Jan 31, 2024
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“The function of socialism is to raise suffering to a higher level.” – Norman Mailer
Below is a snippet of commentary from today’s Morning Lineup. Start a two-week trial to Bespoke Premium to view the full report.
January often seems like the longest month of the year, but it’s hard to believe it’s already winding down. What’s been a strong month for equities so far looks to be going out on a sour note as earnings from mega-caps like Alphabet (GOOGL), Microsoft (MSFT), and Tesla (TSLA) haven’t impressed investors. Based on today’s pre-market levels, all three stocks have traded down in reaction to their earnings reports. That leaves Apple (AAPL), Amazon.com (AMZN), and Meta (META) on Thursday as the last chances to salvage something from the mega-cap space this earnings season (NVIDIA doesn’t report until late February).
On the economic calendar today, the ADP Employment report for January missed forecasts coming in at a level of 107K compared to forecasts for an increase of 150K. The Employment Cost Index was also just released and showed a smaller-than-expected increase of 0.9% compared to forecasts for growth of 1.0%. The only other report on the calendar for the day is the Chicago PMI at 9:45 which is expected to modestly increase from 46.9 to 48.0. But the most important event of the day is the FOMC’s rate decision at 2 PM, and given expectations for no change in rates, every word of Powell’s press conference thirty minutes later will be dissected down to each syllable.
As mentioned above, the first of the mega caps to report haven’t impressed investors so far this earnings season. Earnings reports are just one day in a quarter, though. While a positive stock price reaction to an earnings report can be nice, it’s only a small part of the picture.
Look at the chart of GOOGL below. With the stock trading down over 5% in the pre-market, it is now on pace to have its fifth negative earnings reaction day in the last six quarters. To put that in perspective, if you had purchased the stock at the close on the day of its earnings report and only held it through the close on its earnings reaction day, you’d be down just over 21% on these six trading days alone. Over the entire period and including these six days, though, GOOGL’s cumulative performance has been a gain of over 51%. Again, not only is a stock’s performance on its earnings reaction day a small part of a bigger picture, but it can also be wildly inaccurate.
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Jan 30, 2024
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“No man can tame a tiger into a kitten by stroking it.” – Dick Cheney, born 1/30/1941
Below is a snippet of commentary from today’s Morning Lineup. Start a two-week trial to Bespoke Premium to view the full report.
There’s been a weakening tone in the futures market all morning, but the pace of decline remains relatively small with the S&P 500 indicated to open down less than 0.25%. At the same time, the Nasdaq is down even less. The pace of earnings has picked up substantially, and we’re starting to see a lot of big winners and losers in pre-market trading. Tech-related stocks are reporting some strong numbers while results from more industrial-oriented firms have been weaker. There have been exceptions in each case, but that has been the overall trend. Will it continue through the close this evening when Microsoft (MSFT) and Alphabet (GOOGL) report after the bell? That’s the 5 trillion dollar question!
On the economic calendar, Case Shiller Home Price numbers will be released at 9 AM while Consumer Confidence and JOLTS will hit the wires at 10 AM.
Dallas Fed Manufacturing report. Huge miss.
KC Manufacturing. Miss
Richmond Fed Manufacturing. Miss
Philadelphia Fed Manufacturing. Miss
Empire Manufacturing. Huger than huge miss.
In case you hadn’t noticed, this month’s regional Fed manufacturing reports were a big disappointment not only on an absolute level but also relative to expectations. Not only were all five reports negative (indicating contraction) but they were also all weaker than expected. As we noted in a post yesterday, going back to 2011, the collective magnitude of the misses of the five reports was the third largest on record trailing only the months of December 2018 and March 2020.
Going back to 2012, when data and consensus expectations for all five regional Fed manufacturing indices are available, January was only the fourth time that all five reports were negative and weaker than expected. As indicated in the chart below, the other occurrences were in October 2012, September 2015, and February 2016. While these three months all occurred in the contact of a period of slack in the manufacturing sector, none of them were indicative of recessions, and forward returns for the S&P 500 were positive.
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Jan 29, 2024
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“Believe nothing you hear, and only one half that you see.” – Edgar Allan Poe
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 little changed and crude oil is modestly lower to start the week which is a bit of a surprise given the Iranian-backed militia attacks on a US military base that killed three and injured dozens. The calendar is light to kick off the week, but it will be the busiest week of earnings so far this earnings season, and we’ll get the Fed decision on interest rates on Wednesday. As if that wasn’t enough, on Thursday we’ll get the January read on manufacturing from the ISM, and Friday will cap things off with the Non-Farm Payrolls report.
Friday’s modest losses ended a streak of six straight daily gains of which five were record highs. Since bottoming out at extreme oversold levels back in October, the S&P 500 hasn’t skipped a beat, and since that low hasn’t seen a pullback of even 2% on a closing basis. During last week’s winning streak, the S&P 500 got close but never quite reached extreme overbought levels (2+ standard deviations above the 50-day moving average).
The Russell 2000 has been an entirely different story. It outperformed during last fall’s rally but ran into profit-taking as the calendar turned to 2024. While the S&P 500 hasn’t even pulled back 2%, the Russell experienced a peak-to-trough decline of over 7% on a closing basis before bouncing at support just above its 50-day moving average. Over the last four days, though, there has been a lot of indecision at a key level representing the highs from February and July last year. With a busy week of earnings and a Fed meeting later this week, we should soon get a good idea of which way small caps will break.
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Jan 26, 2024
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“You have to work hard in the dark to shine in the light” – Kobe Bryant
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 was looking like a rough end to the week late last night and into this morning as futures dipped following some weak earnings after the close yesterday from the likes of Intel (INTC), KLA-Tencor (KLAC), and Visa (V), but it started to show some improvement as Europe opened for trading. Right now, S&P 500 and Dow futures are flat to slightly lower, while Nasdaq futures are a bit further below the flatline due to the 10% pre-market decline in shares of Intel (INTC). In the energy space, crude oil is down about 1% after a rally stalled out at its 200-DMA yesterday.
The week’s last batch of economic data included Personal Income and Personal Spending, PCE Deflator (all at 8:30), and Pending Home Sales at 10 AM. Personal Income was right in line with estimates (0.3%), and Personal Spending came in stronger than expected (0.7% vs 0.5%). On the inflation front, the headline PCE Deflator was right in line with forecasts on a m/m and y/y basis. On a core level, the m/m reading was inline (0.2%), but the y/y reading was better than expected, falling to 2.9% versus forecasts for an increase of 3.0%. Net net, this data continues to a backdrop of growth with receding inflation.
Heading into the last four trading days of January, the S&P 500 is up 2.6% YTD which is the strongest start to a year since…last year when the S&P 500 rallied over 5% at this point in the year. In the charts below, we summarize the performance of the S&P 500 during the last four trading days of January since 1953 (which is the first full year of the NYSE five-trading day week in its current form). As shown, in years in which the S&P 500 was down over 2%, median returns for the rest of the month were a gain of 0.14% with positive returns 55% of the time. In the 11 years when the S&P 500 was down less than 2%, the median return in the last four trading days was a decline of 0.27% with gains just 36% of the time. In the years when the S&P 500 was positive to start the year, though, January tended to finish off the month on a more positive note with gains over two-thirds of the time.
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Jan 25, 2024
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“No pressure, no diamonds.” – Thomas Carlyle
Below is a snippet of commentary from today’s Morning Lineup. Start a two-week trial to Bespoke Premium to view the full report.
The market is currently digesting the economic equivalent of a Thanksgiving dinner in terms of the sheer quantity of reports. Like Thanksgiving, most of the platters were good. Headline GDP came in much higher than expected, inflation readings were in line with or better than forecasts, and Durable Goods were weaker than expected at the headline level but stronger after stripping out transportation. The only “yams” on the table were jobless claims, but even they weren’t that bad as both initial and continuing jobless claims came in only modestly higher than forecasts. In reaction to the reports, futures have rallied as the S&P 500 is indicated to open up by about 35 basis points versus just modest gains ahead of the data.
119 years ago today, in a mine 18 feet underground, workers came across what was and still is the largest diamond ever discovered. Weighing in at 1.33 points, the 3,106-carat Cullinan diamond was immediately sold to the local government who then gifted it to Britain’s King Edward VII. The stone was ultimately cut into nine major stones (the Cullinan IX) and dozens of smaller ones, but the two largest, at 530 and 317 carats, respectively, remain on display in the Tower of London along with the other crown jewels.
The equity market’s version of the Cullinan IX is the Magnificent Seven, and while TSLA has had some trouble of late, the remaining “Cullinan Six” of Apple (AAPL), Microsoft (MSFT), Alphabet (GOOGL), Amazon.com (AMZN), Nvidia (NVDA), and Meta Platforms (META) have continued to hum. Through yesterday’s close, the stocks were collectively 22.5% above their 200-day moving averages (DMA) with AAPL the closest at 7.1% and NVDA a seemingly outrageous 43.3% above its 200-DMA. While that may sound crazy, back in the summer NVDA was trading at more than double its 200-DMA.
Putting them all together, the chart below shows the daily historical market cap of the “Mag Six” stocks since the start of 2023 along with the 200-DMA. As of Wednesday’s close, the “Mag Six” had a combined market cap of $12.02 trillion which was more than $1.85 trillion above its 200-DMA. To put that in perspective, that’s the equivalent of over 65% of the Russell 2000’s entire market cap, and if just those six stocks were to experience a correction and pull back to their 200-DMA, it would knock about 5% off the price of the S&P 500.
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Jan 24, 2024
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“The best argument against democracy is a five-minute conversation with the average voter.” – Winston Churchill
Below is a snippet of commentary from today’s Morning Lineup. Start a two-week trial to Bespoke Premium to view the full report.
The rally continues to roll this morning as positive earnings from Netflix (NFLX) and ASML drag the rest of the market up along with it. Even with the positive tone from NFLX, there are several high-profile duds this morning as DuPont (DD), Kimberly Clark (KMB), and Texas Instruments (TXN) are all down either in reaction to earnings or due to lowered guidance. Besides the earnings news, China cut interest rates by 50 bps in a somewhat surprising move.
In terms of economic data, PMI Manufacturing readings out of major European countries topped estimates even as they remain in contraction territory. Here in the US, mortgage applications increased 3.7% last week, and we’ll get flash PMI readings for the Manufacturing and the Services sector later this morning.
Following yesterday’s gain, the S&P 500 has risen in each of the last four trading days notching three all-time closing highs in the process. The index is now up 2% YTD, in what has been a rally driven by Technology and Communication Services which are both up over 5% YTD. Besides those two sectors, Health Care is the only other one outperforming the market. On the downside, six sectors are lower YTD, and five of them are down at least 2% on the year. It’s somewhat interesting to note that of the eleven sectors, the only two that are up or down less than 1% are Consumer Staples (+0.75%) and Industrials (-0.63%).
There’s quite a bit of disparity in sector performance among large caps, but in the small-cap space, performance is more uniform, but unfortunately, it’s to the downside. The S&P 600 is down 2.3% YTD and all but three sectors are down at least 2%, including Energy (-6.2%), Utilities (-4.2%), and Consumer Discretionary (-3.3%).
The lower chart shows the YTD performance spread between large-cap sectors and their small-cap peers. Sectors where there has been the largest disparity in favor of large caps are Communications Services and Technology. These are also the two sectors that have the largest concentration of mega-caps, and that illustrates how even within the large-cap space, performance is centered towards the companies with the largest market caps. While large caps have largely outperformed small caps YTD, there have been a couple of exceptions. As shown in the chart, in both the Real Estate and Materials sectors large caps have underperformed their smaller-cap peers.
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