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Read this week's Major Trend. 

The Equal Weighted S&P 500 has underperformed the Cap Weighted structure in 13 of the last 17 months. From May through June, the EW/CW performance gap was 6.3%. Since 1990, we’ve seen two consecutive months of worse EW relative performance just twice—both were in the throws of vicious bear markets: October-November 2008 (-6.6%), and February-March 2020 (-6.4%).

Our mega-cap proxy—Royal Blue Growth—was (once again) the only game in town for Q2. That size tier outperformed the others by 8-9% and was the lone subset on the positive side of the performance ledger.

It took an ugly relative performance month (S&P 500 +4%, S&P 600 -2%) to break out of the 21%-27% twelve-month range for Small Cap discounts. The Small Cap value trap that began five years ago shows no signs of letting up.

The Up/Down ratio reads 1.20—the best result for the last month of a quarterly reporting period since Q4-21. This figure towers over the last two years’ readings like Danny DeVito towers over a class of second graders. Tacking on other quarterly observations and you quickly see how “short” the contemporary Up/Down ratio has been.

The first U.S. presidential debate brought the election risk front and center.

Value’s migration behavior was the key to its failure between 2010-2020—its pattern got progressively worse, culminating in a Value trap during 2017-2020. We believe macro tailwinds and positive surprises are both needed, and, while the setup on the macro front, post-2020, has become quite favorable, in order to breathe more life into Value we need to see the upswing in earnings surprises continue.

In retrospect, a good hint that the first half of 2024 might be a special one for the stock market came on the year’s first day of trading, when the percentage of S&P 500 stocks trading above their 50-day moving averages broke above 90%.

The last five weeks in the stock market have had a “Groundhog Day” feel to them: S&P 500 and NASDAQ 100 up sharply on most days, while the DJIA and Russell 2000 trade flat- to down.

The main reason the “average stock” looks relatively cheap is that the cap-weighted S&P 500 has moved to within 2% of the valuation levels reached at its January 2022 bull market top. Still, three of the four measures of the median S&P 500 stock shown here reside in their tenth deciles.

The YTD gap between the cap-weighted and equal-weighted S&P 500 is a shocking 13%. The silver lining of this massive underperformance is that valuations for most of the index’s constituents now look pretty cheap relative to the S&P 500 itself.

Question: Would you characterize the current U.S. stock market as a bubble?

We do think that a September rate cut—the first of many—now looks likely. But the aftermath of any cut might not be what traders are conditioned to expect. Subsequent to the tightening cycles of 1999-2000 and 2006-2007, the initial rate cuts provided timely excuses to dump stocks—as did most of the cuts that followed.

The S&P 500 is up about 56% in the last 21 months, a figure that’s right in line with its average gain at the same point of all major market advances since 1957. However, this move should be considered substantially better than average when we consider the “late-cycle” nature of the monetary and economic backdrop that’s accompanied it.

Despite monthly statistical quirks, the clear trend in the labor market is one of weakening. Somehow, though, the “tight labor market” narrative promulgated by economic bulls has yet to die off, with just enough oddball evidence surfacing every few weeks to keep it alive. Contrary to the storyline, certain employment measures have followed paths that are weaker than the lead-up to any previous recession.

We don’t contend that the 3.3% YoY gain in CPI totally understates today’s inflation rate; however, small measurement errors add up over time. Only a government economist could believe that the CPI’s 21% increase since January 2020 captures the true rise in Americans’ cost of living.

The wealth effect created by rising stock prices puts the Fed in a bind. The market recovery since late 2022 has stimulated receipts from capital gains taxes, and should continue to do so for the next several months. But this recovery in tax receipts has still left the 12-month federal deficit at an astounding 6.1% of GDP, about 2 1/2 points wider than at its best level of the recovery in mid-2022.

Is the U.S. stock market a bubble? As we answer elsewhere in this section, no. It is only priced like one.

This month’s “Refresh” is the quarterly update on our factor regime analysis. Factors, or investment styles, have historically performed quite differently under various economic and market conditions, and we have mapped these relationships to identify which factors are best positioned for today’s environment. Second quarter factor returns continued the hot-and-cold pattern that has defined equity markets for some time now.

The unbounded nature of large-cap and small-cap styles means that they cover a great deal of territory, while mid-cap stands alone as a bounded style, and such limits significantly influence how a fund is classified. On the other hand, multi-cap is intentionally defined with wide latitude, but shares a style category with mid-caps, despite having little else in common.