Research.LeutholdGroup

The tool has functioned as a good lead indicator of changes in inflation momentum. When the reading is moving up it is an inflation acceleration alert and a move above 70% is usually cause for a general alarm. On the other hand, readings below 50% are a comfort zone.

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A look at underlying conditions at each stage of the bull market.

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The December 2018 stock-market low was the second most expensive among historical “major market lows.” The most expensive low was October 1998. The S&P 500 corrected -19.8% in late 2018, and by -19.3% in mid-1998. In the current post-correction rebound, the stock market’s breadth is more fractured than at the same stage in the rally following the 1998 correction.

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This issue of Leuthold Quick Takes reviews the conflicted nature of investor sentiment as seen by Doug Ramsey (Chief Investment Officer) and Jim Paulsen (Chief Investment Strategist).

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In 1962, President Kennedy clashed with steel companies over a 3.5% price hike and, in the midst of that, the S&P 500 declined 24% over the span of just a few months. In hindsight, that conflict about steel prices looks like BB gun material compared to the bazookas Trump and trade adviser Robert Lighthizer have fired in the last year. Could the present-day trade war with China “trigger” a decline like that (allegedly) of the Kennedy Slide?

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In the first three months of 2019, the S&P 500 surged 13%, its best quarterly performance in nearly ten years. This is strikingly similar to the rally of 1999—which may have been the most speculative in U.S. history. 

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Based on standard technical retracements, the best-case S&P 500 bounce “should” have been exhausted in the range of 2,700-2,750. Less than three months since a 19.8% close-to-close decline, the market has rallied to within reach of a new high, a move which would commemorate the bull market’s 10th anniversary.

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The Research Summary is now available for download on our website for February 2019. The Research Summary provides a synopsis of The Leuthold Group's monthly market outlook.

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The fourth quarter selloff and subsequent rebound, as seen by Doug Ramsey (Chief Investment Officer) and Jim Paulsen (Chief Investment Strategist).

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The fourth quarter selloff and subsequent rebound, as seen by Doug Ramsey (Chief Investment Officer) and Jim Paulsen (Chief Investment Strategist).

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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.” He felt the change in terminology enabled a more flexible, unbiased mindset.

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Published 60 years ago in a newspaper gossip column, this diagram forecasted a major market high in 1972 and a panic low in 1982.

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In September the popular claim was that “interest rates were rising for the right reasons,” and still too low to threaten stocks or U.S. economic expansion.

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Throughout the recovery from the market’s early-2018 correction, we suggested any new high would be a good candidate for a “fake-out breakout” along the lines of those near the bull market tops of 1990, 2000, and 2007.

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The bears gorged themselves in the two weeks leading up to Thanksgiving and the S&P 500 closed at a correction low the day afterward. “Christmas” arrived immediately thereafter, with a six-day gain of 6%. But that was followed by a two-day collapse on December 4th and 6th, which undercut the post-Thanksgiving low on an intraday basis.

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Asset Allocation in 2018 is about as bad as it gets. No major asset class has done well.

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We wrote in October’s Green Book that “many once reliable seasonal market patterns have been out of sync in recent years.” The market gods punished us for having the audacity to write such a thing (and during October, of all months!), taking the S&P 500 down to within 0.1% of “correction territory” at the October 29th low. But the punishment outside the U.S. commenced long beforehand, and last month’s losses drove several foreign market measures into bear territory. We expect U.S. blue chips to follow.

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Doubling of yields since 2016 has slammed households. Percentage increase in rates is more important than the absolute level.

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Portfolio managers who tilt toward Value or Growth stocks have long known that each style carries with it an inherent bias toward some sectors and away from others. Our recent piece, Value Style’s 100-Year Flood, highlighted the significant role that sector weights (overweight Financials and Energy, underweight Technology) played in Value’s decade-long stretch of underperformance.

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The real short-term interest rate shows how inappropriately-loose monetary policy has remained in the face of a steady economic expansion.

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Value is the philosophical cornerstone of many legendary portfolio managers and is widely recognized as one of the most robust quantitative investment factors. Yet, despite its compelling conceptual merits and long-term record of superior returns, recent years’ underperformance of Value has lasted long enough to weigh on even 10-year performance records. 

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TABLE OF CONTENTS:

Executive Summary / Factor Investing-An Initial Look / Factor Investing And The Importance Of Market Cycles / The Intelligent Use Of Smart Beta / A Six-Factor Study including Value, Momentum, Quality, Stability, Yield, and Size / Next Steps

EXECUTIVE SUMMARY

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Closed-end funds (CEFs) rarely trade at net asset value (NAV). They either trade at a premium or a discount to share price. When demand for underlying assets is high, the price of a CEF will move above its NAV, trading at a premium. On the contrary, when investors are pessimistic about the underlying assets of a CEF, the price is driven below NAV, trading at a discount. Many studies have looked at CEF discounts and premiums as a means to gauge investor sentiment toward the assets they represent.

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