Where are we in the market cycle?

Where are we in the market cycle? The accompanying chart shows a stylized market cycle and changes in sector leadership. Bear markets are characterized by the leadership of defensive sectors such as healthcare, consumer staples and utilities. Early-cycle markets are sparked by the monetary stimulus or the promise of monetary stimulus. The market leaders in...

Team Stagflation, or Team Transitory?

Stagflation fears are rising again. It’s a natural reaction to the short-term data. September headline CPI came in hot, though the core CPI print was in line with expectations and PPI was soft. Inflation expectations are spiking…     …while the Atlanta Fed’s GDP nowcast is plummeting. Consumer confidence is dropping, driven by supply chain...

Will the energy price surge cause a recession?

As energy prices surged around the world, I had an extensive discussion with a reader about whether the latest price spike could cause a recession. This is an important consideration for investors as recessions are equity bull market killers.   The evidence isn’t clear. On one hand, every recession in the post-War period (shaded grey...

Q4 sector review: Assessing the yield surge

In light of the recent surge in global rates, it’s time for another review of sector leadership. I will conduct the review in two ways. First, the market will be viewed through a cross-asset framework. Rising yields and a steepening yield curve have been bullish for the value/growth cycle in the past, will this time...

Time for a mid-cycle swoon?

The S&P 500 fell as much -4% from its all-time high in Evergrande panic pullback last week. Is the recent weakness just typical seasonal weakness or something more serious? The intermediate-term breadth looks disconcerting. The percentage of S&P 500 stocks above their 200-day moving average (dma) had been at the 90% level which indicates a...

Not your father’s stagflation threat

Stagflation worries are rising. A recent analysis of search activity shows that searches for stagflation have spiked compared to other inflation search terms.     The latest BoA Global Fund Manager Survey also shows that stagflation concerns are rising.     These fears are misplaced. The conventional mechanisms for stagflation are not present. Instead, investors...

A time for caution, or contrarian buy signal?

Recently, a number of major investment banks have published warnings for the US stock market. The strategists at BoA, Citigroup, Credit Suisse, Deutsche, Goldman Sachs, and Morgan Stanley have issued either bearish or cautionary outlooks.  On the other hand, Ryan Detrick at LPL Financial documented the effects of strong price momentum on stock prices. History...

Constructive value and reflation green shoots

One of my principal tools of market analysis is the use of trend-following techniques to spot changes in macro conditions. My models are seeing some early green shoots in the value and reflation trade. It began with the stronger than expected July Jobs Report. The subsequent tame core CPI print also helped to reinforce the...

What you should and shouldn’t worry about

The S&P 500 took fright last Monday and skidded -1.6% after falling -0.8% the previous Friday. Talking heads attributed the decline to worries about the rising incidence of the Delta variant around the world.     Fears over the Delta variant slowing economic growth are overblown. However, there are two other key risks that equity...

How to engineer inflation

Both the June CPI and PPI came in hot and well ahead of expectations. There was the inevitable debate about the transitory nature of the price increases. Looking longer-term, however, the conventional models for explaining inflation have been unsatisfactory.   Notwithstanding the numerous failures by Japanese policymakers, consider the US as another example. Let's begin...

Seven reasons to fade the growth scare

It is astonishing to see the market narrative shift in the space of only a few months from "inflation is coming" to a growth scare. In late March, the 10-year Treasury yield topped at over 1.7% and the 2s10s yield curve was steepening. Today, the 10-year has decisively broken support and the yield curve is...

How to navigate the mid-cycle expansion

It's been over a year since the stock market bottom at the height of the Pandemic Panic. The market consensus has evolved from an early cycle recovery to a mid-cycle expansion, as evidenced by the BoA Global Fund Manager Survey.     What that means for investors? Here are the key questions we focus on:...

The Fed’s next challenge: Wage pressure

Stock markets were rattled by the Fed's hawkish tone in the wake of the FOMC meeting. Markets took a risk-off tone, but Jerome Powell walked back some of the hawkishness during his Congressional testimony the following week. The Fed Chair stuck to his familiar refrain that inflation is transitory, dismissed the idea of 1970s-style inflation as...

NFIB conservatives grudgingly turn bullish

Investors received some data points today that is highly revealing about the economy. The most important was the NFIB small business survey. Small business sentiment is especially important as they have little bargaining power and they are therefore sensitive barometers of the economy. The other is the March JOLTS report of labor market conditions, which...

How Powell, the Un-Volcker, is remaking the Fed

Jerome Powell may turn out to be the Un-Volcker Fed Chair. Paul Volcker wrung all the inflation expectations out of the system and convinced everyone that the Fed is an inflation hawk. By contrast, Jerome Powell is attempting a mirror image policy of convincing everyone the Fed is an inflation dove.   A considerable gulf...

Has the reflation trade become too crowded?

In light of last week's partial NASDAQ reversal, I had a number of discussions with readers about whether the reflation trade has become overly consensus and crowded. To be sure, bond prices have become wildly oversold while the cyclically sensitive copper/gold ratio has surged upward and appears extended.     Is the reflation trade, which...

Here comes the recovery

Preface: Explaining our market timing models We maintain several market timing models, each with differing time horizons. The "Ultimate Market Timing Model" is a long-term market timing model based on the research outlined in our post, Building the ultimate market timing model. This model tends to generate only a handful of signals each decade.  ...