Sep 25, 2023
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“Parents of young children should realize that few people, and maybe no one, will find their children as enchanting as they do.” – Barbara Walters
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The September sag continued this morning as equity futures, which were higher overnight, steadily drifted lower to their lows of the session. The culprit this morning once again is higher yields where the 10-year yield has moved back above 4.5% even as the 2-year yield is basically flat. The threat of a government shutdown, which now looks increasingly likely, hasn’t helped either. Not all the news is bad this morning, though, as Hollywood writers have reached a tentative deal, and even the UAW has announced progress in talks with the Big 3 automakers.
There’s still a week left in the month that can’t end soon enough, but if you think this September’s 4.2% decline has been bad so far, remember that last year at this time, the S&P 500 was down 6.6% and then fell an additional 2.9% in the last week of the month. The year before (2021), the S&P 500 was down 1.6% at this point (before falling 3.2%) in the last week, and in 2020, the index was down 7.5% month to date (MTD) through 9/23 before rebounding 3.9% in the last week of the month.
The chart below summarizes the historical performance since 1952 (when the five-day trading week in its current form started) of the S&P 500 in the last week of September based on how the index performed MTD up until the last week. Unfortunately for bulls, the weakest returns to close out the month have come in years when the index was already down by as much or more than it is now. In the 16 years that the S&P 500 was down 3%+ MTD, its median performance in the last week of the month was a decline of 0.67% with positive returns less than 40% of the time. That’s more than twice the decline of the next closest category (up 3%+) and is the only performance range where the index was up less than 40% of the time.
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Sep 22, 2023
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“The future ain’t what it used to be.” – Yogi Berra
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It’s a positive morning for futures as investors look to regroup following the post-Fed declines since Wednesday. Treasury yields are lower, but crude oil is back above $90 per barrel.
A lot of index and sector charts started to show signs of breaking down (on a short-term basis at least) yesterday, and the small cap Russell 2000 moved into ‘correction’ territory as it is now down over 10% from its summer high. The Nasdaq still has a bit over 2% to go before it reaches correction territory, and the S&P 500 is only just over halfway there.
At the sector level, Real Estate and Utilities are the only two sectors down over 10%, but both sectors are down from highs that occurred very early in the year. The only three other sectors that hit their YTD highs before Memorial Day are Financials, Consumer Staples, and Energy. Behind Real Estate and Utilities, Technology is less than half of a percent from correction territory, and the only three sectors that are less than 5% from their highs are Energy, Communication Services, and Health Care.
Heading into the final week of the month, the good news and the bad news are the same – there’s a week left in September. First, the bad news. September has historically been a weak month, and with respect to the four-year presidential cycle, year three is the only time Q3 has been negative. Lastly, the final two weeks of September is the second worst two-week period of the year (behind the two weeks following the close on 2/21), so there’s still another week left of that stretch. With all these weak seasonal tendencies, if Yogi Berra was still around, he may have said, you can understand why investors don’t want to step up and buy anything, and nobody’s going to stop them.
Now, the good news. There’s only a week left in September and that means Q4 is just over a week away. With respect to seasonality, Q4 has historically been a strong time of year and even stronger in year three of the presidential election cycle. Not only that but when it comes to rolling two-week returns, there is only one day in Q4 when the S&P 500’s average forward two-week return is negative. When it comes to seasonality, the last two weeks have followed the script very closely, now bulls hope that continues to be the case.
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Sep 21, 2023
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“It was something devastating — and unreal — like the beginning of the end of the world — or the end of it”
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There’s a post-Fed hangover in the market this morning and dark clouds over Wall Street. After the market followed the recent Fed day script nearly step for step yesterday, international markets continued the downward trend overnight, and US markets are picking up right where they left off yesterday with the S&P 500 down nearly 1% and the Nasdaq down over 1%. Not surprisingly, investor sentiment has taken another hit as the latest data from the American Association of Individual Investors (AAII) showed that bullish sentiment declined to 31.3% from 34.4% and the lowest level since late May.
Besides the Fed, there’s been a ton of other central bank activity overnight, so read all about it in today’s report. On the economic calendar, initial jobless claims came in lower than expected falling to 201K compared to forecasts for a level of 225K. Continuing claims also came in 30K lower than consensus forecasts. Lastly, the Philly Fed manufacturing report dropped to -13.5 which was the lowest level since April and was well below consensus forecasts of -2.
If you told us that the above quote described an event that occurred on this same day in a prior year, 2008 would immediately come to mind, and you would think it came from someone on the former Lehman Brothers trading floor or another investment bank. Lehman had just filed for bankruptcy, and AIG, along with the rest of the financial sector, was teetering on the brink of collapse. At least that’s the way most remember it. What you may be surprised to hear, though, was that while the S&P 500 closed at 1,251.70 on the Friday before Lehman filed for bankruptcy, the Friday after, it closed at 1,255.08 for a gain of 0.27%. Not much to brag about, but not bad considering the largest bankruptcy in US history.
The market always looks forward, and by the time Lehman failed, the S&P 500 had already dropped 20%. Anyone who went home that Friday after Lehman probably breathed a sigh of relief thinking the worst had passed, but the calm of “Lehman week” was only the eye of the storm. Over the course of the next 115 trading days, the Financial Crisis would knock another 44% from the S&P 500 before finally heading out to sea.
So, when is the quote from, and who said it? It was none other than Katherine Hepburn, and she was describing the “Long Island Express” hurricane which struck eastern Long Island on this day in 1938. Hepburn wasn’t even on Long Island at the time, but instead in Connecticut at her family’s summer home in Old Saybrook on the Long Island Sound. Below is the entire quote.
“It was something devastating — and unreal — like the beginning of the end of the world — or the end of it” — and I slogged and sloshed, crawled through ditches and hung on to keep going somehow — got drenched and bruised and scratched — completely bedraggled — finally got to where there was a working phone and called Dad,” – Katherine Hepburn
The “Long Island Express” surprised just about everyone at the time. Back then, there was no radar, satellites, or weather buoys, and forget about hurricane hunters. The only way to detect a tropical storm or hurricane was if it hit land or if a ship encountered out at sea. On a side note, it’s also a reason that storms appear to be more numerous now than they did over time. Back then, if it was out of sight, it was out of mind.
While ships out at sea had encountered the storm, forecasters were anticipating a track towards Florida, but then the storm turned, and on 9/20/1938, the AP reported that it was headed out to sea. The morning of 9/21/1938 was sunny in Long Island, and people were eager to enjoy a day outside after what had been days of rain. The only hint of unsettled weather was a forecast from the Weather Bureau which noted that “The tropical storm will be attended by rain in New England and portions of New York and the Middle Atlantic States tonight”. The part about rain they got right, but they completely missed the direct hit of a category 3 hurricane on Long Island and southern New England. It was a hurricane so strong that it permanently altered the geography of the coastline it encountered.
The chart below shows the path of the 1938 hurricane which took it right over the Hamptons on Long Island, which is home to some of the most expensive real estate in the United States, and into Connecticut and Rhode Island. There hasn’t been a direct hit of a hurricane on the coast of Long Island since 1985, and when Superstorm Sandy hit the New Jersey coast in 2012, its maximum winds were 80 mph. A category three storm like the one in 1938 packs winds in a range of 111 to 129 mph. The financial impact of the storm totaled $620 million which translates to nearly $14 billion in today’s dollars. That may sound like small change compared to a storm like Hurricane Katrina which caused nearly $200 billion in damage, but think about how much less the region was built up back in 1938 versus now. Also, real estate building codes in the region aren’t nearly as strict when it comes to hurricanes as in an area like Florida or even other coastal areas in the southeast or along the Gulf Coast. It’s been a while, but that doesn’t mean the threat is any lower, and as we all know from experience, problems tend to pop up when they’re least expected.
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Sep 20, 2023
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“There is one kind of prison where the man is behind bars, and everything that he desires is outside; and there is another kind where the things are behind the bars, and the man is outside.” ― Upton Sinclair, The Jungle
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It’s Fed Day, and while these are always eventful days for the markets, there is basically zero chance that the Federal Reserve makes any change to rates this afternoon, so the real focus will be on the Summary of Economic Projections (SEP) and Powell’s press conference at 2:30. Outside of the Fed announcement, there is no economic data on the calendar, but we will get earnings reports from FedEx (FDX) and KB Home (KBH) after the close. Heading into the opening bell, equity futures are higher, while yields, the dollar, and crude are all modestly lower.
Investors are on tenterhooks this morning waiting for the latest economic projections and statement on interest rates from the Federal Reserve. With control over the cost of credit and supply of money in the economy (and a nice marble building), the Federal Reserve is in a powerful position. However, even the most powerful people can’t predict the future, and the ability of the men and women who make up the committee to predict where the economy is going probably falls somewhere between Jimmy the Greek’s record on Sunday NFL games in the early 1980s and Pete Rose’s betting percentage on the 1987 Reds. Despite that reality, when the statement and economic projections hit the tape in a few hours, billions in capital will be shifted based on their contents, and traders will make and lose fortunes based on how they were positioned heading into the announcement. Play ball!
It was just over two months ago that headline CPI for June dropped to 3.0% and investors thought some real progress had been made on inflation. With that progress, the view has increasingly been that the Fed would move to the sidelines taking a wait and see approach towards interest rate policy. Unfortunately, for fixed income investors, though, interest rates have done nothing but go up. Since 7/13, the day after the June CPI report, yields have been higher across the curve to levels not seen in at least 15 years. At the very short end of the curve, the 3-year yield is up just 5 basis points (bps), but two-year yields are up 34 bps, and 10-year yields have shot up 50 bps.
In terms of how those higher yields impact price, the iShares 20+ Year Treasury ETF (TLT) is down 8% and back down near its lowest levels since 2011. Talk about a lost decade!
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Sep 19, 2023
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“The very idea of the power and the right of the people to establish government presupposes the duty of every individual to obey the established government.” – George Washington’s Farewell Address, 9/19/1796
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Futures are looking at a modestly positive open this morning even as crude oil and treasury yields are higher. Buildings Permits and Housing Starts were just released, and this was one of the weirder reports we have seen in a while. While Building Permits topped consensus forecasts by about 100K, Housing Starts missed forecasts by about 150K! The reaction in futures has been modestly negative, but at this point, investors have their sites set on the FOMC tomorrow.
While it’s on pace for its third straight day of declines today, the US Dollar Index has had a big rally over the last two months that took it to its highest levels of 2023. With that strength, the 50-day moving average (DMA) has been catching up to the 200-DMA which has also just started to turn higher. Given the trajectory of both moving averages, the Dollar Index is likely to have a ‘Golden Cross’ in the coming days which occurs when a short-term moving average (like the 50-DMA) crosses up through a longer-term average (like the 200-DMA) as both are rising. Technicians consider these types of patterns to be bullish over the longer-term, but often their record in theory is much different than in actual practice.
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Sep 18, 2023
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“A wrong decision is better than indecision.” – Tony Soprano
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Futures were positive overnight, but equities in Europe have been weakening throughout that session, and with both interest rates and oil continuing to drift higher, that has dampened the mood in US markets as we approach the opening bell. As is usually the case when interest rates are higher, the Nasdaq is leading the pre-market declines, but even here, the magnitude of the weakness has been modest.
The economic calendar is quiet to kick off the week with NAHB Homebuilder sentiment the only report scheduled today. That will be followed with Housing Starts and Building Permits on Tuesday, and then Wednesday will be the day everyone is waiting for as the Fed is expected to leave rates unchanged. Last week it was CPI we were all waiting for, and now this week it’s the Fed. There’s always something!
The market has been stuck in a period of indecision for well over a month now as the S&P 500 has traded within 2% of its 50-day moving average (DMA) since early August. Heading into the last two weeks of September, which has historically been one of the weakest two-week periods of the year, the S&P 500 is down around 1.3% for the month. At the sector level, It has been an interesting dynamic as the biggest losers for the month haven’t necessarily been the sectors that were already up the most.
Technology, which is one of the leading sectors YTD, is down more than any other sector on a MTD basis, but Communication Services (the best performing sector YTD) is barely down, and Consumer Discretionary, the third best performing sector YTD, is higher. Both Communication Services and Consumer Discretionary are also outperforming Health Care, Consumer Staples, and Real Estate which are three of the four worst performing sectors this year. So, it hasn’t just been a period of mean reversion.
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