At the market’s January 27th close, the headline blared, “Russell 2000 Enters Bear Market.” Well, not exactly. If one accepts that a 20% decline constitutes a bear market, then the bear actually began on November 9, 2021—the day after the Russell 2000 peak.

It is a scene easy to imagine: Two children on the playground arguing about who’s the top dog. This schoolyard scuffle played out in 2021 between the Value and Growth styles, with each claiming bragging rights from their own perspective.

It’s been a year since the retail crowd on WallStreetBets—a Reddit forum—banded together to “stick it to the shorts.” The event was short-lived, but the effects are still being felt throughout the market.

Our ongoing research into the relative performance of active vs. passive fund styles reveals that market conditions play a significant role in the active/passive return cycle. Accordingly, we identified a set of metrics that describe the market conditions we believe influence which of the two management styles is more likely to outperform. This note updates our research efforts through December 31, 2021.

Read the week's Major Trend

Yesterday, the Russell 2000 closed down 20.9% from its November 8th high, and market bulls have conceded it was “due” for a pullback after a 146% gain off the March-2020 COVID lows.

The Russell’s decline is moderate by the historical high-beta standards of Small Caps. However, this drop—combined with other developments transpiring over the last few years—has produced a shocking result: The Russell 2000 is now unchanged on an inflation-adjusted basis since its “Quantitative-Tightening Top” of August 31, 2018. But what a three-year ride it’s been!

Read this week's Major Trend update.

One measure of a bubbly bull market is the degree of speculative fervor embedded in the prices of companies with nebulous, indeterminate, or even nonexistent intrinsic values. Since the bear market low in March 2020, speculative manias have evolved in a menagerie of asset classes including Innovators & Disruptors, SPACs, meme stocks, crypto currencies, and NFTs. Based on the breadth of valuation extremes across numerous and diverse assets, this bull market may rank second to none.

Read this week's Major Trend. 

We wrote in the latest Green Book that a breadth indicator that should be more well-known than it is—the High/Low Logic Index (or HLLI)—had moved to “maximum negative” right at the cycle high in the NASDAQ Composite on November 19th. Specifically, the 10-week moving average of this indicator showed a perilous internal condition in which too many NASDAQ stocks were reaching 52-week New Highs and New Lows simultaneously. That’s the very definition of a “fractured” market, and has preceded some important NASDAQ declines. There have also been a couple of premature warnings, as in the summers of 1996 and 2019.

The CPI numbers suggest inflation is broad-based and less transitory than expected. Our Scorecard starts to tilt a bit toward a cost-push inflation regime, caution is warranted. Watch the yield curve closely.

Read this week's MTI update.

After years of underperformance, Value was finally productive—it was the best factor we track. In general, overall factor performance was good, but worked much better within small- and mid-caps compared to large-caps. Value was especially superior outside of the large-cap universe.

We know our view on this is controversial, but we like the relative prospects for Small Caps—even though we still believe the broad stock market is currently the most speculative one in U.S. history. 

When we entered the business in 1990, our grandmother mailed us a decades-old clipping from a Minneapolis newspaper featuring a columnist’s cryptic take on a hand-rendered chart. He coyly claimed to have found it in “an old desk”—and it wasn’t until the internet age that we’d learn of its unattributed source.

Numerologists will be disappointed to learn that longer-term time cycles don’t line up for a prosperous 2022 for stocks. However, the historical “hit rates” aren’t high enough to justify running for cover if you have no other fundamental stock-market worries. 

If January is the 21st month of the recovery, then time has elapsed in “dog years.” And that might put this “canine” recovery at around 12 years—just shy of where we might be had COVID never occurred! 

Market revelations were certainly not in short supply in 2021. We believe some of those surprises will continue to have a huge impact on markets in 2022. We have updated our time-cycle composites to provide an idea of what a “typical” 2022 could look like.

You’ve likely heard of “shrinkflation,” the practice in which a package of M&M’s is reduced from 40 pieces to 32, while the price per bag is unchanged. Publicly-traded companies have been engaged in similar schemes for awhile.

We take a look at our historical analysis of industry-group portfolios to see how the “Dreams” and “Nightmares” from 2020 fared in 2021. The industry composition of the 2021 Dream and Nightmare portfolios is also presented.