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Using non-normalized trailing-operating earnings, Small Caps are selling at a 21% valuation discount to Large Caps. Measured back to March, our Ratio of Ratios has delved deeper into Small Cap discount territory—from 8% to today’s 21%.

As we roll-in the final month of Q1 earnings, our Up/Down ratio reads 1.93. This incredibly strong “three-month” figure falls into the 94th percentile of our 38-year history—and is just shy of the first two (tax-rate juiced) quarters of 2018.

With the looming Fed taper and valuations stretched on almost all risky assets, volatility is likely to increase in the near term. Among fixed income, we are favorable toward TIPS and cautious on credit.

The Fed surprised the market with a hawkish projection of two rate hikes in 2023. Real yields did not move up as they typically do with such an episode. Overall, the damage was limited to the reflation trade, and the risk-rally is intact.

Financials, Consumer Discretionary, and Materials remain as the top-three sectors. Consumer Staples dropped for the second consecutive month, now rated 8th out of the eleven broad sectors; Health Care bumped up to 7th from 8th. Energy, Real Estate, and Utilities are the three-worst rated, which has been the case for over a year.

Automotive Retail currently ranks Attractive per our Group Selection Scores. This group offers a range of exposure to a bumpy—but recovering—U.S.-auto industry made up of car dealerships and auto parts & service retailers.

AdvantHedge was down 2.3% in June, in line with the inverse S&P 500 (-2.3%) and slightly trailing the inverse Russell 2000 (-1.9%).

The Leuthold Core and Global portfolios both underperformed during a strong month for equities. Their underlying stock exposure lagged amid the reversal of interest rates and growth outperformance. 

While not yet set in stone, it is the consensus view that infrastructure spending will be raised to a higher level for the next few years compared to past baseline expenditures. Although the exact numbers are still unknown, we examined the President Biden-endorsed bipartisan plan to provide a picture of the relative scale of the anticipated spending in the context of historical trends. In addition, we identified a group of industries that may be beneficiaries of the proposal.

High yield corporate bonds returned over +15% for the twelve months ended June 30th, building on a strong five-year run that was interrupted by a short, but painful, drop at the onset of COVID-19. Chart 1 indicates that high yield bonds compound at a remarkably steady rate, with infrequent but severe drawdowns during times of financial stress.

The mutual-fund category for bonds, in general, continues to rake in record amounts of cash. It has registered the highest inflow ever for the first five months of a year. January, February, and April each captured enough to rank among the top-ten-highest monthly inflows back to 1984.

A replay of a Zoom Call with Chief Investment Strategist, Jim Paulsen 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.

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It’s near the year’s mid-point and U.S. equities are doing what they’ve done nearly every year since the onset of the Great Financial Crisis: trouncing their foreign counterparts. The S&P 500’s YTD gain of 13.5% is about 500 basis points better than EAFE’s, and 800 basis points above that of the MSCI Emerging Markets Index.

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The Value style has broadly underperformed for more than ten years, and the blame for this dismal decade has often been placed squarely on the Price to Book metric. Could it be that Price to Book’s sullied reputation is undeserved?

The performance derby between actively managed portfolios and passive benchmarks is strongly influenced by market conditions.  Active manager success rates are cyclical, but not random, and are driven by slippage created from style, size, and weighting considerations that result from the imperfect slotting of active portfolios into single style boxes.  Moreover, this slippage can be defined and measured, and shows a clear correlation with relative return spreads between benchmarks and their opposite boxes.

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In the May Green Book, and again in the May 21st issue of “Chart of the Week,” we discussed the trailing one-year correlation between weekly percentage changes in the S&P 500 and the 10-year Treasury bond yield. Rollovers from high levels in this correlation have signaled most of the important pullbacks in the bond market over the last 20 years.

Read this week's Major Trend.