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Read this week's Major Trend. 

The balanced portfolio strategy of allocating 60% to equities and 40% to fixed income generated a highly satisfactory 7.9% annualized return over the last 30 years. Despite the excellent returns earned by investors following this strategic model, the past couple of years have seen a parade of articles with headlines such as “Is the 60/40 Portfolio Obsolete?” and “Is the 60/40 Dead?” Given the central importance of this moderate allocation strategy to investment industry practices, we felt a closer look at the 60/40 portfolio was in order.

A replay of a Zoom Call with Chief Investment Officer, Doug Ramsey where he shared his thoughts and observations on today's market and what he sees looking ahead. The slides are available through the PDF Download.

Read this week's Major Trend Update. 

Read this week's Major Trend. 

In a volatile year, protection is coming from what many may deem an unlikely suspect—the momentum factor. Contrary to popular belief, momentum tends to work better in down months than up months.

Diversification has acquitted itself poorly in precisely the type of rough patch its proponents have been hoping for. So have some popular market-timing strategies, unless one has applied them across multiple asset classes.

We’ve reminded dejected readers throughout 2022 that this year was statistically “cursed” from the onset. It’s a year ending in “2” and a Shmita year on the Jewish calendar, both of which have been associated with far below average stock market returns. More importantly, it’s a midterm election year, traditionally the weakest of the four-year cycle.

Leuthold did not invent VLT. The credit goes to Sedge Coppock, a technical analyst who insisted on being called an “econometrician.” While the famed Coppock Curve was based on the Dow Jones Industrial Average, Leuthold found the algorithm useful at the industry group level—it is a component within our Group Selection (GS) Scoring system.

The 2022 bear market has unfolded in a way that’s finally driven our Very Long Term Momentum algorithm for SPX into oversold territory for the first time since 2016. However, that only means a “low-risk BUY signal” is now mathematically possible—we could be writing about the “impending BUY” for many months to come. 

The P/E multiple on Trailing Peak GAAP EPS has plunged 44% from its year-ago peak of 32.5x. The current ratio of 18.1x is below its “New Era” median (1995-to-date) —but some conditions characterizing the New Era no longer apply.

While the MTI’s Cyclical category remains hostile at -3, we’ve observed steady improvement in its leading inflation components. Especially notable is the reversal in the NOPE Index (ISM New Orders Minus Price Index).

The S&P 500 pegged its third consecutive quarterly loss, a remarkable feat for the Index. It hadn’t produced back-to-back quarterly losses (total return) since the Great Financial Crisis. Investors opening their quarterly statements in the next week or so, accustomed to a sharp reversal of losses like those in 2011, 2015, 2019, and 2020 may be in for a surprise.

We scrutinized the typical path of money growth during the four-year presidential election cycle, and found that it typically tends to bottom out in October of the midterm year! The cycle says a monetary pivot is imminent, and the average pattern traced out by M2 suggests an acceleration in the growth rate of about 2.5% leading up to the presidential election. 

More pain for our Royal Blue Growth segment (Large Growth proxy). Q3 performance (-6.9%) was the worst for our style boxes and contrasted against the other Growth boxes (SC Growth +0.2%, MC Growth -0.6%).

The current bear has been no more than moderate based on conventional measurements. However, the loss of market wealth in relation to GDP is not too far from the levels suffered during the Great Financial Crisis.

We think the U.S. economy will slip into recession sometime in the next year, but the level of “excess savings” provided by pandemic aid renders the already difficult task of timing more elusive than ever.

Boy, were the pundits ever right about the Roaring Twenties. Less than three years into the decade, the animal they fear most has already roared two times. Actually, the first one, in the first quarter of 2020, was more like a piercing “yap,” taking the S&P 500 down almost 34% in just 23 trading days. The second roar has been a deeper, more guttural one that’s lasted nine months and is probably not done.

This is the lowest relative valuation registered for Small Caps since May 2020. The end of September also marked the lowest absolute trailing valuations for both Large Caps (20.7x) and Small Caps (15.0x) in our L3000 universe looking back to April 2020.

With the final month of Q2-22 earnings complete, our Up/Down ratio reads 1.02. That is very close to the 1.05 ratio for Q1. Both readings fall below the vignette’s recession threshold of 1.07 (in the past 39 years, all readings below that mark were accompanied by an “official” economic recession).