FOMO is in full gear and—unlike the meme-stock mania of 2021—it’s been underpinned by an extremely compelling storyline: The seemingly limitless possibilities of artificial intelligence.

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Officially, as of September 30th, five of our eight bellwethers have confirmed the latest S&P 500 high. That’s typically good enough for the boat to stay afloat—and looks healthier than at February’s high.

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While our traditional breadth and leadership studies advise the market is quite healthy, we’ve lately observed some broader disagreement from long-term leaders, including the Magnificent Seven—of which only two have made new 52-week highs over the last month.

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We’re in the third upleg of a cyclical bull market that began at full employment, yet  this rally is tracking the path of a bull market that launched in the aftermath of a recessionary bear market bottom.

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Interest-rate cycles driven by Fed-policy changes can be the most powerful determinants of economic and market conditions. Decisions to raise or lower the fed funds rate impact sectors and styles differently; September’s rate cut prompted us to review equity winners and losers from prior episodes.

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A Fed that’s been incapable of controlling the intensity of the flame will soon be supplying it with more oxygen in an attempt to stimulate real activity. The odds are that any new fuel on the fire will find its way into consumer prices, long before it stimulates “unit growth” in slumping sectors.

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After a springtime scare, the stock market has shrugged off more than its fair share of troubles. We offer some quick observations on a range of topics, including our stance on the bull market and historical comparisons, IPO and speculative activity, equity leadership, and the economy/interest rates/inflation.

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The Fed has been neither correct nor anticipatory for an extended period of time. Ironically, if a September rate cut were followed by a decline into recession later this year, the Fed may be hailed as both correct and anticipatory—and some semblance of Fed independence could be maintained.

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There are unmistakable parallels between September’s likely Fed rate cut and the initial lowering of rates preceding the GFC. In each case, despite leading inflation gauges still trending up, a housing slump and deteriorating labor market served to justify the move. In 2007, after the Fed cut, measures of real growth failed to respond and inflation, in fact, shot higher.

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Not only is the stock market no more expensive than in February, but it’s also looking internally more healthy. At the February 19th high, seven of the eight bellwethers were waving warning flags versus just four today.

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To the extent that inflation has been propped up by escalating asset prices, it could also prove to be self-correcting. While rising stocks prices have only been inflationary once in a while, falling stock prices have almost always been disinflationary.

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Commercial hedgers’ bullish activity the last two months has triggered a series of buy signals on the Russell 2000 and DJIA. Conversely, hedging by the same savvy cohort of futures traders tripped a double-sell on the posterchild for Large Growth: the NASDAQ 100.

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Be it the S&P 500 or MSCI USA Index, U.S. Large Caps are on par with the valuation extremes reached in 1999/2000, and again in late 2021—but they aren’t entirely at the point of qualifying the market as the most expensive of all time. (Give it a few more months, perhaps.)

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In the last 100 years, there’s been only a single Republican presidential term that did not see the economy fall into recession. Since 1925, twelve recessions began under Republican administrations, compared to just four under Democrats.

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With this year’s gains in each month of the typically weak May-August period, the S&P 500 has taunted those who chose to “Sell In May.” This streak bodes well stocks. Albeit a small sample size for comparison, after successive advances May-August, SPX returned +5.3% over the next four months vs. +1.9% all other years.

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Whether or not the label "bubble" fits this market, U.S. economic risks continue to rise, while Mega Cap valuations home-in on levels seen only in 1999 and early 2000.

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The stock market looks (superficially?) better in late summer than it did at its “old” high on February 19th. It’s far from cheap, but is no more expensive than in February, and technically speaking, the S&P 500’s July’s highs were broader than those of February. That said, there’s divergent action among secondary measures that are troubling.

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As a testament to the severity of the 2000-2002 Tech Wreck, performance of recent years’ laggards, like the Equal-Weighted S&P 500, S&P MidCap 400, and S&P SmallCap 600 are still well ahead of large-cap Growth on a 25-year basis.

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Nine of ten components in the LEI are signaling there’s trouble dead ahead. Yet, the 12-month momentum of the sole outlier, the S&P 500, still looks sufficient to forestall an imminent slide into recession. Additionally, the index’s short-term strength also supports the argument that SPX is “too strong.”

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Given the prevailing conditions at the beginning of this bull market, the S&P 500 has been an overachiever, though the same can’t be said of the broader market. This translates to an opportunity for active equity managers that nearly matches conditions in Y2K—and at a time when the active manager pool is now dwindling.

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