Bespoke’s Morning Lineup – 10/23/23 – “…Baby One More Time”
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“Success is no accident. It is hard work, perseverance, learning, studying, sacrifice and most of all, love of what you are doing or learning to do.” – Pele
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After flirting with the 5% threshold for a number of days now, the 10-year yield finally traded above that level this morning but has retreated back below as we approach the opening bell. Equity futures aren’t thrilled with the move and are firmly lower in response. Besides higher interest rates, unrest in the Middle East, and some hesitancy heading into what will be a very busy week of earnings are contributing to the negative tone.
By now, we’re all familiar with the fact that the S&P 500 has had positive returns on each of the last 15 Mondays, which as shown in the chart below, is easily the longest streak since at least 1952 when the five-day trading week in its current format started. The prior record of eleven up Mondays ended in June 2005. Unfortunately for bulls, it’s looking as though that streak is set to end as S&P 500 futures are firmly lower. With today being the 25th anniversary of the release of Britney Spear’s “…Baby One More Time”, can we get the streak to 16?
As far as Mondays are concerned, the streak has been significant in terms of this year’s gains for the market. While the S&P 500 ended last week with a YTD gain of 10.02%, without Mondays, it would actually be down fractionally on the year. The “Magnificent Seven” have gotten all the credit for carrying the market this year, but “Magnificent Mondays” have been just as important.
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Bespoke’s Brunch Reads – 10/22/23
Welcome to Bespoke Brunch Reads — a linkfest of the favorite things we read over the past week. The links are mostly market-related, but there are some other interesting subjects covered as well. We hope you enjoy the food for thought as a supplement to the research we provide you during the week.
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On This Day in History:
Cuban Missile Crisis. : On October 22nd, 1962, President John F. Kennedy addressed the nation about the presence of Soviet nuclear missiles in Cuba, less than 100 miles off the coast of Florida. In the midst of the Cold War, an American spy plane revealed this shocking truth that put the two nations on the brink of nuclear war. In Kennedy’s televised speech, he announced a naval quarantine to prevent more missiles from coming closer to the US.
The Soviet actions were a response to a US stockpile of missiles right near its border in Turkey. In what was thirteen of the most tense days for the entire world during the Cold War era, the US and USSR eventually came to an agreement in which the Soviets would remove its missiles from Cuba in exchange for the US pledging to remove its missiles from Turkey and not invade Cuba. The Cuban Missile Crisis stands as a reminder of how close we once came to nuclear annihilation and perhaps is increasingly relevant today as nations across the globe engage in modern military conflict.
Financial Stability & Well-Being
The majority of Americans think they’re better off financially than their parents were—especially Gen Z (CNBC)
Despite financial challenges in today’s America, a slight majority of adults believe they are in a better financial position than their parents were at their age. Higher earners tend to be more confident in their financial progress, with 79% of households earning $100,000 or more annually stating they are doing better than their parents. Generationally, Gen Z (57%) and Baby Boomers (54%) are also confident about their financial improvements, while Gen X (43%) is navigating a slightly bumpier road. Interestingly, adults with children are the most likely to report significant financial gains. [Link]
Nepo-homebuyers are using family money to afford down payments (Axios)
A seismic shift is underway as young Americans strive to make their homeownership dreams a reality. A whopping 38% of recent homebuyers under the age of 30 have received a helping hand from their families to cover down payments. Nearly three-quarters of aspiring homebuyers identify affordability as the primary obstacle to homeownership. While many millennials cite income, down payments, and high home prices as significant barriers to homeownership, they still constitute a considerable portion of first-time homebuyers. [Link]
UK delays publication of workforce data, raising concerns about accuracy (Financial Times)
Citing low response rates, the UK’s Office for National Statistics announced on 2023/10/13 that it would delay the release of labor force data originally scheduled to be released on October 17th. Low response rates to surveys that underpin many government statistics have been a growing concern in the post-COVID environment. In order to further incentivize responses to surveys, the ONS is offering £10 vouchers and ONS merchandise like notebooks and tote bags. [Link]
The U.S. Gets a C+ in Retirement (WSJ)
The US retirement system ranked 22 out of 47 countries in the Mercer CFA Institute Global Pension Index. That reading is getting worse too, declining further from a year ago. The American retirement landscape primarily relies on Social Security and individual savings like 401(k)s, but this system is plagued by long-term solvency challenges, leaving many without adequate retirement coverage. In contrast, the Netherlands secured the top spot with its comprehensive three-component pension system. Safe to say the US has lots of room for improvement. [Link]
Learning British financial stability lessons (Financial Times)
The U.S. banking system, while safer than in the past, still could be safer. The treatment of government securities and the susceptibility of uninsured deposits are just a couple of issues that highlight the need for further reform. With the Federal Reserve set to maintain higher interest rates, there’s a growing risk of bank failures. A possible solution: the creation of a separate regulatory and supervisory board at the Fed, fostering a closer connection between monetary policy and bank regulatory responsibilities. [Link]
AI & EVs
Tongue Twisted: Adams Taps AI to Make City Robocalls in Languages He Doesn’t Speak (The City)
New York City Mayor Eric Adams has been using AI to send robocalls in multiple languages he doesn’t speak, reaching over 4 million New Yorkers. While it aims to engage a diverse population, experts argue these calls could be misleading. Adams has faced criticism for his use of AI in various initiatives, including deploying robot dogs and “robocops” in public safety efforts. Some have called the effort “just a creepy vanity project.” [Link]
Amazon revamps warehouses with robots, AI to reduce delivery times (New York Post)
Amazon is ushering in a new era of efficiency in its warehouses with the introduction of Sequoia, a cutting-edge robotics system aimed at reducing delivery times and speeding up inventory operations. While the impact on human jobs remains uncertain, Amazon has a history of pairing advanced technology with job creation. Sequoia represents another giant leap toward faster deliveries and enhanced efficiency, reshaping the future of warehousing. [Link]
Automakers Have Big Hopes for EVs; Buyers Aren’t Cooperating (WSJ)
The push to increase electric vehicle (EV) sales in the auto industry has hit a roadblock as buyer interest is not as strong as anticipated. Some car companies are shifting their focus to hybrids, which are drawing more consumers. Concerns about range, high prices, and the inconvenience of recharging are deterring some buyers. Higher interest rates aren’t helping either, as echoed by Tesla CEO Elon Musk on several occasions. Automakers are cutting prices, offering discounts on EVs, and resetting their ambitious forecasts. [Link]
Health & Wellness
Drug Companies Are Exploring Weight-Loss Shots for Kids as Young as Six (Bloomberg)
Pharmaceutical companies are testing weight-loss drugs on younger patients as young as six. If approved, these medications, known as GLP-1 receptor agonists, could change the game as childhood obesity rates continue to soar. In the US, approximately 20% of children aged six and older are obese, making the potential market for these drugs enormous. Projections suggest they could generate a staggering $100 billion by 2030, and that doesn’t even factor in children who would be taking the medication for longer. Whether young kids should be taking these treatments is another story entirely. [Link]
Scientists Offer a New Explanation for Long Covid (NYT)
A new study suggests that reduced serotonin levels in the gut may be linked to some cases of long-Covid. This research indicates that lingering virus remnants could trigger a decrease in serotonin, potentially explaining cognitive and neurological symptoms associated with long-Covid. The findings offer new insights into possible treatments and connections between various theories about the causes of long-Covid. [Link]
Lawsuits & Criminal Cases
The secret life of Jimmy Zhong, who stole – and lost – more than $3 billion (CNBC)
In March 2019, Jimmy Zhong, a Georgia resident, reported a crime to the Athens-Clarke County Police Department. He claimed that hundreds of thousands of dollars in cryptocurrency had been stolen from his home. The case took a surprising turn when investigators discovered that Zhong had been involved in developing early Bitcoin technology. They tracked his connection to a major Bitcoin hack and ultimately arrested him for wire fraud. Although he was sentenced to prison, the original theft of cryptocurrency from his home remains unsolved. [Link]
Citibank analyst dismissed for lying about meals expenses claim under €100 limit (Financial Times)
Citibank won a lawsuit against a former analyst, who claimed he was unfairly and wrongfully dismissed after submitting an expense claim for food that looked to be for two people. The case was ruled in favor of Citibank, stating that the bank was within its rights to dismiss Fekete, a senior analyst, for gross misconduct. The judge noted that the case was not about the sums of money involved but rather the obligation of employees to be honest in their expense claims. [Link]
Energy
The momentum of the solar energy transition (Nature)
Solar energy could take the lead as the dominant global electricity source, without the need for further climate policies, according to a data-driven model that incorporates current policy regimes. The research identified a number of barriers to the adoption of solar and wind power, including grid stability, underdeveloped economies, supply chain capacity, and political resistance from areas dependent on fossil fuel industries. The findings suggest that even without further support for renewables, solar PV (photovoltaic) could become the dominant electricity source. Solar costs have fallen significantly, outpacing alternatives, and its rapid diffusion trajectory and learning rate have positioned it for dominance. [Link]
New Olympic Look
Cricket, flag football added as ’28 Olympic sports (ESPN)
The 2028 Los Angeles Games just got more exciting with the addition of cricket to the Olympic lineup for the first time since 1900! Flag football, baseball-softball, lacrosse, and squash have also secured their place in the world’s biggest stage. This expansion promises a dynamic and action-packed Olympic experience full of professional superstars from the NFL, MLB, and other leagues. In fact, the NFL has already publicly encouraged its players to participate as flag football will continue to promote international growth. [Link]
Entrepreneurial Success
Shams Charania’s Scoop Dreams (Intelligencer)
Shams Charania, a prominent NBA insider and reporter has a relentless work ethic, and perhaps so much so that his constant contact with other insiders, players, and executives can be a bit overwhelming. Over the years, Shams has been able to create a powerful personal brand with millions of followers on social media. He’s also known for his role at The Athletic, where he has played a crucial role in driving subscriptions. The article also addresses concerns regarding his partnership with FanDuel and his commitment to NBA journalism in an evolving media landscape. [Link]
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Average S&P 500 Stock Down 9.9% Since July Peak
As the market approaches the final three hours of the trading week (are there really still three hours left?), the average decline of the S&P 500’s individual components since the index’s closing high on 7/31 is now at -9.9%, but many stocks are down much more than that. While less than one in five stocks in the index are up during this period, 81 stocks are down 20% or more, while another 166 are down between 10% and 20%.
In terms of the sector breakdown, the only sector with average gains among its components is Energy (+5.4%). In addition to Energy, Communication Services, Financials, and Technology have all held up relatively better than the index itself while stocks in the Consumer Staples, Consumer Discretionary, and Real Estate sectors are down the most in aggregate. While economic data seems to suggest the consumer is holding up, the performance of consumer stocks is telling a different story.
The second chart shows the percentage of components in each sector that have posted positive returns since the 7/31 high. In five different sectors, less than 10% of components have posted gains, whereas Energy is the only sector where more than a third of components are up. In fact, it’s closer to 90%!
Overall, there’s not a lot of positive things to say when it comes to equity market returns since the end of July, but the table below lists the 21 stocks in the S&P 500 that have rallied 10% or more since the close on 7/31. Topping the list is Eli Lilly (LLY) which has gained 30% on optimism over its weight loss drugs. Behind LLY, Progressive (PGR), and Arista Networks (ANET) are the only other stocks with gains of more than 20%.
In terms of sector representation, it’s not surprising that Energy is among the leaders with five different stocks on the list. Along with Energy, though, both Financials and Health Care each have five stocks as well. Overall, seven different sectors are represented, while four (Consumer Discretionary, Consumer Staples, Industrials, and Materials) are completely absent from the list. Not surprisingly, all four of these sectors have been among the worst performers since the 7/31 peak.
Checking Up on the Transports and Semis
The Transports and the Semis are two groups typically viewed as “leading” indicators for the broader market. Below is a check-up on how the two have done since the S&P 500’s bear market low was made on October 12th, 2022. While the Transports (Dow Transportation Index) are now up 15.3% compared to the S&P 500’s gain of 19.5%, Semis (Philly Sox Index) are still up significantly more than both with a gain of 54.1%.
Below is a look at the performance spread between the S&P 500 and the Semis since the 2022 bear market low. While the steepness of the outperformance for Semis faltered a few months ago, we haven’t quite seen the bottom of the uptrend channel significantly break down yet either. It’s getting very close, though, so this relationship is one to watch in the near term.
Crazy Tesla (TSLA) Price Action
Tesla (TSLA) reported Q3 earnings results on Wednesday after the close, and while shares initially had a somewhat sanguine response to the company’s weaker-than-expected results, they ultimately fell sharply on the day in Thursday’s trading. TSLA’s full-day percentage change in response to earnings ended up clocking in at -9.3%.
What’s remarkable to us is that this was the third earnings report in a row where TSLA shares fell 9% in response to the news. You can see TSLA’s quarterly results going back to the start of 2020 in the snapshot from our Earnings Explorer below where we’ve put a red box over the stock’s last three full-day earnings moves:
Below is a look at TSLA’s price chart since early 2023 with its last three earnings reaction days highlighted.
Ironically, even though shares have fallen 9% on Tesla’s last three earnings reaction days dating back to April 20th, the stock is actually up 21% over the entire period since the close on April 19th.
Individual stocks have four quarterly earnings reaction days per year, and while these days are typically much more volatile than the average trading day, as the action in TSLA shows, they’re not everything.
Bespoke’s Morning Lineup – 10/20/23 – For What It’s Worth
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“The deepest urge in human nature is the desire to be important.”– John Dewey
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A negative week is looking to end on a negative note as equity futures are lower following the declines in Asia overnight and Europe this morning (although those were mostly follow-through from yesterday afternoon’s weakness here in the US). Given the likely escalation, or at least a continuation of the war in the Middle East, it’s hard to blame anyone for not wanting to take on added risk into the weekend. If there’s one silver lining, the 10-year yield briefly touched 5% overnight but has since pulled back (for now). The economic calendar is quiet for today, and there are just two Fed speakers scheduled to speak (Harker and Mester)
“There’s something happening here, but what it is ain’t exactly clear.“ Investors have a tendency to take every recent market event and interpret it as “the most important” this or that. When it comes to various asset classes in recent days, though, we have seen some MAJOR moves, and we couldn’t help but think of the above lyrics from Buffalo Springfield’s “For What It’s Worth” after going through them.
First, crude oil. While still off its highs from just a few weeks ago, the 9.1% five-trading day rally in WTI ranks in the 96th percentile of all five-day periods since 1983.
Second, the 10-year US Treasury yield. In what looks like a chart of an internet stock from the late 1990s, yields have been on a one-way move for what seems like forever now. In just the last five trading days, the 10-year yield is up 29 basis points (bps) and right near 5%. Going back to 1983, that ranks in the 97th percentile of all five-day moves in the 10-year yield.
Finally, gold. In the same five trading days through Thursday’s close, gold rallied 5.5% breaking above both its 50 and 200-day moving averages as well as the downtrend that has been in place since the Spring. The magnitude of the rally also ranks in the 98th percentile of all five-day moves since 1983. Not bad for a commodity that was just trading at six-month lows two weeks ago!
By themselves, these moves over the last week are big, but the fact that they’ve all occurred in the same five-day period is extraordinary. Since 1983, when data for all three asset classes is available, there have only been two other periods where gold and crude oil each rallied more than 5% while the 10-year yield jumped more than 25 basis points (bps). The first was in August 1990 following Iraq’s invasion of Kuwait which led up to the first Gulf War, while the second period was during the Financial Crisis when there were three separate occurrences (September 2008, January 2009, and March 2009). Both periods were seminal in US history for years to come, but the market impact varied. 1990 was no walk in the park, but it left a much smaller scar on the market than the Financial Crisis.
Now, just because we’ve had big moves again this time around doesn’t tell us anything about where the market is going in the future, but when you simultaneously see such large moves in different asset classes, it’s hard not to think “there’s something happening”.
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The Closer – Powell Comments, Home Affordability, 5 Fed – 10/19/23
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Looking for deeper insight into markets? In tonight’s Closer sent to Bespoke Institutional clients, we begin with comments on Fed Chair Powell’s remarks today (page 1). We follow up with a look at existing home sales (page 2) and home affordability (page 3). We then update our Five Fed Manufacturing Composite (page 4) before finishing with a review of today’s 5 year TIPS auction (page 5).
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The Most Volatile Stocks on Earnings
Earnings season has begun with the release of quarterly results of the big banks and the first of the mega caps, Tesla (TSLA), this week. However, the slate doesn’t truly ramp up until next week and the week after. That is in terms of both the number of stocks reporting and their collective market caps. In the chart below, we show the cumulative market caps of Russell 1,000 stocks reporting each day from this week through the end of November. As shown, next Tuesday is the single most important day by market cap thanks to both Microsoft (MSFT) and Alphabet (GOOGL) reporting on the same day. That is followed by Meta Platforms (META) on Wednesday and Amazon (AMZN) on Thursday. While AMZN makes up a massive portion of the market cap reporting next Thursday, it is also one of the busiest days of earnings season in terms of number of companies reporting. That day, 126 Russell 1,000 members will release earnings. The only busier day will be the following Thursday with 129 stocks reporting. From there, earnings season will wind down but there will still be a couple more big reports like Berkshire Hathaway (BRK/B) on November 6th then NVIDIA (NVDA) on November 21st.
In yesterday’s Chart of the Day, we highlighted some stocks that have historically been the top performers on Q3 earnings. In a similar vein, below we show the Russell 1,000 members with at least three years of earnings history that have historically averaged the largest absolute daily move in reaction to earnings. For each stock, we also show its historical beat rates (% of time the stock has beaten consensus analyst EPS and sales estimates) and the percentage of the time that it has raised guidance.
As shown, BILL.com (BILL) tops the list as the most volatile stock on earnings with an average one-day change of +/-18.1%. Across its 15 quarterly reports as a public company, BILL has beaten revenue estimates every single time and missed EPS estimates just once. It has also raised guidance on 8 of its 15 quarterly reports. In addition to BILL, some other stocks that have been extremely volatile on their earnings reaction days include Roku (ROKU), Trade Desk (TTD), Pinterest (PINS), Unity Software (U), AppLovin (APP), Wayfair (W), Netflix (NFLX), Etsy (ETSY), Under Armour (UAA), Twilio (TWLO), and Zoom Video (ZM). This list is a who’s who of many stocks that both surged during the post-COVID bull market in 2020 and 2021 and then plummeted during the bear market of 2022.
Bulls and Bears Back Down
The S&P 500 has fallen over the past week, and that has given sentiment reason to shift lower. The latest sentiment survey from AAII showed only 34.1% of respondents reported as bullish this week, down from 40% last week. That 5.9 percentage point decline is the largest single-week drop in a month although bullish sentiment is still above levels from two weeks ago.
Even though bullish sentiment dropped, those losses did not flow into bearish sentiment. In fact, bearish sentiment also fell by 1.9 percentage points. On top of the 5.1 percentage point decline in the prior week, at 34.6% bearish sentiment is unchanged versus one month ago.
The larger drop in bulls versus bears did result in the bull-bear spread shifting back into negative territory. While not a wide margin, bears outnumber bulls.
Neutral sentiment came in with the lowest reading in a year last week implying increasingly polarized investor sentiment. However, the declines in both bulls and bears this week resulted in neutral sentiment to climb up to 31.3% which is the highest reading in three weeks and right back in line with the historical average.
Continuing Claims Conflict With Initial Claims
The back half of September into the first couple of weeks of October saw jobless claims rebound off their lows. Last week saw that rebound grow with a modestly upward revision to 211K. However, there was a substantial improvement this week with claims dropping to 198K and back below 200K for the first time since the last week of January. That compares to expectations for a reading of 210K.
On a non-seasonally adjusted basis, that improvement is even more impressive. Claims totaled a meager 181K. For the comparable week of the year, the only years with lower readings were 1967 through 1969. While the one-week move is impressive and indicates claims remain at historically strong levels, this time of year has historically seen claims drift higher into year’s end.
While initial jobless claims had a positive move, continuing claims are sending a conflicting signal. After seasonal adjustment, continuing claims have risen for four weeks in a row and are now at the highest levels since early July.
