (click to enlarge) below comes from the post as does
the one below. If you want to read Debt, here there and everywhere at Value Walk then click here. It also touches on the outlook for returns in the medium to long term - 5 to 10 years - given where valuations are, but acknowledges that these may not be good predictors of returns in the short term. You can also read the authors thoughts on this here.
Any way enjoy - if that's the right word, don't get carried away out there while the trend is your friend for now & keep your tin hat close to hand as I think you might need it soon.
Most of the commentary this week has been about the US Presidential Race and what Trump may or may not have said and done to women over the years. However, after the timing indicators warned last week about a possible recession ahead in the US - I thought I'd share some things I've seen recently which shed a bit more light on this.
So first up is a piece from the Economist looking at the probability of a recession during the next Presidents first term in office - which hopefully you should be able to read here, although you may have to get rid of the subscription offers first. Following on nicely from that was a piece from Reuters looking at Janet Yellen's High Pressure Policy designed to keep the economy if not boiling, at least simmering away.
Finally if you really want to dive down an economic rabbit hole I also came across recently some interesting stuff from Ray Dalio from the hedge fund outfit Bridgewater Associates. He has set out his thoughts on How the Economic Machine Works which includes a 305 page document explaining it all.
If that all sound a bit too daunting then there is also a 30 minute video explaining his theories in pretty simple terms, although there are some important messages in the last third or so if you do start watching it and think it is too simplistic. You can also watch the video below which I think might be a better use of your time than watching some fat former politician making a fool of himself on a dancing show or a middle aged woman trying to be a fake rapper - but hey each to their own - take your pick below.
Here is a belated update on the UK Monthly Market Timing indicators that regular readers will know I have been following for a while now, even though I'm not generally a fan of trying to time the market. I delayed reporting on these this month as flagged last month these remain substantially above their moving averages which are used as the trigger for a buy or sell decision. The other reason for the delay was because I wanted to wait for the latest US Unemployment data which was reported yesterday.
Before I get into the detail of that here's a brief summary for new readers and some links for further detail. First off the Market Timing Indicators (here's an early post with links to the research papers) are based on total return indices and these are compared to a 10 month simple moving average. The market is then seen as being in a bull trend and you should be buying / long when the index is above its moving average and you should consider selling / shorting or hedging at that stage.
The problem with this simple indicator is that it often gives false signals and can lead to whipsaws as the market can often dip before rallying to give rapid sell and buy signals within a short space of time. This is where the US Unemployment data comes in. I wrote about this earlier this year where another author at Philosophical Economics had used the US unemployment data and compared it to its 12 month moving average and used this as a recession indicator and as an additional trigger for bullish and bearish signals on the timing indicators (See link above). The bottom line was that by using this additional trigger this helped to eliminate most or all of the whipsaws / false signals and keeps one invested for much longer in a bull market and therefore improved the absolute and risk adjusted returns from the market timing strategy. It means you should ignore market sell signals when US Unemployment is below its moving average and only act on them when it is above as a recession is then likely or in progress.
Now comes the bad news as I have to inform you that the US Unemployment data yesterday somewhat surprisingly saw the headline rate tick up to 5% rather than down to 4.8% as some had expected, even though the Non Farm Payroll numbers themselves seemed OK. So assuming this upturn in the US Unemployment rate and break above the moving average is confirmed in coming months then we have had an early warning of a forthcoming US recession. I say early because this indicator does tend to be slightly early, around 3.5 months on average (as shown in the table below), but early is good in this case. While I also found the Chart (from the Philosophical Economics post) quite compelling too.
Summary & Conclusion
The UK Market Timing indicators remain in a bullish positioning with most of the main indices still being around 9% above their moving averages with only the Mid 250 again lagging with a 6% divergence. Thus these are still indicating bullish / invested, although as I observed last month these are looking quite extended compared to the averages. In addition the FTSE itself with its price index is flirting with its longer term All time highs around the 7000 level see chart below and it remains to be seen if we can break out from this 16 to 17 year trading range or if we will see a treble top and another plunge down in the not too distant future.
Meanwhile the equivalent timing data for US Equities and other asset classes also remain above trend & therefore on a buy (see here for an update on this from Doug Short). Meanwhile Unemployment data is flagging a US recession warning and as such, assuming it is confirmed in the months ahead and doesn't itself whipsaw, then the next time the UK and indeed US Market Indicators turn negative then we should probably be prepared to take the signal more seriously - consider yourself on notice - you have been warned and you read it here first.
This was another month of recovery for the market and CIS Portfolio as it ended the month to the close on 30th September with a total return of +1.82% which compared to a total return on the FTSE All share of +1.12% for a more modest outperformance of 0.7% this month. Thus it was a strong quarter for the CIS with a total return of 13.7% for an outperformance of 6% as it bounced back from the BREXIT induced crash in June.
This leaves the CIS with a total return of -0.5% year to date which is 12.4% behind the index in 2016 to date, but it is still ahead by 8% since inception in April 2015 as it has produced +15.4% total returns versus +7.4% for the All Share since then. One of the top performers was Powerflute (POWR) which as mentioned on the Blog benefited from a bid which looks like a done deal, so I will be replacing that in this months round of transactions. On the downside another stock which featured in the blog, Character Group (CCT), was one of the bigger fallers as it reacted badly to an in line trading update. As flagged in the blog it continues to Score well and looks good value so it will remain in the portfolio.
Rather than highlighting the other winners and losers here subscribers to the CIS Portfolio should check their e-mail as I have attached a spreadsheet detailing the performance of all the stocks over 1,3,6 & 12 months plus some other statistics. There are also two other tabs showing the first showing the Stockopedia Stock Ranks & the QVM factors as well as the full portfolio in the third tab which I hope subscribers will find useful.
Finally, for subscribers and non subscribers I have, as promised in the blog last month, added a drop down item for the CIS Performance under the Portfolio heading on the site.
If you click on this it will take you to a sheet showing the full performance history of the CIS Portfolio since inception in April 2015.