Research Notes

Strategy

• On average, we would expect roughly a 26% total return for the S&P over the next 3 years, but if we look at valuations we are in a zone where that number drops to 23%. Not statistically meaningful, though we are relatively close to being in the bottom 20th percentile for excess CAPE where we do need to start worrying about the returns. 
   
  • Now if we look at the 10yr relative to equities, we see it favoring a tilt towards a higher allocation to bonds as average excess return in equities over 3 years is 20%, but in this zone that drops to 13%. 
  • In the event that we do get into that bottom 20th percentile zone for excess CAPE, then we're looking at an area where bonds tend to outperform.
    
    
• The dollar continues to build on its reversal higher following the September FOMC low, getting close to an overbought condition.
   
  • The bouncing dollar contributed to taking some steam out of the precious metals trade as the gold miners ETF, GDX was down nearly 5% Thursday, it's worst day since May.
  • Silver spiked above $50 before having a sharp reversal, suggesting more tactical consolidation or weakness is likely from here. We are still bullish but would stay patient as this is likely not the time to chase.
    
    
• Consumer Discretionary is oversold for the first time since the April lows. We are closely monitoring the relative performance of cyclicals versus defensives, as a breakdown would signal increased consumer strain. 
   
  • Equal-Weight Discretionary is losing some ground vs. Staples but still remains in a bullish relative trend.
  
  
• Homebuilders are weakening again on a relative basis while also flagging as excess alpha in SERM and excessive ETF inflows. Home Improvement Retail and Textiles, Apparel & Retail are back at the relative lows and look vulnerable. 

Economics

• When we look at labor (without having BLS data), we have a Bathtub Model of Unemployment, looking at what is flowing in vs out. If we picture this bathtub as the pool of unemployment, a low firing rate has us with a slow flow of water into the tub, but hiring rates are not high enough to outpace those firing rates, causing this to eventually flood.
   
  • Important to note that firms typically reduce hiring intensity before taking more drastic action. 
  • We estimate the unemployment rate will reach 4.5% by year-end and continue rising next year.
  
  
• Mortgage purchase demand has slowed. Over the last 6 months, purchase apps are down 2.4% annualized regardless of the fact that the interest rate on a 30yr mortgage has declined 20bps.
   
  • Additionally, home prices are likely declining. Average loan size on purchase loans is down 3.3% YoY which tends to be a reliable proxy for the direction of travel on national home prices.
  
  
• Lately, we've seen a notable slowdown in search queries for home renovations. If less people are searching for these today, we would assume there is less in the pipeline for future renovations spending.
  
  
• Medium and heavy truck sales have declined to 0.400 million units SAAR in August, the lowest level since July 2020, representing a 19% decrease YoY. Putting this into a single-indicator recession model points to a 72% 12-month implied recession probability. We've seen many false positives recently, though this is still worth keeping a close eye on as a proxy for activity in the industrial and freight economy. Important to note, this also precedes the 25% tariff just imposed. 

Research Notes

Economics

• US labor market continues its downtrend. Weekly job postings continue to trend down, layoffs picking up, quits are cooling.
  
  
• March data showed broad economic weakness, with declines in services, confidence, housing, and commercial real estate.
  
  
• Rising inflation, weakening job outlooks, and cautious business spending point to growing economic strain.
  
  
• Home prices are cooling, which may curb spending as household wealth dips and the savings rate edges higher.
  
  
• The rebound in capital goods shipments looks fragile, with growth mostly tied to tech and broader investment plans weakening.
  
  
• New tariffs could cut 0.5% from GDP, strain trade ties, and raise car prices before production shifts take effect.
  
  
• Auto repossessions are at their highest since 2009, and tariffs may push buyers to the used market, keeping prices elevated.
  
  
• Despite trade tensions, signs of de-escalation and strong profits offer some cushion, with markets already pricing in much of the downside.
  
  
• Q4 growth was lifted by consumer and government spending, but with investment falling and key supports fading, a broader slowdown seems likely.

Strategy

• Market technicals show potential for a rebound. We think Mag7 approaches 50dma and potentially crosses through, getting to overbought, high beta stocks slowly recovering, and excessive outflows in IWM and SPY could fuel a tactical bounce.
   
  • Remember, this was a beta-driven correction, not a momentum-driven one.
    
    
• Bullish signals may re-emerge if a high percentage of stocks move about their 20dma and hit 20-day highs, suggesting a reassertion of the bull trend.
  
  
• Despite heightened policy uncertainty and a dark cross in tech, strong credit markets and sentiment tied to returns suggest the current pessimism may be overdone.
  
  
• Semi's continue to weaken, with even "good" ones coming under pressure.
  
  
• Staples pulled back at resistance levels, maintaining relative downtrend. Sharp unwind in beta and extreme underperformance suggests continued downward pressure.
  
  
• Transports reiterate bearish trend but flagging oversold and in "seller's frenzy". Expect short-term tactical bounce but fade the move.

Policy

• Debt limit deadline ("X-Date") likely between July and October, with resolution hinging on reconciliation or bipartisan deal amid uncertain cash flows.
   
  • Delays risk market volatility and a Moody's downgrade, raising U.S. borrowing costs.
    
    
• Trump will announce reciprocal tariffs on April 2, targeting about 15 key partners; recent moves on oil, autos, and threats to the EU and Canada may be strategic leverage.
  
  
• Section 232 is being used more broadly to justify tariffs on national security grounds, covering autos, copper, timber, and pharma, with an emphasis on U.S. production.
  
  
• Tariff timing and scope remain unclear, with Trump using them as a flexible tool, adding to market uncertainty.