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The S&P 500 turned in its fourth consecutive monthly advance in April, rising 4%.

Emerging Market equities have been modest underperformers during the current rally, but they’ve marshaled enough strength to trigger a new low-risk BUY signal on our VLT Momentum algorithm at the end of April.

We are not in the “melt-up” camp but we’re impressed by the close similarities in leadership with the greatest late-cycle melt-up of all time, which took place from late 1998 through March 2000.

Crude oil and the U.S. Dollar Index accomplished a relatively rare feat by moving to simultaneous six-month highs earlier this week (Chart 1).

Although we are not in the “melt-up” camp, we’d concede that stock market leadership is exactly what we’d expect if we were in that camp: Domestic over Foreign, Large over Small, and Growth over Value. Price action continues to remind us of the powerful rebound off the fall 1998 lows. Current earnings and liquidity trends, however, are not nearly as supportive as they were during that historic market move.

The 1999 leadership parallels we discussed in the latest Green Book remain intact—U.S. over foreign, Growth over Value, and Large over Small. Small Caps have given up most of the “beta bounce” enjoyed in the first two months off the December low, with one Small Cap measure—the Russell Microcap Index (the bottom 1000 of the Russell 2000)—undercutting last year’s relative strength low and those of 2011 and 2016.

The Boom/Bust Indicator, a weekly ratio of industrial-commodity prices to initial unemployment claims, has had a near-vertical rebound to old highs in the last several weeks. This index usually peaks out many months in advance of a business cycle peak (although not in 2007, when it provided no warning of the pain to come).

Corporate profits were outstanding last year, but even the benefit of a 40% cut in the top income-tax rate wasn’t enough to lift the net profit margin back to the all-time high of 10.6% established in early 2012. Still, the latest 10.0% figure is more than a percentage point above the 2007 cycle high and about two points better than any other cycle high.

In the first three months of 2019, the S&P 500 surged 13%, its best quarterly performance in nearly ten years. This is strikingly similar to the rally of 1999—which may have been the most speculative in U.S. history. 

If the market’s manic rebound succeeds in assuaging consumers’ recently shaken confidence, we can certainly see a scenario in which the economy and corporate profits firm up after their current slowdown… although that is not our bet.

· From a factor performance standpoint, 2019 is looking a lot like 2018, with expensive Momentum names outperforming everything else and Value struggling.

A steep nosedive followed by a roaring recovery. The index shrugged off an inverted yield curve in Q1. For now, the market prefers the narrative of the remedial powers of lower interest rates over the possibility of a slowing economy. 

What else is new, right? Growth has been a rocket ship to Value’s tricycle the past nine quarters. The valuation work has shown Growth stocks overvalued relative to Value for some time, but that doesn’t seem to be stopping the performance trend.

This is the largest relative Small Cap/Large Cap discount we’ve tracked since June of 2003. After racking up some very good earnings, the absolute trailing P/E ratios for both market cap segments have come down significantly.

After four tremendous quarters of growth, Q4 2018’s final Up/Down Ratio reads 1.46—below our long- term average of 1.51. We expect even lower results in the quarters to come.

With most major central banks now turning dovish, our view on credit is more constructive. We still view pull-backs in EM assets as better entry points. Investment grade corporate bonds are also attractive, and we maintain a neutral view on Munis and High Yield bonds.

The Fed not only signaled no rate hike for the rest of 2019, but also committed to unwinding its balance-sheet reduction program, starting in May and ending in September. The market took it one step further and priced in a rate cut in the second half of 2019.

In May 2015, we warned about rich valuations for small cap Biotech stocks and looked at various ways to evaluate those companies, as the majority have no approved drugs on the market, thus no revenue; therefore, valuing these companies using the conventional methodology is problematic.

For much of this decade, we had an allocation preference for Large Caps over Small Caps because of the considerable P/E premium commanded by the latter.

The tale of two markets has existed for years, but now it’s getting ridiculous.