Feb 21, 2023
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“In business, as in politics, it is never easy to go against the beliefs and attitudes held by the majority.” – J. Paul Getty
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Markets have been bending from the spike higher in interest rates, but they have yet to break yet. This morning, they’re getting another test as retail earnings from Home Depot (HD) and Walmart (WMT) has put a drag on futures. Dow futures are down over 300 to kick off the week, the Nasdaq is down about 1%, and the S&P 500 is down about 0.85%.
Oil prices are modestly higher this morning as they continue to churn around in the high 70s which is a range is has been stuck around for more than two months. As shown in the chart below, the low $70s has been a price floor since early December while the low 80s has been a ceiling. As the sideways range has extended at levels much lower than where they were in all of 2022, the 50 and 200-day moving averages continue to drift lower, and this morning, WTI is back below both of those levels.
The sideways range of the last 50 trading days has now shrunk below 18%, which as shown in the chart below, is the narrowest trading range since May 2021. Not necessarily extreme by historical ranges, but given the war with Russia and its impact on the oil market, it’s been a bit of a snoozer in energy markets.
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Feb 17, 2023
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“The man who reads nothing at all is better educated than the man who reads nothing but newspapers.” – Thomas Jefferson
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After yesterday afternoon’s plunge, equity futures have picked up right where they left off and are indicated to open the last trading day of the week lower. Treasury yields are higher across the curve, and crude oil is plunging as the dollar rallies. Today will be a test for the buy the dippers who failed to step in yesterday. Will they show up today, or did they start their holiday weekend early.
Heading into the last trading day of the week, the market has grown increasingly concerned that the economy and inflation is too strong for the Fed’s liking. This week’s CPI and PPI reports certainly did not provide any ammo to the camp that’s expecting inflation to quickly revert to pre-COVID norms, but they also covered a month where gas prices surged 9%. As we noted in last week’s Bespoke Report, months where national average gas prices increase 9% or more have historically seen an average monthly increase of 0.5% in CPI which is exactly how much CPI increased in January. February is only half over, but gas prices this month have actually declined over 2%, which would be one of the weaker Februarys for gas prices dating back to 2004, so that has the potential to act as a tailwind next month.
Regarding the economy, Retail Sales came in significantly better than expected this week, but with three straight significantly stronger-than-expected Januarys in a row, seasonal adjustments may not be entirely accurate in the post-COVID world. Outside of the consumer, this week’s data wasn’t entirely indicative of a booming economy either. While Jobless Claims remain near historical lows, indicators like Small Business Optimism, New York and Philadelphia Fed manufacturing reports, Industrial Production, Capacity Utilization, Building Permits, and Housing Starts weren’t exactly positive this week.
During the month of January, Housing Starts fell over 4% on a m/m basis and more than 20% y/y. Single-family units, which tend to have a greater economic impact than multi-family units, were even weaker falling by 27% while single-family Building Permits fell 40% y/y. When looking at the 12-month moving average of Housing Starts, what started as a gradual deterioration has turned into a more dramatic decline that looks increasingly reminiscent of prior rollovers that occurred during or leading up to recessions.
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Feb 16, 2023
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“Like it or not, life is a game. Whoever denies that truth, whoever simply refuses to play, gets left on the sidelines.” – Phil Knight
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There’s a tone of weakness in the market this morning ahead of another busy morning for economic data with PPI, Housing Starts, Building Permits, Jobless Claims, and the Philly Fed all being released at 8:30. The S&P 500 is poised to open down about 40 basis points (bps) while the Nasdaq is down closer to 0.5%. Despite the weakness in equities, Treasuries are actually trading modestly higher as crude sees modest gains. The only real asset class showing strength is crypto as bitcoin is up nearly 2%.
Overshadowed somewhat by the much stronger-than-expected Retail Sales report, yesterday’s update on Industrial Production for January missed forecasts by a wide margin showing no growth in January versus forecasts for an increase of 0.5%. January’s report marked the second straight month that Industrial Production was 1.5% or more below a 12-month high which is the largest decline from a peak since the COVID crash. Looking at the chart below, there have been plenty of other times when Industrial Production showed larger declines. That being said, in the majority of instances where Industrial Production dropped this much or more, a recession wasn’t far behind. There were exceptions but not a lot of them.
This doesn’t mean that a recession is imminent. Every period is different. What the current period has going for it is that consumer balance sheets were in great shape heading into the current FOMC tightening cycle, and the employment backdrop remains positive. The hope is that these factors will provide a long enough bridge to get over the valley of the manufacturing sector’s slowdown.
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Feb 15, 2023
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“No company can afford not to move forward. It may be at the top of the heap today but at the bottom of the heap tomorrow, if it doesn’t.” – James Cash Penney
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Futures were already modestly weaker heading into the January Retail Sales report, but the much stronger-than-expected readings have added extra pressure to equity prices as Treasury yields continue to rise. The 10-year yield is on pace to close at its highest level of the year while the 2-year yield is knocking on its cycle highs from late October. Empire Manufacturing for the month of February was still negative but came in better than expected after showing a larger-than-expected improvement from January’s dismal readings. Still on the agenda today, we have Industrial Production, Capacity Utilization, Business Inventories, and Homebuilder sentiment. Lower rates had been helping the housing sector earlier this year, but increases in yields over the last week or so haven’t been helpful.
With Retail Sales on the front burner this morning, we wanted to provide a quick update on the performance of retail-related stocks so far this year. The two most popular ETFs tracking the retail sector are the VanEck Retail ETF (RTH) and the S&P Retail ETF (XRT). Depending on which one you look at, YTD performance varies greatly. RTH has rallied 5.45% since the start of the year, while XRT has nearly tripled that performance with a gain of 16.33%.
So, what explains the outperformance this year? Looking at the top ten holding of each ETF and their YTD performance, they may be retail-related ETFs, but they sure don’t have a lot in common. XRT is basically a broad-based equal-weighted ETF where no company has a weighting in excess of 2.5%. RTH, however, is a more top-heavy market cap-weighted tracker of the retail space. In RTH, Amazon.com (AMZN) accounts for over 20% of the holdings, Home Depot (HD) accounts for 8%, and Walmart (WMT) and Costco (COST) each have a weighting of about 6%.
As shown in the chart below, not one of the top ten holdings of XRT is also a top-ten holding of RTH, and all of the top ten holdings of XRT are up sharply YTD. In fact, the worst-performing top ten holding of XRT (Children’s Place) is still up over 25% YTD which is more than five percentage points better than the top performing top ten holding of RTH (AMZN).
The performance disparity between the two ETFs hasn’t just been confined to this year. Looking at the relative strength of the two ETFs over the last three years shows how they have traded off between periods when each one took the lead. From the early days of COVID through early 2021, XRT outperformed RTH by a wide margin, but during the bear market of 2022, it was RTH that outperformed as the largest cap retailers went down less than many of the smaller ones. This year, though, the tide has been turning in the first six weeks of the year. Despite tracking the same sector of the economy, the performance of both XRT and RTH over the last three years shows how even if you get the macro trend right, how you implement the trade will be just as, if not even more important than the premise behind the trade in the first place.
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Feb 14, 2023
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“Today is Valentine’s Day — or, as men like to call it, Extortion Day!” – Jay Leno
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Given the lack of major economic data last week, investors have had their sights set on the January jobs report ever since the January employment report earlier in the month. Well, the day is finally here. The consensus was for an acceleration from December’s rate, which was a decline of 0.1%. The 9% surge in gas prices during January alone would suggest an increase of 0.5%, which coincidentally is right where consensus forecasts had settled heading into the report. It’s also exactly where the report came in. Ex Food and Energy, the reading came in at 0.4% which was also right in line with forecasts. The only issue was the y/y readings which both also came in higher than expected.
While a 0.5% m/m increase is red meat for the headline writers to paint a narrative of inflation starting a new leg higher, the fact that it’s also right where consensus expectations are means that it was priced into the report. Also, with interest rates rising leading up to the report last week, one could argue that many investors were gearing up for an even stronger number. The market reaction so far has been indecisive. After originally erasing all of the pre-market gains, futures rebounded back above where they were heading into the report, and have now once again erased those gains. All in the span of nine minutes! Interest rates have been moving in the opposite direction. CPI loves me, CPI loves me not.
As far as the market is concerned, CPI reports have taken on an added significance in the last year as we have seen heightened volatility on CPI days. Over the last year, the S&P 500’s average daily move on CPI days has been a gain or loss of 1.94%, which is a level of volatility last seen back during the financial crisis. As shown in the chart below, there’s been a shift within the trend of volatility, though. From February to July of last year, the S&P 500 declined on CPI days for six straight months and was down for seven out of eight straight months from February to September. Since October, though, there have been four straight months where the S&P 500 rallied on CPI days. Not only that, but the degree of volatility is also showing what could be an early sign of abatement as there have been two months in a row where the one-day change on a CPI day was less than 1%.
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Feb 13, 2023
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“When it’s grim, be the Grim Reaper and go get it.” – Andy Reid
Below is a snippet of content from today’s Morning Lineup for Bespoke Premium members. Start a two-week trial to Bespoke Premium now to access the full report.
If you were thinking that there was something familiar about the market last week, you weren’t going crazy. With Communications Services (-5.57%) and Consumer Discretionary (-2.11%) leading the way to the downside and Energy (+4.94%) leading to the upside, it was basically a replay of 2022. Although last week also reflected a fair amount of mean reversion from the YTD moves of 2023, there’s still a good amount of dispersion in the market as six sectors finished the week at overbought levels, three were oversold and just two were neutral. With the oversold camp comprised of Consumer Staples, Health Care, and Utilities, it hasn’t been an especially strong showing for defensive sectors which is something that the defenses of both the Chiefs and Eagles can empathize with. It was such a poor showing for both defenses last night, in fact, that the total of 73 points was the third-highest total of any game, and it was the first time that both teams scored 35 points or more.
Look on the bright side, though, in the ten prior Super Bowls where the total was 60 or more, the S&P 500’s rest of year performance was a gain of 11.7% with positive returns nine out of ten times. The only exception was Super Bowl LII when the Eagles took out the Patriots 41-33 in what was the second-highest-scoring Super Bowl of all time.
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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