Research.LeutholdGroup

The markets and the economy in Trump’s first term benefited from both the shock of his election and “initial” conditions. Among the more attractive backdrops of 2016 were a deficit of “just” 3% of GDP, inflation at 2.1%, and restrained investor confidence. 

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The cyclical backdrop for stocks looks more precarious than that surrounding Donald Trump’s stunning victory in 2016. That said, there’s no real Technical obstacle to a short-term continuation of the 2024 “Trump Trade.” 

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Last year ended with an extremely rare nine-week winning streak, and the S&P 500 is still charting extraordinary upside momentum more than 10 months later. Historically, after a one-year stock surge of this magnitude (>35%), the U.S. has never declined into recession over the next 12 months.

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Based on leading economic indicators, a case could be made for the Fed to cut rates again. Stocks are telling another story: Based on market momentum and valuation, an impending rate cut might be the least justified one in modern history.

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November 10th will mark the 2nd anniversary of the initial inversion of the Near Term Forward Spread, the curve most correlated with subsequent growth in real GDP. If a recession fails to materialize, it would be the first “false positive” since 1966.

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For those who believe long-term valuation relationships are still relevant, we recommend moving down the capitalization spectrum. Small Caps’ 5-year estimated forward return is near +11%, while Mid Caps’ is around +8%. The same valuation tool forecasts a mere +3% for Large Caps.

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We’d expect monthly jobs numbers to confirm a recession, not forecast one. This cycle, though, employment reports have been warning of a downturn for 2½ years. It would be easy to call them misfires, but red flags keep coming. If a soft landing was in store, the jobs numbers should have improved by now. 

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In October, we published a new election barometer using the DJIA to predict the winner. It failed! Interestingly, the last time this model did not correctly pick the winner was also a year in which the sitting president, who was eligible to run, declined to do so—in 1968.

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The market’s September gain was its fifth in a row and tenth in the last eleven months. If the S&P 500 is up in October, it will mark the first time since 1942 that each of the seasonally “weak” months (May through October) will have seen a gain.  

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We’ve acknowledged that this rally does not have the bubbly “feel” of either 1999 or 2021, and the absence of giddiness is a reason many pundits think stocks can move much higher. Nonetheless, the stock market is very close to a full-blown bubble: An average of four key valuation metrics places them only one percent away from the historic peak of January 2022—the craziest market top of all time.

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Admittedly, for much of this year, we’ve been wrong in our view that the U.S. economic path was pre-recessionary. We’re in good company: In 2024 the LEI Index has produced the worst three quarters in its 65-year history. Historically, there has been a solid relationship between the LEI and subsequent growth in real GDP; this year’s misses are peculiar.

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Yes, the labor force is growing, but the rate is by no means “rapid.” In fact, its growth rate over the last 12 months of just 0.6% is weaker than any pre-recessionary period since 1956-57. 

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The recent decline in the Present Situation Index is consistent with a recession already in progress. While we are not in the camp that a recession has begun, the loss of confidence is part of a self-feeding spiral that eventually leads to one.  

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An excellent forecaster of election outcomes over the last 100 years is the stock market, itself. Measured over the three-month period through election day, if the S&P 500 has a gain, the incumbent party historically prevails; a negative return predicts a loss for the incumbent. This simple method has correctly identified the White House winner in 20 of the past 24 elections.

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Extreme stimulus announced by China had the desired effect of spiking the country’s stock market. The move did not trigger our EM Allocation Model; however, if the reversal is for real, there is plenty of time. The EM P/E multiple gap is so extreme that one wouldn’t miss out if they prefer to wait for more compelling confirmation than the fireworks of the last couple of weeks.

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Why does the median S&P 500 stock now look relatively cheap? It’s solely because the asset to which it’s compared—the cap-weighted S&P 500—is back near valuation levels only seen during full-blown bubbles. As of September 30th, 50 of the 500 index members traded above 10x sales, a figure considered ludicrous only five years ago.

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An economic downtown with little or no forewarning from stock prices is possible, but against the odds. Nonetheless, prior to 1950, there were three cases in which stock market gains failed to inoculate the economy against a recession. Today’s the stock market capitalization has become so large relative to the economy that stock price movements affect the outlook for growth and inflation more than ever before. 

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It’s true that we’ve written a few bull-market obituaries throughout the years that turned out to be premature. To make amends, we’ve decided to pen a tribute to the current bull market, whether or not it is about to end (… or even if it might have already terminated, in mid-July).

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Bull markets that lacked a traditional recessionary “father figure” had shorter lives (33 mos. vs. 61 mos.) and produced gains just one-third the size (+63.6% vs. +186.9%). If today’s SPX bull matched the return of its four most-cyclically relevant predecessors, it would extend until May 2025, and top out at 5,852—8% above its September 6th close. (Not great.)

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No bull market in history has faced stiffer monetary headwinds than the one that began in October 2022. Despite that challenge, stocks have illustrated the technical vitality of a youthful bull.

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