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

The first several years of this recovery badly underperformed forecasts, with partial blame going to a pair of deflationary shocks (the European debt crisis and oil price collapse).

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A good rule of thumb for thematic and sector investors is that stock market leadership rarely repeats itself in consecutive cycles.

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Fourth quarter earnings were the last ones to be burdened by a 35% top marginal corporate income tax rate, and therefore seem to have been given a pass by the analyst community.

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We’ve chronicled the ever-expanding gap between commodity prices and commodity-oriented equities.  Don’t expect a rebound in one based on the strength of the other. There’s no clear historical tendency for the weaker asset to catch up.

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During each of the last five months, the U.S. economy has shown a broadening array of “late-cycle” characteristics.

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In light of the remittances they are about to drop in the mail, many readers will find it incredible that the U.S. Treasury has largely sat out the last two years of the stock market and economic upswing.

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After months of research and econometric modeling, we’ve come up with a list of U.S. and foreign industries, companies, and individuals we expect to benefit from a trade war between the U.S. and China.

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The setback from the January 26th market peak represents the ninth correction of 7% or more since 2009, the most ever recorded during a single cyclical bull market.

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Last fall’s market rally drove the DJIA off (literally) our 1900-Present Bull Market chart. Within a year, this bull jumped two spots to #3 in the all-time rankings dating back to 1900.

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The stock market’s nine-day decline off its January 26th high met our definition of an intermediate correction—an S&P 500 loss of between 7-12%.

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We’ve repeatedly shown how well-telegraphed the bull market highs of 1990, 2000, and 2007 were from the perspective of breadth and leadership. Surprisingly, though, the historic high of August 1987 was not so well-anticipated by the eight market bellwethers to which we’ve lately referred.

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At the risk of yelling “fire” in a crowded theater, we present a few parallels between recent action and the year leading up to the October 1987 crash.

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Today’s parallels to stock, bond, and forex market action of 1987 might not be so worrisome if that’s all there was to the story.

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We somehow missed this signal in January, perhaps because we were pre-occupied with so many other signs of “climate change.”

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The prospect of a mid-term congressional shake-up may rattle the markets in 2018. Since 1962, nine major bear market lows occurred during mid-term election years, with eight of those happening during the traditionally weak months of May through October.

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For the first time in this bull market, defensive stocks failed to provide any semblance of defense during a market correction.

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A review of Quality factors, as well as the lower valuations of High Quality stocks, supports the current High Quality cycle amid rising market volatility. The Leverage factor may provide particularly strong backing for High Quality stocks.

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So, what happened to the January Barometer—the old analyst’s maxim that a market gain in January portends a gain for the full year?

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We believe the decline from the broadly-inclusive market highs of late January is a yet another late-cycle correction and not the first installment of something more sinister.

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In the last couple of months, we’ve come across a handful of economic “check lists” purporting to show the relative absence of recession harbingers as the expansion closes in on its ninth anniversary this summer.

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