Nov 7, 2023
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“Man is the only creature who refuses to be what he is.” – Albert Camus
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And on the seventh day, the market rested. After six straight days of the rally looks like it’s taking a day off as equities, crude oil, gold, bitcoin, and even treasury yields are lower. Some of the concerns this morning can be tied to comments made by Minneapolis Fed President Kashkari who said he cannot rule out further rate hikes. On the economic calendar, it’s another light session this morning as will be the case most of the week even as the quantity of earnings reports remains very busy.
Over in Europe, the major indices are all down between 0.1% and 0.5%. PPI for the region was down an incredible 12.4%, and what was even more incredible was that it was a smaller decline than expected! In Germany, construction data was weaker than expected and showed the weakest level of activity since April 2020.
While momentum in the market pulled back yesterday, last week’s rally was accompanied by exceptionally strong breadth. As an example, the S&P 500’s 5-day advance/decline (A/D) line surged to +1,476 as of Friday which ranked as the 7th highest reading dating all the way back to 1990. The chart below shows historical readings in the 5-day A/D line, and the reason it only goes back to 2008 is that before that there were no readings that ever exceeded +1,400. That’s due in at least part to the fact that around that time is when the popularity of ETFs really started to explode creating what has become the current all-or-nothing nature of the market.
The chart below shows the performance of the S&P 500 going back to 2008 on a log scale, and the red dots show every other time that the 5-day A/D line reached +1,400 or higher. As shown, these types of readings occurred at all different phases of the market cycle. While the late 2021 occurrence right near the market top sticks out like a big pimple, other occurrences don’t look nearly as ominous.
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Nov 6, 2023
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“I am a slow walker, but I never walk back.” – Abraham Lincoln
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The market is catching its breath this morning after the big moves of last week. Equity futures, treasury yields, and crude oil are all modestly higher while the dollar follows through on its declines from last week. There’s very little in the way of economic data this morning, and the pace of earnings has been relatively slow so far, but the pace will pick up later this afternoon and into tomorrow as earnings season remains in full swing- at least in terms of the number of reports.
Last week’s 5.82% gain for the S&P 500 was the best week of the year and the best week for the major US benchmark since the week ending November 11th from last year. With geo-political tensions remaining hot, earnings looking not so hot, and interest rates surging, the prospects for equities looked dim. You couldn’t fault an investor for thinking that it may be a good time to lighten up and sit things out for a bit until things cool off and some of the uncertainty recedes. As the market tends to prove time and time again, though, just when things look their worst, the market has a way of going the other way. In addition, timing the market remains one of, if not, the most difficult aspects of investing. Without fail in the markets, the best weeks tend to come when they’re least expected.
The chart below shows the growth of $100 invested in the S&P 500 at the start of 2010 (dividends not included) on both a buy-and-hold strategy as well as if an investor missed out on the best week of each calendar year. The gap is enormous. While the original $100 is now worth $390.85, had you missed out on the best week of each year, you would have less than half of that amount at $193.55. In other words, well over half of the gains since 2010 can be attributed to those 14 weeks. Admittedly, you could make the counterargument that most of the losses during this period have also occurred in a small number of weeks, but trying to successfully anticipate when these good weeks or down weeks will occur is IMPOSSIBLE. As “KC and the Sunshine Band” advised in 1979, “Please Don’t Go”.
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Nov 3, 2023
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“There is nothing wrong with change.” – Joe Maddon
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Seven years ago today, the world woke up to what had been previously thought impossible as the Cubs won the World Series for the first time in 108 years. In typical Cubs style, they didn’t make it easy on themselves; the win came in extra innings of game seven…after a rain delay! There was a lot of excitement in Chicago on November 3, 2016, but no one was happier than Steve Bartman who became the scapegoat of the team’s collapse in game six of the 2003 NLCS when the Cubs blew a 3-0 lead in the eighth and then went on to lose in game seven after blowing a 5-3 lead and losing 9-6 to the Marlins.
The Marlins then went on to win the World Series in six games over the Yankees. Naturally, since the Cubs should have beaten the Marlins, who then went on to beat the Yankees, the Cubs should have won the World Series, and it was all Bartman’s fault. It makes perfect sense, and if you ask any Met fan, they’ll agree.
While not quite as impressive as the Cubs winning the World Series, the market did what seemed impossible on Wednesday by rallying at least 1% on a Fed Day and then rallying more than 1% the next day as well. Fed days lately have been anything but bullish, and like clockwork, you can usually depend on the market selling off right when Chair Bartman steps up to the podium. Wait, does that say Bartman? On Wednesday, though, the S&P 500 traded higher into the press conference and then kept rallying from there and finished near the highs on both days!
In reality, the S&P 500’s two-day rally on Wednesday and Thursday was only the strongest gain on a Fed Day and the day after since the day of and day after the July 2022 meeting. Just like Bartman, Powell probably doesn’t deserve all the blame, but just like Cubs fans when things didn’t go their way, investors are always looking for a scapegoat, and Powell has become the obvious choice. As bad as it has been for Powell over the last two years during this hiking cycle, at least he can go out to dinner this weekend without fearing the mob. It took Bartman 13 years!
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Nov 2, 2023
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“Once you consent to some concession, you can never cancel it and put things back the way they are.” – Howard Hughes
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Stocks are poised to trade higher for the fourth day in a row this morning continuing the positive momentum from yesterday’s trading and a strong session in Europe. Movement in the fixed-income space is also helping as the 10-year yield drops below 4.70%. There’s still a lot of economic data to get through today, and after what has already been a busy day of earnings, there’s still a ton of reports after the close including the biggest of them all – Apple (AAPL) – after the close today. On the economic calendar, we just got a slug of data. Non-farm productivity came in higher than expected, Unit Labor Costs were lower than expected, and both initial and continuing jobless claims were higher than expected.
We’ve all become painfully aware of the typical “Powell Pattern” on Fed days where the S&P 500 finishes near its lows of the day following an afternoon swoon that seems to always take place right after the Fed President starts speaking. Yesterday, the S&P 500 went in the opposite direction as the Powell pattern was completely reversed.
When the closing bell rang yesterday, the S&P 500 tracking ETF (SPY) was up 1.07% making it the best Fed Day since July 2022 when SPY rallied 2.60%. In the nine meetings between yesterday and July 2022, SPY declined an average of 0.78% on Fed days and was only up three times.
The fact that the market finished higher on a Fed Day yesterday was surprising enough. Even more impressive though was the fact that it finished near its highs for the day. When the closing bell rang, SPY was down 0.2% from its intraday high. That was the closest it finished to an intraday high since the May 2022 meeting, and in the eleven meetings between yesterday and May 2022, SPY’s average close relative to the intraday high was a decline of 1.5%. Did Powell get up on the right side of the bed yesterday?
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Nov 1, 2023
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“If you knew how much work went into it, you wouldn’t call it genius.” – Michelangelo Buonarroti
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A 2.4% rally overnight in Japan hasn’t been enough to help the picture for US futures this morning, but we have seen some improvement following a slightly weaker-than-expected ADP report and the refunding announcement from the US Treasury. It’s a busy day of economic ahead with Construction Spending, JOLTS, and ISM Manufacturing. Then, at 2 PM we’ll get the interest rate decision from the FOMC. While the market is all but certain that there will be no change in rates, you never know what Powell will say at 2:30. Once we get through all of that, we’ll get earnings from Apple (AAPL) after the bell.
In yesterday’s Chart of the Day, we discussed the “Nowhere Nasdaq” as the index is basically unchanged since the start of 2021 – a period just two months short of three years! The S&P 500 has fared modestly better during this span, but overall returns have been, at best, ordinary.
The chart below shows the annualized performance of the S&P 500 on a total return basis over the last one, two, five, ten, and twenty years (green bars) and compares those returns to the long-term historical average (blue bars). Outside of the five- and ten-year time windows, returns through the end of October have been weaker than average with the weakest results over the last two years (-3% vs 10.6%). Over the last twenty years, the S&P 500’s average annualized return of 9.3% is 1.6 percentage points below the long-term average, and while that doesn’t sound like much, it adds up over time. For example, $100 invested 20 years ago that compounded at 9.3% is worth $592 today while that same $100 compounded at 10.9% would be worth $792 today.
As ‘meh’ as equity returns have been over time, they blow the returns of long-term US Treasuries out of the water. The BofA 10+ Year US Treasury Index has now had negative 1-year rolling total returns for a record 33 straight months.
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Oct 31, 2023
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“You cannot keep birds from flying over your head, but you can keep them from building a nest in your hair.” – Martin Luther
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It’s been a while and it’s still early in the day, but with futures trading higher as we head into the opening bell, the S&P 500 is on pace for its first back-to-back run of gains in three weeks. Treasury yields are moving lower this morning, and the 10-year yield is barely hanging onto the 4.8% level after breaking above 5% just over a week ago. In international economic data, China released some weak PMI data, and GDP in Europe missed expectations.
Back here in the US, the Employment Cost Index came in slightly higher than expected at 1.1% versus forecasts for an increase of 1.0%. Besides that report, we still have home price data at 9 AM, Chicago PMI at 9:45, and Consumer Confidence at 10 AM.
There’s never a shortage of strange when it comes to the markets, and October has been no exception. In a month where geo-political uncertainty in the Middle East moved to the front burner, gold surged (which you would expect), but crude oil, which you would also expect to rally, quickly ran out of steam. The fact that crude oil was unable to get going given the geo-political backdrop reinforces the view that the market isn’t expecting a major escalation/spillover of the current unrest.
With crude oil down just under 9% this month and gold up just under 9%, October is on pace to be just one of 20 other months in the last 40 years that crude fell at least 5% in the same month that gold rallied more than 5%. In the table below, we list each of those prior periods along with each commodity’s forward three-month performance. Going forward, crude oil has tended to largely recoup the ground it lost, averaging a three-month gain of 8.9% (median: +5.3%) with positive returns just over two-thirds of the time. Gold, however, was not as strong. Over the next three months, it averaged a gain of just 1.2% with gains less than half of the time (42%) On a median basis, though, gold’s forward three-month performance was a loss of 0.2%.
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