Oct 18, 2023
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“There are no rules here — we’re trying to accomplish something.” – Thomas Edison
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Oil is trading higher this morning after President Biden’s planned meeting with Arab leaders was scrapped after the bombing of a hospital in Gaza which each side is blaming on the other. At the margin, the trip’s cancellation raises risks of an escalation of the conflict, hence the rise in oil prices and lower equity prices. Normally, you’d expect to see treasuries rally in a situation like this, but they’re so out of favor these days, that they’ve only managed a modest rally.
Earnings season is finally kicking into gear, and after the close, we’ll get reports from Netflix (NFLX) and Tesla (TSLA), but this morning we’ve already seen notable reports which include Morgan Stanley (MS), Procter & Gamble (PG), and Travelers (TRV). Overall, results relative to expectations have been uninspiring as just over two-thirds of companies reporting this morning have exceeded EPS forecasts while less than half topped revenue estimates.
On the economic calendar, the only reports of note this morning were Building Permits and Housing Starts. Both reports came in close to expectations with Housing Starts slightly missing forecasts while Building Permits slightly beat.
Just when you think that European stocks are going to reverse their long-term underperformance relative to the US, US stocks start outperforming again. The last six months have been a perfect example. The chart below compares the rolling six-month performance between the S&P 500 and the STOXX 600 on a dollar-adjusted basis. While the two indices performed in line with each other in the spring, once Memorial Day arrived, US stocks started to pull away, and through yesterday’s close, the S&P 500 was up over 5% in the last six months while European stocks were down over 6%.
From a longer-term perspective, this trend is nothing new. The chart below shows the rolling six-month performance spread between the S&P 500 and the STOXX 600 ($-adjusted). Over the last 20+ years, especially since the Financial Crisis, there have been multiple six-month periods where the US outperformed Europe by an even wider margin (and far fewer periods where Europe outperformed the US by a wide margin). One major exception, though, was in the six months coming out of last October’s lows though April of this year. During that six-month period, Europe outperformed the US by more than 20 percentage points, which was the widest margin of outperformance on the part of Europe relative to the US since the Financial Crisis. It didn’t last long, though, and that period was more the exception than the rule.
The above quote from Thomas Edison is something to think about when you look at the trend of US outperformance relative to Europe. Sometimes, the more ‘rules’ you have the harder it is to accomplish things, and on the issue of regulation, Europe has a much higher burden than the US.
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Oct 17, 2023
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“Behind every successful person lies a pack of haters.” – Marshall Mathers
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Futures were lower this morning heading into the September Retail Sales report, and with the numbers coming in stronger than expected and August’s report revised higher, the tone has become slightly more negative as yields have risen across the board. There’s still a lot more data left to go today with Industrial Production and Capacity Utilization at 9:15 and then Business Inventories and Homebuilder Sentiment at 10 AM. Outside of economic data, shares of Bank of America (BAC) are trading up in the pre-market after reporting earnings earlier.
After multiple days of testing its 200-day moving average (DMA), the S&P 500 staged a nice rally in the early days of October. Just as it traded multiple days testing its 200-DMA from above, though, it has now stalled out just below its 50-DMA. Investors can’t seem to make up their minds over which way to take the market, and it has resulted in a ton of indecision over the last week. And how can you blame them? Scanning the entire investment landscape, there are seemingly plenty of reasons to like the market but just as many to hate it.
Reflecting this uncertainty, over the last five trading days, the S&P 500’s intraday high has stalled out right around 4,380 each day with a highest high of 4,385.85 on 10/10 and a lowest high of 4,377.10. That works out to a range of less than 0.20% and is the tightest such range in years. In fact, the last time the S&P 500’s intraday highs over a five-day span were in such a tight range occurred exactly six years ago in the five trading days that ended on 10/17/17.
The long-term chart of the S&P 500 below shows every time that the S&P 500’s intraday highs over a five-day span were crammed in a range of less than 0.25%. While these types of indecisive periods for the market have been relatively uncommon in recent history (last occurrence was in June 2021), they were much more prevalent in the past. More importantly if you’re a bull is that they were much more common during longer-term uptrends than downtrends. Sure, there’s plenty not to like about the market, but behind every bull market isn’t there always a wall of worry?
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Oct 16, 2023
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“The difference between winning and losing is most often not quitting.” – Walt Disney
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After investors were hesitant to take any risks heading into the weekend last Friday, the lack of any meaningful news on the geo-political front has caused some relief. The pace of earnings news this morning has been slow, and the one economic report released so far – Empire Manufacturing – came in pretty much right inline with expectations.
While most major equity averages were higher on the week, the bifurcated nature of the market remains in place. As shown in the snapshot of US equity performance from our Trend Analyzer, large-cap indices managed to squeeze out gains of just under 0.5% last week. Smaller cap indices didn’t fare as well, though. At the bottom of the table, you can see that mid-cap-focused indices were down about 0.5% while small and micro-cap stocks were down over 1%. One thing all these indices have in common, though, is that they’re all below their 50-day moving averages.
Looking at the charts of indices on both sides of the market cap spectrum shows the divergent paths, although neither chart looks particularly good. Starting with the largest cap stocks, the S&P 100 ETF (OEF) has been making a series of lower highs since its peak in the summer, and while it had rallied in the first half of last week, just as it got back near its 50-DMA in the middle of the week, the rally ran out of steam. If there’s one thing positive to say about large caps, it’s that the uptrend line from last October’s low has remained in place.
The downtrend in small caps has been even more pronounced. After breaking down from a head and shoulders top formation in September, the Russell 2000 ETF (IWM) has continued to decline and is now testing the lowest levels since May. While the S&P 100 is still well above its 200-DMA and just fractionally below its 50-DMA, the Rusell 2000 is over 6% below both moving averages and whatever uptrend line that had formed off the lows last fall has been broken.
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Oct 13, 2023
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“In politics, if you want anything said, ask a man. If you want anything done, ask a woman.” – Margaret Thatcher
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Equity futures are flat as a pancake this morning as investors and traders try to digest what has been some positive earnings results and lower yields along with higher oil prices as Israel gears up to launch a counterattack into Gaza and the US looks to impose harsher sanctions on Russia.
Today marks the unofficial kickoff to earnings season with the major banks and financial companies reporting, and so far, the results have been promising. Between the reports of Blackrock (BLK), Citigroup (C), JPMorgan (JPM), PNC, and Wells Fargo (WFC), they’ve all topped EPS forecasts, and only BLK reported weaker-than-expected sales. In terms of stock price reactions, BLK is the only one trading lower in the pre-market while all the others are trading up over 1%. A lot can change between then and now, but the immediate first impression is positive.
On the economic calendar, Import and Export Prices will come out just as you are reading this while the University of Michigan Sentiment will be released at 10 AM. The headline index is expected to decline modestly from last month’s reading, but a key item to watch will be inflation expectations. Lastly, with the geo-political landscape extremely uncertain heading into the weekend, it will be interesting to watch how the market trades in the hours leading up to the weekend. How willing investors are to hold stocks into the weekend will say a lot about market sentiment.
Friday the 13th is considered the unluckiest of days, but don’t tell that to the stock market. Since the first full year that the current iteration of the five-day trading week started in 1953, the S&P 500’s average daily change was 3.4 basis points (bps) with positive returns 53% of the time. Fridays have been much stronger with an average daily gain of 6.1 bps and positive returns 55.9% of the time. Even the 13th day of the month has been better than average with an average gain of 5.2 bps and positive returns 53.6% of the time. With both Fridays and the 13th being better than average, you can imagine that Friday the 13th would be better than average as well, and historically, they have been much better than average with the S&P 500 gaining an average of 14.5 bps with gains 58% of the time. That’s more than four times the average for all days!
While Friday the 13th has generally been lucky for the market, it depends on the month it falls on. The chart below shows the median Friday the 13th change of the S&P 500 by month, and while October occurrences haven’t been the worst, they’re far from the best either. With a median daily gain of 9 bps, October Friday the 13ths are right in the middle of the pack in a tie for 6th place amount the 12 months. The best months have been the summer months of June, July, and August with median gains of 49 bps, 30 bps, and 21 bps, respectively.
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Oct 12, 2023
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“You can never cross the ocean unless you have the courage to lose sight of the shore.” – Christopher Columbus
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Inflation data and the upcoming earnings season have been the short-term focus of investors lately, but from a long-term perspective, today markets the one-year anniversary of the bear market low from last year. While the S&P 500 remains below its highs from late July, it is still up over 20% from the closing low a year ago today. Happy Anniversary!
Yesterday’s data was the warmup, but today’s CPI report for the month of September is the main event in a market that has been hypersensitive to inflation data for several months now. As shown in the chart below, the S&P 500’s trailing 12-month average daily change on CPI days has been above 1% since August 2022 and peaked at just under 2% this January. The only other time since 2000, that the S&P 500 was more volatile on CPI days was at the height of the financial crisis from late 2008 and through 2009.
Over the last two months, the S&P 500’s change on CPI days has been much more toned down with a gain of just 0.03% following the July report in August and a gain of 0.12% after the August report last month. Those subdued readings have taken the 12-month average down to 1.11%, and unless the S&P 500 moves up or down 1.25% today, the 12-month average will fall back below 1%.
The September CPI report just hit the tape and the results came in generally higher than expected. Headline CPI rose 0.4% m/m versus forecasts for an increase of 0.3% while core CPI was right in line with forecasts. As you might expect, equity futures have given much of their earlier gains while rates are higher. Obviously, these higher-than-expected readings in yesterday’s PPI and today’s CPI show that the road to lower inflation is a windy one. Jobless claims were also just released, and initial claims were pretty much right in line with forecasts while continuing claims rose more than expected.
Similar to the charts we showed yesterday of the PPI relative to its historical average, below we show how current levels of headline and core CPI on a year/year basis stack up relative to history. At the headline level, the current level of 3.7% is below its 50-year average reading of 4.0% but still above its 25 and 10-year averages of 2.5% and 2.7%, respectively. On a core basis, the picture is even worse with the current level of 4.1% above its 50 (4.0%), 25 (2.5%), and 10 (2.7%) year averages.
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Oct 11, 2023
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“The more I see the less I know for sure.” – John Lennon
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US equity futures are pointing to the fourth day in a row of gains this morning as last week’s oversold levels, positive seasonals, and a lack of escalation in the Middle East have all contributed to the positive tone. The fact that US Treasury yields were sharply lower again after some non-hawkish commentary from Fed speakers like San Francisco President Mary Daly and Fed Governor Michelle Bowman has also helped. The only thing left to get through was PPI, but unfortunately, those numbers were on the hot side.
PPI for the month of September was just released, and the headline reading came in much higher than expected (+0.5% m/m vs 0.3% m/m expectations). The core reading also topped expectations at 0.3% compared to forecasts for a reading of 0.2%. Those readings took the year/year levels to 2.2% (versus 1.6% expectations) at the headline level and 2.7% on a core basis (2.3% expected).
As shown in the charts below, the move higher in headline PPI has sandwiched it right between its pre-COVID average of 1.7% dating back to November 2010 when the current iteration of Final Demand began and its overall average of 2.6%. On a core basis, September’s reading of 2.7% is above its overall average of 2.6% and nearly a full percentage point above its pre-COVID average of 1.8%. There’s still some work to do on the inflation front!
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