Apr 18, 2023
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“The income tax created more criminals than any other single act of government.” – Barry Goldwater
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It’s a positive tone in the futures market this morning as the market builds on yesterday’s gains with some strong earnings reports from Bank of America (BAC), J&J (JNJ), and Lockheed Martin (LMT). It hasn’t all been sunshine and lollipops, though, as both Goldman Sachs (GS) and JB Hunt (JBHT) are down close to 4%. Coming up as we send this, we’ll get updates on Building Permits and Housing Starts at 8:30 Eastern.
Accountants across the country are breathing a sigh of relief this morning as they close the books on another tax season, although their relief is probably being drowned out by the collective swearing on the part of Americans who have taxes due. While today may be the worst day of the year for Americans who owe any taxes, it could get even worse for a lot of Americans this year as IRS plans to hire 87,000 new agents will inevitably lead to a lot more Americans being audited as well!
As bad as Tax Day may be for many Americans, seasonally it isn’t the worst time of year. In fact, over the last 25 years, the S&P 500 has been up in the week after the Federal Tax deadline 19 times for a median gain of 0.83%. That compares to a median gain of 0.31% with positive returns 57% of the time for all one-week periods over the last 25 years.
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Apr 17, 2023
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“Either write something worth reading or do something worth writing.” – Ben Franklin
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Futures were flat up until a few minutes ago, but have moved modestly into positive territory this morning following a better-than-expected Empire Manufacturing report. Just as important as the headline beat was the fact that Prices Paid fell back down to what is basically post-pandemic lows. Despite the bounce in futures, treasury yields have moved higher following the release of the report.
While it didn’t end on a positive note, stocks finished the week higher last week with the S&P 500 up by about 0.8%. Small and mid-caps led the way higher with gains of about 1.5% while mega-caps in the Nasdaq 100 barely finished the week higher. In many respects, last week was mostly about a reversion to the mean where the most overbought sectors underperformed while sectors that were either oversold or neutral heading led the way higher. As shown in the image below from our Trend Analyzer, Financials, Energy, and Industrials were all oversold or neutral heading into the week, and they rallied more than 2%. Meanwhile, all five sectors that were overbought were all either down or up less than 1%. The only exception to the trend was Real Estate. Even though it was one of five sectors below its 50-day moving average coming out of the Easter weekend, it was still the worst-performing sector in the week.
After a strong one-month rally off the October lows, the last five months or so have been a lot like watching paint dry as the S&P 500 is barely higher now than it was at the end of November. Six months removed from the low last October, in order for the S&P 500 to keep its uptrend intact, it’s going to need to clear resistance above its early February high just below 4,200 or roughly $418 in SPY.
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Apr 14, 2023
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“When you put your hand in a flowing stream, you touch the last that has gone before and the first of what is still to come.” – Leonardo da Vinci
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We’ll get to earnings in a sec, but just wanted to note that Retail Sales came in significantly weaker than expected falling 1.0% m/m versus forecasts for a decline of 0.5%. It was a similar size miss after stripping out Autos, but Ex Autos and Gas the decline wasn’t quite as small as expected (-0.3% vs -0.6%). Import Prices also fell 0.6% m/m versus forecasts for a decline of -0.1%. Futures have been little changed on the news. Do you think the Fed will take any of this into account?
Well, it looks like earnings season has kicked off on a positive note. Of the six companies reporting this morning, all of them topped EPS forecasts, and PNC was the only one that had weaker-than-expected revenues. Even here, though, the miss was extremely narrow. All six stocks that have reported are also trading higher in the pre-market, but the star of the show so far has been JPMorgan Chase (JPM), which is trading up 6% as we write this. That’s an impressive gain! Looking through our Earnings Database, there has never been a time since 2000 when JPM gapped up 6% or more in reaction to earnings. Heading into today, the record for the largest opening gap in JPM in reaction to earnings was on 7/17/08.
Back after that July 2008 report, JPM’s CFO Michael Cavanaugh reported that losses in its home equity business were less than expected, and while he noted that, “It’s too early to declare victory”, he added that “The trend of deterioration may be slowing a bit here.” That type of positive tone helped investors breathe a sigh of relief, but you don’t need the chart below to remind you that the trend of deterioration was only about to get worse. In other words, back then, like now, it was important to stay on top of trends and developments in the market and not become dogmatic based on a single metric or point in time. Like a river, the market is always moving, and especially in the rapids, if you don’t move with it, you’re guaranteed to go overboard.
Speaking of the chart below, the red dots indicate each time since 2000 that JPM rallied 5% on its earnings reaction day, and if today’s gain holds, it will be the first time in more than a decade that the stock has rallied that much on an earnings reaction day. The period since 2000 for JPM can be divided into two distinct periods. First, from 2000 through 2012, the stock was essentially range bound with the upper bound capped in the mid-30s. In 2013, the stock broke out of that range and rose nearly four-fold over the next nine years. What’s interesting, though, is that not a single one of the stock’s prior 5%+ rallies in reaction to earnings occurred during that nine-year leg higher, but there were six occurrences in the 12-year period where the stock did nothing.
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Apr 13, 2023
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“People who exit the stock market to avoid a decline are odds-on favorites to miss the next rally.” – Peter Lynch
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Yesterday’s weaker-than-expected headline CPI for March didn’t ultimately do much to boost the market, and today the focus will shift to the PPI which is expected to come in unchanged m/m at the headline level and increase 0.2% on a core basis. Along with PPI, jobless claims will also be released, and those are expected to increase to 235K from 228K last week. After weeks of thinking that initial claims were stuck below 200K, we learned last week that after benchmark revisions claims have actually been above 200K for nine straight weeks and 18 of the last 20. Amazing how some revisions can have such an impactful change on the narrative.
We don’t know what to call what the market has done over the last six months, but yesterday did mark the six-month anniversary of the October low. The S&P 500 is up 12.6%, and its peak performance was a gain of 14.4% as of February 2nd before the stronger-than-expected January employment report sparked a sell-off of nearly 8%. During that decline, the S&P 500 managed to stay above its prior low from December, and in the rally that followed it has yet to even test its February high. That’s just another reason we don’t know what to call what the market has done over the last six months. New bull market? Bear market rally? We are in a bit of a no man’s land.
The chart below shows the performance of the S&P 500 and its industry groups since the 10/12 closing low (blue bars) and each one’s peak performance from the close on 10/12 (gray bars). Semis have been leading the way higher, and it’s not even close. Through yesterday’s close, the group was up over 50%, and at its post-October peak, it was up just shy of 60%. Behind Semis, the only other groups in ‘bull market territory’ (up 20%+) are Consumer Durables, Consumer Services, Software, and Capital Goods.
With only five groups up 20%, it’s not the type of performance you would expect to see if this was a bull market, but at the same time, there has been nothing normal about anything market or economic-related in the last three years. While only five groups are currently up 20%, 14 of the 24 have been up at least 20% relative to their 10/12 close at some point since then. The fact that Semis have led the advance is probably one of the most encouraging characteristics of the market’s performance over the last six months. The group is one of the most cyclical of them all and the best leading indicator for the broader market.
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Apr 12, 2023
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“Simple can be harder than complex: You have to work hard to get your thinking clean to make it simple.” – Steve Jobs
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Investors took an optimistic tone heading into the release of March CPI with futures marginally higher. Headline CPI came in at 0.1% m/m which was less than the 0.2% forecast. Core CPI increased by 0.4% which was right in line with forecasts. On a y/y basis, headline CPI was 5.0% versus estimates of 5.1% while core increased by 5.6% which was right in line with consensus forecasts. The immediate response in the futures market was higher equities and much lower yields as the 2-year drops back below 4%.
CPI reports have become increasingly important in the eyes of market commentators in the post-COVID environment. From an outsider’s perspective, you would think that these are the most important days of the month. Looking at the actual data, though, CPI reports may not necessarily be as impactful as you would originally think.
The chart below compares the S&P 500’s median daily percentage change on all market days versus CPI days for three different periods. First, for all days since 2000, the S&P 500’s median daily change is the same for all days versus CPI days (0.55%), so we can consider that the baseline. Since the start of 2020, when COVID first started showing up in the headlines, the S&P 500’s median daily percentage move on all days has been 0.74% versus 0.59% on CPI days. In other words, in the post-COVID world, the S&P 500 has been less volatile on CPI days versus all market days.
Where the stock market has become more volatile on CPI days is since November 2021 when Fed Chair Powell retired the term transitory. From then until now, the S&P 500’s median daily change has increased to 0.88% while on CPI days, it has risen to 0.95%. So, yes CPI reports have taken on an added significance, but they may not be as impactful as you would think from the headlines. CPI day or not, in the post-COVID world and even more so in the post ‘transitory’ world as the Fed aggressively hiked rates, the market has become more volatile on all trading days. This morning, the CPI report is the most important release of the year so far, but by this afternoon, it will have faded well into the rearview mirror.
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Apr 11, 2023
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“What are the odds that people will make smart decisions about money if they don’t need to make smart decisions—if they can get rich making dumb decisions?” – Michael Lewis
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It’s looking like another quiet start to the trading day here in the US as equity futures are little changed and the yields on two and ten-year US Treasuries have moved less than a basis point. The only economic report on the calendar today was the NFIB’s index of small business sentiment, and while it was slightly better than expected, the headline index declined and remains below where it was at the depths of the COVID shutdowns. Within that report, the percentage of small businesses saying now is a good time to expand dropped to levels only seen at the depths of the Financial Crisis in March 2009 while the index for hiring plans dropped to its lowest level since May 2020. In other words, small business sentiment is not particularly optimistic. We’d also note that within the latest Commitment of Traders report, net short positions on the S&P 500 reached their highest level since 2007, so it’s not as though investors are positioned bullishly against the weaker macro backdrop.
In Europe, Retail Sales for February fell 0.8% on a m/m basis, but that was actually in line with expectations. Stocks on the continent are modestly higher after yesterday’s holiday
As recession concerns have grown in the wake of the SVB Financial and Signature Bank failures and the run of deposits from other smaller banks, investors have become increasingly convinced that the indicators which have been flashing recession warning signs for months now may in fact turn out to be accurate. If the economy was slipping into recession, one would expect to see those concerns manifesting in the performance of cyclical sectors. Specifically, Industrials would be one sector expected to underperform while defensive sectors like Utilities would outperform. Looking at the relative strength of the two sectors, however, the market’s message hasn’t exactly confirmed the headlines.
The chart below shows the ratio in closing prices between the S&P 500 Industrials sector ETF (XLI) versus the Utilities sector (XLU). When the line is rising, the Industrials sector is outperforming Utilities and vice versa. Over the last five years, there have been two distinct troughs in the chart. The first was in March 2020 while the next was last September. Back in late February, it looked as though the ratio was on the verge of hitting new five-year highs, but the bank failures and run on deposits stopped the relative outperformance of Industrials right in its tracks. It’s still too early to tell whether this will be a temporary pause or a new leg lower in the ratio, but with banks kicking off earnings season later this week, the tone of companies giving their results will shed a lot of light on that answer. At this point, if the market really was convinced of an impending recession, this ratio would likely be falling much faster.
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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