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OK, OK–maybe Apple isn’t so “Itsy Bitsy.” However, when viewed through the lens of our “4% Club” vignette, the stock has certainly followed the Sisyphean pattern of that popular nursery rhyme (and accompanying fingerplay, of course) over the last seven-plus years.

Read this week's Major Trend. 

OK, OK–maybe Apple isn’t so “Itsy Bitsy.” However, when viewed through the lens of our “4% Club” vignette, the stock has certainly followed the Sisyphean pattern of that popular nursery rhyme (and accompanying fingerplay, of course) over the last seven-plus years.

The dividend discount model is a popular, conventional method of valuing a stock using the present value of its future dividend payments. The two major components comprising this valuation approach are earnings (from which dividends are paid) and the bond yield (or discount rate used to determine the present value of the future dividend stream).

The June 2016 Brexit referendum kicked off a tortured process for the United Kingdom to leave the European Union. However, the wheels of international politics turn slowly, and the original date of formal withdrawal was set as March 29, 2019. As the calendar rolled into 2019 it became obvious that the March closing date was not going to be met, and concerns mounted over delays, procedures, deal-or-no-deal, a new prime minister, and even calls for another vote.

Read this week's Major Trend. 

This year’s upswing in money-supply growth has been one of many factors that’s prevented our economic work from triggering a recession warning. Following a two-year decline, year-over-year growth in M2 bottomed near 3% late in 2018 and has trended upward all year, reaching 6.7% in the latest week (Chart 1).

Read this week's Major Trend. 

Going forward, high Momentum will depend on an unlikely combination of Information Technology and low Volatility, while low Momentum continues to have outsized exposure to Energy and Materials. Recent weakness only moderately tempered valuations, which could be a headwind.

Our favorite Cupertino-based tech firm is on a roll. Over the past two months, Apple has gained 19.1% and added $160 billion to its market valuation (that’s one Citigroup or two Caterpillars). This advance has propelled Apple back into the exalted 4% club (market cap within S&P 500), joining Microsoft with a similar $1.1 trillion valuation.

After ten quarters of underperformance, the sun is shining on Large Cap Value. Since the end of August: Royal Blue Growth -0.4%; Royal Blue Value +9.2%.

A second month of modest outperformance by the Small Caps has helped lift our Ratio of Ratios from the extreme 23% discount registered at the end of August. If recession fears remain muted, we’d expect this vignette to continue to march toward its long-term normalcy.

Our first month of Q3 2019 earnings has our Up/Down Ratio reading at 1.37. This well below average figure is easily the lowest “one-month” number of our 2019 YOY earnings hangover.

We are turning favorable again toward credit, especially emerging market sovereign debt.

We put together an Inflation Scorecard that monitors two critical sets of inflation drivers: demand pull and cost push. The qualitatively-adjusted score is much closer to a neutral reading than the mechanical composite (which suggested quite a bit more disinflationary headwind).

Emerging Market stocks have been swept up in the last month’s rally in all things cyclical and high beta. Nonetheless, the MSCI Emerging Markets Index is still down marginally from its level coinciding with its April 30th VLT BUY signal.

In our minds, the big story is not the nominal new highs in the blue chips, but rather the rapid changes now occurring on both an “intra-market” and “inter-market” basis. In the case of the latter, we have an important new signal from a simple correlation model we developed earlier this year.

The short-term path for equities “looks” clearer than at any point in 2019, with economic data having stabilized a bit in the last few weeks, the Fed having cut rates again and resumed balance sheet purchases, and some type of trade deal finally looking more tangible than a 2:00 a.m. Tweet.

The bull market took out another old record last month when the S&P 500 topped the cumulative total return of the 1949-56 upswing. The total return since March 9, 2009, is now 468%. Since the highs of March 2000, the S&P 500 cumulative total return is actually a few basis points behind U.S. 10-year Treasury bonds.

At October’s close, a long-term BUY signal was triggered on the Russell 2000. The fact that some market segments are triggering “oversold BUYS” when blue chips are at record highs speaks volumes about the internal disparities that have developed during the last few years. The Russell BUY signal is not inconsistent with our belief that the action since the January 2018 peak remains part of a lengthy cyclical topping process.