Oct 26, 2023
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“I’ll be back” – Arnold Schwarzenegger, The Terminator
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39 years ago today, The Terminator, one of the most iconic Arnold Schwarzenegger movies of all time, hit the screens, and a small line that no one thought would amount to anything during production ended up turning into one of the most recognizable movie quotes of all time. After being denied entry into an LA police station to find Sarah Connor, The Terminator sized up the room and matter-of-factly said, “I’ll be back” and casually walked out. Seconds after leaving, a car comes crashing through the walls and then The Terminator gets out and proceeds to destroy everyone in his path. When faced with a roadblock, The Terminator didn’t mess around.
I wish the same could be said for the bull market that peaked in late July. Don’t get me wrong, the rally through the summer was impressive, and issues like record debt issuance from the US Treasury and war in the Middle East are more than just potholes. But the current pullback of close to 9% in the S&P 500 has been going on for close to three months now, and throughout it all, the best resistance that the bulls have been able to muster is two countertrend rallies of 3%. The small-cap Russell 2000 has been even more pathetic. It’s down 17.5% since the summer high, and through it all, the largest rally has been barely more than 4%. Terminator? The bull market’s reaction to this pullback reminds us more of George Costanza at the birthday party when he pushed all the kids out of the way trying to get out of the apartment when the fire alarm went off.
The market remains in ‘Costanza mode” this morning as futures sell-off in follow-through from yesterday’s shellacking. The primary culprit has been rising rates (what else is new), but earnings results have also been lackluster as many more companies are lowering guidance than raising guidance. As if that wasn’t enough to contend with, the economic calendar this morning is jam-packed with GDP, Core PCE, Durable Goods, Initial Claims, Pending Home Sales, and the KC Fed Manufacturing report among the more notable reports. On the geopolitical front, an Israeli ground invasion of Gaza seems imminent.
Of the data that was just released, GDP topped expectations (4.9% vs 4.5%), Durable Goods Orders were much better than expected (4.7 vs 1.9%), Core PCE was slightly lower than expected (2.4% vs 2.5%), and jobless claims were mixed. While initial claims were pretty much right in line with forecasts, continuing claims surged to 1.790 million which was the highest reading since May. In reaction to the data, treasury yields declined while equity futures got less worse.
Yesterday’s 2.5% decline for the Nasdaq 100 was the index’s worst day of the year. That’s notable because it’s extremely uncommon for the index’s worst day in a calendar year to fall this late. The scatter chart below shows the day (x-axis) and magnitude (y-axis) of the Nasdaq 100’s worst day in each calendar year. Yesterday’s 2.5% decline ranks as the third latest day in a year that the index had its worst day, trailing only 1997 and 1991. 2018 was also close, but the worst day in that year was a day earlier.
There are still two months left in the year, so we could conceivably have an even worse day for the Nasdaq 100 between now and year-end. However, if yesterday ends up being the Nasdaq 100’s worst day, it will also rank as the third mildest worst day of a year for the index trailing only the 2.3% declines in 2005 and 2013.
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Oct 25, 2023
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“Computers are useless. They can only give you answers.” – Pablo Picasso
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It’s looking like a mixed open for the equity market this morning as Dow futures are higher, while S&P 500 and Nasdaq futures are in the red. The pace of earnings is really picking up, and it’s only going to get busier in the coming days. One thing we would note is that in a tape that has been weak for the last several weeks, the ability of the market to get back on track yesterday after the late morning sell-off was encouraging.
In fixed income, we’re seeing a bear steepening of the Treasury yield curve as 10-year yields are up 2 bps to 4.86% while the 2-year yield is slightly lower at 5.09%. Crude oil and gold are basically flat at $83.70 per barrel and $1,987 per ounce, respectively.
On the economic calendar, the only major report is New Home Sales at 10 AM. Economists are expecting a modest increase to 681K from last month’s reading of 675K. Mortgage applications were already released, and they showed a decline of 1% compared to last week’s drop of 6.9%
Despite strength in shares of Microsoft (MSFT), which are up over 3.5% in pre-market trading, Nasdaq futures are lower as shares of Alphabet (GOOGL), where results in its cloud unit were weaker than expected, are trading down over 5%. That puts the stock on pace for its weakest downside gap in reaction to earnings since a year ago today when it opened down nearly 8%. In its history as a public company, there have been ten prior days where GOOGL gapped down more than 5% in reaction to earnings. On those days, the stock’s median performance from the open to close has been a decline of 2.0% with gains just three out of ten times.
While GOOGL’s reaction to yesterday’s earnings report has been weak, we’d note that over the last year, the stock has traded down in reaction to earnings three times with declines ranging from 0.2% up to 9.6%, and yet since the start of October 2022, the stock has still managed to rally 45%. One day doesn’t necessarily make a trend.
Turning back to the market, it seems somewhat hard to believe, but through yesterday’s close, the S&P 500 was down less than 1% in October. With just a week left to go in the month, in the chart below we show the performance of the S&P 500 in the last week of October for every year since 1952 when the current version of the five-trading day week began.
The last week of the month has tended to be positive with a median gain for the S&P 500 of 0.64% and gains 63% of the time. For perspective, the average one-week performance of the S&P 500 since 1952 has been a gain of just 0.17% with gains 56% of the time.
Looking at performance another way, the chart below compares month-to-date performance for the S&P 500 through 10/24 (x-axis) to its performance in the last week of the month (y-axis), and the shaded region shows periods when the S&P 500 was down between zero and 2.5% heading into the last week of the month. During these periods, performance was like the last week of October for all years with a median gain of 0.87% and gains 59% of the time. Overall, there is a slight (and we stress slight) inverse correlation between MTD performance heading into the final week of the month and its performance during the last week, but nowhere near enough to even consider making an investment decision about it.
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Oct 24, 2023
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“Coming up with an idea is the least important part of creating something great.” – Larry Page
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Equity futures are trading higher for what seems like a change this morning after the S&P 500 has posted five straight days of losses. Positive earnings news seems to be driving the gains. We’re starting to see a heavier flow of larger companies report, and this morning’s batch has been generally better than expected. The real test will come after the close, though, as we’ll hear from Alphabet (GOOGL) and Microsoft (MSFT) after the close. Treasury yields and crude oil are generally behaving this morning, and the only data on the economic calendar is preliminary PMI readings for the Manufacturing and Services sectors, as well as the Richmond Fed Manufacturing Index.
After trading in a relatively tight range over the last six months and seeing its daily volatility converge to levels more in line with a long-term US Treasury, bitcoin prices have been rallying over the last few days, capping it off with a gain of nearly 10% today. Prices briefly surged past $35,000 overnight, and while they have pulled back from those highs, the world’s largest cryptocurrency is on pace for its highest close since May 2022. Optimism over approval for a spot ETF has been cited for the gain, but rising geo-political instability and concerns over sovereign debt loads can’t be ruled out either.
While prices got there briefly overnight, bitcoin is currently on pace to come up just short of a double-digit single-day percentage gain. Heading into today, the current streak without a one-day gain of at least 10% was 224 calendar days (bitcoin trades every day) which ranked as the longest streak since the 229-day streak that ended in November 2018. Before that, the only other streak that was longer was the 272 days ending in March 2017.
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Oct 23, 2023
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“Success is no accident. It is hard work, perseverance, learning, studying, sacrifice and most of all, love of what you are doing or learning to do.” – Pele
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After flirting with the 5% threshold for a number of days now, the 10-year yield finally traded above that level this morning but has retreated back below as we approach the opening bell. Equity futures aren’t thrilled with the move and are firmly lower in response. Besides higher interest rates, unrest in the Middle East, and some hesitancy heading into what will be a very busy week of earnings are contributing to the negative tone.
By now, we’re all familiar with the fact that the S&P 500 has had positive returns on each of the last 15 Mondays, which as shown in the chart below, is easily the longest streak since at least 1952 when the five-day trading week in its current format started. The prior record of eleven up Mondays ended in June 2005. Unfortunately for bulls, it’s looking as though that streak is set to end as S&P 500 futures are firmly lower. With today being the 25th anniversary of the release of Britney Spear’s “…Baby One More Time”, can we get the streak to 16?
As far as Mondays are concerned, the streak has been significant in terms of this year’s gains for the market. While the S&P 500 ended last week with a YTD gain of 10.02%, without Mondays, it would actually be down fractionally on the year. The “Magnificent Seven” have gotten all the credit for carrying the market this year, but “Magnificent Mondays” have been just as important.
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Oct 20, 2023
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“The deepest urge in human nature is the desire to be important.”– John Dewey
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A negative week is looking to end on a negative note as equity futures are lower following the declines in Asia overnight and Europe this morning (although those were mostly follow-through from yesterday afternoon’s weakness here in the US). Given the likely escalation, or at least a continuation of the war in the Middle East, it’s hard to blame anyone for not wanting to take on added risk into the weekend. If there’s one silver lining, the 10-year yield briefly touched 5% overnight but has since pulled back (for now). The economic calendar is quiet for today, and there are just two Fed speakers scheduled to speak (Harker and Mester)
“There’s something happening here, but what it is ain’t exactly clear.“ Investors have a tendency to take every recent market event and interpret it as “the most important” this or that. When it comes to various asset classes in recent days, though, we have seen some MAJOR moves, and we couldn’t help but think of the above lyrics from Buffalo Springfield’s “For What It’s Worth” after going through them.
First, crude oil. While still off its highs from just a few weeks ago, the 9.1% five-trading day rally in WTI ranks in the 96th percentile of all five-day periods since 1983.
Second, the 10-year US Treasury yield. In what looks like a chart of an internet stock from the late 1990s, yields have been on a one-way move for what seems like forever now. In just the last five trading days, the 10-year yield is up 29 basis points (bps) and right near 5%. Going back to 1983, that ranks in the 97th percentile of all five-day moves in the 10-year yield.
Finally, gold. In the same five trading days through Thursday’s close, gold rallied 5.5% breaking above both its 50 and 200-day moving averages as well as the downtrend that has been in place since the Spring. The magnitude of the rally also ranks in the 98th percentile of all five-day moves since 1983. Not bad for a commodity that was just trading at six-month lows two weeks ago!
By themselves, these moves over the last week are big, but the fact that they’ve all occurred in the same five-day period is extraordinary. Since 1983, when data for all three asset classes is available, there have only been two other periods where gold and crude oil each rallied more than 5% while the 10-year yield jumped more than 25 basis points (bps). The first was in August 1990 following Iraq’s invasion of Kuwait which led up to the first Gulf War, while the second period was during the Financial Crisis when there were three separate occurrences (September 2008, January 2009, and March 2009). Both periods were seminal in US history for years to come, but the market impact varied. 1990 was no walk in the park, but it left a much smaller scar on the market than the Financial Crisis.
Now, just because we’ve had big moves again this time around doesn’t tell us anything about where the market is going in the future, but when you simultaneously see such large moves in different asset classes, it’s hard not to think “there’s something happening”.
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Oct 19, 2023
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“I am not a politician… I only suffer the consequences.” – Peter Tosh
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With complete dysfunction in Washington, we’re all suffering the consequences of politicians. The continuing resolution keeping the government open expires on 11/17, and besides the geo-political turmoil around the world that needs to be addressed, the longer Republicans in the House go without reaching an agreement on who to elect as speaker, the more likely it is that we reach that mid-November deadline without a budget agreement. As easy as it is to complain about the incompetence in DC, though, Thomas Jefferson was right when he said, “The government you elect is the government you deserve.”
After a disheartening session on Wednesday, things aren’t looking all that positive this morning. Nasdaq futures are the lone bright spot following a positive reaction to Netflix (NFLX) earnings as the stock is poised to gap up over 13%. Tesla (TSLA), however, is moving in the opposite direction as the stock is trading down over 7% following a weak report that showed compressed margins and some downright somber commentary from Elon Musk. S&P 500 futures are essentially flat, and Dow futures are low.
Outside of equities, crude oil is trading down by about 1%, gold is slightly lower, the dollar is mixed, and bitcoin is modestly higher. The real action this morning, however, is in the Treasury market, where yields are higher across the curve with the biggest upside moves coming the further out you go as the 10-year yield is up over 7 basis points to just under 5% (4.98%). 5%!
On the economic calendar, jobless claims will be released at 8 AM, and are expected to remain right around the same levels as last week. Along with those numbers, the Philly Fed Manufacturing report will also be released at 8:30 (expectations are for a modest increase) and Existing Home Sales will hit the tap at 10:00. On the jobless claims front, initial claims were lower than expected while continuing claims came in modestly ahead of forecasts but at the highest level since June. Philly Fed was modestly weaker than expected and came in negative at the headline level for the 13th time in the last 14 months. Besides those numbers, Fed Chair Powell will speak at noon along with five other Fed officials throughout the day. Depending on their messages, it could be a pivotal day.
Admittedly, there’s not a lot of positives out there this morning, but we’ll give you two. First, while today’s date is October 19th, it’s not October 19th, 1987. Second, despite oil prices hovering near $90 per barrel, gas prices have been falling hard. As shown in the chart below, the national average price of a gallon currently sits at $3.565, according to AAA, and that’s the lowest price since July. You know what that means? More money to go inside and grab a bag of Doritos, a Big Gulp, and if you’re really adventurous, one of those things on the hot rollers!
Over the last month, national average gas prices are down just over 8% which is the largest 30-day decline of the year and ranks in in the lowest decile of 30-day returns dating back to 2005.
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