Nov 7, 2022
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“Our goal has never been to make the most. It’s always been to make the best.” – Tim Cook
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We got past the employment report unscathed on Friday and heading into the new week, the economic calendar is extremely light with one exception. Thursday’s October CPI report will make or break the market for the week. Economists are expecting the headline reading to rise 0.6% m/m and 0.5% on a core basis. We’re past the peak of earnings season, but the cadence will still be busy. Outside of the economy, tomorrow’s midterm elections will likely provide a good amount of sound and fury, and from a market perspective, we can only hope that the results aren’t drawn out for days.
These are the performance numbers for the S&P 500 on the last trading day of the prior seven weeks: -1.72%, -1.51%, -2.80%, -2.37%, +2.37%, 2.46%, and 1.36%, respectively. After these moves, the S&P 500 has now ended the week with a 1% move 29 times this year. As shown in the chart below, since the NYSE moved to the five-trading day week in late 1952, 2022 already has seen the most 1% moves to end a trading week and there are still eight weeks left in the year!
The S&P 500 finished a down week on a positive note last week, but even on the week’s one positive day, the S&P 500 closed lower than it opened (as it did every other day last week). After rallying up to the 50-day moving average during the trading day, the S&P 500 pulled back from its early highs. Futures are indicating a positive open this morning, but in order for a bounce to have any staying power, that 50-day will have to be broken to the upside.
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Nov 4, 2022
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“A man is worked upon by what he works on. He may carve out his circumstances, but his circumstances will carve him out as well.” – Frederick Douglass
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Futures are rallying nicely this morning on optimism over a relaxing of COVID restrictions in China, and the gains here follow what has been an overnight rally in risk assets around the globe. If these gains can hold, it will help to reverse some of the steep losses we’ve seen this week, but we still have to get through the October Non-Farm Payrolls report. Needless to say, any strength on the jobs or wage front will not be greeted kindly by the FOMC.
Wasn’t November supposed to be a good month for stocks? We’re only three trading days into it, but already the S&P 500 is down close to 4% (-3.92%) in what ranks as the worst three-day start to a month for the index since August 2019 and the 11th worst start since late 1952 (when the five-trading day week on the NYSE began). The chart below shows the first three-day performance for the S&P 500 for every month since 1953 and what really sticks out is the fact that all but two of the months that had weaker starts were all since the start of 2000, while the other two were in December 1973 and December 1975.
We’d also note that this month’s poor start followed October’s exceptionally strong start where the index rallied 5.51% in the first three trading days of the month. That strong start ranked as the 6th strongest three-day starts to a month since 1953.
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Nov 3, 2022
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“Be innovative. Don’t listen to the tried and tested wisdom. Take a risk!” – Daniel Libeskind
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A horrible market reaction to yesterday’s Fed meeting is getting even worse this morning as futures have been weakening throughout the morning and are now indicating a decline of 1% at the open. It’s a busy day of economic data, and Unit Labor Costs were weaker than expected (3.5% vs 4.0%) while Initial Jobless Claims were basically in line with expectations (217K vs 220K). Still on the docket, we have ISM Services at 10 AM where economists are forecasting a drop in the headline reading from 56.7 down to 55.4.
As noted in the Closer last night, yesterday’s post-Fed sell-off (-3.22%) was the worst performance for the S&P 500 in the final 90 minutes of trading on a Fed day going all the way back to 1994 when the FOMC first started announcing their interest rate policies on the day of the meeting.
As a result of yesterday’s sell-off, the S&P 500 finished the day down 2.5% which was the 21st time the index has been down 2% or more this year. While there are still nearly two full months left in the year, 2022 already ranks as the fifth most number of 2%+ daily declines since the five-trading day week was established in 1952. The only years with more 2% declines were 2008 (41), 2002 (29), 2009 (28), and 2020 (2025). 2008’s total is out of reach at this point, but if volatility persists between now and year-end, the spots of any of those other years are up for grabs.
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Nov 2, 2022
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“A 75-basis point increase is not something that the committee is actively considering” – Jerome Powell
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Futures have been fluctuating around the unchanged line this morning, and a stronger-than-expected ADP Private Payrolls report earlier currently has them on the south end of the flatline. Treasury yields are also in a holding pattern ahead of the Fed later today and the 10-year yield is a few basis points above 4%.
In his post-meeting press conference on May 4th, Jerome Powell, after hiking rates by what at the time was an abnormally large 50 basis points (bps), put investors at ease by telling CNBC’s Steve Liesman that the committee wasn’t’ actively considering a 75-bps rate hike. As the headlines the next day read, 75 bps was ‘off the table’. In the six months since those comments were made, it has been an all-you-can-eat buffet of 75 bps hike, and the overwhelming consensus is that today will be the fourth such hike of that magnitude. In fact, CME’s FedWatch tool currently puts the odds of a hike of less than 75 bps at just 12.5%.
What changed after May 4th that caused the Fed to shift direction so sharply? Well, it all started back in early to mid-June when gas prices were up over 50% YTD and a University of Michigan preliminary report showed a surge in inflation expectations. Fed officials became increasingly worried that expectations were becoming unmoored raising fears of a 1970s-type spiral. Since the committee was in a blackout period, they ‘leaked’ news to the WSJ that a 75-bps hike was the likely course of action at its meeting later that week. On the 15th of June, the FOMC did in fact hike rates 75 bps in what would become the first in a run of hikes of that magnitude.
It turns out that June 13th marked the YTD peak in gas prices (they have since declined 25%), and the spike in inflation expectations from the preliminary Michigan Confidence report was revised away. In the historical data, it doesn’t even exist anymore! Even compared to the revised reading for both the 1-year and 5-10 year periods, inflation expectations are lower now than they were in June. In other words, the two primary catalysts for the Fed put a 75 bps hike back on the table have reversed, and yet, the FOMC not only hiked rates 75 bps once but is on pace to hike rates by that amount for a fourth time today.
Who knows where interest rates should or shouldn’t be, but the inconsistency between comments made just six months ago and their actions since then is stark. Markets will likely have notable moves in either direction today based on what Powell and the committee say today, but don’t be too quick to chisel anything into stone.
What we can say for sure is that over the last six months, the move in the 3-month US Treasury yield has been extreme. With an increase of over 325 bps, it has been the largest six-month increase in the yield since May 1981. Going back to 1961, there have only been 147 trading days (less than 1% of all days) where the six-month rate of change was higher than it is now. As shown in the chart below, those readings were from a brief period in 1973 and then intermittently throughout a two-year period from 1979 to 1981.
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Nov 1, 2022
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“For every moment of triumph, for every instance of beauty, many souls must be trampled.” – Hunter Thompson
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After the best month for the DJIA since 1976 (and a strong but not nearly as notable month for the S&P 500 and Nasdaq), the markets are looking to kick off November on the same bullish footing as both the S&P 500 and Nasdaq are on pace to open higher by over 1%. It’s not just US stocks that are rallying either. Chinese stocks surged overnight on rumors that the country would relax its COVID restrictions, and the gains followed right into the European markets as major averages on the continent are up over 1% across the board. Bond yields are also lower and commodities are rallying. In fact, just about everything except for the dollar is trading higher this morning. Even the yen is up!
There are three economic reports on the calendar this morning, and they’re all at 10 AM. The JOLTS report is lagged a month (September), but that will be an important indicator to watch to see if there’s any follow-through from last month’s big drop. A decline well below 10 million would be just what the Fed would want to see heading into this week’s meeting. Also at 10 AM, we’ll get September Construction Spending which is expected to fall by 0.6% compared to last month’s decline of 0.7%, and most importantly, the ISM Manufacturing report is expected to decline right to 50.0. Anything below that would indicate a contraction in the manufacturing sector.
Earnings season is barely half over, but already it’s been a memorable one. Think about this for a minute. While Apple (AAPL) managed to buck the trend and rally over 7% in reaction to its earnings report last week, the other mega-caps in the S&P 500 like Alphabet (GOOGL), Amazon.com (AMZN), Microsoft (MSFT), and Tesla (TSLA) all fell 7% or more in reaction to their reports. Additionally, Meta (META), which is no longer a mega-cap because it fell so much, lost a quarter of its market cap in a single day! Despite the pummeling in the S&P 500’s largest stocks, the index is still up over 6% this earnings season. Talk about resilience!
The chart below compares the performance of the S&P 500 at this point in earnings season to the same point (24 calendar days) in each prior earnings season since the start of 2009. The 6.4% rally so far ranks as the best since Q3 2011. Going back to the start of 2009, there have only been two other earnings seasons where the S&P 500 was up more at this point in the reporting period, and there were only a total of five where it was up more than 5%. Now, just because equities have done well this reporting period doesn’t mean it’s off to the races from here (last earnings season the S&P 500 also performed well only to crater from late August through early October), but the market’s ability to rally with no help from its ‘generals’ is impressive.
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Oct 31, 2022
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“It’s better to burn out than to fade away.” – Neil Young
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After an exceptionally strong end to last week, equities are in a bit of a letdown mode to close out October as S&P 500 futures are down about 0.30% with the Nasdaq weaker. A number of weak data points out of China and Europe along with continued geo-political concerns haven’t helped sentiment. The 10-year yield is firmly above 4% again this morning and crude oil prices are nearly 2% lower and back below their 50-DMA. It’s been nice over the last several sessions not to have to contend with the FOMC, but that will all change on Wednesday when they will likely raise rates by 75 bps for an unprecedented fourth straight meeting.
We’ve seen some wild finishes to the trading week lately. Over the last 12 weeks, there has only been one Friday where the S&P 500 didn’t finish up or down at least 1% (9/16), and over the last six weeks, the last trading day of the week has seen a gain or loss of at least 1%. Not only that, but the last trading day of the week has become even more volatile over the last four weeks. Of the four Fridays this October, the S&P 500 has rallied or declined at least 2% each time. The first two Fridays of the month experienced declines of 2.8% and 2.4%, respectively and the last two Fridays have seen gains of 2.4% and 2.5%.
Prior to this month, going back to 1952 when the five-trading day week was established on the New York Stock Exchange, there were only four times when the last trading day of the week had a daily move of +/-2% for three straight weeks, but none of those streaks never extended to four. There’s a first for everything, though, and this month’s streak is the first time in over 70 years that the S&P 500 has ever had four straight 2% gains or losses to end a trading week.
Last Friday’s 2%+ gain for the S&P 500 capped off what was a weekly gain of just under 4% for the S&P 500 in what was a broad rally. Sectors leading the way higher were Industrials, Utilities, Financials, Real Estate, and Consumer Staples which all had gains of over 6%. Health Care and Technology also marginally outperformed the S&P 500 gaining over 4%. On the downside, Communications Services was by itself the to downside as negative reactions to earnings from Alphabet (GOOGL) and Meta (META) weighed on the sector. Lastly, even though they all rallied over 1.5%, Consumer Discretionary, Energy, and Materials all underperformed.
As far as the major indices are concerned, the chart patterns for both the Nasdaq 100 and the S&P 500 look very similar. The key difference between the two is that while the S&P 500 managed to rally back above its 50-DMA last week, the Nasdaq 100, weighed down by weakness in mega-cap stocks and their reactions to earnings, has yet to break above that critical level.
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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