Paulsen's Perspective
2022 Cyclical Tilt?
Even though cyclical stocks’ excess return has been somewhat modest in 2021, they have done well overall since the start of this bull market. Moreover, while the economy is poised to slow next year, real-GDP growth should post another healthy gain near 4% to 4.5%—helping to keep cyclical stocks in a leadership position. Thus, owning a wide variety of cyclical stocks again during 2022 probably makes sense. Still, there are a couple of reasons investors should consider tilting those cyclical bets toward consumer cyclicals rather than industrial cyclicals.
Bonds Are BAD!
Why do we own bonds? I understand the nostalgia. After all, bonds have been part of portfolios ever since, well, there have been portfolios. They have always represented the consummate balancing asset; bonds make those risky stocks tolerable and allow a restful night’s sleep. But, just like Linus and his blankie, it’s tough to let go of such a comforting friend.
Labor-Market Runway?
The U.S. labor market holds the key to the duration of the economic expansion and its corollary bull market. In October, the U.S. unemployment rate declined to 4.6%—which is lower than 75% of the time since 1948. Although there’s still room for further improvement, historically, when the unemployment rate fell below 4%, economic conditions often became difficult.
Monday Musings
Just cleaning out the “thought box” today…
Cyclicals Are CHEAP And UNDER-OWNED
In this prolonged era of growth-stock dominance, cyclical stocks seem antiquated and passé. Why own something that is highly volatile, subject to the vagaries of an unpredictable economy, and offers no true sustainable long-term growth story? Particularly when there are FANGS available that are painting the future of society and the economy. FANG-style stocks are also much steadier, significantly less connected with economic cyclicality, and offer sexy future growth. When I put it that way, I too am having a hard time being convinced to buy a cyclical stock?
Inflation & Yields: Some Historical Observations
Investors have two primary questions regarding the current inflation problem: 1) Is the recent inflation surge just temporary or will it prove sustainable, and 2) Why are bond yields ignoring higher inflation? Unfortunately, we do not have a definitive answer for either question, but a look at U.S. history is informative.
Is This Stock Market Driven By “FOMO”… Or By “FOBI?”
One Main Street sentiment indicator implies that, contrary to FOMO, today’s stock-market strength is more likely driven by “FOBI”—the Fear Of Being In.
Supply-Side Soundness?
The problems associated with Supply relative to Demand have been well documented. Burgeoning demand has simply overwhelmed supply chains, causing the prices of nearly everything to soar.
A Few Thoughts On Earnings & Inflation
The earnings season kicked off last week and, so far, it appears that corporate America had another solid performance in the third quarter. Since inflation is proving to be more persistent than expected, anxieties surrounding profit-margin pressures are escalating.
Give Me Frightful Or Boring… Just Not Ordinary!
The stock market’s past performance has long been recognized as a good indicator of future performance. A notable performance attribute that shows excellent prowess in predicting future stock-market returns is the degree of total-return divergence among the market’s underlying constituents.
Should Hotter Inflation Be FEARED Or EMBRACED?
Coming of age in the 1970s, I understand the current, widespread fears of runaway inflation. Although it’s unlikely, could the last couple of years’ abuse and overuse of monetary and fiscal policies bring back a 1970s’ Inflationary Disco-era?
Growing Into Itself
One of the more interesting (if not unique) aspects of the current economic expansion is its outsized need to “grow into itself.” In its infancy, every recovery displays this attribute.
Best Way To Play Rising Yields? Small-Cap Cyclicals!
For at least the last decade, small-cap cyclical stocks have had a very close, and positive connection with rising bond yields. From 2012 forward, the correlation between daily movements in small-cap cyclicals’ relative price performance and bond yields is a strong +0.65!
Are Policy Officials AHEAD Of Inflation?
Although supply-chain problems dominate the headlines, what is most unnerving is the seeming indifference of economic policy officials.
SCARED And LOADED
Based on the University of Michigan’s Consumer Sentiment Index, household confidence has collapsed in recent months. Other measures paint a less dire picture about consumer fears but most of them similarly suggest that enthusiasm has waned. Importantly, this decline in consumer confidence comes at a time of abnormally high consumer savings.
Surface Turbulence… But The Undertow Is Strengthening?!?
Under the surface of today's stock-market turbulence is an increasingly solid undertow of stock market support. Maybe it won’t be enough to ward off the pressures, but a foundation does seem to be forming in favor of another leg up for this bull market.
COVID Still Controls The Financial Markets
Fear has gripped the stock market. Some popular, technical indicators are flashing a warning, including a worrisome drop in the cumulative Advance/Decline Line and last Friday’s S&P 500 tumble to its 50-day moving average.
Messages From The Business Battlefield
Companies are always in the trenches. Sometimes winning, sometimes losing, and often simply striving to survive. So let’s listen in on some messages emanating from “Businesses on the Battlefield.”
Fear The Taper?
Everyone fears the Taper. Fed members constantly remind us that it’s coming soon, the financial media frequently preview the taper’s potential ugly market fallout, and a parade of Wall Street firms are warning that stocks will almost assuredly suffer at least some sort of taper tantrum.
Let’s Talk DEFENSE!
When the stock market finally succumbs to a long-overdue correction, conventional defensive plays may prove more inadequate in preserving capital than they have in the past.