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Last month, we published a table showing where we thought a variety of economic and financial-market measures lay along the economic recovery “continuum.” Although the upturn has officially entered just its 22nd month, the bulk of those measures looked “late cycle” in nature.

The ink hadn’t dried on 2020’s PPP checks when pundits began speculating that the new decade could be a repeat of last century’s “Roaring Twenties.” That’s become a popular view after a booming 5.7%  real GDP growth and a nearly 30% stock market gain in 2021. Just how popular? Analysts are already extrapolating their bullish views into the 2030s! 

In early 2018, we thought the market was expensive, but certainly not a bubble. Today, the trouble is not just high P/E multiples, but the sustainability of the “E” itself—with profit margins nearly 20% higher than ever before. Whether one believes U.S. Large Caps are engulfed in a bubble or not, we have a P/E ratio for you.

Last year’s consensus view that inflation would prove “transitory” missed the mark. There’s no reason for shame; inflation forecasting hadn’t been a required investment skill for the previous 30 years.

In San Francisco, thefts of less than $950 have been decriminalized, while in Minneapolis, police are so beleaguered that car thefts not involving injury are ignored. Is it any wonder that the economy felt free to violate its usual stock market “speed limits” throughout much of 2021?  

At the market’s January 27th close, the headline blared, “Russell 2000 Enters Bear Market.” Well, not exactly. If one accepts that a 20% decline constitutes a bear market, then the bear actually began on November 9, 2021—the day after the Russell 2000 peak.

One might have predicted that big beneficiaries of war-time-style levels of federal spending, financed by money printing, would be Small Cap stocks. And from March 2020 until March 2021, they were. But the larger picture is sobering. 

The economic expansion officially entered its 22nd month in February. In dog years, that translates to an age of 13—the same age the recovery might have reached this July if not for the COVID disruption. The late-cycle characteristics displayed by a recovery that’s statistically so young dissuade us from issuing a high-conviction forecast for 2022.

Senator Rand Paul’s annual “Festivus” report on wasteful spending makes for sobering reading to the dwindling few who care about federal finances. The “low light” for 2021 was a $465,000 grant to the National Institute of Health for a study of pigeons playing slot machines.

In late January, the S&P 500 was down so much (almost 10%!) that it revived talk of investors’ favorite “safe” security. No, not T-bills—and not even Amazon or Apple common stock—but the Fed “put.” Years ago, we called it the “hypothetical” Fed put. But by now, we’re believers.

With a price decline of -5.2%, the S&P 500 suffered its worst month since March 2020. The carnage would have been much more severe (and downside estimates more rosy) had it not bounced +4.4% in the last two trading days.

Read this week's Major Trend.

It is a scene easy to imagine: Two children on the playground arguing about who’s the top dog. This schoolyard scuffle played out in 2021 between the Value and Growth styles, with each claiming bragging rights from their own perspective.

AdvantHedge was up 8.4% in January, ahead of the inverse S&P 500 (+5.2%), but it trailed the inverse Russell 2000 (+9.6%).

The Leuthold Core and Global portfolios both held up well compared to the broad equity market as speculative growth stocks continued to lead the market lower.

It’s been a year since the retail crowd on WallStreetBets—a Reddit forum—banded together to “stick it to the shorts.” The event was short-lived, but the effects are still being felt throughout the market.

See this month's sector rankings.

Not much has changed at the top of our sector rankings in recent months, with Financials, Energy, and Info Tech in the top three positions. But, we have seen a very rapid decline with two sectors, Consumer Discretionary and Industrials. Over the past several months, these cyclical sectors have sunk to the bottom of our ratings. Here we take a look at what has caused this dramatic drop.

For a brief period during the January 24th trading day, the S&P 500 was down 12% from the all-time closing high it set just three weeks earlier. The index went on to halve those losses and mask the carnage experienced by the small cap and growth subsets. Big Oil and Big Banks came to the rescue in our Equal-Weighted mega cap basket.

The monthly performance gap between Royal Blue Value (+1.9%) and Royal Blue Growth (-11.8%) is the largest we’ve seen since 2009.