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

U.S. 10-Year Treasury Bonds—last year’s Bridesmaid holding—eked out a 1% gain in 2016, a disappointing result but one that preserved a streak of positive annual returns dating back to 2001 (Table 2).

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While the consideration of risk seems almost a quaint notion as the bull market nears its eighth birthday, it’s nonetheless worth noting the Bridesmaid allocation strategy has generated a favorable return/volatility trade-off in relation to: (1) the seven candidate asset classes; and, (2) the strategy of owning an asset class with a prior-year total return rank other than #2.

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Our analysis on the Bridesmaid effect originated back in 2006, but was initially based on equity sectors rather than asset classes.

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Table 4 shows the annual sector selection and accompanying performance results for the Bridesmaid approach dating back to 1991.

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Not wanting to be seen as shameless shills for momentum investing, we’ve developed a contrarian alternative to the Bridesmaid sector approach that’s delivered even better long-term outperformance. It’s based on the holy grail of value investing: Low P/E.

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Table 6 summarizes annual sector selection and accompanying performance for the “Cheapest Sector” strategy back to 1991.

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For nearly three decades The Leuthold Group has tracked its hypothetical industry group portfolios composed of the previous year’s “Dreams” (best performers) and “Nightmares” (worst performers).

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A stock market wild card in 2017 is the potential for a significant reduction in the corporate tax rate. President-elect Trump’s desire to lower corporate taxes, if implemented, would have multifaceted impacts on businesses.

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Bull markets seem to create their own moods that lead to fundamental developments being viewed in a mostly favorable light.

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We revisit our “Red Flag Indicator” of prior bull market tops versus today. Usually most of these internal market measures will deteriorate in advance of the final bull market peak. At the latest S&P high, three of the seven leading measures had raised Red Flags, by not confirming, but two of them (DJ Transports and the NYSE A/D Line), are within just ticks of new bull market highs.

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With DJIA and S&P 500 losses in the 2015-16 decline limited to less than –15%, there’s no way we’d argue the episode represented a completed cyclical bear market (and we said so at the time).

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One of our most reliable stock market liquidity indicators decided not to wait for Janet Yellen to formally hike interest rates later this month.

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While the Dow Jones Bond Indicator has stood the test of time, history shows that rising bond yields are not always a bearish stock market phenomenon.

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We considered the launch of the QE tapering program in January 2014 as the formal onset of the Fed’s tightening campaign, and that view seemed to be on the mark when High Yield bonds, and then stocks,  unraveled over the next couple of years—although the final losses in the DJIA and  S&P 500 fell short of what we expected.

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Thanks to the U.S. dollar’s recent spike, foreign equities in dollar terms declined during November while the U.S. markets were celebrating a Trump victory. Thirty-nine of the 49 MSCI country indexes are in bear market territory from the perspective of a dollar-based investor.

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Companies are returning cash to investors at a level never before seen. Does the historically high level of cash being returned to shareholders crowd out the use of cash elsewhere? One wide-spread concern is that by shelling out cash through dividends and share buybacks, companies are spending less on capital expenditures. Is that a real concern?

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Earnings season is not only important for fundamental investors, it can be equally so for quant managers. For quants that incorporate fundamental data, like us, historical trends and changes in consensus estimates may weigh heavily on model output.

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Allow us to put forth yet another theory for this season’s plummet in NFL television ratings: Fed watching is back!

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One never appreciates what he or she has until it’s gone. In our case, during the many years it was freely available, we failed to appreciate the zero interest rate. Now that it’s gone, we already feel pressured to join a game where we (and very few others) have any edge: Fed-watching. Our real edge is that we recognize this.

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In mid-summer we suggested that attaining new market highs would probably require a rotation away from the long-time Low Volatility market leaders and into High Beta areas like Technology and industrial cyclicals.

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