The Leuthold Group
@LeutholdGroup
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Institutional Research Disclosure: Distributor: Compass Distributors, LLC
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We have been active, asset allocators for over three decades. Our perspective is long term, yet we evaluate the underlying health of the market on an ongoing basis and make adjustments as needed.
$LCORX Leuthold Core Fund
$LCR Leuthold Core ETF
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The Norm S&P 500 PE closed yesterday at 23.4x— exactly ten points above the median of the last 12 bear market lows. We know that “valuations aren’t timing tools,” but bulls should be cognizant that if the market were to bottom here, it would represent the “priciest” bear market.
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Is this a 1st leg of new bull market or 2nd-largest bear rally of 125 yrs? The March low was 0-for-5 w/ conditions typical at cyclical bear lows. And the 30% surge off the low met 0-of-3 dynamics that usually accompany the 1st leg of a bull market. 0-for-8 is not encouraging.
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The SPX gain looks nothing like the early stages of any past bull mkt we’ve studied (“initial conditions” preceding this action were also in stark contrast). Even the recent small-cap rally leaves the $RUT gain from its lows at a fraction of that of a typical bull.
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Massive consumer deleveraging between 2008-2013 has been fully reversed. Real personal-interest payments recently eclipsed all-time high of ’07. This 6-yr, 50% increase is similar to that which preceded the last two
#recessions
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Most sentiment gauges show extreme optimism from institutional & retail investors. One showing fear is the weekly
#AAII
poll, which targets older demographics. Why are U.S. retirees so timid toward stocks? Could it be the thought of buying a new bull market w/ 1999 valuations??
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If this is a new bull market, it has achieved—in two-months’ time—what took the last bull market more than eight years to accomplish: surpass 25x on our Normalized P/E ratio.
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Large Caps have broken through valuation levels of Nov-08 & Mar-09 but are far from levels of Tech Bubble peak. Valuation spreads among Small/Mid Caps are truly historic, however. The opportunity in smaller Value stocks sets the stage for massive outperformance ahead.
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As devastating as the losses in the DJIA and S&P 500 have been, they actually UNDERSTATE the damage to the broad market. $SPX $DJI
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Regardless of valuation levels, periods of high unemployment were followed by strong $SPY gains, whereas full employment combined with top-quintile valuations produced just +2.9% on a 7-year forward basis. Today’s cyclical backdrop suggests it’s a very poor time to “risk up.”
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$SPX overthrows another longstanding record: $SPY cumulative total return since 3/9/09 is+468% (thru Nov. 4th), surpassing that of +454% attained during 1949-56.
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Years ending in 7:
#StockMarket
tends to have strong downward bias, especially from Aug-Nov (even if omitting extreme case of
#1987
) $DJIA
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Red Flag: Margin Debt >34% last 12-mos. Yet it rose >50% YOY before many key market tops & >60% before major bears of ‘73-74, ‘00-02, ‘07-09. Bulls awaiting a wilder speculative top ought watch this gauge—BUT some big bears surfaced w/ little/no warning: ‘69-70, ‘87, ‘90, ‘20
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Despite massive underperformance by equal-weighted $SPX, the median stock is not cheap: Trailing P/E, price/cashflow, price/book readings are >90th percentile; normalized P/E and price/sales are 86th & 89th percentile. That’s pricey for any monetary or economic backdrop.
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Big is Beautiful:
#LargeCaps
have erased all the Small Cap alpha provided since ‘03. LC domination now 99 months, the 2nd longest cycle. SC relative P/E now at 12% discount, down from record 41% premium. Market tops of ’87 & ’90 were preceded by a year of SC P/E compression
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Any new $DJIA high after today puts
#BullMarket
in
#1
spot for longevity, ousting 1921-29 bull. Gain since Mar. ’09 is in 5th place.
#DJIA
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2020’s market whipsaw hasn’t upset the trend of S&P 500’s Top-5 and 10 stocks from gaining market share. Thru 4/29 each added 3.3% to its weight; well clear of Y2K peaks. This is 1st time in 30 yrs the Top-5 $SPY firms have added this much weight in a 3- or 6-mo window.
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With few exceptions, bear markets do not typically “bottom” coincident with the downside extreme in momentum. Bear market lows of 2002 and 2009 exhibited the classic pattern in that the final bear market low occurred three to five months after the worst momentum reading.
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Drawn-out attempts by $SPX to recover to Jan. highs are not the only ties that bind 2018 and
#Y2K
. A handful of parallels, market-related and otherwise, are highlighted in this table.
@Jose_Maria_Olaz
@TommyFleetwood1
#BlockbusterVideo
$NFLX
@PGA
@RedSox
@Avengers
$SPY $NYA
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$SPX Price/Sales ratio at
#Y2K
bubble level while median $SPY P/Sales is more than double that of Feb-Y2K. Translation: Overvaluation in 2000 was highly concentrated; today it is pervasive.
"One measure of market valuation has reached 2000 levels, while another has doubled..."
One of my favorite valuation charts via the great
@LeutholdGroup
.
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If the final bull-market end is deflationary in nature, the NYSE bond-like securities will be stronger for longer, negating some (all?) of the A/D Line’s predictive value. Its oddly robust behavior during the recent top-heavy market hints this deception may already be at work.
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Two weeks ago, we noted that a “breadth-thrust” signal was triggered on August 12th, when the percentage of S&P 500 stocks trading above their 50-day moving averages topped 90%, after having traded below the 20% level within the prior 50 days.
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At the end of 2019, $SPY’s 5 heaviest-weighted stocks topped the weight of the bottom 300 for the first time since the Tech Bubble. With about 1/5 of $SPX invested in 5 names w/ overlapping businesses, passive investing has significantly more risk than many investors may realize
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Those who must be fully-invested may be flabbergasted to learn the S&P 500 still trails gold on a total return basis since Y2K! That’s not to advocate for gold. Rather, it’s to illustrate that high “initial” valuations have long-term consequences.
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#1987
parallel? Most
#bullmarkets
show internal cracks in advance of a top; some are less pronounced. Only 2 of 8 bellwethers raised red flags at Aug-87 high. With today’s lofty valuations and wilting monetary/liquidity conditions, don’t wait for “too much” confirmation. $SPY
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YTD thru July, Equal-Wtd SP500 has notably lagged Cap-Wtd $SPY. The 8.85% spread is widest 7-mo gap since Tech-Bubble top. This is/was the result of outsized gains by the biggest firms. At March Y2K peak, 5-largest firms=18.1% of S&P 500. Now, 5-largest firms=22.6% of $SPX
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The economy is soaking up scarce money supply. Despite two declines in real GDP in the last four quarters, nominal GDP is up 9% year-over-year. Yet, M2 has grown just 2.5% over the same period, resulting in one of the most negative readings for the “Marshallian K” on record.
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Since Y2K thru Oct. 2019, S&P 500 cumulative TR is a couple bps behind the 10-yr Treasury. To achieve this, it required $SPY to escalate to over 25x Normalized EPS and 2.2x Sales.
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If $SPX closes above 2,717 this
#BullMarket
will become the greatest (postwar) cyclical bull of all time, eclipsing the +302% of 1990-1998
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Downward bias of $DJIA in years ending in “7” is a calendar pattern… and highly speculative (not our prediction). Charts show 13 incidents
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If $DJIA exceeds its late-Jan. high on March 9th, or later, cyclical bull mkt will become first to survive 9 years. Call us skeptics a decade ago, our chart’s duration wasn’t designed to go past 102 months… bull market is now literally “off the chart.”
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1st month of Q2 earnings (reported during July): The ratio of up/down earnings is the worst reading since the depths of the pandemic. This assessment is weighed against the dismal first-month results of Q2 2022—thus, a “high hurdle rate” is not the culprit.
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In the face of concerns about overly narrow
#StockMarket
, total $SPX weight of 10 largest companies is unremarkable & below LT avg. $GOOG
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Never in the post-war era has the U.S. stock market suffered three separate setbacks of this magnitude within 48 months.
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Doubling of
#yields
since 2016 has slammed households. Real
#InterestPayments
now exceed that of last three
#BusinessCycle
peaks. Percentage rise in rates is more important than the rate level.
#InterestRates
#Liquidity
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Nikkei still 41% below record of 30yrs ago (Dec89). Japan was >60% of MSCI EAFE in late-80s; it rose 20%/yr for 10yrs—an impossible contest for active managers. Ensuing $NKY collapse of 1989-99 had 89% of active managers beating EAFE. Something to ponder as FAANG runs its course.
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NASDAQ’s decline from 2021 peak is now worse than at the same point in Y2K and 2008.
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Don’t count on strong future
#StockMarket
returns when buying at high P/E levels. The $SPX 5-yr normalized
#PEratio
now in 10th decile. This has typically supplied a 3-yr median TR of +1.3% and 10-yr median TR of +2.9%. $SPY $SDS $SH $IVV $VOO $DJIA $DIA $IYY
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Based on past, successful intermediate-correction recoveries, $SPX “should have” moved above January highs by now. Reversal attempt is now 2nd longest in duration, tracking 1994-95 path (an environment of fast-rising short-term rates & strong corporate profits). $SPY $IVV $VOO
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S&P 500’s Top-5 firms’ combined mkt-cap weight rose 11 of the past 12 mo’s—rocketing to 23.9% in Aug from 15.8% in Sept-2019. Even w/ recent trim to 21.7% it’s well above Y2K high. Late Aug also saw a record spread (9.1%) between $SPY’s Top-5 and Bottom 300.
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Valuations high: ratios sitting in 9th/10th deciles but only P/Sales looks bubbly. Expect to see even higher levels before
#stocks
tip. $SPX
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1998 parallels: the corrections of 2018 and 1998 were curiously similar; however, based on comparative valuations, Fed policy, and the relative maturity of the economic expansion of each, chasing the market now may be a riskier proposition than after the late-1998 decline.
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$SPX valuations well below
#Tech
bubble peak but “typical” stock trades at March 1998 level--a month prior to late-90’s broad market peak.
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Yesterday was the 6-mo anniversary of the March bear market low. $SPX is up 44.7% since then—the 3rd largest 6-mo gain for a new bull market post-1932. On the negative side, today’s $SPY Norm. P/E of 26.9x is 30% above the highest valuation previously seen at the 6-month point
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$GRZZX has been delivering inverse exposure since 2000. This liquid fund is active, diversified, uses no leverage, and targets exposure near 100% net short.
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$SPY P/E on Trailing Peak GAAP EPS at 30.8x = 99%-tile but still 5-handles below all-time high Dec.’99 (35.8x). To match 35.8x, $SPX will top 5,000. All readings >28x faced 10-yr TR loss. To outwit this math, valuations must remain @ mania-like levels for the next several yrs.
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In $SPY history this is 15th >19% drop from a bull mkt high. Ensuing action is all over the board. The >19% loss was the exact low 5 times; in 2 cases the added loss was less than 0.5%. Four times the additional loss was deep into double-digits—all 4 were associated w/ recession
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As we slog through the 2019 earnings-growth hangover, our Up/Down Earnings Ratio continues to drop. It now matches the lowest “two-month” reading of the 2015-16 earnings recession (1.08 ratio; 8th percentile of observations in our 36-year history).
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With May/June breakout, $SPX (led by
#Tech
) likely to move higher this summer; could set up for opportunity to go “risk off” in the fall
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Jim Paulsen on Making Money with
@cvpayne
@FoxBusiness
TV approx. 2:00pm ET
Investing Lesson: Controlling Emotions
Market Edges Up
Consumer Sentiment Plunging
Lockdown Fails
Does Hard Work Pay
@wesbury
@kimcforrest
@PMorici1
@LeutholdGroup
@TheLunaRob
@heatherzuma
@ScottyMarkets
@JillianKayM
Making Money
Please Tune In & RT
Song:
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$SPX trailing
#PEratio
>25x; this is incredibly high for a period in which
#earnings
aren’t tainted by
#recession
.
#SP500
#EPS
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Cumulative $SPX price gain since ‘09 trumps all prior postwar runs. But in terms of REAL total return, the mighty run of 1949-56 is the GOAT.
#SP500
would have to top 3,000 before the next
#BearMarket
to achieve GOAT status on a real total return basis. Possible…but unlikely?
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Late Aug: 44% NYSE
#stocks
hit new 52wk low. From 1955, readings >40% were linked to Bear Mkt or just preceded Bear
http://t.co/UxTTfHLS9l
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Early Aug: $DJIA closed at 1-yr high while $DJT/$DJIA RS ratio at 1-yr low; a fairly infrequent event that often spells trouble.
#Transports
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Market risks partly masked by high margins & creative methods used to attain them. But look at
#TopLine
downside
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July’s surge drove Gold to the brink of its overvaluation threshold; only 150 ounces of the yellow metal would be needed to buy the median-priced existing home ($299,000). If $GLD moves to its historical extremes of 1980 & 2011, it’d be priced in the range of $3,200-$3,300.
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If $SPX closes May >=2062 a longterm low-risk buy signal will trigger. False signal for indicator possible but rare
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At year-end, the SP500 Top-5 firms’ weight was on par w/ bottom 300. On April 30 the gap = 6%. Equal-weighted $SPY is @ 11-yr RS low vs. cap weighted. The “proletariat” firms’ revolution may not be imminent, but this excess should be a tailwind for active management… eventually
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Other
#1987
parallels? (Just for fun): 1) $SPX +36% in 12-mo prior to Aug-87
#bullmarket
peak compared to “mere” +25% in 12-mo preceding Jan-2018 top (this one more directional than by degree); and, 2) $USD 12-mo weakness relatively comparable on % basis to that seen in 1986-87.
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2023 stock gains seem irrational, but they're likely part of a predictable 4-year monetary & fiscal policy cycle to support the POTUS re-election. $SPX average return for the 6-mos. from Nov 1 (of mid-term yr) to Apr 30 (of pre-election yr) was +16.9%. Small Caps gained 22.7%.
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$SPX today vs
#1999
?
#SP500
valuation profile equates to that of Aug 1997;
#Stocks
rallied 60% from that point (NOT a forecast!)
#TechBubble
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The majority of time, placing one’s bets on momentum and sticking with the previous year’s best industry group performers is a long-term winning strategy. In 2018, the “Dream” groups of 2017 lost half as much as the 2017 “Nightmare” groups.
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@GS_CapSF
@jessefelder
We're still in the midst of a bear mkt that launched following the 1/3/2022 SPX closing high. As some believe we're already in a new bull mkt, we're showing how unusual the results are for the early stages of a bull mkt.
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“4% Club” update: 3 firms inhabit the exclusive club. The last time 3 co’s assembled here was Mar-2000; that lasted just 1 month. $MSFT’s 18-mo stay is the longest on record. It’s $AAPL’s 6th visit and its longest (1-yr). $AMZN is the 6th firm to ever gain membership.
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Forward
#PE
solidly above ‘07
#BullMarket
peak. Major upswing now will demand speculative skill, not investing skill
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Which is the best yield curve version? The "2s10s" spread that's ubiquitous in bond-land scored near the bottom of the pack. We prefer, for economic forecasting purposes, the 10Y-3M.
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Using 1957-to-date median level, $SPY (-30% from Feb high) is STILL 4% OVERvalued. That tells how HIGH the valuations were, going into this calamity. Some believe history back to 1957 is irrelevant, so we measured from 1990 forward: $SPX is now 13% UNDERvalued vs. its median.
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Only 7 other periods of substantial underperformance by equal-wtd index since 1927. Except for Y2K instance, once the equal-wtd index reversed & began to outperform meaningfully like today, it proved to be a great time to buy
@LizAnnSonders
Index of equal-weighted large caps outperforming cap-weighted group; similar reversals in past (noted by red circles) have indicated solid entry point for stock investors
@LeutholdGroup
@TuckSchool
@Bloomberg
[Past performance is no guarantee of future results]
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#SellinMay
? Historically,
#StockMarket
is weak between May-Oct. From Nov-Apr $SPY $RUT outperformed by spreads of 6% and 19%, respectively. Favored period winning streaks have lasted nearly seven and eight consecutive decades.
#Seasonality
#MarketAnomalies
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Entry points are key--even for very long-term investors. Consider the 1990s Tech-Bubble late-comers (and fund flows show there were a lot of them): Had they instead bought the 10-Yr U.S. Treasury, they’d have done just as well—although the ride would not have been as adventurous.
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The $11.1 trillion loss-to-date in the Wilshire 5000 amounts to 41% of GDP. While on a percentage basis, it’s the shallowest of the 10 declines since 1980, it already ranks as the 4th largest for wealth destruction relative to the size of the economy.
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#EmergingMarket
BUY triggered Aug 31 after 5 ½ yrs in bear mode. Upgrade consistent w/ 1-4 yrs leadership over
#DevelopedMarkets
$MSCI
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Do IPOs give you FOMO? We hope not. About 700 NASDAQ stocks (nearly one-fifth) touched new 52-wk LOWS in the last 8 trading days, despite NASDAQ rebounding to w/in 2% of an all-time high. One-third of those new lows are from firms that WENT PUBLIC AFTER the COVID outbreak!
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Nothing new under the sun. Market history offers valuable lessons for long-term investment success. Will today’s new-era investments break the mold and sustain their incredible success or succumb to the style’s cyclical ebbs & flows? We do not pretend to know—only time will tell
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Number of Zombie companies overall is up significantly since late 2019; it is now near Y2K peak. Drilling down, the escalating gap between Small Cap Zombies and Large Cap Zombies is substantial. SC Zombies now just below their historical peak.
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#Bonds
have beaten
#inflation
by incredible 6.1% per annum over last 35 yrs. A reasonable real return forecast for the next 35 yrs: ZERO!
1
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Investors still paying over 20x trailing
#EPS
for
#Utilities
stocks—this is far above any pre-2015 cycle high. $SPX
#LowVol
#PE
#Dividends
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Only the wildest 3 yrs of
#Tech
Mania yielded higher S&P
#Industrials
Price/Sales readings than the last 2 yrs. $SPX
0
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These three categories make up 15% of the headline CPI but have an outsized effect on lower-income households. Prolonged price increases in these groups will continue to weigh on consumer sentiment, change consumer behavior, and affect political preferences in coming elections.
0
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An old Wall Street adage says: “When the wind blows hard enough, even the turkeys fly.” A high-tech meteorological gauge known as the “price chart” tells us the wind died down beginning in January 2018, leaving only late-stage leadership themes airborne.
0
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Tough market for
#Value
managers. Widest sector
#overvaluation
since 2002; 8 of 10 are >20x trailing
#EPS
$SPX
#PE
1
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#StockMarket
’s downside in next
#BearMarket
? Our
#SP500
estimates show 2 clusters near 1750 and 1550. $SPX $SPY
#Stocks
4
10
24
Based on valuation range since ‘92,
#Shiller
#CAPE
#PE
just broke above upper band,
#TrailingPE
is close to breaching upper band, & median PE at record high! Is
#StockMarket
finally expensive now that many discount ability of valuations to warn of imminent risk?
@RobertJShiller
2
18
26
A “best-case” bounce for a bear-market rally is around +15%-17%. The current $SPX rally has gone beyond that, and nearly fully recovered from its 19% loss in late 2018. $SPY cumulative gain since March 6, 2009 thru March 6, 2019 is +310%.
1
4
23
2019 gains led by 2018’s leaders: Growth, Tech, & U.S. stocks. Foreign stocks fell more in Q4 and valuations are very attractive, yet they’ve rallied just ½ as much as $SPY. Alas, most leadership reversals between $EAFE & $SPX were prompted by a U.S. bear market.
1
7
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#SP500
10% below 50-day MA on 8/25. With 1 exception, since 1950s, -10% readings all tied to cyclical Bear Mkt $SPY
http://t.co/XBm9jyGoDX
1
18
24
We don't know if the final high in $TSLA or Palladium has been made, but it seems likely there will be some variety of a speculative stock market “echo” in the months ahead.
Been some discussion here of how isolated parabolic price moves seem to occur near the start of broad-market pullbacks. These charts from
@LeutholdGroup
identify some instances.
@ZorTrades
@hmeisler
24
50
191
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Despite
#Technology
index near all-time
#Y2K
price high,
#valuations
are nowhere near a bubble zone.
#Price
/CashFlow
#PEratio
$SPX
#EPS
1
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@Shoup_PI
Currently, we think that monetary trends (and, very soon, economic trends) may truncate this advance soon after the turn of the year.
5
0
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How much is enough
#recession
evidence? Positive
#GDP
Output Gap, inverted
#YieldCurve
, early-cyclicals’ harsh underperformance, faltering (?) housing & autos, sharp decline in industrial commodity prices, business & consumer confidence teetering.
1
13
24
Worst of the “Windows” upon us: historically weakest period of Presidential Election Cycle + Seasonal Pattern:
http://t.co/uOstDfywmI
1
23
22
Don’t fight the “Three-Gun Gooser:” Policy support is now coming from the Fed, the Treasury, and Bond Vigilantes—a rare combination. The simultaneous support of all three major policy guns has historically been productive for the stock market.
1
9
24
The Draw of Small: On a relative basis, the rotation trade away from Large-Cap and “Growth” may still have a long way to run. Based on historical averages, Value segments are overvalued by 5%-21% vs. Growth’s overvaluation range of 57%-96%. $RUT
1
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