Green Book April 2022
Welcome To The Terrible Twos!
In late March, the S&P 500 came close enough (3.5%) to its January high that a second birthday celebration for the bull seemed warranted. Who doesn’t love a party? But, as we noted in a recent Chart of the Week, a milestone like this is a good excuse to haul our pet to the veterinarian for a checkup.
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Featured Articles
Cycles: A Key “Window” Is Approaching
Next month kicks off the seasonally-weak phase of the stock market’s Annual Cycle: May-October. Overlaid on that is the statistically vulnerable stretch of the four-year Election Cycle: the “mid-point” of the Mid-Term Year. There’s a positive way to spin this mid-term malaise: The cycles imply that an ideal window for a major low is about to open.
A Tale Of Two CDs
Investors considering a position in the Consumer Discretionary sector need to be aware of what they are buying: a basket in which one-half consists of mature, modestly-valued consumer brands, while the other half is two mega caps with excellent growth profiles and high absolute valuations. It would be a mistake to view this sector as a homogeneous set of companies.
Factor Performance: A Tale Of Two Halves
Through the first two-and-a-half months of 2022, factor performance maintained the trend established in 2021: Value outperformed everything else and Growth lagged. When the 10-2 year differential dropped near 20 bps on March 16th, Growth stocks outperformed from that day forward, while Profitability and Value suffered.
The Terrible “Two-Year”
In a simple test of 15 yield-curve variants, we found that the 2s10s spread ranks second to last, based on its correlation with one-year-forward real-GDP growth since 1978. The three best measures employed the 3-month bill as the “short” rate. The spread between the 5-year note and 3-month bill showed the strongest correlation with subsequent economic growth.
Yield Curve—Focus On More Reliable Themes
Predicting a recession is a very tall task, let alone using a single yield-curve indicator with long and highly variable lead time. Instead, we would rather focus on some of the more reliable themes: The macro-policy setting; U.S. dollar; and Bank stocks.
Recession Dashboard Update—Recession Not Imminent
Currently, the dashboard shows 6 green, 3 yellow, and 2 red lights. The overall message is that, while there are areas of concern, a recession is unlikely to be imminent (within the next twelve months).
Table of Contents
Stock Market
- Welcome To The Terrible Twos!
- The Terrible “Two-Year”
- X-Rays And EKGs
- Signs Of “Demand Destruction?”
- Consumers’ Misery Is Also The Fed’s
- Earnings: Reversing The “New Normal?”
- “Gapping” Lower?
- Cycles: A Key “Window” Is Approaching
Of Special Interest
Macro Monitor
- Yield Curve—Focus On More Reliable Themes
- Recession Dashboard Update—Recession Not Imminent
- Risk Aversion Index: Stayed On “Lower-Risk” Signal
Quant
Market Internals
- Earnings Momentum
- Small Cap vs. Mid Cap vs. Large Cap
- Growth vs. Value vs. Cyclicals
- Additional Factors
Portfolios
Major Trend
Estimating the Downside
At Random
Cycles: A Key “Window” Is Approaching
Next month kicks off the seasonally-weak phase of the stock market’s Annual Cycle: May-October. Overlaid on that is the statistically vulnerable stretch of the four-year Election Cycle: the “mid-point” of the Mid-Term Year. There’s a positive way to spin this mid-term malaise: The cycles imply that an ideal window for a major low is about to open.
A Tale Of Two CDs
Investors considering a position in the Consumer Discretionary sector need to be aware of what they are buying: a basket in which one-half consists of mature, modestly-valued consumer brands, while the other half is two mega caps with excellent growth profiles and high absolute valuations. It would be a mistake to view this sector as a homogeneous set of companies.
Factor Performance: A Tale Of Two Halves
Through the first two-and-a-half months of 2022, factor performance maintained the trend established in 2021: Value outperformed everything else and Growth lagged. When the 10-2 year differential dropped near 20 bps on March 16th, Growth stocks outperformed from that day forward, while Profitability and Value suffered.
The Terrible “Two-Year”
In a simple test of 15 yield-curve variants, we found that the 2s10s spread ranks second to last, based on its correlation with one-year-forward real-GDP growth since 1978. The three best measures employed the 3-month bill as the “short” rate. The spread between the 5-year note and 3-month bill showed the strongest correlation with subsequent economic growth.
Yield Curve—Focus On More Reliable Themes
Predicting a recession is a very tall task, let alone using a single yield-curve indicator with long and highly variable lead time. Instead, we would rather focus on some of the more reliable themes: The macro-policy setting; U.S. dollar; and Bank stocks.
Recession Dashboard Update—Recession Not Imminent
Currently, the dashboard shows 6 green, 3 yellow, and 2 red lights. The overall message is that, while there are areas of concern, a recession is unlikely to be imminent (within the next twelve months).
Stock Market
- Welcome To The Terrible Twos!
- The Terrible “Two-Year”
- X-Rays And EKGs
- Signs Of “Demand Destruction?”
- Consumers’ Misery Is Also The Fed’s
- Earnings: Reversing The “New Normal?”
- “Gapping” Lower?
- Cycles: A Key “Window” Is Approaching
Of Special Interest
Macro Monitor
- Yield Curve—Focus On More Reliable Themes
- Recession Dashboard Update—Recession Not Imminent
- Risk Aversion Index: Stayed On “Lower-Risk” Signal
Quant
Market Internals
- Earnings Momentum
- Small Cap vs. Mid Cap vs. Large Cap
- Growth vs. Value vs. Cyclicals
- Additional Factors