Latest Research

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.

Read this week's Major Trend.

The S&P 500 scored another win in June, adding 3.5%. The index has now gained 30% since the end of October.

The portfolio continues to maintain exposure to growth, cyclicals, and defensives, with a slight preference for rising interest rates and positive performance. 

Read this week's Major Trend 

After a strong period of market leadership following the internet bubble low of 2002, small cap stocks have been a great disappointment since 2016. Despite favorable economic conditions and a generally bullish market tone since the pandemic, small caps have failed to deliver on the hope of outperformance in a risk-on environment.  As tactical investors interested in owning smaller asset classes when conditions are favorable, we are taking a fresh look at small caps, attempting to diagnose what has been ailing this market segment and what might be coming next.

Read this week's MTI

Read this week's Major Trend. 

The Major Trend Index remains at High Neutral, after improving one notch from Neutral in mid-May.  The primary driver for the upgrade, the Technical category, is also the main threat to the MTI maintaining its slightly positive stance.

Read this week's Major Trend. 

Elsewhere in this section, we bemoaned Small Cap long-term underperformance, which has trailed the S&P 500 by 5% per annum since the end of the last Small Cap leadership cycle (early 2011). Lately, we’ve noticed that academic discussion of the “Small Cap Return Premium” has largely disappeared—a potentially encouraging sign for contrarians.

Monetary tightening has yet to send the economy into recession, although we still believe that’s likely to change before year-end. But the lack of monetary support helps explain market-leadership trends that have been the inverse of what one would normally expect from an early-stage bull.

While the NASDAQ rebounded sharply from its mini-setback in April, daily 52-week new lows in the index eclipsed new highs several days in late May and early June. It’s rare to see that happen on days when the NASDAQ 100 itself closes at a 52-week high, yet that’s exactly what transpired on May 24th.

Our studies of the S&P 500’s co-movements with the A/D Line and Financials sector confirmed our belief that these bellwethers are valuable ones. It’s certainly the type of result we like to publish. (“Hey look, our gut instincts were correct all along.”)

While “divergences” between two market indexes are readily apparent on a chart, they are not so easily quantified. And evaluating whether such disparate action has any forecasting ability is even more difficult.

The stock market picture at the June 5th SPX high was not as cohesive as that of late March. Just two of our eight bellwethers—Dow Jones Transports and Dow Jones Utilities—had failed to confirm the new market high at the end of March. At the high on June 5th, however, the list of laggards expanded to include the Russell 2000, S&P 500 Cyclical Sector Composite, and the S&P 500 Equal Weighted Index.

Over the years, some of the best thematic plays in our Select Industries equity portfolio have been those that—at least initially—seemed to make the least “economic sense.” For example, who would have bet on Homebuilding stocks to shrug off a four-point spike in the 30-year mortgage rate over the last two-and-a-half years? Not many.