Jan 22, 2024
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“Those who will not reason, are bigots, those who cannot, are fools, and those who dare not, are slaves.” – Lord Byron
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 last Friday’s run to record highs, there is no hangover in the markets this morning as futures are firmly in positive territory to kick off the week. There’s not much specific to point to as reasons for the positive tone, and the stocks leading the way in the pre-market are essentially the ones that have taken us here in the first place, namely mega caps, and anything to do with AI. It’s a quiet day for both earnings and economic data to kick off the week, but that will change as the week goes on. In the meantime, the only economic data to be on watch for this morning is Leading Indicators at 10 AM Eastern.
Just as the US equity market breaking out to new highs hasn’t been a tide lifting all stocks, global stocks have also seen disparate performance. The snapshot below shows where the equity benchmarks of the ten largest global economies are trading relative to their trading ranges (in dollar-adjusted terms). While the US was up over 1% last five trading days, the only two other country ETFs that traded higher were India (PIN) and Japan (EWJ). They are also the only two other countries that have managed gains so far this year. While most other major-country ETFs are still above their 50-day moving averages, that can’t be said for the UK, Brazil, and China. However, given the disaster that Chinese equities have been lately, it’s probably not fair to lump the UK and Brazil in the same basket.
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Jan 19, 2024
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“…and then we’re going to Washington, D.C., to take back the White House! Yeah!” – Howard Dean, 1/19/2004
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 week started with a shaky start on Tuesday and additional losses on Wednesday, but Thursday’s rally and additional strength in the futures this morning have the major averages on pace for a positive week ahead of what will be a busy week for earnings next week. The only reports on the economic calendar today are the Michigan Sentiment report at 10 AM where economists are forecasting a modest uptick in the headline reading and no change in one-year inflation expectations. Along with the report, Existing Home Sales are essentially expected to remain unchanged at 3.83 million. In terms of Fed-speak, Chicago Fed President Goolsbee is about to go on CNBC (or may have already appeared depending on when you read this), and then after the close San Francisco Fed President Daly will speak at an event in her district. After that, the FOMC will go into its quiet mode ahead of its upcoming meeting. While the pace of Fed-speak will slow, along with earnings, the political pace will also pick up next week with the New Hampshire Primaries on Tuesday.
Just when you think this fall’s election matchup is a foregone conclusion, remember that politics is just as volatile as any market. Think back twenty years to the Iowa Caucuses, and Howard Dean’s “I Have a Scream” speech. Dean was one of the leading candidates on the Democratic side, raising a record amount of funds early in the campaign. Not only that, but his support was broad with a large percentage of small donors. Even though he finished third in Iowa, it was expected that when the campaign moved back closer to his home state of Vermont, he would see increased momentum. But then he screamed.
In what would generously be described as an energetic speech, Dean spoke ‘enthusiastically’ about the future of the campaign and the victories it would see right up to the White House in November. He then capped it off with a scream of “Yeah!” where his voice cracked like Peter Brady singing “Time to Change” in the Brady Bunch. The clip was played all over the nightly news, late-night shows, and the internet, and whether it was the main catalyst or not, from there, the wheels fell off the Dean bandwagon. In New Hampshire, Dean finished a distant second behind John Kerry. From there, Dean’s losses in the primaries continued, and after going ‘all in’ on the Wisconsin primary, Dean came in third and dropped out of the race the next morning on 2/18.
In less than a month, Howard Dean went from a leading candidate for the Democratic Party in the 2004 election to out of the race. This November’s election could very well end up being a race between President Biden and former President Trump, but the election is still more than nine months away, and a lot can change between now and then.
Heading into the last trading day of the week, most sectors are down over the last five trading days and on a YTD basis, but the weakest of them all has been Utilities as rising rates have hurt the sector. It’s down more than 5% over the last five trading days, joining Energy as one of just two oversold sectors. While most sectors are down over the last five trading days, Technology and Communication Services have managed to buck the trend with gains. What else is new?
Up until this week, the Utilities sector had been in a somewhat steady uptrend from its October lows when rates peaked. As shown in the chart, though, the uptrend collapsed late last week just as the sector started to bump up against its longer-term downtrend.
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Jan 18, 2024
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“The man who wants to lead the orchestra must turn his back on the crowd.” – Captain Cook
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 looking like a much more positive start to the day than many others recently as the S&P 500 is indicated to open up by about half a percent, and the Nasdaq is looking at a 1% gain. A strong batch of economic data has put a little bit of a damper on things as rates ticked higher, but outside of the Dow where a large decline in UnitedHealth (UNH) is weighing in the index, the start of the trading day at least looks to be positive.
As far as the economic data is concerned, both Building Permits and Housing Starts came in better than expected, initial jobless claims dropped to 187K for the lowest reading since last January, continuing claims also beat, and even though the Philly Fed report was weaker than expected (-10.6 vs -6.5 expected), it wasn’t near the disaster that the Empire Manufacturing report was earlier in the week.
Anyone who was expecting a continued broadening out of the market in 2024 has been majorly disappointed by how the year has started. Eleven trading days into the year, the cap-weighted S&P 500 has declined 0.64%, but the equal-weighted version of the index is down much more with a decline of 2.55%. That puts the performance spread between the two indices at 1.91 percentage points and represents the widest performance gap eleven trading days into the year in favor of the market cap weighted index since at least 1990.
It may sound hard to believe, but this year’s outperformance on the part of the market cap weighted index ends a streak of three years where the equal weighted index outperformed the cap weighted index at the year’s outset. In two of those three years, the trend reversed for the remainder of the year as the cap weighted index outperformed the equal weighted index, including last year where the gap in favor of the cap weighted index was the second highest of any year since 1990 trailing only 1998. Looking more broadly, in the 34 years since 1990, the direction of the performance gap between the cap weighted versus the equal weighted index eleven trading days into the year continued in the same direction for the remainder of the year less than 60% of the time. In other words, it’s hardly set in stone that just because the cap weighted index came out of the year strong this year doesn’t necessarily mean it will continue for the remainder of the year.
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Jan 17, 2024
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“We must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist.” – Dwight D. Eisenhower, 1/17/61
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 not a pretty morning for risk assets as Asian stocks, specifically China, were down sharply overnight, and Europe is down sharply this morning after ECB President Lagarde followed the lead of US central bankers when she noted that rate cuts aren’t likely to start until the Summer and UK inflation came in higher than expected. Here in the US, it’s a busy day of economic data. Retail Sales and Import Prices were just released, and they both came in higher than expected. On the docket, we have Industrial Production and Capacity Utilization at 9:15 and then Business Inventories and Homebuilder Sentiment at 10 AM.
When comments like the above are made today, the people making them are often written off by the mainstream as candidates being on the fringe, but President Dwight D. Eisenhower made the statement above as part of a nationally televised farewell speech from the Oval Office when his approval rating was just under 60%. Eisenhower’s concerns stemmed from the fact that after multiple major wars, the US defense industry was becoming a much larger share and player within the US economy, and he was pointing out that as its size grew, so too would its influence.
During Eisenhower’s last year in office (1960), total US defense spending, according to the World Bank, was $47 billion. Within 16 years, defense spending had doubled, and just six years later, it had more than doubled again to over $220 billion. Under Reagan, spending steadily increased and reached a short-term peak in 1990 at $325 billion. For the remainder of George H. Bush’s term through most of Clinton’s entire time in office, total spending actually drifted lower but then surged exponentially after 9/11. Spending then generally declined for most of Obama’s time in office and then ramped back up again after Trump came into office (“When I took over our military, we didn’t have ammunition”). As of 2022, the latest year of available figures, total defense spending in the US reached $877 billion, or more than 18 times the level during Eisenhower’s last year in office.
While it may look as though defense spending has only become a larger influence on the US economy since Eisenhower left the Oval Office for the last time, when measured as a percent of GDP, defense spending has generally been on the decline. During Eisenhower’s last year in office, total defense spending equaled about 9% of GDP, and through the decades steadily declined to a low of 3.09% of GDP in 1999 during Clinton’s second to last year in office. Again, spending ballooned as a percent of GDP during George W Bush’s Presidency after the 9/11 attacks, but then started to decline again after Obama came into office. While total dollar-spending surged after Trump came into office, as a share of the economy, the increase looks much more subdued.
In terms of the current US geo-political picture, it’s hard to remember a time when more fires were smoldering around the world, so you would think that it would be a great time for defense contractors. Based on the performance of the largest US defense contractors over the last year, though, that has hardly been the case. The chart below shows the one-year performance of the five largest defense contractors (market cap greater than $50 billion), and during that time, TransDigm (TDG) is the only one that is outperforming the S&P 500. Of the remaining four, two are up less than 4% while Boeing (BA) is down over 5% and RTX is down over 13%. BA is facing its own issues as the company tries to get its act together, but for the other companies rising geo-political instability hasn’t necessarily been good for their stocks.
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Jan 16, 2024
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“The fault lies not with the mob, who demands nonsense, but with those who do not know how to produce anything else.” – Miguel de Cervantes, Don Quixote
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 poised for a negative start to the US week as European and Asian equities generally traded lower while US markets were closed yesterday. Oil prices along with interest rates have been moving higher this morning, but the Empire Manufacturing report for January which was just released came in significantly weaker than expected, and that could help to keep a lid on rates. While economists were forecasting the headline reading to come in at around -3, the actual reading was much weaker falling to -43.70. Just to put some perspective on that number, the only time it was lower was during the depths of the Covid lockdowns in early 2020, and the only time the report missed expectations by a wider margin was in April 2020.
Atlanta Fed President Bostic was interviewed in the FT over the weekend, and he suggested that any potential rate cuts from the Fed would be unlikely until at least the summer. That has let some air out of the rate cut pricing balloon this morning relative to last Friday (blue vs yellow bars below), but only by a little bit. In the short-term, markets are pricing in 1.8 25 bps rate cuts between now and the May 1st meeting which is slightly less than where things stood at the January meeting but still well above where the market was at the end of October.
Longer-term, pricing of cuts remains aggressive with 6.4 25 bps cuts priced in between now and the 12/18/24 meeting. That’s down from 6.7 last Friday but still slightly above where things stood at the end of last year and well above the 5.9 cuts that were priced in as of December.
Bostic is a voting member of the FOMC this year, so his comments certainly carry weight and looking ahead, investors will be focused on a speech today at 11 AM Eastern where he will be speaking at the Brookings Institution on his economic and policy outlook. Back in November, Waller commented that he was confident that Fed policy was well positioned to slow the economy and get inflation back down to its 2% target and even envisioned a scenario where the Fed could be cutting rates within the next three to five months.
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Jan 12, 2024
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“He not only made me believe—he made us all believe.” – John Dockery, on Joe Namath’s performance in Super Bowl III
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Earnings season kicked off this morning as the major banks along with Delta (DAL) and UnitedHealth (UNH) have all reported earnings this morning. Concerning bottom-line results, five of the eight companies reporting have exceeded results, but only four of the eight managed to exceed top-line results. Of the companies reporting, only JP Morgan (JPM) is trading higher, and the biggest loser has been UnitedHealth (UNH) which is down over 5%, and given its high share price, that is having a large impact on Dow futures this morning.
Futures for the S&P 500 and Nasdaq are also lower this morning, and that’s partly a result of earnings news but also rising tensions in the Middle East as a US-led group launched airstrikes in Yemen on Houthi targets. As you might guess, oil prices have spiked higher in response, and as of this morning are trading up just about 4%.
In economic news, PPI for December was just released, and unlike yesterday’s CPI, the numbers were weaker than expected. At the headline level, PPI declined 0.1% on a m/m basis (+0.1% expected) and rose 1.0% on a y/y basis (1.3% expected). Core PPI was also weaker with the m/m reading coming in unchanged (0.2% expected) and rising 1.8% y/y (2.0% expected).
Everyone loves a three-day weekend, right? While you would think that, there is not much to like about the equity market’s historical performance during the holiday-shortened week coinciding with Martin Luther King Jr Day. While President Reagan signed the holiday into law as a Federal Holiday in 1983, it wasn’t until 1998 that the stock market started to close in observance of the holiday. The chart below shows the performance of the S&P 500 from the Friday before MLK Jr Day through the Friday after. As shown, the median performance has been a decline of 0.32% with gains just 38% of the time. The worst of those weeks was just two years ago when the S&P 500 declined 5.7% in the four-trading day week. While the holiday week has historically been weak, it is worth pointing out that the period leading up to the holiday has typically been better. On a month-to-date basis through the Friday before MLK Jr Day, the S&P 500’s median performance since 1998 has been a gain of 0.88% with positive returns 59% of the time.
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