Oct 12, 2022
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“It is well that war is so terrible, or we should grow too fond of it.” – Robert E. Lee
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The big news item of the day will be the September PPI which is being released as we type this, and the results were not all that good. Headline PPI came in at 0.4% versus forecasts for an increase of 0.2%. Core PPI was in line with forecasts at 0.3%. On a y/y basis, the headline reading came in at 8.5% versus forecasts for an increase of 8.4%. Y/Y Core PPI was actually slightly weaker than expected at 7.2% versus forecasts for 7.3%. Futures were higher heading into the print along with US Treasury yields as the 10-year trades back up near 4%, but equities have now given up nearly all of their gains in the immediate aftermath of the report.
Pepsi (PEP) reported better-than-expected earnings and sales and also raised guidance this morning, and the stock is trading 2.5% higher in response. Today is really just the warmup for tomorrow, though, when we’ll get the release of CPI and banks will kick off the Q3 earnings season. In the meantime, keep an eye on the UK as officials there can’t seem to make up their minds on how long they intend to support the gilt market.
With the S&P 500 down five days in a row, the number of down days this year continues to pile up. Through Tuesday’s close, the S&P 500 has traded down on 56.9% of all trading days. That may not sound all that extreme, but since the five-trading day week began in late 1952, this year is currently on pace to have the second-highest percentage of down days in a given calendar year. The only one with a higher percentage of down days was 1974 (58.3%) when the S&P 500 was down 29.7% for the calendar year. Barring a major reversal in Fed policy, which is only taking on an increasingly hawkish stance even as economic activity shows signs of weakness, 2022 could end up in the record books.
Not only has the S&P 500 experienced a large number of down days, but the frequency of big down days has also been at historical extremes. 2022 just took out 1974 for third place in terms of the percentage of down 1% days, trailing only 2008 (29.6%) and 2002 (28.6%). Just as the S&P 500 was down nearly 30% in 1974, 2008 and 2002 were horrible years as well with declines of 38.5% and 23.4%, respectively. If it Ever Went Up, They Wouldn’t Call it Losing
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Oct 11, 2022
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“Sometimes the wheel turns slowly, but it turns.” – Lorne Michaels
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Equity futures were sharply lower this morning but have rebounded sharply in the last hour. There’s no specific catalyst to the move, but the BoE’s expansion of its bond-buying program has certainly helped. The monthly look at small business sentiment from the NFIB came in slightly higher than expected (92.1 vs 91.6) and increased slightly relative to August’s reading. There are no other economic data on the calendar today, but Cleveland Fed president Loretta Mester will be speaking at noon, and remember that in late September she made some rather hawkish comments suggesting that hell or high water wouldn’t deter the Fed from hiking rates to combat inflation.
Between value and growth stocks yesterday, we saw a modest divergence where the S&P 500 Growth ETF (IVW) traded at a new low while the Value ETF (IVE) did not. At face value, that divergence would sound like a negative for growth stocks. Looking at the price charts of each ETF, though, shows that while the growth ETF made a new low yesterday breaking through its September and summer lows, the value ETF had already broken below its summer lows in late September. So yes, value has outperformed over the last few days, but the technical picture for both is lousy.
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Oct 10, 2022
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“For the execution of the journey to the Indies I did not make use of intelligence, mathematics or maps.” – Christopher Columbus
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The bond market is closed today, so at least Treasury yields can’t go up. We wish we could say the same thing about yields across the Atlantic, though, where British gilt yields are all higher and getting back up near their closing highs from less than two weeks ago.
Equity markets are open for trading today, and after opening sharply lower last night, futures have rebounded to move close to the unchanged level. That’s the type of environment we’re in these days when just a modestly negative open to start the day is considered a win. With banks and the treasury market closed for trading, there is no economic data on the calendar today, so expect volumes to be on the light side.
How bad is sentiment out there? In looking through the various Bloomberg headlines this morning, the following three were all out one after the other:
- “Deutsche Bank Strategists See 12% Drop in US EPS Next Year”
- “MS Strategists See Bear Market Continuing Until Earnings Reset”
- “Goldman’s Kostin Sees Strong Dollar as Headwind for US Earnings”
Like the birds overhead, sentiment heading into earnings season has been moving south. Bulls can only hope that sentiment has moved south enough already.
Over the last several years, Columbus Day has seen some extreme market moves. The two best Columbus day performances for the S&P 500 were in 2008 (+11.58%) and 2011 (3.41%), and the one thing both of those years have in common is that they were lousy years for stocks heading into Columbus Day To the downside, the worst Columbus Day performance was in 2014 when the S&P 500 declined 1.65%, and no other year besides 2014 over the last 25 has seen a decline of more than 1%.
While the two best Columbus Days for the S&P 500 came in years when stocks were already down big YTD, there isn’t really much of an inverse correlation between YTD performance and Columbus Day returns. In the seven years over the last 25 when the S&P 500 was down YTD heading into the holiday, the median Columbus Day performance was a gain of 0.13% with positive returns four out of seven times (57%). In the 18 remaining years when stocks were up YTD heading into the holiday, the S&P 500’s median performance on Columbus Day was a gain of 0.05% with gains 10 out of 18 times (56%).
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Oct 7, 2022
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“You never know what those Cumberland players have up their sleeve” – John Heisman
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The above comment was made by coach Heisman during halftime of a game on this day in 1916 when Georgia Tech was beating Cumberland University by a score of 126-0. Bulls are this year’s Cumberland University as financial assets of all types are in the red YTD, and the classic 60/40 portfolio is having its worst year on record. This week, they’ve seen a faint glimmer of hope even as the Fed keeps turning up the heat, but it remains to be seen if they can chip away at the bears’ lead. After taking a 126-point lead at the half, Georgia Tech went on to win 222-0 in what was the most lopsided college football game of all time. The bulls can only hope the next three months don’t play out like the second half of Georgia Tech vs Cumberland and make 2022 one of the most-lopsided years in terms of downside stock market performance.
Today’s employment report isn’t going to help the bull’s cause. While Non-Farm Payrolls only surpassed expectations by 8K (263K vs 255K), the Unemployment Rate came in at 3.5% versus forecasts for an increase to 3.7%. Futures, which were higher heading into the report, have reversed those gains and are now indicated modestly lower.
When the economy was cratering during the early days of COVID, once the Federal Reserve and Congress stepped in with massive stimulus, markets looked right through the weakness and rallied. Two years later, we’ve done a 180. Heading into today’s Non-Farm Payrolls (NFP) report for September, seven of the eight reports for 2022 have come in better than expected. Over the course of these eight reports, the initially reported reading was an average of 133K greater than consensus forecasts. That may not sound like a lot, but prior to COVID, there were only six other NFP reports out of 262 where the actual reported reading exceeded consensus forecasts by more than that amount.
Even as the US employment situation has outperformed expectations this year by an unprecedented margin, stocks haven’t liked it one bit. The table below lists the date of each NFP report this year and summarizes how the initial reading came in relative to expectations along with how the S&P 500 performed on the day (using SPY as a proxy). Of the seven NFP reports that came in better than expected, the S&P 500 gapped lower by an average of 0.48% and finished the day down by an average of 0.55% six out of seven times. The economy may be doing OK, but once again, the market is looking right through it to one of the most aggressive tightening cycles by the Federal Reserve investors have ever seen.
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Oct 6, 2022
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“I hope to let every citizen know what steps he can take without delay to protect his family in case of attack.” – John F. Kennedy
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The focus for the rest of the week will be on jobs and Fedspeak with jobless claims today (higher than expected) and the September jobs report coming out tomorrow. In addition to the hard data, there are at least seven Fed speakers scheduled to speak between now and the end of the trading week. Last night, Atlanta Fed President Raphael Bostic was relatively hawkish when he noted that the fight against inflation was still in its ‘early days’ and sees the Fed Funds rate rising to around 4.5% by the end of the year and then from there the Fed should assess where the economy is heading. The path of a hike to 4% or 4.5% and then a pause (rather than a pivot) from there seems to be the Fed’s ‘plan’ at this point.
Investor sentiment this week improved after the market’s rally but with bullish sentiment still below 24% sentiment remains extremely depressed. There’s still a lot going wrong these days. The prices we’re paying for everything remain higher than we could have ever imagined, relations with China and Russia haven’t been this strained in a generation, a major hurricane just decimated parts of one of the country’s largest states, and by some measures, Americans have never been more miserable. It stinks out there.
But if you think you have it bad now, we’ve been here before, and it’s been even worse. Consider yourself lucky that Joe Biden isn’t on TV or TikTok today with a hammer and nails giving you a step-by-step guide on how to build a bomb shelter in the event of a nuclear attack. That may sound farfetched, but that’s where we were just 51 years ago today when President Kennedy made the comments above in a speech on the threats of an attack. And this was a full year before the Cuban Missile Crisis. The current geo-political backdrop is far from stable these days, but at least we’re not all learning to build bomb shelters in our basements or know at least where the closest Fallout Shelter is. Some of you out there may even remember firsthand or through stories from your parents of drills where they would get under their desks in order to protect themselves from nuclear fallout. A lot of good that would have done.
What a difference a few days can make in the markets. Equities around the world are gingerly easing themselves out of the bunker from weeks of declines that brought them into oversold territory. Just over a week ago, on September 27th, every regional equity ETF with the exception of the Latin America ETF (ILF) that we track in our Trend Analyzer tool was in extreme oversold territory, and all but two had been down at least 5% over the prior five trading days. Six were even down over 7%.
Fast forward to the present and every one of these same ETFs has now notched gains over the last week and each one of them has moved out of ‘extreme’ oversold territory. They’re still oversold and only ILF is not down by double-digit percentages YTD, but you have to start somewhere. As we noted in Wednesday’s quote of the day, “When nobody wants something, that creates an opportunity.” Nobody wanted anything to do with stocks – or for that matter, any other asset – as the third quarter ended last week. Investors have hardly fallen back in love with equities again, but they left a pillow on the couch and the back door unlocked.
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Oct 5, 2022
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“When nobody wants something, that creates an opportunity.” – Carl Icahn
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Equity futures are giving back much of yesterday afternoon’s gains and treasury yields are higher as markets reverse some, but certainly not all, of the moves from the last two trading days. ADP Private Payrolls increased 208K in September which was slightly above the consensus forecast of 200K. Oil is down marginally today ahead of an expected production cut announcement today, but crude rallied over 8% to start the week in anticipation of today’s decision. Overnight and this morning, we’ve seen the release of Services PMIs for a number of countries, and the general trend was of sequential declines suggesting that economic momentum continues to wane.
The S&P 500 rallied 5.7% in the first two trading days of the week, and while large, moves of this magnitude haven’t been unprecedented, and looking back over the last 50 years, there have been more than 30 other two-day rallies of 5%+. This week’s move was the largest since April 2020 and we saw a number of similar moves in the weeks coming off the COVID lows. Between those occurrences and the Financial Crisis, there was one occurrence in late 2018 and another in August 2015.
The red dots in the chart below indicate every prior day where the two-day trailing return of the S&P 500 was 5% or more. In recent years, a number of these occurrences came right or near market lows, but over the longer term, they have sprung up in all sorts of market environments like near market tops, early in a downturn, near market lows, or in the early stages of new bull markets. In other words, their level of significance is debatable.
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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