Dec 6, 2022
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“Sometimes, you can learn more from criticism than you can from flattery.” – Doug McMillon
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It’s been a quiet morning for both earnings and economic news, and futures are doing little in response after yesterday’s drubbing. JP Morgan Chase (JPM) CEO Jamie Dimon was on CNBC earlier and said he expects to see a recession in 2023. That echoes comments from UAL CEO Scott Kirby who also expects to see a mild Fed-induced recession while noting that business travel has plateaued. Other CEOs appearing on CNBC this morning didn’t go as far as to use the r-word, but Union Pacific (UNP) CEO Lance Fritz sees the economy and consumer slowing driven by weakness in housing, and Walmart CEO Doug McMillon said he sees the low-end consumer being pressured as the percentage of consumers making more than $100K per year visiting stores increases.
Yesterday, we were talking about the mixed signals coming from the equity market. Today, it’s the Energy sector’s turn. Energy-related commodities were all the rage earlier this year when Russia invaded Ukraine, setting off the potential for major supply disruptions in both the global natural gas and oil markets. At one point earlier this year, WTI was up over 64% YTD and natural gas was up 160%. That helped to push the Energy sector to a gain of over 70% on the year while just about every other area of the market was down YTD, and in many cases, down big.
Since the initial hysteria in Energy markets earlier this year, energy-related commodities have come crashing back down to earth. Over the last six months, WTI is down 35%, and natural gas is down 40%. With declines of that magnitude, you would expect to see Energy stocks under heavy pressure, but during that same span, the Energy sector is down less than 1.5% and still up 58% YTD. To be sure, even after the recent big declines in energy commodities, they’re still positive YTD, although both natural gas (51%) and crude oil (3%) have trailed the gains in Energy equities.
One explanation given for the outperformance of Energy stocks versus the commodities has been the Biden Administration’s release of oil from the Strategic Petroleum Reserve (SPR) which has acted as an artificial weight on prices. That’s certainly a valid argument, but natural gas has not had to contend with increased supply from an SPR and yet it too is down just as much as crude oil in the last six months. Just when you think you have the market figured out, it throws you a curveball.
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Dec 5, 2022
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“Once, during Prohibition, I was forced to live for days on nothing but food and water.” – W. C. Fields
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It’s been a weak start to the trading week this morning as major averages in Europe and futures in the US are lower. While China rallied overnight, economic data in the EU didn’t do anything to encourage investors as PMI data for the services sector was generally weaker than expected, remaining in contractionary territory. Retail Sales in the region also declined slightly more than expected, falling 1.8% versus forecasts for a decline of 1.7%. Here in the US, the S&P 500 is on pace to open about 0.5% lower, treasury yields are modestly higher and crude oil is higher after OPEC+ announced plans to keep production levels intact. The only area of the market showing any strength this morning is crypto where bitcoin and Ethereum are both up nearly 1%. Overall, there’s no real catalyst for the weaker tone besides the fact that Morgan Stanley’s Mike Wilson said the rally has little upside left in the tank.
The equity market finds itself at an interesting juncture right now with almost as many conflicts as a high school lunchroom. Despite declines on five of the last six trading days, thanks to a 3%+ rally last Wednesday, the S&P 500 managed to finish the week up just over 1%. Similarly, while the S&P 500 also closed above its 200-day moving average (DMA) for the first time since the spring, the downtrend from the all-time high at the start of the year remains firmly in place. For every positive, it seems, there’s a negative.
In the European equity market, it’s a similar setup. The STOXX 600 was three weeks ahead of the S&P 500 in getting above its 200-DMA, and it also managed to break its downtrend on that same day. While those are positive technical developments, the current 16%+ rally is at least temporarily running out of gas right at the same levels that rallies in May and August both stalled out. If all of this confusion is enough to make you want to drink, look on the bright side; at least you can now do that legally now as Prohibition ended 89 years ago today.
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Dec 2, 2022
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“The indictment, in a lot of ways, that was the turning point.” – Jeffrey Skilling
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History has a way of repeating itself, and just as the FTX bankruptcy is all anyone can talk about these days, it was 21 years ago today that Enron filed bankruptcy, and it was 14 years ago this month that the Madoff Ponzi scheme broke. There’s something about December and bear markets! The only difference between FTX and the Enron and Madoff scandals is that back then the masterminds of the scandals weren’t doing everything they could do to get in front of a camera, and the media wasn’t obliging them. As they say in show biz, though, any publicity is good publicity.
In any discussion of the economy these days, economists typically cite employment as an area of strength, and rightly so. When many other sectors of the economy are contracting or simply stalled out, people look for bright spots. At 3.7%, the Unemployment Rate and jobless claims are at the low end of their historical ranges, and the number of job openings in the JOLTS report is still 2.5 million above its pre-COVID peak. That’s the good news.
Less positive is the fact that momentum in US employment is clearly weakening. We saw it yesterday with Continuing Jobless Claims which are up over 20% in the last six months. Even the JOLTS report, which showed levels of job openings well above their pre-COVID peak, is still down 1.5 million from its high this March.
Today’s employment report will show another example of the labor market losing steam. Economists are forecasting Non-Farm Payrolls to 200K during the month of November, and any reading below last month’s level of 261K will be the weakest monthly reading since the end of 2020. The trend is clearly lower as the three-month average has been steadily trending lower all year.
The weaker momentum within the employment sector also comes as workers are making less. For nearly two years now, wage growth hasn’t been enough to even keep up with inflation. Over the last two years, y/y wage growth adjusted for inflation has declined at an average rate of just over 1%, and November’s report will be the 20th straight month that the reading was negative. And this is the good news!
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Dec 1, 2022
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“To bring about change, you must not be afraid to take the first step. We will fail when we fail to try.” – Rosa Parks
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It was looking like a little bit of a hangover this morning as futures were modestly lower, but as yields have continued to plunge and the dollar declines, futures have been drifting higher. It’s a busy day for economic data with Jobless Claims, PCE, Personal Income, and Personal Spending all on the docket at 8:30 and then ISM Manufacturing at 10 AM. Outside of the US, China’s PMI was below 50 but stronger than expected. There’s also been some additional optimism for growth prospects on reports that the country will further relax COVID restrictions. Commodities are rallying in reaction to the news, and WTI is firmly above $81 per barrel after trading in the low $70s earlier this week.
The 8:30 data was just released and initial claims came in lower than expected while continuing claims surged above 1.6 million. Inflation data was roughly in line to slightly better than expected. Personal Income was well above expectations (0.7% vs 0.4%) while Personal Spending came right in line with estimates (0.8%). In response to the data, futures have been ticking higher.
After August’s miserable failed attempt to break above the 200-day moving average and the double-digit percentage loss that followed, bulls had been attempting to take out that level again in the last couple of weeks. Just when it looked as though the latest attempt was running out of steam, yesterday’s Fed-fueled rally finally got the job done. Whether or not it holds will be the real test.
Before bulls could even start to celebrate the breakout of the 200-DMA, another resistance level looms above. From the high in early January, you can draw a perfectly straight line connecting the dots of the subsequent lower highs we have seen this year, and yesterday’s close is the fourth point in that line.
Yesterday’s 3.1% rally was the second-best day of the year for the S&P 500 in terms of performance and the seventh-best breadth reading. At +461 it was still a strong reading but were it not for underperformance in the Energy sector, which accounted for about a third of the 24 stocks in the index that traded lower on the day, breadth would have been even stronger. Yesterday’s +461 reading was also the second all-or-nothing day of the week. That brings the year’s total to 45 and puts 2022 on pace for 49 all-or-nothing days. Already 2022 ranks fourth in terms of the most all-or-nothing days for a calendar year since 1990, but anything above 48 would rank at least third behind 2008 (52) and 2011 (70). In terms of volatility, 2022 ranks right up there with the best of them.
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Nov 30, 2022
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“There is nothing government can give you that it hasn’t taken from you in the first place.” – Winston Churchill
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European stocks are trading higher this morning as inflation in the region came in at a weaker-than-expected 10% y/y. 10%! If that doesn’t sum things up for 2022, we don’t know what does. Economists were forecasting the headline number to come in at 10.4%, but with the m/m reading actually falling 0.1% in November, markets are rallying.
Futures here in the US are also higher on the positive inflation data out of Europe, but there’s still a lot of data on the calendar to contend with starting off with the November ADP Employment report which came in at a weaker-than-expected 127K (estimate 198K). The second read of Q3 GDP, Core PCE, and Personal Consumption will all be released at 8:30, and then at 10 AM, we’ll get the October report on Pending Home Sales. The 8:30 data was just released and came in mixed relative to expectations with GDP revised higher while PCE came in higher than expected. Besides all the economic data, Powell’s speech at the Brookings Institution at 1:30 is likely to be the biggest market mover of the day.
While US stocks are set to end the month of November with modest gains, stocks in Hong Kong have been on a tear as the benchmark Hang Seng index rallied an astonishing 26.62% for its largest monthly gain since October 1998 and just its ninth monthly gain of 25% or more since 1970. As great as this month’s rally in Hong Kong stocks sounds, we would note that since the end of August, the index is still down nearly 7%, and YTD it’s down over 20%. Again, these performance numbers are after you factor in November’s rally. The S&P 500 may only be up 2% this month, but since the end of August, it is actually up fractionally, and YTD it’s not down as much as the Hang Seng.
You’ve likely heard the phrase that big market moves tend to occur during bear markets but in the case of the Hang Seng and monster moves, that hasn’t entirely been the case. The chart below shows Hong Kong’s benchmark index going back to 1970 with red dots indicating every time the index moved 25% or more in a month. Looking at the chart, more of these moves actually tended to occur in the later stages of bull market runs or early on in a rally. What is unique about November’s move is that it is only the second time that the index rallied 25%+ but was still down over the trailing three months. The only other time that occurred was in January 1975 when the Hang Seng rallied more than 28% but was still down nearly 2% over the last three months. It’s a sample size of one, but bulls wouldn’t mind if history repeated itself.
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Nov 29, 2022
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“What I learned is that nothing is given easy to you.” – Christian Pulisic
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Futures were higher earlier this morning, but those gains have been evaporating like morning dew with the sunrise. Reports that China is on the verge of finally starting to relax some of its COVID restrictions helped to contribute to the positive tone in global markets overnight. The catalyst for that sentiment appears to be a story that the CCP is beginning to urge older people to get vaccinated. Reports from other sources suggest that the government will also announce that because current strains of COVID are less virulent, extreme measures to stop the spread can be relaxed. We’ve heard a number of these rumors in recent months only to see the CCP reiterate its strict zero-Covid policy, but these stories seem to have a little bit more momentum behind them.
News of a reopening in China has commodities rallying, and WTI is back to just under $79 per barrel, although the 10-year yield is a couple of basis points lower. The economic calendar is on the light side again today with housing price data at 9 AM Eastern and Consumer Confidence at 10. Over in Europe, inflation data out of Spain and Germany was lower than expected. Down south in Brazil, inflation data came in lower than expected as the y/y rate fell below 6% for the first time since 2019!
Yesterday wasn’t the type of performance that bulls were hoping for coming back from the Thanksgiving weekend holiday. With a decline of 1.54%, it was the S&P 500’s 9th worst post-Thanksgiving Monday performance in the post-WWII period. As disappointing of a day as it was for bulls, the Monday after Thanksgiving typically hasn’t been a very good day for the stock market. Since 1945, the S&P 500’s median performance on the day has been a decline of 0.29% with positive returns just 39% of the time. For comparison, on all trading days since 1945, the S&P 500’s median change has been a gain of 0.05% with positive returns 53% of the time. As demoralizing of a day that it may have been for bulls, one silver lining to Monday’s weakness is that in the nine prior years where the S&P 500 was down 1%+ on the Monday after Thanksgiving, its median performance for the rest of the year was actually better than the median for all other years.
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