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Inside The Stock Market ...trends, cross-currents, and outlook

Oct 07 2020

The New FOMO

  • Oct 7, 2020

“Bull markets climb a wall of worry,” the old saying goes. We’ve heard that piece of wisdom (or imagined we heard it) every week since early summer. But we doubt it was meant to apply to today, when the paralyzing fear is not of potential loss, but of foregone upside (i.e., fear of missing out, or FOMO).

Oct 07 2020

A Fast Start Comes At A Big Price

  • Oct 7, 2020

The first up-leg of the bull market has catapulted many Large Cap valuations to levels seen only in 1999, 2000, 2019, and pre-pandemic 2020. At the six-month point on September 23rd, the S&P 500 P/E on 5-Yr. Normalized EPS had already reached 26.9x—a reading that is 30% higher than at the same point of any other bull market.

Oct 07 2020

Inflation In The Wrong Places?

  • Oct 7, 2020

Long before policymakers’ extreme response to the COVID collapse, we feared that the Fed’s interventions were suppressing important signals from the stock and bond markets. But we now suspect that hyper-expansionary policies are suppressing price signals from the “real” economy as well.

Oct 07 2020

The Valuation Case For “SMIDs”

  • Oct 7, 2020

Mid and Small Cap stocks underperformed in 2018 and 2019. However, after the collapse of February and March, these “SMID” Caps have largely kept pace with the torrid rebound in the blue chips. Today’s valuations are priming the SMIDs for a similar “decoupling” in the years ahead, like that following Y2K.

Oct 07 2020

The Use And Abuse Of Corporate Debt

  • Oct 7, 2020

U.S. corporations piled on almost $1 trillion in debt over the first six months of the year (a 10% increase). Corporate debt has now surged to 56% of GDP. We’ve argued that the level of corporate debt isn’t the problem, in and of itself. Rather, it’s what this debt has failed to generate that is the real problem.

Oct 07 2020

Remember The Yield Curve?

  • Oct 7, 2020

It would be a mistake to ignore (as most pundits will) this important forecasting tool until the next time it threatens to invert. The level and direction of the yield curve provide helpful information throughout the entire economic cycle.

Oct 07 2020

Tech Mania 2.0 Doesn’t Quite Measure Up

  • Oct 7, 2020

In the 24 months leading up to its early-September peak, the S&P 500 Technology sector gained 68%. By comparison, the two-year S&P 500 Technology gain going into its March-2000 peak was 203%. The S&P SmallCap 600 Technology Index doubled in the 23 months leading into the early-2000 top versus the two-year gain of just 6% at its 2020-summer peak.

Oct 07 2020

Homebuilders: The Weird And Unexpected

  • Oct 7, 2020

Like many years, 2020 is one in which an investor who was armed with a perfect economic forecast would have been befuddled by stock market action. Who would have imagined that passive equity investors (including many posing as Wall Street strategists) would be so well-rewarded for ignoring the economic downturn?  

Oct 07 2020

Five Reasons To Expect Higher Yields

  • Oct 7, 2020

Much of what we think “we know” about the bond market says yields should be headed higher.

Oct 06 2020

SPACs: Fashion Or Fad?

  • Oct 6, 2020

Special Purpose Acquisition Companies (SPACs) have become increasingly popular of late. We ask a seemingly simple question: “How do companies fare following a SPAC merger?”

Sep 05 2020

Keep Safe

  • Sep 5, 2020

A truly skilled writer would attempt to build up a little suspense before revealing the central theme of this section. But in this makeshift world of sixty-game baseball schedules and seven-inning doubleheaders, who has the time or patience for that?

Sep 05 2020

Musings On A Manic Market

  • Sep 5, 2020

Officially, those quick to pronounce the move off March lows as a new bull market have been proven correct with new S&P 500 all-time highs. Fundamentally, though, there’s enormous risk in Large Cap valuations, regardless of where one believes we are in the economic cycle.

Sep 05 2020

The Tab For “Freebies” Keeps Escalating

  • Sep 5, 2020

There’s an underlying faith that bureaucrats at the Fed and Treasury will keep good and bad businesses, alike, afloat—and overvalued. We’re still trying to unearth a single historical analog that merits such confidence.

Sep 05 2020

Foreign Stocks Party Like It’s The “2010s”

  • Sep 5, 2020

The most likely catalysts for improved relative performance of foreign stocks would be: (1) a bear market; (2) a recession; and, (3) a major downturn in the U.S. dollar. This year has supplied all three, yet the relative strength ratios of most foreign equity composites continue to grind lower as if it’s “business as usual.”

Sep 05 2020

Does An Economic Rebound “Inoculate” The Stock Market?

  • Sep 5, 2020

The 2020 decline exhibits a strong resemblance to the “incomplete” bear market of March 2000-September 2001—in that neither decline sufficiently deflated the extreme valuations of the preceding bull, and each was followed by an immediate rebound in reliable valuation measures to top decile levels.

Sep 05 2020

Can Money Growth Trump All Else?

  • Sep 5, 2020

In 2019 and 2020, our regard for time-tested valuation tools resulted in tactical portfolios being underexposed to stocks during a pair of tremendous rallies. Now, the critique is that we don’t appreciate the brilliance of today’s policymakers and their miraculous ability to pivot just when the stocks (and, in the latest case, the economy) need it most.

Sep 05 2020

Back To The Brink

  • Sep 5, 2020

Despite equal-weighted measures’ long-time underperformance, all valuation ratios we monitor for the median S&P 500 stock have returned to their top historical deciles. Even worse, our new equally-weighted “Valuation Composite,” based on these measures, closed August at a 98th percentile reading.

Sep 05 2020

An Unspoken Dilemma

  • Sep 5, 2020

Need more proof that we really are contrarians? While others were celebrating new all-time highs in the S&P 500 during August, we were wringing our hands over a disturbing new all-time low.

Sep 05 2020

An Unwelcome Surprise?

  • Sep 5, 2020

Several measures of U.S. economic “surprises” have soared to all-time highs in the last couple of months, showing that even economic forecasters have finally learned to play the corporate game of  “under-promise then over-deliver.” Mind you, that’s only 30 years after most industrial firms eliminated the role of “staff economist.”

Sep 05 2020

Earnings’ Lost Relevance

  • Sep 5, 2020

One characteristic of recent stock market action is extreme correlation. Chart 1 shows that during the sharp market decline following the COVID-19 arrival in the U.S. and the V-shaped upturn thereafter, the average correlation of S&P 500 constituents moved to near its highest level measured back to 1986.