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NVDA’s 13% gain contributed just under half of the S&P 500’s +2.2% return for the month. The chipmaker ended July with an 8.1% index weight. Since 1990, there’s never been an 8% month-end weight from a single firm. The weight of NVDA and MSFT is equal to the combined weight of the smallest 332 firms in the S&P 500.

Our Deep Cyclical Group has been on a tear over the past three months, rising 18%. The S&P 500 High Beta Index has done even better, with a 30% gain over that time.

This is the narrowest discount the vignette has registered in three-and-a-half years, although we’re not far off the 25% average discount for the period.

The Up/Down ratio reads 1.84. This figure is above our 41-year average of 1.82 for the first time since January 2022. That gap of 13 quarters between above average “one-month” readings matches the longest previous streak, which was the lead-up to and during the depths of the Financial Crisis.

With the general backdrop of an easing Fed and expansive fiscal stance, the economy should be doing okay.

Stablecoins are reshaping the financial landscape by combining the stability of the U.S. dollar with the speed and global reach of crypto technology. Backed by short-term Treasuries and used across DeFi, payments, and remittances, they’re becoming digital cash for the internet era. With new U.S. legislation unlocking growth, their impact on banking, global dollar dominance, and Treasury demand is just beginning.

The U.S. dollar has seen some interesting dynamics this year, so we’ve updated our U.S. Dollar Monitor. Currently, the model implies a higher likelihood of dollar strength, or at least a decent rebound over the next few months.

Though it’s ramping up daily, the level of retail participation in the stock market is not quite on par with that observed during the last gasp of the Technology Bubble. Maybe a phase of full-blown euphoria still lies ahead. 

The Cyclical/Defensive Relative Valuation Ratio jumped to yet another record in July, with Cyclicals commanding a valuation premium of 23%. Put differently, investors have a very strong implicit bet that the economic expansion will continue.

The U.S. economy is now mired in what we view as a temporary phase of stagflation. To our way of thinking, the “flation” is, in fact, exacerbating the “stag”—a situation that should soon self-correct in an unpleasant manner.

The LEI’s recession warning in June 2022 was woefully premature and has persisted for so long that it’s now met with eye-rolls. Nonetheless, economic momentum—specifically the lack there of—is why it may be time to take that ominous signal seriously.

The market lacks the traditional bubble feel because investor giddiness is simply not shared by consumers—which is markedly different that of the late 1990s. There is a huge disparity between confidence about stock price gains vs. expectations for consumers’ near-term economic well being—a gap that did not exist during the Tech Bubble.

Given the prevailing conditions at the beginning of this bull market, the S&P 500 has been an overachiever, though the same can’t be said of the broader market. This translates to an opportunity for active equity managers that nearly matches conditions in Y2K—and at a time when the active manager pool is now dwindling.

Nine of ten components in the LEI are signaling there’s trouble dead ahead. Yet, the 12-month momentum of the sole outlier, the S&P 500, still looks sufficient to forestall an imminent slide into recession. Additionally, the index’s short-term strength also supports the argument that SPX is “too strong.”

As a testament to the severity of the 2000-2002 Tech Wreck, performance of recent years’ laggards, like the Equal-Weighted S&P 500, S&P MidCap 400, and S&P SmallCap 600 are still well ahead of large-cap Growth on a 25-year basis.

The stock market looks (superficially?) better in late summer than it did at its “old” high on February 19th. It’s far from cheap, but is no more expensive than in February, and technically speaking, the S&P 500’s July’s highs were broader than those of February. That said, there’s divergent action among secondary measures that are troubling.

Whether or not the label "bubble" fits this market, U.S. economic risks continue to rise, while Mega Cap valuations home-in on levels seen only in 1999 and early 2000.

Our hypothesis is that true active managers are more diversified than their style box indices and when one style has a prodigious quarter, active portfolios of that variety will surely lag. Q2’s low success rate for actively-managed growth portfolios is exactly what we expect in such a stylistically lopsided period.

These days, the rate of inflation is a much-discussed topic, as it hovers near the threshold that would allow the Fed to begin cutting interest rates. The CPI’s latest reading of 2.9% is down significantly from pandemic levels, but not quite low enough to claim victory in achieving the Fed’s 2% target.

Read this week's Major Trend.