Of Special Interest ...examining a significantly timely topic

It’s time to start looking but too early to start buying. In this issue the groundwork is laid for being ahead of the crowd in timing a potential move back into the traditional inflation hedge stocks. A new conceptual stock grouping is introduced (The Inflation Resurgence? Index) and the current status of some inflation monitoring tools is reviewed. If a re-entry can be timed well, a profitable tactical move may be in store sooner than most now expect.

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While a move of 15%-20% more from current levels would not be surprising, all things considered, we have decided not to partake of this “opportunity.”

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Combining historic P/E multiple levels based on various inflation environments, with “normalized” earnings for S&P 500 and DJIA, twelve-month potential for DJIA could be 1177, 151 for S&P 500. More realistic level might be 1115 for DJIA and 143 for S&P 500. However, Bonds might well provide even greater total return.

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Energy market weight now down to 20%, from 32% in late 1980. Historic weighting has been 17%. The worst part of the “round trip” may be close to over. Good rally expected in the next 90 days, but new long-term leadership is not in the cards.

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A distribution by traditional economic sectors of groups ranked “very good” or higher. We think this provides a good fix on current market leadership areas, as well as providing clues as to future areas of leadership.

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Does it pay to buy last year’s winners? Not usually. 1981’s best and worst performers reviewed, with an update of what happened to 1980’s best and worst in 1981.

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Depending on how you measure it, with a few days to go, it’s either been a superbly profitable 2023 or a year that barely crept above the 30-year average.

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The Leuthold Major Trend Index tracks eight sentiment surveys; four from the Conference Board covering consumer confidence and four industry measures of investor convictions. Each of these are contrarian signals, meaning that negative sentiment often relates to stronger equity markets while positive sentiment leads to weaker markets. We periodically review the effectiveness of each signal in the MTI, and this study takes a fresh look at a group of indicators related to consumer confidence and investor expectations.

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Wise investors have long understood that fear and pessimism often create excellent buying opportunities, while exuberance and greed often produce an environment that leads to poor future returns. Sentiment is one of the four pillars of our Major Trend Index, and a wide variety of approaches to gauging the mood of investors have evolved over the years. One set of metrics within our Sentiment category focuses on the level of volatility implied in option prices, and our research shows that option volatility is a reliable, contrary indicator of sentiment, which in turn is a useful regime indicator for future returns.

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The timeline of American economic development is punctuated by episodes of intense capital spending to build out a new and revolutionary concept that transforms the entire country.  The investment plans of hyperscalers Microsoft, Alphabet, Amazon, and Meta have captured the public’s attention this year as the release of ChatGPT in November 2022 ignited a quantum shift in capex spending, with the third quarter of 2025 coming in at a run rate of $97 billion, or nearly $400 billion annualized.  The astronomical amounts being spent to build AI capacity are almost hard to fathom, and today, we take a closer look at the data center phenomenon.

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Tracking revenue and earnings beats to identify conditions where the Equal Weighted S&P 500 may outperform the Cap Weighted S&P 500 (or vice versa). Original study by Brian Weisenberger, guest contributor, along with Scott Opsal.

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From its December 1989 inception through the end of 2022, the Dividend Aristocrats (DA) Index handily outperformed the S&P 500, posting an 11.8% annualized return compared to the parent index’s 9.7% gain. However, the AI mania driving the market today has erased much of that 33-year advantage, and Dividend Aristocrats rank as the worst performing style since the beginning of 2023. We were intrigued by this turnabout and what it means for investing in dividend growers going forward.

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Levered ETFs have been on the scene for almost 20 years, but their popularity has exploded during the post-pandemic bull market led by the tech titans that dominate the Artificial Intelligence evolution.  Two characteristics of levered ETFs suggest to us that this asset class could possibly be a useful barometer of investor sentiment.  First, their exaggerated payouts mean that investors will win big when they are right and lose big when they are wrong, implying a high degree of confidence in their outlook.  Second, with their effectiveness measured in days, these instruments are best used to reflect an outlook that will come to pass in a fairly short time.  These two properties are suggestive of a particular mindset, and our study considers this signaling potential from a number of angles.

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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.

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Price momentum is one of the essential factors in a quantitative investor’s toolbox, consistently demonstrating its effectiveness across different asset classes and multiple market cycles.  The dimension of periodicity indicates that time frame is a key determinant of Mo’s potential. Shorter time frames exhibit a reversal pattern, however 9- and 12-month windows show nicely positive results.  Furthermore, Momentum's success at the stock level translates into excellent returns when companies are grouped into sectors and industries. Our research indicates that Mo is at its best when industries are more narrowly defined rather than being applied at the sector level.

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As tactical investors and market historians, we are intrigued by the long cycles of market leadership, always curious to understand what drives these seismic shifts.  One idea that continually pops up in our studies is the notion that bear markets frequently tend to produce changes in asset class superiority.  This study examines the relative performance of three pairs of major asset classes: small vs. large, value vs. growth, and international vs. domestic.  The historical record seems to corroborate our intuitive thesis that bear markets and asset class leadership rotations are connected, either due to changes in fundamentals or market psychology.

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Extended bull markets are the primary attraction of equity investing and play an integral role in generating long-term returns.  However, investors must take heed when psychological excesses turn a garden variety bull market into mania-induced price chasing.  Instead of reaping the customary gains offered up by a typical bull, the risk and reward tradeoffs become exponentially larger when exuberance overpowers prudence.  Recognizing the difference between a bull market and a bubble is critical for building a respectable long-term track record.   There are subjective attributes common to most manic equity markets, and although these signposts are not mechanical or quantitative, taken together they tell a coherent story.

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With yesterday commemorating the 25th anniversary of the S&P 500 Y2K peak, it’s worth evaluating the long-term results of the unlucky purchases of U.S. equities occurring at that time. Of course, it’s doubtful that many investors decided to dump their money-market funds and go “all in” on stocks that day. Instead, think of this analysis as a review of how one’s dutiful, monthly 401(k) contribution for March 2000 has likely performed over the subsequent 25 years.

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This essay takes a broader view of Manias, Bubbles, Panics, and Crashes by expanding on these terms, considering the benefits of studying stock market bubbles, and looking for commonalities that mark each phase of a euphoric price cycle.  The most practical reason to study bubbles and crashes is the simple fact that they appear far more often than one might expect. Rational investors may be inclined to dismiss the periodic appearance of bubble conditions as just so much noise and frivolity, leaving us to focus on real world issues like the economy, profits, and expected returns. However, we believe the impact of manias and crashes on investment performance over an entire career is significant to the point of being decisive, and that is the most compelling reason to study the history of financial manias.

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Defined Outcome and Derivative Income ETFs each offer attractive features in the form of modified payout or income characteristics. However, these benefits come at a cost of limited upside, and a “buyer beware” approach should be taken to weighing their pros and cons. Sustained bull markets reveal the true impact of trading potential upside for considerable benefits in the here and now. This study attempts to quantify the opportunity costs of capped funds using 2023-24 as a particularly harsh test case.

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