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In an effort to manage stock market risk, we monitor reams of data relating to the economy, earnings, Fed policy, and investor sentiment, along with technical indicators of all stripes. But for the rare occasions when upside price action seems practically uncapped, it’s hard to beat pure price action if one is inclined to play along.

Lofty valuations amid shrinking liquidity conditions make all risky assets vulnerable.

The market has started to price in a much faster pace of the Fed’s tightening this year. We have found more similarities than differences between recent market action and the historical patterns around the first rate hike.

It’s been so long since investors have faced a serious Fed tightening episode that they may have forgotten a helpful rule of thumb: An initial hike in the fed funds rate is usually a good excuse to dump some Consumer Discretionary stocks. 

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.