Inside The Stock Market ...trends, cross-currents, and outlook
How Will It Be Remembered?
A way to gain perspective on the present is by trying to view it from the future. Ask yourself, “What are the signs of impending decline, now ignored by investors, that will one day be memorialized by the same investors as the most obvious in retrospect?”
A Tough Tape To Read
Over the nearly two years since the stock market’s “momentum” peak in January 2018, the S&P 500 has gained less than 9%, while the Value Line Arithmetic Composite is unchanged. Mid Caps and Small Caps have made no upside progress during this period and most foreign markets are down.
Are Stocks And The Economy Disconnected?
The consensus among market pundits is that a U.S. recession will be averted and, as a consequence, domestic stocks remain the best game in town.
Lagging From Behind?
As Yogi Berra might have quipped, it’s not just the leading indicators that are lagging… the lagging ones are, too.
A “Best Case” Bear Scenario?
We intentionally curtailed our discussion of stock market valuations the last few months to allow the “dead horse” to recover from the thrashings administered in recent years. Now we’re rested, refreshed, and ready to deliver a few more lashes.
Risks Still High In The “Median” Large Cap
The relative domination of Mega Caps might leave the impression that valuation of the “typical” (or median) Large Cap stock is reasonable. It’s not. The fall rally leaves all major valuation ratios for the median S&P 500 stock in the top decile of the 30-year history, and above the levels prevailing at the September 2018 market high.
More Good News For Small Caps
Our call for improved relative performance in Small Caps received another boost in November, when VLT Momentum for the S&P SmallCap 600 confirmed the prior month’s “low-risk” BUY signal on the Russell 2000.
A New Take On Small Cap Valuations
For valuation work, we’ve traditionally favored the 1,200 company Leuthold Small Cap universe over the S&P SmallCap 600 because we get almost a full additional decade of perspective. But figures for the latter shed extra light on just how significant the revaluation in Small Caps has been.
No Place Like Home For The 2010s
We thought we’d get a jump on all the “End of the 2010s” retrospectives you’re sure to see next month. Though not quite yet the official end of the decade, the changing of the “tens” digit definitely has a certain gravitas to it.
Capex Beneficiaries “Delivered,” But Only On Price Action
With optimistic views on capex in late 2017, we built a thematic group of companies that appeared to be potential beneficiaries of higher spending going forward. This group has outperformed the market; but, the capex trend is disappointing and quite concerning.
Can New Reins Take Hold Of An Old Bull?
Three months ago, Large Cap Growth and Momentum were the winning ways to play the market; the long-time resiliency of these entrenched leaders was a cornerstone of the bullish case. Suddenly it’s Value and Deep Cyclicals leading, anything possessing Momentum, of late, has turned toxic. Ironically, this “new” leadership is now the foundation for the bullish reasoning.
Monetary Musings
Among six major monetary gauges, five are now graded bullish, compared with just three a few months ago, and zero at the end of 2018.
VLT Complicates The Market Puzzle
At October’s close, a long-term BUY signal was triggered on the Russell 2000. The fact that some market segments are triggering “oversold BUYS” when blue chips are at record highs speaks volumes about the internal disparities that have developed during the last few years. The Russell BUY signal is not inconsistent with our belief that the action since the January 2018 peak remains part of a lengthy cyclical topping process.
Back To Y2K?
The bull market took out another old record last month when the S&P 500 topped the cumulative total return of the 1949-56 upswing. The total return since March 9, 2009, is now 468%. Since the highs of March 2000, the S&P 500 cumulative total return is actually a few basis points behind U.S. 10-year Treasury bonds.
A Short-Term S&P Top?
The short-term path for equities “looks” clearer than at any point in 2019, with economic data having stabilized a bit in the last few weeks, the Fed having cut rates again and resumed balance sheet purchases, and some type of trade deal finally looking more tangible than a 2:00 a.m. Tweet.
Simple Bond Model Says “SELL”
In our minds, the big story is not the nominal new highs in the blue chips, but rather the rapid changes now occurring on both an “intra-market” and “inter-market” basis. In the case of the latter, we have an important new signal from a simple correlation model we developed earlier this year.
Jury Is Still Out On EM
Emerging Market stocks have been swept up in the last month’s rally in all things cyclical and high beta. Nonetheless, the MSCI Emerging Markets Index is still down marginally from its level coinciding with its April 30th VLT BUY signal.
Labor Cost Observations
We take a look at different data sets reflecting labor costs. The main finding is that using Unit Labor Cost as the measurement for the true cost suggests that the labor market is very tight in terms of affordability for businesses.
The Last “Spoos” To Drop?
For many months, we’ve argued that global stocks have been tracing out a major cyclical top. But the global stock market “tape” has narrowed so much that it’s really only the U.S. blue chips that are left to do the tracing.
“Quant Quake” But No Market Quake
Value, High Beta, and Small Cap stocks all captured a few rays of sunlight for the first time in a long while. It’s too early to tell if last month’s leadership U-turns can be sustained, but major market trends are the most susceptible to reverse during cyclical bear markets.
Where Would You Rather Be?
On October 3rd, the S&P 500 briefly traded below the high it made in January 2018 before reversing to close the day higher.
Small Cap VLT BUY: Not Quite...
Small Caps came tantalizingly close to activating a major VLT BUY signal in September, with the Russell 2000 closing less than a half percent below the trigger level. A new bull signal from this indicator wouldn’t “fit” into our market and economic narrative, but we won’t sweep it under the rug if it occurs.
Making Money In The Money-Losers
Despite an economy operating “beyond” full employment for the past seven quarters, more than one-fourth of the companies in the Leuthold 3000 universe are losing money on a 12-month trailing basis. The Fed has subsidized what’s truly become irresponsible behavior.
The Trend Is Your “Fiend!”
Over the last year of market swings, we’ve tracked the horrific performance of what had previously been a solid long-term system for timing the S&P 500, the 10-month moving average crossover system. In the last 12 months, this generally low-risk approach has generated a total return loss of 13.74%.
More Trends We Don’t Find Friendly…
The yield curve’s ten-month moving average inverted in September, hence the yield curve inversion can no longer be dismissed as transitory; the Boom/Bust Indicator remains below its descending 10-month moving average, confirming economic weakness predicted by the yield curve; and, the “Present Situation” component of September’s Consumer Confidence survey slipped below its 10-month moving average for the third time in 2019.
More Yield Curve Musings
The U.S. yield curve inversion has lasted long enough that even a few economic optimists now concede it will ultimately prove significant.
Last Bastion Breaking Down?
We’ve been expecting weakness in the manufacturing sector to spread to the service economy, but were not prepared for the nearly four-point drop in the latest ISM Non-Manufacturing Composite. We don’t want to overplay a single monthly reading from an historically volatile report, but the Non-Manufacturing Price Index spiked despite the drop in New Orders.
Credit Cracking?
One of the key pillars of the bullish case has been the supposedly “benign” trend in corporate credit. While that’s been true for holders of the popular junk bond ETFs (HYG and JNK), the broader credit picture is not as reassuring.
Quality Stocks’ Stronghold
Despite higher volatility, market performance is still up in the high double-digits YTD. Interestingly, as our index of High Quality Stocks versus Low Quality Stocks shows, High Quality is prevailing in terms of relative performance.
We’re All Economists Now!
It’s now been more than 19 months since global stocks peaked on January 26th, 2018. Those lucky enough to have been invested solely in the S&P 500 and to have held on for the volatile ride have a 3.7% gain to show for it. Nice going.
More Extreme Than 1999?
We noted that the December 2018 stock market low was the second most expensive in history, second only to that of October 1998. Similarities between 2019 market action and the 1998-99 rebound remain eerie. Something isn’t right, and it’s not bullish.
ISM Shows This Is A Different Kind Of Cycle
The manufacturing economy has thrown us a deflationary curve in 2019: The Price Index broke down in advance of New Orders, a reversal of the textbook recession/recovery sequence between these two measures.
Monetary Madness
We always do our own work and draw our own conclusions. Lately, though, we’ve wondered what the late “Monetary Marty” Zweig might say about the stock market’s current liquidity backdrop.
Pricing In “Peak” EPS
A recent theme in our valuation work is that we no longer need to assume a full-blown “reversion to the mean” to illustrate current U.S. stock market risks: Even a reversion to “old” bull market highs in ratios like S&P 500 Price/Sales, Price/Cash Flow, and Normalized P/E would result in bear-sized losses.
“Too Smooth” Of A Ride?
While investors in Value, Small Caps, and especially foreign stocks might beg to disagree, a key MTI technical measure suggests this decade’s stock-market ride has been almost entirely “pain free.”
Small Caps: “What If?”
The Russell 2000 is the most important major index on the cusp of a new BUY signal. Our best guess is that Small Caps will still trend lower for now, creating a buying opportunity in the months ahead.
Commodity Stocks: “Low” But Not Cheap
A general rule of thumb for thematic equity investors is that the dominant leadership sectors and groups in a given bull market normally don’t repeat as leaders in the subsequent bull.
A Final Warning
This Stock Market section’s unifying theme has been that of an historically two-tiered market, one in which Domestic, Large Cap, Growth, Consumer-oriented, and Low Volatility stocks have reigned supreme.
Worrisome Profitability Trend Among Small Cap Companies
Despite a historic economic expansion during the past decade, there is an ever-increasing number of companies that are finding profitability has become harder to achieve.
Are You Really A Contrarian?
The need to sound contrarian has become a borderline obsession among market pundits. Media opportunities for talking heads have exploded in the last decade, forcing those who hold the safest consensus views to falsely portray themselves as lonely and misunderstood market mavericks.