Harry Truman is famous (among other things) for saying, “Give me a one-handed Economist. All my economists say ‘on hand…’, then ‘but on the other…”  And it’s true.  You rarely will see an economic analysis that doesn’t couch one view with an alternative scenario, and you can’t fault them for hedging their bets.  Predicting the future is impossible, especially when it involves the direction of the world’s largest economy.

This morning’s employment report also has a number of hands.  At the surface, the report was better than expected coming in ahead of expectations (261K vs 193K).  As shown in the chart below, this was the seventh straight better-than-expected print and the ninth in the last ten months.

To illustrate just how impressive this recent run has been, the chart below shows streaks of better-than-expected prints in non-farm payrolls (NFP).  The current streak of seven is easily the longest such streak since at least 2000.

While job growth in the US economy has consistently surpassed expectations this year, it is important to point out that the pace of job growth isn’t accelerating.  This month’s print of 261K was actually the smallest monthly increase since late 2020 and is well off the peak readings seen in 2021 when the FOMC was maintaining its zero interest rate policy.  To put this trend in perspective, in 2021 the average monthly change in NFP was 562K.  In 2022, that average has declined to 407K, and in just the last three months, the average has been 289K.  On the one hand, the job market remains strong. On the other hand, momentum has clearly peaked and there has been a trend of deceleration. Click here to learn more about Bespoke’s premium stock market research service.

Jobless claims continue to be a snoozer.  Headed into tomorrow’s nonfarm payrolls report, initial jobless claims were little changed falling 1K down to 217K.  Over the past month, claims have been in a relatively tight range of only 12K.  That is the tightest one-month range since late June/early July, albeit claims are at slightly healthier levels than back then as well.

On a non-seasonally adjusted basis, claims are at 185.6K, which is the lowest level since 1969 for the comparable week of the year.  Claims have been on the move higher as is the norm for the point of the year.  In fact, the current week of the year has been one of the most frequent to see week-over-week increases in unadjusted jobless claims with increases 83% of the time since 1967.

While initial jobless claims have not seen particularly large moves recently, the picture for continuing claims has begun to shift.  Although continuing claims are much further below their pre-pandemic range than initial claims, the most recent week saw a move up to 1.485 million which is the highest level since the end of March. As a result, the ratio of initial to continuing claims has moved sharply lower and is closing in on its historical average.  That compares to earlier this year when initial claims were running at much weaker levels than continuing claims implying little follow-through on initial claims. Click here to learn more about Bespoke’s premium stock market research service.

Given the collection period, the latest sentiment data from the weekly American Association of Individual Investors survey would not have fully captured the FOMC meeting yesterday or the market’s reaction to the event. As a result, with the S&P 500 having erased a large portion of late September and early October losses, sentiment took a massive bullish swing. Bullish sentiment gained 4 percentage points for the third weekly increase in a row. Bullish sentiment topped 30% for the first time since the week of August 18th.

Relative to the moves in bearish sentiment, those gains to bulls are outright modest. In the past two weeks, bearish sentiment has seen back to back double digit declines, bringing it from 56.2% all the way down to 32.9%; the lowest level since the end of March. That was the first time that bearish sentiment has seen back to back declines of at least 10 percentage points since 2009, and further back in the history of the survey that has only happened two other times: June 2004 and in the first year of the survey in September 1987.

While back to back double digit declines for bearish sentiment are exceedingly rare, there has been more precedent for bearish sentiment falling at least 20 percentage points in a two week span.  In the table below, we show each occurrence that has happened with at least 3 months between the prior occurrence.

As for how the S&P 500 has typically reacted, forward performance has been lackluster.

Given the massive drop in bearishness, the bull bear spread has experienced a massive reversal.  At the moment, the spread is only at -2.3.  That is the highest reading since the end of March, and the near record streak of consecutive negative readings (31 weeks) appears to be at risk.

Obviously considering only a small share of the losses to bears have gone to bulls, the percentage of respondents reporting neutral sentiment has risen sharply.  The reading climbed 8.8 percentage points week over week to 36.5%. That is the highest reading and largest weekly jump since the end of March  Click here to learn more about Bespoke’s premium stock market research service.

As mortgage rates continue to press higher with Bankrate.com’s 30 year national average for a fixed rate loan hovering well above 7%, high frequency housing data continues to show no signs of relief. The latest mortgage purchase reading from the Mortgage Bankers Association released this morning showed the lowest level of applications since the start of 2015.  As we mentioned in today’s Morning Lineup, that would imply further significant declines in new and existing home sales data to come.

Refinance applications are even worse. Given homeowners would be refinancing at some of the highest rates of the past few decades, refinance applications were up modestly week over week, although that is far from enough to lift it off of the lowest levels since August 2000.

On a non-seasonally adjusted basis, purchases tend to peak in the late spring followed by a gradual decline through the end of the year. While mortgage activity has fallen off of a cliff this year, the drop has followed the usual seasonal pattern.  What is amazing about this year is just how large of a drop that has been.  Whereas 2022 started with purchase apps coming in at some of the strongest levels of the past decade for the comparable weeks of the year, the opposite is true today.

Although purchases have followed their seasonal pattern, the chart above does not do justice in showing how large of a decline it has been off of the annual peak.  It has been nearly half a year (25 weeks) since applications hit their seasonal high, and in that time, purchases have been essentially cut in half.  Relative to the 25 weeks after each other annual high since 1990, 2010 was the only other year in which there was a similar decline.  However, that year comes with a caveat that the expiration of special homebuyer tax credits lent to a particularly strong home-buying season. Similarly, a change in mortgage disclosure rules in the fall of 2015 resulted in a seasonal peak occurring unusually late in the fall of that year, so 25 weeks later extended out to the following year.  Given that, purchases were actually higher in the 25 weeks later; the only year in which that is the case.  In other words, caveats aside, no other year in the history of this data has seen as sharp of a decline in homebuying/mortgage origination activity as this year. Click here to learn more about Bespoke’s premium stock market research service.

The past year has been a rough road for equities, but growth in particular has certainly seen its fair share of underperformance. The past month especially has been a notable microcosm of that underperformance.  As we approach the one-year mark of the last all-time high in growth-oriented indices like the Nasdaq (discussed in today’s Chart of the Day) or S&P 500 Growth index, large-cap growth’s relative strength has broken down versus equities broadly, as well as growth and value across various market cap ranges.

As shown below, S&P 500 Growth relative to the S&P 500 steadily moved higher (upwards trending lines indicate S&P 500 growth outperformance) throughout the post-Global Financial Crisis era and absolutely took off in the early stages of the pandemic. After peaking in November of last year, the relative performance of growth has been on the downswing and erasing most of its earlier pandemic outperformance.  In fact, following the historic weakness of mega caps on earnings (which we discussed in last week’s Bespoke report) that has continued into this week, and the relative strength is now at the lowest level since the end of February 2020.

Large-cap growth has not only underperformed other large caps, but it has also dramatically underperformed its mid and small-cap peers. From the post-Dot Com Bubble years through the Global Financial Crisis period, large-cap growth serially underperformed growth stocks of both the mid and small-cap varieties. The past decade, however, erased much of that underperformance. In fact, the 20-year relative strength line of S&P 500 growth versus S&P 400 growth actually turned positive briefly earlier this year in February. In other words, after almost two decades the performance of large-cap (S&P 500) and mid-cap (S&P 400) growth was finally near equal. Since then, the relative strength line has pivoted sharply lower and is now testing the uptrend line that has been in place since 2016.

Relative to small-cap growth, large-cap growth was much weaker in the first half of the 2010s and didn’t really begin to turn higher until the past five years. With that said, it also peaked far earlier (September 2020) than the relative strength versus mid-cap growth and is not quite testing its multiyear uptrend line yet.

Where the more dramatic underperformance of large-cap growth has been is relative to value stocks. As shown in the first chart below, relative to large-cap value, large-cap growth generally remains in its longer-term uptrend although most post-pandemic outperformance has been erased.  Moving down the market cap chain increasingly worsens that picture through.  The relative strength line of S&P 500 growth versus S&P 400 value recently hit a new low for the post-pandemic period, nearing the flatline in the process. In other words, large-cap growth has almost erased all of its outperformance versus mid-cap value, not only since the start of the pandemic but over the past 20 years. As for small caps, that outperformance is now gone entirely gone as the relative strength line now registers negative readings. Both versus mid and small-cap value, large-cap growth has definitively broken its multi-year uptrends that had been in place since late 2016. Click here to learn more about Bespoke’s premium stock market research service.