Research.LeutholdGroup

Economic Work Lifts MTI Into Neutral Zone

Within the Economic work, the big development was a bullish flip in our Dow Bond Oscillator (DBO), which crossed above the zero threshold by the thinnest of margins. Subjectively, however, we are troubled that government yields across the maturity spectrum have been holding near recent lows in the face of equities’ powerful rally.

Growth & Inflation?

U.S. economic growth has recently slowed and may weaken further in coming months. Moreover, inflation still lingers—commodity prices have bounced, both core consumer and producer price inflation remain near recent highs, and wage inflation is steadily rising. Investors face two big questions.

Be Wary Of The “E” In P/E

U.S. equity valuations remain considerably higher than those of any major foreign market, but there’s no denying they’ve improved from the cyclical peak made in January 2018. That’s true across the capitalization spectrum, and on the basis of both normalized and non-normalized fundamentals.

Don’t Hold Your Breath On Inflation

The latest CPI numbers were slight misses and at the bottom end of their contemporary ranges. The recent rally of risk assets might be the only tail wind we can find for future inflation. The stark difference in durable and non-durable goods inflation is an excellent study in globalization.

MTI: Valuations Ignoring Indications Of An Earnings Recession

Valuations seem to ignore indications that an earnings recession has begun, let alone the possibility that S&P 500 GAAP Earnings Per Share for 2018 could represent not just a short-term peak, but perhaps a cyclical peak as well.

Bond Market Message?

The stock and commodity markets have been messaging confidence in the future of this economic recovery since the December stock swoon. The S&P 500 has surged by about 10% so far this year on strong breadth led by economically-sensitive small cap stocks and cyclical sectors, while traditional defensive equities have lagged. 

So Long Tax Cuts… We Hardly Knew Ye

Our earnings waterfall analysis for the fourth quarter tells a story consistent with the entirety of 2018: earnings growth was fantastic, boosted by the twin drivers of strong sales growth and a lower corporate tax rate. Chart 1 spotlights the quarter’s tally, which produced a healthy sales growth number despite some economic weakening.

The Emerging Markets Dilemma

We’ve been either light on Emerging Market stocks or out of them altogether since early 2011, but have lately been watching for an opportune time to re-enter.

The Correction In Historical Context

While it’s too early to let the ink dry on the accompanying table and chart, we’ve decided to add last year’s decline for comparative purposes.

Yet Another Anniversary?

We received two media calls in December hoping we would comment for upcoming special features about the tenth anniversary of the bull market. We rolled our eyes.

Beta & Volatility On The Move

We explore these factors’ behaviors from the stance of our proprietary equity group universe and present industry ideas—across sectors—that fit each of these investment viewpoints. The intent is to offer new investment ideas from a different analysis perspective.

The Great British Breaking Show—All You Need To Know About Brexit

The biggest near-term wild card is the infinitely confusing and hopelessly unpredictable Brexit.

Momentum Factors Reflect Breadth Of 10-Week Rally

All of the domestic and global quantitative Chart Scores in the Momentum category are now positive and both the Advance/Decline and High/Low figures leave no doubt as to the breadth behind the market’s 10-week rally.

‘Betting To Beat’ The Market?

The macro-investment environment can be simply described by two dimensions—the directions of real growth and inflation. Since the performance of both the stock and bond markets are highly responsive to these two factors, investors need to be mindful of their macro bets. 

Assessing The Cyclical Risks

With all the excitement over the Fed’s shift in rhetoric and the excellent subsequent market action, there’s a danger of losing sight of the broader cyclical backdrop for U.S. stocks. Remember, the economy is still operating beyond government estimates of its full-employment potential, and it’s not as if the Fed has actually eased policy—as it did successfully at a similar late-cycle juncture in the fall of 1998 and (ultimately unsuccessfully) in the summer of 2007.

MTI: Still Negative, But Gap Narrows

The MTI’s stubbornness during the current rally confirms our overall sense that cyclical risks facing U.S. equities remain high. That said, we have great respect for the action of the market itself—enough so that we’ve allowed net equity exposure in our tactical funds to drift upward.

Balance Sheet Recession Risk?

Arguably, the biggest risk facing the stock market is a recession. Currently, traditional recession gauges are mostly comforting and a key indicator—balance sheet health—is remarkably strong. Often, recessions occur when financial health deteriorates, limiting household or business capabilities and lowering confidence.

Momentum Buyers: Beware

Momentum is a smart beta factor that gives investors excellent upside participation in rising markets. Most other smart beta factors are defensive plays, so Momentum is the place to be in strong upward moves. Momentum filled that role admirably in recent years, rising 56% from 2016 to the September top, compared to an average of +26% for the other major factors.

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.

“Four Corners” Cloud Plays

The Social/Mobile/Cloud theme (SMC) has dominated the stock market in recent years, eventually reaching a frenzied peak in the summer of 2018.

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.