Apr 4, 2023
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“We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten.” – Bill Gates
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We’re looking at a modestly positive start to the trading day with overseas markets leading futures higher. The Reserve Bank of Australia announced a pause in its rate hiking cycle, and PPI fell more than expected in the Eurozone, and inflation expectations in the region slowed from 6.2% down to 5.8%.
48 years ago today, a college dropout and a computer programmer in Boston started one of the most successful business stories in US history. The number of millionaires minted from “Micro-Soft’s” founding in 1975 is nowhere near the number of ‘blue screens of death’ and subsequent airborne staplers flying across the room that its software has caused, but when it comes to money printing presses, they don’t get much more efficient than Microsoft (MSFT). With its market cap of just over $2 trillion, Microsoft is now the second-largest company in the US. To put it another way, $10,000 invested in MSFT stock on the day of the IPO would be worth A LOT more today – like, 20 million more.
The chart below shows the rolling 10-year price performance of MSFT stock since 1996 (ten years after the company went public). The early years for the company were a great time to be a stockholder or a Microsoft employee with stock options, but the heady days of gains came to an end in the early 2000s when the US government launched its antitrust suit against the company. After a judge originally ruled that Microsoft violated parts of the Sherman Antitrust Act, the company later won on appeal, and the verdict was overturned. Microsoft may have won in the courtroom, but it was losing in the stock market. The stock’s rolling 10-year returns plummeted throughout the early 2000s and even went negative for the first time in its history during the financial crisis.
Looking just at the last twenty years, the last decade has been another golden era for the stock, in what has been a legendary reinvention of the company. It’s hard enough to lead one major industry trend, but to completely change your business model and do it again is rare indeed. While the chart above makes it look as though returns for the stock have continued to languish in the last ten years, that’s only because of the perspective of the stock’s returns during the 1990s. As late as 2021, the stock’s rolling 10-year return was a gain of over 1,200%. Even after the market turmoil of the last year or so, MSFT stock is still up over 900% in the last ten years which works out to an annualized gain of 25%. Yup 25%! Feel free to run the numbers in Excel yourself or just go over to Bing and ask GPT.
Another lesson of Microsoft’s stock performance over the last several decades is the power of compounding and the fact that sometimes, the best action is no action. An investor frustrated with the stock’s performance in the early 2000s could have easily sold the stock to chase the next best thing. Not only would they have taken a major tax hit on their gains, but by switching, they would have missed out on what has been a stock run unequaled by the vast majority of other publicly traded stocks. That doesn’t mean that you should always stick with an underperforming position, but if you are going to make a move, you want to be as sure as possible that the alternative is a better option.
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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Apr 3, 2023
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“Man himself is the beginning and the end of every economy.” – Carl Menger
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Equities are poised to open right around the unchanged level this morning as crude oil is surging following news of the OPEC+ production cut over the weekend. Within the market, though, there’s a lot of dispersion as energy stocks are surging while tech stocks have been under pressure on concerns that higher oil prices will push inflation higher and keep the Fed on the warpath to hike rates for longer.
The surprise production cut from OPEC+ over the weekend has both oil prices and oil-related stocks rallying this morning as the S&P 500 Energy sector ETF (XLE) is set to gap up over 4%. As mentioned above, the S&P 500 is treading water after last week’s surge and is poised to open around the unchanged level. While energy stocks are notoriously volatile, this morning is set to be just the ninth time since 2000 that XLE has gapped up at least 3% even as the S&P 500 ETF (SPY) gapped down or up less than 0.5%.
The first chart below shows the performance of SPY over the last ten years (a period that covers all the occurrences mentioned above) with the red dots indicating each of the days that XLE gapped up 3%+ while the S&P 500 was basically flat or down at the open. More than half of these occurrences (5) occurred in a three-month span from April to June 2020 with another occurrence last February and the other two occurrences back in 2019 and 2016. While the most recent occurrence was followed by weakness, the S&P 500 rallied immediately following the prior occurrences.
Below we show a similar chart for the Energy sector. Here, forward returns were more mixed. The most positive period was after the most recent occurrence, but forward returns following each of the pre-COVID occurrences were weaker.
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Mar 31, 2023
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“Good publicity is preferable to bad, but from a bottom-line perspective, bad publicity is sometimes better than no publicity at all. Controversy, in short, sells.” – Donald Trump
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A bunch of economic data just hit the tape and it was generally better than expected. Personal Income was slightly better than expected (0.3% vs 0.2%) while Personal Spending was a little weaker (0.3% vs 0.2%). On the inflation front, Core PCE came in lower than expected on both a month-over-month and year-over-year basis. The m/m reading came in at 0.3% versus forecasts for an increase of 0.4% while the y/y reading was also a tenth lower than expected at 4.6%. In response, futures, which were already higher, added a little bit to their gains.
What an interesting quarter it’s been for the stock market. While the S&P 500 is up 5.5%, the Russell 2000 is barely hanging on to gains, and the Dow is actually slightly lower. These all pale in comparison to the Nasdaq which is up 14.8% and the Nasdaq 100 which is up an unbelievable 18.5%. If these gains hold through the end of today, Q1 will go down as the best quarter for the Nasdaq 100 since Q2 2020, and it will mark the 21st quarter in the Nasdaq 100’s history (since 1985) that the index was up at least 15%.
Of the 20 prior quarters where the Nasdaq 100 was up 15%+, its median performance in the following quarter was a gain of 6.1% with positive returns 65% of the time. That compares to an average gain of 4.0% with positive returns 68.4% of the time in all quarters since 1985. When the 15%+ gain occurred in Q1, however, forward returns weren’t as positive. In those six quarters, the median performance in Q2 was a decline of 1.2% with gains just half of the time while the median rest of year gain was 7.5% also with positive returns half of the time. Before reading too much into these numbers, though, we would caution that returns were all over the map. In terms of the rest of year performance, 97 percentage points separate the best (50.4% in 1998) and worst performances (-46.8% in 2000).
Looking at the Nasdaq 100 ETF’s (QQQ) price chart shows an interesting picture depending on your perspective. In the short run, QQQ broke above resistance this week and traded to its highest level since Powell’s Jackson Hole speech in late August. It has also carved out what technicians would describe as a bullish cup and handle formation.
Longer-term, QQQ’s rally has taken it to levels that once acted as support back in the first half of 2021 and Q1 2022. Since that Q1 2022 period there have only been a handful of days that QQQ traded above these levels, and two other times it attempted to make a break of that level it immediately pulled back.
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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Mar 30, 2023
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“Russia has sold us a sucked orange… has therefore done wisely in selling the territory and islands which to her had become useless.” – New York World, 4/1/1867
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After the Nasdaq 100 closed at the highest levels since Powell’s Jackson Hole speech last August, investors are looking to close out the quarter on a positive note. A bunch of economic data just hit the tape, and there weren’t a lot of big surprises. Initial Jobless Claims came in slightly higher than expected (198K vs 196K) while Continuing Claims came in modestly below forecasts. The final read of Q4 GDP was revised lower by a tenth of a percent to 2.6% from 2.7%. One piece of bad news was Core PCE which was revised up to 4.4% versus forecasts for a reading of 4.3%. The market reaction to the news has been muted with only a slight ding to the positive tone in futures and a slight upward move in interest rates.
When news surfaced that Secretary of State William Seward had negotiated to purchase Alaska from Russia on this day in 1867, “Seward’s Folly” was widely ridiculed in the press and the public as a waste of money for land that was nothing but ice and frozen dirt. By the late 1800s, Alaska’s main trade of fur had been largely depleted due to overhunting that resulted in the near extinction of sea otters. Also, other minerals couldn’t be mined because of the climate conditions in the area.
Little did anyone know at the time how rich the Alaskan territory was in terms of oil and gold and that advances in mining would make these resources more accessible. In terms of oil alone, according to the Department of Energy, Alaska produced an average of 437K barrels of oil per day last year which works out to roughly $35 million! Seward’s $7.2 million purchase of Alaska translates to $146 million in today’s dollars, so even after adjusting for inflation, the amount of oil that comes out of the ground in Alaska every five days is more than enough to cover what the US paid for the entire state!
There are two important investment lessons that investors can take from “Seward’s Treasure”. First, the largest returns don’t usually come when you’re following the crowd (think tech’s performance so far this year and sentiment towards the sector heading into 2023). Second, no matter how bad an investment may look in the short term, the more time you are willing to give it, the better it will likely look down the road.
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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Mar 29, 2023
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“Anyone who isn’t confused really doesn’t understand the situation.” – Edward R Murrow
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50 years ago today, the United States officially withdrew from Vietnam ending what was at the time the longest war in US history and easily the least popular. Five decades is a long time, but it’s also hard to imagine how quickly things can change in that time or even shorter.
You don’t need to look at the back of an electronic device or a tag of clothing to realize that China has long been considered the factory to the world. However, beginning under the Trump Administration, China has, for numerous reasons, been losing its allure as a place for companies to source production and manufacturing. That trend was only exacerbated by COVID as shattered supply chains, strict COVID-zero policies, and the desire of companies not to have all their production eggs in one basket all resulted in what has become a wave of diversification. China still remains the dominant global manufacturing source for cheap production, but other countries in the region have picked up share.
Enter Vietnam. The chart below shows the relative strength of the MSCI China ETF (MCHI) versus the VanEck Vietnam ETF (VNM). From 2013 right up through the end of Q1 2020, Chinese stocks handily outperformed China, but right when COVID hit, that outperformance came to a screeching halt. Within a year after the onset of COVID, it became clear that China would maintain its strict COVID policies, investors and manufacturers looked elsewhere. For the next year, Vietnamese stocks crushed Chinese stocks on a relative basis. Over the last several months as China has reopened, some of the outperformance by Vietnam has reversed, but the momentum of Chinese stocks in the years from 2013 through 2020 is a broken trend.
Closer to home, Mexico has also been a winner in the wave of global manufacturing diversification. While it doesn’t have the manufacturing infrastructure of China, for certain applications or sectors, Mexico has been able to pick up share as companies save on the costs and time of shipping and can more easily oversee operations. Given that Mexico’s economy is also one-fifth the size of China, a ‘little’ loss of share in China goes a much longer way in Mexico.
The shift in Mexico’s fortunes has clearly been reflected in the performance of Mexican stocks, especially relative to China. Like the chart above, the one below compares the relative strength of the MSCI China ETF (MCHI) to the MSCI Mexico (EWW) over the last ten years. Again, right up to and in the very early days of COVID, China handily outperformed Mexico, but early in the pandemic, the attractiveness of Mexico started to improve, and in the span of just over two years, Mexico has erased pretty much all of China’s outperformance from the prior eight years. Looking at charts like these is it any wonder that China was quick to pretty much drop all of its COVID restrictions in the last few months?
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Mar 28, 2023
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“If you want total security, go to prison. There you’re fed, clothed, given medical care, and so on. The only thing lacking… is freedom.” – Dwight D Eisenhower
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You couldn’t really ask for a more sleepy morning in the markets as futures are basically unchanged. S&P 500 futures are up less than a point, the Nasdaq is indicated to open down less than two points, and the Dow is indicated to open up by less than a point as well. Treasury yields are higher with the 10-year yield up by 4 basis points (bps) to 3.57% while the 2-year yield is up by 7 bps and back over 4%.
We could see the market wake up later on today with Wholesale Inventories at 8:30, the FHFA House Price Index at 9:00, and then finally at 10, we’ll get Consumer Confidence and Richmond Fed. The Richmond Fed report will be the fifth and final of the five Fed manufacturing reports that are reported each month, and like the rest of them (which showed no growth), it is expected to come in negative, although not as bad as February’s reading.
Investors can’t seem to make up their minds as to where stocks should go from here, how the bank crisis will play out, and whether the FOMC’s next move will be a rate hike, a rate pause, or a rate cut! Think about it. How often is it that credible arguments can be made for any of those three decisions? With that uncertainty, is it any surprise that the S&P 500 is sandwiched right between its 50 and 200-day moving averages (DMA)?
Even as the S&P 500 shows the characteristics of an indecisive market, there’s more dispersion at the sector level. Of the eleven sectors, seven (shown below) closed yesterday below both their 50 and 200-DMAs.
On the upside, the only two sectors above both their 50 and 200-DMAs are Communication Services and Technology (below). That leaves just one sector – Industrials (XLI) – which, like the S&P 500, is sandwiched between those two averages.
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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