Weekly Trends - Raymond James

Weekly Trends Ryan Lewenza, CFA, CMT, Private Client Strategist

June 19, 2015

Bull Markets Don’t Die Of Old Age 

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Equity Market YTD Returns (%)

The current bull market which began in March 2009 is now 75 months old. Since 1950 there have been 12 bull markets which have lasted on average 54 months. With this bull market above the long-term average, many believe that we’re “long in the tooth” and that the stock market should soon roll over. With this in mind we examined previous stock market tops to isolate common characteristics often found at major tops, and contrast those results to today.

S&P/TSX Comp

S&P/TSX Small Cap

We also looked at the three central causes of bear markets which are monetary tightening by central banks, recessions, and wars. Given that we cannot predict the latter we focused on central bank tightening and recessions. With the Fed keeping rates anchored at 0% to 0.25%, the yield curve remains upward sloping which is a positive signal for the equity markets. Moreover, our most reliable leading indicators of signaling a recession or slowdown remain positive. As always, our investment outlook is evolving, incorporating new information as it comes in, but as of right now, we remain constructive on equities as the weight of evidence continues to point us this way.

1.7

S&P 500

2.7

Russell 2000

6.6

MSCI World

4.1

MSCI Europe

In determining our “stock market top checklist” we examined key statistics at previous stock market tops, looking at the bond and equity markets, along with investor sentiment readings. Overall, while some indicators are consistent with previous market tops, most are neutral to positive supporting our case for further, albeit modest gains in equities over the next 6-9 months.

0.5

11.7

MSCI EAFE

6.0

MSCI EM

2.2 -5

Canadian Sector

Current Bull Market Is Getting Older, But Most Indicators Point To Further Upside 160 140

6.8

Overweight

3.8

Market weight

Energy

20.2

Market weight

Financials

35.1

Market weight

Health Care

6.0

Market weight

Industrials

8.0

Overweight

Information Technology

2.4

Overweight

Materials

10.9

Underweight

Telecom

4.7

Market weight

Utilities

2.1

Underweight

Level

Reading

S&P/TSX Composite

14,707.1

50-DMA

15,134.0

Downtrend

200-DMA

14,872.3

Downtrend

38.6

Neutral

16,000

15,500 15,000

86.9 75.0

74.9

80 50.4

60

44.1

40

Average Length

26.1

61.3

60.9

20

S&P/TSX 50-DMA 200-DMA

14,500 14,000 13,500

32.0

13,000

3.5

12,500

1.6

0

12,000

Jun '49

Oct '57

Jun '62

Oct '66

May Oct Aug Dec '70 '74 '82 '87 Start Date of Bull Market

Sep '01

Oct '02

Nov '08

Mar '09

11,500

11,000 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15

Source: Bloomberg, Raymond James Ltd. Source: Bloomberg, Raymond James Ltd.

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15

Consumer Staples

# of Months of Bull Market

120 100

10

TSX Weight Recommendation

RSI (14-day)

149.8

5

Consumer Discretionary

Technical Considerations

Chart of the Week

0

Weekly Trends

June 19, 2015 | Page 2 of 5

Bull Markets Don’t Die Of Old Age The current bull market which began in March 2009 is now 75 months old. Since 1950 there have been 12 bull markets which have lasted on average 54 months. With this bull market now above the long-term average many believe that we’re “long in the tooth” and that the stock market should soon roll over. With this in mind we examined previous stock market tops to isolate common characteristics often found at major tops, and we contrast those results to today. In determining our “stock market top checklist” we examined key statistics at previous stock market tops, looking at the bond and equity markets, along with investor sentiment readings. Below we summarize our findings.

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Equity Markets: For equities we analyzed P/Es, dividend yields and one year returns for the S&P 500 at market peaks. Two of these metrics are positive as they are currently below their average peak levels. The S&P 500 P/E is currently below its average peak level (18.4x versus 19.3x) and the prior one year return of the S&P 500 is below the average (7.7% versus 12.7%). The one indicator that is providing a negative reading is the S&P 500 dividend yield. Currently it sits at 2% which is below the average peak yield of 2.4%. However, it is above the levels seen in 2000, 2002 and 2007. Bond Markets: For the bond market indicators we looked at corporate bond spreads, the one year change in Fed Funds Rate before the stock market top and the US yield curve spread. With the Fed keeping rates anchored at 0% to 0.25%, the yield curve remains upward sloping which is a positive signal for the equity markets. Overall, the bond indicators are signaling a neutral to positive reading for the equity markets. Investor Sentiment: Finally, we looked at investor sentiment as it is often at high bullish levels at market tops. With just 25% of investors polled currently bullish versus 48% at market tops and the increase in margin debt in line with the average, we would characterize investor sentiment as neutral to positive for the stock market.

Overall, while some indicators are consistent with previous market tops, most are neutral to positive supporting our case for further, albeit modest gains in equities over the next 6-9 months. Stock Market Top Checklist

Peak Dates 2-Aug-56 12-Dec-61 9-Feb-66 29-Nov-68 11-Jan-73 28-Nov-80 25-Aug-87 24-Mar-00 4-Jan-02 9-Oct-07 6-Jan-09 Average Current Reading

P/E 13.7 22.4 18.0 18.0 19.5 9.1 22.3 30.6 27.2 17.5 14.2 19.3 18.4 +

S&P 500 Bonds Dvd Return Corporate Fed Funds Rate Yield Yield (%) 1 Yr Chg (%) Spread (bps) 1 Yr Chg (%) Curve (bps) 15.6 27.8 7.8 10 14.7 26 2.7 16.0 2.25 120 4.4 31.6 2.50 -176 2.7 35.9 207 0.87 233 1.1 20.4 214 1.25 29 1.3 -12.1 283 -4.25 341 1.8 15.9 192 -0.50 64 3.0 -33.8 583 -4.00 231 2.4 12.7 296 -0.27 98 2.0 7.7 273 0.00 235 + = +

Source: Bloomberg, Raymond James Ltd.

Sentiment Bullish Sent. Margin Debt (4-week MA) 1 Yr Chg (%) 29.5 1.4 1.8 35.1 29.5 54.8 20.5 52.7 78.0 55.7 -23.7 45.1 41.4 32.5 -46.0 48.1 16.7 24.9 16.0 + =

Current Bull Market Is 75 Months Old Versus The Average At 54 Months 160 140

149.8 # of Months of Bull Market

120 100

86.9 75.0

74.9

80 50.4

60

44.1

40

Average Length

26.1

20

61.3

60.9

32.0 3.5

1.6

0 Jun '49

Oct '57

Jun '62

Oct May Oct Aug Dec Sep Oct Nov Mar '66 '70 '74 '82 '87 '01 '02 '08 '09 Start Date of Bull Market


Weekly Trends

June 19, 2015 | Page 3 of 5

What Causes Bear Markets? We have found that the three central causes of bear markets are monetary tightening by central banks, recessions, and wars. Given that we cannot predict the latter we will focus on central bank tightening and recessions. As the economy begins to heat up resulting in stronger economic growth and higher inflation levels, central banks begin to tighten monetary policy by hiking interest rates. The yield curve, which is the difference between shorter term maturities (i.e, 90 day T-Bills) and longer dated maturities (i.e., 10-year Treasury yields), typically begins to flatten as the US Federal Reserve (Fed) hikes interest rates. In the accompanying chart we overlay the S&P 500 with the US yield curve. Note how the US yield curve has “inverted” or gone negative just prior to the last three major bear markets. In fact, we have found the US yield curve to be one of the best indicators in predicting a bear market. Over the last 50 years the yield curve has inverted or significantly flattened prior to every bear market. On average it “inverts” 12 months before the start of the bear market. Currently, the US yield curve is upward sloping by 235 bps which is “normal” and is signaling the prospect of higher future interest rates which is consistent with a strengthening economy. While we believe this concern of an inverted or flattening yield curve could materialize later in 2016 and into 2017 as the Fed is further along in its tightening cycle, we believe for 2015 this great indicator of bear markets remains bullish for the stock market. On the second main cause of bear markets – recessions – our most reliable leading indicators of signaling a recession or slowdown remain positive. Some of the key leading indicators that we track include initial jobless claims, stock market returns and manufacturing new orders, with most of them being positive and signaling continued strength in the US economy. Alternatively, one can use the US Conference Board Leading Economic Index (LEI) which combines many different indicators into one easy to monitor index. This indicator continues to trend higher which signals an improving economy, not one on the cusp of a recession. US Yield Curve Is Upward Sloping 1200 1000

US Yield Curve (LHS) S&P 500 (RHS) Log Scale

While the US LEI Continues To Trend Higher 2500 20 15 10

800

5

600

0

400

-5 -10

200

-15

0

US Recession

-20

-200

50 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14


US Leading Indicator Index Y/Y % Change

-25 '80

'85

'90

'95

'00

'05

'10

'15

Weekly Trends

June 19, 2015 | Page 4 of 5

US Economic Update Q1/15 was undeniably weak surprising many economists and strategists. However, as we’ve expressed in recent publications that: 1) Q1 US growth is historically weak, roughly 1% below all other quarters; and 2) we believe there were transitory factors (i.e., weather and the West coast port shutdown) which likely weighed on economic activity. As such, we’ve been predicting that the US economy would soon turn, and begin to show stronger economic momentum. We believe recent US economic reports could be signalling this turn. In particular, May nonfarm payrolls, retail sales, and manufacturing data have all rebounded and come in above expectations. Looking at the ISM manufacturing report, which is one of our favourite economic indicators, showed that manufacturing strengthened (ISM Manufacturing Index ticked higher to 52.8), driven by a strong rebound in new orders. These better-thanexpected economic reports are captured in the US Citigroup Economic Surprise Index which has recently turned up from a low level. This is one of our favourite indicators as it captures positive/negative momentum in the US economy and does correlate with three month S&P 500 stock performance. Conclusion With the US economy and stock market stalling in Q1/15, many are beginning to question whether this bull market can continue. As we’ve covered, bear markets are generally brought on by central bank tightening or economic recessions. Neither of these conditions are present nor is our “stock market top checklist” suggesting an imminent bear market. As always, our investment outlook is evolving, incorporating new information as it comes in, but as of right now, we remain constructive on equities as the weight of evidence continues to point us this way. US Manufacturing Looks To Be Turning 62

150

ISM Manufacturing Index

60

58.1

58 56

Along With The US Citigroup Economic Surprise Index

55.6 55.7

56.4

57.9 57.6

Citigroup Surprise Index (LHS) S&P 500 3-Month % Chg (RHS)

100

30% 20%

56.1

54 52 50

55.1 53.5

52.9

50

10%

0

0%

52.8 51.5 51.5

-50

-10%

48 46

-100

-20%

r = .48 -150

-30% '09


'10

'11

'12

'13

'14

'15

Weekly Trends

June 19, 2015 | Page 5 of 5

Important Investor Disclosures Complete disclosures for companies covered by Raymond James can be viewed at: www.raymondjames.ca/researchdisclosures. This newsletter is prepared by the Private Client Services team (PCS) of Raymond James Ltd. (RJL) for distribution to RJL’s retail clients. It is not a product of the Research Department of RJL. All opinions and recommendations reflect the judgement of the author at this date and are subject to change. The author’s recommendations may be based on technical analysis and may or may not take into account information contained in fundamental research reports published by RJL or its affiliates. Information is from sources believed to be reliable but accuracy cannot be guaranteed. It is for informational purposes only. It is not meant to provide legal or tax advice; as each situation is different, individuals should seek advice based on their circumstances. Nor is it an offer to sell or the solicitation of an offer to buy any securities. It is intended for distribution only in those jurisdictions where RJL is registered. RJL, its officers, directors, agents, employees and families may from time to time hold long or short positions in the securities mentioned herein and may engage in transactions contrary to the conclusions in this newsletter. RJL may perform investment banking or other services for, or solicit investment banking business from, any company mentioned in this newsletter. Securities offered through Raymond James Ltd., Member-Canadian Investor Protection Fund. Financial planning and insurance offered through Raymond James Financial Planning Ltd., not a Member-Canadian Investor Protection Fund. Commissions, trailing commissions, management fees and expenses all may be associated with mutual funds. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. The results presented should not and cannot be viewed as an indicator of future performance. Individual results will vary and transaction costs relating to investing in these stocks will affect overall performance. Information regarding High, Medium, and Low risk securities is available from your Financial Advisor. RJL is a member of Canadian Investor Protection Fund. ©2015 Raymond James Ltd.