Research.LeutholdGroup

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Things are moving fast! Attitudes and expectations are changing. On the health front. On the economic front. And, in the financial markets. Here are a few “Conjectures?”

Many believe it will take years to fully recover from Covid-19. Indeed, over the weekend, U.S. Federal Reserve chairman Jerome Powell suggested that although the economy will eventually recover, the process could stretch through until at least the end of next year and ultimately depends on the development of a vaccine.  

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When we first met Steve Leuthold in the old company office in a renovated warehouse, he was updating a several-foot-long chart of either the DJIA or S&P 500, by hand, and we got a brief lecture on the importance of using logarithmic scale on price charts.

The attempt to re-open parts of the U.S. economy amidst the ongoing Covid-19 crisis is either Red, Blue, or Purple! Using data from an employment tracking tool utilized by 100,000+ local businesses across the United States, the accompanying chart illustrates the speed and depth of the decline in hours worked and its recent slow recovery among traditional Republican, Democratic, and Swing states.

Growth stocks have been outperforming for much of the last decade, particularly in recent years, and amazingly so since year-end. However, as the charts here illustrate, it is not so much that growth stocks are winning as it is “Growth!” 

The CPI numbers missed expectations. COVID-19 is the divide between inflation winners vs losers. Our inflation scorecard continues to point to lower inflation and it’s driven by a demand shock. Lower capacity utilization and money velocity also indicate a disinflationary trend ahead.

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Economic policies have long been a potent force for both the economy and the financial markets. Despite being unsure and worried about how the Covid-19 crisis will yet play out, investors are also currently fearful of ignoring the old adage “Don’t Fight the Fed.” 

We review the somewhat out-of-character performance of the Utilities sector to try to pinpoint what is influencing results. This article touches on several potential drivers for the sector’s relative strength.

Valuations aside, the absence of any sustained market pain over the last ten years argues for challenging times for stocks in the new decade.

One would think that one of the most explosive market rallies of all time would trip-off all the traditional “breadth thrust” signals, or maybe even invent a few of its own. Sorry, no luck.

Small Caps lagged during the bounce off the March lows before a late-April spurt briefly pulled them ahead of the S&P 500. Still, considering that Russell 2000 losses were so much steeper than the S&P 500’s (-43% versus -33%), we would have expected something better.

Valuation dispersions remain at extreme levels. Dispersions within Large Cap stocks remain above Tech Bubble levels, but are on par with Mid and Small Cap stocks on an absolute basis. Spreads within sectors also present historic stock selection opportunities.

From a top-down view, since 2003, Value’s performance has been much more closely tied to various asset markets and macro drivers. From a bottom-up perspective, we believe the change in Value’s migration behavior might be the key to its failure. We believe macro tailwinds and positive surprises are both necessary for a true Value revival.

Health Care has been the best performing sector following mid-February’s market peak. Its robust relative performance during this bear market isn’t terribly surprising given the sector’s defensive qualities, but it has impressively outpaced other safe haven areas.

It is always challenging to judge value, particularly during recessions when earnings power temporarily (one hopes?) contracts. The difficulty has been magnified in the current situation because, like economic data in general, earnings are in freefall! 

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With May Day marches and demonstrations cancelled, the workers of the world have one less opportunity to remind us of the ever-widening wealth gap and the evils of the “Top 1%.” It’s a shame, because this was the year that we active managers would have stood shoulder to shoulder with those protesters voicing our own contempt for the “Top 1%”… of the S&P 500.

Domestic, large capitalization, and growth have dominated stock market leadership for much of the last decade. During this stretch, investors (author included) have repeatedly attempted to exploit “undervalued and out-of-favor” segments of the stock market, only to be proved premature. 

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Is there any way to judge when U.S. economic reports may finally bottom? Obviously, it depends on what happens with the virus. If it continues to burn hot or simply lingers longer than expected, keeping “stay-at-home” orders in place, could economic data prove bottomless? 

Through last night’s close, the S&P 500 had gained 25.0% in exactly one month. Impressive, but a bit superficial. Anyone running active equity portfolios recognizes the breadth of this move has been unusually narrow.

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For the second time in the last 30 years, “growth” has dominated leadership within the stock market. After significant outperformance during the 1990s’ dot-com era, the growth style has again substantially outpaced since the start of the last recovery (Chart 1).

Earnings, like everything in the economy, are in freefall. Finance textbooks would argue this paints a bleak future for the stock market, but that isn't always the case. 

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The CPI numbers missed expectations. The segments most affected by COVID-19 were the biggest detractors. The market isn’t too concerned about weak inflation at this point, because there are much bigger issues at present, such as liquidity and financial conditions.

After another volatile week amongst the rubble of COVID-19, from a government-mandated “stay in place” prison that I lovingly refer to as my home, here are a few Random Revelations.

Volatility within the stock and bond markets has recently parted company. Since 1990, the correlation in daily movements of the stock market’s VIX Volatility index and the bond market’s MOVE index has been about 0.60. While they do not move perfectly together, they usually move in the same direction.

March’s mad dash for cash didn’t stop with rates/credit/FX markets. Among equities, there was also a strong preference for cash liquidity. The market rewarded companies that had strong cash positions and punished those without—which explains why traditionally defensive styles actually underperformed.

During the peak-to-trough market drawdown through mid-March, some of the most popular Low/Min Vol ETFs did not perform as anticipated. Stable and boring businesses, that weather downturns relatively well, are facing atypical vulnerabilities.

In recent weeks, we’ve seen the “sell-side” investment community get about as cautious as it ever gets, recommending investors to “trim risky holdings on ‘up’ days” and “stay diversified.” However, these cheerleaders’ idea of diversification is usually to hold more equities in different sizes and styles.

For those who must remain fully invested, an interesting (if not sickening) feature of the bear market is that those who entered it loaded with the most expensive and “trendiest” stocks and sectors have lost the least.

We rolled our eyes when Barron’s and others proclaimed a “new bull market” after a three-day, 21% surge off the March low. That incredible bounce is much more likely to be the first of at least a few bear market rallies.

Bear markets are the financial system’s version of the changing seasons—a cycle we “enjoy” to extremes here in Minnesota.

With an economic calamity and the Easter season upon us, we thought this would be a great time to resurrect our “Why We Normalize Earnings” vignette. Long time readers will recognize this as a staple from Green Books’ past.

With the enormous popularity of ETFs, we’ve wondered if the high level of passive fund ownership could lead to stock price deviation from company fundamentals, and thus create greater price volatility.

This has been a “speedy” Bear Market. Measured through the first 22 days of all bear markets in post-war history, the contemporary bear market declined by almost 6.5 times more than all the others! In 2020, the market dropped 32% in 22 days versus an average of just -5.1% for the previous 13 bear markets. See Paulsen’s Perspective “Recession By Proclamation!” posted on March 23rd.