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We update our annual exercise reviewing how the industry “Dreams” and “Nightmares” of the previous year (2021 in this case) fared in the ensuing year (2022), and conclude with the new year’s industry composition of the Dream and Nightmare portfolios based on 2022 performance.

Market veterans know there’s just one thing more probable than a recession after the yield curve inverts: Yield curve denial among a large group of sell-side economists and market strategists! Indeed, the earliest of those dismissals occurred last March—a month before the first of more than a dozen iterations of a yield curve inversion. 

With the stock market horrors of 2022 already well-lamented by others, we tried hard to a come up with a longer-term, cheerier take on the recent state of things. We’ll confess... it was challenge.

Read this week's Major Trend.

Style rotation powered S&P 500 Value to a 24.2% advantage vs. Growth, while DM large-cap Value earned a 20% return spread against Growth. Small-cap spreads favoring Value were also in the double-digits, but narrower because small-cap Growth wasn’t exposed to the collapse of mega-cap Tech. 

Santa brought the S&P 500 a lump of coal in December 2022, as the index declined 5.9%. That move reversed November’s gain (and then some).

Read this week's Major Trend. 

We’ve heard for eons that “Low bond yields justify high equity valuations.” Value-conscious investors might have described this conundrum another way: “Low future returns in one asset class justify low future returns in another.” (Mysteriously, only the first rendition became a CNBC catch-phrase.)

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The 2022 bear market will be remembered as a year when collapsing growth stock valuations and rising interest rates doomed almost every asset class to return purgatory. Hopes for avoiding a second down year rest with a potential top in interest rates and solid earnings underpinning the stock market. Wall Street strategists have a year-end 2023 price target of just over 4,000 for the S&P 500, a few percentage points of upside from today but hardly reason to toast a prosperous new year.

Read this week's Major Trend. 

Today, we are announcing that our Chief Investment Strategist, Jim Paulsen, will be retiring at the end of the year. Jim has been a popular counselor to our firm's institutional clients and a regular commentator in financial media. He will be stepping back from publishing and other day-to-day duties, but will remain a partner and senior advisor to our firm, which he joined over five years ago.

Jim is such an original thinker and provocative market forecaster, and we feel fortunate he chose to wrap up a long and distinguished career here at Leuthold. Our research clients and the millions of people who followed his work in hundreds of TV and print interviews were equally fortunate, having benefitted from his insights and, frankly, his knack for being right.

We’re going to miss Jim at a professional level — he has legions of fans on Wall Street and Main Street, but none bigger than the members of our own research and investment teams — and personally, as a friend and colleague. His family, the philanthropies he cares about and the Minnesota Timberwolves basketball team are all lucky to be getting more of his time and focus.

We wish him well with his new endeavors.

-John Mueller and Jeff Leadholm – Co-CEOs

It will be years before policymakers know the long-term effects of the COVID experiment with Modern Monetary Theory. However, the episode has helped answer, once and for all, a question that’s troubled psychologists forever: Money can buy happiness! But it can’t buy hope.

Read this week's Major Trend Index update...

While VLT for the S&P 500 continued to trend lower in November, the DJIA calculation edged higher and triggered a new BUY signal. The message could soon get more confusing: A BUY signal for the Russell 2000 would be triggered if that index closes December above 1,813, while the S&P 500 and NASDAQ would have to climb more than 11% and 15%, respectively, to trigger a VLT BUY.

With less than a month to go, our hypothetical All Asset, No Authority (AANA) Portfolio seems likely to beat the S&P 500 on an annual basis for the first time since 2011. However, it’s doubtful that many real-world, institutional multi-asset portfolios were as heavily exposed as AANA to the best-performing assets—commodities and gold.

Economists who believe a 2023 recession will be avoided, may not know it but they are “messing with perfection.” Since August, we’ve chronicled several developments that have, without fail, correctly forecasted past recessions, or confirmed that one was already underway. 

We found the spread between the “Expectations” and “Present Situation” series (the “Confidence Gap”) has historically moved almost in lockstep with the yield curve. As the Confidence Gap plummeted throughout 2021, the implication was the yield curve would soon follow. After some initial resistance, it did. 

Unlike the five prior cycle peaks, this year’s inflation peak materialized during an ongoing economic expansion. That implies the “post-peak” monetary policy has never been tighter than today—making a soft landing even more improbable.

Jay Powell’s speech on November 30th triggered a 1,000-point intraday reversal on the DJIA and left us wondering who might have slipped the Chairman a recent copy of the Green Book.