Download STOCK MARKET TIMING UPDATE DJIA: 18400.88

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Volume 31, No. 10
www.bobbrinker.com
October 4, 2016
“It’s not the employer who pays the wages.
Employers only handle the money. It’s the
customer who pays the wages.”
....Henry Ford
STOCK MARKET TIMING UPDATE
DJIA: 18308.15
S&P 500: 2168.27
The Marketimer stock market timing model encompasses several disciplines in our
ongoing effort to evaluate future stock market potential. One aspect of our model involves the monitoring of our economic cycle pre-recession indicators in order to
gauge the risk of recession going forward. This month we update this analysis in order to gauge the overall health of the economy and to assess where the economy is
heading. In our view, our five pre-recession indicators provide a basis for determining the likely path of economic growth over the next six to twelve months.
1) Accelerating Inflation: The year-over-year rate of inflation as measured by the
consumer price index (CPI) now stands at 1.1%. This is below the average gain of 2.1%
over the past ten years. Over the past six months, the annualized rate of increase in
the CPI is 2.2%. The core CPI year-over-year increase stands at 2.3%. This figure excludes the volatile food and energy sectors. Over the past year food prices have been
stable and energy prices have declined 9.2%.
The favorite inflation gauge of the Federal Reserve is the personal consumption
expenditure (PCE) index. Over the past year the PCE index has increased 1.0%, and
the PCE core price index has risen 1.7%. The Employment Cost Index shows private sector compensation which has risen 2.4% over the past year, with wages rising 2.6% and
the cost of benefits increasing 1.7%. Employment costs are a key factor in the inflation outlook as they represent a significant cost of doing business. The strong
dollar continues to act as a headwind against inflation by restraining the prices of
imported goods. Over the past year import prices have declined 2.2%.
2) Payroll Growth: U.S. payrolls have increased an average of 232,000 per month over
the past three months as the job market continues to expand. The unemployment rate
has held at 4.9% for three straight months as the labor force has increased. The
underemployment rate remains elevated at 9.7%. This figure includes over six million
employees who are working in part-time jobs but prefer to work full-time.
The average work week for all workers decreased by six minutes to 34.3 hours,
the lowest reading since 2014 and the first decline in six months. Average hourly
earnings now stand at $25.73, with a year-over-year increase of 2.4%. The monthly
employment reports remain a critical element in gauging the health of the overall
economy. Job growth provides employee cash-flow that provides the fuel for growth
in consumer spending in our largely consumer based economy. We also know from past
comments that Fed Chair Janet Yellen takes the underemployment rate into account in
the process of formulating monetary policy. Ten years ago the underemployment rate
was 8.0% and we believe Chair Yellen would prefer to see the current 9.7% rate decline before making an effort to reduce the level of monetary accommodation.
10789 Bradford Rd. / Suite 210 / Littleton, CO 80127 / Phone: 303-660-8686 / Editor: Bob Brinker
STOCK MARKET TIMING UPDATE (continued from page one)
3) Rising Unemployment Claims: New unemployment insurance claim figures are released
weekly and show the number of individuals who filed for the first time. A rising
trend suggests deterioration in labor market conditions and therefore this data
provides valuable input into the state of the labor market and the economy. The
trend of new unemployment claims has been favorable for several months and the
recent data places the key four-week moving average of new claims close to its
historic lows. The figures at the end of September show 254,000 new claims filed
in the most recent week, and a four-week moving average figure of 256,000. As long
as the new claims figures are low, the prospects for employment growth remain in
favorable territory.
4) Inverted Yield Curve: The yield curve measures the relationship between the level
of short-term interest rates and long-term rates based on U.S. Treasury yields.
An inverted yield curve occurs when short-term rates exceed long-term rates and
this typically occurs prior to the start of a recession. Yield curve analysis can
provide helpful input into the outlook for the economy and the stock market.
When short-term rates exceed long-term rates, investors fear that the outlook
for the economy is deteriorating and long-term rates will continue to decline.
During periods when the yield curve shows an upward slope, the risk of recession
is very low. As of now, the yield curve continues to maintain an upward slope,
with the 3-month Treasury Bill yielding 0.27% and the 30-year Treasury Bond
yielding 2.33%. In our view, the risk of recession in the foreseeable future is
very low.
5) Leading Economic Indicators: The Conference Board Leading Economic Index (LEI)
edged down 0.2% in August after rising 0.5% in July and 0.2% in June. Four of the
ten index components gained ground including the interest rate spread, stock
prices, the credit index and manufacturers' new orders for consumer goods. Over
the six-month span through August, the LEI increased 0.9%, with three out of ten
components advancing.
The Conference Board Coincident Economic Index (CEI) increased 0.1% in August
as three of the four index components advanced. The positive contributors to the
index were employees on non-agricultural payrolls, personal income, and manufacturing and trade sales. The weak component was industrial production which
continues to face headwinds from the strong dollar. In our view, the LEI data is
consistent with continued gradual economic growth into next year.
The housing sector has made an important contribution to the economic recovery
and the outlook remains favorable. Builder confidence jumped six points in the
September NAHB/Wells Fargo Housing Market Index (HMI) and matched its best level
since October 2005 with a reading of 65. The index is in favorable territory when
readings exceed 50. A spokesman for the NAHB said "upward momentum will build
throughout the remainder of this year and into 2017." The key underpinnings for the
sector are: (1) rising employment; (2) very low mortgage rates; and (3) tight
inventory. At the August sales pace, it would take 4.6 months to clear the stock
of houses on the market. A six-month supply is viewed as a healthy balance between
supply and demand.
The HMI components increased across the board in September. The component
that measures current sales expectations gained six points to 71, while the component measuring sales expectations for the next six months rose five points to
71. The index measuring prospective buyer traffic gained four points to 48.
2
STOCK MARKET TIMING UPDATE (continued from page two)
Housing starts declined 5.8% in August to a 1.142 million unit annual rate.
The decline was confined to the South where Hurricane Hermine disrupted economic
activity and caused severe flooding. Despite the monthly decline, the 12-month
average rose to its highest level since May 2008.
Building permits edged lower by 0.4% for the month to a 1.139 million unit
annual rate. All regions rose except the storm plagued South region. Single-family
permits rebounded 3.7% for the month, while multifamily permits declined 7.2%. The
increase in single-family permits is consistent with the 11-year high in the HMI
during September.
The latest data from the Federal Reserve Bank of Atlanta indicates that third
quarter real gross domestic product (GDP) growth will rebound following the soft
patch in the first-half which saw real GDP growth at an annual rate of 1.1%. Our
estimate for calendar year 2016 real GDP growth remains in the 1.8% to 2.2% range,
with a midpoint of 2.0%. The new Federal Reserve 2016 real GDP central tendency
growth estimate range is 1.7% to 1.9%, with a midpoint of 1.8%.
In our view, real GDP growth in 2017 is also likely to be in a range of 1.8%
to 2.2%, which is very close to the new Federal Reserve forecast of 1.9% to 2.2%
next year. Based on this outlook, we estimate 2017 S&P 500 Index operating earnings
will reach $127. Our estimate is conservative relative to the consensus estimate
of over $130. While there is potential upside to our estimate, we prefer to take a
conservative approach given the fact that the strong dollar continues to act as a
significant headwind for U.S. export demand.
The combination of gradual economic growth and accommodative Federal Reserve
monetary policy has been the perfect financial elixir for investors in recent years.
We would not be surprised to see a continuation of the recent consolidation pattern
in the stock market as investors deal with the uncertainty created by the problems
at Deutsche Bank and the uncertainty inherent in the upcoming general election.
Despite this short-term consolidation process, we anticipate additional new
record highs for the S&P 500 Index going forward into the winter season as investors become more confident in an improving earnings trend next year. We are
estimating a price/earnings ratio range in the 16.5 to 17.5 zone, which is slightly
above the 5O-year average. We view a modest valuation premium as appropriate in a
low inflation economy. Our S&P 500 Index target remains in the mid-2200s range.
Additional upside targets will be a function of the sustainability of the
gradual economic recovery and the effectiveness of the Federal Reserve in its effort
to navigate the monetary challenges going forward. We recommend a dollar-cost-average
approach for new equity money, especially during periods of market weakness. All of
our Marketimer model portfolios remain fully invested.
FEDERAL RESERVE POLICY UPDATE
The Federal Open Market Committee (FOMC) held the federal funds overnight rate
at 0.25% to 0.50% at their September 20-21 meeting and set the stage for a possible
rate increase at the December 13-14 meeting. The FOMC also has a meeting scheduled
for November 1st and 2nd, but given its proximity to the election we do not expect
a rate hike at that time.
Chair Yellen would like to see further improvement in the elevated 9.7%
underemployment level and would also like to see signs that the inflation rate
is moving toward the Fed's 2% target level based on the PCE inflation index. At the
same time, Chair Yellen is under increasing pressure by FOMC members to raise rates
and this was exemplified by the three dissenting votes at the September meeting.
3
BOB BRINKER'S RECOMMENDED LIST OF NO-LOAD FUNDS
INV.* SIZE
OBJ. MIL.$
’11
’12
% Total Return
’13
’14
’15
Akre Focus Fund (W)
615 E. Michigan St.
Milwaukee, WI 53202
877-862-9556
www.akrefund.com
G
$ 4881
11.2
16.0
38.8
10.5
2.5
Vanguard Index
Small Cap Stock Portfolio
P.O. Box 2600
Valley Forge, PA 19482
800-662-2739
www.vanguard.com
CRSP $59573
(2.8)
18.0
37.6
7.4
Vanguard Dividend
Growth Fund
(address/phone above)
G
9.4
10.4
31.3
11.8
FUND
$1000 INV.
1-1-2011=
EST.a TEL. ANN.b
YD. SWCH EXP.
8.1
$ 2192
0.0% #
1.35%
25.00
(3.8)
11.3
$ 1815
1.0% Yes
0.20%
58.53
2.7
6.4
$ 1937
1.9% Yes
0.33%
23.60
’16
PRICE
9-30-16
(9-30)
Vanguard Dividend
Appreciation Index Fund
(address/phone above)
Vanguard Equity
Income Fund
(address/phone above)
AKREX
NAESX
$30198
VDIGX
Note: Vanguard Dividend Growth Fund closed to new accounts in July and the fund
remains open to existing accounts. New subscribers can substitute Vanguard
Dividend Appreciation (VDAIX) in model portfolio II and III.
G
$26538
6.1
11.5
28.9
10.0
(2.0)
9.4
$ 1798
2.1% Yes
0.19%
33.58
$20736
10.6
13.5
30.1
11.3
0.8
9.4
$ 2004
2.8% Yes
0.26%
31.69
VDAIX
G&I
VEIPX
* Investment Objective Codes: CGA = Capital Gains Aggressive; G = Growth; G&I = Growth & Income.
# Telephone redemption available for taxable accounts.
a) Estimated annual yield represents approximate investment income for last 12 months expressed as a percentage of fund assets.
b) Annual expense ratio reflects investment advisory fees and other expenses expressed as a percentage of total fund assets.
W) 1% redemption fee on the sale of shares held for 30 days or less.
4
BOB BRINKER'S RECOMMENDED LIST OF NO-LOAD FUNDS
FUND
INV.* SIZE
OBJ. MIL.$
’11
’12
% Total Return
’13
’14
’15
’16
$1000 INV.
1-1-2011=
EST.a TEL. ANN.b
YD. SWCH EXP.
PRICE
9-30-16
(9-30)
Schwab 1000 (R)
101 Montgomery St.
San Francisco, CA 94101
800-435-4000
www.schwab.com/funds
G
Vanguard FTSE All-World
Ex-U.S. Index Fund
P.O. Box 2600
Valley Forge, Pa 19482
800-662-2739
www.vanguard.com
Non
USA
$ 7009
1.1
15.7
32.7
12.5
0.7
7.5
$ 1890
1.8% Yes
0.29%
53.42
$24285
(14.4) 18.3
14.3
(4.1)
(4.6)
6.4
$ 1127
3.3% #
0.30%
17.88
(8.9)
19.5
27.6
4.3
(0.3)
6.5
$ 1538
1.5% Yes
0.61%
25.18
SNXFX
VFWIX
Vanguard Global Equity
(address/phone above)
www.vanguard.com
World $ 4552
Stock
Vanguard Balanced
Index Fund
(address/phone above)
G&I
$28452
4.1
11.3
17.8
9.7
0.4
7.0
$ 1608
1.8% Yes
0.24%
30.95
Vanguard Wellesley
Income Fund
(address/phone above)
$45154
Balanced
9.6
10.0
9.2
8.0
1.3
8.7
$ 1566
2.5% Yes
0.25%
26.13
VHGEX
VBINX
VWINX
R) 0.50% redemption fee on shares held less than six months.
Marketimer is written and published monthly by Robert J. Brinker Investment Advisory Services, Limited. All rights reserved. Although the information in this newsletter is based on sources which are believed to
be reliable, accuracy cannot be guaranteed. All opinions and estimates included herein constitute our judgment as of this date and are subject to change. This report is for information purposes only. Marketimer
employees may invest in securities mentioned herein. The information contained in this report may not be published, rewritten or otherwise disseminated without prior written consent from Bob Brinker.
Copyright © 2016.
5
BOB BRINKER'S RECOMMENDED LIST OF NO-LOAD FUNDS
INV.* SIZE
OBJ. MIL.$
’11
’12
% Total Return
’13
’14
’15
Index $46287
(3.7)
18.3
38.1
7.4
(3.4)
0.9
16.2
33.1
12.3
1.9
15.8
32.2
(4.2)
18.6
DoubleLine Total Return Bond Fixed $61432
333 S. Grand Ave. 18th Floor Income
Los Angeles, CA 90071
DLTNX
877-354-6311
www.doubleline.com
9.1
Osterweis Strategic
Income Fund (x)
c/o U.S. Bancorp
P.O. Box 701
Milwaukee, WI 53201
866-236-0050
www.osterweis.com
4.1
FUND
$1000 INV.
1-1-2011=
EST.a TEL. ANN.b
YD. SWCH EXP.
9.8
$ 1792
1.2% Yes
0.24%
69.27
0.3
8.1
$ 1900
1.6% Yes
0.17%
54.18
13.4
1.2
7.7
$ 1928
1.7% Yes
0.17%
200.21
36.4
10.4
(4.8)
13.3
$ 1845
1.6% Yes
0.24%
26.54
8.8
(0.2)
6.5
2.2
3.7
$ 1337
3.1% Yes
0.72%
10.91
8.6
6.6
1.3
(0.8)
8.8
$ 1318
5.5% Yes
0.86%
11.16
’16
PRICE
9-30-16
(9-30)
Vanguard Index
Extended Market Portfolio
P.O. Box 2600
Valley Forge, PA 19482
800-662-2739
www.vanguard.com
VEXMX
Vanguard Index Total
Stock Market Portfolio
(address/phone above)
CRSP $439403
Vanguard Index 500
(address/phone above)
S&P 500 $237881
Vanguard Small Cap
Value Index
(address/phone above)
CRSP $18705
VTSMX
VFINX
VISVX
Fixed $ 4867
Income
OSTIX
(x) Fund has 2% redemption fee if held 30 days or less.
(DL) DoubleLine Total Return Bond Fund replaces Vanguard High Yield Corporate effective this month.
6
FEDERAL RESERVE POLICY UPDATE
(continued from page three)
As long as the incoming economic data in the fourth quarter justifies an
increase in the federal funds rate, the table will be set for a 0.25% increase
in the federal funds rate on December 14th assuming that global financial conditions are stable. Even after such an increase, the federal funds rate would
remain at the historically low range of 0.50% to 0.75% and the Federal Reserve
would remain highly accommodative. The latest data underscores the fact that
both the M-1 and M-2 monetary aggregates show healthy rates of expansion.
Latest Monthly Data ($Billions)
M-1
M-2
September 2016
September 2015
$ 3,333
$13,077
$ 3,028
$12,223
Real Y-O-Y*
Change
+ 9.0%
+ 5.9%
* adjusted for the 1.1% CPI increase for the year through August 31, 2016.
INCOME INVESTING/INCOME PORTFOLIO
The Marketimer income portfolio has a weighted-average current yield of 3.3%
and a weighted-average duration of 1.7 years. Duration is a measure of the potential
volatility of the price of debt securities prior to maturity. The current 1.7 year
duration implies that a one-percent increase in corresponding interest rates would
result in a 1.7% decline in portfolio value. Zero risk tolerance income investors
may prefer a short-term FDIC insured CD ladder as an alternative.
Income Portfolio
Weighting
DoubleLine Low Duration Bond Fund
DoubleLine Total Return Bond Fund
MetroWest Unconstrained Bond Fund
Osterweis Strategic Income Fund
(DLSNX)
(DLTNX)
(MWCRX)
(OSTIX)
DoubleLine & Osterweis: see page six;
Current Yield
25%
25%
25%
25%
2.17%
3.13%
2.41%
5.50%
Duration
1.1
2.6
1.4
1.8
MetroWest: 800-241-4671 or www.mwamllc.com
Subscribers seeking additional income ideas can request a complimentary copy of the
Brinker Fixed Income Advisor at www.brinkeradvisor.com or by calling 800-660-3293.
ACTIVE/PASSIVE PORTFOLIO – This portfolio invests for long-term growth with a highly
diversified portfolio. The portfolio currently holds an 80% weighting in Vanguard
Total Stock Market Index (VTSMX), and a 20% weighting in Vanguard All-World ex-U.S.
(VFWIX). Exchange-traded-fund investors can invest 80% in VTI and 20% in EFA, VEA
or VEU, all listed in the table below.
INDIVIDUAL ISSUES – All issues are currently rated hold. Individual stock holdings
are limited to 4% of total equities in order to manage specific stock risk.
Issue
Yield
Beta
Microsoft (MSFT)
Suncor Energy (SU)
S&P Depositary Receipts (SPY)
Total Stock Market (VTI)
Russell 3000 IShares (IWV)
DJIA Diamonds (DIA)
IShare DJ Select Dividend (DVY)
Vanguard Div. Appreciation (VIG)
IShare MSCI EAFE Index (EFA)
Vanguard FTSE Dev. Ex-N.Am.(VEA)
Vanguard FTSE All-World ex-U.S
2.7%
3.4%
2.0%
1.9%
1.9%
2.4%
3.0%
2.0%
2.8%
2.8%
2.8%
1.06
1.24
1.00
1.00
1.00
0.97
0.89
0.95
1.09
1.09
1.01
7
9-30 Close
57.60
27.78
216.30
111.33
128.19
182.78
85.69
83.93
59.13
37.41
45.43
EPS Estimates
2.90 (6-17) 3.22 (6-18)
-.30 (2016) 1.30 (2017)
11.70 (2016) 12.70 (2017)
n/a
n/a
10.60 (2016) 12.10 (2017)
n/a
n/a
n/a
n/a
n/a (symbol VEU)
MARKETIMER NO-LOAD MUTUAL FUND MODEL PORTFOLIOS
The Marketimer no-load model portfolios are designed to provide investors seeking aggressive, growth and balanced
objectives with a strategic approach to investing in no-load funds over the long-term.
Model Portfolio I is designed for investors with aggressive growth investment objectives. Such investors seek maximum
returns and are willing and able to accept high levels of risk and volatility. Current income is not a factor in this portfolio.
Model Portfolio II is designed for investors with long-term growth objectives. Such investors seek to enhance the value
of capital over time and assume a reasonable level of diversified market risk. Current income is not an important factor.
Model Portfolio III is designed as a balanced portfolio for current investment income along with capital preservation and
modest growth. The portfolio is allocated between equities and fixed-income securities. This portfolio is best suited to
investors nearing or already enjoying a retirement lifestyle.
MARKETIMER MODEL PORTFOLIO I
Current Holdings
Akre Focus Fund
Vanguard Small Cap Index
Vanguard FTSE All-World
Vanguard Total Stock Market
Symbol
AKREX
NAESX
VFWIX
VTSMX
MARKETIMER MODEL PORTFOLIO II
Current Holdings
Akre Focus Fund
Vanguard Small Cap Index
* Vanguard Dividend Growth
Vanguard FTSE All-World
Vanguard Total Stock Market
Symbol
AKREX
NAESX
VDIGX
VFWIX
VTSMX
MARKETIMER MODEL PORTFOLIO III
Current Holdings
Akre Focus Fund
* Vanguard Dividend Growth
Vanguard FTSE All-World
Vanguard Total Stock Market
DoubleLine Low Duration Bond
DoubleLine Total Return Bond
Osterweis Strategic Income Fund
Symbol
AKREX
VDIGX
VFWIX
VTSMX
DLSNX
DLTNX
OSTIX
($20,000 value on 1-1-88)
%
15
15
20
50
100%
Beta
0.92
1.16
1.01
1.00
1.01
Value 9-30-16
$ 72,622
76,345
96,562
241,787
$ 487,316
% Change
+ 2,336%
($20,000 value on 1-1-88)
%
10
10
10
20
50
100%
Beta
0.92
1.16
0.87
1.01
1.00
1.00
Value 9-30-16
$ 39,821
41,863
38,199
79,423
198,869
$ 398,175
% Change
+ 1,891%
($40,000 value on 3-1-90)
%
05
05
10
30
20
20
10
100%
Beta
0.92
0.87
1.01
1.00
------0.49
Value 9-30-16
$ 17,689
16,968
35,281
106,009
61,364
61,575
33,336
$ 332,222
* See Vanguard Dividend Growth Fund Note on page four fund listing.
HOW TO SUBSCRIBE TO BOB BRINKER'S MARKETIMER
NAME
ADDRESS
CITY / STATE / ZIP
Make check or money order payable to Marketimer and send to:
One-year subscription: $185 (overseas subscribers add $10)
8
Marketimer
10789 Bradford Rd.
Suite 210
Littleton, CO 80127
% Change
+ 730%