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Despite our reservations about the durability of the expansion, we have to respect what it has overcome: interest-rate hikes of 425 bps; a nearly 2-year runoff in the Fed’s balance sheet (QT); and a 9-month bear market that began before the expansion reached its 2-year milestone. Even consumer “expectations,” which track the market higher in the early phase of a bull market, never rebounded and are lower now than at the fall-2022 market low.

The stock market seems to relish the headlines it believes we’ll be reading three- to six-months from now. At the end of that window, of course, is the presidential election, and it’s impossible for us to see an outcome that doesn’t deepen the partisan chasm.

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Despite a hostile setting for active management in Q1, six of nine style boxes in our ongoing analysis achieved active-fund win rates above 50% (60% on average bested their passive benchmark). The other three each scored just below 50% of active strategies beating passive. This is remarkable given the proven importance of market conditions in the active/passive performance derby.

Two of the most intriguing storylines across global markets in recent years concern Asian economies. The Japanese stock market provided the upside surprise, gaining a remarkable 64% in local currency terms since the end of 2020, making it one of the world’s top performers. On the flipside, South Korea ended April with a cumulative loss over the last three-plus years.

The S&P 500 snapped its five-month winning streak as it shed -4.1% in April.

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Q1 bottom-up S&P 500 operating EPS estimates jumped a little over a dollar to $55.36 after the first month of reporting. This halted the usual “slow-erosion” pattern that shaved $3 off the quarter’s estimate since last summer (Chart 1). The three forward quarters of 2024 also experienced a bump in estimates. S&P 500 full-year EPS projections now sit at $242. That would be a 13% YOY gain from 2023’s results.

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Our March report titled Lifeboat Drill examined the effectiveness of sectors, styles, and factors in protecting investors during major market declines. We found that Consumer Staples are significant and consistent outperformers during times of distress, serving as “comfort food” for investors trying to minimize their financial and emotional distress in a falling market.  Staples are relatively inexpensive today based on market-relative metrics, and today’s level of cheapness has historically corresponded to positive relative returns going forward.

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The Core composite gained 2.7% in March with outperformance from the equity positions, both long and short, helping the fund participate in another strong month for equities. 

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The market upswing is now confirmed by Cyclicals, Defensives, Breadth, and Bonds. Endorsement by all four occurs about one-third of the time and has led to an S&P 500 average annualized compound return of +15%.

Realizing a gain in each of the first three months of the year, like Q124, is not as bullish for the next twelve months as are back-to-back gains in January and February. The three-month streak produces a one-year performance advantage of around 2%, while a string of Jan-Feb gains was additive by 900 bps. 

The S&P 500’s Very Long Term (VLT) Momentum algorithm generated an immensely profitable low-risk BUY signal in March 2023. Its trajectory since then has vaulted ahead of the average gain following profitable signals back to 1957, and historical results call for still higher prices over the next year, albeit at a likely more muted pace.

Twenty-five years ago, few investment axioms were held more dearly than the belief that corporate profit margins were “the most mean-reverting series in finance.” Today, if there’s anyone still clinging to that belief, he or she is unwilling to say it publicly.

It’s possible to focus on the right things at the wrong times, and there’s no better example in recent years than investors’ initial fixation with—and subsequent dismissal of—the yield curve inversion.

If spectacular fundamental performance over the next ten years is required to produce merely average stock market results, what might be in store if the fundamentals instead adhere to that antiquated notion of “mean reversion?” The answer might have you paying closer attention to the next Treasury bill auction. 

Is the stock market forming another bubble? Market “sentimenticians” assure us it’s not, and rightly point out that today’s AI craze is not yet on par with the silliness of the meme stock and SPAC manias of 2021. However, the mention of that year in any discussion of stock market sentiment is itself a clue that investors are lathered up.