Research.LeutholdGroup

Read this week's MTI update

Read this week's Major Trend. 

CPI readings for October were softer than estimates. We caution against linearly extrapolating the current disinflation trend. Our scorecard update shows an uptick in inflation pressures.

Read this week's Major Trend. 

At the pre-COVID business-cycle peak of February 2020, the qualifying income for a median-priced home was $47,232. As of September 2023, that level had surged exactly $60,000—to $107,232! How many households have enjoyed a pay boost of even one-third that amount in the last four years? 

The number of firms beating on both the top and bottom lines has been underwhelming thus far. Those that missed EPS estimates have seen their equity drop an average of 4-5% relative to the index. That’s quite a bit higher than the usual 2-3% decline we’d expect given the history of data.

The 10Y-2Y yield curve broke above the key level of -0.4% and that means a double-bottom pattern is in play. While we are confident that a major steepening cycle is here, we have to acknowledge that the nascent move could fail. A steepening move is also the market’s way of signaling easier conditions ahead.

A little over half of the S&P 500 reported earnings for calendar Q3-23 in October. Bottom-up operating EPS estimates for the quarter have remained basically flat since May. This is a positive development given the proclivity of EPS estimates to erode over time. We should note, however, that longer term, the decline in estimates for Q3 has been well above average—diminishing by 14% since April of 2022. If there will be another reporting window pop in EPS estimates for Q3 like we saw for Q1 and Q2, it will have to come in November.

Read this week's Major Trend. 

Read this week's Major Trend.

The momentum style factor has a long history of producing excess returns and is found in the security selection toolbox of many asset managers. This concept is regarded with such esteem that a number of ETFs have been launched to capture this value-added factor, including eight funds with AUM exceeding $300 million. The Magnificent Seven, the seven largest stocks in the S&P 500 index, have booked remarkable returns in 2023 with the equal weighted performance of this basket of tech titans gaining 88% YTD. The also-rans that make up the other 493 members of the S&P 500 have collectively returned a pathetic 1.6%. The Magnificent Seven seem to embody the momentum factor perfectly, yet momentum ETFs have been hugely disappointing this year. Not only have they failed to capture the Magnificent Seven move, but these ETFs have also badly lagged the broader market. This leads to the question, “In a seemingly perfect environment for momentum, what happened to the missing mo?”

Read this week's Major Trend. 

The bear-market low in the S&P 500 occurred one-year ago, yesterday. Whether that low remains intact during a potential recessionary down-leg is difficult to say, but the mere fact it’s survived for an entire year renders it significant.

CPI readings for September leaned hotter for the headline numbers. Our Inflation Scorecard hints at building price pressures. The Fed’s tightening campaign is currently on hold with the rise in longer term rates.

Read this week's Major Trend. 

Federal outlays, federal debt, and M2 have each jumped ~50% in five years, while the Fed’s balance sheet soared by 90%. The “reward”: Real GDP cumulative growth per capita of 1.6% per year (a good chunk of which will be reversed during a recession).

The latest market down-leg triggered one of our short-term breadth oscillators into super-oversold territory. While “oversold” may sound bullish to most contrarians, when SPX becomes as internally weak on a 10-day basis as it did in early October, there’s usually another shoe to drop.

Oil & Gas Equipment & Services was purchased for the Select Industries portfolio last month, re-establishing exposure to what was our largest overweight entering 2023. The sector leapt from #11 to #4 in the ranks on the back of improved sentiment and macro readings. 

Typically, duration contracts when rates go up, all else equal. The Magnificent Seven, however, saw their duration going the wrong way: They seem to be the only cohort to see duration lengthening and are now more risky than a year ago.

The dominating and overwhelming gains by the Magnificent Seven have made it nearly impossible for most traditional equity factors to excel. Only two styles have managed to surpass the S&P 500’s YTD return: Growth and Quality—and both have healthy exposures to the Magnificent Seven.

In a year when the Magnificent Seven has epitomized the concept of price momentum, investors who spotted that phenomenon and employed a momentum ETF to capitalize on the trend were not rewarded: Owning MTUM or SPMO not only forewent the tech titan rally, they both badly lagged the S&P 500.

Read this week's Major Trend. 

Read this week's Major Trend.

If uncertainty is the bane of investors everywhere, then the fear of large losses in a bear market is the boogeyman hiding in the closet. The threat of an agonizing downturn often leads investors to carry lower equity weights in their balanced portfolios than might be advisable, and even drives them to hold excess cash to avoid the risk of sizable declines.

ETF families have responded to this anxiety with a fund design that takes some downside risk off the table and may enable investors to tiptoe into equities even when they suspect a selloff might be around the corner. Known as “buffer”, “defined outcome”, or “target outcome” funds, these ETFs utilize an options collar overlay to trim the upside and downside tails of the underlying asset’s return distribution, thereby giving nervous investors a more comfortable way to pick up some equity exposure during riskier times.

Read this week's Major Trend. 

Latest numbers are largely in line with expectations. Higher wages boost the wealth effect, which supports the economy, which also means inflation and rates are likely to stay higher for longer. The latest update of our inflation scorecard shows inflation pressures are starting to build again.

Read this week's Major Trend. 

The 10-year yield made a new cycle high just before the Jackson Hole meeting. That is significant, as it not only broke the lower-high-lower-low pattern since last October, but also rejected the hypothesis, “we have seen the cycle high in interest rates,” which was the consensus at the start of 2023.

The Broker-Dealer Index (XBD) is one of just a handful of indexes to surpass its old bull market high, but its gains are far below average for the first year of a major advance. Meanwhile, the BKW Bank Index (BKX) is revisiting price levels of 25 years ago—it is just one percent above the average daily close in 1998. Yes, as a group, the big banks have been dead money for 25 years (excluding dividends).

After hovering near the highs of the post-COVID expansion, in August, the Present Situation Index turned down, and is now below its 10-month moving average for the first time since December. When this measure is at a high level, but declining (like now), it is the worst backdrop for stock performance.

Based on successful Russell 2000 VLT BUY signals, 1982-forward, the index had gained an average of 23% eight months later—and none had a losing position. Since the VLT BUY on January 31st (eight months ago), the Russell 2000 has dropped 3.9%. Furthermore, Small Caps bottomed 15 months ago, and in a normal cyclical bull market, the Russell 2000 would be up 50-70% by this time.

Option collar strategies provide a defined outcome on the date of maturity, but the value from inception to maturity varies. In the case of an extreme market move either direction, a collar strategy will not capture the fullness of the fluctuation early in its lifecycle, but should reach its cap/floor value as maturity nears.

Read this week's Major Trend. 

An outstanding second half for Q2-23 earnings pushed the S&P 500 bottom-up EPS estimate from $51.30 to $54.92. Amazon and Nvidia were the two largest contributors to the August surge. With the entire index nearly done reporting, our current EPS estimate will end 11% below its high watermark ($61.56).

Despite skyrocketing investor enthusiasm, buy-write strategies are complicated investments with skewed payoff structures that muddle the interpretation of past performance, because returns depend on market conditions.

Read this week's Major Trend.

Read this week's Major Trend. 

Latest numbers are in line with expectations. There are several indicators that start to paint a more muddled picture on inflation going forward. The latest update of our inflation scorecard shows a Neutral reading of 50.

Read the latest MTI update.

All the talk has been about mega-cap growth stocks, but equities with low-quality characteristics have fared even better. High beta, negative earnings, and those with high short interest have trounced the rest of our universe.