Chart Of The Week

The U.S. yield curve has flattened in the last few months but remains a long way from inversion—an event that’s preceded each of the last eleven recessions.

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Thanks to reasonable valuations outside the United States, our work finds global equities only moderately above their long-term valuation norms. 

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Federal receipts tend to be a reflection of where the economy and stock market have been rather than where they might be headed.

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In February, NYSE Margin Debt finally edged above its prior record established in April 2015, a certain sign—according to many bears—that stock market speculation has reached a fever pitch.

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Given the flood of assets into passive equity mutual funds, it’s a mathematical certainty that some unlucky investor will make his or her first purchase of the SPDR S&P 500 Trust on the exact day of the eventual bull market high.

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For months on end, the Dow Jones Utilities has been the only bellwether group not to participate in the parade of new bull market highs.

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The latest Green Book highlighted the unusual divergence between crude oil and the relative performance of the S&P 500 Energy sector. Crude prices had—until this week—been trading near 18-month highs, while the relative strength of Energy stocks had slipped back towards January 2016 lows.

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The Financial sector is up more than 30% from last summer’s Brexit lows and, as of March, ranks atop our Group Selection (GS) Scoring framework for the fourth consecutive month.

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The stock market looks overbought on virtually every technical measure we can think of, but an overbought condition doesn’t always mean the market is vulnerable. To the contrary, we’ve found that “initial” overbought readings—like the one triggered last week on the S&P 500’s 14-Week Relative Strength Index—are generally followed by above-average gains in the intermediate-term (Chart).

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While stock market valuations are high, they are still considerably below their Technology bubble peak of March 2000. We’ve therefore conceded that there’s still room for a true market melt-up as long as cyclical conditions remain positive.

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Growth Is Re-emerging: A recurring theme in recent Leuthold Group research is the apparent turn in corporate profits and a general improvement in business results. To monitor corporate sales/earnings trends, we measure the number of companies reporting higher quarterly sales and earnings than a year ago, versus companies reporting lower sales and earnings.

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While Wall Street is extremely well represented in the new administration, we doubt that Wall Street’s performance under Trump will come close to that enjoyed under Obama.

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Contrary opinion theory is a valuable tool to investors, but today there are so many self-described contrarians that we sometimes struggle to identify what’s “consensus” and what’s “contrary.”

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In recent years the Fed has been more forthright than ever about the importance of the wealth effect as a transmission mechanism of monetary policy. But this (or any) policy effect hardly exists in a vacuum, and the Fed would do well to recognize that stock market swings have played an increasingly important role in the country’s fiscal balance.

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Our July special report “Active vs. Passive: A Three-Club Headwind” studied the recent dominance of passive indexes over actively managed funds.

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It’s well-known that 2016 was a very difficult year for active equity managers, as if purveyors of passive products were in need of a lifeline. That’s especially disconcerting because the year was one that offered—if nothing else—big potential for outperformance.

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The advance since March 2009 has just surpassed the bull market of 1990-1998 to become the second longest bull of all time, and it will move into the top spot if it can survive until next March 15th (the “Ides of March”). The current record holder is the 1921-1929 bull, which expired just a few days following its eighth birthday.

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The mania for stability and dividend yield have been two of this bull market’s defining characteristics.

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It was less than two months ago that broad market valuations--measured by the Leuthold 3000 median Normalized P/E--were still within the wide range we consider to represent fair value (between the 30th and 70th percentiles). Thanks to the rush of post-election euphoria, that's no longer the case, with median P/E shooting up three points in six weeks to 26.1x.

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Wednesday's action erased two divergences cited in the latest Green Book, with both the NYSE Advance/Decline Line and the Dow Jones Transports moving to new bull market highs. The latter index had failed to do so for almost two years.

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