Dec 16, 2024
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“Abnormally good or abnormally bad conditions do not last forever.” – Benjamin Graham
Below is a snippet of commentary from today’s Morning Lineup. Start a two-week trial to Bespoke Premium to view the full report.
It’s been a weak start to the week for global equities in Asia and Europe. In Asia, Retail Sales in China came in weaker than expected while Industrial Production was in line with estimates. In response to the data, Chinese 10-year yields made another new low while policymakers hint at fiscal and monetary moves to help break the rut in the Chinese economy. European stocks are currently modestly lower in response to weaker-than-expected flash manufacturing reports and a Moody’s downgrade of France.
While international markets are lower, US futures remain undeterred with S&P 500 futures trading up by about 0.2% while Nasdaq futures are up by twice that amount. The only economic reports on the calendar this morning are Empire Manufacturing which is expected to pull back from November’s surge and flash PMI readings for the Manufacturing and Services sectors. The big event of the week will be Wednesday’s Fed decision. While a 25 bps cut is all but certain, the market will be intently focused on the statement, revised economic expectations, and Powell’s press conference. With inflation proving to be stickier than most would like, a ‘hawkish cut’ has become increasingly priced in.
Abnormally bad may be a good way to describe the performance of value stocks to start December. The chart below shows the performance of the S&P 500 Value (IVE) and S&P 500 Growth (IVW) ETFs over the last year. While the S&P 500 Value ETF has seen its share of ups and downs within a longer-term uptrend over the last year, December has been consistently weak with ten straight days where it has closed lower than it opened.
As shown above, while value has been consistently weak, growth has rallied to new highs powered by mega-cap tech stocks. As a result of the divergent performances between the two styles, the S&P 500 Value ETF has declined 4.0% over the last ten trading days while the S&P 500 Growth ETF has rallied 3.4%. The chart below shows the 10-day performance spread between the two ETFs since their inception in mid-2000.
Over the last four years, there have been other periods when large-cap value stocks significantly underperformed growth while large-cap growth significantly underperformed at other times. There were other periods of elevated volatility between the two styles around the dotcom peak and during the Financial Crisis, but neither lasted anywhere as close to long as the current period. The term has been thrown around often in the last decade or longer, but is this era of elevated volatility between the performance of the two investment styles a new normal?
Even with the wide swings in performance spread of Value and Growth, the current spread is extreme relative to recent history as there have been only a few times when the spread was this wide, and they have all occurred in the post-Covid period (mid-2020, March 2022, and June 2024).
Dec 13, 2024
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“In general, things either work out or they don’t, and if they don’t, you figure out something else, a plan B.” – Dick Van Dyke
Below is a snippet of commentary from today’s Morning Lineup. Start a two-week trial to Bespoke Premium to view the full report.
gain of 0.40% with positive returns just under 62% of the time!
Before you go out and buy everything this morning, though, there’s a big caveat to that average; one of the better market days on record occurred on March 13th, 2020 when the S&P 500 rallied 9.3%! If you take that out, the average S&P 500 performance on Friday the 13th falls by more than half to 0.15%. Still not terrible, though.
The chart below shows the S&P 500’s performance on each individual Friday the 13th since 1999. Big downside moves on Friday the 13th have been uncommon with just three days out of 42 where the S&P 500 fell more than 1% (December 2002, April 2012, and November 2015) while there have been seven days that rallied more than 1%. Who knows? Since Friday the 13th historically hasn’t been that unlucky for the market, maybe we’ll finally get a day of positive breadth!
Dec 12, 2024
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“You only live once, and the way I live, once is enough.” – Frank Sinatra
Below is a snippet of commentary from today’s Morning Lineup. Start a two-week trial to Bespoke Premium to view the full report.
Heading into today’s PPI report, US equity futures took a breather after yesterday’s rally. While S&P 500 futures were just marginally lower, Nasdaq futures were down by a more sizable amount, indicating a decline of nearly 0.5%. Yields are up by a couple of basis points across the curve, crude oil is back above $70, and Bitcoin has held above $100K overnight for now at least.
The just-released November PPI came in hotter than expected at the headline level (0.4% vs 0.2%) and October’s reading was revised up from 0.2% to 0.3%. Ex food and energy, producer prices were inline with forecasts at 0.2%. While inflation data was on the hot side, jobless claims were weak. Initial claims spiked up to 242K versus forecasts for a reading of 220K while continuing claims also came in 9K higher than expected at 1.886 million. In response to the data, equity futures added modestly to their pre-market losses while yields erased most of their morning increases.
The Nasdaq broke out to a record high yesterday, and the S&P 500 finished within one-tenth of a percentage point shy of hitting its 58th record closing high this year, and the S&P 500 is up 27.5% for the year. With numbers like these, you can’t fault investors for being optimistic about the stock market. By just about every sentiment measure out there, investors have embraced the bull market, but many of the indicators we track seem somewhat restrained relative to the magnitude of the market’s gains.
Take the weekly sentiment survey from the American Association of Individual Investors (AAII). In the latest update this week, bullish sentiment declined from 48.3% to 43.3%. Bulls still outnumber bears by over ten percentage points, but current levels are hardly extreme, and the weekly reading has been higher on just over 20% of all other weekly readings since the start of 2009.
Taking a closer look at bullish sentiment during the current bull market, the peak sentiment reading was just under a year ago on 12/21/23 when bullish sentiment reached 52.9%. Back in July shortly before the August pullback, bullish sentiment got close to that December reading reaching a level of 52.7%. Since then, bullish sentiment has been gradually trending lower with multiple lower highs and lower lows.
One reason sentiment has remained contained lies in the fact that breadth has been incredibly weak in recent days. As noted yesterday, the S&P 500’s daily breadth reading has been negative for eight straight trading days. Just over the last five trading days, the S&P 500 is essentially unchanged (-0.03%), but nine out of eleven sectors are lower with five down over 2%! Not exactly what you would associate with a year-end rally.
Dec 11, 2024
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“I certainly wouldn’t invest in the stock market. I never believed in it. Most people lose money because of the emotional difficulty involved.” – Bernie Madoff
Below is a snippet of commentary from today’s Morning Lineup. Start a two-week trial to Bespoke Premium to view the full report.
Equity futures and international markets were little changed headed into the November CPI report. The STOXX 600 was unchanged, and overnight the Nikkei was also unchanged. The CPI report continued the narrative that inflation remains sticky, but it wasn’t any worse than expected. For both the headline and core readings, the m/m and y/y readings were right in line with expectations. At 3.3% y/y, though, core CPI remains too high for the Fed’s liking. The lack of any upside surprises, though, has provided a boost to pre-market futures, bond yields have pulled back slightly, and Bitcoin has gotten a bump higher. The fact that the numbers were right in line with expectations, though, all but locks in a rate cut at next week’s meeting.
Remember when CPI reports were the only thing the market cared about? Back in late 2022 and early 2023 right in the middle of the Fed’s rate hiking cycle, the monthly release of CPI was to economists and traders what a Taylor Swift concert was to teenage and twenty-something girls (and a lot of other people). It was an event, and the S&P 500 regularly rallied or declined 1% or more in reaction to the monthly “drop”. As shown in the chart below, in late 2022 and early 2023, the 12-month average daily change in the S&P 500 on the day of CPI reports was a gain or loss of just under 2%. Dating back to the turn of the century, the only other time that market reactions to CPI reports were more volatile was during the financial crisis, but that was a period when overall volatility was a lot higher too, so moves of more than 1% were the norm on any day during that period.
As inflation data has become less ‘exciting’, the market’s infatuation with it has subsided. As shown in the chart below, the average daily change of the S&P 500 on CPI days has plummeted below the long-term average of 0.86% down to 0.71%.
The S&P 500’s daily change on CPI days since the start of 2022 when the Fed’s last rate hiking cycle kicked off, shows the declining importance of CPI data on the market. Over the previous six months, there has only been one month where the S&P 500 moved 1% on a CPI Day, and following last month’s report, the S&P 500 finished the day unchanged rising by just 0.02% or 2 basis points (bps). That was the smallest daily move on a CPI Day since 2019 and was a far cry from two years earlier when the S&P 500 rallied 5.54% in reaction to the October 2022 report which was the largest upside move in reaction to a CPI report since 2008 and the third largest since 1999.
One reason for the more muted reactions to recent CPI reports is that the data has become more behaved and less ‘exciting’. Whether that changes or not remains to be seen, but the recent stickiness of Core CPI relative to headline has economists speculating that there could be a second act.
Dec 10, 2024
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“Having faith is believing in something you just know ain’t true.”– Mark Twain
Below is a snippet of commentary from today’s Morning Lineup. Start a two-week trial to Bespoke Premium to view the full report.
Equity futures are mixed this morning with the Dow trading slightly lower while the S&P 500 and Nasdaq futures along with Treasury yields, crude oil, gold, and bitcoin are all modestly higher. In terms of economic news, NFIB’s index of small business optimism saw a monster surge and rose to a 3+ year high in the wake of November’s election. Unit Labor costs for Q3 came in much lower than expected (0.8% vs 1.9% forecast) and Q3 Productivity was inline with forecasts at 2.2%.
Yesterday was a rough day for US stocks relative to the post-election period. With a decline of 0.61%, the only day worse since the election was on 11/15 when the S&P 500 fell 1.32%. In a post yesterday, we noted that the biggest losers of the day were the stocks that had the biggest YTD gains, and that can be seen in the performance of the Momentum ETF (MTUM) which fell 2.13% for its worst one-day decline since the election. Even after the relatively large drop yesterday, the MTUM ETF still managed to hang onto to its uptrend from the summer lows and also remains comfortably above its 50-DMA.
At the sector level yesterday, performance was essentially the opposite of sectors’ direction in the month after the election. As shown in the table and chart below, four of the five best-performing sectors from the election through Friday – Communication Services, Financials, Technology, and Industrials – were also four of the five worst-performing sectors yesterday. Similarly, the only three sectors down in the post-election period through last Friday – Health Care, Materials, and Real Estate – were the only three sectors to trade higher yesterday. The only major exception to yesterday’s reversal theme was Consumer Discretionary (XLY). While it was the best-performing sector ETF after the election through Friday, it only saw a modest decline yesterday.
Turning to individual stocks, the table and chart show the 20 best-performing stocks in the S&P 500 from 11/5 through 12/6 along with their performance yesterday. In the post-election period, these 20 stocks were up an average of 30.3%, and all but one was up at least 20%. Yesterday, though, was not nearly as positive. As shown, 13 of the 20 stocks were down on the day, and the average performance of all 20 stocks for the day was a decline of 1.8% or three times the decline of the S&P 500.
Dec 9, 2024
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“I’ve got an old saying: at the poker table, you’ve got to pay to learn. You can talk all you want, but you’ve got to get in the game.” – Steve Cohen
Below is a snippet of commentary from today’s Morning Lineup. Start a two-week trial to Bespoke Premium to view the full report.
Even though the S&P traded higher on four of five trading days last week and finished the week up nearly 1%, the index saw more decliners than advancers (negative breadth) on all five trading days. Fortunately, the index had a streak of seven straight days of positive breadth heading into last week, so maybe it was just downside mean reversion, but we’ll be watching breadth closely over the next few days.
As shown below, eight sectors fell more than 1% last week, while three sectors gained more than 2%. Last week was a mega-cap AI-led rally, while pretty much everything else traded lower.
