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Steve Leuthold, a nationally respected investment strategist known for his contrarian nature and unpretentious style, passed away peacefully at his home in Carlsbad, CA, on March 7, 2023, at the age of 85.

In mid-2020, we wrote that a new multi-year leadership cycle had probably begun. Technically, that belief hasn’t been disproven, but the extent of outperformance has been disappointing in the nearly three years since. 

The Major Trend Index current sits at Neutral, down one notch from its High Neutral reading entering February as the market pullback was enough to cause some deterioration in the Technical indicators. Equity exposure remains at 55% across tactical accounts.

Factor performance stabilized in February, recovering from a brutal start to the year. While those dynamics bled into the first two days of February, the trend quickly reversed as interest rates bounced off recent lows and stayed on an upward trajectory for the rest of the month.

As the market slumped in February, we saw more follow through from the three mega-cap dogs of 2022: TSLA, NVDA, and META all gained a uniform 18% for the month. Those three stocks, just 4.6% of the S&P 500’s weight, are responsible for nearly half of the index’s modest +3.7% YTD total return.

Within the Mid- and Small-Cap tiers, Growth seems to be forming a relative-strength bottom versus Value. However, in our Royal Blue space, where Growth peaked much later, no evidence of a bottom has yet developed.

We’re now three years removed from the 2020 COVID market panic, when, over the course of four weeks, the S&P 500 and Russell 2000 lost 30% and 40%, respectively. That action sank our Ratio of Ratios to levels not seen since the height of the Tech Bubble. The Small-Cap discount, at present, is not too far removed from 2020 lows.

Our Up/Down ratio reads 1.27. That is noticeably higher than the other three “two-month” figures of 2022, but still well below the historical average. Given the dour direction of reported- and estimated earnings, it’s a bit surprising that we’re seeing even a small pop in the results.

Inflation worries have rekindled expectations for additional rate hikes. Providing this dynamic is still in play, risky assets are apt to face challenges.

While the valuation gap between Growth and Value sectors was compelling just a couple of years ago, it has closed drastically the last twelve months. Our analysis shows that Value sectors (Energy, Industrials) are still more favorable than Growth sectors (IT, Health Care).

The China-reopening theme is alive and well, which will likely support cyclical outperformance. The disinflation trade is at a crossroads. Value/Growth started to decouple from interest rates.

Utilities, Real Estate, and Consumer Staples are the bottom three sectors among the GS Scores. 

Energy remains the top-rated sector, but Information Technology, Communication Services, and Financials follow closely behind. These offer a diverse mix of commodity, growth, and cyclical options.

Select Industries has overweight positions in Energy, Materials, Consumer Discretionary, and Industrials. The portfolio has no exposure to Consumer Staples, Real Estate, or Utilities.

YTD, passive strategies are again ahead of most attempts at timing, though we still believe that asset allocation success over the next several years will require much more use of the latter.

At nearly 4-1/2 months, the stock market rally has reached an age where the Technical confirmation should be overwhelming if the upswing is in fact the first phase of a “new” bull. That’s not what we observe, however.

Imagine telling a Small Cap investor in mid-2018 that: (1) the U.S. economy would spend all but two months of the next 4-1/2 years in expansionary mode; and (2) M2 money supply would increase by 50% in that time, and yet the Russell 2000 would gain a grand total of just 9% over the same span.

Unless the S&P 500 and NASDAQ correct more than 5% from their March 6th levels by the end of the month, both will trigger new VLT BUYs. Rather than celebrating that prospect, however, we find ourselves wondering what might go wrong.

A large swath of the institutional asset-allocation world is engaged in the sometimes dangerous, binary game of “stocks versus bonds.” Although the 2022 bond debacle caused relatively mild damage to a massively overweight equity position, the bear markets of 2000-2002 and 2007-2009 produced losses for stocks versus bonds that exceeded 60%. 

To our surprise, the measure that most closely correlated with real-GDP growth on a one-year time horizon is the rarely mentioned Treasury spread for the 5-Yr./3-Mo.