Inside The Stock Market ...trends, cross-currents, and outlook

In the last twelve months, spending on energy goods and services as a share of total consumer outlays dropped by 1.1%—that amounts to about $200 billion in savings (annualized).

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Not to pick a fight with Keynesians (or other economists), but we’re reluctant to label the explosion in the federal deficit as unequivocally “stimulative.” Some factors behind the increase probably do boost the economy, but others simply rob Peter to pay Paul.

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The S&P 500 came within 4% of its early-2022 high on July 31st, and some technicians insist that such a powerful recovery of bear-market losses has invariably been a bear killer. In both 1957 and 2000, however, bear rallies brought the SPX to within 1% of its prior high; and it’s worth noting, in 1957, the mid-July retest gave way to a recession in just six weeks.

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As we’ve noted, none of the major indexes has kept pace with the typical path traced out during past cyclical upswings. It has since occurred to us that this nearly ten-month stock rally is being compared to an unrealistically high standard: The current advance doesn’t have the advantages enjoyed by bulls that launched out of recessionary conditions.

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In mid-July, we sold our tactical portfolios’ small (2%-ish) position in physical gold ETFs. That holding had been built up from 2018 to 2020 to around 5.5% of the portfolio, then pared in early 2022 when Russia invaded Ukraine. That doesn’t mean we’re gold bears.

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The market broadened enough in July for the NYSE Daily A/D Line to “confirm” new SPX highs—a statistical positive: When the A/D Line made a concurrent 12-month high during July, the average return for August-December was +6.5% versus -1.1% when breadth didn’t confirm the index.

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Last month’s title, “Echoes of 2021,” didn’t fully capture the speculative fervor that’s gripped big Technology stocks—and the NYSE FANG+^® Index immediately set out to rectify that shortfall by tacking on another 5% to bring its YTD return to +74%.

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U.S. stocks have either begun one of the most underwhelming and economically illogical bull markets in history, or have staged an exceptionally long and deceptive bear market rally. Our bet is on the latter.

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With leading economic measures still trending down, optimists who advocated against fighting the Fed during the free-money era have ditched their own advice. Their focus is now on lagging indicators, like the employment numbers—but that last bastion of strength seems ready to buckle.

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Last month, we noted that Jay Powell’s preferred measure of the yield curve—Near Term Forward Spread (NTFS)—was a winner, but a newly introduced index by the Fed, “Financial Conditions Impulse on Growth (FCI-G),” is a dud. Several simple forecasting gauges we’ve relied on for years are considerably more effective.

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Factoring in both the duration and depth of the existing yield-curve inversion, it is considered more severe than all predecessors since the 1960s. Even Duke University yield-curve guru, Campbell Harvey, abandoned his January forecast that a recession would be avoided.

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Despite this year’s massive underperformance by the Equal Weighted S&P 500, the median stock doesn’t appear substantially more attractive than the cap-weighted index. Three of five valuation measures are now back in the top decile of readings, which we’d consider pricey in any monetary or economic backdrop.

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Although we can’t claim that the 2022 decline purged the economic and stock-market excesses for another multi-year bull, there’s nothing in the action of the S&P 500, itself, that exposes its upswing as fraudulent.

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Data included in the accompanying tables are normally placed in the Green Book’s Appendix, but we added them here to make an important point: Deteriorating market breadth and Small-Cap underperformance are not necessarily the same thing.

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While we have an above-market weight in Technology stocks in our Select Industries portfolio, it’s doubtful that NASDAQ bulls have drawn much inspiration from these pages of late. But here’s a simple finding to potentially rectify that.

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The NY FANG+® Index is up 68% YTD and +21% in the last month, with the Equal-Weighted S&P 500 up less than 2% YTD. Yet a measure of internal market disparity has 2023 barely cracking the top-ten of “incongruent” market years—meaning it can get worse before it gets better.

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For more than a year, we’ve characterized the U.S. economy and policymakers’ decisions as increasingly late-cycle in nature, but that probably doesn’t do justice to the U-turn in the investment backdrop.

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While we aren’t clamoring to add long-term Treasuries in tactical accounts, we believe that the past 18-months’ action has left them more attractive versus stocks than during most of the last 15 years. However, compared to gold, the S&P 500 still trails on a total return basis measured back to Y2K.

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Is the stock market disconnected from a souring economy? It might seem that way, and the topic dominated the discussion at the recent Market Technicians Association annual symposium.

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Developments over the last four months leave us even more skeptical that the November yield-curve inversion will join 1966 as a “false positive.” The number one reason being the subsequent shift in the yield curve itself.

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