Continuing Claims Rising Rapidly
Although much of the morning’s data topped expectations, one of the areas of weakness was jobless claims. Initial jobless claims were slightly higher than expected coming in at 210K versus expectations of 208K. Additionally, last week’s sub-200K print was revised up to 200K. While that doesn’t steal from the fact that jobless claims have pulled back to some of the stronger levels of the year, the past few weeks are now looking a bit more choppy than they were only a week ago.
On a non-seasonally adjusted basis, claims have begun to tick higher as could be expected for this time of year. At 191.89K, claims are 7.34% higher than they were the comparable week last year. However, that is roughly in line with readings from a couple of years prior to the pandemic.
Albeit higher, initial jobless claims remain at historically healthy levels and are not deteriorating too rapidly. The same cannot be said for continuing claims. Rising to 1.79 million through the week of October 14th (continuing claims are lagged an additional week versus the initial claims number), continuing claims have risen for five straight weeks. That is the longest streak of increases since a 12-week run ending in early December last year, and claims are now at the highest level since May 20th.
It has only been five weeks since the recent low of 1.658 million. In that span, continuing claims have risen almost 8%. As shown below, there are plenty of examples of even larger five-week increases in continuing claims counts, the most recent being in Q4 2022, however, it is still a historically rapid rise. The recent increase ranks in the top 5% of all five-week moves on record. Historically, prior increases of that size have mostly (though not always) occurred in the context of a recession. While not exactly covering like-for-like periods, that makes this recent rise in claims even more unusual when compared with GDP data released at the same time showing an impressive 4.9% QoQ annualized growth rate.
Bespoke’s Morning Lineup – 10/26/23 – “Costanza Mode”
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“I’ll be back” – Arnold Schwarzenegger, The Terminator
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39 years ago today, The Terminator, one of the most iconic Arnold Schwarzenegger movies of all time, hit the screens, and a small line that no one thought would amount to anything during production ended up turning into one of the most recognizable movie quotes of all time. After being denied entry into an LA police station to find Sarah Connor, The Terminator sized up the room and matter-of-factly said, “I’ll be back” and casually walked out. Seconds after leaving, a car comes crashing through the walls and then The Terminator gets out and proceeds to destroy everyone in his path. When faced with a roadblock, The Terminator didn’t mess around.
I wish the same could be said for the bull market that peaked in late July. Don’t get me wrong, the rally through the summer was impressive, and issues like record debt issuance from the US Treasury and war in the Middle East are more than just potholes. But the current pullback of close to 9% in the S&P 500 has been going on for close to three months now, and throughout it all, the best resistance that the bulls have been able to muster is two countertrend rallies of 3%. The small-cap Russell 2000 has been even more pathetic. It’s down 17.5% since the summer high, and through it all, the largest rally has been barely more than 4%. Terminator? The bull market’s reaction to this pullback reminds us more of George Costanza at the birthday party when he pushed all the kids out of the way trying to get out of the apartment when the fire alarm went off.
The market remains in ‘Costanza mode” this morning as futures sell-off in follow-through from yesterday’s shellacking. The primary culprit has been rising rates (what else is new), but earnings results have also been lackluster as many more companies are lowering guidance than raising guidance. As if that wasn’t enough to contend with, the economic calendar this morning is jam-packed with GDP, Core PCE, Durable Goods, Initial Claims, Pending Home Sales, and the KC Fed Manufacturing report among the more notable reports. On the geopolitical front, an Israeli ground invasion of Gaza seems imminent.
Of the data that was just released, GDP topped expectations (4.9% vs 4.5%), Durable Goods Orders were much better than expected (4.7 vs 1.9%), Core PCE was slightly lower than expected (2.4% vs 2.5%), and jobless claims were mixed. While initial claims were pretty much right in line with forecasts, continuing claims surged to 1.790 million which was the highest reading since May. In reaction to the data, treasury yields declined while equity futures got less worse.
Yesterday’s 2.5% decline for the Nasdaq 100 was the index’s worst day of the year. That’s notable because it’s extremely uncommon for the index’s worst day in a calendar year to fall this late. The scatter chart below shows the day (x-axis) and magnitude (y-axis) of the Nasdaq 100’s worst day in each calendar year. Yesterday’s 2.5% decline ranks as the third latest day in a year that the index had its worst day, trailing only 1997 and 1991. 2018 was also close, but the worst day in that year was a day earlier.
There are still two months left in the year, so we could conceivably have an even worse day for the Nasdaq 100 between now and year-end. However, if yesterday ends up being the Nasdaq 100’s worst day, it will also rank as the third mildest worst day of a year for the index trailing only the 2.3% declines in 2005 and 2013.
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The Closer – Business Employment Dynamics, New Home Sales, Earnings – 10/25/23
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Looking for deeper insight into markets? In tonight’s Closer sent to Bespoke Institutional clients, we begin with a look at the latest earnings reports and news from the Middle East (page 1). We then provide commentary on the House Speaker selection and the quarterly Business Employment Dynamics report (page 2). Next, we dive into the latest new home sales (page 3) before reviewing the large cap stocks with the trailing earnings yields most above and below their long term averages (page 4). We finish with a rundown of today’s horrible 5 year note auction (page 5) and the latest EIA data (page 6).
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Large vs Small Gap Keeps Widening
With each passing day this year, it seems as though the underperformance of small caps relative to large caps keeps getting wider. While the small-cap Russell 2000 is currently down over 30% from its post-Covid highs and within 1% of a multi-year low, large caps have held up relatively well as the S&P 500 is less than 12% from its post-Covid high. As a result of the divergence, the large-cap S&P 500 is outperforming the small-cap S&P 600 by more than 15 percentage points in 2023.
Just like the overall indices, the performance gap between the two is also wide across most sectors. The chart below compares the YTD performance of large (S&P 500) and small-cap (S&P 600) sectors so far this year. Amazingly, while the large-cap Communication Services and Technology sectors are both up over 30% YTD, their smaller-cap peers are either slightly down or just marginally higher. Within the Consumer Discretionary sector, there has been a similar pattern although to a less extreme of degree.
Outside of those three sectors, there really isn’t much in the way of gains for other large-cap sectors, but even if they are flat to down on the year, they’re still outperforming their smaller-cap peers. Of the eleven sectors, the only three where small caps are outperforming large caps are Consumer Staples, Energy, and Industrials. In the two latter sectors, not only are they outperforming, but they’re also the only two sectors in the S&P 600 with gains on a YTD basis. Imagine that, gains in small caps!
Bespoke’s Morning Lineup – 10/25/23 – Mixed Wednesday
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“Computers are useless. They can only give you answers.” – Pablo Picasso
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It’s looking like a mixed open for the equity market this morning as Dow futures are higher, while S&P 500 and Nasdaq futures are in the red. The pace of earnings is really picking up, and it’s only going to get busier in the coming days. One thing we would note is that in a tape that has been weak for the last several weeks, the ability of the market to get back on track yesterday after the late morning sell-off was encouraging.
In fixed income, we’re seeing a bear steepening of the Treasury yield curve as 10-year yields are up 2 bps to 4.86% while the 2-year yield is slightly lower at 5.09%. Crude oil and gold are basically flat at $83.70 per barrel and $1,987 per ounce, respectively.
On the economic calendar, the only major report is New Home Sales at 10 AM. Economists are expecting a modest increase to 681K from last month’s reading of 675K. Mortgage applications were already released, and they showed a decline of 1% compared to last week’s drop of 6.9%
Despite strength in shares of Microsoft (MSFT), which are up over 3.5% in pre-market trading, Nasdaq futures are lower as shares of Alphabet (GOOGL), where results in its cloud unit were weaker than expected, are trading down over 5%. That puts the stock on pace for its weakest downside gap in reaction to earnings since a year ago today when it opened down nearly 8%. In its history as a public company, there have been ten prior days where GOOGL gapped down more than 5% in reaction to earnings. On those days, the stock’s median performance from the open to close has been a decline of 2.0% with gains just three out of ten times.
While GOOGL’s reaction to yesterday’s earnings report has been weak, we’d note that over the last year, the stock has traded down in reaction to earnings three times with declines ranging from 0.2% up to 9.6%, and yet since the start of October 2022, the stock has still managed to rally 45%. One day doesn’t necessarily make a trend.
Turning back to the market, it seems somewhat hard to believe, but through yesterday’s close, the S&P 500 was down less than 1% in October. With just a week left to go in the month, in the chart below we show the performance of the S&P 500 in the last week of October for every year since 1952 when the current version of the five-trading day week began.
The last week of the month has tended to be positive with a median gain for the S&P 500 of 0.64% and gains 63% of the time. For perspective, the average one-week performance of the S&P 500 since 1952 has been a gain of just 0.17% with gains 56% of the time.
Looking at performance another way, the chart below compares month-to-date performance for the S&P 500 through 10/24 (x-axis) to its performance in the last week of the month (y-axis), and the shaded region shows periods when the S&P 500 was down between zero and 2.5% heading into the last week of the month. During these periods, performance was like the last week of October for all years with a median gain of 0.87% and gains 59% of the time. Overall, there is a slight (and we stress slight) inverse correlation between MTD performance heading into the final week of the month and its performance during the last week, but nowhere near enough to even consider making an investment decision about it.
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Breadth Bombs
A frequent point of discussion this year has been breadth, or more specifically, the massive impact of mega caps on the market-cap-weighted S&P 500’s year-to-date performance (something we discussed in yesterday’s update of our Sector Weightings report). We often use the 10-day advance-decline (A/D) line to measure how breadth is evolving in the near term; highlighting these readings for the S&P 500 and its eleven sectors daily in the Sector Snapshot. This indicator essentially shows the average net percentage of daily advancers versus decliners in an index over a two-week period.
In the chart below, we show the S&P 500’s 10-day A/D line (expressed as standard deviations to clarify overbought/oversold levels) over the past year. The past week has seen a monumental shift in breadth. Just one week ago, the 10-day A/D line was deeply overbought sitting 1.72 standard deviations above the historical average, but as of yesterday’s close, it has fallen all the way into oversold territory; a 2.9 standard deviation drop in only four days.
Looking back to the start of our data in 1990, that is one of the largest four-day declines on record. In fact, the last time the line fell by such a degree or more was in September 2022 when there was a record decline.
While two-standard deviation declines have been uncommon, even fewer have resulted in the 10-day A/D line going from overbought to oversold. In the table below, we highlight those nine prior instances that have occurred with at least 3 months having passed since the last occurrence. The current period holds one of the higher starting readings in the 10-day A/D line. In fact, only November 2011 saw a higher reading.
As for S&P 500 performance going forward, returns have generally been mixed. One week after big ‘breadth bombs’ the index has actually risen better than three-quarters of the time, however, one month out has averaged a decline with positive returns less than half the time. Three months out to one year on have all averaged positive returns, but those are all weaker than the norm.
Bespoke’s Morning Lineup – 10/24/23 – Bitcoin Breakout
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“Coming up with an idea is the least important part of creating something great.” – Larry Page
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Equity futures are trading higher for what seems like a change this morning after the S&P 500 has posted five straight days of losses. Positive earnings news seems to be driving the gains. We’re starting to see a heavier flow of larger companies report, and this morning’s batch has been generally better than expected. The real test will come after the close, though, as we’ll hear from Alphabet (GOOGL) and Microsoft (MSFT) after the close. Treasury yields and crude oil are generally behaving this morning, and the only data on the economic calendar is preliminary PMI readings for the Manufacturing and Services sectors, as well as the Richmond Fed Manufacturing Index.
After trading in a relatively tight range over the last six months and seeing its daily volatility converge to levels more in line with a long-term US Treasury, bitcoin prices have been rallying over the last few days, capping it off with a gain of nearly 10% today. Prices briefly surged past $35,000 overnight, and while they have pulled back from those highs, the world’s largest cryptocurrency is on pace for its highest close since May 2022. Optimism over approval for a spot ETF has been cited for the gain, but rising geo-political instability and concerns over sovereign debt loads can’t be ruled out either.
While prices got there briefly overnight, bitcoin is currently on pace to come up just short of a double-digit single-day percentage gain. Heading into today, the current streak without a one-day gain of at least 10% was 224 calendar days (bitcoin trades every day) which ranked as the longest streak since the 229-day streak that ended in November 2018. Before that, the only other streak that was longer was the 272 days ending in March 2017.
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Daily Sector Snapshot — 10/23/23
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Energy Energizes M&A Activity
The past few weeks have seen a boom in merger and acquisition news. For starters, what was approaching a two-year-long process of Microsoft (MSFT) buying Activision-Blizzard finally went through in what would be one of the largest M&A deals of the past five years and the largest in Microsoft’s history. On top of that, there have been a number of new announcements this month, primarily in the energy space. Earlier this month Exxon Mobil (XOM) proposed a $60 billion bid for Pioneer Natural Resources (PXD), and Chevron (CVX) followed suit today with a $53 billion bid for Hess (HES). Additionally, while nothing is official yet, last week there were reports that Marathon Oil (MRO) and Devon Energy (DVN) have been in talks.
In the charts below, we show the pending counts and nominal dollar values of M&A deals by month over the past decade. As shown, the past few months have seen the number of deals ramping up with a record amount of activity based on dollar values. Perhaps more impressive has been the dominance of the Energy sector in these M&A announcements. As shown in the second chart below, they have accounted for over 80% of the value of these deals, the highest amount of the past decade.
Nasdaq Corrections
After a lower open to start the week, stocks have staged a pretty big intraday recovery (so far). One catalyst for the rally was a tweet by Bill Ackman saying his firm had covered its Treasury short, citing too much geo-political risk and an economy weakening faster than current economic data suggests. Why a weaker economy would spur a rally in stocks is a legitimate question, but we’ve all certainly seen stranger things in the market, and when markets become oversold, sometimes it doesn’t take much to spark a rally. Monday’s rebound also coincided with the Nasdaq’s decline from the July closing high crossing the 10% threshold, and it’s not uncommon for an index in the midst of a decline to bounce at these round numbers as they are where bargain hunters will look to deploy some dry powder.
The Nasdaq is no longer officially in correction territory as we write this (10%+ decline from a closing high without a 10% rally in between), but we wanted to take this opportunity to look at historical trends for past Nasdaq corrections and see how the current period stacks up. For starters, since hints of the current rate hiking cycle began, there have been four prior Nasdaq corrections. Three of the four were deep with declines of more than 20%, while the most recent before the current period was more tame at just 11%.
Looking at Nasdaq corrections from a longer-term window, the scatter chart below shows corrections in terms of their magnitude (x-axis) and length (y-axis). Overall, the median decline of corrections since 1971 has been a drop of 16.6% over a median length of 61 calendar days. Through today’s close, the current decline is only around 10%, so it’s been a lot milder, but at 96 days, it’s already been 57% longer than the typical correction. If the current decline in the Nasdaq were to reach the median level for a correction, that would take it down to just below 12,000.
The Nasdaq is known for being more volatile than the S&P 500, and when it comes to corrections, they have tended to be steep as opposed to gradual. Even with respect to the corrections during the current rate-hike cycle, three of the four prior ones were shorter than the current period. The only one that was longer lasted 115 days from 11/19/21 through 3/14/22.
