Inside The Stock Market ...trends, cross-currents, and outlook
“Great Quarter, Guys!”
After the market just delivered investors their “birthright”—a full-year average total return of +10.5% in just a single quarter—it’s fun to imagine how a quarterly analyst call with the “management” of S&P 500, Inc. might sound.
Steve’s Sagacious Advice
Near the turn of the millennium, Steve Leuthold compiled investment advice as part of an essay, “Managing Your Mother Lode… Your Serious Money,” which was later published in the 2002 book, The Global-Investor Book of Investing Rules: Invaluable Advice from 150 Master Investors. This month we reprint what Steve liked to call his “Ten Commandments.”
A Hugely Productive Rally
Rallies of this magnitude (+30% in 5-6 months) are not uncommon; however, this one began one year into a yield-curve-inversion cycle and with stock valuations already elevated. The latter condition could be viewed as a positive because the market surge has created one of the most pronounced short-term wealth effects in history.
Stock Price “Seepage?”
The decade of the teens showed that asset price inflation could persist for an extended period without spreading to consumer prices. That likely reflects the economic slack that existed for the first several years of the decade.
Bubble Or No Bubble?
Is the stock market forming another bubble? Market “sentimenticians” assure us it’s not, and rightly point out that today’s AI craze is not yet on par with the silliness of the meme stock and SPAC manias of 2021. However, the mention of that year in any discussion of stock market sentiment is itself a clue that investors are lathered up.
What It Will Take To Earn “Average” Returns
If spectacular fundamental performance over the next ten years is required to produce merely average stock market results, what might be in store if the fundamentals instead adhere to that antiquated notion of “mean reversion?” The answer might have you paying closer attention to the next Treasury bill auction.
Too Soon To Ditch The LEI
It’s possible to focus on the right things at the wrong times, and there’s no better example in recent years than investors’ initial fixation with—and subsequent dismissal of—the yield curve inversion.
Profits: Give Credit Where It’s Due
Twenty-five years ago, few investment axioms were held more dearly than the belief that corporate profit margins were “the most mean-reverting series in finance.” Today, if there’s anyone still clinging to that belief, he or she is unwilling to say it publicly.
In Hindsight, It Was Obvious!
The S&P 500’s Very Long Term (VLT) Momentum algorithm generated an immensely profitable low-risk BUY signal in March 2023. Its trajectory since then has vaulted ahead of the average gain following profitable signals back to 1957, and historical results call for still higher prices over the next year, albeit at a likely more muted pace.
Implications Of A Great First Quarter
Realizing a gain in each of the first three months of the year, like Q124, is not as bullish for the next twelve months as are back-to-back gains in January and February. The three-month streak produces a one-year performance advantage of around 2%, while a string of Jan-Feb gains was additive by 900 bps.
Technicals: Four On The Floor!
The market upswing is now confirmed by Cyclicals, Defensives, Breadth, and Bonds. Endorsement by all four occurs about one-third of the time and has led to an S&P 500 average annualized compound return of +15%.
Bubbling Up?
We are not sure whether the stock market’s upswing has reached an altitude that qualifies as “bubbly.” Based on numerous measures, the S&P 500 looks dangerously close.
The Ghost Of Bubbles Past
Our 30x bubble-P/E threshold did a good job of capturing the most speculative phase of the Technology Bubble, as the S&P 500 traded north of that ceiling from early 1999 until the fall of 2000. That bubble and its aftermath should serve as a reminder that the already tenuous connection between the stock market and the economic cycle can become even more unstable during bubble periods.
Stocks “Inoculating” The Economy?
We must acknowledge that our current thinking on the stock market and U.S. economy is based on an element of circularity of which we’re not completely comfortable.
The Inversion: Forgotten, But Not Gone
Mentions of the yield curve by the financial media and market pundits have plummeted the last few months. That’s understandable, but dangerous. We remember the same happening in 2007—with one of the more memorable dismissals coming from Fed Chair Bernanke.
“J” Giveth And “J” Taketh Away
During a summer internship almost 40 years ago, we’d stay a few minutes late on the Chicago Merc’s trading floor for the Thursday afternoon release of the Fed’s money supply numbers. Today, thanks to the joint efforts of “JJ” (Jay Powell and Janet Yellen), the analysis of monetary trends is infinitely more complex.
Which “New Highs” Are They Talking About?
Recent gains have failed to lift the market-cap/GDP ratio back to old highs and, to date, no major index has fully reversed its bear-market loss if the cumulative effect of 2+ years of consumer price increases are considered—small caps look especially bad when viewed through that lens.
Broader Than It Looks?
Breadth and leadership of this bull market have fallen short of the typical patterns of early-cycle bulls, even if contrasted only to other new bulls that did not emerge from recessionary lows, like 1962-66 and 1987-90. Still, participation looks broad enough that the odds are against an imminent cyclical peak.
Bettering An Old Barometer
The team at Caron Wealth Management recently published a modification of the January Barometer strategy, and the results are far-superior: With only two exceptions, when SPX closed higher in both January and February, the index ended the year (ten months later) with an additional average gain of 12%.
Narrower Than It Looks?
It’s been 26 months since the all-time peaks the NYSE Weekly and Daily Advance/Declines Lines. The weakness in the Daily version is especially troublesome given the strong upward bias it’s exhbited since 2001. In addition, figures for 52-Wk. New Highs and New Lows have been anemic relative to the major index gains—especially among NASDAQ stocks.
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