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Many believe it will take years to fully recover from Covid-19. Indeed, over the weekend, U.S. Federal Reserve chairman Jerome Powell suggested that although the economy will eventually recover, the process could stretch through until at least the end of next year and ultimately depends on the development of a vaccine.  

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When we first met Steve Leuthold in the old company office in a renovated warehouse, he was updating a several-foot-long chart of either the DJIA or S&P 500, by hand, and we got a brief lecture on the importance of using logarithmic scale on price charts.

 

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The attempt to re-open parts of the U.S. economy amidst the ongoing Covid-19 crisis is either Red, Blue, or Purple! Using data from an employment tracking tool utilized by 100,000+ local businesses across the United States, the accompanying chart illustrates the speed and depth of the decline in hours worked and its recent slow recovery among traditional Republican, Democratic, and Swing states.

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Growth stocks have been outperforming for much of the last decade, particularly in recent years, and amazingly so since year-end. However, as the charts here illustrate, it is not so much that growth stocks are winning as it is “Growth!” 

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Economic policies have long been a potent force for both the economy and the financial markets. Despite being unsure and worried about how the Covid-19 crisis will yet play out, investors are also currently fearful of ignoring the old adage “Don’t Fight the Fed.” 

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It is always challenging to judge value, particularly during recessions when earnings power temporarily (one hopes?) contracts. The difficulty has been magnified in the current situation because, like economic data in general, earnings are in freefall! 

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With May Day marches and demonstrations cancelled, the workers of the world have one less opportunity to remind us of the ever-widening wealth gap and the evils of the “Top 1%.” It’s a shame, because this was the year that we active managers would have stood shoulder to shoulder with those protesters voicing our own contempt for the “Top 1%”… of the S&P 500.

 

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Domestic, large capitalization, and growth have dominated stock market leadership for much of the last decade. During this stretch, investors (author included) have repeatedly attempted to exploit “undervalued and out-of-favor” segments of the stock market, only to be proved premature. 

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Is there any way to judge when U.S. economic reports may finally bottom? Obviously, it depends on what happens with the virus. If it continues to burn hot or simply lingers longer than expected, keeping “stay-at-home” orders in place, could economic data prove bottomless? 

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Through last night’s close, the S&P 500 had gained 25.0% in exactly one month. Impressive, but a bit superficial. Anyone running active equity portfolios recognizes the breadth of this move has been unusually narrow.

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For the second time in the last 30 years, “growth” has dominated leadership within the stock market. After significant outperformance during the 1990s’ dot-com era, the growth style has again substantially outpaced since the start of the last recovery (Chart 1).

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We view the coronavirus pandemic as the final straw that tipped an already vulnerable U.S. economy into recession, rather than the watershed event that will change the way we view growth, profitability, and even the nature of work itself. But even economic “optimists” like us need to recognize that the recovery back to last cycle’s earnings peak will be a long and grinding one. There’s a good chance that the four-quarter trailing S&P 500 GAAP Earnings Per Share cycle peak of $139.47 will not be exceeded until 2023 or 2024 (Chart 1).

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Earnings, like everything in the economy, are in freefall. Finance textbooks would argue this paints a bleak future for the stock market, but that isn't always the case. 

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