Oct 1, 2024
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“Doctors tell me I have the body of a thirty-year-old. I know I have the brain of a fifteen-year-old. If you’ve got both, you can play baseball.” – Pete Rose
Below is a snippet of commentary from today’s Morning Lineup. Start a two-week trial to Bespoke Premium to view the full report.
With Chinese markets closed through October 7th, they didn’t rally last night, but Japan managed to erase some of Monday’s losses with a rally of nearly 2%. However, the country’s manufacturing sector remained in contraction as September PMI fell to 49.7 from 49.8 but still slightly beat expectations.
In Europe this morning, equities are also higher with the STOXX 600 up 0.4%. Like Japan, the manufacturing PMI for September further contracted falling to 45.0 from 45.8, but that was also slightly better than expected. The bigger news, though, was a tame inflation report where headline CPI rose just 1.8% y/y and pushed interest rates in the region sharply lower.
On the economic calendar in the US this morning, we’ll get manufacturing PMIs from S&P and ISM at 9:45 and 10, respectively. Also at 10, we’ll get Construction Spending and JOLTS. Following in the wake of Europe, US interest rates are also falling with the 10-year yield down over 5 bps to 3.74%. Lastly, the East Coast port strike is less than nine hours old, so it isn’t a major concern at this point, but the longer it lasts, the more we’ll have to start factoring in negative impacts on the economy.
A breeze of relief blew through Wall Street after the closing bell as the S&P 500 finished the month with a gain of just over 2%. Based on the calendar, October has been a much friendlier month to bulls from start to finish, but in between it hasn’t been a walk in the park. As shown in the chart below, the S&P 500’s average Intra month peak to trough decline (on a closing basis) has been the largest of any month at 4.6%.
The chart below shows October peak-to-trough declines for every October since 1945. For the last two years, the S&P 500 has experienced an intra-month decline of at least 5%, and there have been four in the last six years. While the average decline has been 4.6%, that magnitude has been heavily skewed by 25%+ declines in 1987 and 2008. On a median basis, October’s intra-month decline has been a relatively more modest 3.4%. Overall, though, there have still been 26 intra-month drawdowns of at least 5% in the last 79 years.
With those 26 intra-month declines of over 5%, October is tied with September for the highest frequency at 33%. From here, though, intra-month volatility tends to abate into year-end. Historically, only 24% of Novembers have experienced 5% intra-month drawdowns while December has had the lowest frequency of drawdowns of that size.
Sep 30, 2024
While the equity markets keep chugging along, there have been some spectacular/peculiar moves over the last several weeks. It started with the Nikkei in early August when it plunged over 10% in a single day. Over the last several days, we’ve seen extraordinary moves in the opposite direction in China. Just yesterday, even as China had its best day in over 15 years, the Nikkei fell more than 4%. As we noted on X, in less than two months now, the Nikkei has seen its two largest days of underperformance relative to the Shanghai CSI 300 dating back to when China joined the WTO in late 2001.
The crazy moves haven’t been just confined to equities either. On the heels of the big run in Chinese equities on Monday, copper got caught in the current with prices surging over 4% in early trading. Throughout most of the trading day, though, prices steadily gave up the gains finishing down over 1%.
Even for a commodity like copper that type of intraday reversal is uncommon. Since 1990, it’s only occurred six other times. It happened four times during the Financial Crisis in Q4 of 2008, and the only two other times were in June 2006 and November 2016 just after former President Trump won the 2016 election. As for how copper performed following the prior reversals, performance was mixed. In the four occurrences during the Financial Crisis, copper was up over 30% six months later each time, but in the six months after the two non-financial crisis periods, it was lower both times. Forward returns were trendless, but that doesn’t make the volatility any easier to stomach.
Sep 30, 2024
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“What is time? Swiss manufacture it, French hoard it, Italians squander it, Americans say it is money. Hindus say it does not exist. Know what I say? I say time is a crook.” – Truman Capote
Below is a snippet of commentary from today’s Morning Lineup. Start a two-week trial to Bespoke Premium to view the full report.
US equity futures are modestly in the red to kick off the week. That follows a poor start to the week for European markets as well. In Asia, most major benchmarks were also lower to start the week with one big exception. Chinese stocks have continued their gangbusters rally ahead of the week-long holiday where markets will be closed until October 8th, and it appears as though a rush to cover shorts ahead of that closure sparked a frenzy in that country’s stock market.
Look at the chart below because you may not see one like it again, at least for the stock market of the world’s second-largest economy. As we noted on Friday, China’s Shanghai CSI 300 went from a 52-week low to a 52-week high in less than two weeks, and as unbelievable as that rally was, it followed through on that run with a gain of over 8% to kick off the week. Again, charts like this may not be impressive for an individual small-cap stock, but the CSI 300 has a market cap of over $7 trillion.
Last night’s gain in the CSI 300 was the largest in more than 15 years, and there have only been three other days since China entered the WTO that the index had a larger one-day gain.
As mentioned above, last night’s rally capped off what had already been an impressive run for the CSI 300, and the index has now traded higher for nine straight trading days. That’s tied for the second-longest streak of daily gains on record trailing only the 12 gain in December 2014.
This next chart could be the most unbelievable of them all. The CSI 300 has surged just over 25% in the last five trading days. No other five trading day period since 2002 even comes close.
What’s most ironic about the last five days of gains is how much Chinese stocks still are in the hole. From the post-COVID high in February 2021, the CSI 300 remains in a drawdown of over 30%, and the index is still down modestly relative to where it was two years ago and essentially unchanged over the last five years.
Sep 27, 2024
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Sep 27, 2024
With all the talk leading up to last week’s rate cut, it became a forgone conclusion that interest rates would fall. People forget, however, that the Federal Reserve only has control over the short end of the yield curve, and as one moves further out on the curve, the Fed’s control diminishes. At the long end of the curve, rates haven’t declined; they’ve actually seen relatively large increases. The chart below shows how much 10-year yields moved in the days after the first cut of prior Fed easing cycles. In each of the bars below, we show the change in the 10-year yield from the close on the day before the first cut to where it closed seven trading days later (in the case of the current period that would equate to the period from the close on 9/17 through 9/26).
While longer-term interest rates tended to decline in the days that followed prior cuts to kick off easing cycles, the current period is one of just three when 10-year yields increased. The only other periods where yields also increased were following the cuts to kick off the 2001 and 2007 easing cycles.
To compare the change in yields in the current period to the 2001 and 2007 periods, the charts below show the 10-year yield in the six months before and after the first cut in each of the two prior cycles versus the 10-year yield over the last six months. For both periods, there are some similarities between the patterns leading up to the first cut. In each one, yields fell sharply in anticipation of the first cut (or the looming recession) and bounced when the Fed cut as investors became confident in the Fed’s ability to stave off a recession. In both cases, the bounce was short-lived, and yields quickly resumed their downward trajectory.
Given the similarities between the direction of yields, we were also curious to see if the path of the S&P 500 now had any similarities to the 2001 and 2007 periods. Starting with the period surrounding the 2001 cut, the patterns are nearly complete opposites. Whereas the S&P 500 was already plummeting after the dot-com peak in 2001, it’s at record highs now. The S&P 500’s performance in 2007 looks a bit more similar. In both cases, the S&P 500 experienced a moderate pullback in the weeks leading up to the cut and started recovering in advance of it. While the S&P 500 has already hit a new high since the Fed cut rates last week, in 2007 it took about three weeks for the index to get back to its prior highs. The new high didn’t last long, though, and within six months, the S&P 500 was near bear market territory with a decline of over 18%.
While the price charts of the S&P 500 now versus the period leading up to and after the 2007 rate cut look similar, breadth was notably weaker back then. As shown in the chart below, in 2007 (top chart), the S&P 500’s cumulative A/D line peaked in the spring, and as the S&P 500 made a new high in the summer, breadth made a lower high. Then again, October’s higher high was accompanied by a lower high in the cumulative A/D line.
For the current period, the S&P 500’s cumulative A/D line looks different than it did back then. This time, breadth has led prices to new highs, indicating a healthier underlying trend. Whether that positive breadth trend continues remains to be seen, but for now even as the S&P 500’s performance in the last several weeks has been similar to its performance around the 2007 cut, there are some notable differences.
