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The theory of “contrary opinion” is important to market analysis, but so is an understanding of its limitations. When investor-sentiment surveys dipped sharply in late January, we warned that the declines (which are usually signals to “buy”) might instead mark the beginning of an important trend change. 

With the first month of Q2-22 earnings in the books, our Up/Down ratio is 1.09. This figure lands in the fifth percentile of observations for our 39-year history and nearly matches the “one-month” reading of  Q1.

We won’t dispute that investors were not genuinely frightened at the June market lows, or that fears have evaporated following a 13% rally in the S&P 500. The distress is understandable: For 26 traumatizing days in 2022, our S&P 500 Normalized P/E multiple traded below its 1957-to-date top decile!

We cringe when we hear the Treasury Secretary or a regional Fed bank president dismiss the possibility of recession on the basis of “low unemployment and strong job gains.” Those measures are as “laggy” as any economic statistics the government publishes.

Yield curve action is getting harder to dismiss by the day. But which curve is the most relevant? We tried to answer that question in disciplined fashion in April. To our surprise, the “2s10s” spread that’s ubiquitous in bond-land scored near the bottom of the pack.

The LEI’s 3.6% six-month annualized loss through September 2006 was the largest decline not followed almost immediately by a recession. This year, the LEI contracted by 3.7% over the six months through June—if a recession is avoided in the current experience, it would be the most misleading signal in the history of the LEI as currently constructed.

The 2022 bear market is the 13th cyclical bear since 1950, and it’s already joined the mightiest half of its predecessors based on the fact that it’s actually contained a bear-market rally. Six of the prior 12 bear markets weren’t interrupted by even one rally of at least 10%.

The risk of a policy error is extremely high as the Fed stays on an aggressive tightening path even with the U.S. in a “technical” recession. Caution is recommended.

Our recession indicators have continued to deteriorate. Given the stagflation backdrop, the Fed’s tightening cycle is very likely to end in a recession.

While our breadth measures do not consider this rally to be thrust-worthy, when based on nothing more than performance, it’s difficult to distinguish between the “first up-leg” in a new bull market and a bear-market rally. The vital signs at present appear to be more in-line with the latter (although making that conclusion based on price action, alone, is hardly better than a coin toss).

Now that the yield curve has inverted, its dynamic is apt to change from bear flattening (higher rates, flatter curves) to bull steepening (lower rates, steeper curves) fairly soon.

Living in Minneapolis, we’re bewildered by the absence of research considering global warming as potentially a good thing for certain organisms. That’s especially true for creatures where the science is almost nonexistent—like the stock market. Record heat wave? Bring it on!

Secular bear markets will drop far below median valuation levels. Today, if the S&P 500 sank to the 25th percentile (1957-to-date data), it would lose 41%.

Read this week's Major Trend.

The performance derby between actively-managed portfolios and passively-managed index funds is a topic of ongoing interest for Leuthold clients and the investment community at large. Therefore, we are providing an update to all charts and tables of our Active/Passive performance analyses.

AdvantHedge was down 10.1% in July, trailing the inverse S&P 500 (-9.2%), but ahead of the inverse Russell 2000 (-10.4%).

Both the Leuthold Core and Leuthold Global portfolios participated in July’s equity rally, but lagged their all-equity benchmarks.

Read this week's Major Trend. 

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.