Skip to content
Jun 06 2024

Research Preview: Small Caps, Small Returns

  • Jun 6, 2024

Despite the overwhelming superiority of small cap returns, historically, during the winter months, the last three years have not followed the script. Three consecutive failures of this powerful seasonal influence make us curious if there are other market conditions that may be negatively influencing the smalls.

May’s CPI figures were cooler than expected, breaking a trend of generally hotter than anticipated results. Many inflation data series continue to plateau at rates higher the Fed’s comfort zone.

Read more

While the NASDAQ rebounded sharply from its mini-setback in April, daily 52-week new lows in the index eclipsed new highs several days in late May and early June. It’s rare to see that happen on days when the NASDAQ 100 itself closes at a 52-week high, yet that’s exactly what transpired on May 24th.

Read more

The stock market picture at the June 5th SPX high was not as cohesive as that of late March. Just two of our eight bellwethers—Dow Jones Transports and Dow Jones Utilities—had failed to confirm the new market high at the end of March. At the high on June 5th, however, the list of laggards expanded to include the Russell 2000, S&P 500 Cyclical Sector Composite, and the S&P 500 Equal Weighted Index.

Read more

With the Mag 7 driving S&P 500 returns on a daily basis, the other 593 stocks have become less correlated with the S&P 500’s day-to-day changes. Although dropping correlations are typically a good thing for active managers, we think this time is different.

Read more

Nvidia’s +27% return in May means that this chip company now has a similar market cap and index weight as Microsoft and Apple (NVDA was less than one-fifth the size of AAPL just 18 months ago). In May, Nvidia contributed a little over one-quarter of the S&P 500’s return. For the first five months of 2024, the firm’s 121% gain has subsidized one-third of the index’s YTD performance.

Read more

Chinese investors have flocked to gold as traditional investments have massively disappointed. Global central banks are also buying gold amid heightened geopolitical tension. Both trends help explain why gold has defied the gravitational pull of a stronger dollar and higher real yields.

Read more

Today’s eight largest firms produced an average gross margin of 65% over the last fiscal year, a 15-point gain since 1999—and pretax margins are truly amazing. The striking level of profitability at the top of the S&P 500 explains the top-heavy nature of the bull market, and at least partially justifies valuations. 

Read more

Q1 bottom-up operating EPS for the S&P 500 sank slightly to $54.94 after the second month of reporting.  However, with reporting for the Index nearly complete, this figure is still 70 cents above the final pre-reporting estimate recorded at the end of March. The fifteen months of Q1 snail trail in Chart 1 shows remarkably consistent estimates, especially given our recent “ski slope” quarters of 2023. EPS estimates, at least in the aggregate, continue to hold up nicely for the other three quarters of 2024 reporting as well.

Read more

Read this week's Major Trend. 

Read more

Read this week's Major Trend. 

Read more

The financial performance of Korean companies has retreated to distressingly low levels in recent years. Consider that 67% of KOSPI index members trade at a P/B below 1x, and the median ROE is just 4.9%.  To address the concerns of fading corporate performance, low valuations, and weak stock market returns, the Financial Services Commission joined with the Korean Stock Exchange to announce the “Corporate Value-Up” program in February 2024. The objective is to enhance corporate governance and shareholder accountability and to encourage companies to improve financial performance in the areas of P/B, ROE, ROA and shareholder payouts.

Read more

The latest CPI report was boring, but no bad surprise is really good news these days. Our scorecard is currently Neutral and it’s likely on the cusp of turning disinflationary over the next few months.

 

Read more

Read this week's Major Trend. 

Read more

One casualty of the U.S. market’s hawkish turn is the Japanese Yen. It certainly grabbed its share of headlines, yet, when viewing the selloff in historical perspective, this year’s uptick looks entirely inconsequential. Additionally, when considering the Yen through the lens of other Asian currencies, its outsized weakness versus the dollar essentially disappears. Dollar strength is the real driver and it has pummeled Asian currencies across the board.

Read more

Now at the bull market’s one-and-a-half-year mark, it’s notable that every major stock index has trailed the average path for a new bull market at this point in a cycle. But, it’s unfair to liken today’s bull with past bulls, because it has a unique adverse trait that is apt to be life-shortening: It arose during an economic expansion—and likely in the latter stages, considering the unemployment rate was 3.5%.

Read more

Despite our reservations about the durability of the expansion, we have to respect what it has overcome: interest-rate hikes of 425 bps; a nearly 2-year runoff in the Fed’s balance sheet (QT); and a 9-month bear market that began before the expansion reached its 2-year milestone. Even consumer “expectations,” which track the market higher in the early phase of a bull market, never rebounded and are lower now than at the fall-2022 market low.

Read more

Despite a hostile setting for active management in Q1, six of nine style boxes in our ongoing analysis achieved active-fund win rates above 50% (60% on average bested their passive benchmark). The other three each scored just below 50% of active strategies beating passive. This is remarkable given the proven importance of market conditions in the active/passive performance derby.

Read more

Two of the most intriguing storylines across global markets in recent years concern Asian economies. The Japanese stock market provided the upside surprise, gaining a remarkable 64% in local currency terms since the end of 2020, making it one of the world’s top performers. On the flipside, South Korea ended April with a cumulative loss over the last three-plus years.

Read more

Read this week's Major Trend. 

Read more

Q1 bottom-up S&P 500 operating EPS estimates jumped a little over a dollar to $55.36 after the first month of reporting. This halted the usual “slow-erosion” pattern that shaved $3 off the quarter’s estimate since last summer (Chart 1). The three forward quarters of 2024 also experienced a bump in estimates. S&P 500 full-year EPS projections now sit at $242. That would be a 13% YOY gain from 2023’s results.

Read more

Our March report titled Lifeboat Drill examined the effectiveness of sectors, styles, and factors in protecting investors during major market declines. We found that Consumer Staples are significant and consistent outperformers during times of distress, serving as “comfort food” for investors trying to minimize their financial and emotional distress in a falling market.  Staples are relatively inexpensive today based on market-relative metrics, and today’s level of cheapness has historically corresponded to positive relative returns going forward.

Read more

CPI readings were a touch above estimates again in March. The actual data surprises are not nearly as dramatic as the market reactions, which have been almost entirely driven by sentiment swings.

 

Read more

The market upswing is now confirmed by Cyclicals, Defensives, Breadth, and Bonds. Endorsement by all four occurs about one-third of the time and has led to an S&P 500 average annualized compound return of +15%.

Read more

Realizing a gain in each of the first three months of the year, like Q124, is not as bullish for the next twelve months as are back-to-back gains in January and February. The three-month streak produces a one-year performance advantage of around 2%, while a string of Jan-Feb gains was additive by 900 bps. 

Read more

Rallies of this magnitude (+30% in 5-6 months) are not uncommon; however, this one began one year into a yield-curve-inversion cycle and with stock valuations already elevated. The latter condition could be viewed as a positive because the market surge has created one of the most pronounced short-term wealth effects in history.

Read more

To gauge how much faith we should have in this “virtuous” cycle, we examine the macro context in terms of the business cycle, the Yen, interest rates, and inflation. Ultimately, inflation holds the key to bond yields, as the main difference between pre- and post-1990 rate hikes boils down to inflation—which is also the key determinant of how far the BoJ can go in this tightening cycle.

Read more

This month’s Leuthold Refresh is a quarterly update on our factor regime analysis. Factors, or investment styles, have historically performed quite differently under various economic and market conditions, and we’ve mapped these relationships to identify the factors best positioned for the environment at this time.

Read more

Well-respected analysts have been espousing different views on the Staples sector’s overall valuation. Some argue Staples is rather richly priced, while others believe it is a bargain in the making. Disagreement creates opportunities, and we believe a closer look at Staples is in order.

Read more

Read this week's Major Trend. 

Read more

ETFs that focus on a single sector, style, or theme enable investors to make tactical calls that reflect their outlook and risk tolerance, resetting their risk/return profile to benefit from prevailing economic and market conditions. As fate would have it, the explosion of tactical, thematic funds that began 15 years ago coincided with a drought in market cycles.  Following the Global Financial Crisis, the S&P 500 only experienced one moderate drawdown in the next nine years, meaning that opportunities to judge these new thematic ETFs during market declines were in short supply.  This dearth of real-world corroboration has been remedied in recent years as the market experienced three major declines in the span of 49 months, and this expanded sample size serves as the basis for our current study evaluating defensive ETFs in down markets.

Read more

Read this week's Major Trend. 

Read more

Like January, February’s CPI figures were hotter than expected. Stickier inflation data, spiking breakeven rates, and fewer Fed cuts haven’t scared the equity market one bit.

Read more