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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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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