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

The December employment report temporarily eased fears of a severe U.S. slowdown. That’s a mystery to us.

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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.

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While the number of recession forecasts is on the rise, there’s a general reluctance among economists to project a downturn in the absence of a yield curve inversion.

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Wage inflation should accelerate in the months ahead, oil could bounce from its oversold low, and college textbooks might double in price before the fall semester. No problem…

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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.

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Having monitored market internals for warning signs for longer than we care to admit, it’s refreshing to turn around and watch many of the same signals for… wait for it... BUY signals!

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Christmas Eve came not with snowfall but a market freefall which was the worst-ever recorded for that date.

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While our market disciplines remain negative, we certainly aren’t oblivious to the haircut in equity valuations that’s already occurred.

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The market difficulties of 2018 were hardly limited to stocks. Commodities, in fact, were the worst performer among the seven major asset classes.

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After a bad market year like 2018, there’s a natural instinct for allocators to skew portfolios toward assets with poor recent performance. History suggests, though, that one shouldn’t make a habit of buying an asset on the basis of price weakness alone.

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The best we can say about last year’s Bridesmaid asset—the S&P 500—is that it did not underperform “the S&P 500.”

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Our analysis of the Bridesmaid effect originated in 2006, but was based on S&P 500 sectors rather than asset classes.

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Momentum strategies aren’t for everyone. Still, contrarians should recognize that buying the prior year’s worst performing sector for a one-year hold has been an underperforming proposition over the long term.

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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.

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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.

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The old maxim says that when the bears have Thanksgiving, the bulls have Christmas.

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The tops of 1990, 2000, and 2007 were all better “telegraphed” by the action of the market itself, than the September 2018 peak, but secondary measures of market internals suggested all summer that the internal trend was in fact deteriorating—and so did the action in low-grade corporate bonds.

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A bear market will almost always prove to be the catalyst of one or more shifts in long-term market leadership.

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The consensus focus all year has been on the boom in U.S. corporate profits.

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While the monetary and liquidity backdrop has deteriorated all year, the shorter-term economic evidence has remained mixed.

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