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The U.S. yield curve inversion has lasted long enough that even a few economic optimists now concede it will ultimately prove significant.

The yield curve’s ten-month moving average inverted in September, hence the yield curve inversion can no longer be dismissed as transitory; the Boom/Bust Indicator remains below its descending 10-month moving average, confirming economic weakness predicted by the yield curve; and, the “Present Situation” component of September’s Consumer Confidence survey slipped below its 10-month moving average for the third time in 2019.

Over the last year of market swings, we’ve tracked the horrific performance of what had previously been a solid long-term system for timing the S&P 500, the 10-month moving average crossover system. In the last 12 months, this generally low-risk approach has generated a total return loss of 13.74%.

Despite an economy operating “beyond” full employment for the past seven quarters, more than one-fourth of the companies in the Leuthold 3000 universe are losing money on a 12-month trailing basis. The Fed has subsidized what’s truly become irresponsible behavior.

Small Caps came tantalizingly close to activating a major VLT BUY signal in September, with the Russell 2000 closing less than a half percent below the trigger level. A new bull signal from this indicator wouldn’t “fit” into our market and economic narrative, but we won’t sweep it under the rug if it occurs.

On October 3rd, the S&P 500 briefly traded below the high it made in January 2018 before reversing to close the day higher.

Value, High Beta, and Small Cap stocks all captured a few rays of sunlight for the first time in a long while. It’s too early to tell if last month’s leadership U-turns can be sustained, but major market trends are the most susceptible to reverse during cyclical bear markets.

For many months, we’ve argued that global stocks have been tracing out a major cyclical top. But the global stock market “tape” has narrowed so much that it’s really only the U.S. blue chips that are left to do the tracing.

Despite higher volatility, market performance is still up in the high double-digits YTD. Interestingly, as our index of High Quality Stocks versus Low Quality Stocks shows, High Quality is prevailing in terms of relative performance.

The S&P 500 erased the modest losses of August and ended September +1.7%.

Bond and money-market fund subsets are seeing strong net cash inflows year-to-date, having captured $581 billion thus far (versus $176 billion at this time last year).

Read this week's Major Trend.

In a reversal from August when the portfolios performed well in a down month, the Leuthold Core Portfolio and the Leuthold Global Portfolio both lagged their respective 100% equity benchmarks in September.  

Something remarkable occurred on September 9th. Momentum crashed and Value soared on that Monday, in what one analyst described as a five standard deviation event. Do we have a clear understanding of what really happened? This research project takes a multi-faceted look at what transpired during one unusual week in September.

Recent data has certainly increased the risk of an imminent recession, but more confirmation is needed to move us into the recession camp.

September was an emotionally exhausting month for investors as reversals in major themes produced wide-ranging repercussions. Movements in various markets have been increasingly tied to bonds—the market that is most sensitive to recession outlook.

The weather vane on top of the S&P 500 swung violently in September. A sudden preference for Value stocks (not just low volatility) over Growth was intertwined with a dramatic crash in the Momentum factor. Similarly, the Equal Weighted Average, which had been steadily losing ground to the Cap Weighted measure, snapped back and almost pulled even in YTD performance.

Our Royal Blue Value segment surged in September and ended ten consecutive quarters of underperformance to Royal Blue Growth. Since the start of 2017: Royal Blue Growth +64.9%; Small Cap Value +5.9%.

Modest outperformance from the Small Caps helped pull our Ratio of Ratios out of its recent nosedive. Still, this vignette sits at 18-year lows, and there’s no guarantee that the relative valuation plunge in Small Caps won’t resume.

As we roll-in the final month of Q2 earnings, our Up/Down Ratio reads only 1.11. This quarter’s figure was looking back to the best period of the 2018 earnings bonanza (2.06 ratio in Q218).