OmniDivitia Wealth Management, Inc. - ODWM Blog #market cycleOmniDivitia Wealth Management, Inc. - ODWM Blog #market cyclehttps://www.omnidivitia.com/blogs/tag/market-cycleFri, 05 Jun 2026 21:56:50 -0700http://zoho.com/sites/<![CDATA[Bullish, But Fragile]]>https://www.omnidivitia.com/blogs/post/bullish-but-fragileHelping to decipher economic & market trends]]>

Markets Continue to Climb While the Economy Sends Mixed Signals

As we move through the second quarter of 2026, investors continue to navigate an environment characterized by conflicting signals. Equity markets have maintained a bullish posture despite mounting evidence that the broader economy is losing momentum. This divergence between market behavior and economic fundamentals remains one of the most important themes shaping investment decisions today.


Our Active Regime Analysis framework evaluates three key dimensions of the investment landscape:

  • Economic Trends

  • Market Trends

  • Current Market State

Together, these factors help identify potential risks, opportunities, and regime transitions before they become obvious to the broader market.


Current Regime Overview

The second quarter began with an encouraging shift. April marked a transition from a Neutral Market State to a Bullish Market State while both Economic Trends and Market Trends registered as Improving. At first glance, this suggested a more favorable backdrop for risk assets.  However, May introduced a more nuanced picture.


While market trends remained positive and the market continued to exhibit bullish characteristics, Economic Trends slipped from Improving to Mixed. This change occurred while valuations remained firmly in overvalued territory and the economy continued to reside within a Peaking phase.

The result is a market that continues to reward risk-taking, but with a narrowing margin for error. I would consider this a regime with "Hidden Exhaustion", leading toward a potential late-cycle plateau.


The Return of Regime Disconnect

One of the most notable developments during May was the reappearance of a regime disconnect.  A regime disconnect occurs when market behavior and economic conditions tell materially different stories. In this case, investors remain optimistic and market momentum remains constructive, while underlying economic data has become increasingly inconsistent.  Historically, these periods deserve careful monitoring, and can take multiple months to confirm. Markets can continue advancing for extended periods despite weakening economic fundamentals, particularly when liquidity, sentiment, or expectations remain supportive. However, disconnects may precede periods of increased volatility as markets eventually reconcile with economic reality.  This does not imply an imminent market decline. Rather, it suggests that investors should remain disciplined and avoid assuming that recent market strength automatically translates into lower future risk.


What the Economic Data Is Telling Us

The economy currently looks like it is entering a Peaking phase, a stage that often represents the latter portion of the business cycle's expansion.

Characteristics of a peaking environment typically include:  slowing economic growth; moderating corporate earnings expectations; increasing sensitivity to monetary policy; & greater dispersion among sectors and asset classes.  Presently, monetary policy could be redefined in upcoming months as Kevin Warsh takes over the role as Federal Reserve Chairman.  We definitely have increased dispersion among sectors and classes.  However, earnings expectations are ascending due to the focus on AI and a narrow group of related companies.


While we have not observed a broad deterioration in economic conditions, the shift from Improving to Mixed economic trends suggests that forward momentum has become less uniform.  Specifically, while the overall 6-month trend still shows improvement, the monthly information shows smaller increases, reflecting a potentially slowing economy.


Economic data for May 2026 will be updated through the month of June.
The S&P 500 has continued strong performance, spending much of 2Q26 in "Overbought" territory (as it relates to the Relative Strength Index).

What the Markets Are Telling Us

In contrast, market trends remain constructive. The six-month Market Trend remains Improving, and the overall Market State remains Bullish. This indicates that investor sentiment, price momentum, and risk appetite continue to support higher asset prices.


Bull markets rarely end simply because valuations are elevated. In fact, markets can remain expensive for extended periods when investors believe future growth and earnings will justify current prices.



Nevertheless, elevated valuations reduce the margin of safety available to investors and increase the market's vulnerability to unexpected economic disappointments.


Looking Ahead

The key question for the remainder of 2026 is whether economic trends stabilize and begin improving again or whether the recent softening develops into a broader deterioration.


If economic conditions strengthen while market trends remain positive, the current bull market could continue with relatively healthy foundations.

Conversely, if economic trends weaken further while valuations remain elevated, the current regime disconnect may widen, increasing the probability of market volatility and a potential shift toward a more defensive environment.


For now, the evidence suggests remaining invested while maintaining heightened awareness of evolving economic conditions. The market continues to reward optimism, but the economic backdrop is becoming increasingly important to monitor.  As always, successful investing is not about predicting every market move. It is about understanding the current regime, managing risk appropriately, and remaining disciplined as conditions evolve.

Disclaimer: Portions of this post were written with the assistance of artificial intelligence (AI).  Please schedule a call to discuss your specific situation more in depth.

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]]>Thu, 04 Jun 2026 22:34:12 -0500<![CDATA[Are We In a "Melt-Up?"]]>https://www.omnidivitia.com/blogs/post/are-we-in-a-melt-upA closer look into a quietly emerging risk in the stock market]]>

Understanding a Melt-Up in the Market and Its Potential Effects in 4Q24

As we enter the final quarter of 2024, investors and analysts are closely watching market movements, particularly the possibility of a "melt-up". This confusing term refers to a sharp, unexpected rise in asset prices driven primarily by investor sentiment, often unrelated to fundamental economic growth. In other words, a melt-up is characterized by euphoria in the market, with stock prices soaring as investors fear missing out (FOMO) on further gains, rather than any significant improvement in company performance or broader economic indicators.  While a melt-up can be exciting in the short term, it often signals heightened risk, and understanding its dynamics and potential consequences is critical for investors as they navigate 4Q24.

What Exactly is A "Melt-Up?"

A melt-up can happen when investors, worried about missing out on future profits, pile into stocks, creating a self-reinforcing cycle of rising prices. Unlike a **bull market**, which is supported by fundamental economic factors such as corporate earnings growth or macroeconomic expansion, a melt-up is often fueled by **speculative behavior** and psychological drivers.  Some common characteristics of a melt-up include:
    • Valuations exceeding fundamentals =  Stock prices surge far beyond what earnings or company fundamentals can justify.
    • FOMO-driven buying =  Investors rush into the market, driving prices higher due to fear of missing out on potential gains.
    • Volatility and market irrationality =  Rapid price movements can create instability and heighten risks of a correction.
In previous instances, such as the dot-com bubble in the late 1990s or the more recent surge in speculative assets during the 2020–2021 pandemic recovery, melt-ups have typically been followed by sharp corrections or even full-blown market crashes.  However, despite some of the above concerns, one positive thing to note is that forward stock market earnings continue to rise.  The question remains: do current estimates justify these prices?

Several factors appear to be creating conditions for a melt-up as we close out 2024, including monetary policy adjustments & global macroeconomic uncertainty.  The Federal Reserve has pivoted to a more dovish stance as its focus turns away from inflation toward the labor market.  This shift may have sparked optimism, pushing investors to assume that lower interest rates will keep supporting asset prices. Additionally, while inflation has cooled in some regions, economic growth remains uneven, especially in Europe and China. Investors, seeking safe havens for their capital, may turn to U.S. equities, driving prices upward.

Potential Effects of a Melt-Up in 4Q24

While the short-term effects of a melt-up might seem positive, with portfolios seeing substantial gains, the long-term risks and economic impacts are more complex.

  1. Market Volatility = As prices rise quickly, the risk of a sharp correction increases. History shows that melt-ups are often followed by downturns. For example, the dot-com bubble of the late 1990s led to a spectacular crash in 2000. If the market becomes overextended, any negative news—be it an earnings miss, geopolitical tension, or macroeconomic disappointment—could trigger a sell-off.
  2. Weakened Investor Confidence = If the market does correct after a melt-up, it could undermine investor confidence for a period of time, potentially leading to a prolonged bear market. Once investors realize that prices have far exceeded the fundamentals, many may exit the market, exacerbating the downturn.
  3. Potential for Sectoral Divergence = During a melt-up, certain sectors may benefit disproportionately. When the correction occurs, the most overinflated sectors may experience the steepest declines.
  4. Impact on Monetary Policy = If a melt-up occurs, central banks, including the Federal Reserve, may face pressure to adjust monetary policy. On one hand, a melt-up could lead to concerns about **asset bubbles**, prompting tighter monetary conditions to curb speculative excesses. On the other hand, a sudden collapse in asset prices could push central banks to ease rates again to stabilize markets. This dynamic adds uncertainty to future monetary policy decisions.
  5. Wealth Effect and Consumer Spending = In the short term, a melt-up can fuel the **wealth effect**, where rising asset prices encourage consumers to spend more. However, this can lead to temporary surges in inflation and demand. When prices correct, the opposite could happen, with consumers pulling back on spending, leading to slower economic growth in early 2025.

How Investors Can Navigate a Potential Melt-Up

Given the uncertainty surrounding a melt-up, it’s important for investors to remain cautious:
1. Diversification: Allocating investments across different asset classes, regions, and sectors can help reduce exposure to an overvalued sector or asset class.
2. Focus on fundamentals: While speculative stocks may be tempting, focusing on companies with strong earnings growth and reasonable valuations can protect against downside risks.
3. Prepare for volatility: It’s crucial to brace for heightened volatility. This might mean adjusting asset allocations or hedging positions to mitigate potential losses in the event of a sharp market correction.

As we enter the final quarter of 2024, the possibility of a market melt-up is real. While the allure of quick profits may drive asset prices higher in the short term, investors should be mindful of the risks that come with euphoric markets. A disciplined, diversified approach, focusing on long-term fundamentals, will be essential for navigating this turbulent period.  To get a better idea of the risk your portfolio may be taking on, schedule a call today by clicking the button below.

Disclaimer:  
The content provided here is at least partially generated by artificial intelligence and is for informational purposes only. While I strive to ensure accuracy, the information may not always reflect the most current developments or data. It's recommended to verify any critical information from reliable sources or consult with a professional expert when making decisions based on this content.
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]]>Thu, 10 Oct 2024 08:00:00 -0500<![CDATA[2019 Finishes With a Bang]]>https://www.omnidivitia.com/blogs/post/2019-Finishes-With-a-BangStocks trounce bonds with double-digit gains MAIN POINTS Stock markets around the world rallied strongly in 2019. Returns likely to be more normal in 20 ]]>

Stocks trounce bonds with double-digit gains


MAIN POINTS

Stock markets around the world rallied strongly in 2019. Returns likely to be more normal in 2020.

Bonds rallied for the first three quarters due to global and trade uncertainty, but dropped in Q4.

Election uncertianty and high optimism and risks for stocks in the first half of 2020.

A year ago, investors were worried about rising interest rates. Policymakers, like the Fed, reversed course in early 2019. By the time the year was over, the Fed had cut rates three times and added about $240 billion to liquidity.


Lower rates and some clarity around the China trade agreement drove a move to riskier assets in Q4. The S&P 500's 8.5% surge (price only) in Q4 was the best since 2013 and the 19th highest since 1928. Stocks trounced bonds. The S&P 500 gained 9.07% on a total return basis, while the Long-Term U.S. Treasury Bond Total Return Index dropped 4.12% in Q4. 


A typical 60/40 portfolio (S&P 500 Total Return/U.S. Aggregate Bond Total Return) put in a strong performance for the quarter at 5.44% (chart below). 

The Nasdaq Composite Index was the top U.S. equity benchmark. Led by the tech sector, the Nasdaq surged 35.2% in 2019, including a 12.2% gain in Q4. Growth beat Value across all three cap tiers in Q4 and for all of 2019. The strongest gains were within large-caps. The Russell Top 200 Growth beat the Top 200 Value by 3.33% in Q4.

 

Technology and Health care both surged over 13% in Q4, leading all sectors. The U.S. outperformed developed international stocks, while emerging markets kept pace in Q4. In contrast to last year, most commodities gained. Oil prices were up 30%, and gold finished up 18.77% for the year.


 2020 Outlook

 Stock gains likely to outpace bonds

There are four cycles that are near critical junctures: economic; earnings, Fed, and election. Whether they align with or counteract each other should determine how 2020 unfolds.

 

The U.S. economy will likely slow but avoid a recession. Earnings growth should accelerate modestly to about 6%. If the Fed stops at three cuts, by the second half of 2020, much of the liquidity will have worked its way through the system. So, a risk for 2020 is that monetary policy shifts from being a tailwind to a headwind in the second half. An additional risk is the typical path of the market during election years.

 

According to Ned Davis Research, the S&P 500 2020 Cycle Composite is weak in the first half (chart right), primarily due to the four-year presidential cycle. While the stock market typically rallies in the second half, it struggles when the incumbent party has lost. The market hates uncertainty, and a new president brings unknowns. 


  

 

Another risk is that investor sentiment is optimistic. The market is vulnerable to the next piece of bad news - no matter what it is.

 

Rising rates could continue to pressure bond proxy sectors, like Utilities, in early 2020.

To obtain the full outlook, contact us or schedule a call to discuss how this affects your financial situation further.
]]>Fri, 10 Jan 2020 17:50:44 -0600<![CDATA[Presidential Cycle Choppy into Mid-2020]]>https://www.omnidivitia.com/blogs/post/Presidential-Cycle-Choppy-into-Mid-2020Consolidation typically starts now and ends in May MAIN POINTS In the first half of 2020, the risk for a political overhang to the stock market is high. ]]>

Consolidation typically starts now and ends in May

MAIN POINTS

In the first half of 2020, the risk for a political overhang to the stock market is high.

Near-term risks continue to include earnings expectations and the trade war with China.

Once a presidential winner has been identified, the market has tended to move higher, regardless of political party.

The U.S. presidential election is top of mind for investors.


Typically, the pre-election year is the strongest in the four year cycle. In fact, since 1948, the average gain for the Dow Industrials has been 11.9%, while the S&P 500 has gained 16.1% during the pre-election year.  Historically, the government stimulates the economy in the pre-election year.


2019, a pre-election year, has been no different.  The Fed has cut rates three times this year.  The first half of 2019 had the strongest government spending since 1990.  Both accomodative policies should help drive growth in the business and consumer sectors in future quarters.


The typical year-end rally in the pre-election year has stalled out.  The stock market has endured a trading range from early September of the pre-election year to mid-May of the election year (chart below).

According to Ned Davis Research, the 2020 S&P 500 Cycle Composite (which combines the one-, four-, and 10-year cycles) is stronger than the four-year cycle alone, but it still shows choppiness in the first half of the year.


Over the next few quarters, the capability for companies to achieve earnings expectations and clarity on the trade war with China will likely be important catalysts for the market.  If forward progress isn't made, the stock market remains vulnerable and the choppy phase of the typical election cycle is a likely scenario.


Looking to 2020, a common variable to an election year rally is when the market has identified the likely presidential winner.  Once the uncertainty has been lifted, the market has tended to move higher, regardless of political party.

]]>Thu, 07 Nov 2019 16:43:23 -0600