Jun 8, 2023
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“It wasn’t the money, it was just that we had them on the run and gave in. They knew it, and that’s why they wanted to come to terms.” – Al Davis
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In a week that has been quiet on the market, economy, and policy fronts, one of the biggest stories has been the merger between the PGA and LIV Golf, and it came 57 years and just two days after what was the most important merger in US sports history when the NFL merged with the AFL forming what has gone on to become the most formidable league in all of professional sports. This week’s merger in golf hasn’t been without controversy, but with time, will we look back on this merger as anything nearly as significant?
As we said, it has been a quiet week, and this morning is no exception. The only economic reports of note today are Jobless Claims and Wholesale Inventories, and they’ll also be the last reports of the week. Jobless claims were mixed as initial claims came in at an 18-month high of 261K while continuing claims were lower than expected (1.757 mln vs 1.802 mln) falling to their lowest level since February. Equity futures are slightly higher but basically unchanged. Likewise, crude oil is up fractionally, and treasury yields are higher across the curve.
Market rotation has been a common theme this year, and throughout the first week of June, we’ve seen it again where the winners YTD have underperformed as the laggards lead. Look at the chart below which compares the YTD performance of major equity index ETFs (x-axis) to their performance in the first week of June. With its 31.2% YTD gain, no index ETF has performed better than the Nasdaq 100 (QQQ), but in the first week of June, it is the only index ETF up less than 1%. Conversely, the Russell Microcap ETF (IWC) was the second worst-performing index ETF YTD, but it’s the best performed during the first week of June (+8.25%).
At the sector level, the inverse relationship hasn’t been quite as notable, but it has still been a factor. Technology (XLK) and Communication Services (XLC) are the two best-performing sector ETFs YTD with gains of over 30% each, but in the first week of June, they’ve been two of the three worst performers. Meanwhile, Energy (XLE), the worst-performing ETF this year (-6.11%), has rallied more than 7%, leading all other sectors. There have also been some exceptions, though. Consumer Discretionary (XLY) is the third best-performing sector YTD and it remained near the top in the first week of June as the fifth best-performing sector. Meanwhile, Utilities (XLU), Health Care (XLV), and Consumer Staples (XLP) were among the weakest sectors YTD, and they continued to lag in the first week of June.
Whatever side of the trade you are on, the question of whether this rotation is a trend shift or not is important, but the fact that it has coincided with the start of a new month would suggest that it has been more a function of rebalancing than a real trend shift.
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Jun 7, 2023
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“The Edge… There is no honest way to explain it because the only people who really know where it is are the ones who have gone over.” – Hunter Thompson
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It’s another quiet morning in the markets today as futures are little changed with a positive bias. Crude oil and yields are also higher, although overnight economic data out of China and Europe generally came up short of expectations, and mortgage applications in the US declined 1.4% versus the prior week. Bitcoin is also modestly lower on the morning, but given the SEC’s actions towards the industry this week, one might have thought the sector would be under even more pressure.
With every advancement, the negative side effects tend to get a disproportionate amount of attention even when the societal benefits of the breakthrough dwarf the costs. The bank runs this spring were a perfect example. How many times did we hear that a consumer’s ability to transfer large sums of capital with nothing more than a couple of taps on their smartphone was a threat to the banking system?
The list of benefits these same commentators fail to mention is long and includes the ability to effortlessly move funds around the world with just a couple of taps and how it has radically improved economic efficiency. Besides the benefits, if banks simply offered even something resembling a competitive deposit rate and didn’t load up on long-duration assets when interest rates were near zero, they never would have run into these problems in the first place. And anyway, is a business model built on a foundation of making it difficult for customers to take their business elsewhere really one we all want to get behind? If that’s the case, why wasn’t anyone defending America Online back in the early 2000s when the company made it nearly impossible for customers to cancel their accounts?
The only reason for bringing this up now is that back on this day in 1962 Switzerland opened its first drive-through bank. After seeing that, we wondered if, even with the added convenience, there were similar cries from the Luddite community railing against the fact that customers could now just drive up to the bank and withdraw funds…all while the car was still running. Talk about a bank run!
Regarding banks, we noticed yesterday that the S&P Regional Banking ETF (KRE) closed above its 50-day moving average for the third day in a row which hasn’t happened since late February/early March, before the onset of the regional banking crisis. Who knows if the worst is over, but if it is, it would have been one hell of a quick ‘crisis’.
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Jun 6, 2023
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“I’m not in this world to live up to your expectations and you’re not in this world to live up to mine.” – Bruce Lee
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Equity futures have had a quiet session overnight on little news flow. The only major news of note was a surprise 25 bps rate hike in Australia. Investors are still digesting the virtual headset that Apple unveiled at WWDC yesterday, and while a charitable description is that it is a work in progress, hopes are that future versions will show improvement in form, function, and price. After trading lower after the headset was unveiled, shares of AAPL are trading down over 2.5% this morning. In case you missed it yesterday, we published a BIG Tips report on how AAPL stock historically performs before, during, and after the annual WWDC conference.
There’s no economic data to speak of in the US, but in Europe this morning, Retail Sales for the EU were unchanged, which was weaker than 0.2% m/m growth that was expected. Factory Orders in Germany declined 0.4% which was much worse than expectations for 2.8% growth. In Spain, Industrial Production also declined by 0.9% compared to consensus forecasts of 1.7%, so a weak showing overall. Maybe the lack of economic news in the US today is a good thing!
We discussed oil’s lack of ability to rally on what should be considered good news for prices last Wednesday, but considering the commodity’s action in reaction to the weekend news that Saudi Arabia would cut supply, it’s worth updating again. First, OPEC+ announced a surprise production cut in early April which caused prices to immediately spike by over 8% and a total ultimate gain of just over 10%. The gains didn’t last long, though. The rally stalled out just shy of the 200-day moving average, and by the end of the month, the gains had all been erased.
In late May, a Saudi minister warned speculators who were short oil to ‘watch out’. Those comments were good for a rally of less than 4% lasting less than two days, and after stalling out at the 50-day moving average (DMA) the gains were erased within a day. That brings us to the past weekend when Saudi Arabia announced it would cut production by 1 million barrels per day in July. That production cut was good for a 4%+ rally in crude oil when futures markets opened for trading Sunday evening, but by the end of the trading day Monday, crude oil was already below its Friday close, and this morning crude oil is down another 2%.
A key factor behind all three rallies and their ultimate bearish reversals is that they all ended abruptly at a key moving average. During bull markets, moving averages tend to act as support in any pullback, during bear markets, they act to squash any rally right in its tracks.
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Jun 5, 2023
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“Never miss a good chance to shut up.” – Will Rogers
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Crude oil is getting a little bit of a bounce this morning after Saudi Arabia announced over the weekend that it would cut production by a million barrels per day in July. While prices are up nearly 2%, they are well off their highs of the overnight session as resistance at the 200-day moving average (DMA) kicked in. Equity futures are modestly higher following the lead of Europe where stocks are also marginally higher.
Summer doesn’t officially start for another two weeks or so, but when it comes to doldrums, it doesn’t get much quieter than the data slate for the upcoming week. On the economic calendar, two days this week – Tuesday and Friday – will have no scheduled releases, and on the remaining three days, the only reports of note will be ISM Services and Factory Orders (Monday), Consumer Credit (Wednesday), and Jobless Claims (Thursday). The earnings calendar is equally light as the only two earnings reports on the calendar for S&P 500 companies are JM Smucker (SJM) on Tuesday morning and Campbell Soup (CPB) on Wednesday: soup and jelly. So, not only do we have a minuscule number of companies reporting, but they could also be among the most ‘boring’ stocks in the market when it comes to earnings.
Fed speakers and politicians are always good for a few tape bombs throughout the week, but not this week. The Fed entered its blackout period ahead of the June meeting over the weekend, and with the debt deal getting signed into law, there isn’t much for politicians to talk about either. Who knows what the future will bring, but if the calendar is right, prepare for a quiet week.
With the lack of data to focus on here in the US, this morning we wanted to highlight the overnight release of inflation data in Turkey. If you thought we had it bad with inflation here in the US, Consumer Prices in Turkey rose 39.59% on a year-year basis in May, and as bad as that may sound, it was the seventh month in a row of declines and is now down by more than half from its peak of 85.51% in October. Just as inflation on the way up has been a global phenomenon, inflation on the way down (from varying levels) has also been a global trend.
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Jun 2, 2023
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“The four most dangerous words in investing are: this time it’s different.” – Sir John Templeton
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Positive earnings news from the likes of lululemon (LULU) and MongoDB (MDB) plus a positive tone in overseas markets, where many benchmark indices are trading up over 1%, is pushing US equity futures higher ahead of the May jobs report. Reports that China is considering a new round of stimulus measures to support the property market has commodity stocks ripping higher following gains in Thursday’s session as well. The Senate also passed the debt ceiling bill, which will now move to the President’s desk. Its quick movement through Congress is a positive, but at this point, you can only rally on the same news so many times.
Heading into this morning’s jobs report, economists were expecting an increase of 195K non-farm payrolls (down from 253K last month), the Unemployment Rate to increase to 3.5% (from 3.4%), average hourly earnings to increase 0.3% (down from 0.5%), and average weekly hours of 34.4 (unchanged). The actual headline number was much stronger than expected (339K), but the Unemployment Rate was also much higher than expected at 3.7% and the highest since last October. Also, average hourly earnings were in line with forecasts and average weekly hours were weaker at 34.4. While the headline number is a bit of a shocker, given the higher Unemployment Rate, it’s unlikely to have much impact on FOMC policy forecasts.
This time is different, may be a dangerous phrase, but when it comes to economists’ forecasts surrounding the monthly non-farm payrolls report, this period really is like no other we have ever seen. As shown in the chart below, this morning’s release extended the streak of better-than-expected reports to 14 months. For over a year now, economists have been underestimating the rate of job growth in the US economy, and they still haven’t made the necessary adjustments to their modeling. In football, a coach only gets one halftime to make the necessary adjustments, but economists have had more than ten halftimes, and they still can’t get things quite right. If the definition of insanity is doing the same thing over and over and expecting a different result, Wall Street needs an army of psychiatrists.
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Jun 1, 2023
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“When people see some things as beautiful, other things become ugly. When people see some things as good, other things become bad.” – Lao Tzu
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Flat on either side of unchanged. That’s where futures stand this morning heading into what is going to be a very busy day for economic data. Things started off with ADP Private Payrolls at 8:15 which came in much stronger than expected at a level of 278K versus forecasts for an increase of 170K. After that, we got updates on Non-Farm Productivity, Unit Labor Costs, as well as Initial and Continuing Claims. Non-Farm Productivity was less bad than feared, falling 2.1% versus forecasts for a decline of 2.5%. Unit Labor Costs were a big bright spot as they only increased 4.2% compared to forecasts for an increase of 6.1%. Jobless claims, meanwhile, were slightly better than expected on both an initial and continuing basis.
We’re still not done yet, though. At 9:45 S&P Manufacturing PMI comes out at 9:45 followed by ISM Manufacturing and Construction Spending at 10 AM.
In Europe, stocks are higher this morning following some positive economic data as most manufacturing PMIs were modestly better than expected but still in contraction. Inflation data also came in lower than consensus forecasts with EU CPI unchanged in May versus expectations for an increase of 0.2%. With that, the y/y change fell to a 14-month low of 6.1% which was the lowest reading since February 2022.
In central bank news, ECB vice president Luis de Guindos noted that the central bank is in the ‘final stretch’ of the current rate-hiking cycle and that hikes in increments of 25 bps are ‘the new norm’. In comments earlier, ECB President Lagarde was more hawkish noting that there is no ‘clear evidence’ that underlying inflation has peaked, and added that she can’t say the ECB is satisfied with the inflation outlook.
It was a tale of many equity markets in May with the great (Nasdaq up 5.8%), the good (S&P 500 up 0.3%), the bad (Russell 2000 down 1.1%), and the ugly (Dow down 3.5%). Comparing the performance difference between the ‘great’ and the ‘ugly’ in May, the Nasdaq outperformed the Dow by 9.29 percentage points which ranks as the 9th widest margin of outperformance for the Nasdaq relative to the Dow in history.
The eight other months where the Nasdaq outperformed the Dow by more than it did in May all occurred in a 35-month span beginning in December 1998 and ending in October 2001. In fact, the Nasdaq outperformed the Dow by more than ten percentage points in back-to-back months twice (Dec 1998 to Jan 1999 and Nov 1999 to Dec 2000). If you think the Nasdaq is in a frenzy now, the period from late 1998 to the early 2000s makes it look like breakfast at Wimbledon.
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