An economic downtown with little or no forewarning from stock prices is possible, but against the odds. Nonetheless, prior to 1950, there were three cases in which stock market gains failed to inoculate the economy against a recession. Today’s the stock market capitalization has become so large relative to the economy that stock price movements affect the outlook for growth and inflation more than ever before. 

Extreme stimulus announced by China had the desired effect of spiking the country’s stock market. The move did not trigger our EM Allocation Model; however, if the reversal is for real, there is plenty of time. The EM P/E multiple gap is so extreme that one wouldn’t miss out if they prefer to wait for more compelling confirmation than the fireworks of the last couple of weeks.

An excellent forecaster of election outcomes over the last 100 years is the stock market, itself. Measured over the three-month period through election day, if the S&P 500 has a gain, the incumbent party historically prevails; a negative return predicts a loss for the incumbent. This simple method has correctly identified the White House winner in 20 of the past 24 elections.

Small caps turned sour in August 2018, and since then, performance has been nothing less than disastrous. Is the enormous shortfall pervasive across small caps in general, or is it due to a top-heavy market with unusually huge returns from a few huge stocks? The answer may be helpful for those contemplating a contrarian position in this unloved corner of the market.

Read this week's Major Trend. 

Read this week's Major Trend. 

Traditionally defensive themes such as Staples and Utilities have outperformed over the summer months, reminding investors of the benefit of not going all-in on the AI growth theme. Quality is one of the most robust defensive factors, but even so has managed to outperform during the bull market run that began in October 2022.  While some Quality funds are designed to play defense, others seem more inclined to the offensive side of the field. We recommend that investors decide if they are targeting Quality specifically as a defensive exposure or as a core long-term holding to ensure they select the appropriate fund.

Read this week's Major Trend. 

August’s Core CPI was a tad hotter than expected, locking in a 25bps cut a week from today. Markets currently forecast 250bps of Fed easing by the end of 2025. We probably won’t see sub-2% inflation rates until the Spring of 2025.

Read this week's Major Trend.

2022-24 monetary tightening has been one of the most aggressive cycles in history, but other stimuli may have muted its impact. First, fiscal policy has been conspicuously looser than any prior period of tight money. Second is the stock-market wealth effect: U.S. equity market cap has leapt nearly $12T (~40% of GDP)—a larger wealth increase (versus GDP) than that of the entire 1982-1987 bull market.

The yield curve is back in the spotlight, as the yield spread between the 10-yr. Treasury and 2-yr. Note finally flipped positive on September 4th, after a record 26 months of inversion. While some economists claim this steepening implies a recession is now imminent, the historical record of such “un-inversions” is a mixed bag—in some cases the recession was still eight months- to over one-year away.

Bull markets that lacked a traditional recessionary “father figure” had shorter lives (33 mos. vs. 61 mos.) and produced gains just one-third the size (+63.6% vs. +186.9%). If today’s SPX bull matched the return of its four most-cyclically relevant predecessors, it would extend until May 2025, and top out at 5,852—8% above its September 6th close. (Not great.)

The economy normally fades heading into a series of rate cuts, with higher unemployment and lessening CPI inflation. Risky assets (stocks and credit) do well, and bond yields move lower. Real assets also benefit (gold in particular). On the whole, an easing cycle is favorable for most assets.

Read this week's MTI.

With Fed rate cuts likely to begin just days from now, the mathematical connection between changing rates and duration means that lower rates are almost certain to result in higher bond prices, an effect that has proven reliable since 2024’s high point in rates last April.  The simple approach of targeting longer durations is complicated by today’s inverted curve, meaning that lower rates will almost surely not manifest themselves through a parallel downward shift in the curve, but will be accompanied by an un-inversion that will return rates to an upward sloping shape.  This twist in the curve’s slope will require investors to target the appropriate spot on the curve to optimize the interest rate effect on bond prices.

Read this week's Major Trend. 

Read this week's Major Trend. 

The latest CPI report was in line with consensus. Our scorecard suggests that the modest disinflationary regime continues.

Read this week's Major Trend.