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Read this week's Major Trend. 

Read this week's Major Trend.

The momentum style factor has a long history of producing excess returns and is found in the security selection toolbox of many asset managers. This concept is regarded with such esteem that a number of ETFs have been launched to capture this value-added factor, including eight funds with AUM exceeding $300 million. The Magnificent Seven, the seven largest stocks in the S&P 500 index, have booked remarkable returns in 2023 with the equal weighted performance of this basket of tech titans gaining 88% YTD. The also-rans that make up the other 493 members of the S&P 500 have collectively returned a pathetic 1.6%. The Magnificent Seven seem to embody the momentum factor perfectly, yet momentum ETFs have been hugely disappointing this year. Not only have they failed to capture the Magnificent Seven move, but these ETFs have also badly lagged the broader market. This leads to the question, “In a seemingly perfect environment for momentum, what happened to the missing mo?”

Read this week's Major Trend. 

The bear-market low in the S&P 500 occurred one-year ago, yesterday. Whether that low remains intact during a potential recessionary down-leg is difficult to say, but the mere fact it’s survived for an entire year renders it significant.

Read this week's Major Trend. 

The Major Trend Index fell to Negative with the latest reading, after spending the last nine months within the Neutral zone.  With the valuation, cyclical, and sentiment components already negative, recent deterioration of market technicals was enough to move the MTI lower. 

It’s been said that the definition of insanity is doing the same thing over and over again and expecting different results. But that quote was from a physicist who was lucky enough to deal with natural laws, not with the “madness of crowds.”

There’s an institutional segment of the tactical asset-allocation universe that believes it all boils down to “stocks versus bonds.” We find that world-view dangerously limiting.

Consensus calls for a recession in 2023 have been off the mark, but that doesn’t mean all recession-oriented portfolio bets have necessarily gone awry.

In recent years, stock market swings have become a more reliable predictor of tax receipts than the economy, itself. If both were to roll over, deficits in the “teens” as a share of GDP—and Fed efforts to deal with them—are unavoidable.

Federal outlays, federal debt, and M2 have each jumped ~50% in five years, while the Fed’s balance sheet soared by 90%. The “reward”: Real GDP cumulative growth per capita of 1.6% per year (a good chunk of which will be reversed during a recession).

Based on past experience, steepening in the curve from deeply inverted levels, as it has done recently, means a recession should be fairly close at hand. Worse, the fact that this move is of the “bear-steepening” variety should further depress economic prospects over the next 12-18 months.

Question: While hopes for an economic soft landing have ticked up a bit, the consensus view among economists still seems to be for a recession in 2024. Does having so much company concern you? 

Response: Of course!

The latest market down-leg triggered one of our short-term breadth oscillators into super-oversold territory. While “oversold” may sound bullish to most contrarians, when SPX becomes as internally weak on a 10-day basis as it did in early October, there’s usually another shoe to drop.

At last October’s lows, we had yet to see any manner of economic, monetary, and valuation “reset” that would clear the path for a resilient cyclical bull. And, in the 51 weeks since that bottom, U.S. economic, monetary, and valuation conditions have only deteriorated further.

The one-year anniversary of the 2022 bear-market low occurs on October 12th, yet—after all this time—we’re not confident enough to declare it as the bull’s first birthday.

We’re interested to see whether or not CBNC breaks out new baseball caps for the occasion, as they did in the late 1990s for “Dow 10,000.”

Oil & Gas Equipment & Services was purchased for the Select Industries portfolio last month, re-establishing exposure to what was our largest overweight entering 2023. The sector leapt from #11 to #4 in the ranks on the back of improved sentiment and macro readings. 

Growth has performed much better among large caps than small caps, resulting in higher relative valuations for large caps. Based on factor valuations, we think value provides a more attractive large-cap entry point, while growth looks more attractive within small caps. 

Surging interest rates were the story of September, as the benchmark 10-year and 30-year yields both moved 50 basis points higher. The rate increases were felt most acutely by Utilities, as the sector ETF (XLU) fell over 13% in the twelve trading days from 9/15 to 10/2. XLRE, the Real Estate sector ETF, was squeezed as well, falling 11% during that same period.