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Information Technology has led the market higher this year, gaining 37% to rank as the leader among all eleven sectors as of November 8th. However, there is a return anomaly within this sector that catches our attention. The S&P 500’s Semiconductor sub-industry has risen 96% while the Semiconductor Equipment sub-industry is up just 9%, miles behind the semiconductor group. The divergence seen in Chart 1 seems hard to fathom given the fundamentally interconnected nature of these two business models.

Read this week's MTI update.

Read this week's Major Trend.

The most notable gainer in last week’s Trump Bump 2.0 was the Russell 2000. That index’s weekly surge of +8.6% was its best since the wild pandemic gyrations of April 2020. Yet, this latest Trump-associated upswing fell short of the Russell 2000’s election-week return of +10.2% in 2016 when Trump was the clear underdog.

October brought mixed results across strategies. Core fell 1.6% as equities and fixed income declined, while Select Industries dropped 1.9%, hurt by earnings misses in sectors like Health Care and Semiconductors. AdvantHedge gained 1.2%, capitalizing on companies with negative earnings surprises.

The portfolio is positioned with a slightly pro-cyclical stance, but also owns defensive and growth-oriented groups that are deemed attractive by the Group Selection (GS) Scores.

In October, the Mag 7’s combined contribution to the S&P 500 was 0%—neither adding to, nor detracting from the index’s -1% return. Since the end of June, a market-weighted basket of those seven names has produced +1.8%, while the cap-weighted S&P 500 is up 4.9%.

At 43.8x, the median P/E ratio for our Royal Blue Growth segment is still 64% higher than its 1982-to-date average multiple of 26.7x. On the other hand, it is only 14% above its five-year average (38.4x).

Our Ratio of Ratios currently sits right at the moving average over the past one-, two-, and three-years. This vignette has, and continues to be frustratingly consistent in both its message and range. It’s also a perfect example that “valuation” is not a timing tool.

The Up/Down ratio reads 1.38—the highest “one-month” figure of the last two years but still below average. More importantly, the ratio has finally broken out of the range that has historically been identified as recessionary.

In October, we published a new election barometer using the DJIA to predict the winner. It failed! Interestingly, the last time this model did not correctly pick the winner was also a year in which the sitting president, who was eligible to run, declined to do so—in 1968.

We’d expect monthly jobs numbers to confirm a recession, not forecast one. This cycle, though, employment reports have been warning of a downturn for 2½ years. It would be easy to call them misfires, but red flags keep coming. If a soft landing was in store, the jobs numbers should have improved by now. 

For those who believe long-term valuation relationships are still relevant, we recommend moving down the capitalization spectrum. Small Caps’ 5-year estimated forward return is near +11%, while Mid Caps’ is around +8%. The same valuation tool forecasts a mere +3% for Large Caps.

November 10th will mark the 2nd anniversary of the initial inversion of the Near Term Forward Spread, the curve most correlated with subsequent growth in real GDP. If a recession fails to materialize, it would be the first “false positive” since 1966.

The market keeps brushing aside the increase in geopolitical risks and we continue to believe the risk is underpriced. On the other hand, the Trump win and favorable seasonality should support risky assets at least in the near term.

Given the beginning of an easing cycle in September and the Trump Trade in October, the lack of steepening in the yield curve is intriguing. While tighter financial conditions are likely a challenge to the steepening move, policy regimes and the term premium are favorable toward further curve steepening.

Based on leading economic indicators, a case could be made for the Fed to cut rates again. Stocks are telling another story: Based on market momentum and valuation, an impending rate cut might be the least justified one in modern history.

Last year ended with an extremely rare nine-week winning streak, and the S&P 500 is still charting extraordinary upside momentum more than 10 months later. Historically, after a one-year stock surge of this magnitude (>35%), the U.S. has never declined into recession over the next 12 months.

The cyclical backdrop for stocks looks more precarious than that surrounding Donald Trump’s stunning victory in 2016. That said, there’s no real Technical obstacle to a short-term continuation of the 2024 “Trump Trade.” 

The markets and the economy in Trump’s first term benefited from both the shock of his election and “initial” conditions. Among the more attractive backdrops of 2016 were a deficit of “just” 3% of GDP, inflation at 2.1%, and restrained investor confidence.