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With promised breakthroughs on Brexit and the trade war miraculously occurring on the same day, few pundits now believe the market is anywhere close to an important peak. (A peak in the S&P 500, that is, since peaks occurred long ago in the ACWI, MSCI Emerging Markets, NYSE Composite, Value Line Arithmetic, S&P MidCap 400, and the Russell 2000.)

The Core CPI is in line with consensus. The recent string of weak economic numbers has increased the odds of an imminent recession. A currency pact with China would serve to cap the upside in the dollar and may even help weaken it, providing support to inflation.

Equity market themes have been boringly consistent of late; growth beating value, large beating small, and domestic beating international. In the factor world, Momentum and Low Volatility have been investor favorites for most of 2019 while Value resided in last place – the same old, same old. Then, something remarkable occurred on September 9^th.

Read this week's Major Trend. 

The yield curve’s ten-month moving average inverted in September, hence the yield curve inversion can no longer be dismissed as transitory; the Boom/Bust Indicator remains below its descending 10-month moving average, confirming economic weakness predicted by the yield curve; and, the “Present Situation” component of September’s Consumer Confidence survey slipped below its 10-month moving average for the third time in 2019.

Small Caps came tantalizingly close to activating a major VLT BUY signal in September, with the Russell 2000 closing less than a half percent below the trigger level. A new bull signal from this indicator wouldn’t “fit” into our market and economic narrative, but we won’t sweep it under the rug if it occurs.

Value, High Beta, and Small Cap stocks all captured a few rays of sunlight for the first time in a long while. It’s too early to tell if last month’s leadership U-turns can be sustained, but major market trends are the most susceptible to reverse during cyclical bear markets.

Despite higher volatility, market performance is still up in the high double-digits YTD. Interestingly, as our index of High Quality Stocks versus Low Quality Stocks shows, High Quality is prevailing in terms of relative performance.

Bond and money-market fund subsets are seeing strong net cash inflows year-to-date, having captured $581 billion thus far (versus $176 billion at this time last year).

September was an emotionally exhausting month for investors as reversals in major themes produced wide-ranging repercussions. Movements in various markets have been increasingly tied to bonds—the market that is most sensitive to recession outlook.

The groups we examine here are particularly interesting because they are a diversified mix across sectors with varying macro-factor relationships and risk profiles. They have scored well for a long period of time and have been long-term positions in our SI portfolio.

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The Momentum style—in which investors buy what has been going up recently—represents an optimistic, hopeful, “I’ll take some of that” mentality. The Low Volatility factor entails a pessimistic, fearful outlook in which investors want (or need) to stay invested in stocks but desire downside protection in case the market performs badly.

Read this week's Major Trend.

Style rotation! Regime change! Market action of the first two weeks of September coaxed the few remaining Small Cap Value managers off ledges from New York to San Francisco.

Read this week's Major Trend. 

This week’s massive stock market leadership flip has certainly remedied some of the breadth weakness we discussed in this month’s Green Book. But we can’t help wonder whether the move is analogous to performing a transplant on a 95-year-old. The patient might survive the surgery, then die while under anesthetic.

The Core CPI registered its highest YOY increase of the past year. However, a recent NY Fed survey and other inflation forecasts seems to point to softening expectations. During Fed easing regimes, the CPI has been a good indicator of how aggressive the Fed needs to be. The next few months will be critical in assessing our economic situation.

Smart beta ETFs have become an immensely popular investment tool, attracting billions of dollars in AUM by providing investors with targeted exposure to factors such as Value, Momentum and Quality.  Characteristics such as these have been shown to generate alpha over time, and investors understandably wish to have focused positions in these return-generating styles.