Aug 30, 2023
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“I am not a person of opinions because I feel the counter arguments too strongly.” – Mary Shelley
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If there’s one topic we can be confident that Mary Shelley wouldn’t be weighing in on if she was around today, it would be the economy. No matter which side you choose, there’s good evidence to support your view. Recession? How can we even entertain the thought with jobless claims and the unemployment rate both still at extremely low levels and the Atlanta Fed GDP Now tracking Q3 growth at 5.9%? OK, but with the yield curve on pace for a record streak of inversion, leading indicators down for more than a year straight, and manufacturing surveys deeply in negative territory, how can you not have a recession in your forecast? There’s merit to both arguments.
It’s a busy day for economic data, and it started off with the ADP Employment report. After a weaker than expected JOLTS report and a Consumer Confidence report which showed softening sentiment towards the labor market yesterday, the ADP report continued that trend coming in at 177K versus forecasts for an increase of 200K and follows four months where the reported number was well over 250K. Besides ADP, there is plenty of other data to contend with this morning including Wholesale Inventories (less bad than expected), revised GDP (down to 2.1% from 2.4%), Personal Consumption (slightly weaker), and Core PCE (2.0% vs 2.2% forecast). The only other report on the calendar today is the Pending Home Sales report (10 AM), which is expected to show a decline of 1%.
With two trading days left in August, it’s impressive to see that after heading into the week going all month without back-to-back positive days in the S&P 500, the S&P is now looking to string together its fourth straight positive day. That’s the good news. The bad news is that we’re heading into one of the toughest parts of the calendar. As shown in the composite chart of the S&P 500’s tracking ETF (SPY) over the last ten years, September has been the weakest part of the late summer/early fall consolidation period.
Below the chart, we have also included gauges from our Seasonality Tool which show how performance in the week and month after today’s date over the last ten years has compared to all other one week and one-month periods throughout the year. In the week after 8/30’s close, SPY’s median gain of 0.18% ranks in the 44th percentile relative to all other one-week periods. Over the next month, though, the median decline of 1.21% ranks in just the fourth percentile relative to all other rolling one-month periods. Just another reason very few people like to see summer end.
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Aug 29, 2023
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“You can’t have a better tomorrow if you are thinking about yesterday all the time.” – Charles Kettering
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After its first back-to-back gains of the month, the S&P 500 is poised for a lower open despite positive returns in Europe and Asia overnight. The parade of employment related data for the week kicks off today with the July JOLTS report. We’ll also get an updated read on Consumer Confidence from the Conference Board at 10 AM.
With just three days left in the month, the Nasdaq and the DJ Utilities Index (Utes) are on pace for a near record wide performance gap through the first eight months of the year. With the Nasdaq up just over 30% and the Utes down nearly 10% YTD, the nearly 40 percentage point gap between the two ranks as the third largest in history (dating back to 1971) trailing the 41.3 percentage point gap from 1991 and just slightly coming up short of the 39.9 percentage point gap in 2020 (August isn’t over yet though). The divergent performance of the two indices continues what has been a wild ride over the last few years. While this year has favored the Nasdaq, last year Utes outperformed the Nasdaq by a record amount.
A relative strength chart of the two indices really highlights the roller coaster highs and lows of the last three years. Despite this year’s massive outperformance of the Nasdaq, its relative strength versus the Utes is still well off its 2021 high.
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Aug 28, 2023
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“Defeat is a state of mind; no one is ever defeated until defeat has been accepted as a reality.” – Bruce Lee
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After the first positive week of August, stocks are looking to close out the month on a positive note as we head into September on Friday. It’s a slow day for data today, but we’ll have a number of important reports throughout the week with Consumer Confidence, a ton of labor related reports, GDP, and the ISM Manufacturing report. It’s also the last week of August heading into Labor Day weekend, so there could be air pockets to the upside and downside throughout the week.
Well, it started out as a good day for Chinese stocks. After last week’s “15-minute rally”, Chinese stocks kicked off the week with a 5%+ surge at the open following news that the government would cut the tax on trading and limit the supply of IPOs. The point of maximum optimism was the opening print, though, and from there, the CSI 300 sold off and finished right near the lows of the day. It was still a positive day with a gain of over 1%, but as far as 1% rallies go, this was one of the more disheartening ones.
As far as 5%+ opening gaps are concerned, they don’t occur very often. Today’s was the first since July 2015 and just the seventh since 2005. Besides the one in July 2015, the other five all occurred during 2008.
The chart below shows the performance of the CSI 300 since 2005 with red dots showing each of the prior days that the CSI 300 had a 5% gap at the open. While three occurred near the lows in 2008, the others came in the middle of major legs lower. It’s also worth noting that of the seven 5%+ gaps in the CSI 300 (including today’s), four of them were followed by declines of at least 4% from the open to close.
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Aug 25, 2023
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“Some people without brains do an awful lot of talking, don’t you think?” – Frank Baum, The Wonderful Wizard of Oz
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There’s less than 90 minutes until Powell speaks in Jackson Hole, and before anyone leaps to the assumption that the above quote is directed at certain monetary authorities or any of the commentators who will dissect every syllable spoken or even imagined in Jackson Hole today and this weekend… there could be some truth to that, but we’d also note that today marks 84 years since The Wizard of Oz first hit the silver screen, and after the August we’ve had, we could only wish that it was as easy as clicking our heels to get back to the rally of July.
Although it was primarily one stock driving the move yesterday, in early trading it looked like the S&P 500 was going to build on Wednesday’s gain and string together a rally that would take it back above its 50-day moving average (DMA). It didn’t take long for the sellers to step in and ruin the party, though, leaving the S&P 500 with another outside reversal day.
There are a number of different ways to screen for an outside reversal day, but for our purposes we looked at days where the SPDR S&P 500 ETF (SPY) had an intraday range of more than 1%, its intraday high was higher than the prior day’s high, the intraday low was below the prior day’s low, and it closed in the bottom quintile of its intraday range (near the lows). Based on those criteria, yesterday was the fourth outside reversal in the last month.
While outside reversal days like Thursday aren’t particularly uncommon, you rarely see four within a one-month span (21 trading days). Since SPY started trading in 1993, there have only been four other periods with as many or more, with the most recent being late last April.
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Aug 24, 2023
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“Life is fragile. We’re not guaranteed a tomorrow so give it everything you’ve got.” – Tim Cook
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There’s a positive mood across the global equity universe as stocks in Asia had a positive day, Europe is trading higher, and US futures are indicating a gain of about 0.6% at the opening bell, half of which can be attributed to Nvidia’s (NVDA) 9% pre-market gain. Commodities are mixed but skewed to the downside, and both the dollar and US Treasury yields are slightly higher. It’s a busy morning for economic data with jobless claims, Chicago Fed National Activity Index, and Durable Goods at 8:30 and Kansas City Fed Manufacturing at 11:00.
The August pullback in equities has had the desired effect on sentiment as AAII’s weekly sentiment survey showed bullish sentiment declining for the third week in a row falling from 35.9% down to 32.3%. That’s the lowest level since May 31st, and represents a nearly 20 percentage point decline from its recent peak of 51.4% on 7/19.
It’s hard to think about a more fitting statement from Tim Cook regarding his predecessor who resigned on this day twelve years ago. After taking a leave of absence in January 2011 due to his battle with pancreatic cancer, Jobs formally stepped down as CEO on 8/24/11. The news was made public after the close, and shares fell sharply in the after-hours session before recovering. The following morning AAPL dropped by just about 3% as analysts came out and defended the stock, and by the end of the day it was down less than 1%. At first glance, the fact that the stock had such a muted reaction on news of the departure of one of the all-time greatest tech visionaries may seem counterintuitive, but Jobs had already given up most of his day-to-day responsibilities. While no one could fill the shoes of a leader like Jobs, Tim Cook had (and continues) proved that he was more than capable of leading the company. Just 41 days after formally leaving Apple, Steve Jobs passed away on 10/5/11.
The chart below shows the market cap of Apple since Steve Jobs returned to the company as CEO in 1997 through today. Its market cap under Jobs is shown in blue, while Cook’s tenure is shown in green. One of the most ironic aspects of the chart is that the vast majority of Apple’s market cap has accrued under Cook’s tenure. When Jobs stepped down, Apple’s market cap was just under $348 billion compared to $2.8 billion today. Put differently, more than 87% of the company’s current market cap came during the Cook years compared to less than 13% under Jobs. Even crazier is the fact that in the 13 trading days that followed its peak on 7/31 through the close a week ago on 8/17, Apple lost more in market cap ($369 billion) than the company had accrued from the time it was founded through Jobs’ ultimate departure.
Obviously, this is a major oversimplification of the impact Steve Jobs had on Apple as well as the entire US economy, bit it also illustrates the importance of compounding, and Steve Jobs left Tim Cook with more than a substantial base to build off.
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Aug 23, 2023
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“Things always seem to end before they start.” – Lou Reed
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A few hours ago, it appeared as though we’d be seeing a respectable rally to start the trading day, but much of the gains have faded and there’s still nearly an hour left before the opening bell. The pullback this morning has come in tandem with a sell-off in European stocks which are well of their highs of the day, and one catalyst has been a batch of mixed PMI readings for August. While activity in the manufacturing sector did not shrink by as much as expected, Eurozone services sector activity unexpectedly contracted. In Asia, most major indices were positive during the session, but China was a notable laggard as the CSI 300 fell 1.64% taking its MTD decline to just under 8%.
Weakness in China has really acted as a drag on the performance of Emerging Markets as an asset class as the country accounts for 30% of the entire index, but closer to home, Mexico, which has a much smaller representation in the index, has been moving in the exact opposite direction. The chart below shows the performance of the iShares China (MCHI) and Mexico (EWW) ETFs over the last ten years. While the two ETFs performed similarly with each other from August 2013 through August 2015, they really started to diverge from late 2015 through the onset of COVID, and as concerns over supply chains intensified during the pandemic, Mexico’s renaissance began. Despite periods in the last ten years where the performance of the two ETFs couldn’t have been more divergent, through yesterday’s close their performances was very similar; the MSCI China ETF (MCHI) was down 2.49% over the last ten years, while Mexico (EWW) was down 4.33%. On the chart, Mexico looks like the reflection of China much as the way a mountain range reflects on a lake.
The chart below shows the relative strength of EWW relative to MCHI over the last decade, and this chart further illustrates the roller coaster of Mexico relative to China. From late 2013 right through the onset of COVID, China steadily outperformed Mexico, but with the onset of COVID, the trend reversed abruptly, and in the span of three years has erased seven years of underperformance.
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