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Small Caps have come alive the past two quarters with the Russell 2000 posting a 21% price increase. Why hasn’t our Ratio of Ratios turned higher (lower SC discount)? This vignette excludes firms with no earnings. Note that the higher-quality S&P 600 has gained 13% since the end of March.

The Up/Down ratio reads 1.51. This is the first time the “three-month” tally has been above the vignette’s 41-year average since Q3-21 (15 quarters ago). Both the level and the momentum of this survey would suggest that an economic recession is not imminent.

With a supportive backdrop of a more accommodative Fed and expansive fiscal stance, markets have grown accustomed to spinning both good and bad news into a positive narrative. Within fixed income, we remain constructive toward higher-quality credit.

The stock rally and associated wealth effect make an imminent recession less likely (data that corroborates our Up/Down Earnings figures). Yet, things can change quickly when so much is riding on the market. Employment is still the biggest threat.

While the U.S. is the center of attention for global investors, Chinese stocks have quietly outperformed. At first glance, it might be tempting to give credit to the surge in Chinese Tech names. In reality, the upswing is much broader and began long before the Alibaba rally.

In contrast to its solid showing through the mega-cap-growth boom of recent years, Quality was a Q3 outlier, trailing SPX by over 5%. Part of the cause is sector allocation, as defensive stocks are badly out of favor. The other force was stock selection—for example, the absence of NVDA.

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Make that “five” consecutive-monthly advances for the S&P 500. From the April 8th low through the end of September, the index has returned an eyepopping +35%.

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Levered ETFs have been on the scene for almost 20 years, but their popularity has exploded during the post-pandemic bull market led by the tech titans that dominate the Artificial Intelligence evolution.  Two characteristics of levered ETFs suggest to us that this asset class could possibly be a useful barometer of investor sentiment.  First, their exaggerated payouts mean that investors will win big when they are right and lose big when they are wrong, implying a high degree of confidence in their outlook.  Second, with their effectiveness measured in days, these instruments are best used to reflect an outlook that will come to pass in a fairly short time.  These two properties are suggestive of a particular mindset, and our study considers this signaling potential from a number of angles.

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Core gained 3.2% with year-to-date returns now at 10.5%, as equities and bonds both advanced. Select Industries rose 4.9%, led by standout strength in Precious Metals (up 90% YTD) and renewed momentum in Auto Parts & Equipment. Grizzly slipped 1.8%, but continued to benefit from short exposure in richly valued industries.

The Trump administration inherited a fully employed economy, but one showing most leading indicators (except the stock market) flashing yellow or red. Nearly eight months into his term, that’s still the case—only more so.

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The bookends of our sector rankings seem to have stabilized after a very rocky start to the year. The only changes in the past few months have been in the middle of the standings, with Health Care, Industrials, Utilities, and Materials oscillating between the #5 and #8 positions.

Trends in place since the April 9th tariff pause took a little break in August. Within the S&P 500: Value beat Growth, the Top-Ten Index lagged, the Momentum Factor Index underperformed, and High Dividend stocks surpassed all for the first time in four months.

With this year’s gains in each month of the typically weak May-August period, the S&P 500 has taunted those who chose to “Sell In May.” This streak bodes well stocks. Albeit a small sample size for comparison, after successive advances May-August, SPX returned +5.3% over the next four months vs. +1.9% all other years.

In the last 100 years, there’s been only a single Republican presidential term that did not see the economy fall into recession. Since 1925, twelve recessions began under Republican administrations, compared to just four under Democrats.