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May 06 2019

Signs Of Spring For Financials

  • May 6, 2019

Signs of spring are popping up everywhere in the Financials sector. S&P Financials was easily the top- performing sector in April and several sub-industries have been bubbling higher in our Group Selection discipline.

May 20

Say Hi To Goldie?

Despite the current trade war with China, the U.S. economy has taken on an air of ‘Goldilocks’ since the December stock market swoon. Real economic growth has slowed, and both inflation and interest rates have moderated. The pace of growth is no longer too hot—as it was last year—nor has it yet become too cold—as most feared earlier this year. 

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May 17

Microsoft Reclaims The Iron Throne

Even our staid and august firm isn’t above a little Game of Thrones clickbait.

After nineteen years in the wilderness, an old king has returned for his throne. The House of Microsoft is once again the most valuable company in the S&P 500 and, as of last month, is the sole occupier of the “4% Club” (i.e., weighting in the index).

 

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May 14

MTI: Momentum Pulls Back

The Momentum work has been the largest week-to-week MTI swing factor for many months, and that was the case again last week. The Attitudinal category improved, reflecting increasing investor anxiety.

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May 13

April Inflation—A Sideshow To Trade Talk

The latest CPI numbers are slightly lower than market expectations. Oil prices need to be watched closely as further oil weakness would likely drag down inflation expectations too. Concerns about new tariffs causing higher inflation are misplaced.

 

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May 13

The Fed Hit The Pause Button But Investors Pressed ‘Replay’

After the December stock market swoon, amidst escalating recession fears, the Federal Reserve hit the pause button on interest rate hikes. Investors, though, had a déjà vu moment, sensing the 2018 experience as reminiscent of a few years earlier and, considering the aftermath of the prior occurrence turned out to be profitable, investors in 2019 opted to hit the replay button! 
 

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May 10

Non-Energy Commodities Signal A Major Slowdown

Late in the cycle, blue chip indexes like the DJIA and S&P 500 can fool investors by hiding subtler deterioration in the broad list of stocks. That’s been underway in the last couple of months, but it’s nothing in relation to the divergence that’s opened in the commodity market, where there’s an almost 20% YTD performance gap between the headline S&P/GS Commodity Index and its non-Energy components (Chart 1).

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May 07

AANA: The Good And The Bad

Large Cap U.S. Technology has been the place to be this year, but even an “unmanaged” portfolio with a variety of assets has fared well so far in 2019.

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May 07

It’s A Confidence Game

U.S. stock funds have seen heavy outflows despite the market’s YTD gains of 15-20%, once again reviving the tired characterization of this bull market as the “most hated in history.”

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May 07

Mixed Monetary Messages

Confidence in the U.S. economy’s health reached a new peak with the April employment report, with a blowout number for nonfarm payroll coinciding with a soft wage print.

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May 07

Bull Markets Are In The Eye Of The Beholder

The market’s four-month recovery from the brink of a bear was completed in April, and the ten-year-old bull looks better than ever against all of its post-World War II competitors.

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May 07

Signs Of Margin Pressure Ahead

Banks’ lending standards for C&I loans (typically to large businesses) tightened quite a bit in Q1, which bodes ill for both investment and overall economic growth going forward.

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May 07

Information Technology Sector Now Highest Rated

For the first time since late 2017, Information Technology moved into the top-rated spot. This sector has historically produced especially strong results during periods after which it took over the #1 seat.

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May 06

Bank Loan CEFs: Double Leverage Implies Higher Risk

In prior publications we’ve written about corporate leverage, which has risen to an alarming level, and we’re concerned that this could be a trigger for the next market downturn.

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May 06

Is U.S. Expansion Old Or Just Middle-Aged?

An aging economic expansion can be hazardous for investors. It tends to develop vulnerabilities (e.g., indebtedness, a lack of savings, over-indulgences, etc.) which threaten a premature ending. Often, old recoveries develop a capacity shortage leading to worsening inflation, interest rate pressures, and restrictive economic policies.

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May 03

Adding Some Emerging Markets On A “Rent-to-Own” Basis

Emerging Market equities have been modest underperformers during the current rally, but they’ve marshaled enough strength to trigger a new low-risk BUY signal on our VLT Momentum algorithm at the end of April.

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April 30

MTI: Stock Leadership Similar To Late 1990s’

We are not in the “melt-up” camp but we’re impressed by the close similarities in leadership with the greatest late-cycle melt-up of all time, which took place from late 1998 through March 2000.

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April 29

Relationship Problems?

Investors have struggled this year with the relationship between stocks and bonds. The stock market seems very optimistic about the future, whereas bonds appear much more reserved, if not frightened, by the outlook. Should investors be concerned by the seeming contentiousness between stocks and bonds? 

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April 26

Oil And The Dollar At New Highs: Is Something About To Give?

Crude oil and the U.S. Dollar Index accomplished a relatively rare feat by moving to simultaneous six-month highs earlier this week (Chart 1).

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April 26

Trade And Fiscal Juice?

This morning’s U.S. GDP report should help calm fears about a pending recession and perhaps set the stage for a surprising acceleration in economic growth? Fears of recession have caused the Federal Reserve to pause its tightening campaign, slightly boost the pace of money supply growth, and significantly lower long-term yields. Improved monetary accommodation definitely raises future economic growth prospects.

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April 23

Price Action Strong Despite Earnings/Liquidity Trends

Although we are not in the “melt-up” camp, we’d concede that stock market leadership is exactly what we’d expect if we were in that camp: Domestic over Foreign, Large over Small, and Growth over Value. Price action continues to remind us of the powerful rebound off the fall 1998 lows. Current earnings and liquidity trends, however, are not nearly as supportive as they were during that historic market move.

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April 22

‘Wall Of Worry’ Taller Than Trump’s Border Wall!

Compared to post-war norms, the contemporary economic expansion has been odd in many ways. Persistent sub-par economic growth, a lack of normal lending and borrowing activities, declining labor-force participation rates, a stubbornly high underemployment rate, an inflation no-show, negative yields, and bizarre economic policies (e.g., TARP, cash for clunkers, stress tests, and quantitative easing). 
 

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April 18

Cyclicality is Scarce?

Better economic reports in the U.S. and about the globe are slowly reducing imminent recession worries. For example, today’s favorable reports on U.S. retail sales, unemployment claims, and the Leading Economic Indicator reinforces the likelihood the expansion perseveres. 

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April 18

Small Caps And The Recent “Rate Hike”

The 1999 leadership parallels we discussed in the latest Green Book remain intact—U.S. over foreign, Growth over Value, and Large over Small. Small Caps have given up most of the “beta bounce” enjoyed in the first two months off the December low, with one Small Cap measure—the Russell Microcap Index (the bottom 1000 of the Russell 2000)—undercutting last year’s relative strength low and those of 2011 and 2016.

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April 16

MTI: Dead Neutral

The Boom/Bust Indicator, a weekly ratio of industrial-commodity prices to initial unemployment claims, has had a near-vertical rebound to old highs in the last several weeks. This index usually peaks out many months in advance of a business cycle peak (although not in 2007, when it provided no warning of the pain to come).

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April 15

Exposed To ‘Margin’ Investments?

U.S. profit margins have widened significantly in the last couple decades. Total U.S. corporate profits as a percent of GDP averaged only about 8% in the 20 years leading up to 2000, but has since risen by almost 30%, averaging 10.5%. Similarly, the overall profit margin among S&P 500 companies has increased steadily in this recovery to record highs! 

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April 12

Margins Prove Capitalism Still Works

Corporate profits were outstanding last year, but even the benefit of a 40% cut in the top income-tax rate wasn’t enough to lift the net profit margin back to the all-time high of 10.6% established in early 2012. Still, the latest 10.0% figure is more than a percentage point above the 2007 cycle high and about two points better than any other cycle high.

 

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April 11

Inflation Remain Contained

The latest CPI numbers are largely in line with market expectations. The recent rebound in oil prices certainly helped the recovery in inflation expectations. Recent U.S. economic numbers have been decent overall and the latest uptick in the U.S. ISM index also offers support for inflation.

 

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April 09

MTI: Momentum Keeps Gaining

If the market’s manic rebound succeeds in assuaging consumers’ recently shaken confidence, we can certainly see a scenario in which the economy and corporate profits firm up after their current slowdown… although that is not our bet.

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April 08

Embrace Your New Sugar Daddy!

Many believe the contemporary bull market has been nothing more than a Sugar High produced by massive and unprecedented monetary easing. In the last couple years, however, the Federal Reserve has raised interest rates and allowed its balance sheet to run off, weaning the markets from its sugar. 
 

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April 05

Small Cap Biotech Getting Pricey Again

In May 2015, we warned about rich valuations for small cap Biotech stocks and looked at various ways to evaluate those companies, as the majority have no approved drugs on the market, thus no revenue; therefore, valuing these companies using the conventional methodology is problematic.

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April 05

A Confidence Game

Several consumer confidence gauges plunged in the wake of the Q4 market decline (as expected), and then rebounded in a lagged response to the stock market recovery (again, as expected). But March saw the largest one-month drop in consumers’ assessment of their “Present Situation” since 2008.

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April 04

Movies & Entertainment & Broadcasting Revisited

Performance has been robust for this group, rising on a relative strength basis since the end of 2017. Its diverse mix of constituents equates to a group that, overall, is middle-of-road in terms of beta and volatility relative to other industries. These dynamics have contributed to its solid relative returns across diverging market environments of late.

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April 03

Factor Frontiers And Investing To The Max

Quantitative investing has taken the industry by storm over the last decade, and smart beta ETFs are pulling in billions of dollars as investors and advisors gravitate to this portfolio management technique.

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April 03

Flows Muted For Most Equity Categories

As of the end of February, net cash flow into equity fund categories was subdued compared to that logged for the first two months of 2018.

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April 02

MTI: Valuation Factors Still A Drag, But Well Below Extremes

The Intrinsic Value category remains a drag on the MTI but is well below cycle extremes seen in January 2018 and again in September. The Momentum category, however, continues to nudge the MTI higher for the third consecutive week.

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April 02

A Rally With Fundamental Foundations?

A legitimate concern facing investors is how quickly, and how much, the stock market has recovered while economic and earnings fundamentals have deteriorated. Without improving fundamentals, this rally appears overdone—based on hope—and increasingly suspect.

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March 29

The Cycle Is Over If Confidence Fades Further

The “Expectations” component of the Consumer Confidence survey has been wobbly in the last few months, but the latest report, released on Tuesday, showed the first meaningful hit to consumers’ “Present Situation” since the stock market first began to struggle 14 months ago (Chart 1).

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March 28

Has The Yield Curve Been TRUMPed?

The U.S. yield curve has inverted (at least the 10-year Treasury yield to either the 3-month T-bill or the Fed funds rate) and captured the full attention of investors. Rightly so, since a yield curve inversion has historically been an excellent indicator of a pending recession. However, a condition that has always existed in the post-war era when the yield curve has inverted is absent today.

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March 26

MTI Remains Low-Neutral

One of our long-term momentum models improved last week, while the Dow Bond Oscillator—as good of a mechanical monetary indicator as we’ve encountered—pushed further into positive territory.

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March 25

How SWEET It Is!

Stocks do best in times of general price stability. In the post-war era, the stock market has provided investors with significantly higher returns and lower risk whenever the annual rate of consumer price inflation has been between 1% and 3%. However, when outside this “Sweet Spot”—when the porridge is either too hot or too cold—investment results are far less hospitable. 

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