Research.LeutholdGroup

As shown in Chart 1, since 2015, the trade-weighted U.S. Dollar index has generally ranged between 90 and 100. Its recent stability, at a level much higher than it was during the first half of this economic recovery, has played an important role in shaping the economic and financial-market landscape. 

• Read more

There is still plenty to worry about. The never-ending trade war enters yet another round of negotiations, geopolitical risks simmer, many economic reports (both in the U.S. and around the globe) remain weak, the size of negative-yield debt is becoming nearly as large as U.S. GDP, the U.S. stock market continues to exhibit a worrisome “triple-top” pattern, small cap stocks continue to trail, the yield curve is still inverted and, because of a “strong” jobs report on Friday, there is now doubt about whether the Fed will cut interest rates later this month. 

• Read more

Like today, the Federal Reserve usually sucks all the oxygen out of the national economic-policy conversation. And, why not? It is comprised of a small elite group who hold conferences in exotic locations (Jackson Hole), have regular strategy meetings culminating in ‘must-see’ press conferences, make dot-plots sound interesting, and, between meetings, members regularly spout-off contradictory opinions. 
 

• Read more

U.S. bond yields have been declining all year despite a stock market which continues to trend higher. The stock market appears optimistic about the future of this recovery, whereas the bond market is acting increasingly nervous. 

• Read more

This week the Federal Reserve delivered the requisite preamble signaling an inevitable cut in the Fed funds rate. Following that, the 10-year Treasury yield declined below 2%, financial markets now point to a 100% probability of a rate reduction, and the old adage ‘Don’t Fight the Fed’ has been ringing in investors’ ears.

• Read more

Surveys are conducted frequently on Wall Street as investors are always assessing whether there are too many bulls or too many bears. The problem with surveys is people do not always do what they say (perhaps as we found out leading up to the last presidential election).

• Read more

A survey asking equity investors whether the stock market does best with a strong or weak U.S. dollar would likely yield a variety of contradicting opinions—and they would all be correct! Like many couples, the stock/dollar relationship is complicated. Sometimes they get along blissfully, other times they separate because they find they rarely agree and, often, they simply seem indifferent to each other. They are an odd couple!
 

• Read more

U.S. economic growth has recently slowed and most attribute the weakening to trade wars now being fought on several fronts (China, Mexico, Europe?). Bond vigilantes have become so concerned about the potential for negative economic fallout that they have inverted the yield curve.

• Read more

The bond market is now the primary fear for stock investors. Bond yields just keep declining, the yield curve has again inverted, and many wonder ‘why is the bond market so spooked?’ Could it be signaling a recession and therefore a bear market?

• Read more

Just some unrelated thoughts this week. A few concepts for the cranium! 

• Read more

Despite the current trade war with China, the U.S. economy has taken on an air of ‘Goldilocks’ since the December stock market swoon. Real economic growth has slowed, and both inflation and interest rates have moderated. The pace of growth is no longer too hot—as it was last year—nor has it yet become too cold—as most feared earlier this year. 

• Read more

After the December stock market swoon, amidst escalating recession fears, the Federal Reserve hit the pause button on interest rate hikes. Investors, though, had a déjà vu moment, sensing the 2018 experience as reminiscent of a few years earlier and, considering the aftermath of the prior occurrence turned out to be profitable, investors in 2019 opted to hit the replay button! 
 

• Read more

An aging economic expansion can be hazardous for investors. It tends to develop vulnerabilities (e.g., indebtedness, a lack of savings, over-indulgences, etc.) which threaten a premature ending. Often, old recoveries develop a capacity shortage leading to worsening inflation, interest rate pressures, and restrictive economic policies.

• Read more

Investors have struggled this year with the relationship between stocks and bonds. The stock market seems very optimistic about the future, whereas bonds appear much more reserved, if not frightened, by the outlook. Should investors be concerned by the seeming contentiousness between stocks and bonds? 

• Read more

This morning’s U.S. GDP report should help calm fears about a pending recession and perhaps set the stage for a surprising acceleration in economic growth? Fears of recession have caused the Federal Reserve to pause its tightening campaign, slightly boost the pace of money supply growth, and significantly lower long-term yields. Improved monetary accommodation definitely raises future economic growth prospects.

• Read more

Compared to post-war norms, the contemporary economic expansion has been odd in many ways. Persistent sub-par economic growth, a lack of normal lending and borrowing activities, declining labor-force participation rates, a stubbornly high underemployment rate, an inflation no-show, negative yields, and bizarre economic policies (e.g., TARP, cash for clunkers, stress tests, and quantitative easing). 
 

• Read more

Better economic reports in the U.S. and about the globe are slowly reducing imminent recession worries. For example, today’s favorable reports on U.S. retail sales, unemployment claims, and the Leading Economic Indicator reinforces the likelihood the expansion perseveres. 

• Read more

U.S. profit margins have widened significantly in the last couple decades. Total U.S. corporate profits as a percent of GDP averaged only about 8% in the 20 years leading up to 2000, but has since risen by almost 30%, averaging 10.5%. Similarly, the overall profit margin among S&P 500 companies has increased steadily in this recovery to record highs! 

• Read more

Many believe the contemporary bull market has been nothing more than a Sugar High produced by massive and unprecedented monetary easing. In the last couple years, however, the Federal Reserve has raised interest rates and allowed its balance sheet to run off, weaning the markets from its sugar. 
 

• Read more

A legitimate concern facing investors is how quickly, and how much, the stock market has recovered while economic and earnings fundamentals have deteriorated. Without improving fundamentals, this rally appears overdone—based on hope—and increasingly suspect.

• Read more

The U.S. yield curve has inverted (at least the 10-year Treasury yield to either the 3-month T-bill or the Fed funds rate) and captured the full attention of investors. Rightly so, since a yield curve inversion has historically been an excellent indicator of a pending recession. However, a condition that has always existed in the post-war era when the yield curve has inverted is absent today.

• Read more

Stocks do best in times of general price stability. In the post-war era, the stock market has provided investors with significantly higher returns and lower risk whenever the annual rate of consumer price inflation has been between 1% and 3%. However, when outside this “Sweet Spot”—when the porridge is either too hot or too cold—investment results are far less hospitable. 

• Read more

U.S. economic growth has recently slowed and may weaken further in coming months. Moreover, inflation still lingers—commodity prices have bounced, both core consumer and producer price inflation remain near recent highs, and wage inflation is steadily rising. Investors face two big questions.

• Read more

The stock and commodity markets have been messaging confidence in the future of this economic recovery since the December stock swoon. The S&P 500 has surged by about 10% so far this year on strong breadth led by economically-sensitive small cap stocks and cyclical sectors, while traditional defensive equities have lagged. 

• Read more

The macro-investment environment can be simply described by two dimensions—the directions of real growth and inflation. Since the performance of both the stock and bond markets are highly responsive to these two factors, investors need to be mindful of their macro bets. 

• Read more

Arguably, the biggest risk facing the stock market is a recession. Currently, traditional recession gauges are mostly comforting and a key indicator—balance sheet health—is remarkably strong. Often, recessions occur when financial health deteriorates, limiting household or business capabilities and lowering confidence.

• Read more

Economic growth in the contemporary expansion has been perpetually weaker than any in the post-war era. Many explanations have been offered for why the U.S. is stuck in low gear, including aging demographics, overextended balance sheets, overused and increasingly ineffective economic policies, and a tech-boom-induced world awash with excess capacity. 

• Read more

Just some noodling over an array of issues including:

• What private sector confidence currently suggests about the stock-bond allocation tilt?
• Is the fuel for Populism fading? 
• Will winning the trade war cause U.S. stocks to lose?
• How have stocks performed once the unemployment rate bottoms?
• What does a 2019 U.S. economic slowdown imply for the 2020 election?
• A nice revaluation refresh for stocks!
   

• Read more

Emerging Markets (EM) are not generally considered defensive investments and, therefore, investors do not often turn toward these economically-sensitive stocks near the end of a bull market cycle. However, as Chart 1 highlights, if the current economic expansion/bull market is in its late innings, perhaps you should consider “Emerging for the Finish.”
 

• Read more

During the December carnage many Bulls were killed on the battlefield and others badly wounded. This year, although the skirmish has quieted, most remain on edge. However, investors may just now be jumping out of their foxholes because the Cavalry has recently been sighted coming over the hill with bugles blaring!

• Read more

While many factors will determine how the stock market ultimately does this year (e.g., the pace of economic and earnings growth, valuation, policy support, and technicals), a few indicators show “sentiment” remains supportive for the stock market. 

• Read more

The next recession, whenever it is, could face an unusual headwind. Normally, recessions are about liquidating fundamental excesses. Restoring health to balance sheets which were abused in the last expansion, purging bad business decisions, restoring liquidity, replenishing savings, and restarting the profit, job, and income creation cycles. 
 

• Read more

In 2018, the U.S. recovery was on a path toward recession. It couldn’t last much longer growing above 3% in real terms and 5.5% in nominal terms, with an unemployment rate below 4%. Wages, consumer, producer, and commodity prices were rising and the Federal Reserve (Fed) and bond vigilantes were tightening.

• Read more

Amongst the carnage and ongoing financial market volatility are a few encouraging signs the stock market may eventually regain its footing. As the pictures below illustrate, a proprietary U.S. economic momentum indicator suggests that recession fears may lessen by the spring, valuations have now fallen well below levels justified by bond yields, investor mindsets are quickly shifting away from overheat fears, and the U.S. dollar may finally be breaking down.

• Read more

Welcome to 2019! As we begin the New Year, volatility (the stock market’s VIX volatility index spiked above 30 last week) and uncertainty (Bear Market, Recession?) reign. Amongst all the chaos, and with much personal trepidation over what may actually happen this year, here are some observations and a few guesses for 2019.

• Read more

Emerging Markets (EM) are not normally considered a safe place to hide during severe stock market corrections—but they have been in the latest equities swoon. As shown in Chart 1, while the S&P 500 composite stock price index has declined by more than 14% from its high on September 20th, the MSCI Emerging Market stock price index has only declined by about 7%. 

• Read more

Stagflation is normally considered an economic condition characterized by weak real growth accompanied by rising inflation. Today, however, this condition may be most noticeable in the mindset of equity investors. 

• Read more

Recently, when Federal Reserve Chairman Jerome Powell and President Donald Trump both blinked—one on rate hikes and the other on trade wars—the S&P 500 surged by more than 6% in about a week! Many sensed the primary challenges holding back stocks were finally resolving and sentiment quickly turned bullish as investors did not want to miss the Santa Rally! 

• Read more

The valuation of the stock market has been under steady pressure this year. The S&P 500 trailing price-earnings (P/E) multiple has declined by about 25% from a recovery peak of 23 in January to about 18. The hope for this bull market is that P/E contraction is almost over, allowing stock prices to again rise with earnings gains. 

• Read more

We first published the accompanying chart in March of this year. The PP Ratio had just spiked sharply upward in the previous three months, as it did near the end of the dot-com era in 2000. Since March, in a very similar fashion as shown, the PP Ratio has eerily traced the same path as during the dot-com era.
 

• Read more