Bespoke’s Morning Lineup – 2/16/23 – More Data
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“Like it or not, life is a game. Whoever denies that truth, whoever simply refuses to play, gets left on the sidelines.” – Phil Knight
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There’s a tone of weakness in the market this morning ahead of another busy morning for economic data with PPI, Housing Starts, Building Permits, Jobless Claims, and the Philly Fed all being released at 8:30. The S&P 500 is poised to open down about 40 basis points (bps) while the Nasdaq is down closer to 0.5%. Despite the weakness in equities, Treasuries are actually trading modestly higher as crude sees modest gains. The only real asset class showing strength is crypto as bitcoin is up nearly 2%.
Overshadowed somewhat by the much stronger-than-expected Retail Sales report, yesterday’s update on Industrial Production for January missed forecasts by a wide margin showing no growth in January versus forecasts for an increase of 0.5%. January’s report marked the second straight month that Industrial Production was 1.5% or more below a 12-month high which is the largest decline from a peak since the COVID crash. Looking at the chart below, there have been plenty of other times when Industrial Production showed larger declines. That being said, in the majority of instances where Industrial Production dropped this much or more, a recession wasn’t far behind. There were exceptions but not a lot of them.
This doesn’t mean that a recession is imminent. Every period is different. What the current period has going for it is that consumer balance sheets were in great shape heading into the current FOMC tightening cycle, and the employment backdrop remains positive. The hope is that these factors will provide a long enough bridge to get over the valley of the manufacturing sector’s slowdown.
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Homebuilder Sentiment Pops
Wednesday’s release of homebuilder sentiment from the NAHB showed a significant rebound in sentiment as the headline reading has risen in back-to-back months from the low of 31 in December up to 42 this month. While that is not a screaming endorsement of strength from homebuilders (in the past decade, the only times the index was this low was the past few months and the start of the pandemic), it does mark an improvement in sentiment that is consistent with the recent turnaround in mortgage rates and the rise in weekly mortgage applications.
While sentiment has risen in back-to-back months, the moves from January to February were historic across the report. The only index to not experience a monthly move that ranks in the top decile of all periods was the Midwest. Future Sales was the most impressive with its 11-point jump tied with November 1988 for the second largest month-over-month increase on record.
As for the headline index, the 7-point increase was the largest increase since the months of May, June and July 2020 when sentiment began to recover from the pandemic plummet. Prior to 2020, June 2013 was the last time sentiment has risen by as much. Click here to learn more about Bespoke’s premium stock market research service.
Bespoke’s Morning Lineup – 2/15/23 – Retail Sales Come in Hot
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“No company can afford not to move forward. It may be at the top of the heap today but at the bottom of the heap tomorrow, if it doesn’t.” – James Cash Penney
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Futures were already modestly weaker heading into the January Retail Sales report, but the much stronger-than-expected readings have added extra pressure to equity prices as Treasury yields continue to rise. The 10-year yield is on pace to close at its highest level of the year while the 2-year yield is knocking on its cycle highs from late October. Empire Manufacturing for the month of February was still negative but came in better than expected after showing a larger-than-expected improvement from January’s dismal readings. Still on the agenda today, we have Industrial Production, Capacity Utilization, Business Inventories, and Homebuilder sentiment. Lower rates had been helping the housing sector earlier this year, but increases in yields over the last week or so haven’t been helpful.
With Retail Sales on the front burner this morning, we wanted to provide a quick update on the performance of retail-related stocks so far this year. The two most popular ETFs tracking the retail sector are the VanEck Retail ETF (RTH) and the S&P Retail ETF (XRT). Depending on which one you look at, YTD performance varies greatly. RTH has rallied 5.45% since the start of the year, while XRT has nearly tripled that performance with a gain of 16.33%.
So, what explains the outperformance this year? Looking at the top ten holding of each ETF and their YTD performance, they may be retail-related ETFs, but they sure don’t have a lot in common. XRT is basically a broad-based equal-weighted ETF where no company has a weighting in excess of 2.5%. RTH, however, is a more top-heavy market cap-weighted tracker of the retail space. In RTH, Amazon.com (AMZN) accounts for over 20% of the holdings, Home Depot (HD) accounts for 8%, and Walmart (WMT) and Costco (COST) each have a weighting of about 6%.
As shown in the chart below, not one of the top ten holdings of XRT is also a top-ten holding of RTH, and all of the top ten holdings of XRT are up sharply YTD. In fact, the worst-performing top ten holding of XRT (Children’s Place) is still up over 25% YTD which is more than five percentage points better than the top performing top ten holding of RTH (AMZN).
The performance disparity between the two ETFs hasn’t just been confined to this year. Looking at the relative strength of the two ETFs over the last three years shows how they have traded off between periods when each one took the lead. From the early days of COVID through early 2021, XRT outperformed RTH by a wide margin, but during the bear market of 2022, it was RTH that outperformed as the largest cap retailers went down less than many of the smaller ones. This year, though, the tide has been turning in the first six weeks of the year. Despite tracking the same sector of the economy, the performance of both XRT and RTH over the last three years shows how even if you get the macro trend right, how you implement the trade will be just as, if not even more important than the premise behind the trade in the first place.
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Inflation Concerns Easing
As we noted in an earlier post, this morning’s release of the NFIB Small Business Survey showed fewer and fewer respondents observing price increases. Similarly, while still high, fewer respondents to the survey are reporting inflation as their biggest problem. While the issue remains historically elevated and the predominant issue for small businesses, the percentage of respondents reporting inflation as their biggest issue fell to 26% in January. That compared to a peak of 37% last summer. As shown below, this reading still has a long way to fall to get back to pre-COVID norms, but at least it’s trending in the right direction.
In the table below, we break down the percentage of small business respondents that reported various issues as their most pressing this month. As mentioned above, inflation remains the single most commonly reported issue and that reading is also the most elevated with regards to its historical range. However, the six point decline month over month ranks in the bottom 1% of all month over month moves. At the same time, fewer respondents reported costs of insurance to be an issue. Government requirements and red tape also pulled back, albeit that was offset with a 4 percentage point jump (a 95 percentile month over month move) in the share reporting taxes as their biggest issue. When it comes to “poor sales,” only 4% of small businesses listed this as their number one problem — the same level it was at last month and in the bottom percentile of all readings in the survey’s history. When it comes to recessionary indicators, we would expect small businesses to list “poor sales” as their number one problem when things really start to slow down, and that simply hasn’t happened yet. Click here to learn more about Bespoke’s premium stock market research service.
NFIB Nuances
This morning’s release of the NFIB‘s survey of small business sentiment showed only a modest rebound. Whereas the index was expected to rise from 89.8 up to 91, the index only rose to 90.3. Albeit higher sequentially and off the lows from last fall, the January reading also remains below the worst levels from the onset of COVID.
In addition to optimism remaining weak, the most recent month also saw a surge in economic policy uncertainty. Rising 5 points month over month to 76, that index is at the highest level since July 2021 and saw its biggest one month jump since last July.
Looking across the individual components of the report, breadth was mixed with six of the ten inputs into the headline optimism number moving higher while the other four fell. Multiple categories—in addition to the headline index—are in the bottom decile of their historical ranges. As we discussed in today’s Morning Lineup, while in aggregate some aspects of the report remain weak, there is some nuance. In general, this month’s report saw improvement in categories measuring realized changes (i.e. actual earnings changes, actual sales changes, actual employment changes, etc.) while expectations were much worse (i.e. plans to make capital outlays, plans to increase inventories, etc.). In other words, small businesses appear to have pessimistic outlooks contrary to reporting actual improvements in their businesses.
The employment situation showcases that divergence between actual changes and plans. Hiring plans remain at the low end of the pandemic range even after a slight rebound versus the December reading. Meanwhile, compensation plans have plummeted to a new low and the weakest level since April 2021. That was in spite of actual employment changes showing net hirings at the highest level since March 2020 with a coincident uptick in compensation to the highest level in six months.
Albeit on net more firms are seeing declines rather than increases, this month also saw an improvement in actual sales and earnings. Part of that change is likely thanks to alleviation in inflation as the higher prices index hit a new post-high low of 42. In turn, the percentage of respondents reporting now as a good time to expand has modestly recovered. With that said, sales expectations continued to reverse lower after peaking two months ago.
As for expenditure indices, again the dichotomy of plans and actual changes is apparent. While plans experienced a 13th percentile month over month decline to the low end of its pandemic range, reported capital expenditures have surged with a top decile month over month reading. In fact, that sharp rise during the month of January resulted in the joint highest reading of the post pandemic period (March and May 2021 saw identical readings).
Meanwhile, plans to increase inventories are rapidly declining. The index for inventory accumulation has now reached the lowest level since 2009. However, even though inventories are rapidly declining, businesses on net report satisfaction with current inventory levels. Following the very high readings in inventory satisfaction earlier in the pandemic (meaning on net a higher percentage of respondents reported inventories were too low), the huge drop in inventory accumulation would indicate some supply/demand mismatches are working themselves out; likely in part thanks to weakening sales.
Turning back to capital expenditures, the NFIB also surveys on what these small businesses are spending their money on. January saw a broad uptick across categories with the exception of furniture or fixtures. Click here to learn more about Bespoke’s premium stock market research service.
Bespoke’s Morning Lineup – 2/14/23 – CPI Loves Me, CPI Loves Me Not
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“Today is Valentine’s Day — or, as men like to call it, Extortion Day!” – Jay Leno
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Given the lack of major economic data last week, investors have had their sights set on the January jobs report ever since the January employment report earlier in the month. Well, the day is finally here. The consensus was for an acceleration from December’s rate, which was a decline of 0.1%. The 9% surge in gas prices during January alone would suggest an increase of 0.5%, which coincidentally is right where consensus forecasts had settled heading into the report. It’s also exactly where the report came in. Ex Food and Energy, the reading came in at 0.4% which was also right in line with forecasts. The only issue was the y/y readings which both also came in higher than expected.
While a 0.5% m/m increase is red meat for the headline writers to paint a narrative of inflation starting a new leg higher, the fact that it’s also right where consensus expectations are means that it was priced into the report. Also, with interest rates rising leading up to the report last week, one could argue that many investors were gearing up for an even stronger number. The market reaction so far has been indecisive. After originally erasing all of the pre-market gains, futures rebounded back above where they were heading into the report, and have now once again erased those gains. All in the span of nine minutes! Interest rates have been moving in the opposite direction. CPI loves me, CPI loves me not.
As far as the market is concerned, CPI reports have taken on an added significance in the last year as we have seen heightened volatility on CPI days. Over the last year, the S&P 500’s average daily move on CPI days has been a gain or loss of 1.94%, which is a level of volatility last seen back during the financial crisis. As shown in the chart below, there’s been a shift within the trend of volatility, though. From February to July of last year, the S&P 500 declined on CPI days for six straight months and was down for seven out of eight straight months from February to September. Since October, though, there have been four straight months where the S&P 500 rallied on CPI days. Not only that, but the degree of volatility is also showing what could be an early sign of abatement as there have been two months in a row where the one-day change on a CPI day was less than 1%.
Our Morning Lineup keeps readers on top of earnings data, economic news, global headlines, and market internals. We’re biased (of course!), but we think it’s the best and most helpful pre-market report in existence!
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Inflation Expectations Trending Lower
The monthly survey of consumer expectations from the New York Federal Reserve was released this morning and showed that ahead of January’s CPI report on Tuesday, consumer expectations towards inflation are generally stable and trending lower. On a one-year basis, inflation expectations dropped ever so marginally falling from 4.99% down to 4.95%. Three-year inflation expectations dropped from 2.99% down to 2.71%, and the only increase was in five-year expectations which increased from 2.4% to 2.5%.
Regarding expectations for the next five years, it’s hard to read too much into the trend since the NY Fed has only been surveying consumers on this time frame for a year. For the one and three-year time frames, however, we have close to 10 years worth of monthly responses so we can get a better read on how things stand now versus the past. Starting with expectations for the next year, consumers expect inflation to continue to trend lower from the peak of 6.78% last June, and at the current level of 4.95%, they’re at the lowest level since July 2021 even as they remain well above the historical average of 3.34%.
Inflation expectations for the next three years are more interesting. While expectations peaked at 4.21% in October 2021, January’s reading came in at 2.71%, which was the lowest since October 2020, but more importantly, below the historical average of 2.99%. In other words, consumers expect less inflation over the next three years than they have across the majority of other times in the last ten years. See more analysis of economic data with a Bespoke Premium membership. Click here to sign up for a two-week trial today.
New 52-Week Highs in 2023
20% of stocks in the large-cap Russell 1,000 have made 52-week highs at some point so far in 2023. However, about 23% of stocks in the index made their last 52-week highs in February 2022. Across the entire index, the average stock made its last 52-week high 156.9 days ago. Real Estate stocks made their 52-week highs an average of 202.2 days ago, the furthest back of any sector, while Energy stocks on average made their 52-week highs 106.9 days ago (the most recent of any sector).
Below is a list of Russell 1,000 stocks with market caps above $50 billion that have made new 52-week highs at some point in 2023. Of the 28 stocks that made the list, there’s representation from eight of eleven sectors. That’s pretty spread out. The only sectors that aren’t represented are Materials, Real Estate, and Utilities. Health Care, Industrials, and Technology each have six stocks that made the list. The largest stocks include names like Exxon Mobil (XOM), Eli Lilly (LLY), Merck (MRK), Mastercard (MA), Oracle (ORCL), and Visa (V). You can monitor the daily list of new 52-week highs in our Tools section with a new Bespoke Premium membership. Click here to sign up for a two-week trial today.
Bespoke’s Morning Lineup – 2/13/23 – Tough Times For Defense
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“When it’s grim, be the Grim Reaper and go get it.” – Andy Reid
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If you were thinking that there was something familiar about the market last week, you weren’t going crazy. With Communications Services (-5.57%) and Consumer Discretionary (-2.11%) leading the way to the downside and Energy (+4.94%) leading to the upside, it was basically a replay of 2022. Although last week also reflected a fair amount of mean reversion from the YTD moves of 2023, there’s still a good amount of dispersion in the market as six sectors finished the week at overbought levels, three were oversold and just two were neutral. With the oversold camp comprised of Consumer Staples, Health Care, and Utilities, it hasn’t been an especially strong showing for defensive sectors which is something that the defenses of both the Chiefs and Eagles can empathize with. It was such a poor showing for both defenses last night, in fact, that the total of 73 points was the third-highest total of any game, and it was the first time that both teams scored 35 points or more.
Look on the bright side, though, in the ten prior Super Bowls where the total was 60 or more, the S&P 500’s rest of year performance was a gain of 11.7% with positive returns nine out of ten times. The only exception was Super Bowl LII when the Eagles took out the Patriots 41-33 in what was the second-highest-scoring Super Bowl of all time.
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Bespoke Brunch Reads: 2/12/23
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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Frauds
The Great Gatsby of Gold Took Their Millions—and Vanished by Emily Shugerman (The Daily Beast)
An investment manager who promised investors that he would shepherd their savings via physical precious metals certificates ended up absconding with millions in client assets. [Link]
Commodity Trader Trafigura Faces $577 Million Loss After Uncovering Nickel Fraud by Archie Hunter and Jack Farchy (Bloomberg)
One of the world’s largest metals traders may have bought bogus nickel by the hundreds of millions. The metal is a favorite for fraudsters because of relatively high value-weight ratios but less scrutiny and security than precious metals. [Link; soft paywall, auto-playing video]
‘Sam? Are you there?!’ The bizarre and brutal final hours of FTX by Joshua Olver (FT)
A detailed look at leadership of the crypto trading giant as its entire business model evaporated over the course of a couple days last fall, leading to frantic calls trying to borrow billions in order to meet client redemptions. [Link; paywall]
Platform Demise
Elon Musk fires a top Twitter engineer over his declining view count by Zoë Schiffer and Casey Newton (Platformer)
When engineers tried to explain to the irate CEO of Twitter that people might be losing interest in his whole narrative (as opposed to his own tweets’ reach being suppressed by the company’s algorithm) one was fired. There are now only two principal engineers left at the company. [Link]
Tiktok’s enshittification by Cory Doctorow (Pluralistic)
As platforms grow, they stop optimizing for users and start optimizing for advertisers and other paying customers, creating negative feedback loops of bad experiences which eventually doom the audiences advertisers are trying to access. [Link]
Big Mistakes
‘As bad as it gets without body bags.’ by James Fallows (Breaking The News)
Some background on a harrowing incident at Austin’s airport which would likely have led to a disastrous mid-air collision if not for some quick thinking by a very attentive FedEx flight crew. [Link]
Your jailbroken ChatGPT might violate OpenAI’s safety guidelines when role-playing as ‘DAN’ by Clint Rainey (Fast Company)
OpenAI has built guardrails into its popular ChatGPT chatbot, but a set of instructions posted on Reddit appear to show how to get around the restraints that have been placed on the AI system by its creators. [Link]
Government Chaos
A single Republican holdout doomed the GOP’s ‘skinny budget’ on Monday by Jerod Macdonald-Evoy (AZ Mirror)
A single Republican state House legislator in Arizona is preventing the passage of a budget until the 2022 election can be re-done as she claims that the election was rigged. With a one vote majority, that means the state is faced with a difficult path to keeping government operating. [Link]
Moldova’s Pro-Western Government Collapses as Fallout From Ukraine War Worsens by James Hookway (WSJ)
The small neighbor to Ukraine, which has also been put under pressure by Russia, saw its pro-EU government resign this week after a brutal series of economic shocks related to the war in Ukraine. [Link; paywall]
Fungus
Fungal infections are becoming more common. Why isn’t there a vaccine? by Berkeley Lovelace Jr (CNBC)
While fungal infections are less of a threat than bacteria or viruses, a warmer planet is making them more common with some fungal infections untreatable. But no vaccine currently exists. [Link]
Texas
How the Crispy Dog Became San Antonio’s Signature Snack by José R. Ralat (Texas Monthly)
A cheese-stuffed dog fried in a tortilla shell is a famed snack for San Antonians, but the demise of small family restaurants that popularized the treat is making it harder to find in the city. [Link]
Investing
The Retreat of the Amateur Investors by Gunjan Banerji (WSJ)
First-time investors went from near-overnight millionaires thanks to free-to-trade apps and lots of leverage to working in delis after a year-long bear market that hit momentum and growth plays especially hard. [Link; paywall]
Real Estate
Boomer Dads Are Driving Real-Estate Agents Nuts by Adriane Quinlan (Curbed)
Millennials are relying on their parents for advice buying homes as well as funding, which has Boomer Dads more involved in real estate transactions than has historically been the case. Realtors, at least, are not fans of this arrangement. [Link]
Superbowl
Patrick Mahomes Is the NFL’s Half-Billion Dollar Quarterback. He’s Still a Bargain. by Andrew Beaton (WSJ)
While a half-billion dollar contract may sound impossible to live up to, the Kansas City Chiefs’ Patrick Mahomes has turned out to be worth much more than the Chiefs pay him. [Link; paywall]
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Have a great weekend!