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

Last December, we marveled at the disconnect between the (surging) S&P 500 and the (sagging) Boom/Bust Indicator. Just six months later, we can only scratch our heads at what the hell we were complaining about.

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Long-term sentiment indicators have carved out a four-month pattern similar to what we’ve observed in Large Cap valuation measures. That’s no surprise; valuation is a sentiment measure.

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Imagine our surprise when the bullish stock market narrative is suddenly all about money. Cynically, though, that might be because money supply and the unemployment rate are the only economic data series staging upside breakouts, and the latter doesn’t lend itself to a good narrative.

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Late last year, we presented data showing that profitability has become more elusive for small companies despite a record-long period of economic expansion. We discussed the potential causes underlying this phenomenon.

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It’s a down year for stocks, yet John Bogle must still be chuckling. A full-employment economy that had propped up one of the two most overvalued stock markets in U.S. history just suffered a cataclysmic “sudden stop.” Yet Bogle’s buy-and-hold disciplines have so far dodged the bear.

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The optimists are betting that the longest bull market in history—one that carried valuations above levels seen at all but one of preceding cyclical peaks—has been followed by the shortest bear in history, at 27 days.

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Small Caps lagged during the bounce off the March lows before a late-April spurt briefly pulled them ahead of the S&P 500. Still, considering that Russell 2000 losses were so much steeper than the S&P 500’s (-43% versus -33%), we would have expected something better.

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If many of the typical leaders of a new bull market aren’t leading, what is? Technology, obviously—and the bigger, the better.

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One would think that one of the most explosive market rallies of all time would trip-off all the traditional “breadth thrust” signals, or maybe even invent a few of its own. Sorry, no luck.

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How does one value a stock market in which 12-month forward EPS estimates show their widest dispersion in history? A good start might be with methods we use when forward estimates show practically no dispersion (like three months ago). In either case, we place little weight on such estimates; each revision usually has only marginal impact on our 5-Year Normalized EPS.

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If we assume that valuations will “bottom” at the “richest” levels ever seen at a bear market low, there’s still 32% downside remaining in the median S&P 500 stock.

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Valuations aside, the absence of any sustained market pain over the last ten years argues for challenging times for stocks in the new decade.

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Even casual market observers have begun to marvel at the NASDAQ’s ability to defy the rest of the stock market, and the “U.S. Exceptionalism Index” continues to go parabolic.

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The most valuable gauge we construct from the ISM Manufacturing and ISM Non-Manufacturing reports sunk into bear territory with the April update, signifying a serious margin squeeze has hit the service sector.

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We review the somewhat out-of-character performance of the Utilities sector to try to pinpoint what is influencing results. This article touches on several potential drivers for the sector’s relative strength.

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The bull market of 2009-2020 is no longer. But its spirit—its leadership—has somehow lingered, right through the worst of the decline and during the eleven-day, +19% S&P 500 bounce that followed.

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From now ’til eternity, bullish market pundits will always be able to argue that the global spread of the coronavirus “caused” the current global recession and bear market. While the pandemic was certainly the final catalyst, these pages had been detailing the emerging cracks for over a year.

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We rolled our eyes when Barron’s and others proclaimed a “new bull market” after a three-day, 21% surge off the March low. That incredible bounce is much more likely to be the first of at least a few bear market rallies.

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One of the first cautionary signals to emerge during the market’s two-year topping process was the failure of spreads on low grade corporate bonds to return to their early-2018 cycle “tights,” despite last year’s surge to new stock market highs.

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The bull case for a “brief” pandemic-related recession and powerful recovery is the same as the bull case from two months ago for “no recession or bear market” at all: stimulus (as if that’s exactly what the U.S. economy has lacked for the last 11 years).

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