Dec 14, 2022
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“Adventure is just bad planning.” – Roald Amundsen
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Welcome to the 8th and final FOMC policy announcement of the year. Maybe it’s just us, but we would have been fine with just one or two announcements this year and a whole lot fewer speeches. Markets are pricing in a near certainty of a 50 bps rate hike today bringing the Fed’s total interest rate increases for 2022 to 4.25 percentage points. While markets are pretty certain of what the Fed will do, the big question on everyone’s mind is what is Powell going to say.
Isn’t it ironic that in the age of maximum Fed transparency where Fed officials practically speak multiple times a day that investors really have no idea what kind of tone the Fed chair will take at his news conference today? Will he start off the disclaimer that the Fed is “strongly committed to bringing inflation back down to our 2 percent goal”? Hopefully, Powell got up on the right side of the bed this morning and traffic getting to K street wasn’t too bad.
Futures have been mixed all morning on what has been a quiet day for data. The only release on the calendar was Import and Export Prices. Import Prices fell more than expected (-0.6% vs -0.5%), and Export Prices fell less than expected (-0.3% vs -0.5%). At the end of the day, though, none of this matters. Whatever Powell says will dictate the tone of the day. Any hints of a pause or a lowering in the magnitude of rate hikes going forward will be what bulls need to keep the rally going.
Despite recent comments from FOMC officials looking to downplay the significance of inverted yield curves and their impact on the economy, market participants have been intently focused on both the quantity and persistency of inversion at various points on the US Treasury curve. One of the Fed’s preferred measures of the yield curve is the spread between the yields on the 10-year and 3-month US Treasuries. This morning, the 10y3m curve remains inverted by over 80 basis points (bps) which will mark the 15th straight trading day that the curve was inverted by 50 bps or more.
Going back to 1962, there have been four other periods where the 3m10y curve inverted by 50 bps or more for at least 15 straight trading days. Each of those prior streaks lasted much longer than the current streak, although, with the curve inverted by over 80 bps, this streak can also be expected to last much longer. In terms of where these streaks occurred in the business cycle, in each of the four periods, a recession followed within eight months.
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Dec 13, 2022
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“It’s a proprietary strategy. I can’t go into it in great detail.” – Bernie Madoff
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One day short of 14 years after Bernie Madoff surrendered to authorities for his Ponzi scheme, Bahamian authorities arrested Sam Bankman-Fried yesterday in connection with his massive fraud in the cryptocurrency markets. Now that he’s behind bars, we can only hope that the nonstop media tour he has been on will come to an end.
We’ve got two very important days ahead for the markets with today’s November CPI and tomorrow’s FOMC rate decision. Futures are sharply higher heading into this morning’s release after a strong day yesterday, but hopefully, the markets haven’t set the bar too high.
While there is optimism among investors that the worst of inflation is behind us, the sentiment from two sectors that stand to benefit the most from inflation – Energy and Materials – has been mixed. The charts below show the relative strength of the S&P 500 Energy (XLE) and Materials (XLB) sectors versus the S&P 500 over the last ten years (top chart) and just the last year (bottom two charts).
Starting with the long-term picture, after years of underperformance, both Energy and Materials made a trough relative to the S&P 500 in 2020. While they have both stopped the bleeding, the rebound in Energy has been much stronger than the improvement in Materials (which never underperformed as much in the first place).
Over the last year, both sectors have significantly outperformed the market. Starting with Materials, its outperformance peaked in the spring and then came crashing back down to earth in the summer. The sector started outperforming again this fall, but in recent weeks it has started to run out of steam again.
The Energy sector has seen a much steadier trend out of outperformance this year, and its relative strength actually peaked in early November. While the sector has been under pressure relative to the market for the last month now, its relative strength uptrend has remained intact.
In the case of both sectors, their relative strength in recent weeks hasn’t been nearly as strong and steady as it was in the first half of 2022, but they are also far from collapsing reflecting the fact that while inflation pressures have not been as intense as they were earlier in the year, they still haven’t gone away.
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Dec 12, 2022
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“The best is yet to come.” – Frank Sinatra
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Futures are in the green to start the week, but with less than 15 trading days left in 2022, any hopes for anything but a bad year in the stock market can be put to bed. The bulls have pretty much run out of time. This week is starting out on a quiet note with little in the way of economic or earnings-related news, but it’s a major week for global central banks, including the FOMC, and the tone of these meetings will also likely be dictated at least in part by Tuesday’s CPI report for the month of November.
We’ve never fully adhered to the idea that small caps lead the broader market. When an entire index like that Russell 2000 is only 22% larger than the largest single company in the S&P 500 (Apple – AAPL), it’s hard to say that it leads the entire economy. Whether they are a leading indicator or not, though, small-cap stocks are widely followed, and recent trading in the space hasn’t been particularly bullish.
Starting with the Russell 2000, the IWM ETF has been range bound now since early November, but in Friday’s decline it barely closed out the week above its 50-DMA after closing below the 200-DMA earlier in the week.
Trading in micro-cap stocks has been even weaker. Not only did the Micro-Cap ETF (IWC) never trade above its 200-DMA in the last several weeks, but on Friday, it opened and closed below its 50-DMA as well.
Looking at all US index ETFs in our Trend Analyzer, the indices that track the largest market cap companies are generally the farthest above their 50-DMAs, and then as you go down the market cap scale, the closer they get to their respective 50-days with the micro-cap ETF (IWC), the only one actually trading below that level.
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Dec 9, 2022
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“I’m lazy. But it’s the lazy people who invented the wheel and the bicycle because they didn’t like walking or carrying things. ” – Lech Walesa
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With an important PPI report about to be released plus Michigan Confidence at 10 AM, futures have still managed to post gains heading into the opening bell. Weaker inflation data out of China could be setting the tone for the positive start as CPI rose just 1.6% y/y which was down from 2.1% in October. All of this will become irrelevant, once the US data is released, though. Stay tuned.
Russia’s invasion of Ukraine caused massive disruption in the global economy, but nowhere was it more pronounced than in Europe. Commodity prices soared resulting in massive inflationary pressures in both food and energy. The negative impacts were also felt in the performance of European stocks. From the time of Russia’s invasion in February through late September, the SPDR Euro Stoxx 50 ETF (FEZ) was down over 25% and nearly double the decline in SPY over that same span. Making matters worse, summer was barely over. Heading into the winter heating season things were only going to get worse.
Well, that’s not exactly what happened. Over the last several weeks, stocks in both the US and Europe have rallied, but with the dollar also declining, European stocks have seen much stronger returns on a dollar-adjusted basis. In fact, through Thursday’s close, FEZ is now outperforming SPY since Russia invaded Ukraine in February. Ten months after Russia’s invasion of Ukraine, crude oil is down, and European stocks are outperforming the US. Now, all we need is natural gas to continue falling.
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Dec 8, 2022
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“Happiness is just how you feel when you don’t feel miserable.” – John Lennon
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Futures have been steadily improving as we head into the opening bell as the S&P 500 looks to end a streak of five straight declines. European equities have been basically flat trading in a range, while treasury yields and crude oil are higher. One notable asset class that hasn’t been moving at all is bitcoin. In the span of the last 24 hours, the world’s largest cryptocurrency has traded in a range of less than 1%. Looking ahead, the only economic reports on the calendar today are initial and continuing jobless claims. After that, all eyes will shift to Friday’s PPI…and then CPI and the Fed next week.
Happiness is not a feeling the bulls have after the first week of December. The Nasdaq just completed its worst first week to December since 1975. Think about that. Chances are you had no idea what the stock market even was the last time the Nasdaq started off December this bad. Weakness hasn’t just been isolated to the Nasdaq and growth stocks either. While some sectors have done worse than others, they’re all down over the last week as Powell’s speech last week at the Brookings Institution fades into the rearview mirror.
Leading the way lower, Energy has plunged over 6.5% as weaker oil and natural gas prices finally catch up to the sector. There’s no need to feel bad for Energy, though, as it’s still up over 58% YTD and is more than 57% percentage points ahead of the next closest sector (Utilities). Other sectors that have been under pressure since December started were Consumer Discretionary, Financials, Technology, and Communication Services. At the other end of the performance spectrum, Health Care and Utilities get the participation trophies as they’re both down less than 1% MTD.
As bad as December has been to start, one potential bright spot is that every sector except for Energy and Consumer Discretionary remains above its 50-day moving average, so if you want to take the optimistic approach, the last week can still be considered a digestion of the rally off the October lows.
One last side note. This year has been unique for a lot of reasons, but how often is it that you see Energy and Consumer Discretionary simultaneously leading the market to the downside?
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Dec 7, 2022
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“Theory is splendid but until put into practice, it is valueless.” – James Cash Penney
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December just keeps getting lousier and lousier as futures are negative, putting the S&P 500 on pace for five straight losses to kick off what has historically been one of the more positive months of the year. The culprit for this morning’s weakness is negative trade data out of China, and the action in oil over the last couple of days has been signaling that weakness. The just released reports on Nonfarm Productivity and Unit Labor Costs came in better than expected providing a boost to futures but at this point, not enough to push them into positive territory.
It hasn’t been a healthy start to the month of December for the market, but the Health Care sector has held up better than a lot of others with its decline of less than 1.3%. The sector has had a strong run from its October lows, and technicians are salivating over the impending ‘golden cross’ for the sector. A golden cross occurs when a security’s short-term moving average crosses above a longer-term one as both are rising, and it’s considered a positive technical pattern. In the case of the Health Care sector, we’re looking at the 50 and 200-day moving averages and barring any major moves, that crossover will occur tomorrow.
With a lot of technical patterns, the theoretical doesn’t always translate to reality. The table below lists the thirteen prior golden crosses for the Health Care sector since the start of 1990, and for each one, we list the sector’s performance following that occurrence. As shown at the bottom of the table, while median returns over the following week and month were better than the average for all periods since 1990, median returns three and six months later were actually below the long-term average for all periods. One year later, the Health Care sector was positive 12 out of 13 times for a median gain of 9.2%, and while the consistency of positive returns was better than average, the median return of 9.2% was basically right in line with the historical average. Historically speaking, golden crosses for the Health Care sector haven’t been bad, but they haven’t necessarily been followed by better-than-average returns either.
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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