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In a simple test of 15 yield-curve variants, we found that the 2s10s spread ranks second to last, based on its correlation with one-year-forward real-GDP growth since 1978. The three best measures employed the 3-month bill as the “short” rate. The spread between the 5-year note and 3-month bill showed the strongest correlation with subsequent economic growth.

In late March, the S&P 500 came close enough (3.5%) to its January high that a second birthday celebration for the bull seemed warranted. Who doesn’t love a party? But, as we noted in a recent Chart of the Week, a milestone like this is a good excuse to haul our pet to the veterinarian for a checkup.

Through the first two-and-a-half months of 2022, factor performance maintained the trend established in 2021: Value outperformed everything else and Growth lagged. When the 10-2 year differential dropped near 20 bps on March 16th, Growth stocks outperformed from that day forward, while Profitability and Value suffered.

The first quarter of 2022 saw crude prices surge 33%. The largest three Energy firms, CVX (+39%), XOM (+35%), and COP (+39%) posted similar gains, resulting in XLE’s best quarterly performance in its 23-year history (+38%). Despite the last three months’ windfall, XLE has a total return of just +5% over the last eight years compared to +168% for the overall index.

A uniform drubbing for Growth in Q1, as all three of our Growth style boxes lost between 13-14%. The Value segments all held up nicely, with returns between -2% and +2%. The 15.6% performance gap between our Royal Blue Value (+1.8%) and Royal Blue Growth (-13.8%) is the widest since Q2-2009.

Our Ratio of Ratios sank a little deeper into Small-Cap discount territory as Large Caps outperformed in March’s bounce. The young bull market, when Small Caps bid to normalize this relationship back to the historical median, seems to be long gone.

With the final month of Q4-21 earnings in the books, our Up/Down ratio is 1.30. This figure is looking more and more “late cycle,” and earnings growth is not equal across the market cap tiers.

With the Fed still on a tightening path, caution is still recommended. Among fixed income, we remain neutral on TIPS but have turned favorable toward EM bonds.

Currently, the dashboard shows 6 green, 3 yellow, and 2 red lights. The overall message is that, while there are areas of concern, a recession is unlikely to be imminent (within the next twelve months).

Predicting a recession is a very tall task, let alone using a single yield-curve indicator with long and highly variable lead time. Instead, we would rather focus on some of the more reliable themes: The macro-policy setting; U.S. dollar; and Bank stocks.

AdvantHedge was down 3.5% in March, slightly leading the inverse S&P 500 (-3.7%), but trailing the inverse Russell 2000 (-1.2%). It was a tale of two halves as the selloff continued through the first half of the month, while the second half saw a rebound led by speculative growth and reopening stocks.

The Leuthold Core and Global portfolios treaded water in March; their equity positions lagged the market move higher, and fixed income continued to trade lower.

Investors considering a position in the Consumer Discretionary sector need to be aware of what they are buying: a basket in which one-half consists of mature, modestly-valued consumer brands, while the other half is two mega caps with excellent growth profiles and high absolute valuations. It would be a mistake to view this sector as a homogeneous set of companies.

Read this week's Major Trend.

The S&P 500 clawed back some of its losses from earlier in the quarter but still declined almost 5% for the first three months of 2022—breaking a streak of seven consecutive advancing quarters.

Read this week's Major Trend.

Read this week's Major Trend. 

Just after yesterday’s close, we loaded our precocious bull into an SUV and drove to the local veterinary clinic for a two-year checkup.

Our bovine buddy drew some sympathetic stares while we were waiting in the lobby. Noting our bull’s droopy eyelids and gray facial hair, an assistant informed us, “You know, you didn’t actually need to bring him here. We now have a mobile euthanasia service.” We just smiled, and waited for the veterinarian, who is said to be a specialist in this new super-species of bull.

Read this week's Major Trend. 

The ETF concept began as a vehicle to provide low-cost access to a broad market index, and the terms “passive”, “cheap”, “index”, and “ETF” were often used synonymously. However, ETFs soon evolved into specialty funds that allowed investors to take focused active tilts in sectors, styles, and countries; a landmark shift away from the notion of passively investing in the total market.  These specialty funds are easy to trade and tax efficient, but they do not fall under the labels of cheap, passive, or broad market.