Jan 11, 2023
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“It is easy to quit; I’ve done it at least a hundred times.” – Unknown
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Flights across the US are grounded due to an outage at the FAA, but stocks remain airborne as futures are modestly higher across the board, and the Nasdaq is looking to extend its winning streak to four straight days. News flow looks to be relatively light as there are no major economic reports on the calendar, and the only earnings report is KB Home (KBH) after the bell. Tomorrow will be the big day of the week, though, when the December CPI will be released at 8:30. Then, on Friday we’ll start to get the first of the big earnings reports from the major banks.
Back on this day in 1964, the US Surgeon General issued a report on smoking that was thought to be so damaging to the tobacco industry that he waited until a Saturday when markets were closed to release it to limit the potential stock market chaos. The day after the report was released it was front page top of the fold news in the New York Times with a headline reading “Cigarettes Peril Health” and the sub-headlines “Cancer Link Cited” and “Smoking Is Also Found Important Cause of Bronchitis”. Besides the front-page headlines, the Sunday edition was rife with stories on the ‘revelation’ that smoking wasn’t good for you.
As much as the tobacco companies tried for decades to convince consumers otherwise, anyone with a minimal amount of intelligence who had ever smoked a cigarette probably already knew that it wasn’t something you did in order to get yourself into shape or good health. As far back as the 1940s, scientists had already made the link between smoking and lung cancer. Smoking was considered a vice for a reason! Even as many (or most) Americans already knew of the dangers of smoking, an official statement from the Federal government was a big deal, though, and would pave the way for more regulation of the sector. If you owned tobacco stocks heading into that weekend, you probably weren’t looking forward to Monday’s opening bell.
When the bell rang Monday morning, tobacco stocks opened lower, but by the end of the trading day, their performance was a surprise to most. Of the five major tobacco companies at the time, Reynolds American actually finished the day higher, and American Tobacco was unchanged on the day. Of the remaining three major tobacco stocks, none of them even finished the day down 2%. Perhaps the most amusing aspect of the New York Times market recap the following morning was that cigar stocks traded higher on the day as “cigar smoking received a relatively clean bill of health”. It looks like at least one part of the industry had effective lobbyists!
The performance of the cigarette stocks on the first trading day after the Federal Government first officially recognized the dangers of smoking illustrates once again how the market can defy consensus expectations. While the Surgeon General’s report on the dangers of smoking should have been a blow to cigarette stocks, the initial reaction to the report was muted. When everyone is zigging, the market often zags.
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Jan 10, 2023
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“Instinct is a marvelous thing. It can neither be explained nor ignored.” – Agatha Christie
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After a good first week of the year for stocks, futures are in a bit of a retreat this morning, and a key reason for the caution is that Fed Chair Powell will be speaking on Central Bank Independence at 9 AM eastern. Given his recent penchant to crush the market, no one really wants to make a big stand ahead of that speech. Along with lower equity prices, bond yields are higher while crude oil is up marginally even as natural gas pulls back.
In terms of economic data, NFIB Small Business Sentiment came in weaker than expected and fell back down near its lowest levels in a decade. The only other report on the calendar today is Wholesale Inventories at 10 AM.
By nature, people put a lot of weight on first impressions, and that’s especially true in the stock market. If the year starts out on a positive note, it is thought to set a positive tone for the rest of the year and vice versa. With the new trading year fully one week old, below we take a look at how the S&P 500 has performed in the first week of this year compared to all other years since 1953 when the five-day trading week started. The S&P 500’s first week gain of 1.37% this year is definitely an improvement over last year’s decline of 1.87%, and it’s also more than double the 0.58% median gain dating back to 1953. But does it mean anything?
The scatter chart below shows the S&P 500’s performance in the first five trading days of the week versus the rest of the year, and the shaded area indicates all periods where the S&P 500 rallied more than 1% in the first five trading days. Since 1953, there have been 27 other years where the S&P 500 gained 1%+ in the first five trading days, and of those years, the S&P 500’s median rest of year performance was a gain of 13.9% with positive returns 79% of the time. For all other years, the S&P 500’s median rest-of-year return was a gain of 5.6% with gains 59% of the time. Maybe first impressions really do matter.
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Jan 9, 2023
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“The finest steel has to go through the hottest fire.” – Richard Nixon
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It’s a merger Monday to start the week with three relatively small deals by today’s standards. In the biotech space, CinCor (CINC) will be acquired by AstraZeneca (AZN) in a deal that could be valued at up to $1.8 billion while Albireo (ALBO) will be acquired by Ipsen for just under $1 billion. Both of those stocks are trading up 90% or more in the pre-market. Outside of biotech, software company Duck Creek Technologies will be acquired by Vista Equity Partners for $19 per share in cash ($2.6 billion). While the deal represents a 46% premium to Friday’s closing price, it’s worth noting that DCT traded for just under $60 per share in early 2021. So, the price of the deal is still less than a third of where it once traded during the height of the mania in software stocks.
Along with the deal activity, futures are seeing some follow-through from Friday’s big rally, and growth stocks are leading the move higher with Nasdaq futures trading up just over 0.5%. Some of the reasons for optimism this morning include reports that China has removed all of its border restrictions and that the saga to elect a Speaker of the House is finally behind us. Yields are slightly higher on the long end of the curve, and it’s a quiet day on the economic calendar.
Friday’s rally for the bulls was a nice respite from what had been some disappointing sessions. On the positive side, it was nice to see the S&P 500 finally break out of what had been a nearly two-week very tight trading range- and not break out of that range to the downside! For all the optimism about the rally, it’s still important to note that the S&P 500 wasn’t even able to close out the week above its 50-day moving average (DMA). Late in the day Friday, it attempted to take out that level but pulled back modestly into the close after briefly touching it.
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Jan 6, 2023
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“The telegraph would bind man to his fellow-man in such bonds of amity as to put an end to war.” – Samuel Morse
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In what has been an overall trend of weaker economic data, the monthly non-farm payrolls report has been an oasis. Heading into this morning’s report, the headline reading had come in better than expected for a record eight straight months, and this morning’s stronger-than-expected report extends the streak to nine. The only notable current streak we can think of that has gone longer is the 11 unsuccessful votes to elect a Speaker of the House.
While the headline reading has enjoyed a record streak of better-than-expected readings, the trend heading into this month and which still remains in place is one of weaker momentum. As shown in the chart below, while readings have been positive for the last two years, they have generally been trending lower. Combining the streak of better-than-expected readings with the actual readings in the total number of jobs created, economists were correct in forecasting a slowdown in job growth, but they overestimated the pace of it.
Not only that, but average hourly earnings and the length of the average workweek both came in weaker than expected.
Heading into this morning’s report, other indicators of employment that we saw earlier this week, including the ADP Private payrolls and jobless claims, investors were gearing up for a hot number this morning. The fact that the headline reading only came in 20K above expectations and that wage growth was weaker than expected are both modest positives.
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Jan 5, 2023
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“Yesterday’s home runs don’t win today’s games.” – Babe Ruth
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Futures had reversed overnight lows and moved into positive territory earlier, but the stronger-than-expected ADP Private Payrolls report coupled with lower-than-expected jobless claims has pushed equities back in the red. Jobless claims were just released and also came in better than expected on both an initial and continuing basis, and that hasn’t helped the tone heading into the opening bell as the 10-year US Treasury yield has spiked up to 3.75%.
It was a close call but Santa did come this year as the S&P 500 posted a positive return during the seven trading day window (the last five trading days of one year and the first two of the next) when the Santa Claus Rally is said to occur. With a gain of 0.80%, though, it was a smaller-than-normal rally. As shown in the chart, that continues a trend of recent subdued returns during this period. In fact, the last time the S&P 500 rallied more than 2% during the Santa Claus Rally was back in 2013, and that ten-year drought without a 2% rally is the longest since at least 1953 when the five-day trading week on the NYSE in its current form began. Hey Santa, stop being such a cheapskate!
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Jan 4, 2023
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“Yet we still live in a troubled and perilous world. There is no longer a single threat. There are many. They differ in intensity and in danger. They require different attitudes and different answers.”– Lyndon B Johnson
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Investors are waking up to a bit of – dare we say it – goldilocks this morning as commodity prices and treasury yields are both lower and economic data out of Europe has been positive. Service sector PMIs for the Eurozone and each of the largest economies in the region have come in better than expected while some inflation-related reports have come in lower than estimates. Import Prices in Germany for the month of November dropped more than expected (-4.5% vs -1.6%) and French CPI for December unexpectedly declined. In response, futures are modestly higher heading into what is likely to be an eventful day with ISM Manufacturing and JOLTS at 10 AM, and the FOMC Minutes at 2 PM.
It wasn’t a particularly great year for financial assets anywhere across the spectrum in 2022. The only area to buck the trend was Energy. To start off 2023, though, Energy has been among the weakest areas as WTI opened the year with a decline of 3.9% on Tuesday (and is down an additional 3%+ this morning). With that decline, the Energy sector tumbled 3.5% (and is down another 1.5% in the pre-market).
The chart for WTI doesn’t look particularly encouraging. After making a lower high last June, the sector has been in a relatively consistent downtrend for more than six months, and a key trend since that peak has been multiple occurrences where the sector tried to rally back above its 50-DMA but failed. The last week has been the most recent example. After failing to take out its 50-DMA yesterday, WTI’s plunge yesterday was its largest decline to kick off a new year since 2007.
Even as oil prices have plunged from their 2022 highs, Energy stocks have held up impressively well. It was only back in mid-November that the Energy sector made a new high for the year while oil prices were well off their highs. Despite the outperformance, the sector’s technical picture has deteriorated. November’s peak was technically a higher high, but it’s starting to look more like a double-top. The fact that after trading below its 50-DMA in early December, the Energy sector has had multiple failed attempts to trade back above that level is a concern for longs. Like crude oil, Tuesday’s 3.6% decline was the weakest opening-day performance for the sector to start a year since 2007.
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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