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In the aftermath of the Great Financial Crisis, we reminded investors that it would be historically unusual for the thematic leaders of a bull market to repeat as the winners of the subsequent bull.

We are troubled that the bullish optimism has spilled over into the 2020 estimates for S&P 500 earnings. Zero growth in 2020 is probably not a bad guess for NIPA figures, but S&P numbers don’t always follow suit.

Following the deflationary bust of 2007-2009, the last decade was expected to be one of deleveraging. Only U.S. consumers appeared to get that memo, however.

Economists argue the best thing the stock market has going for it is the continuation of the U.S. economic expansion. Maybe.

Last year the Federal Reserve dumped historic stimulus onto a full-employment economy and an already richly-valued stock market. The stock market obviously loved it.

After last year’s 30% S&P 500 gain, many strategists are now suggesting that the real melt-up still lies ahead. We think a melt-up has already occurred, and the bulk of it has been booked.

In the spirit of good holiday cheer, we made a partial concession to the True Believers with a December “Chart of the Week” in which we narrowed our stock market valuation analysis to the historically elevated levels of last 30 years.

With 2020 representing The Leuthold Group’s 40th year of publishing Perception For The Professional, we perused the first few Green Books for relevant nuggets from 1981, but the backdrop could not have been more different. Therefore, we instead turned the clock back 20 years, thinking it might yield insights more resonant with today’s environment.

It was during the very first days of the great 2019 market rally that we noted its similarities to the bubbliest of all the bubble years—1999. Wow. We had it in our hands and frittered it away.

Both strategies posted positive performance in December, aided by allocations to Emerging Markets and Gold.

Read this week's Major Trend.

In response to client queries, we extended our research of small cap equities from last month. One angle we pursued was the relationship between small caps, quality, and business risk. The full report will be released mid-month.

During a decade characterized by surging equity markets and the proliferation of smart beta products, the best performing quantitative factor was Sales Stability, which isn’t usually associated with either of those trends.

The S&P 500 plowed through the dour narratives of 2019 and came within spitting distance of its best yearly performance since the Tech Bubble. Microsoft and Apple, a combined 9.1% of the index’s market cap, punched above their enormous weights and contributed +15% of 2019’s total return.

Those institutionally-loved Large Cap stocks—our Royal Blue Growth and Value indexes—were both up 35% in 2019. Another sign of the affection for these stocks is showing up in their deviation from historical valuations.

After a handful of years dancing around the long-term average, our Ratio of Ratios got off the fence in 2019. The current gap in valuation has been driven by performance; 2019 became the third consecutive year of small cap underperformance.

Our Up/Down Ratio reads 1.07—matching the lows of the 2015-16 earnings recession. It’s a bleak picture but, at the very least, firms have maintained their elevated earnings levels of 2019.

While the overall near-term tone is still positive for risky assets, complacency seems widespread too. This tempers our enthusiasm to chase risky assets at this point.

Two words sum up the past decade pretty nicely: U.S. Exceptionalism. The superiority of U.S. assets really comes down to the unique combination of growth (U.S. stocks), yield (U.S. bonds), and relative safety (both U.S. stocks and bonds).

The top-two rated sectors are Financials and Information Technology. Health Care advanced to rank #3, while Communication Services—among the top-three positions since July—was bumped down to #5. Real Estate, which ranked highly in the top three just six months ago, deteriorated to the 9th lowest (out of eleven broad sectors). Materials edged out of the bottom three ranks after nine consecutive months, while Utilities and Energy have now been among the bottom three positions for ten months in a row.