The Bespoke Report – It’s the Geo-Political Unrest, Stupid
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Bespoke’s Morning Lineup – 10/27/23 – An Up Day to End the Week?
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“If you could kick the person in the pants responsible for most of your trouble, you wouldn’t sit for a month.” – Theodore Roosevelt
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It’s getting to the point where if you want to see the market trading higher, set your alarm an hour or two earlier. Dow futures were firmly in the green very early this morning but reversed sharply a couple of hours ago as oil prices spiked following news that the US had launched airstrikes on certain targets in Syria. You know what that means; we’re heading into another weekend with a ton of uncertainty over what’s going to happen in the Middle East. There’s very little incentive to take much of a stand heading into an over 60-hour lull where the equity market will be closed for trading. Therefore, how the market manages to finish the day today will give a good idea of how sentiment looks after a rough couple of weeks of trading. Not including today, the S&P 500 has been down on five of the last six Fridays.
While Dow futures are now firmly in the red, S&P 500 futures are hanging onto positive territory (for now), and the Nasdaq is indicated to open firmly higher. Whether those gains hold will depend in part on how this morning’s economic data comes in relative to expectations. At 8:30, we got updates on Personal Income (weaker than expected) and Personal Spending (stronger than expected) as well as the PCE Deflator on both a headline (higher than expected) and core (inline) basis. At 10:00, the University of Michigan will give us updates on overall consumer sentiment and inflation expectations. Of the reports, Core PCE and the inflation expectations components of the Michigan survey are the two we’ll be paying closest attention to.
The last five trading days have been painful for US stocks, but the weakness has been global in nature. The snapshot below from our Trend Analyzer shows the performance of regional global equity ETFs and where they stand relative to their trading ranges. Outside of Europe, which is still oversold, every other ETF in the snapshot closed yesterday at ‘extreme’ oversold levels. Declines have been widespread around the globe with every ETF trading down at least 1.5% over the last week and all but two are at least 5% below their 50-day moving averages.
Looking a little closer at the returns in the last week, US equity ETFs have been hit especially hard with declines of more than 3% while most of the other ETFs are down closer to 2% or less. The underperformance of US equity-based ETFs is mostly a reflection of the weakness in mega caps this week. Mega caps have been big drivers of US outperformance this year, but now investors are getting a taste of the process working in reverse.
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New Lows for S&P and Sentiment
The S&P 500 having made fresh lows in the past week has justified a continued decline in bullish sentiment per the latest AAII survey. As shown below, only 29.3% of respondents reported as bullish this week compared to 34.1% last week. Although sentiment has quickly reversed, the last week of September actually saw an even lower bullish reading of 27.8%.
Bearish sentiment, on the other hand, rose up to 43.2% which was the highest reading since the first week of May. Bearish sentiment rose 8.6 percentage points week over week which was the largest single-week increase since February.
Given the new high in bearish sentiment and drop in bulls, the bull-bear spread tipped deeper into negative territory. Bears now outnumber bulls by 13.9 percentage points. That is the widest margin since May.
While the AAII survey has shown an expressly negative turn, other sentiment surveys are more mixed. For starters, the NAAIM Exposure Index echoed the AAII results. The index tracking equity exposure of fund managers echoed the pessimistic tones of the AAII survey as it dropped to the lowest level since the week of October 12th last year. Meanwhile, the Investors Intelligence survey of newsletter writers has managed to hold onto a more bullish tone. That survey’s bull-bear spread has been more steadily above its historical average over the course of the past couple of months.
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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