Research.LeutholdGroup

A Dollar Downgrade?

As shown in Chart 1, since 2015, the trade-weighted U.S. Dollar index has generally ranged between 90 and 100. Its recent stability, at a level much higher than it was during the first half of this economic recovery, has played an important role in shaping the economic and financial-market landscape. 

Core CPI Slightly Better Than Expected

The headline CPI numbers are in line while Core CPI is slightly ahead of consensus. Higher tariffs are not showing through import prices yet. Global slowdown underpins recent inflation path.

Factor Tilts at Mid-Year

Factors provide investors with the ability to shift their portfolio’s characteristics to fit a particular economic and market outlook.  Value might look appealing under one set of conditions while Quality might be more desirable in another. We developed a research platform that analyzes various drivers of factor returns, summarized in Exhibit 1. 

MTI: Attitudinal Measures Erode On Investor Enthusiasm

The Momentum category continues to grind higher, but this push has predictably stirred up investor enthusiasm (as measured this week by an identical decline in our Attitudinal composite). At the same time, longer-term measures like CEO Confidence, Small Business Optimism, and Consumer Confidence have all weakened in the latest reports, suggesting a rollover in animal spirits could be underway.

A Picture Is Worth 1,000 Words ... and it was a holiday week and I felt lazy

There is still plenty to worry about. The never-ending trade war enters yet another round of negotiations, geopolitical risks simmer, many economic reports (both in the U.S. and around the globe) remain weak, the size of negative-yield debt is becoming nearly as large as U.S. GDP, the U.S. stock market continues to exhibit a worrisome “triple-top” pattern, small cap stocks continue to trail, the yield curve is still inverted and, because of a “strong” jobs report on Friday, there is now doubt about whether the Fed will cut interest rates later this month. 

Correlations Are Worthless, Except This One

We’ve never understood investment quants’ desire to project correlations among assets. Such correlations are inherently unstable.

Building The Wall?

One of the more impressive feats that bullish pundits have pulled off is their successful portrayal of themselves as lonely and misunderstand contrarians even as the eleventh year of a cyclical bull market grinds on.

Big Is Still Beautiful

The 10-year-old bull grabs most of the headlines, but its younger sibling has begun to command more respect.

Slowdown Or Recession? Confidence Is Key

The pattern of sharp sell-offs followed by equally sharp rallies continued in June. Most risky assets recouped nearly all the losses suffered in May, and then some.

Return Implications Of Dividend Cuts

Last month we noted that current interest-rate expectations might indicate good timing for dividend investments; however, we strongly suggested being selective, and lean toward high-quality dividend payers.

MTI: NOPE Index Boosts Economic Category

The bounce in the Economic category interrupted its last few months’ steady grind lower; the increase was led mostly by an upgrade to the NOPE Index (ISM New Orders Minus Price Index), which moved from high neutral to moderately bullish. The action of individual components is hardly reassuring, however.

Beware… Fiscal Policy May Screw Up The Conventional Playbook?

Like today, the Federal Reserve usually sucks all the oxygen out of the national economic-policy conversation. And, why not? It is comprised of a small elite group who hold conferences in exotic locations (Jackson Hole), have regular strategy meetings culminating in ‘must-see’ press conferences, make dot-plots sound interesting, and, between meetings, members regularly spout-off contradictory opinions. 
 

Limbo Rock!

As global rates have taken a precipitous dive the last few months, it’s been hard not to hum “Limbo Rock.” And just like Chubby Checker, we’ve been asking our screens “How low can you go?” on a daily basis.

Who Has The Outlook Correct… Stocks Or Bonds?

U.S. bond yields have been declining all year despite a stock market which continues to trend higher. The stock market appears optimistic about the future of this recovery, whereas the bond market is acting increasingly nervous. 

MTI: Economic Work Continues To Erode

The Economic work continues to erode, and it would now be deeply negative if not for the conventional scoring of our leading inflation measures, in which disinflation is viewed as a good thing. But if our suspicions that this economic cycle will end in a deflationary bust are correct, the conventional interpretation will be wrong.

The Market Is On Fire… Unless It’s Ice

Yesterday’s S&P 500 new all-time high triggered a few simple internal studies we’ve used to help shape second-half expectations for the stock market.

A Three-Gun Gooser

This week the Federal Reserve delivered the requisite preamble signaling an inevitable cut in the Fed funds rate. Following that, the 10-year Treasury yield declined below 2%, financial markets now point to a 100% probability of a rate reduction, and the old adage ‘Don’t Fight the Fed’ has been ringing in investors’ ears.

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.

Can Smart Analysts Generate Smart Beta?

One of the virtues of quantitative investing is that it relies on measurable data points that fit smoothly into mathematical models.

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).