· The latest CPI numbers were in line with consensus. Our Inflation Scorecard maintained a modest disinflationary reading. There are signs that demand-pull indicators will add to inflationary pressure over the coming months.

Read this week's update

The U.S. dollar has seen some interesting dynamics this year, so we’ve updated our U.S. Dollar Monitor. Currently, the model implies a higher likelihood of dollar strength, or at least a decent rebound over the next few months.

The Cyclical/Defensive Relative Valuation Ratio jumped to yet another record in July, with Cyclicals commanding a valuation premium of 23%. Put differently, investors have a very strong implicit bet that the economic expansion will continue.

Given the prevailing conditions at the beginning of this bull market, the S&P 500 has been an overachiever, though the same can’t be said of the broader market. This translates to an opportunity for active equity managers that nearly matches conditions in Y2K—and at a time when the active manager pool is now dwindling.

As a testament to the severity of the 2000-2002 Tech Wreck, performance of recent years’ laggards, like the Equal-Weighted S&P 500, S&P MidCap 400, and S&P SmallCap 600 are still well ahead of large-cap Growth on a 25-year basis.

Our hypothesis is that true active managers are more diversified than their style box indices and when one style has a prodigious quarter, active portfolios of that variety will surely lag. Q2’s low success rate for actively-managed growth portfolios is exactly what we expect in such a stylistically lopsided period.

These days, the rate of inflation is a much-discussed topic, as it hovers near the threshold that would allow the Fed to begin cutting interest rates. The CPI’s latest reading of 2.9% is down significantly from pandemic levels, but not quite low enough to claim victory in achieving the Fed’s 2% target.

Read this week's Major Trend. 

The S&P 500’s Q2 estimated bottom-up operating EPS shot 2% higher after the first month of reporting. This recovery effectively negates some of the earnings markdown associated with trade uncertainty in the months leading up to this reporting season. The EPS snail trails for the coming three quarters also leveled out or have even turned higher.

And just like that, we’re thrust back into the good ‘ole days where Roaring Kitty was a household name and SwaggyStocks.com was one of our bookmarks in Internet Explorer (RIP). Highly-shorted stocks are back in vogue among the retail crowd. Those virtuous crusaders—or perhaps compulsive gamblers—brave or stupid enough to crowd into names with almost 50% of shares sold short have returned for another round of “sticking it” to the short-sellers*.

Read this week's Major Trend. 

The relative valuation across major themes can be highly informative of investor sentiment and economic expectations. July’s Green Book observation of the unusually high valuations of cyclicals vs. defensives is suggestive, indicating a positive outlook on the business cycle and hinting at a risk-on mentality. Periods when the reverse is true would reflect concerns of an economic slowdown and a desire to play it safe when it comes to equity risk exposure.  Whether one is a portfolio manager looking to play the momentum in cyclicals or a relative value opportunity in defensives, it is worthwhile to keep an eye on this telling relationship.

Read this week's Major Trend. 

• The latest CPI numbers came in slightly below consensus again.
• Our Inflation Scorecard saw a few signal changes but maintained a modest disinflationary reading.
• The demand-pull side has started to show more inflationary pressure.

Read this week's MTI.

“Sell In May” has been better advice historically than random chance suggests. Still, that seasonal pattern has so far been “Trumped” this year, with SPX +12% since late-Apr. Technicians tend to view new market highs as bullish, but that’s not always the case. The NYSE Daily A/D Line provides a clue as to whether the mid-year strength is apt to persist.

Housing activity remains at very depressed levels, with 30-year mortgage rates near 7% keeping those with low-rate mortgages frozen in place, and those wishing to get into a home are frozen out. Qualifying income to buy a median-priced home is almost $105,000—up 122% from Feb-2020.

On the whole, the probability of an imminent recession has declined since our last update in April and now stands below 50%. Only two signals changed in this update, the most significant being the S&P 500, which improved from yellow to green.

Economic resilience that prompted the Fed’s pause is consistent with past cases. Equities and bonds have largely followed historical patterns. The exceptions—gold’s outsized return and the dollar’s weakness—highlight the unique risks introduced by the current political environment.