Paulsen's Perspective

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?

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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.

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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.

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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.

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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.

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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. 

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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?

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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.

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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!
 

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Although supply-chain problems dominate the headlines, what is most unnerving is the seeming indifference of economic policy officials.

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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.

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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.
 

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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.

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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.”

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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.

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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. 
 

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It’s the question on everyone’s mind: When will we know if transitory is “no longer” transitory? Although no one can say for sure, perhaps monitoring the accompanying chart will provide some insight.

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Since the pandemic, economic policy has become an obsession for most investors. The thickness of former Federal Reserve Chairman Alan Greenspan’s briefcase seems pedestrian today. When fiscal and monetary authorities began adopting highly unconventional methodologies after the 2008 financial crisis (e.g., Tarp, Cash for Clunkers, and QE), the mantra on Wall Street became WWPOD (What Will Policy Officials Do?).
 

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Small-cap stocks had a ferocious leadership run beginning last October when vaccinations were at hand—and hope surged that the COVID pandemic was finally ending. As economic activities restarted, the Russell 2000 outpaced the S&P 500 by nearly 33% between September and mid-March.

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In recent weeks, the news surrounding the stock market has turned much more challenging. Most economic reports have come in below expectations, taper-talk swirls about the Federal Reserve, and company earnings reports—while mostly still robust—no longer seem to boost stock prices. In addition, the U.S. exit from Afghanistan has been disturbing, supply shortages and inflation evidence are rampant, and, most importantly, the escalating spread of the Delta variant is dampening economic activities.

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