Research.LeutholdGroup

MTI: Momentum Strengthens

Momentum category gain was driven by strength in breadth measures, selected trend models, and most of the Chart Scores.

Make RISK Great Again!

Economic growth in the contemporary expansion has been perpetually weaker than any in the post-war era. Many explanations have been offered for why the U.S. is stuck in low gear, including aging demographics, overextended balance sheets, overused and increasingly ineffective economic policies, and a tech-boom-induced world awash with excess capacity. 

2019 Earnings: Don't Bet On 6%

Currently, the collective intelligence of Wall Street is predicting 6% S&P 500 EPS growth in 2019. It’s also the 61-year average annual growth rate for the index, so how wrong could it be?

Inflation Stable

The latest CPI numbers are largely in line with market expectations. The Fed pause and other central bank easing moves are positive for risk markets. Watch cyclicals/defensive relative performance and ISM for near term direction.

MTI: Attitudinal Measures Net Negative

The Attitudinal category, which tends to vary inversely with the Momentum work, turned negative for the first time since mid-October, suggesting growing investor conviction that the rally will continue.

Nothing But Noodling?

Just some noodling over an array of issues including:

• What private sector confidence currently suggests about the stock-bond allocation tilt?
• Is the fuel for Populism fading? 
• Will winning the trade war cause U.S. stocks to lose?
• How have stocks performed once the unemployment rate bottoms?
• What does a 2019 U.S. economic slowdown imply for the 2020 election?
• A nice revaluation refresh for stocks!
   

New Year, Old Leadership

We’ve written at length about a bear market’s tendency to catalyze major leadership changes—across sectors, styles, and even geographies.

Trend-Following Travails

To recap our allocation moves over the last year: We established an initial equity hedge in tactical accounts very close to the January 2018 highs.

1998 Parallels

There are enough parallels between the 1998 and 2018 market declines that we decided to flesh out the comparison a bit more.

It Wasn’t Powell Who Panicked

The Fed’s “Christmas capitulation” seems to get most of the credit for the stock market rebound, but we’re not exactly sure how, or even if, the Fed capitulated at all.

Airlines Travel To Attractive In The GS Scores

We look at our domestic Airlines’ GS Score and examine the historical relationship between oil prices and Airline stocks. Additionally, we explore several other data sets to determine where the industry’s supply/demand picture stands heading into 2019.

恭喜发财- Red Envelopes From The Fed & PBoC

A significant policy move by China’s People’s Bank of China (PBoC) has gone largely unnoticed.

MTI: Big Boost In Momentum Measures

From a Momentum perspective, chart work has improved across the board but much of the longer-term trend work has remained in neutral or bear territory. These measures are, by definition, late at turning points, and we strongly prefer that the “anticipatory” tools within the MTI drive most of the swings.

‘EMERGING’ For The Finish?

Emerging Markets (EM) are not generally considered defensive investments and, therefore, investors do not often turn toward these economically-sensitive stocks near the end of a bull market cycle. However, as Chart 1 highlights, if the current economic expansion/bull market is in its late innings, perhaps you should consider “Emerging for the Finish.”
 

Here Comes The Cavalry...

During the December carnage many Bulls were killed on the battlefield and others badly wounded. This year, although the skirmish has quieted, most remain on edge. However, investors may just now be jumping out of their foxholes because the Cavalry has recently been sighted coming over the hill with bugles blaring!

John Bogle: Investment Philosopher

The passing of investment legend John Bogle has brought forth many well-deserved tributes to his professional accomplishments. He was a tireless champion of passive investing and the founder of The Vanguard Group which, as more than a few investors don’t realize, also manages almost $1 trillion in active funds.

MTI: Investor Expectations Are Subdued

The Attitudinal category remains solidly bullish, suggesting there are significant investor doubts surrounding the rally. The market has also absorbed the past few days’ earnings torpedoes fairly well, another sign that expectations are still subdued.

Supportively ‘Sour’ Sentiment?

While many factors will determine how the stock market ultimately does this year (e.g., the pace of economic and earnings growth, valuation, policy support, and technicals), a few indicators show “sentiment” remains supportive for the stock market. 

The Trump Trade, Two Years In

Donald Trump is thought to have been born with a silver spoon in his mouth, and the economic circumstances prevailing at his inauguration two years ago might have further perpetuated that view. The U.S. economy had already been in recovery mode for 7 1/2 years, and the bull market in U.S. stocks was about to celebrate its eighth birthday.

Leuthold Quick Takes: Cyclical Bear Or Recovery Refresh?

The fourth quarter selloff and subsequent rebound, as seen by Doug Ramsey (Chief Investment Officer) and Jim Paulsen (Chief Investment Strategist).

MTI: Economic Numbers Continue To Weaken

While growth rates in M1, M2, and MZM appear to have leveled off following their sharp declines over the prior 18 months, the annual rate of decline in the Adjusted Monetary Base (a good proxy for the Fed’s balance sheet) accelerated to almost 12% at year-end from just 3% six months earlier.

Policy Paralysis

The next recession, whenever it is, could face an unusual headwind. Normally, recessions are about liquidating fundamental excesses. Restoring health to balance sheets which were abused in the last expansion, purging bad business decisions, restoring liquidity, replenishing savings, and restarting the profit, job, and income creation cycles. 
 

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.

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.

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%.

Incongruities In High Quality

Quality is one of the most popular and successful of the equity market’s quant factors. It is intuitively appealing and serves as a useful defensive strategy in falling markets. Low Volatility and Dividend Growth are also defensive factors, while Momentum and High Beta are viewed as aggressive or bullish factors. These offsetting behaviors would seem to make for excellent diversification opportunities in equity portfolios, and for the most part, that is true. 

Inflation In Line And The Fed Will Pause

The latest CPI numbers matched market expectations. Lower oil and stock prices are disinflationary. China will lead the U.S. in inflation and currencies.

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).

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.

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.

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.

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.

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.

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).

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.

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.

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.

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.

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.

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.