Mar 1, 2023
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“If you find yourself suddenly wearing a hot cup of coffee on the way to work, the day can only get better from there.” – Anonymous
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Futures were looking to start the new month off on a positive note, but that tone has shifted and the current setup is for a modest decline at the open. Following yesterday’s stronger-than-expected inflation data in France and Spain, this morning it was Germany’s turn to report hot inflation data, and that predictably, has been followed by hawkish commentary from ECB officials. In China, stronger-than-expected Manufacturing PMI data led to a 4% rally in Hong Kong’s Hang Seng, but stronger growth in China will be greeted as inflationary by the market, hence the move higher in US treasury yields. Economic data on the calendar today includes Manufacturing PMI reports from S&P and ISM as well as Construction Spending. Minneapolis Fed President Kashkari will also be speaking this morning, so you can expect the headlines from that even to be hawkish.
2023 is already 16% complete, so we can start to get a read on how trends are shaping up. Below we summarize the performance of S&P 500 sectors through the end of February. On a YTD basis, there’s been quite a bit of disparity in sector performance as four sectors are up over five percent, and two are down over 5%. Between the extremes, more than 20 percentage points separate the best-performing sector (Consumer Discretionary) which is up 12.7% from the worst-performing sector (Utilities) which is down close to 8%. Looking at where sectors finished out February relative to their trading ranges, not a single sector is overbought relative to its 50-day moving average, nearly half are below their 50-day moving averages, and four sectors are oversold. That’s not what you would expect to see in a year where the S&P 500 is up nearly 4% YTD.
While there’s a wide dispersion in sector performance after the first two months of this year, it’s a big improvement versus where the market stood at this time last year. Twelve months ago, more than 40 percentage points divided the best-performing (Energy) and the worst-performing sectors (Consumer Discretionary), six sectors were oversold, and the only sector above its 50-DMA was Energy. February wasn’t a great month for stocks, but it sure beats where things stood last year at this point.
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Feb 28, 2023
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“Life, Liberty, and the Pursuit of Happy Hour.” – Hawkeye Pierce
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After yesterday’s rally that lost momentum throughout the trading day, futures are looking to start the day higher again today as positive and not as bad as feared earnings have lifted the mood in early trading. Treasury yields are modestly higher but mostly behaving while crude oil is up close to 2%. European stocks are modestly higher and well off their lows of the morning as investors shake off stronger-than-expected inflation data out of France and Spain. On the economic calendar in the US, Wholesale Inventories were just released (weaker than expected; down 0.4% versus +0.1% consensus), and later this morning we’ll get Case Shiller data, Chicago PMI, Consumer Confidence, and Richmond Fed.
40 years ago, tonight, nearly half of all Americans and three-quarters of all TVs in the United States were tuned into the same channel. Never had such a large number of Americans watched the same event at the same time. What were they watching? It wasn’t the Super Bowl. The Redskins had already beaten the Dolphins a month earlier after the strike-shortened season. No, on this Monday night, they were watching Hawkeye Pierce leave the 4077th Mobile Army Surgical Hospital for the last time on the series finale of M.A.S.H. Outside of its first season in 1972, when the show was almost canceled, M.A.S.H. was one of the top-rated shows on TV in every other season of its eleven-year run. M.A.S.H. fans watched the series finale and were sad to see it go, but subconsciously many of them were probably saying good riddance.
M.A.S.H. coincided with a dark period in the American economy, and its end can be looked back on as being symbolic of throwing some of the last vestiges of the 1970s behind us. The fact that the most popular comedy of the 1970s and early 1980s was set on a hospital base in a war zone where the plot of nearly every episode was interrupted by an incoming influx of war casualties says all you need to know about the psyche of Americans in the 1970s.
The chart below shows the performance of the S&P 500 from the first episode of M.A.S.H in September 1972 to the series finale in February 1983. Less than four months after the show first aired, the S&P 500 peaked and went on to lose nearly half of its value over the next 18 months before bottoming out and slowly reclaiming the declines of the bear market over the next several years. In fact, it took three-quarters of a decade before stocks finally made new highs again, and the real breakout of the 1980s bull market wasn’t for another two years after that in August 1982, six months before the show ended.
The performance of the S&P 500 during M.A.S.H. was bad enough in nominal terms, but when you factor in the crushing inflation of that period into the equation, performance was even weaker. After deflating the S&P 500 by headline CPI during the 1970s and early 1980s (gray line), you can see why M.A.S.H was a period of American history many were happy to forget. Is it any surprise that after a decade of high inflation, war, and general economic malaise, that as M.A.S.H. was getting ready to sign off, Americans were now turning the channel to a washed-up baseball player running a bar in Boston? Americans were ready for a drink. Cheers!
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Feb 27, 2023
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“Money cannot consistently be made trading every day or every week during the year.” – Jesse Livermore
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It may have only been four trading days, but last week was a tough one for the bulls. When the dust finally settled, the S&P 500 closed modestly back below its 50-day moving average as well as its uptrend from the October lows. If the market can recover quickly from here, technicians will look past Friday’s breakdown as it wasn’t entirely convincing, but for now, the burden of proof has shifted to the bulls. One thing we can be pretty confident of is that with less than 1% separating them, by the end of the week, the S&P 500 will probably either be above both its 50 and 200-day moving averages or below them.
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Feb 24, 2023
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“I shall never surrender or retreat.” – Sam Houston
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Equity markets are poised to open lower this morning, and the tone has been weakening all morning as futures are right near their lows of the morning. Treasury yields and crude oil are higher, but the moves aren’t really enough to justify the magnitude of the decline in equity futures. Boeing (BA), which is down 3% in the pre-market, helps explain the weakness in Dow futures, but that doesn’t explain the weakness in S&P 500 and Nasdaq futures, which are actually down even more than the Dow.
There’s a lot of economic data to go through this morning. It started with Personal Income and Spending as well as PCE which were just released and will be followed by New Home Sales and Michigan Confidence at 10 AM. In terms of the early data, it wasn’t market-friendly. Personal Income was weaker than expected (0.6% vs 1.0%) while Personal Spending was higher than expected (1.8% vs 1.4%), so consumers are earning less and spending more. Maybe that’s due to higher-than-expected inflation where the headline PCE came in at 0.6% vs 0.5% m/m. Core was even worse relative to expectations coming in at a level of 0.6% versus 0.4% estimates m/m. As you’d expect, equity futures have sold off in reaction to the news while interest rates are higher. with the two-year on pace to close at a new high yield for the cycle.
When looking through the various sector price charts, there were several significant reversals just as they tested (or briefly broke below) some key moving averages. As shown in the charts below, Communication Services, Energy, Consumer Staples, Health Care, and Consumer Discretionary all reversed higher to varying degrees after trading down around their 200-day moving averages (DMA). In addition to those five sectors, Financials, Industrials, and Real Estate all managed to stage similar reversals as their 50-DMAs came into play.
Given this morning’s early weakness and the disappointing economic data, it may look like it was all for nothing. However, if markets can find a way to erase this morning’s weakness and close out the week on a positive note, that lack of surrender will be a difficult trend to ignore.
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Feb 23, 2023
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“Intuition will tell the thinking mind where to look next.” – Jonas Salk
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It may be the shortest month of the year, but after four straight days of declines for the S&P 500, February is seeming like a long month. This morning, futures are looking to reverse their losing ways, but based on some of the intraday selloffs we’ve seen in recent days, you can’t be too sure of anything. February’s weakness has put a damper on individual investor sentiment as the weekly survey from AAII showed that bullish sentiment plunged from 34.1% down to 21.6%. February hasn’t been a fun month so far, but when you consider the fact that the 10-year yield is up over 40 basis points MTD, it could have been a lot worse than a 2% decline for the S&P 500 and a decline of less than 1% for the Nasdaq.
We just got a slug of economic data with GDP, Personal Consumption, Core PCE, and Jobless Claims. Results relative to expectations were mixed. GDP was revised lower, both initial and continuing jobless claims were lower than expected, while Core PCE was higher than expected at 4.3% vs forecasts for 3.9%. As one might expect given the stronger inflation data, equity futures have seen a modest decline in the immediate aftermath of the report while interest rates are higher.
Even after this month’s weakness, the S&P 500 is still up nearly 4% YTD, but those gains have come with a good deal of volatility. Yesterday was the 35th trading day of the year, and already nearly half of all trading days have seen daily moves of at least 1%. Going back to 1953 which was the first full year of the five-trading day workweek, there have only been five other years where there were as many or more 1% moves in the first five trading days of the year. Of the five prior years where 17 or more of the first 35 trading days were moves of 1% or more, the only year where the S&P 500 was up YTD was 1988 (+7.51%). In all four other years, the S&P 500 was down in the first seven weeks of the year with losses ranging from 3.6% in 2003 to a plunge of 17.7% in 2009.
That’s the past. Looking ahead, of the five prior years shown, that volatility to start the year was followed more often than not by gains. In four of the five years shown below, the S&P 500 was higher for the remainder of the year. The only exception was a big one when in 2008, the S&P 500 started the year off with a decline of 8.5% in the first 35 trading days of the year and then went on to drop an additional 32.7% for the remainder of the year.
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Feb 22, 2023
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“Do you believe in miracles? YES!” – Al Michaels
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43 years ago today, the US men’s national hockey team shocked the world by defeating the dominant Soviet team in what everyone now knows as the “Miracle on Ice”. Today, faced with stubborn inflation, high-interest rates, lofty valuations, and numerous other concerns, a miracle isn’t the only way out of the current predicament for bulls, but after a sell-off like yesterday’s, it may seem that way. Futures are actually modestly positive in early trade, but hardly in a convincing way. The economic calendar is quiet this morning, but we’ll get the release of the Fed minutes from the previous meeting at 2 PM Eastern.
Yesterday’s plunge in stocks capped off what has been a pretty lousy five days for stocks as the early-year glow in the equity market has lost some of its shine. Every sector in the S&P 500 has traded down over the last five trading days. The least damage has been done in the Consumer Staples and Utilities sectors which are both down less than 2%. Leading the way to the downside, more than half of sectors are down over 3% with Energy leading the way falling over 6.5%. Energy is also one of four sectors down YTD and is the third worst-performing sector YTD.
Sometimes, when you’re watching a game you look at the scoreboard and think, how are we not down even more? The Energy sector has that feeling now. As we noted yesterday, crude oil isn’t far from 52-week lows, and to call the drop in natural gas a free-fall may be an understatement. Earlier this morning, front-month futures briefly dropped below $2 per million BTUs which is a level it hasn’t traded to very often over the last 20+ years. Six months ago, it was close to $10! If someone showed you the charts of oil and natural gas and gave you no other information regarding the state of the economy, the last thing on your mind would be inflation.
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