Nov 28, 2022
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“Formula for Success- Rise Early, Work Hard, Strike Oil” – J. Paul Getty
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It was a long weekend for most, but it’s now back to the grind for the final five weeks of 2022. After gains for US stocks last week, things are starting off on a down note as widespread protests in China weigh on sentiment and have raised concerns over supply chains for large companies like Apple (AAPL). US futures are down about 0.8% as of this writing, and the 10-year yield is down below 3.7%. The Dallas Fed Manufacturing report is the only report on the calendar today, but it’s a busy week ahead culminating with the November Non-Farm Payrolls report on Friday.
Those protests in China over the government’s strict COVID policies and continued concerns over the prospects for the global economy have crude oil prices down nearly 3% this morning, and that now takes the price of WTI down to its lowest level of the year. Yup, crude oil is down YTD.
Despite the weakness in crude oil, Energy stocks remain well in the black YTD with the Energy sector still up over 70%. That’s nearly 70 percentage points above the next closest sector (Utilities: +1.21%). The ten largest components of the sector are also all well into positive territory for the year with gains in the range of 50% for Pioneer Natural (PXD) to more than 140% for Occidental Petroleum (OXY). When WTI was trading well over $100 per barrel, the bullish case for energy stocks was that these companies would be profitable even if crude oil prices corrected sharply. Now that WTI has corrected by more than 40% from its closing high earlier this year, energy companies may still be profitable at these levels but not by nearly as much as they were just a few months ago.
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Nov 25, 2022
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“If you cannot get rid of the family skeleton, you may as well make it dance.” – George Bernard Shaw
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We hope everyone had an enjoyable Thanksgiving, and if you have the day off today, we hope you enjoy the long weekend. US equity markets are open but for a half session with trading for the week ending at 1 PM Eastern. Futures are mixed on the session so far with the Dow indicated higher and the Nasdaq trading lower. Shares of Apple (AAPL) are down nearly 1% in the pre-market as workers at Foxconn plants in China have been staging protests over pay and working conditions. The company has even had to offer bonuses of up to a month’s pay to employees willing to quit and board buses to go back home.
In terms of data today, there is none to speak of on either the economic or earnings front. European markets are little changed this morning but with a positive bias. Over in Europe, Q3 GDP was slightly stronger than expected, but Consumer Confidence came in weaker than expected and missed expectations for the 9th time in the last ten months.
Through the first three trading days of this week, the S&P 500 was up 1.56%. For a typically positive week, a gain of this magnitude is strong even for Thanksgiving week and ranks as the 13th best week-to-date performance through Wednesday of Thanksgiving week since 1945. As we noted in a post earlier this week, the majority of the gains from Thanksgiving week typically come on Wednesday and Friday. The S&P 500’s median performance on the Friday after Thanksgiving has been a gain of 0.24% with positive returns two-thirds of the time. In years where the S&P 500 was up over 1% on the week heading into Thanksgiving, the median gain was even stronger at 0.36% compared to a gain of just 0.15% on all other Thanksgiving Fridays. Even more notable is the consistency of positive returns. In those weeks where the S&P 500 was up 1%+ in the first three trading days of the week, the S&P 500 traded higher on Friday 87.5% of the time. On all other Thanksgiving Fridays, however, the S&P 500 was higher barely more than half of the time.
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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.
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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