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It’s been popular to argue that U.S. government bonds are a bubble while U.S. equities are not. But even if we agreed, the potential cyclical total return losses in Treasury bonds are a fraction of those likely to occur in an equity bear market.

While service industries have minimal direct exposure to trade disputes, they will begin to suffer from knock-on effects if the tensions continue to escalate.

We believe the U.S. free-trade initiatives of the last 25 years have been wildly bullish for the stock market.

It’s difficult to knock a stock market in which Small Caps and major breadth measures are making frequent new highs, however, there are performance anomalies that suggest liquidity is no longer sufficient to “float all boats.” Recent underperformance of the Equal Weighted S&P 500 is a case in point, at the same time, the current dichotomy in market breadth pales in comparison to the 1999-2000 episode.

How do today’s cyclical conditions stack up with those accompanying other stock market declines? 

We’ve been reticent to draw links between the current bull and that of the late 1990s; we felt the last phase of the earlier episode was so extraordinary it was unlikely we’d see anything similar again in our lifetimes. But statistical parallels are on the rise, including the attempt by the S&P 500 to recoup its 2018 correction losses.

A few clients pointed out that the longest-ever recovery from an intermediate correction (Apr. 1994–Feb. 1995) became the base from which the S&P 500 would eventually triple over the next five years. We’re not equipped to address that possibility in an objective fashion, so we’ll let you be the judge.

The S&P 500 is on the verge of reversing its early-2018 losses and, if achieved, it would initially be accompanied by six “Red Flags”—which are based on key market indexes failing to record new highs in the 21 trading days preceding a new S&P 500 high. The last time the tally reached “six” was in May 2015—occurring at the final high before an S&P 500 loss of nearly 15% over the ensuing nine months.

To summarize (and oversimplify), here are some of the frequent client responses to our prevailing “cautiously bearish” stance:

Whatever one’s philosophical leaning, the practice of adjusting earnings has left investors with too many watches to consult. We look deeper into the topic of adjusted earnings to gauge the slippage between commonly-referenced earnings clocks.

The Leuthold Core and Global Portfolios both lagged their 100% equity benchmarks last month in a strong month for stocks.

Read this week's Major Trend.

The S&P 500 got within spitting distance of its January high (price) by gaining 3.6% in July.

Following a seven-month stint as the highest-rated sector overall, Consumer Discretionary relinquished the throne to Health Care.

Movies & Entertainment & Broadcasting’s Group Selection (GS) Score has been steadily improving of late; it rose to High Neutral in March and pushed up to Attractive two months ago. Currently a member of the Consumer Discretionary sector, this is a less-correlated option to the many retail industries also currently ranking strongly among the Discretionary components.

Value finally performed well during July, turning in its best month of 2018 on a spread basis. While the factor category is still deep in negative territory for the year, almost 85% of its underperformance is coming from the worst quintile outperforming the universe; meaning Value has mostly struggled because of expensive stocks outperforming, not cheap stocks lagging.

The index, still a bit shy of its all-time closing high, did set a new total return high on July 25th—six months after the trouble began in January. The FAANG stocks had some divergent components in July  but still provided a big boost for the S&P 500.

Our Royal Blue Low P/E Tier finally outperformed the High P/E Tier for the first time since November. YTD, Value stocks still lag Growth in all market cap tiers.

The recent run up in Small Cap stocks, coupled with a less rosy (though still fantastic) trailing earnings profile, has given us the largest Small Cap premium we’ve seen in three years.

As we digest the first round of Q2 earnings reports, our Up/Down Ratio sports another outrageous reading of 3.67. If you need a chart to make a case for peak earnings growth, here you go.