The Lucky Bull born in March 2020 produced a 114% SPX gain during its short time in the pasture. The Luckless Bull conceived in October 2022 produced an index gain of 58% as of its July 16th peak. If last month’s high becomes the final top for the Luckless Bull, its legacy may be paltry: Current valuations imply the bull’s offspring may suffer from a similarly short lifespan and subdued productivity. 

Market pundits christened the violent rotation in stock leadership as the “Trump Trade.” It’s more likely that the incumbent stock leaders were fated to stall before last month’s wild events. Major inflection points are sometimes accompanied by cyclical turning points in the market itself: The Y2K peak occurred just as the market broadened after two years of hyper-concentration.

The mild CPI report on July 11th kicked off a violent rotation out of mega-cap stocks, with the Russell 2000/S&P 500 performance differential at +4.5% for the day. Other factors reversed as well, with all major styles posting inverse performance relative to their year-to-date numbers.

Is the market overreacting to recent economic data? Concerns about a growth slowdown are replacing the optimistic outlook of early 2024. Our Recession Dashboard shows increased risks, with notable declines in housing, employment, and consumer confidence. Despite this, equity and credit markets remain resilient. As we navigate these uncertain times, discover how upcoming elections and potential economic policies could shape the future.

Domestic equities lost a little over 3% in the second quarter. Seven styles posted declines in that range, only to be countered by the continued outperformance of mega-cap growth stocks, which gained almost 10% for the quarter. This odd mix of returns left the S&P 500 up 4.3%, although that was clearly not the central tendency of equities in 2Q24

With multiple rate cuts nearly assured through year-end, investors can profit from the iron-clad link between changing rates and bond fund prices. But there are two circumstances that introduce complexity: 1) the yield curve will likely un-invert during this process, and the longest duration funds may therefore not experience the strongest price response; 2) potential changes in credit spreads may either enhance or diminish the duration effect felt by corporate bonds.

Confidence was shaken in the bulletproof Mag 7 as only Tesla and Apple (the YTD laggards of the esteemed group) escaped what was otherwise a fairly uniform 5-6% haircut. Those seven magic names shaved 70 bps off the S&P 500’s narrow monthly advance (but still account for half of the index’s YTD performance).

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The S&P 500’s Q2 bottom-up estimated operating EPS sank 3% to $56.38 in the first month of reporting (Chart 1). This is a notable departure from the 2% rise we saw with the first month of Q1 results. One month is certainly not a trend but the most recent data brings some question into the above-average, no-erosion EPS estimates we have grown accustom to.

Read this week's MTI report.

Multi-cap funds face two paradoxes that introduce subtle hurdles into their fund analytics. While it is desirable for a fund to rely on a sound investment process and to follow that process consistently, a successful multi-cap fund might not be able to meet both desires simultaneously. Second, a successful multi-cap fund will always be compared to the highest performing peer group while unsuccessful funds will be compared to a less successful set of peer funds. Attentive fund analysts can overcome the challenges we have identified in this study, assuming they are cognizant of the unique issues facing multi-cap and mid-cap funds. This report is intended to arm analysts with just such insights to ensure that benchmark and peer group comparisons are meaningful and constructive.

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Read this week's Major Trend. 

The latest CPI report was a tad cooler than consensus. Our scorecard suggests the modest disinflationary regime is likely to persist.

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Value’s migration behavior was the key to its failure between 2010-2020—its pattern got progressively worse, culminating in a Value trap during 2017-2020. We believe macro tailwinds and positive surprises are both needed, and, while the setup on the macro front, post-2020, has become quite favorable, in order to breathe more life into Value we need to see the upswing in earnings surprises continue.

We do think that a September rate cut—the first of many—now looks likely. But the aftermath of any cut might not be what traders are conditioned to expect. Subsequent to the tightening cycles of 1999-2000 and 2006-2007, the initial rate cuts provided timely excuses to dump stocks—as did most of the cuts that followed.

We don’t contend that the 3.3% YoY gain in CPI totally understates today’s inflation rate; however, small measurement errors add up over time. Only a government economist could believe that the CPI’s 21% increase since January 2020 captures the true rise in Americans’ cost of living.

The unbounded nature of large-cap and small-cap styles means that they cover a great deal of territory, while mid-cap stands alone as a bounded style, and such limits significantly influence how a fund is classified. On the other hand, multi-cap is intentionally defined with wide latitude, but shares a style category with mid-caps, despite having little else in common.

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