The S&P 500’s 8.9% November gain ranks as the 18th largest over the 800 months since the index’s inception in March 1957. Are such short-term market spikes typically followed by additional upside? The evidence is not quite as compelling as the data-mined analysis we found on X (formerly Twitter) initially had us believing. 

It would take a solid December gain of about 5% to bring the S&P 500 back to its all-time high of 4,796.56—printed on January 3, 2022. Well then, what’s been accomplished in the nearly two-year trip to nowhere? For one, valuations for the cap-weighted S&P 500 have receded from truly bubbly readings to levels we’d merely consider “pretty damn high.” 

The retail investor is warming up to the stock market. We also see the “smart money” is also taking a shine to stocks. It’s rare to see these two classes in agreement. Usually when the retail public becomes euphoric, insiders become fearful.

Will 2023 be remembered as a delightful year with +20% returns, or might it go down as a time when stocks lagged even a risk-free money market fund? We introduce this month’s research topic: The huge return disparity between the capitalization weighted S&P 500 and the equal weighted version.

Value has worked much better within small caps compared to large caps for three of the last four years. This is nothing new, though, as value is historically a much better factor within the less efficient smaller-cap universe.

With the market penciling in four rate cuts in 2024, the consensus appears to have accepted the idea that the last rate hike of the series was in July. We look at various market indicators around the end of previous hiking cycles and compare the historical pattern with today’s episode.

Read this week's Major Trend. 

As we put a fork in the S&P 500’s Q3 earnings, our snail trail is now decidedly pointing south. However, the kink you see in Chart 1 should not be viewed as an EPS collapse. An accounting sleight of hand from Berkshire Hathaway—R.I.P. Charlie Munger—shaved off just under $3/share in EPS for the index. If that were added back, the quarterly estimate of $55 would be pretty much unchanged since the start of the summer.

Read this week's MTI update

Read this week's Major Trend. 

Performance chasing is one of the most common behavioral errors made by mutual fund investors and represents one of the most heavily traveled roads to poor investment results.  Now, when we use the phrase performance chasing it is universally understood that we are talking about chasing good performance. That is why we are so intrigued with TLT, this year’s fund flow leader among bond ETFs. The iShares 20+ Year Treasury Bond ETF has raked in over $20 billion in new assets this year, but not by posting strong results. Rather, inflows have surged despite returns that are frankly terrible. Such an incongruity deserves a closer look, and this study lays out some of the key storylines behind this surprising development. 

CPI readings for October were softer than estimates. We caution against linearly extrapolating the current disinflation trend. Our scorecard update shows an uptick in inflation pressures.

Read this week's Major Trend. 

At the pre-COVID business-cycle peak of February 2020, the qualifying income for a median-priced home was $47,232. As of September 2023, that level had surged exactly $60,000—to $107,232! How many households have enjoyed a pay boost of even one-third that amount in the last four years? 

One of this year’s most fascinating stories in financial markets evolves around investors’ atypical response to the dreadful returns posted by TLT (iShares 20+ year Treasury bond ETF). Despite its dismal performance, investors have been moving a tremendous amount of money into TLT. 

The number of firms beating on both the top and bottom lines has been underwhelming thus far. Those that missed EPS estimates have seen their equity drop an average of 4-5% relative to the index. That’s quite a bit higher than the usual 2-3% decline we’d expect given the history of data.

The 10Y-2Y yield curve broke above the key level of -0.4% and that means a double-bottom pattern is in play. While we are confident that a major steepening cycle is here, we have to acknowledge that the nascent move could fail. A steepening move is also the market’s way of signaling easier conditions ahead.

A little over half of the S&P 500 reported earnings for calendar Q3-23 in October. Bottom-up operating EPS estimates for the quarter have remained basically flat since May. This is a positive development given the proclivity of EPS estimates to erode over time. We should note, however, that longer term, the decline in estimates for Q3 has been well above average—diminishing by 14% since April of 2022. If there will be another reporting window pop in EPS estimates for Q3 like we saw for Q1 and Q2, it will have to come in November.

Read this week's Major Trend. 

Read this week's Major Trend.