Advisors.LeutholdGroup

Companies are always in the trenches. Sometimes winning, sometimes losing, and often simply striving to survive. So let’s listen in on some messages emanating from “Businesses on the Battlefield.”

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Everyone fears the Taper. Fed members constantly remind us that it’s coming soon, the financial media frequently preview the taper’s potential ugly market fallout, and a parade of Wall Street firms are warning that stocks will almost assuredly suffer at least some sort of taper tantrum.

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When the stock market finally succumbs to a long-overdue correction, conventional defensive plays may prove more inadequate in preserving capital than they have in the past. 
 

It’s the question on everyone’s mind: When will we know if transitory is “no longer” transitory? Although no one can say for sure, perhaps monitoring the accompanying chart will provide some insight.

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Since the pandemic, economic policy has become an obsession for most investors. The thickness of former Federal Reserve Chairman Alan Greenspan’s briefcase seems pedestrian today. When fiscal and monetary authorities began adopting highly unconventional methodologies after the 2008 financial crisis (e.g., Tarp, Cash for Clunkers, and QE), the mantra on Wall Street became WWPOD (What Will Policy Officials Do?).
 

Small-cap stocks had a ferocious leadership run beginning last October when vaccinations were at hand—and hope surged that the COVID pandemic was finally ending. As economic activities restarted, the Russell 2000 outpaced the S&P 500 by nearly 33% between September and mid-March.

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In recent weeks, the news surrounding the stock market has turned much more challenging. Most economic reports have come in below expectations, taper-talk swirls about the Federal Reserve, and company earnings reports—while mostly still robust—no longer seem to boost stock prices. In addition, the U.S. exit from Afghanistan has been disturbing, supply shortages and inflation evidence are rampant, and, most importantly, the escalating spread of the Delta variant is dampening economic activities.

This year, investors, policy officials, and the financial media have been obsessed with when the Federal Reserve will finally start tapering its quantitative easing (QE) program. And perhaps more importantly, is it possible to curtail QE without triggering a temper tantrum in the stock and bond markets?

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Last Friday, the University of Michigan reported its Consumer Sentiment Index suffered a shocking collapse. It fell by 11 points, which is the sixth-largest monthly decline since its inception in January 1998. Amazingly, as shown in Chart 1, it deteriorated to a weaker level than April 2020—right after the U.S.-onset of the COVID crisis that essentially shut down the entire economy. Moreover, the Sentiment Index now resides at one of its most pessimistic levels of the last 23 years. Only during the Great Financial Crisis was consumer sentiment shaken noticeably more than today.

Market environments are driven not just by industry preferences, but also by a bias toward the very largest companies. We have developed a new set of groups composed of the 10 largest companies from each sector. With several of these baskets sporting positive rankings, we felt a closer look was in order.

Here are a few U.S. economic transformations that could have important investment implications—and a couple of economic conditions that remain status quo.

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Normally, volatility is feared. It’s a lesson learned early by investors. Experiences like the 1987 crash, the 2008-09 financial crisis, and the 2020 pandemic serve to educate investors. Strive for more return but only while being ever vigilant about risks (volatility). Move that risk/return profile as far as you can to the northwest investment quadrant!