Research.LeutholdGroup

MTI: Consumer Confidence Worrisome “Inversion”

A less-publicized, but still worrisome “inversion” occurring beyond the Treasury market is that of Consumer Confidence, in which the Conference Board’s Present Situation Index has soared almost 70 points above the Expectations Index. This gap always becomes extreme in the late stages of an economic expansion, and today’s reading surpasses those recorded at all business cycle peaks other than February 2001.

Watch What I Do… Not What I Say!

Surveys are conducted frequently on Wall Street as investors are always assessing whether there are too many bulls or too many bears. The problem with surveys is people do not always do what they say (perhaps as we found out leading up to the last presidential election).

The Odd Couple?

A survey asking equity investors whether the stock market does best with a strong or weak U.S. dollar would likely yield a variety of contradicting opinions—and they would all be correct! Like many couples, the stock/dollar relationship is complicated. Sometimes they get along blissfully, other times they separate because they find they rarely agree and, often, they simply seem indifferent to each other. They are an odd couple!
 

Deflation And Deception

We think the current economic cycle is more likely to end in a deflationary bust than with a bout of late-cycle “overheating,” and analysts and investors should recognize that such a cycle ending could be especially difficult to detect.

May Inflation—Dude, Where’s My Rate Cut?

The latest batch of softer than expected inflation figures gives the Fed more cover for a rate cut. Consumer inflation expectations are now the lowest in two years. Housing price increases remain critical to overall inflation.

MTI: Economic Measures Continue To Lose Ground

We view market and economic risks as high, but the Momentum picture has been convincing enough to prevent us from adopting a maximally defensive posture.

Will Stimulus “Trump” Trade?

U.S. economic growth has recently slowed and most attribute the weakening to trade wars now being fought on several fronts (China, Mexico, Europe?). Bond vigilantes have become so concerned about the potential for negative economic fallout that they have inverted the yield curve.

Homebuilding Stocks Take Flight

Homebuilding rose to rank #1 among our universe in our latest monthly Group Selection (GS) Scores. The industry has staged an impressive turnaround, beginning in October 2018, with strong returns outpacing the S&P 500 by more than 2.5x YTD. 

All That You Don’t Hear About The Curve

While the 10Y-3M curve inversion does warrant extra attention, movements in other parts of the curve also need to be taken into consideration.

Time For Dividend Stocks, But Stick With Quality

With multiple indicators flashing signs of an economic slowdown amid trade war uncertainty, investors are betting that an interest rate cut is on the horizon.

Take A Closer Look At “Goldilocks”

We’ve frequently written of the uncanny parallels between the rallies of 2018-19 and 1998-99, but hope that newer readers don’t mistake this analysis as a forecast.

“Granddaddy” Tells A Lie

Based on the “granddaddy” of all technical indicators—the daily advance/decline line—we wouldn’t normally be worried that the April 30th high in the S&P 500 could be the final high of the bull market.

Still Tracing Out A Top

Major market tops are drawn-out processes that can prove costly, and infuriating, to bulls and bears alike. Younger readers might be surprised to know that was true before Twitter.

MTI Back In Negative Territory

We don’t like “news-driven” market moves, and it’s pretty obvious that May’s decline was due in large part to the ramp-up in the trade war. That said, trends in the economy and earnings were already weakening prior to the latest escalation.

An Economy This Healthy Is Hostile To Profits

It’s hard to grow profits when an economy’s resources are already fully employed, a fact we highlighted when the U.S. Output Gap turned positive several quarters ago. Therefore, the first quarter drop in NIPA corporate profits, reported yesterday, shouldn’t have come as a surprise.

What Doesn’t Kill You… May Make You Rich?

The bond market is now the primary fear for stock investors. Bond yields just keep declining, the yield curve has again inverted, and many wonder ‘why is the bond market so spooked?’ Could it be signaling a recession and therefore a bear market?

MTI: Economic/Momentum Continue To Lose Steam

Aside from the decidedly bearish action in the Treasury yield curve, U.S. and global money supply growth rates remain sluggish; both the Fed balance sheet and the Adjusted Monetary Base are still in outright decline.

Concepts On The Cranium

Just some unrelated thoughts this week. A few concepts for the cranium! 

First Quarter Earnings Waterfall

What a difference a year makes! In early 2018 we were celebrating 20% earnings growth, driven by a strong economy and the massive corporate tax cut. Sales were rising at a double-digit rate and the tax burden was shrinking dramatically, setting up one of the best earnings years in history.

MTI: Economic Measures Remain Weak

Weakness in several coincident economic measures suggest that global-policy tightening over the last 18 months is having an impact. The current Fed policy stance doesn’t lead us to believe much improvement is likely in the near term.

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. 

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).

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.

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.

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! 
 

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).

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.

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.”

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.

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.

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.

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.

Signs Of Spring For Financials

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.

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.

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.

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.

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.

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? 

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).

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.