Inside The Stock Market ...trends, cross-currents, and outlook
A High-Risk Rally
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.
Did The Doves Swoop In And Save The Day?
Just a few months ago, Fed Chairman Jerome Powell boasted a reputation as a straight-talking, sound-money banker.
It Wasn’t Powell Who Panicked
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.
Credit Conundrum
The stock market seems to have concluded that a recession will be averted in 2019, but evidence from other asset markets is less convincing.
What Are Bonds Telling Us?
Corporate bonds aren’t the only asset reluctant to embrace the stock market’s latest “all clear” verdict on the 2019 economy.
1998 Parallels
There are enough parallels between the 1998 and 2018 market declines that we decided to flesh out the comparison a bit more.
Trend-Following Travails
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.
New Year, Old Leadership
We’ve written at length about a bear market’s tendency to catalyze major leadership changes—across sectors, styles, and even geographies.
Sifting Through The Commodity Carnage
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.
Are New Lows The Key To New Highs?
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.
The Line Of Least Resistance Is Lower
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.”
Is The “Star” Aligned For 2019?
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!
About That Great Jobs Report...
The December employment report temporarily eased fears of a severe U.S. slowdown. That’s a mystery to us.
The Market Is Off Its Meds!
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.
Yields Might Be Throwing A Curve
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.
The Fed Was Not The Only One To Tighten Last Month
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…
December’s Low Didn’t Have The “Right Look”
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.
Watching For An Internal Washout
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!
You Call That A Panic?
Christmas Eve came not with snowfall but a market freefall which was the worst-ever recorded for that date.
Guess-timating The Downside
While our market disciplines remain negative, we certainly aren’t oblivious to the haircut in equity valuations that’s already occurred.
“De-Worsification” Ruled In 2018!
The market difficulties of 2018 were hardly limited to stocks. Commodities, in fact, were the worst performer among the seven major asset classes.
Read This Before Taking The “Plunge”
After a bad market year like 2018, there’s a natural instinct for allocators to skew portfolios toward assets with poor recent performance. History suggests, though, that one shouldn’t make a habit of buying an asset on the basis of price weakness alone.
Bridesmaid Strategy - Asset Classes
The best we can say about last year’s Bridesmaid asset—the S&P 500—is that it did not underperform “the S&P 500.”
Bridesmaid Strategy - Sectors
Our analysis of the Bridesmaid effect originated in 2006, but was based on S&P 500 sectors rather than asset classes.
Bridesmaid Strategy - Valuations
Momentum strategies aren’t for everyone. Still, contrarians should recognize that buying the prior year’s worst performing sector for a one-year hold has been an underperforming proposition over the long term.
Industry Group Dreams And Nightmares
The “Dreams” portfolio represents a simple industry group trend-following approach, while the “Nightmares” portfolio serves as a bottom-fishing strategy made up of the previous year’s biggest losers.
Corporate Executives Might Be Peeking Into Quants’ Toolkits
In terms of long-term planning, corporate executives are often tasked with choosing between expanding their business or returning cash as a way to reward shareholders. In the quant world, the two decisions have a consequence on future stock returns.
Bull Pause, Or Bear Paws?
The old maxim says that when the bears have Thanksgiving, the bulls have Christmas.
Stock Market Observations
The tops of 1990, 2000, and 2007 were all better “telegraphed” by the action of the market itself, than the September 2018 peak, but secondary measures of market internals suggested all summer that the internal trend was in fact deteriorating—and so did the action in low-grade corporate bonds.
It’s Not A Pause… It’s “Paws”
A bear market will almost always prove to be the catalyst of one or more shifts in long-term market leadership.
It’s About Money, Not Profits
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The consensus focus all year has been on the boom in U.S. corporate profits.
Economic Stocking Stuffers
While the monetary and liquidity backdrop has deteriorated all year, the shorter-term economic evidence has remained mixed.
VLT = Very Lousy Timing?
In the spirit of keeping an open mind, three months ago we observed that our S&P 500 VLT Momentum measure had triggered a “moderate-risk” BUY signal with its August reading.
Low Vol For All Seasons?
The S&P 500 Low Volatility Index has performed so well for so long that the ETF based on the index has amassed more than $8 billion.
The Downside Leaders Look Familiar
It wouldn’t be a December Green Book without at least one page of hand-wringing over the year’s extreme underperformance of foreign stocks.
Deep-Six The “Threes-Fives”
We’ve sometimes called the yield curve our “favorite economist,” so we were amused when some enthusiastic data miner in the Treasury market tried to slip us a cheap imitation in late November.
They Can’t Tax What’s Not Earned
With three quarters of a sharply lower corporate tax rate on the books, the median four-quarter trailing profit margin for both the S&P 500 and S&P MidCap 400 jumped to all-time records in the third quarter.
Earnings Releases Cause Surge In Price Volatility
Three years ago, we did a series of studies looking at price reactions to corporate earnings releases (ER) and we found that, since 2007, price movement has become more dramatic on ER days.
Time To Hide In Quality?
Although both High Quality and Low Quality stocks suffered in the last two months’ market turmoil, we are not surprised to see that, on a relative basis, High Quality stocks outperformed Low Quality.
Warning Crack
We wrote in October’s Green Book that “many once reliable seasonal market patterns have been out of sync in recent years.”