Research. LeutholdGroup

Sizing Up The Rally

There’s an old saying that bear market rallies look better than the real thing, yet the upswing off December lows looks even better than the typical bear market rally.

January 16

A Recovery Refresh?

In 2018, the U.S. recovery was on a path toward recession. It couldn’t last much longer growing above 3% in real terms and 5.5% in nominal terms, with an unemployment rate below 4%. Wages, consumer, producer, and commodity prices were rising and the Federal Reserve (Fed) and bond vigilantes were tightening.

January 15

MTI: Bear Market Rally In Progress

The move off the late-December lows has been broad and powerful but not at all unusual for a countertrend move in a bear market. Since 1945, bear market rallies in the S&P 500 have lasted an average of six weeks and carried the index higher by an average of 10.8%.

January 11

Characteristics Of Major Market Lows

We wrote in the January Green Book that the S&P 500 Christmas Eve low did not have the “right look,” in that: (1) there had been no sign of “smart money” accumulation beforehand; and, (2) downside momentum was also at a new low for the entire correction. Smart money buying is measured by the Smart Money Flow Index, which evaluates trends in first half-hour market action (considered to be more emotional and news-driven), and the last hour of trading (viewed to be more informed and institutional in nature).

January 08

A Few Encouraging Signs...

Amongst the carnage and ongoing financial market volatility are a few encouraging signs the stock market may eventually regain its footing. As the pictures below illustrate, a proprietary U.S. economic momentum indicator suggests that recession fears may lessen by the spring, valuations have now fallen well below levels justified by bond yields, investor mindsets are quickly shifting away from overheat fears, and the U.S. dollar may finally be breaking down.

January 08

Corporate Executives Might Be Peeking Into Quants’ Toolkits

In terms of long-term planning, corporate executives are often tasked with choosing between expanding their business or returning cash as a way to reward shareholders. In the quant world, the two decisions have a consequence on future stock returns.

January 08

December’s Low Didn’t Have The “Right Look”

As the market sunk to a 3% loss on Christmas Eve, we sensed genuine investor panic—at least among the fraction of investors then paying attention.

January 08

The Market Is Off Its Meds!

While investors obsess over the market level at which a hypothetical “Powell Put” might come into play (or whether such a put even exists), they seem to have overlooked the absence of another such put that proved dependable throughout the cyclical bull market.

January 08

Quant

Momentum Negative In Q4, But Positive For 2018

2018 was frustrating for most investors as Value continued to struggle and positive Momentum performance was difficult to capture. Small Caps, Mid Caps, and ADRs also underperformed.

January 08

Equity Strategies

Housing Affordability & Homebuilding Stocks

The Homebuilding stocks represent another Consumer Discretionary group ranking Attractive via our GS Scores; we have held the Homebuilding group for the last year and a half. Homebuilders is an extremely rate-conscious industry group given mortgage rates’ impact on housing affordability (and thus, demand).

January 07

Industry Group Dreams And Nightmares

The “Dreams” portfolio represents a simple industry group trend-following approach, while the “Nightmares” portfolio serves as a bottom-fishing strategy made up of the previous year’s biggest losers.

January 04

How This ‘Borderline’ Bear Stacks Up

The S&P 500 has again shown its mysterious ability to defy the conventional bear market threshold, with the decline into its Christmas Eve low becoming the fourth one in the last 30 years to halt just shy of the magic -20% figure.

January 03

MTI: Attitudinal Factors Best Since 2016

The Attitudinal category’s net reading is the best (i.e., most pessimistic) since the week following the February 2016 correction low. While that’s an encouraging sign, there’s no mechanical threshold on this composite which would indicate a “safe” re-entry point.

January 03

Some 2019 Market Musings?

Welcome to 2019! As we begin the New Year, volatility (the stock market’s VIX volatility index spiked above 30 last week) and uncertainty (Bear Market, Recession?) reign. Amongst all the chaos, and with much personal trepidation over what may actually happen this year, here are some observations and a few guesses for 2019.

December 26

MTI: Intrinsic Value Readings Jump

The lack of more meaningful MTI improvement in response to this month’s collapse suggests the bear has yet to fully express himself. But the swipes he’s taken so far have hit hard: Last week saw a nearly 150-point gain in the Intrinsic Value composite to its best level since April 2016.

December 21

Market Observations

It’s been one of the worst years on record for diversification, with our hypothetical All Asset No Authority (AANA) portfolio down 7.2% YTD through yesterday. That’s the second-worst year for AANA since 1972, and there’s probably not enough time left for performance to undercut 2008 (-24.9%) for the bottom spot.

December 20

Do Emerging Market Stocks Play Offense And Defense?

Emerging Markets (EM) are not normally considered a safe place to hide during severe stock market corrections—but they have been in the latest equities swoon. As shown in Chart 1, while the S&P 500 composite stock price index has declined by more than 14% from its high on September 20th, the MSCI Emerging Market stock price index has only declined by about 7%.

December 18

MTI: Median P/E Ratios Much Improved, But Not Blue Chips’

The median trailing P/E across the Leuthold 3000 universe has corrected more than 30% from January’s bull market peak (and all-time peak) of 25.1x to just 17.3x on Friday, while the median Normalized P/E ratio has shrunk more than 20% to 22.4x.

December 17

Stag, Flation, Or Both?

Stagflation is normally considered an economic condition characterized by weak real growth accompanied by rising inflation. Today, however, this condition may be most noticeable in the mindset of equity investors.

December 13

Rental Rates Rocket Alongside Slowing Home Prices

Headlines surrounding the U.S. housing market have recently fixated on sputtering home sales; declining affordability, thanks to the combination of rising mortgage rates and sky-high home prices, is to blame.

December 13

Inflation Watch

Inflation—Conditions Right For Fed Pause

Lower oil prices are dragging down the headline number. Markets are urging the Fed to take a pause in hiking. Core inflation remains in a healthy, tight range. Wealth effect concerns may drag on future price increases.

December 07

Earnings Releases Cause Surge In Price Volatility

Three years ago, we did a series of studies looking at price reactions to corporate earnings releases (ER) and we found that, since 2007, price movement has become more dramatic on ER days.

December 07

Deep-Six The “Threes-Fives”

We’ve sometimes called the yield curve our “favorite economist,” so we were amused when some enthusiastic data miner in the Treasury market tried to slip us a cheap imitation in late November.

December 07

It’s About Money, Not Profits

The consensus focus all year has been on the boom in U.S. corporate profits.

December 07

It’s Not A Pause… It’s “Paws”

A bear market will almost always prove to be the catalyst of one or more shifts in long-term market leadership.

December 07

Of Special Interest

Styles And Factors DeFANGed

Social media, mobile computing, and digital life-in-the-cloud were the dominant storylines for U.S. stocks over the last five years—reaching the apex of popularity following the early-2016 market low.

December 07

Quant

What’s In Momentum Now?

Along with market volatility, the composition of Momentum has changed, becoming more defensive and less exposed to cyclicals and commodities.

December 07

Equity Strategies

Restaurants Group Dishes Up Defense

The Restaurants industry is another Consumer Discretionary group ranking Attractive via our GS Scores; we purchased it in the Select Industries (SI) portfolio in November. This group has exhibited defensive qualities of late.

December 07

Macro Monitor

Risk Aversion Index: New “Lower Risk” Signal

Despite the recent signal whipsaws, we have been cautious toward all risky assets and we continue to recommend defense amid higher volatility across all asset classes.

December 06

Problems Aplenty

Recently, when Federal Reserve Chairman Jerome Powell and President Donald Trump both blinked—one on rate hikes and the other on trade wars—the S&P 500 surged by more than 6% in about a week! Many sensed the primary challenges holding back stocks were finally resolving and sentiment quickly turned bullish as investors did not want to miss the Santa Rally!

December 04

MTI: Inflation Measures Have Faded Sharply

The Economic/Interest Rates/Inflation category was not a big mover on the week, but its relative stability of late has masked a major shift within key indicator groupings. Leading inflation measures have faded sharply, with upgrades across the board in the commodity readings.

December 03

P/E Pressures

The valuation of the stock market has been under steady pressure this year. The S&P 500 trailing price-earnings (P/E) multiple has declined by about 25% from a recovery peak of 23 in January to about 18. The hope for this bull market is that P/E contraction is almost over, allowing stock prices to again rise with earnings gains.

November 30

What Can Margins Do For An Encore?

A massive drop in corporate tax payments lifted the third quarter NIPA profit margin back to the 10% level for the first time four years. But while we try not to always view the glass as half empty, we find it troubling that margins remain well-below their 2012 highs (10.6%) in spite of this one-time windfall.

November 27

MTI: Fundamentals Improve

While the improvement in the fundamental categories is encouraging, the weight of the evidence continues to support a cyclically defensive stance toward the stock market.

November 23

Thanksgiving Leftovers

Whatever one’s preferred leftovers from yesterday’s feast, the odds are good you’ll find them more appetizing than the slop served up by global asset markets this year. Stocks have obviously been turkeys, but all the surrounding trimmings that help diversify a portfolio have proven anything but complementary to the main course.

November 20

MTI: Extensive Overvaluation Vs. 1999/2000

A critical difference we’ve discussed repeatedly is that market overvaluation in the 1999/2000 episode was concentrated in roughly the top-50 Mega Caps, while current overvaluation—though arguably not as extreme—afflicts nearly the entire list of publicly-traded U.S. stocks.

November 20

Popular/Panned (PP) Ratio — An Update

We first published the accompanying chart in March of this year. The PP Ratio had just spiked sharply upward in the previous three months, as it did near the end of the dot-com era in 2000. Since March, in a very similar fashion as shown, the PP Ratio has eerily traced the same path as during the dot-com era.

November 19

Velocity Quietly Rises?

he velocity of the money supply measures the pace at which cash is spent in the economy, or the amount of total GDP activity created by each dollar of the money supply. Monetary velocity has long been a focal point for the Federal Reserve, economists, and investors because its growth often shapes the character of the recovery.

November 16