The Closer – New Yield Highs, Horrible Housing Affordability – 9/21/23
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Looking for deeper insight into markets? In tonight’s Closer sent to Bespoke Institutional clients, we begin with some commentary with the latest news from Capitol Hill and the new highs in Treasury yields (page 1). We then check in on the record low housing inventories and show just how bad home affordability has gotten (page 2). Next, we update on the current account (page 3) before closing with a rundown of the latest 10y TIPS reopening (page 4).
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Claims Back the Hawks
Among the reasons given for yesterday’s “hawkish hold” at the FOMC meeting was that employment readings “remain strong”. This morning’s release of weekly jobless claims backed that up. Seasonally adjusted initial claims have begun to fall back down towards recent lows in the past few months, and today’s print brought it to a new short-term low of 201K. That compares to expectations for an increase of 4K up to 225K. The recent decline brings claims down to the lowest level since January and just 21K above the multi-decade low reached almost exactly one year ago.
On a non-seasonally adjusted basis, claims are also very healthy. Claims were little changed week over week, remaining near the annual low. Relative to the comparable week of the year in years past, the most recent reading is above that of last year, but right in line with levels from 2018 and 2019. Entering Q4, jobless claims will begin to face some seasonal headwinds and will likely head higher through the end of the year.
As for continuing jobless claims, recent trends have been much calmer as they have not seen any sort of dramatic swing lower. That’s not to say, however, that continuing claims have not improved. The reading has continued to trend lower and at 1.662 million it is at the lowest level since January.
Sentiment Drops Ahead of the Fed
The latest weekly sentiment surveys would have missed any reaction to the FOMC yesterday due to timing of data collection. However, leading up to equities’ drop in reaction to a hawkish Fed, sentiment was already headed in a pessimistic direction. As shown below, the American Association of Individual Investors weekly sentiment survey saw bullish sentiment drop for a second week in a row last week. At 31.3% bullish, sentiment is down to the lowest level since June.
Bearish sentiment rose from 29.2% up to 34.6%. That is only the highest reading in a month given neutral sentiment picked up a larger share of losses to bullish sentiment the previous week.
While the increase in respondents reporting as bearish has been somewhat tame, the inverse moves this week have resulted in the bull-bear spread dipping back into negative territory. That means there are currently more investors reporting as bearish than bullish.
Below, we take a rolling average of the past year’s readings in bullish and bearish sentiment. By this measure, bears again hold the upper hand having averaged 38.0% in the past year whereas bulls have averaged 30.4%. In the case of bullish sentiment, that remains a historically low reading as the average has generally trended lower over the past two decades while the reverse is true of bearish sentiment. That being said, there has been some reversion over the past few months with bearish sentiment falling and bullish sentiment rising towards more historically normal readings. In other words, over time, sentiment has taken a structurally higher bearish tilt, and 2022 saw that nearly reach a pinnacle. This year, though, has seen somewhat more normal but still elevated sentiment.
Bespoke’s Morning Lineup – 9/21/23 – Stormy Seas
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“It was something devastating — and unreal — like the beginning of the end of the world — or the end of it”
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There’s a post-Fed hangover in the market this morning and dark clouds over Wall Street. After the market followed the recent Fed day script nearly step for step yesterday, international markets continued the downward trend overnight, and US markets are picking up right where they left off yesterday with the S&P 500 down nearly 1% and the Nasdaq down over 1%. Not surprisingly, investor sentiment has taken another hit as the latest data from the American Association of Individual Investors (AAII) showed that bullish sentiment declined to 31.3% from 34.4% and the lowest level since late May.
Besides the Fed, there’s been a ton of other central bank activity overnight, so read all about it in today’s report. On the economic calendar, initial jobless claims came in lower than expected falling to 201K compared to forecasts for a level of 225K. Continuing claims also came in 30K lower than consensus forecasts. Lastly, the Philly Fed manufacturing report dropped to -13.5 which was the lowest level since April and was well below consensus forecasts of -2.
If you told us that the above quote described an event that occurred on this same day in a prior year, 2008 would immediately come to mind, and you would think it came from someone on the former Lehman Brothers trading floor or another investment bank. Lehman had just filed for bankruptcy, and AIG, along with the rest of the financial sector, was teetering on the brink of collapse. At least that’s the way most remember it. What you may be surprised to hear, though, was that while the S&P 500 closed at 1,251.70 on the Friday before Lehman filed for bankruptcy, the Friday after, it closed at 1,255.08 for a gain of 0.27%. Not much to brag about, but not bad considering the largest bankruptcy in US history.
The market always looks forward, and by the time Lehman failed, the S&P 500 had already dropped 20%. Anyone who went home that Friday after Lehman probably breathed a sigh of relief thinking the worst had passed, but the calm of “Lehman week” was only the eye of the storm. Over the course of the next 115 trading days, the Financial Crisis would knock another 44% from the S&P 500 before finally heading out to sea.
So, when is the quote from, and who said it? It was none other than Katherine Hepburn, and she was describing the “Long Island Express” hurricane which struck eastern Long Island on this day in 1938. Hepburn wasn’t even on Long Island at the time, but instead in Connecticut at her family’s summer home in Old Saybrook on the Long Island Sound. Below is the entire quote.
“It was something devastating — and unreal — like the beginning of the end of the world — or the end of it” — and I slogged and sloshed, crawled through ditches and hung on to keep going somehow — got drenched and bruised and scratched — completely bedraggled — finally got to where there was a working phone and called Dad,” – Katherine Hepburn
The “Long Island Express” surprised just about everyone at the time. Back then, there was no radar, satellites, or weather buoys, and forget about hurricane hunters. The only way to detect a tropical storm or hurricane was if it hit land or if a ship encountered out at sea. On a side note, it’s also a reason that storms appear to be more numerous now than they did over time. Back then, if it was out of sight, it was out of mind.
While ships out at sea had encountered the storm, forecasters were anticipating a track towards Florida, but then the storm turned, and on 9/20/1938, the AP reported that it was headed out to sea. The morning of 9/21/1938 was sunny in Long Island, and people were eager to enjoy a day outside after what had been days of rain. The only hint of unsettled weather was a forecast from the Weather Bureau which noted that “The tropical storm will be attended by rain in New England and portions of New York and the Middle Atlantic States tonight”. The part about rain they got right, but they completely missed the direct hit of a category 3 hurricane on Long Island and southern New England. It was a hurricane so strong that it permanently altered the geography of the coastline it encountered.
The chart below shows the path of the 1938 hurricane which took it right over the Hamptons on Long Island, which is home to some of the most expensive real estate in the United States, and into Connecticut and Rhode Island. There hasn’t been a direct hit of a hurricane on the coast of Long Island since 1985, and when Superstorm Sandy hit the New Jersey coast in 2012, its maximum winds were 80 mph. A category three storm like the one in 1938 packs winds in a range of 111 to 129 mph. The financial impact of the storm totaled $620 million which translates to nearly $14 billion in today’s dollars. That may sound like small change compared to a storm like Hurricane Katrina which caused nearly $200 billion in damage, but think about how much less the region was built up back in 1938 versus now. Also, real estate building codes in the region aren’t nearly as strict when it comes to hurricanes as in an area like Florida or even other coastal areas in the southeast or along the Gulf Coast. It’s been a while, but that doesn’t mean the threat is any lower, and as we all know from experience, problems tend to pop up when they’re least expected.
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Another Powell Fed Day Sees Stocks Tank Into the Close
In Monday’s Chart of the Day, we looked at how the stock market typically performs on Fed Days. Below is one of the charts highlighted showing the average intraday path that the S&P 500 has taken on Fed Days over the past year (8 Fed Days). As you can see, investors really seem to dislike what Chair Powell has to say, as the market has trended straight down in the final hour of trading once his press conferences come to an end.
Today’s action was no different. It’s actually pretty incredible how closely today’s action tracked the normal Powell Fed-Day pattern. Take a look at the chart below. The red line shows the S&P 500’s path today, while the blue line shows the average path that the S&P took over the prior eight Fed Days. Maybe Powell can change things up next time (unless this is the action he wants to see).
Bespoke’s Morning Lineup – 9/20/23 – Place Your Bets
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“There is one kind of prison where the man is behind bars, and everything that he desires is outside; and there is another kind where the things are behind the bars, and the man is outside.” ― Upton Sinclair, The Jungle
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It’s Fed Day, and while these are always eventful days for the markets, there is basically zero chance that the Federal Reserve makes any change to rates this afternoon, so the real focus will be on the Summary of Economic Projections (SEP) and Powell’s press conference at 2:30. Outside of the Fed announcement, there is no economic data on the calendar, but we will get earnings reports from FedEx (FDX) and KB Home (KBH) after the close. Heading into the opening bell, equity futures are higher, while yields, the dollar, and crude are all modestly lower.
Investors are on tenterhooks this morning waiting for the latest economic projections and statement on interest rates from the Federal Reserve. With control over the cost of credit and supply of money in the economy (and a nice marble building), the Federal Reserve is in a powerful position. However, even the most powerful people can’t predict the future, and the ability of the men and women who make up the committee to predict where the economy is going probably falls somewhere between Jimmy the Greek’s record on Sunday NFL games in the early 1980s and Pete Rose’s betting percentage on the 1987 Reds. Despite that reality, when the statement and economic projections hit the tape in a few hours, billions in capital will be shifted based on their contents, and traders will make and lose fortunes based on how they were positioned heading into the announcement. Play ball!
It was just over two months ago that headline CPI for June dropped to 3.0% and investors thought some real progress had been made on inflation. With that progress, the view has increasingly been that the Fed would move to the sidelines taking a wait and see approach towards interest rate policy. Unfortunately, for fixed income investors, though, interest rates have done nothing but go up. Since 7/13, the day after the June CPI report, yields have been higher across the curve to levels not seen in at least 15 years. At the very short end of the curve, the 3-year yield is up just 5 basis points (bps), but two-year yields are up 34 bps, and 10-year yields have shot up 50 bps.
In terms of how those higher yields impact price, the iShares 20+ Year Treasury ETF (TLT) is down 8% and back down near its lowest levels since 2011. Talk about a lost decade!
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Dividends (DVY) Get Payback on Growth (VUG)
Checking in on our Trend Analyzer tool, the clear biggest losers over the past week have been growth stocks. As shown in the snapshot below, almost all of the growth ETFs regardless of market cap have fallen over 1% in the past week. Although these are the same groups that have posted some of the biggest gains on a year to date basis, that recent drop has brought them back below their 50-DMAs with some like the Russell Mid-Cap Growth ETF (IWP) and small-cap Russell 2,000 Growth ETF (IWO) falling into oversold territory.
On the other end of the spectrum, there are only a small handful of ETFs in this screen that have risen over the past five days. The strongest of those has been the Select Dividend ETF (DVY) with a nearly 1% gain in the past week. That has cut into modest year to date declines (few other ETFs in this screen are also down year to date, but those are also dividend or low volatility focuses). In other words, price action over the past week has to some degree been a rotation of year to date performance.
In the charts below, we show the ratio of the Dividend ETF (DVY) versus the Growth ETF (VUG). The ratio has been in a steep downtrend throughout 2023 meaning growth has trumped dividend payers. However, this month’s reversal of that outperformance has resulted in the ratio to break out of that downtrend. Zooming out, that rebound in the ratio has also coincided with an uptrend line off of late 2020 and 2021 lows. Time will tell how lasting this reversal in relative performance will be, but from a purely technical standpoint, it has come at a logical point.
Housing Starts and Building Permits Go Separate Ways
Building Permits and Housing Starts are always reported on the same day, but today’s report for the month of August was one of the more bizarre ones we’ve seen in some time. While Building Permits topped consensus forecasts by 100K (1.54 million vs 1.44 million), Housing Starts had a big miss coming in at just 1.28 million versus forecasts for a pace of 1.44 million. In the case of Starts, it was the biggest miss relative to expectations since February 2019 and the weakest monthly print since June 2020. In terms of the divergent results relative to expectations, going back to at least 2002, it was the first time that either Building Permits or Housing Starts missed expectations by at least 100K while the other beat forecasts by at least 100K.
As shown in the table below, all of the strength and weakness in this month’s report was due to fluctuations in multi-family units. While multi-family starts were down 26% m/m, multi-family permits were up 16% m/m. Single-family units, meanwhile, were much more restrained with starts down just 4% while permits were up 2%. Thus, what looked like a very volatile report at the surface was more grounded below the surface.
Looking at Housing Starts on a 12-month average basis shows that activity has slowed sharply over the last year. At an average of 1.41 million over the last twelve months, total Housing Starts were the lowest in August since February 2021.
Again, while overall starts and permits have been driven by swings in multi-family units, both single-family permits and starts have actually started to stabilize and turn higher over the last two months. If that trend can continue in the months ahead, it would be a positive shift in the trend.
Bespoke’s Morning Lineup – 9/19/23 – Divergent Housing Data
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“The very idea of the power and the right of the people to establish government presupposes the duty of every individual to obey the established government.” – George Washington’s Farewell Address, 9/19/1796
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Futures are looking at a modestly positive open this morning even as crude oil and treasury yields are higher. Buildings Permits and Housing Starts were just released, and this was one of the weirder reports we have seen in a while. While Building Permits topped consensus forecasts by about 100K, Housing Starts missed forecasts by about 150K! The reaction in futures has been modestly negative, but at this point, investors have their sites set on the FOMC tomorrow.
While it’s on pace for its third straight day of declines today, the US Dollar Index has had a big rally over the last two months that took it to its highest levels of 2023. With that strength, the 50-day moving average (DMA) has been catching up to the 200-DMA which has also just started to turn higher. Given the trajectory of both moving averages, the Dollar Index is likely to have a ‘Golden Cross’ in the coming days which occurs when a short-term moving average (like the 50-DMA) crosses up through a longer-term average (like the 200-DMA) as both are rising. Technicians consider these types of patterns to be bullish over the longer-term, but often their record in theory is much different than in actual practice.
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The Dirty Dozen
The latter part of September has historically been one of the weakest periods of the year for the S&P 500, and last year was especially painful. The chart below shows the percentage of S&P 500 stocks that posted positive returns from the close on 9/18 through the end of September over the last ten years. Since 2013, there have only been two years where more than half of the index’s components managed to eke out a gain during this period. The average over the last ten years was just 36% which is a pretty low number when you think about it. Even that looks good, though, when you look at last year (2022) when just 2% of stocks in the S&P 500 managed to rally during the last twelve days of September!
The table below lists the seventeen S&P 500 stocks that have traded down from the close on 9/18 through month end at least nine out of ten times over the last ten years. Of those seventeen stocks, four – Viatris (VTRS), Sealed Air (SEE), Simon Property (SPG), and Johnson & Johnson (JNJ) have traded lower during this period in all ten of the last ten years. That being said, the range of declines varies widely from a median decline of 5.89% for VTRS to less than 1% for JNJ. Besides those four stocks, another 13 in the S&P 500 have traded lower during this period in nine of the last ten years, including names like Freeport-McMoRan (FCX), Discover (DFS), and CVS Health (CVS).
Some stocks have managed to buck the late September blues, though. O’Reilly Automotive (ORLY) was one of the few stocks to rally between 9/18 and the end of September last year, and it has traded higher during this period in eight of the last ten years for a median gain of 1.73%. ORLY is the only stock to trade higher during this period in eight of the last ten years, but Automatic Data Processing (ADP), WR Berkley (WRB), and Tyler Technology (TYL) have traded higher 70% of the time, and just seventeen other stocks have traded up at least half of the time. Some of the more well-known names in this cohort include Domino’s (DPZ), Chipotle (CMG), Cisco (CSCO), and IBM. Unless you’ve been heavily exposed to these stocks in the later part of September over the last ten years, you’re probably counting the minutes until October!
