May 4, 2023
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“When you blow away the foam, you get down to the real stuff.” – T. Boone Pickens
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After a relatively hawkish tone from Fed Chair Powell where he reiterated his view that the regional banking system is doing fine, reports surfaced that PacWest (PACW) is mulling strategic options for its business. Shares of PACW and other regional banks immediately plunged on the idea that things really aren’t fine, and that pulled futures for the broader market lower as well. In earnings news, shares of Qualcomm (QCOM) are down over 7% after the company reported weaker-than-expected EPS and lowered guidance. QCOM’s weak earnings report suggests that sales of handsets have been weak, and on that news, Apple (AAPL) is also trading lower heading into its earnings report after the close.
On the economic calendar today, jobless claims are the primary focus, but we also got updates on Non-Farm Productivity and Unit Labor Costs. Initial claims were slightly higher than expected (242K vs 240K) while Continuing Claims were significantly lower than expected (1.805 million vs 1.865 million). Non-Farm Productivity fell 2.7% versus forecasts for a decline of 2.0%, and Unit Labor Costs rose 6.3% compared to estimates of 5.6%.
All the headlines surrounding the troubles in the banking sector have weighed on sentiment in the last week as the AAII sentiment survey showed that bulls were unchanged at 24.1%, but bullish sentiment jumped from 38.5% up to 44.9%.
When it comes to trends within individual asset classes, the typical pattern is one of a tide lifting or sinking all boats. While it hasn’t necessarily been the case over the last two years, when the stock market rallies, most individual stocks rally and vice versa. Similarly, when bonds rally rates usually fall, even if the move lower is to varying degrees. One area of financial markets where we have been seeing a wide degree of disparity within the asset class is commodities.
The snapshot from our Trend Analyzer below shows where various commodity-related ETS currently stand relative to their trading ranges. At the top of the list and all trading in overbought territory are ETFs related to precious metals like gold and silver. Most of them are also up by double-digit percentages YTD. While these ETFs have performed well both recently and on a YTD basis, most other ETFs in the sector are down sharply YTD and trading at oversold levels. Crude oil ETFs like USO and DBO are down 7% over the last week while Natural Gas is sitting on a 55% YTD decline after falling an ominous 6.66% over the last five trading days. Is it getting hot in here?
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May 3, 2023
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“Men in general judge more from appearances than from reality. All men have eyes, but few have the gift of penetration.” ― Niccolo Machiavelli
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If you were to apply the quote above to the markets, it would be that you should never invest based on the headlines.
It was nice while it lasted, but the Fed blackout will come to an end this afternoon when the FOMC announces its latest decision on interest rates and Powell holds a 2:30 PM Eastern press conference. There’s a bit of a positive tone in the markets ahead of the announcement, but that will all change later on. The ADP Employment report crushed estimates surpassing forecasts by more than 100K, and while it hasn’t been particularly reliable in forecasting the Non-Farm Payrolls report, the strong reading suggests that the labor market is holding up even after yesterday’s weaker JOLTS report. We’ll have to wait and see jobless claims and Non-Farm Payrolls later this week to get a better read on that sector. As far as the rest of the day is concerned, we still have ISM Services at 10 AM.
As large caps have carried the lion’s share of the weight in market performance this year, the performance gap between the Nasdaq 100 and the Russell 2000 has really widened. Year to date, the Nasdaq 100 has rallied by 19.9% while the Russell 2000 has declined nearly 2%, and over the last six months, the gap has been similar at 19.8%. The chart below shows the rolling six-month performance spread between the two indices, and while the spread has spiked in the last few months, it’s still lower than it was at post-COVID extremes in the fall of 2021 and the middle of 2020. At the other extreme, the peak period of outperformance for the Russell 2000 was in Mach 2021 when US consumers were flush with stimulus cash. Over the last 13 years, though, the performance gap has been in the Nasdaq 100’s favor as the spread has been positive 65% of the time since 2010.
With the gap in performance favoring the Nasdaq 100 nearly two-thirds of the time over the last 13 years, its relative strength versus the Russell 2000 has, up until recent years, been in a consistent uptrend. After going parabolic in the early COVID days, relative strength has been in a sideways range for three years now. Tighter credit conditions from the regional banking crisis this year have recently helped buoy the performance of large caps. Now, with the Fed on tap this afternoon, will Powell continue the hawkish tone and keep a tight grip on the credit spigot for smaller companies, or will he take a softer tone and help grease the skids?
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May 2, 2023
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“Time takes it all, whether you want it to or not.” – Stephen King, The Green Mile
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Markets look to be starting off on a sluggish note this morning as Europe returns from the long holiday weekend to some mixed economic data regarding manufacturing and inflation while the Australian central bank announced a hawkish surprise at its policy meeting by hiking rates 25 bps. In the US, futures are just moderately lower ahead of the 10 AM release of the JOLTS- the first of many employment-related indicators on top for the week. Speaking of employment, Bloomberg is reporting that Morgan Stanley plans to lay off 3,000 employees, while IBM will halt hiring and replace up to 7,800 positions and replace them with AI.
The more things change, the more they stay the same. You’ve heard the phrase thousands of times before, and it’s uncanny how often it applies to real-world situations. This morning, though, we wanted to show you an example of how things this year couldn’t be more different than they were last year. Through the end of April last year, the three worst-performing sectors on a YTD basis were Communication Services (XLC), Consumer Discretionary (XLY), and Technology (XLK), while Energy (XLE) was the only sector with any meaningful gains. This year, through yesterday’s close, the three best-performing sectors on a YTD basis have been Communication Services, Technology, and Consumer Discretionary while the worst-performing sector has been Energy. So basically, this year’s market leaders and laggards couldn’t be more opposite from each other.
The only sectors that have been exceptions in any way are Consumer Staples (which is the only sector that was up YTD in both 2022 and 2023) and Financials and Health Care (which are the only two sectors that were down YTD in both 2022 and 2023). When it comes to sector performance so far this year, the more things change, the more they change. Then again, when it comes to broader market concerns, the Fed still seems to be all anyone can focus on, economic indicators suggest weakness or even a recession on the horizon, and the war in Ukraine is still going.
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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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