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The Up/Down ratio reads 1.32—the best quarter-end figure since Q4-21. More firms outside of the mega-cap space seem to be participating in the EPS-growth story for the first time in two-and-a-half years.

Our Risk Aversion Index edged lower but stayed on the “Higher-Risk” signal.

Our assessment shows that “who” wins the White House does not seem to matter that much to most major asset classes. Nevertheless, we believe a strong dose of caution against political and/or geopolitical risk is prudent.

Market reaction to the latest flood of monetary and fiscal stimuli has been spectacular. While conviction about Beijing’s attempts to revive its flagging economy has been severely lacking, this time we should believe it. It’s certainly the right medicine China needs and the spark of confidence these actions will ignite should not be underestimated.

An economic downtown with little or no forewarning from stock prices is possible, but against the odds. Nonetheless, prior to 1950, there were three cases in which stock market gains failed to inoculate the economy against a recession. Today’s the stock market capitalization has become so large relative to the economy that stock price movements affect the outlook for growth and inflation more than ever before. 

Why does the median S&P 500 stock now look relatively cheap? It’s solely because the asset to which it’s compared—the cap-weighted S&P 500—is back near valuation levels only seen during full-blown bubbles. As of September 30th, 50 of the 500 index members traded above 10x sales, a figure considered ludicrous only five years ago.

Extreme stimulus announced by China had the desired effect of spiking the country’s stock market. The move did not trigger our EM Allocation Model; however, if the reversal is for real, there is plenty of time. The EM P/E multiple gap is so extreme that one wouldn’t miss out if they prefer to wait for more compelling confirmation than the fireworks of the last couple of weeks.

An excellent forecaster of election outcomes over the last 100 years is the stock market, itself. Measured over the three-month period through election day, if the S&P 500 has a gain, the incumbent party historically prevails; a negative return predicts a loss for the incumbent. This simple method has correctly identified the White House winner in 20 of the past 24 elections.

The recent decline in the Present Situation Index is consistent with a recession already in progress. While we are not in the camp that a recession has begun, the loss of confidence is part of a self-feeding spiral that eventually leads to one.  

Yes, the labor force is growing, but the rate is by no means “rapid.” In fact, its growth rate over the last 12 months of just 0.6% is weaker than any pre-recessionary period since 1956-57. 

Admittedly, for much of this year, we’ve been wrong in our view that the U.S. economic path was pre-recessionary. We’re in good company: In 2024 the LEI Index has produced the worst three quarters in its 65-year history. Historically, there has been a solid relationship between the LEI and subsequent growth in real GDP; this year’s misses are peculiar.

We’ve acknowledged that this rally does not have the bubbly “feel” of either 1999 or 2021, and the absence of giddiness is a reason many pundits think stocks can move much higher. Nonetheless, the stock market is very close to a full-blown bubble: An average of four key valuation metrics places them only one percent away from the historic peak of January 2022—the craziest market top of all time.

The market’s September gain was its fifth in a row and tenth in the last eleven months. If the S&P 500 is up in October, it will mark the first time since 1942 that each of the seasonally “weak” months (May through October) will have seen a gain.  

Factor returns flipped dramatically in the third quarter after posting widely divergent results in the first half of 2024. The opening six months of the year saw Momentum and Growth each gain more than 20%, while the combined factors’ overall median return was a measly +5%.

Small caps turned sour in August 2018, and since then, performance has been nothing less than disastrous. Is the enormous shortfall pervasive across small caps in general, or is it due to a top-heavy market with unusually huge returns from a few huge stocks? The answer may be helpful for those contemplating a contrarian position in this unloved corner of the market.

Read this week's Major Trend.

The S&P 500 shot up 5.5% in Q3 and marked the seventh advance of the last eight quarters. During this two-year period, the index has posted a total return of +66%.

Read this week's Major Trend. 

Read this week's Major Trend. 

Traditionally defensive themes such as Staples and Utilities have outperformed over the summer months, reminding investors of the benefit of not going all-in on the AI growth theme. Quality is one of the most robust defensive factors, but even so has managed to outperform during the bull market run that began in October 2022.  While some Quality funds are designed to play defense, others seem more inclined to the offensive side of the field. We recommend that investors decide if they are targeting Quality specifically as a defensive exposure or as a core long-term holding to ensure they select the appropriate fund.