Read this week's Major Trend. 

Read this week's Major Trend.

Like January, February’s CPI figures were hotter than expected. Stickier inflation data, spiking breakeven rates, and fewer Fed cuts haven’t scared the equity market one bit.

Factor performance was decidedly risk-on in February. Through month end, high-momentum names have outperformed the universe by 6.7%—we have to go back to the Tech Bubble to find a year when momentum had a stronger start.

Improvement in bank lending trends should be a tailwind for economic activity, while steeper yield curves also imply a looser lending environment lies ahead. Another area supporting U.S. economic resilience is the wealth effect: The surging wealth effect is boosting consumer confidence which, in turn, leads to higher consumption.

It’s been 26 months since the all-time peaks the NYSE Weekly and Daily Advance/Declines Lines. The weakness in the Daily version is especially troublesome given the strong upward bias it’s exhbited since 2001. In addition, figures for 52-Wk. New Highs and New Lows have been anemic relative to the major index gains—especially among NASDAQ stocks.

Breadth and leadership of this bull market have fallen short of the typical patterns of early-cycle bulls, even if contrasted only to other new bulls that did not emerge from recessionary lows, like 1962-66 and 1987-90. Still, participation looks broad enough that the odds are against an imminent cyclical peak.

Mentions of the yield curve by the financial media and market pundits have plummeted the last few months. That’s understandable, but dangerous. We remember the same happening in 2007—with one of the more memorable dismissals coming from Fed Chair Bernanke.

We are curious if factor ETFs have provided downside protection in recent years’ selloffs or whether their defensive nature, shown by academic studies, is lost in the translation to live-money portfolios.

On its face, the second month of Q4 reporting was much more positive than the first. After sagging in January, the S&P 500 bottom-up EPS estimate rose back to $54—almost exactly where it stood before Q4 announcements got underway (Chart 1). With just a few stragglers left to report, full-year 2023 EPS will come in at $214. That’s almost 9% better than 2022’s final result.

Read this week's MTI update.

Real Estate was the top performing sector in the final quarter of 2023, climbing an impressive 18.8% against the market’s 11.7% gain.  Signs of enthusiasm for the REIT industry have been rare in recent times.  While the S&P 500 gained 96% over the last five years, REITs returned a paltry 31% over that time.  We wondered if last quarter’s success signaled that it was time to take a fresh look at the group.  This report examines the investment merits of REITs as an asset class, using the mental model of evaluating “what you pay vs. what you get.”

Read this week's Major Trend. 

CPI readings were a tad hotter than estimates again in January. Given the speed of disinflation that’s currently priced in by the market, we are probably headed toward a period of expectation adjustment.

See this week's Major Trend Index Update.

It’s too soon to know if the October low for small caps will stand, but it would have been a better, more buyable low if it had been accompanied by a recession. It’s all about “initial conditions.” Russell 2000 lows associated with recessions bottomed with a normalized P/E multiple nearly five points below that of the median multiple for non-recessionary lows—and subsequently gained an average of 185% versus +75%.

The stock market remains “externally” strong, with the S&P 500 and DJIA at new all-time highs on February 2nd.  However, the YTD performance gap between the S&P 500 and the Russell 2000 is already 8%—the worst five-week start ever for Small Caps on a relative basis. And, on a trailing 12-month basis, the percentage of S&P 500 stocks outperforming the index, itself, is the lowest on record at just 25.6%. That’s made it a challenging time for active managers and dart-throwers alike.

The probability of a soft landing has materially increased, while stronger than expected growth is likely to put a floor on inflation, which challenges the consensus disinflation view. A refresh of our Dollar Monitor suggests a weaker dollar going forward.

While mid- and small caps notably underperformed, large growth results were freakish. Measured against the S&P 500 Growth index, an implausible 96% of active large growth funds beat that benchmark—a result that stands as one of the most extreme win rates ever seen for a style box.

Since the pandemic, investors have been leery of adding REITs to their asset mix due to fears that flexible scheduling and work-from-home will permanently diminish the demand for office space. While that view may prove correct, the magnitude of such a change is much less significant than some might suspect.