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After years of underperformance, investors who pay attention to both Momentum and Value are finally being rewarded. The turnaround has been substantial, but the relative valuation of expensive Momentum vs. cheap Momentum stocks is still extremely elevated by historical standards.

Financials, Materials, and Consumer Discretionary maintained their positions as the top three sectors. Industrials improved from 7th to 4th place, ousting Info Tech down to #5. Consumer Staples dropped two spots to rank 7th out of the eleven broad sectors. Health Care kept its place at #8, while Energy, Real Estate, and Utilities maintain their one-plus-year reign as the three worst.

Impressive strength across the factor spectrum implies that the recent pop in the long-time beaten-down Financials sector should have more room to run. We highlight five attractively-rated Financials groups for investment ideas beyond the popular big-bank-concentrated Financial sector ETFs.

The talk of taper has started to resurface. In this context, higher inflation might become a negative for credit. For now, we remain favorable toward TIPS but turn cautious toward credit.

Most people agree that growth stocks have longer duration than value, but few bother to back this up with numbers. Our implied equity-duration study says the conventional wisdom is right: Growth stocks do have longer duration. But... the devil is in the details.

For years, we’ve noted the increasing valuation gap between domestic and foreign stocks. And for years, we contended that the most likely catalyst for a narrowing of that gap would be a recession-induced cyclical bear market in stocks. Evidently the 2020 bear market was not big enough to do the job.

Small Cap median valuations are among the highest in our 40-year database, but they are bottom quintile versus the nose-bleed level of the median Large Cap. If this Small Cap leadership cycle only matches the shortest one on record, it will last another three years. Based on the valuation gap, that guess seems conservative.

In an echo of last decade, the Fed has come under fire for keeping crisis-based monetary policies in place well after a crisis has subsided. Predictably, the Fed rationalizes its uber-accommodation by citing the slowest-to-recover data series from a set of figures that already suffer from an inherent lag (labor market indicators).

On a technical basis, Homebuilding stocks have only just emerged from their decade-long post-bubble bust. With P/B 24% below the mid-2005 peak and 15% below the “overvalued” threshold, they look reasonably priced in a world that’s almost entirely devoid of value.

We expected that the earnings recovery from the shortest-ever U.S. recession would be the fastest on record. Trailing figures for the MSCI USA Index now confirm this: Trailing EPS and Cash Flow Per Share have surged to new highs only 14 months after their March 2020 peaks. 

The refusal of the bond market to acknowledge the worsening inflation readings seems to have strengthened the consensus view that any inflation trouble will be “transitory.” Do bonds still know best when there’s a systematic, price-insensitive buyer hoovering up $120 billion of them per month? 

Our trusted civil servants must have found a list of our old Economic/Interest Rates/Inflation components and began to “discontinue” those once invaluable to us and other Fed watchers. It’s a hindrance, but we still have the one that is most correlated to stock prices and it’s free: The ever-expanding balance sheet.

The COVID collapse showed the Fed could abandon its clunky forward guidance and make the appropriate “pivot” when the facts changed. Now that facts have changed for the better, the Fed is right back to the rigid and dogmatic approach that characterized Fed-speak for almost all of the last economic expansion.

On May 25th, Fed Chair Jerome Powell promised to pull back emergency support “very gradually over time and with great transparency.”

“Very gradually?” No one doubts that. But “with great transparency?” Not a chance...

Read this week's Major Trend.

The ultimate measure of a SPAC sponsor’s success is stock performance post merger: De-SPAC results. We analyze historical returns of De-SPACs that had initial market caps greater than $200 million.

AdvantHedge was up 0.6% in May, ahead of the inverse S&P 500 (-0.7%) and the inverse Russell 2000 (-0.2%). Valuations once again mattered—both for sectors, overall, and for stock and industry group selection.

The Leuthold Core and Global portfolios both outperformed during an up month for broad equity markets. All sleeves of the portfolios (equities, fixed income, alternatives) posted positive performance.

The active-passive performance derby is cyclical, determined not by the ebb and flow of portfolio managers’ brilliance but, rather, by market conditions and the slippage that arises from imperfectly comparing funds and benchmarks. 

The S&P 500 posted its fourth consecutive winning month in May. It was a modest gain (+0.6%), but all of our downside estimates managed to improve—a testament to the rapidly rising fundamentals.