From the Desk of Willie Delwiche.

Stocks rallied heading into the weekend, with the S&P 500 finishing up 1.6% for the day. Friday’s 1%+ move ended four consecutive days of relative quiet, the longest stretch without a 1% swing (on a closing basis) since a seven day streak in mid-November. We still have had just one week over the past year that did not experience a single 1% swing in the S&P 500.

Why It Matters: Bull markets are characterized by persistent strength, steady progress, and more often, relatively few big swings. That was the case coming off of the COVID lows. 2020 and 2021 saw multiple weeks without a single 1% daily move in the S&P 500. 2022 brought plenty of noise and plenty of volatility. That has persisted as we have moved into 2023. While the week finished on an upbeat note, the pattern of behavior is little changed. Just a month ago we experienced the first full week of 1% swings since March 2020.

From the Desk of Willie Delwiche.

Annual data shows that the Federal government’s cost to service its debt (as a % of GDP) reached its highest level in two decades last year. 

Why It Matters: Debt servicing costs were at a generational low just a few years ago. Now persistent inflation is pushing bond yields higher and the latest CBO projections show federal debt levels continuing to soar (new highs that aren’t cause for celebration). Interest payments on the debt are moving from afterthought to fiscal burden. Without a rediscovery of fiscal discipline getting a handle on inflation is going to be a challenge and that is likely to keep yields higher for longer. A quick return to the market and fiscal conditions of the past decade does not appear to be in the cards.    

From the Desk of Willie Delwiche.

Prior to this week, we had seen just one day in the past three months with less than 70% of world markets above their 50-day averages. We’ve now had two days in a row with this indicator of global market strength in the yellow zone. 

Why It Matters: The strongest markets have the broadest participation and historically the S&P 500 hasn’t run into much trouble as long as at least 70% of world markets are above their 50-day averages. Risks intensify when this drops below 40%. We discussed this (and other indicators of market stress) in our weekly Townhall as well as the Takeaways summary. 

The Bottom Line is this: It’s not a red flag yet, but rally risks increase if fewer world markets are above their 50-day average and the dollar finding a bid after selling off in Q4 could challenge the strength we’ve seen around the world in recent months.       ...

From the Desk of Willie Delwiche.

Nearly three-quarters of the way through Q4 earnings season, two things stand out: stocks that have reported earnings misses have been less severely punished than in the past and an increasing number of companies are having their earnings estimates for the coming year revised higher. 

Why It Matters: This earnings season has hardly been spectacular and the percentage of companies beating estimates has been below average. Aggregate earnings numbers may (or may not) need to be revised lower as we move through 2023. But at this point, the worst case scenarios are not playing out and that has left plenty of folks offsides. Investors have moved to embrace the strength we have seen so far in 2023 and analysts are running higher numbers through their models. After seeing fewer and fewer upward revisions to earnings estimates in H2 2021 and H1 2022, the trend stabilized over the second half of last year and for now is ticking higher. The market doesn’t tend to get into too much trouble when analysts have...

From the Desk of Willie Delwiche.

After Tuesday’s 9-to-1 upside volume day, our Bull Market Re-Birth Checklist is now five out of five.

Why It Matters: The conditions for a new bull market have been met. It’s hard to argue otherwise from a market perspective. Large-cap and mid-cap value indexes reached new all-time highs this week, and small-cap value is not too far behind. The trend for the market for the market is higher, even if not all the indexes (including the popular benchmarks) are trending higher. But when the trend is higher, leadership is evidence of opportunity.

Our Bull Market Re-Birth Checklist has served its purpose well. But it is now time to put it aside and now turn our attention to questions of sustainability and leadership. These will be best answered by price and breadth trends and not one-off surges and thrusts. We will be aggregating some of the key indicators in this regard and introducing a new bull market sustainability checklist next week. Stay tuned.       

From the Desk of Willie Delwiche.

The last decade-plus has featured extended periods of US leadership and only brief bouts of with the rest of the world on top. While it may be outside of the experience or active memory for many investors, the first decade of this millennium saw the exact opposite: persistent strength from the rest of the world and little leadership from the US.

Why It Matters: When it comes to global equity exposure, diversification has been a dirty word for a decade. US investors have not been rewarded for looking overseas. Now that is changing. Absolute uptrends are more common right now outside of the US than within our borders. Our asset allocation model that uses the ACWI (60% US) as a benchmark is near max underweight equities (versus bonds and commodities), while a version that takes the US out of the equation is at max overweight equities. Investors are taking notice, with US equity ETFs seeing outflows and foreign equity ETFs experiencing a surge in inflows. The paradigm is shifting and investors are getting...

From the Desk of Willie Delwiche.

Firms are still hiring but with average weekly hours being curtailed, aggregate hours worked appear to have peaked in Q4.

Why It Matters: Talk of a soft landing has intensified, but the data paint a different picture. Real spending peaked in Q1. Housing starts in Q2. Industrial production in Q3. Payrolls are still expanding and layoffs are near historically low levels. Given the structural imbalance between unfilled jobs and unemployed workers, those metrics are unlikely to be useful indicators of what lies ahead for the economy. Don’t even start with the unemployment rate, which has long been considered a lagging indicator. Rather than firing workers who were hard to hire in the first place, firms are keeping their payrolls largely intact. They are responding to softening demand by curtailing hours worked. Payrolls and initial jobless claims are noise in this environment. The news is that the economy is weakening, inflation is lingering, and the Fed is still raising rates.       

From the Desk of Willie Delwiche.

Money supply is unchanged over the past year and has fallen at a never-before-seen 5% annualized rat over the past 3 months.

Why It Matters: Money supply growth peaked (on a year over year basis) at 27% in February 2021 as policymakers responded to the COVID crisis by flooding the financial system with liquidity. That growth has now dissipated and over shorter time periods money supply is actually contracting (it was down for the fourth month in a row in November). Collapsing money supply growth helps take the edge off of inflationary pressures in the economy (there is less money chasing all the goods & services). But liquidity is also the lifeblood of the financial markets. As with seedlings in the garden, when the spigot is turned off, green shoots turn brown and asset prices could struggle to flourish.    

From the Desk of Willie Delwiche.

After unexpectedly good headline and core CPI prints for November, the stocks were caught off guard by unexpectedly hawkish forecasts on both rates and inflation when the Fed released its Summary of Economic Projections following Wednesday’s FOMC meeting.

Why It Matters: The market is used to looking at core CPI as a way to filter out inflation noise. The problem is that core CPI was created with political motives, not for economic clarity. The median CPI is a better tool for discerning underlying trends. Central tendency measures of inflation (like the median CPI) were slower to climb post-COVID but now show inflationary pressure persisting. This helps explain why the Fed is likely to remain in inflation fighting mode longer than the market now expects. The Fed’s record here is not without blemish. Pre-COVID they were overly focused on the core indexes and missed the building of inflation pressure. In 2012, both the median and core CPI showed inflation near 2.3%. Core CPI was still there in the...

From the Desk of Willie Delwiche.

The NASDAQ 100 peaked over a year ago. Its 1-year return dipped into negative territory in April and has been there ever since.   

Why It Matters: The NASDAQ 100 has spent more time underwater (on a trailing 1-year basis) over the past 160 days than it did in the entire time going back to 2010. After a decade of sustained strength and limited duration downturns, investors who are sticking with their growth biases must deal with a challenging new reality. Those  who are locked into one asset class (e.g. stocks over bonds or commodities) or one style (growth over value) or one region (US over the rest of the world) are seeing previously sustained trends move against them. Adaptability across asset class, style and region is likely to be a critical component of investing success as we move into 2023 and beyond. Keep the trend your friend. 

From the Desk of Willie Delwiche.

As the dollar was peaking in late-September, 4% of world markets were above their 50-day average and 4% were above their 200-day average. The dollar now is 8% of that peak (and below its 200-day average for the first time since June 2021). More than two-thirds of ACWI markets are now above their 200-day averages (the most in over a year) and nearly 95% are above their 50-day average (the most in nearly 2 years).  

Why It Matters: Dollar weakness may be the catalyst (or one of several catalysts), but the important development is improving global breadth. That is typically supportive of US stocks. Beyond that, dynamics in the current environment are actually pointing to a changing of the guard in terms of global leadership. The US has seen its relative strength wane while Europe and other developed markets have taken the lead. For US investors, this means abandoning home country bias and embracing global diversification.      

From the Desk of Willie Delwiche.

With stocks experiencing week-to-week swings at a nearly unprecedented level, zooming out and keeping a bigger picture in mind is an essential. The Value Line Geometric Index’s affinity for round numbers makes this an easier exercise.

Why It Matters: The Value Line Geometric Index (a broad proxy for the median US stock) is in the middle of the range between 500 and 600 that has been intact since Memorial Day. Prior to that it spent 15 months moving from 600 to 700 and then back to 600. Looking back over the past 15 years, round numbers have acted as magnets for this index. If this tendency holds, a break above the August peak could clear the way for a test of its high near 700. Conversely, breaking below the September low could lead to a test of 400, a level seen during the COVID sell-off & recovery. Which way it breaks remains to be seen - but the lines have been drawn.