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Regardless of one’s view on the maturity of today’s economic and market cycles, it’s hard to deny that the continuation of extraordinarily-loose economic policies is now causing those cycles to age prematurely. And no doubt it’s contributing to the premature “graying” of many market participants. 

Factor investing has gained wide popularity in recent years, enabled by a proliferation of smart-beta ETFs coming to market, which opened new opportunities for tactical investors. In 2018, we launched our Factor Tilt ETF strategy, and here we discuss how we’re now enhancing it by adding Seasonal Cyclicality to our analytical toolbox for evaluating factor conditions.

AdvantHedge was down 5.9% in October, ahead of the inverse S&P 500 (-7.0%), but trailing the inverse Russell 2000 (-4.3%).

The Leuthold Core and Global portfolios were higher in October, but trailed their all-equity benchmarks as mega-cap growth leadership hurt relative performance in the equity sleeves.  

Read this week's Major Trend.

The S&P 500 gained 6.9% in October—it was the best month in a year. The steep rise in prices more than cancelled-out the brief dip in September. However, improving fundamentals limited the adjustments within our downside estimates.

Read this week's Major Trend

Read this week's Major Trend

If there is one thing sure to make equity investors swoon, it is the prospect of buying into a credible, long-lived secular growth story at a relatively modest valuation. Over the past three decades, Emerging Markets (EM) have proffered just such an opportunity. EM’s economic growth rates have far surpassed those of developed nations, and the valuations attached to EM stocks have often been at a discount to other markets.

However, this combination of secular growth and attractive valuations has not always paid off for investors. The MSCI Index has underperformed the U.S., Europe, and even Japan over the last ten years in local currencies. Furthermore, EPS growth for the EM Index has come in far below its economic growth rate, creating an exasperating drag on Index performance as it tries to keep up with other regions.

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In a possible sign we’re not getting enough oxygen at current valuation altitudes, we decided to replace the usual mean-reversion technique with a much friendlier approach that we’ve dubbed “maximum attraction.”

Read this week's Major Trend

The streak of consecutive positive quarters for the S&P 500 would have been shattered had it not been for our current 4%-Club members. Apple, Microsoft, and Google contributed a combined +75 bps of performance in Q3, while the index’s other 500 or so deadbeat members generated -17 bps.

A stronger U.S. dollar is “supposed” to be bearish for commodities, but it’s been a banner year for most commodities with gold among the few that are down on the year. However, keep in mind that gold tends to be a harbinger of major moves in industrial commodities, with a lead time of about six months—and its year-over-year change is now negative.

The revival of the Growth trade has been uneven over the last six months: Royal Blue Growth +16.5%; Small Cap Growth -2.0%. Small Cap Value continues to be the only style-box that is undervalued compared to its history.

Analysts at Standard & Poor’s will soon confirm what’s been known for several months: The earnings downturn associated with the COVID recession was the shallowest and shortest of any recession-related EPS decline.

Using non-normalized trailing operating earnings, Small Caps are selling at an 18% valuation discount to Large Caps. Our Ratio of Ratios has spent the last four months in a very tight range—fluctuating between an 18-21% Small Cap discount.

Consumer Price Inflation has stabilized in the 5.2–5.4% range in the last two months, giving the Fed hope that it’s reached a near-term peak. Still, the presence of 5%-plus inflation in the face of ZIRP leaves the real short-term Treasury-bill rate about as deeply negative as it has ever been.

The COVID rescue plan has generated a multi-trillion-dollar deluge of federal spending that has trickled down to government transfer payments, personal incomes, retail sales, and surging EPS. When considering all of these data series in relation to their long-term trends, it’s truly remarkable that the only item analysts consider to be “transitory” is inflation.

With the final month of Q2-21 earnings in the books, our Up/Down ratio reads 1.96. Divot repair should receive most of the credit for our outstanding 2021 figures as the comparisons were some of the darkest days in our economic history.