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Factoring in both the duration and depth of the existing yield-curve inversion, it is considered more severe than all predecessors since the 1960s. Even Duke University yield-curve guru, Campbell Harvey, abandoned his January forecast that a recession would be avoided.

Last month, we noted that Jay Powell’s preferred measure of the yield curve—Near Term Forward Spread (NTFS)—was a winner, but a newly introduced index by the Fed, “Financial Conditions Impulse on Growth (FCI-G),” is a dud. Several simple forecasting gauges we’ve relied on for years are considerably more effective.

With leading economic measures still trending down, optimists who advocated against fighting the Fed during the free-money era have ditched their own advice. Their focus is now on lagging indicators, like the employment numbers—but that last bastion of strength seems ready to buckle.

U.S. stocks have either begun one of the most underwhelming and economically illogical bull markets in history, or have staged an exceptionally long and deceptive bear market rally. Our bet is on the latter.

Last month’s title, “Echoes of 2021,” didn’t fully capture the speculative fervor that’s gripped big Technology stocks—and the NYSE FANG+^® Index immediately set out to rectify that shortfall by tacking on another 5% to bring its YTD return to +74%.

The risk rally has survived a wide range of challenges, including renewed central bank hawkishness, and tighter credit/bank-lending standards, among others. “Soft landing” is still the key narrative that supports the current rally.

So far, it’s all about sector exposure in 2023.

The latest pause is widely expected to be short-lived, but many things can happen to extend the pause or even completely end the tightening cycle. While some markets show little distinction between a final pause and an interim one, most behave in a way that’s consistent with the economic backdrop.

Read this week's Major Trend.

This Leuthold Refresh updates our Factor Tilt analysis, an ongoing process to evaluate the attractiveness of commonly accepted investment styles. Factors are investment characteristics that have historically produced excess risk-adjusted returns, but relative results fluctuate over time.

After being ignored for a generation, Japanese stocks are roaring in 2023. The Nikkei puts the S&P 500’s 16.9% YTD gain to shame with its +28.7% return. With developed international equities (ex-Japan) up a paltry 9.5%, diversification from expensive U.S. stocks cannot fully explain Japan’s surge.

June marked the third-consecutive quarterly gain for the S&P 500, with all the results remarkably similar: +7%, +7%, +8%. The index now sits at a level not seen since April 2022.

The Group Selection Scores have performed well in the first half of 2023, not an easy feat considering the abrupt style reversal that took place in January. Value and technical indicators are struggling, but the rest of the model is more than picking up the slack.

Apple’s 9% gain in June helped it to become the first firm to reach a $3 trillion market valuation. For perspective, the combined market cap of the S&P 400 and S&P 600 is roughly $3.5 trillion. AAPL’s weight in the S&P 500 also reached a new high of 7.72%—which means it is a bigger slice of the index than the combined weight of the Materials, Real Estate, and Utilities sectors.

Like Q1, Growth dominated Value in Q2. The more exaggerated performance gaps were again in the larger market-cap tiers. Our Royal Blue Growth style box is up 22% YTD compared to Royal Blue Value’s +4%.

Small Caps halted their three-month relative performance slide versus Large Caps, which boosted our ratio of ratios back to the twelve-month average. 

Our latest Up/Down ratio is 1.06. This “three-month” figure is a step back from Q4-22’s ratio of 1.19, and lands in the range of the abysmal readings from the first three quarters of 2022 (1.02-1.07). The current figure also doesn’t have the high look-back figures that 2022’s numbers had to overcome.

Read this week's Major Trend. 

Read the latest Major Trend Index.

The Fed’s June announcement of a pause with further rate hikes to come has extended the uncertainty of whether an inverted curve and persistent policy tightening will ultimately lead to a recession. The business cycle is a critical investment issue because the relative returns of many assets depend on the state of the macro economy. This study examines the Consumer Discretionary (CD) sector’s behavior in recessionary times, with the goal of understanding the typical performance pattern during economic lows in order to help investors position their portfolios for a potential recession.