Feb 8, 2024
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“I don’t play small. You have to go out and play with what you have. I admit I used to want to be tall. But I made it in high school, college, and now the pros. So it doesn’t matter.” – Spud Webb
Below is a snippet of commentary from today’s Morning Lineup. Start a two-week trial to Bespoke Premium to view the full report.
After getting within pennies of 5,000 yesterday, will today be the day? Futures are mixed this morning, but the changes are small on either side of the unchanged line. The only economic data on the calendar was jobless claims, and both initial and continuing claims came in slightly lower than expected. Like equities, treasury yields are little changed, but the bias is to the upside. Outside of the US, international markets are biased to the upside, and Japan rallied over 2% following some dovish commentary from the BoJ deputy governor suggesting that he doesn’t see a path of continuous rate hikes.
Before the NFL Season stretched out until mid-February, the NBA All-Star game used to take place in late January to early February (it’s now been pushed out to the second half of the month with this year’s scheduled for 2/18). One of the most exciting aspects of All-Star weekend for a lot of kids was the slam dunk contest where the tallest and most athletic players would show off their skills on an undefended rim (you could argue that defense doesn’t exist for the whole weekend, but that’s another story). Depending on when you grew up, you probably remember MJ going airborne from the foul line flying through the air to the rim, and finishing it off one-handed. For younger fans, maybe it was Zach Lavine in 2016 going through his legs while in the air.
But back on this day 38 years ago in 1986, the unlikeliest of contestants, one Spud Webb, who clocked in at 5 feet, 7 inches (generously) stunned the crowd to win. Going against players over a foot taller, including his teammate Dominique Wilkins, Webb wowed the crowd with a 360-degree midair jam to bring the trophy home.
If only small caps could get some inspiration from Spud Webb. Over the last five weeks, the Russell 2000 has underperformed the S&P 100 (largest stocks in the S&P 500) by over ten percentage points, a margin of underperformance that has only been exceeded in a few periods. That said, it was less than two months ago that the Russell 2000 had outperformed the S&P 100 by more than ten percentage points in the prior five weeks. Given the gyrations in performance between the two indices in the post-COVID period, there’s been a lot of indecision on the part of investors, although the bias has been to mega-caps.
From a longer-term perspective, the Russell 2000 has been in a consistent period of underperformance relative to the S&P 100 for ten years now, and the ratio of the prices of the two indices is down to its lowest level in 20 years. As long as this period of underperformance has been, though, from the mid-1980s through 1999, small caps pretty consistently underperformed mega caps for a period of nearly 16 years.
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Feb 7, 2024
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“If your work is so smart that only smart people get it, it’s not that smart.” – Chris Rock
Below is a snippet of commentary from today’s Morning Lineup. Start a two-week trial to Bespoke Premium to view the full report.
US equity futures were flat to modestly lower up until about an hour ago, but have seen a nice bounce, and all three major US indices are indicated to open higher on the day. Once again, there’s not much economic data to steer futures, and the pace of earnings since yesterday’s close has been mixed. On the upside, Ford (F) has been one of the bigger winners as it trades 5% higher after better-than-expected earnings and announcing a special dividend of 18 cents per share. To the downside, shares of Snap (SNAP) have lost nearly a third of their value this morning following a weaker-than-expected report, putting the stock on pace to fall in reaction to earnings for seven straight quarters.
In international markets, it was a mixed session in Asia overnight as Japan saw a stronger-than-expected report on Leading Indicators. Europe has taken a modestly negative tone in early trading as most major indices in the region trade down fractionally. In Germany, Industrial Production fell more than expected while a payrolls report in France was slightly better than expected.
After Tuesday’s rally in mainland China, the KraneShares CSI China Internet ETF (KWEB) had its best day since last July as it rallied 6.7%. Investors were excited about the prospects for a major round of stimulus from the Chinese government to prop up its stock market and economy, but it’s important to realize that there have been more than a few false alarms over the last few years. Already this morning, KWEB reversed some of yesterday’s gains with a decline of over 2% in the pre-market.
The chart below shows the performance of KWEB since its inception in 2013, and the red dots indicate each time the ETF rallied more than 5% in a single day. It’s easy to see that there have been a lot more occurrences since the ETF’s peak in February 2021 than before it. Of the 58 occurrences in the ETF’s history, 42 (72%) have been in the last three years.
After big rallies in a bear market like Tuesday, it’s tempting to think that it’s the start of something bigger, but in KWEB’s case, it has not. We saw a similar dynamic at play in the US during the dot-com bust and then during the financial crisis where the response to every big move was “Is this it?” Eventually, one of the rallies does take hold, but there are a lot of false alarms along the way. In KWEB’s case, Tuesday’s rally only took the ETF back to where it was less than two weeks ago.
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Feb 6, 2024
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“Government is like a baby: an alimentary canal with a big appetite at one end and no sense of responsibility at the other.” – Ronald Reagan
Below is a snippet of commentary from today’s Morning Lineup. Start a two-week trial to Bespoke Premium to view the full report.
Across the S&P 500, Nasdaq, and Dow this morning, futures are pointing to modest losses with all three indices trading down 0.12% as of this writing. True to form, though, the Russell 2000 is down more than triple that at 0.37%. Outside of the US, European stocks are modestly higher, and Chinese stocks surged on hopes for more government support. The economic calendar in the US is light today as it will be for most of the week.
Today would have marked the 113th birthday of former president Ronald Reagan, and besides being the leader of the free world for eight years, Reagan’s acting career was highlighted by his role in Knute Rockne – All American, where he played George Gipp. Knute Rockne was the coach of football at Notre Dame and was famous for his ”Win One for the Gipper Speech” which he gave at halftime in a game against Army at Yankee Stadium in 1928. The team was having a terrible season and living up to their Fighting Irish nickname they were not. Inspired by the pep talk, Notre Dame came out and scored two second-half touchdowns to stun Army by a score of 12-6. If there’s any part of the market that could use a Rockne boost right about now, it’s small caps.
Well maybe not just small caps. Just when you thought it was safe to get back in the 60/40 pool, long-term US treasuries have found themselves getting bombarded in 2024. Year to date, the iShares 20+ Year US Treasury ETF (TLT) is already down over 4%. Long-term treasuries sold off throughout just about all of January, and while they rallied in the last days of January and to kick off February to get back to even, the two trading days since last Friday’s employment report have been painful. TLT has experienced back-to-back declines of over 2%, taking it back below both its 50 and 200-day moving averages and perilously close to breaking the loose uptrend that emerged from the October lows.
Consecutive declines of over 2% hurt no matter what the asset class, but the sting of two declines of that magnitude for treasuries hits hard. Since TLT started trading in late 2002, there have only been two other periods where the ETF experienced back-to-back 2% declines, and they occurred at the two most volatile periods of trading in the last two decades – late in the Financial Crisis (January 2009) and within days of the Covid lows. As everyone remembers, those two prior periods both ended up being massive buying opportunities for the equity market, but they also occurred after very large declines in stocks. Right now, the S&P 500 is within half of one percent of an all-time high. Extreme volatility in the treasury market with the VIX under 14? You don’t see that often, but then again, there’s a lot that has happened in the last four years that wouldn’t get filed in the normal folder.
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Feb 5, 2024
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“It doesn’t need to be better than what we’ve seen, or even as good. It just needs to be good.” – Jerome Powell
Below is a snippet of commentary from today’s Morning Lineup. Start a two-week trial to Bespoke Premium to view the full report.
After hitting record highs last week, sentiment in the equity market is a bit more subdued this morning as the major averages are all indicated to open modestly lower even as futures are off their overnight lows. Oil prices are lower while bond yields are higher. The only economic data on the calendar are PMIs for the services sector, and the rest of the week will be quiet on that front. We’re also past the peak of earnings season, but the pace will still be brisk. Already this morning, we have seen some notable reports from Caterpillar (CAT) and McDonald’s (MCD). Air Products (APD) is the only one of the major companies reporting that missed EPS forecasts, but the top-line results have been more mixed relative to expectations.
In his 60 Minutes interview on Sunday (taped on Thursday), Fed Chair Powell didn’t make any new headlines relative to his post-Fed meeting comments last Wednesday. He reiterated the stance that the FOMC would likely not be cutting rates at its March meeting by saying “it’s not likely that this committee will reach that level of confidence in time for the March meeting, which is in seven weeks.” But he also reiterated that getting to 2% inflation isn’t a pre-requisite for cutting rates: “I’ve said that we wouldn’t wait to get to 2% to cut rates. In fact, you know, we’re actively considering now going forward cutting rates, and on a 12-month basis inflation, you know, is not at 2%. It’s between 2-3%.” Those comments along with his statement on Wednesday that he repeated in the quote at the top suggest that as long as inflation data comes in as it has been or better, the Fed will be cutting rates by the summer. Powell may not have “seen his shadow” last week, but rate cuts are still coming, it’s just going to be later rather than earlier.
While there was nothing new in his comments in Sunday’s interview, market pricing for the number of rate cuts between now and the end of the year is more modest now than it was last week before Friday’s January employment report. The chart below shows the number of 25 bps cuts that the Fed Funds market had priced in at various points this year before last week’s meeting, after the meeting, and now this morning. After last week’s meeting when Powell took March off the table, the number of cuts priced in for that meeting declined, but at the margin, they increased for every other meeting from May through December. After investors have had a weekend to sleep on it and see Powell’s 60 Minutes comments plus a speech from Fed Governor Michelle Bowman on Friday, the number of cuts priced in has declined significantly for every meeting between now and December.
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Feb 2, 2024
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“Nobody goes there anymore. It’s too crowded.” – Yogi Berra
Below is a snippet of commentary from today’s Morning Lineup. Start a two-week trial to Bespoke Premium to view the full report.
If Yogi Berra were alive today, we could only imagine how he would describe Meta Platforms (META). While the company owns the apps that everybody loves to hate, not only are most people on it, but thanks to AI-enhanced algorithms, they’re spending more time on them than ever. The result is a record high in META’s stock price and an overnight increase in its market cap of $170 billion. According to Bloomberg, that would rank as the fifth largest one-day gain in market cap for a single company on record. Can you imagine where META would be if people “liked” the product?
Turning to the rest of the market, futures were sharply higher on the back of earnings from META and Amazon.com (AMZN) overnight, while a 2.5% decline in Apple (AAPL) keeps the gains in check. All in, the S&P 500 was indicated to open up by about 0.7% while the Nasdaq was up over 1% as each index erased its declines from the mid-week “Fed-induced” decline.
Almost lost in the shuffle of all the earnings news after the close yesterday and this morning is this morning’s employment report for January. If you thought the results relative to expectations of AMZN and META knocked the cover off the ball, you may want to sit down for this one. Non-farm payrolls showed a monster increase of 353K relative to forecasts for a gain of just 185K, and the last two months were also revised higher. Average hourly earnings doubled expectations (0.6% vs 0.3%), and the Unemployment Rate came in at 3.7% versus 3.8%. The only negative in the report was average hourly earnings which dropped to 34.1 hours from 34.3 last month. This was a very strong report and will put the idea of good news being good news for the market to the test. The immediate reaction in equity futures was a decline as the Dow dipped into the red, while the gains in the S&P 500 and the Nasdaq were more than cut in half.
META’s 15%+ pre-market rally has the stock on pace to have its fifth-best day in reaction to earnings since the IPO in 2012. It will also be the ninth time that the stock rallied at least 10% on an earnings reaction day. A big question for traders is whether the stock tends to build on these gains after gapping up so much or does it give back some of the gains.
The chart below compares the relationship between META’s performance on its earnings reaction day versus its performance from that day up until its next earnings report. When the stock was down on its earnings reaction day or up less than 10% (non-shaded area in chart), its median performance up until its next earnings report was a gain of 5.8% compared to the 10.2% forward performance following the eight days when the stock rallied more than 10% on its earnings reaction day. History is never guaranteed to repeat itself, but when META rallied by double-digit percentages in reaction to earnings it tended to keep the rally going moving forward.
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Feb 1, 2024
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“Alexander Hamilton started the U.S. Treasury with nothing, and that was the closest our country has ever been to being even.” – Will Rogers
Below is a snippet of commentary from today’s Morning Lineup. Start a two-week trial to Bespoke Premium to view the full report.
Futures are higher this morning as investors look to regroup following yesterday’s FOMC meeting and Powell’s press conference which pooh-poohed the possibility of a March cut. The S&P 500 finished the day down over 1.5% in what was the worst day in four months. Powell gets much of the blame for the decline, but equities were already firmly in the red leading up to the announcement, and the market was also trading at overbought levels. Powell didn’t help, but what he said wasn’t exactly a major surprise. Just the fact that the chair was openly talking about rate cuts being a matter of when rather than if is a stark difference from the last two years.
The tone right now is positive, but if you think Tuesday was a seminal moment in the earnings season, today promises to be even bigger with Apple (AAPL), Amazon (AMZN), and Meta (META) being just three of the dozens of companies reporting after the close.
On the economic calendar, Jobless Claims, Unit Labor Costs, and Non-Farm Productivity were all just released, and later we’ll get Construction Spending as well as the S&P and ISM Manufacturing PMIs. Non-Farm Productivity came in stronger than expected (3.2% vs 2.5%) while Unit Labor Costs were weaker than forecasts (0.5% vs 1.2%). Jobless claims weren’t particularly good as both initial and continuing claims came in higher than expected and at their highest levels since November. Expectations for the PMIs aren’t particularly positive, and based on the regional Fed Manufacturing reports we got throughout the month, we’ll be lucky to even get an inline reading.
What had been a very strong first month of the year turned into a more modest one as Fed Chair Powell successfully let some of the air out of the market balloon in his press conference yesterday. When the dust settled, the S&P 500 finished January up 1.7% on a total return basis after being up well over 3% heading into yesterday’s session.
On a y/y basis, the S&P 500 is still up over 20% on a total return basis which is nine full percentage points above the long-term historical average of 11.8% ranking the last year in the 69th percentile relative to all one-year periods. While one-year returns have been very strong, two-year returns have been the complete opposite. At 5.3% annualized, the S&P 500’s two-year performance ranks in just the 28th percentile relative to all other two-year periods. Looking further out, both five and ten-year annualized returns have been above the historical norm while 20-year returns are still below their long-term average.
Long-term US Treasuries are a completely different story. Based on returns of the BofA/Merrill 10+ Year US Treasury Index, long-term treasuries were down 1.65%. You may recall that in December treasuries ended a 34-month streak of negative 12-month returns, but January’s weakness moved the one-year returns back below zero. As shown in the chart below, annualized returns over the last one, two, and five years are all negative. On a 10 and 20-year basis, returns are positive, but they are still well below their historical long-term average, and for all periods except the last year, current returns rank in the 3rd percentile or below relative to all other periods. Calling the last decade a dark age for bonds wouldn’t be an understatement.
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