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Last month, the Fed claimed to be in the “last mile” of the road toward 2% inflation. Naturally, their preferred inflation metric is the one currently nearest that goal: the headline CPI, up 2.6% from a year ago. On the contrary, no other inflation measure suggests the mission is almost accomplished. 

Prior to the September 1929 economic downturn, the NYSE Daily Advance/Decline Line had trended sharply lower since early 1928—a sign the market was sniffing out trouble. Today, with the latest highs in the blue chips having been confirmed by the major bellwethers, if a recession materialized in Q1-25, it would likely be the market’s worst failure in history from an economic forecasting perspective.

Statistically (and paradoxically), the consequence of 2024’s huge stock gains has made the market look riskier for long-term investors, but potentially safer for near-term speculators. The larger and broader the upside action, the more challenging the math becomes for the “buy-and-hold” crowd.

AI might have culled some 2024 stock market dynamics, like Growth over Value and Large Cap over Small Cap from a sample of just a few Green Books from the last dozen years. Maybe the software has already become sentient, as its creators fear. 

Big November gains in 2022 and 2023 were clearly kick-off events, while the more speculative backdrop of late 2024 makes the latest November jump look more like a blow-off. Nonetheless, market internals do not reflect a bull that’s ready to top out: The S&P 500 simply has too much companionship at recent highs, including cyclical stocks, financials, and small caps.

The election gave small caps and Financials a boost, but didn’t help value stocks as hoped. Momentum and growth were the main winners within large caps, while no factors worked well among small caps, where more speculative names benefited.

One of the benefits of exchange traded funds is the ability for investors to access complicated or non-traditional strategies in a simple easy-to-trade wrapper. We recently reviewed covered call funds and buffer funds, two option-based positions that are now available through ETFs. This month, we examine another multifaceted security that has recently become easier to obtain thanks to new ETF launches.

The Trump rally was the dominant theme in November, with the U.S. dollar playing a big part. Over the past few weeks, the dollar has appreciated significantly. The latest surge in the DXY index, both in magnitude and velocity, bears a striking resemblance to that which followed Trump’s unexpected win in 2016.

The Trump win, the Fed’s easing cycle, and favorable seasonality should support risky assets. However, expectations are very high and there is little room for disappointment.

Financials had another boost as the sector should thrive under the new administration. Among others, less regulatory oversight and weaker capital controls are apt to improve profitability. Within Info Tech, several industries that contain top AI-beneficiaries have deteriorated; both Semiconductors and Tech Hardware Storage & Peripherals are now rated Unattractive.

Revenues progressed for 75% of S&P 500 companies reporting, but only 60% of those realized gains in operating income. Pretax and net income continued to drop, such that headway in the bottom-line was positive for barely more than half of the firms.

Read this week's Major Trend.

The S&P 500 returned to its winning ways in November, logging its largest monthly advance (+5.7%) in a year; over the last 13 months, the index has a price gain of 44%.  

The index was not the star of the November surge, as a decisive election result and the possibility of another corporate-tax cut via the GOP sweep turbo charged the S&P 600 (+11%), regional banks (KRE +15%), speculative tech (ARKK +26%), and TSLA (+38%). The rotation and Mag 7 weakness led to a surprisingly small win for the Equal Weighted Average over the Cap Weighted measure.

The median P/E ratio for SMID Value stocks is finally back to its 42-year average. This area of the market is still a relative bargain compared to everything else.

Noting the five-percent monthly return gap between the S&P 600 (+11%) and the Equal Weighted S&P 500 (+6%), the expectation was that our Ratio of Ratios would jump out of its recent range. That was not the case, as both of the trailing P/E ratios soared a uniform 9% from October to November.

With the second month of Q3 reporting complete, the ratio of up-earnings to down-earnings was an improvement over the same period last quarter and the highest “two-month” figure in two years. Still, this vignette is hovering in the grey zone of results that aren’t deemed recessionary but are decidedly below average. 

The S&P 500’s estimated bottom-up operating EPS was flat during the second month of Q3 results (Chart 1). With reporting essentially complete, the final Q3 figure will be roughly 1.5% below what was ultimately projected before the quarter’s announcements began. That’s a decent divergence from Q1 and Q2, which came in at 0.7% and 0.3% ahead of their respective “pre-reporting” estimates. The shrinkage in Q3 EPS is more in tune with long-term trends but also marks the end of a nice window of higher results—which is a rarity. Traditional EPS erosion is also evident in the snail trail for the anticipated outcome in Q4 .

Read this week's Major Trend. 

Read this week's Major Trend.