Research.LeutholdGroup

As the market rebound has extended, we’ve noted its striking similarities with the rally of 1999—one that might have been the most speculative in U.S. history.

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Several consumer confidence gauges plunged in the wake of the Q4 market decline (as expected), and then rebounded in a lagged response to the stock market recovery (again, as expected). But March saw the largest one-month drop in consumers’ assessment of their “Present Situation” since 2008.

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Last fall, we repeatedly noted that low grade corporate credits—measured by Moody’s BAA bond yields—were behaving, well, baaadly.

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Some recent headlines are word-for-word regurgitations of those published in response to the early-2006 yield curve inversion. In that case, the naysayers were temporarily correct, as both the U.S. economy and stock market pushed higher for another year and a half before rolling over.

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The S&P 500 has bounced back to levels seen at the January 2018 spike high, yet is valued more cheaply than it was 14 months ago.

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A common criticism of our long-term valuation work is that valuations shifted north into a new trading range during the 1990s, meaning Leuthold’s benchmarks (dating back to 1957 and earlier) are no longer relevant.

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This ten-year boom—one that’s taken the S&P 500 to the second-highest valuations in history—has merely lifted the index to the top end of a channel that’s contained the S&P 500’s 6% annualized gain over the last nine decades.

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The tale of two markets has existed for years, but now it’s getting ridiculous.

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For much of this decade, we had an allocation preference for Large Caps over Small Caps because of the considerable P/E premium commanded by the latter.

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In May 2015, we warned about rich valuations for small cap Biotech stocks and looked at various ways to evaluate those companies, as the majority have no approved drugs on the market, thus no revenue; therefore, valuing these companies using the conventional methodology is problematic.

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We’re almost at a loss for words! But we want to thank our parents, siblings, extended family, an eighth grade English teacher who doubted us for an entire year, and our golden retriever, Miley.

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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.

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To paraphrase a talking head and the Talking Heads, someday you might find yourself in a beautiful deleveraging, with beautiful valuations, and you may ask yourself, well, how did I get here?  

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February’s Oscar win validated our efforts to make the ‘Green Book’ suitable for all audiences, like our decision to relegate “bottom-quartile” valuation outcomes to the very back of the publication.

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While the celebration over Jerome Powell’s “Christmas Capitulation” lingered throughout February, we’re still awaiting signs the capitulation consisted of anything more than words.

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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.

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A few pundits have suggested that Jack Bogle’s death in January might prove to be the symbolic capstone to a cycle in which passive investing has completely dominated the full-fee, active money-manager ranks.

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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.

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We’ve done extensive work on the yield curve, but until now had entirely overlooked an employment-based recession indicator that’s lately come into focus.

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For a couple years, we’ve labeled the S&P 500 Price/Sales ratio as the scariest chart in the Leuthold database, and last year’s decline did little to improve its intimidating appearance.

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Is the performance of certain countries mainly driven by particular sectors? And, does U.S. sector performance drive the performance of other countries? (i.e., when U.S. Financials underperform, do foreign countries with large Financials sector weights underperform?). We did some data crunching to address the second question.

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During the market bounce over the last few weeks, we reminded ourselves and others of the old maxim that “bear market rallies look better than the real thing.” Evidently, the stock market overheard us and took the advice as marching orders.
 

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Just a few months ago, Fed Chairman Jerome Powell boasted a reputation as a straight-talking, sound-money banker.

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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.

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The stock market seems to have concluded that a recession will be averted in 2019, but evidence from other asset markets is less convincing.

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Corporate bonds aren’t the only asset reluctant to embrace the stock market’s latest “all clear” verdict on the 2019 economy.

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There are enough parallels between the 1998 and 2018 market declines that we decided to flesh out the comparison a bit more.

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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.

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We’ve written at length about a bear market’s tendency to catalyze major leadership changes—across sectors, styles, and even geographies.

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Commodities were the worst performer among the major asset classes during 2018, with the S&P/Goldman Sachs Commodity Index losing 13.8% on a total return basis.

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Last year’s market decline was one of the largest to have occurred without a lengthy-preceding period in which breadth narrowed and Small Caps significantly underperformed.

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At some point in his career, famed stock trader Jesse Livermore ceased using the terms bull and bear,  opting instead to describe trends in terms of “lines of least resistance.”

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For those who remain skeptical that more stock market troubles lay ahead, we’ve supplemented the MTI and our other market tools with something truly authoritative: Evidence from a gossip column in a 1958 issue The Minneapolis Star!

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The December employment report temporarily eased fears of a severe U.S. slowdown. That’s a mystery to us.

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While investors obsess over the market level at which a hypothetical “Powell Put” might come into play (or whether such a put even exists), they seem to have overlooked the absence of another such put that proved dependable throughout the cyclical bull market.

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While the number of recession forecasts is on the rise, there’s a general reluctance among economists to project a downturn in the absence of a yield curve inversion.

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Wage inflation should accelerate in the months ahead, oil could bounce from its oversold low, and college textbooks might double in price before the fall semester. No problem…

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As the market sunk to a 3% loss on Christmas Eve, we sensed genuine investor panic—at least among the fraction of investors then paying attention.

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Having monitored market internals for warning signs for longer than we care to admit, it’s refreshing to turn around and watch many of the same signals for… wait for it... BUY signals!

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Christmas Eve came not with snowfall but a market freefall which was the worst-ever recorded for that date.

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