May 1, 2023
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“I am not responsible, but I will find out who is.” – J.P. Morgan
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Even with First Republic going into receivership over the weekend, it’s a quiet morning in the futures market. Perhaps it’s because you couldn’t have had a more telegraphed bank failure or simply that most world markets are closed for May Day. Economic data overnight has been mixed in the few reports that have been released so far, but we’ll have to wait until tomorrow to get the full barrage of data as markets that are closed today reopen for trading. One notable weak spot in the PMI data was China where both the Manufacturing and Services sector reports were weaker than expected (manufacturing below 50 and services above).
This week will be an extremely busy one for economic data with ISM Manufacturing today, ADP Employment, ISM Services, and the FOMC Wednesday, Jobless Claims on Thursday, and then the Employment report Friday. Oh, and don’t forget about earnings too.
Despite the tumultuous issues in the US banking system and specifically the demise of First Republic (FRC), US stocks managed to finish the week higher capping off what has been a rally of over 8% for the S&P 500 in the first four months of the year and a rally of nearly double that in the Nasdaq composite. The only blemish is the small-cap Russell 2000 which is barely hanging on to gains for the year. While a lot of attention is placed on the small caps, though, keep in mind that the Russell 2000’s entire market cap is less than Apple’s (AAPL)!
Now that the first four months are behind us, we’re at the dreaded point of the year where it’s time to sell in May, although as most aware and we pointed out last week, there’s some nuance to that. The chart below summarizes the performance of S&P 500 sectors during the month of May going back to 2000. Over the last 23 years, every sector except for Telecom Services (now Communication Services) has had gains during the month of May on a median basis, and the S&P 500’s median performance has been a gain of 1.07% with gains 70% of the time. Small caps, which have lagged so badly this year, have tended to perform even better with a median gain of 1.51% and gains 61% of the time.
Looking at individual sectors, Technology has been the clear winner as it’s the only one with a median gain of over 2% (although positive just 57% of the time). There’s been a lot of volatility for the sector, though, as it has seen a move of +/-5% during the month more than half of the time. The only other sectors with median gains of more than 1.5% have been Financials (1.70%) and Materials (1.66%), but both sectors have only been positive during the month 61% of the time. Speaking of consistency, the only three sectors that have been up during May more than two-thirds of the time are Health Care (74%), Real Estate (74%), and Consumer Staples (70%).
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Apr 28, 2023
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“In Technology, whatever can be done will be done” – Andy Grove
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While the market initially reacted positively to Amazon’s (AMZN) earnings last night, the stock reversed course and is trading down over 2% this morning. That weakness has overflowed to the major indices as well as the S&P 500 and Nasdaq are both indicated to open lower as treasury yields are lower. It’s been a busy morning of economic data and while there were no major surprises, the majority of reports were more biased to the upside like the Employment Cost Index, Personal Income, and Personal Spending which all exceeded forecasts by 0.1 percentage points. Meanwhile, PCE was inline with forecasts at both the headline and core levels.
It’s been a rough month for semiconductor stocks. After outperforming the S&P 500 by nine percentage points in January, four percentage points in February, and nearly six percentage points in March, the Philadelphia Semiconductor Index (SOX) is down nearly 9% in April compared to a gain of 0.6% for the S&P 500. There’s still a day left of trading in the month, but at the current levels, the SOX is underperforming the S&P 500 by the widest margin since May 2019, and before that, you need to go all the way back to November 2008 to find another month where the SOX lagged the S&P 500 by a larger amount.
As shown in the chart below, there have only been eight other months in the last 20 years that the SOX has underperformed the S&P 500 by 7.5 percentage points or more. While this month’s underperformance comes after three months of steady outperformance, for a sector that has led the market in recent years, the underperformance of semis cannot be ignored.
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Apr 27, 2023
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“Popping M&Ms in the air and going after them and chomping them like Pac-Man. I actually gained weight in space which no one ever does.” – Mike Massimino
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We just got a slug of economic data, and the results relative to expectations was mixed. Both initial and continuing jobless claims came in lower than expected which eased some fears about a weaker labor market. GDP, however, was also weaker than expected as was Personal Consumption. Most concerning for the market, though, was that inflation readings in the form of the GDP Price Index and Core PCE both came in higher than expected. Futures are still considerably higher driven by technology as Meta earnings after the close yesterday were considerably better than expected. In response to the data, interest rates increased and futures lost a little bit of steam.
Occasionally, a trend enters the mainstream and sucks all the air out of the room. In the early 1980s, Pac-Man was released with little fanfare and critical acclaim, but it quickly overtook the country. Only 5,000 arcade units were originally produced for the US, but according to Wikipedia, within a year of its release, Pac-Man had grossed more than a billion dollars in quarters and generated more revenue than Star Wars. That’s literally tons of money! One reason for Pac-Man’s popularity was its ability to cross the gender divide; it was not only popular with boys and young men, but also wildly popular among women (hence the subsequent release of Ms. Pac Man). Pac-Man became so popular that in 1982, the song “Pac-Man Fever” reached number nine on the Billboard 100!
Since the early 1980s, there have been several other trends that have had different levels of lasting impact on mainstream consciousness, with the latest being AI. As a caveat, this is in no way meant to imply that AI is a fad. Unlike Pac Man, AI technologies will have a lasting and profound impact on every sector of the economy in ways that we can’t even imagine, so let’s just get that little bit of housekeeping out of the way. But the way in which AI has overtaken every other topic and crowded out every conversation has been unparalleled to anything we have ever seen, and Chat GPT’s ability to make AI technology accessible to everyone is probably a big reason why.
Corporate America is a perfect example of how AI has crowded everything else out. In Tuesday’s conference call from Alphabet (GOOGL), the term AI was mentioned 58 times after being mentioned 59 times in its January call. That’s an average of about once a minute! Alphabet first started to call itself an ‘Ai-first’ company in 2017, so you would think that they’ve been talking about it a lot on their quarterly calls since then. However, prior to the Q4 2022 call, the term was only mentioned more than 20 times once, and the average number of mentions per call up until then was less than ten. It wasn’t until Chat GPT’s launch in November that Alphabet (and many other companies) really started talking about it.
Unlike Pac-Man, AI doesn’t yet have a hit song topping the charts, but it’s probably only a matter of time. In this case, though, “AI-Fever” probably won’t even be written by a human.
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Apr 26, 2023
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“Unlike some governments which fear change and fear the future, China is beginning to reach out toward new horizons, and we salute your courage.” -Ronald Reagan 4/27/1984
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Times have really changed in the last 39 years. In 1984, when President Reagan became the third US President, after Nixon and Ford, to visit China, it was a much smaller player on the global economic stage. According to the World Bank, Chinese GDP per capita was $250.7 in 1984, compared to $17,121.2 in the US. Through 2021 (the latest available data), GDP per capita in the US has increased by over 300% to $70,248, which sounds impressive at face value. However, in China, the same figure has grown by 4,900% to $12,556 per capita. US GDP per capita is still much larger than it is in China, but the gap has narrowed immensely, and China is on a much more equal footing with the US than it was then.
What’s also changed in the last 39 years is the relationship between the US and China. Reagan’s visit was a major diplomatic event where he was greeted with a 21-gun salute in Tiananmen Square. Today, it’s hard to imagine a US President even considering a visit to China, as diplomatic relations between the two countries have mostly frozen over. If there’s one bipartisan issue in Washington right now, it’s that China is an enemy rather than a friend.
One thing that hasn’t changed between now and 1984 is the issue of Taiwan’s independence, one of the primary reasons for the now icy relationship. During President Reagan’s visit in 1984, Chinese Premier Zhao noted in a news conference with reporters that “The question of Taiwan remains the major obstacle to stable, sustained development of Sino-U.S. relations”. The more things change…
Moving on to the markets this morning, futures are trading modestly higher as concerns over First Republic (FRC) get pushed back, and positive earnings from several companies, most notably Microsoft (MSFT), drive positive sentiment. Given the concerns over the banking sector and the debt limit, Treasuries are at the short end of the curve. Speaking of how the more things change, the more they stay the same, just as MSFT is trading at 52-week highs, the company finds itself in regulatory crosshairs on antitrust concerns. This time it’s the proposed acquisition of Activision (ATVI) which the UK CMA has blocked citing risks to innovation in cloud gaming. Is this the 2020s or the late 1990s?
Looking ahead, as the FOMC appears almost certain to hike rates another 25 basis points (bps) next week, even as risks of a recession increase, the spread between short and long-term US Treasuries yields continues to widen. As of yesterday’s close, the 10-year vs. 3-month yield curve, the Federal Reserve’s preferred measure of the yield curve as an indicator of a recession, was inverted by 164 bps, which is the most extreme reading since the early 1980s. Every other time in the last 60 years that it inverted by as much or more, the economy was either right on the cusp of or already in a recession.
Even more extreme than the actual level of the yield curve is the pace at which it has flattened/inverted over the last year. As shown in the chart below, the 367 bps pace at which the yield curve has flattened over the last year is the most extreme since just before the onset of the second dip of the double-dip recession in May 1981. Besides that, the only other time that the curve flattened by as much was in 1973, just months before the onset of a recession lasting nearly a year and a half.
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Apr 25, 2023
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“I don’t think people understand there’s 100% correlation with what happens to a company’s earnings over several years and what happens to the stock.” – Peter Lynch
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After a slow start, earnings season has picked up pace with around 60 US companies reporting results this morning. These companies have combined sales of $350 billion, and the results have been very positive. The EPS beat rate is at 77%, while the revenue beat rate is still high at 73%. Additionally, only two companies have lowered their guidance, while five companies have raised theirs. It’s only one morning of results, but does this look anything like an earning collapse?
Despite this positive news, futures are lower, although not by a significant amount. Treasury yields have also decreased by 5 basis points or more across the curve. In the commodities space, crude, gold, and copper are all trading lower.
Even when you consider its volatile nature, bitcoin has had a notably strong six months, with its price almost doubling off the lows from last fall. The bulk of this rally occurred in the final months of 2022 and the first four months of 2023. However, there has been a moderate pullback in the last two weeks, as the rally lost momentum just as it was testing the 30,000 level. Over the past few days, bitcoin has been testing its 50-day moving average, which has held for now. If you are involved in crypto, it’s essential to watch this key level (~27,200).
Although bitcoin and the crypto space have little to do with the stock market, some traders monitor the space on the belief that they provide a good barometer of overall risk appetite. Trend changes in Bitcoin eventually bleed through to the equity market. Comparing the performance of the S&P 500 to the relative strength of Bitcoin versus the S&P 500 shows a loose but unconvincing link between the two series. The ratio of Bitcoin to the S&P 500 peaked about two months before the S&P 500’s peak in late 2021/early 2022. However, when the S&P 500 hit its recent low in October, it took another two months before the relative strength of Bitcoin began to pick up steam. Rather than leading moves in the stock market, shifts in the relative strength of Bitcoin tend to coincide with shifts in the S&P 500.
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Apr 24, 2023
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“It is not enough that we do our best; sometimes we must do what is required.” – Winston Churchill
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In what is sure to be a very active week with respect to earnings, it’s starting off on a very quiet note as equity futures are little change and trading just barely below the flatline. Outside of Japan, which finished the session modestly higher, Asian stocks started the week on a negative note while most European benchmarks are little changed with a slight positive bias. In the Treasury market, yields are lower. On the economic calendar today, the only two reports are the Chicago Fed National Activity Index at 8:30 AM and the Dallas Fed Manufacturing report at 10:30.
In last weekend’s Bespoke Report, we highlighted the massive outperformance of European stocks relative to the US since the October lows. While Europe may be outperforming the US, it hasn’t been a global trend. The snapshot below from our Trend Analyzer shows the performance of international regional equity markets and where they finished last week relative to their trading ranges. Right at the top of the list are three ETFs whose focus is on Europe. They were among the best-performing international ETFs last week, the best performers YTD, and are all the most extended relative to their trading ranges.
Europe may have been higher last week, but Emerging Markets sold off. As shown at the bottom of the list, ETFs associated with Emerging Markets and Latin America were all at the bottom of the list and declined more than 1.5% last week. They are also some of the worst performers YTD and among the only ETFs in the group that aren’t overbought relative to their short-term trading ranges. The hardest hit on the week was Latin America where Chile’s proposed nationalization of its lithium industry hasn’t helped investor sentiment towards that area of the world.
The MSCI Emerging Markets ETF (EEM) has been in pretty much of a sideways trading range all year, but the technical picture is leaning more negative than positive. While EEM finished off its lows on Friday, it closed below its 50-day moving average (DMA) and has now seen both a lower low and a lower high.
Our Morning Lineup keeps readers on top of earnings data, economic news, global headlines, and market internals. We’re biased (of course!), but we think it’s the best and most helpful pre-market report in existence!
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