While growth rates in M1, M2, and MZM appear to have leveled off following their sharp declines over the prior 18 months, the annual rate of decline in the Adjusted Monetary Base (a good proxy for the Fed’s balance sheet) accelerated to almost 12% at year-end from just 3% six months earlier.

There’s an old saying that bear market rallies look better than the real thing, yet the upswing off December lows looks even better than the typical bear market rally.

The move off the late-December lows has been broad and powerful but not at all unusual for a countertrend move in a bear market. Since 1945, bear market rallies in the S&P 500 have lasted an average of six weeks and carried the index higher by an average of 10.8%.

Quality is one of the most popular and successful of the equity market’s quant factors. It is intuitively appealing and serves as a useful defensive strategy in falling markets. Low Volatility and Dividend Growth are also defensive factors, while Momentum and High Beta are viewed as aggressive or bullish factors. These offsetting behaviors would seem to make for excellent diversification opportunities in equity portfolios, and for the most part, that is true. 

The latest CPI numbers matched market expectations. Lower oil and stock prices are disinflationary. China will lead the U.S. in inflation and currencies.

We wrote in the January Green Book that the S&P 500 Christmas Eve low did not have the “right look,” in that: (1) there had been no sign of “smart money” accumulation beforehand; and, (2) downside momentum was also at a new low for the entire correction. Smart money buying is measured by the Smart Money Flow Index, which evaluates trends in first half-hour market action (considered to be more emotional and news-driven), and the last hour of trading (viewed to be more informed and institutional in nature).

In terms of long-term planning, corporate executives are often tasked with choosing between expanding their business or returning cash as a way to reward shareholders. In the quant world, the two decisions have a consequence on future stock returns.

As the market sunk to a 3% loss on Christmas Eve, we sensed genuine investor panic—at least among the fraction of investors then paying attention.

While investors obsess over the market level at which a hypothetical “Powell Put” might come into play (or whether such a put even exists), they seem to have overlooked the absence of another such put that proved dependable throughout the cyclical bull market.

2018 was frustrating for most investors as Value continued to struggle and positive Momentum performance was difficult to capture. Small Caps, Mid Caps, and ADRs also underperformed.

The Homebuilding stocks represent another Consumer Discretionary group ranking Attractive via our GS Scores; we have held the Homebuilding group for the last year and a half. Homebuilders is an extremely rate-conscious industry group given mortgage rates’ impact on housing affordability (and thus, demand).

The “Dreams” portfolio represents a simple industry group trend-following approach, while the “Nightmares” portfolio serves as a bottom-fishing strategy made up of the previous year’s biggest losers.

The S&P 500 has again shown its mysterious ability to defy the conventional bear market threshold, with the decline into its Christmas Eve low becoming the fourth one in the last 30 years to halt just shy of the magic -20% figure.

The Attitudinal category’s net reading is the best (i.e., most pessimistic) since the week following the February 2016 correction low. While that’s an encouraging sign, there’s no mechanical threshold on this composite which would indicate a “safe” re-entry point.

The lack of more meaningful MTI improvement in response to this month’s collapse suggests the bear has yet to fully express himself. But the swipes he’s taken so far have hit hard: Last week saw a nearly 150-point gain in the Intrinsic Value composite to its best level since April 2016.

It’s been one of the worst years on record for diversification, with our hypothetical All Asset No Authority (AANA) portfolio down 7.2% YTD through yesterday. That’s the second-worst year for AANA since 1972, and there’s probably not enough time left for performance to undercut 2008 (-24.9%) for the bottom spot.

The median trailing P/E across the Leuthold 3000 universe has corrected more than 30% from January’s bull market peak (and all-time peak) of 25.1x to just 17.3x on Friday, while the median Normalized P/E ratio has shrunk more than 20% to 22.4x.

Headlines surrounding the U.S. housing market have recently fixated on sputtering home sales; declining affordability, thanks to the combination of rising mortgage rates and sky-high home prices, is to blame.

Lower oil prices are dragging down the headline number. Markets are urging the Fed to take a pause in hiking. Core inflation remains in a healthy, tight range. Wealth effect concerns may drag on future price increases.

Three years ago, we did a series of studies looking at price reactions to corporate earnings releases (ER) and we found that, since 2007, price movement has become more dramatic on ER days.