Latest Research

Most factor categories reversed performance along with the market in October. During the month, Value had solid results while Growth gave up all of its 2018 gains. Profitability also had a nice bounce-back month. 

After pulling the load for so long, the much loved FAANG stocks proved to be a liability for the index. Coming into the month, the FAANGs accounted for 12.8% of S&P 500 market cap. When October was through, the five firms made up 20% of the losses, wiping out a collective $330 billion (one XOM) in market cap.

The month of October made this vignette a lot more interesting.

Large Cap Value stocks were the best place to weather last month’s storm as Royal Blue Value lost “only” -6.1%. Small Cap Growth plunged 12.6%.

The recent plunge in our Ratio of Ratios is due to significant underperformance in Small Caps. Since the end of August: Russell 2000 -13%; S&P 500 -6%.

Our first Up/Down Ratio of Q3 stands at 2.74—the third highest “one-month” figure of the past 34 years. However, it’s by far the lowest “one-month” figure of the past three quarters.

For the fifth consecutive month, the top-three rated sectors are Health Care, Consumer Discretionary, and Info Tech. The newly launched Communication Services sector (which replaces Telecom Services) debuts with a strong ranking in fourth place. Rounding out the bottom end of the rankings are Utilities, Materials, and Real Estate.

Although Discretionary stocks broadly underperformed during October’s market decline, prominent amongst the very top industry group performers was a rather unexpected genre of industries—brick & mortar retail. Not only did this cohort hold up during October’s tumult, but many of the underlying stocks have been posting strong returns all year.

A significant rise in real yields would make us turn cautious toward all spread products.

We have been leaning toward the defensive side despite the recent signal whipsaws and we continue to recommend caution in light of the increase in volatility across all asset classes.

The 40 bps jump in the 10-year yield, a 2-standard-deviation event, occurred within a five-week win-dow. Interestingly, historical data doesn’t suggest a continued increase in the near term.

During the stock market’s protracted retracement of its January/February decline, we speculated a few times that the final outcome might look similar to the bull market tops of 1990, 2000, and 2007.

Momentum category collapsed to receive its first negative reading since early March 2016, while the Attitudinal category flipped to net positive ground for the first time in more than 2-1/2 years.

Our tactical accounts remain positioned very defensively, and we have yet to see the sort of capitulative market action that would lead us to lift any existing equity hedges.

We believe the catalyst for market weakness has been the decline in accommodation by the Fed and other central banks. While there has been a pullback in some of the leading inflation measures since June, the rate of global tightening has actually accelerated.

Momentum is one of the most successful investment styles over the long run, and does particularly well in the later stages of a bull market during the run-up to an eventual peak.

The abrupt decline in the Momentum work reflects deterioration in most trend models, along with bearish flips in the Chart Scores for the Russell 2000, NYSE Financials, KBW Bank Index, and Securities Broker/Dealer Index (XBD). The NYSE Daily Advance/Decline Line provided only limited warning of the impending weakness.

Portfolio managers who tilt toward Value or Growth stocks have long known that each style carries with it an inherent bias toward some sectors and away from others. Our recent piece, Value Style’s 100-Year Flood, highlighted the significant role that sector weights (overweight Financials and Energy, underweight Technology) played in Value’s decade-long stretch of underperformance.

We think the odds are better than even that the September 20th S&P 500 high will stand as the stock market high for 2018, and perhaps also as the high for a historic event begun back in 2009. We’re well-prepared for that possibility, with the Leuthold Core now positioned today with net equity exposure of just 37%.

The weakening we’ve observed for several weeks in most internal stock market measures began to spread last week to the “externals,” i.e., the major market indexes like the DJIA and S&P 500. Still, we are amazed these indexes remain so close to their cycle highs in light of the extent of subsurface damage reflected in the daily and weekly breadth figures.