Nov 23, 2022
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“Those who previously claimed they were too old or ill to work embraced the idea of private property once they could enjoy the fruits of their own labor.” – Caroline Baum, “The Story of Thanksgiving – and Proper Incentives”
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Investors may be thinking ahead to the Thanksgiving holiday and spending time with friends and family, but there is still a full-day left of trading ahead of us. The earnings calendar is light as Deere (DE) has been the only report on the calendar, but there’s plenty of economic data to tide you over as we try to jam three days worth of reports into one day. Things kick off at 8:30 with Durable Goods and Initial Claims. At 9:45, S&P will release flash PMI readings for the manufacturing and services sector, and then at 10 AM, we’ll get Michigan Sentiment and New Home Sales. Not enough for you? OK. Well, how about we cap it off with some FOMC Minutes at 2 PM? Is that enough for you?
Futures are technically in the green this morning, but they’re pretty much unchanged, and we’ve seen a number of ticks this morning where they were actually unchanged. The same is true in Europe where trading has been uneventful. Economic data in the region, however, has been positive as flash PMI readings for both the manufacturing and services sectors came in higher than expected for the entire Eurozone as well as Germany, the UK, and France individually.
Which of these indices is not like the other? As technicians attempt to divine whether the S&P 500 and other major US equity benchmarks will be able to break above its 200-DMA in this current leg higher, it seems out of place to be talking about the DJIA breaking out to six-month highs. Heading into the Thanksgiving holiday, the DJIA has rallied more than 19% off its Q3 low and is already more than 5% above its 200-DMA. The DJIA isn’t often thought of as a leading indicator for the broader market, but more than a few 401k plans have hopes that the rest of the indices play follow the leader.
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Nov 22, 2022
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“The one unchangeable certainty is that nothing is certain or unchangeable.” – John F Kennedy
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There’s been little in the way of major news this morning. In the retail space, we’ve seen some positive earnings reports from Best Buy (BBY) and Dick’s Sporting goods (DKS), although Dollar Tree (DLTR) and Zoom (ZM) are under pressure following disappointing results relative to expectations. There’s little in the way of economic data on the calendar as the Richmond Fed regional report is the only release scheduled (10 AM), but there are a number of Fed speakers slated to speak, including Cleveland Fed President Mester, KC Fed President George, and St Louis Fed President Bullard. Can’t these people take a break for Thanksgiving?
The story of 2022 has been one where the market has been constantly playing catchup to the Fed’s aggressive pace of monetary tightening. Back in May when the market thought 75 bps was off the table, it quickly had to change course as the Fed went on to hike rates by 75 bps at each of the last four meetings. Periods where the market finds itself playing catch up to a tighter reality aren’t a good setup for equities.
With just over three weeks between now and the next Fed meeting, have investors finally caught up to the Fed? Based on comments from Loretta Mester like “I don’t think we’re anywhere near stopping,” you would think that the market is still behind the Fed, but that may not entirely be the case. Even hawkish officials have publicly stated openness to ratcheting down the pace of rate hikes, and that’s a big change from where we were. Throughout all of August, September, and the first half of October, the market was steadily raising its forecasts for policy rates, and not surprisingly, stocks were under pressure. In mid-October, though, the odds of a 75 bps hike at the December meeting peaked at 77% and have been steadily declining to less than 20% today. It’s no coincidence that during that same stretch, equities have rallied. It sounds pretty obvious, but as long as the market remains on the same page as the Fed or finds itself playing catch up to a less aggressively hawkish policy path, equities should benefit from a tailwind.
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Nov 21, 2022
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“At its essence, good leadership isn’t about being indispensable; it’s about helping others be prepared to possibly step into your shoes” – Bob Iger
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Outside of Disney (DIS), it’s been a very quiet morning in US markets. Futures are down, but they’re off their lows. The Nasdaq is leading the declines with a decline of 0.5%, and the economic calendar is quiet with the Chicago Fed National Activity Index the only report on the calendar. One bright spot this morning has been related to the Fed. While most speakers of late have been hawkish, Atlanta Fed President Bostic said he favors smaller rate hikes and a terminal rate of between 4.75% to 5.00%. Unfortunately, he’s not a voter.
Hollywood loves sequels, and investors are hoping for a good one this morning on the news that Bob Iger is returning to Disney (DIS) to replace Bob Chapek. In response, DIS shares have rallied nearly 10% which would be the best day for the stock in nearly two years. Based on the performance of DIS stock under Iger versus Chapek, you can understand the optimism. During the nearly 15-year tenure of Iger, DIS stock rallied more than fivefold for an annualized gain of 13.9% including dividends versus the S&P 500’s annualized total return of 8.8%. Under the less than three-year tenure of Chapek, DIS stock has declined more than 28% for an annualized decline of more than 11.5% versus an annualized gain of 10.8% for the S&P 500. Put another way, it took less than three years for Chapek to undo all of the outperformance that DIS shares racked up under Iger.
It wouldn’t be fair to put all the blame for Disney’s underperformance on Chapek. Iger stepped down just as COVID was arriving on US shores, so he benefitted from good timing. There’s also been massive disruption in the media space, so who knows how a DIS under Iger would have navigated these storms. Chapek was also Iger’s hand-picked successor, and as Iger himself once said, good leadership is about helping others be prepared to possibly step into your shoes. So Chapek’s disappointing tenure doesn’t exactly reflect all that well on Iger.
Whatever the circumstances were under Chapek’s tenure, you can only play the hand your dealt. The numbers are the numbers, and that’s why investors are so excited this morning. Just like Hollywood, Wall Street loves sequels. Let’s just hope for Disney investors, the Iger sequel is a success more of a Godfather II or Top Gun Maverick than a Jaws 2.
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Nov 18, 2022
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“I became a good pitcher when I stopped trying to make them miss the ball and started trying to make them hit it.” – Sandy Koufax
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We made it! We’re not sure about you, but following rumors that Twitter was going to break overnight, we slept soundly. But that’s just us. We’re sure that there are more than a few people out there who as much as they say they hate it, couldn’t imagine a life without their beloved little blue bird. OK. Maybe we sometimes find ourselves in that camp too. Depending on where you stand on social media or these days, your opinion of Elon Musk, fortunately or unfortunately, Twitter is still chipping this morning.
Twitter’s survival is just as good a reason as any to attribute as the catalyst for this morning’s rally in futures, but lower oil prices aren’t hurting matters. We did find it interesting, though, that just as yesterday, futures were positive heading into the European open and steadily lost steam, today has been an exact mirror image. For the rest of the day, the only economic reports on the calendar are Existing Home Sales and Leading Indicators at 10 AM.
It’s been a relatively strange week in terms of index and sector performance as returns have been all over the place. At the index level, all the major index ETFs are above their 50-DMAs, but the S&P 500 (SPY) and Dow (DIA) are both overbought while the Nasdaq 100 (QQQ) and Russell 2000 (IWM) are in neutral territory. The Russell is pulling back from more overbought levels last week with a decline of more than 1.5%, but the Nasdaq 100 gained ground as it’s the only one of the four index ETFs that is up in the five-day period ending yesterday.
While the Nasdaq 100 has been the top-performing index ETF, Technology (XLK) isn’t the top-performing sector. With a gain of 0.79% over the last week, it is underperforming both Communication Services (XLC) and Energy (XLE) by more than a full percentage point. On the downside, five sectors are down a full percentage point in the last five trading days with Real Estate (XLRE) and Utilities (XLU) leading the way lower with declines of more than 2%. The only two sectors below their 50-DMAs are Consumer Discretionary (XLY) and Utilities (XLU) while Energy, Industrials (XLI), and Materials (XLB) are the most extended relative to their 50-DMAs at 8.75% or more above that level. Communications Services and Utilities, meanwhile, are right in the zone and both within 1% of their 50-DMAs.
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Nov 17, 2022
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“If the euro fails, Europe fails.” – Angela Merkel
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It was a pretty uneventful evening for global equities, that is, until Europe opened. After opening slightly higher, European equities have been grinding lower all morning, and that has dragged US futures along for the ride. Making matters worse, hawkish commentary hitting the tape in the last half hour from Jim Bullard and Esther George has only added to the negative tone. On deck, we have Housing Starts, Building Permits, Philly Fed, and Initial Jobless Claims at 8:30. Then, at 11 AM, we’ll get a November update on manufacturing from the KC Fed.
The first three quarters of 2022 were a time to forget for the euro as the common currency plunged over 16% YTD at its intraday low on 9/28 and well below the psychologically important parity level versus the dollar. Since that intraday low, the euro has rallied over 8%, and in the process of that rally, it has broken the steady downtrend that had been in place all year. This week, the euro has encountered another level of resistance at the 200-day moving average (DMA). On Tuesday and Wednesday, the euro tried and failed both days to stay above its 200-DMA, and today it is once again off its intraday highs but this time it never even made it to the 200-DMA. Rallies failing at their 200-DMA are a classic trait of bear markets, and it’s a trend we’ve seen across financial markets all year, so it will be interesting to see if this level acts as similar resistance for the euro as well.
In some ways, you could say that the euro is wearing out its welcome below the 200-DMA. The current streak of 372 trading days closing below its 200-DMA ranks as the longest since the common currency’s launch in 1999. Over the last 22 years, this current streak marks only the fourth time that the currency has traded below its 200-DMA for more than an entire year.
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Nov 16, 2022
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“You always hear the phenomenon that people are trading down, that’s not happening in our space.” – Marvin Ellison, CEO Lowe’s (LOW)
“Based on softening sales and profit trends that emerged late in the third quarter and persisted into November” Target (TGT) Earnings Release (11/16/22)
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After some geo-political tensions yesterday afternoon following reports of a Russian missile strike on Poland, markets are breathing a sigh of relief this morning after NATO said that the missile likely did not come from Russia and wasn’t an act of aggression. Despite the eased tensions, futures are modestly lower this morning following a mixed batch of earnings reports. Treasury yields are lower on continued optimism that inflation pressures in the US are easing (we’ll see what Fed officials think throughout the day as a number of speakers are on the calendar), but over in the UK, CPI rose by a 40+ year high of 11.1% y/y.
It looks like it’s a morning of the haves and have-nots in retail. Target (TGT) noted in its earnings release that sales trends are softening after reporting weaker-than-expected EPS and sales. Lowe’s (LOW) seems to be operating on a whole different landscape, though, as the company reported better-than-expected EPS and sales while raising guidance. In an interview on CNBC, CEO Marvin Ellison noted that he has seen no signs of a consumer slowdown and no sign of trading down. Two large American retailers with two entirely different viewpoints on the consumer. It will be interesting to see which comments today’s Fed speakers decide to place more weight on. Getting back to the Lowe’s report, while Ellison noted that consumer trends remain strong, he also added that input prices are starting to trend down, so even from the strong report, there were some positive signs on the inflation front… but it’s just ‘one data point‘.
It’s only fitting that right in the thick of retail earnings season, we’re also getting the monthly update on Retail Sales for October this morning. The report came in stronger than expected with headline Retail Sales rising 8.3% on a y/y basis. While that’s strong at the surface, keep in mind that Retail Sales are a nominal reading. After adjusting for inflation, the y/y reading was up 0.5%.
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