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

We find it remarkable that the five-year trailing real return on Treasurys has dropped to zero without investors having (yet) suffered any real pain.

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We recognize it’s uncultured to discuss federal debt and deficits during a multi-year bull market, but in economics and investing it frequently pays to worry when others don’t, and to stop worrying when others do.

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Last month we assessed the effectiveness of using valuation factors as a basis for country allocation. Using 20 years of data, our results showed that they work quite well specifically for Emerging Market (EM) country-rotation, however, the same valuation-based strategy does not appear to be value-added for Developed Market (DM) allocation/rotation.

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Through early August, the S&P 500 had matched last year’s total return gain of 12%, while futures on that index have gained more than 20% from their after-hours lows made on election night.

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The S&P 500 and DJIA were up 10-11% on the year through early August—solid, but not quite the “melt-up” scenario we’d envisioned earlier this year…We think S&P 500 2,550-2,600 will be achieved, but not until year-end…

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Last month we spent a full page explaining why the underperformance of the S&P 500 High Beta Index was not a bearish portent for stocks (Chart 1).

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Does the last few weeks’ stumble in the Dow Jones Transportation Average foretell anything sinister? Not on the face of it.

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Is stock market volatility so low that it’s a bad thing? For volatility sellers, the answer is an unequivocal yes. But for stock market investors, the answer isn’t so clear.

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The stock market has a tendency to lay an egg during years ending in “7,” specifically during the late summer and fall… ‘Year Seven’ also tends to see a massive volatility spike…

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Last year’s “low-risk” BUY signals from our Very Long Term (VLT) Momentum algorithm have proven very profitable, but enough time has elapsed that they should no longer be considered an important bullish factor.

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Given our money management mantra of “making it and keeping it,” we can’t imagine we’ll ever get comfortable with crypto-currencies.

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The great mystery behind the trade-weighted dollar’s nearly-10% YTD decline is that it’s failed to fuel further gains (or any gains) in commodity prices in 2017.

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Many studies have evaluated momentum factors for over/underweighting country exposures within a portfolio, but few have considered valuation factors for country rotation within the Emerging Market space.

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We are pleased to announce that James Paulsen, PhD, a leading investment strategist whose commentary is widely followed on Wall Street and across the country, has joined The Leuthold Group as our Chief Investment Strategist.

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Two years ago, we played the role of the bull market’s mortician, preparing it for burial after a six-year run that had taken it to valuations on par with those at the 2007 top.

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While the S&P 500 remains below our 2,550-2,600 summer target zone, we can’t help but be impressed by the quality of its recent highs—including confirmations by all of the “Red Flag” bellwethers except the S&P 500 Financials (which barely missed a new high on July 7th).

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We’ve generally spoken of the market’s “broad participation” as a good thing. And from a purely technical point of view, it is.

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Low Volatility stocks have been the darlings of this bull market, and Low Vol is now considered a long-term “alpha generator” alongside such Hall of Fame quant factors as Low P/E and Price Momentum.

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If one manipulates the data correctly, one can make the size effect—whereby Small Caps earn excess returns over the long pull—look instead like a beta effect.

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After laying an egg in 2016, momentum-based stock selection strategies have acquitted themselves better through the year’s first half.

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