Bespoke’s Morning Lineup – 12/15/22 – Data Deluge
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“I was now resolved to do everything in my power to defeat the system.” – Oskar Schindler
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Investors didn’t like what they heard from Powell yesterday, and after sleeping on it overnight, they like what they heard even less. Futures are sharply lower this morning, but it’s not all because of the Fed. Since the close yesterday, we’ve seen a number of other central bank rate decisions around the world, plus a big batch of bad data from China where retail sales, unemployment, industrial production, and property prices all came in weaker than expected. This morning in the US, we’ve also seen a bunch of data, and it has also generally been weaker. Retail Sales, Empire Manufacturing, and Philly Fed all came in weaker than expected, while initial jobless claims were stronger than expected, and continuing claims came in right in line with forecasts.
This morning’s negative tone in the futures is disheartening for investors as it looks like just another failed test of the 200-DMA and the downtrend line that has been in place since the start of the year. Only time will tell if that ends up being the case, but the fact that the Fed continues to push the hawkish narrative right into what is an increasingly large pile of recession signals doesn’t inspire a lot of confidence.
Looking at the chart of the S&P 500, one light of encouragement is the fact that while the S&P 500 completely reversed course and sold off following its two prior tests of the downtrend, in the current one, it has been hanging around right around those levels for a few weeks now. There’s a saying in technical analysis that the more support or resistance is tested, the weaker it becomes, so the fact that we’ve seen multiple tests of the current downtrend with increasing frequency in the last few weeks could be just what the market needs to get through that level. That’s the hope at least!
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Another Fed Day Ends in the Red
Another Fed day is in the books, and the Fed Funds target rate is now 50 bps higher than it was yesterday. In tonight’s Closer, we will provide further commentary on the content of the FOMC’s statement, SEP, Fed Chair Powell’s presser, and the market reaction. With the S&P 500 finishing the day down 0.61%, today marked the third decline on a Fed day in a row. That is the longest streak of consecutive declines on Fed days since the three meetings ending July of last year. Looking at the price action of the S&P over the past three meetings, today basically stuck to the script. Whereas the index traded higher throughout most of the session leading up to the release of the policy decision, it plummeted when the statement hit the tape. That drop brought the index into the red on the day in a similar way to the September meeting. Declines kept on coming until shortly after Powell took the podium. From there, the S&P 500 rebounded, even pivoting back into the green briefly around the time of the conclusion of the presser. While it did not go on to end the day at the lows of the day like the past couple of meetings, Powell’s presser that pumped stocks back into the green was not long-lasting as the S&P dipped back into the red in the final hour of trading. Click here to learn more about Bespoke’s premium stock market research service.
Energy Losing Its Grip
You know those scenes in the movies where a character finds themselves hanging off a bridge, and slowly their sweaty grip starts to loosen as a finger or two starts to slip? That’s what the energy sector is going through right now. As oil prices have been under pressure over the last few months, energy stocks had been holding up relatively well as the S&P 500 Energy sector hit a new cycle high exactly a month ago today. Since then, the sector has declined nearly 9% even as the S&P 500 has moved higher. Last week, the sector broke below its 50-DMA for the first time in over two months before stabilizing this week. Since that break below the 50-DMA on 12/6, the sector has made multiple intraday attempts (including today) to get back above it, but each time the sector has sold off and finished off its intraday highs. When looking at a price chart, any time you see a security break below a key moving average and then make several unsuccessful attempts to get back above that level, it’s often a sign of a momentum shift.
On a relative strength basis, the Energy sector is also toeing a key trendline. The chart below compares the relative strength of XLE to the S&P 500 (SPY) over the last year. During that time, Energy’s relative strength has been riding a trendline higher with bounces each time it kissed that level. The most recent example occurred this week, but at this point, the bounce has been meager. Energy stocks have been outperforming energy commodities in recent months, so it’s only natural to see some mean reversion in the stocks as well, but with the sector already breaking below its 50-DMA, this is a key trendline to watch. If the sector’s relative strength weakens further, the technical picture for the sector would weaken materially, which would be a development investors in just about every other sector wouldn’t shed a tear for. Click here to learn more about Bespoke’s premium stock market research service.
Bespoke’s Morning Lineup – 12/14/22 – Eight is More Than Enough
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“Adventure is just bad planning.” – Roald Amundsen
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Welcome to the 8th and final FOMC policy announcement of the year. Maybe it’s just us, but we would have been fine with just one or two announcements this year and a whole lot fewer speeches. Markets are pricing in a near certainty of a 50 bps rate hike today bringing the Fed’s total interest rate increases for 2022 to 4.25 percentage points. While markets are pretty certain of what the Fed will do, the big question on everyone’s mind is what is Powell going to say.
Isn’t it ironic that in the age of maximum Fed transparency where Fed officials practically speak multiple times a day that investors really have no idea what kind of tone the Fed chair will take at his news conference today? Will he start off the disclaimer that the Fed is “strongly committed to bringing inflation back down to our 2 percent goal”? Hopefully, Powell got up on the right side of the bed this morning and traffic getting to K street wasn’t too bad.
Futures have been mixed all morning on what has been a quiet day for data. The only release on the calendar was Import and Export Prices. Import Prices fell more than expected (-0.6% vs -0.5%), and Export Prices fell less than expected (-0.3% vs -0.5%). At the end of the day, though, none of this matters. Whatever Powell says will dictate the tone of the day. Any hints of a pause or a lowering in the magnitude of rate hikes going forward will be what bulls need to keep the rally going.
Despite recent comments from FOMC officials looking to downplay the significance of inverted yield curves and their impact on the economy, market participants have been intently focused on both the quantity and persistency of inversion at various points on the US Treasury curve. One of the Fed’s preferred measures of the yield curve is the spread between the yields on the 10-year and 3-month US Treasuries. This morning, the 10y3m curve remains inverted by over 80 basis points (bps) which will mark the 15th straight trading day that the curve was inverted by 50 bps or more.
Going back to 1962, there have been four other periods where the 3m10y curve inverted by 50 bps or more for at least 15 straight trading days. Each of those prior streaks lasted much longer than the current streak, although, with the curve inverted by over 80 bps, this streak can also be expected to last much longer. In terms of where these streaks occurred in the business cycle, in each of the four periods, a recession followed within eight months.
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Inflation Concerns Give Way to Interest Rate Worries
In an earlier post, we detailed the latest NFIB survey of small business optimism. Included in that report are survey results of what small businesses are reporting to be their most important problems to their business. As could be expected with CPI continuing to run in the 7% YoY range, inflation remains top of mind. 32% of respondents to the November survey reported inflation as their biggest concern, slightly outnumbering those reporting cost or quality of labor as the biggest issue. While that continues to be a historically large share of responses, the reading did fall one percentage point month over month as it remains off the peak of 37% in July.
As previously mentioned, behind inflation, the cost or quality of labor (combined) is the next biggest issue for small business, accounting for 30% of responses. That matches the readings from this past July and March for the lowest readings since January 2021. Paired with the other labor related indices of the report, these figures point to some softening of the labor market.
The November report of course coincided with the midterm election. Historically, the NFIB survey has been fairly sensitive to political happenings and the reading on the percentage of respondents reporting government red tape or taxes as their biggest issues has been a good proxy for this. In the past, the reading has tended to be higher during Democrat administrations and lower during Republican administrations. However, during President Biden’s time in office, high inflation has resulted in few respondents seeing political related problems as their biggest issue. That was re-emphasized in November as the reading returned to tie July’s record low of only 16%. We would note that this reading has the potential to turn higher given that past midterm months like 1990, 2002, and 2018 have marked short term spikes lower and higher.
With those biggest issues all seeing a lower share in November, it begs the question of what problems replaced them? Poor sales (+1 ppt), Cost/Availability of Insurance (+2 ppt), Competition from Small Businesses (+2 ppt), and Financial & Interest Rates (+2 ppts) all saw higher readings last month. Of those problems, the latter two are perhaps the most interesting. Historically, neither of these two issues have tended to rank particularly high up among the ten choices given in the survey, but in the past year their share has been decimated without anyone reporting them to be the biggest problems at certain points. That is less so the case today. Competition from big businesses has risen back up to 5% of responses; a reading that would have been similar to much of the first half of the 2010s previously.
Meanwhile, as interest rates have risen rapidly, 3% of responses saw problems with financials and interest rates. Although that is not a large share of total responses, it was the highest share in nearly four years. The NFIB survey is a relatively minor data point and this issue accounts for an overall small share of responses meaning it is highly unlikely this would so much as be considered in regards to monetary policy, however, one potential takeaway of these responses is that small businesses are at least beginning to see some negative impacts of a higher rate environment. Click here to learn more about Bespoke’s premium stock market research service.
Inflation Subsiding For Small Business
The National Federation of Independent Business (NFIB) released its November read on small business sentiment this morning with the report showing a modest uptick in optimism. The headline index rose from 91.3 to 91.9, but as shown below, that remains at historically low levels.
Across the individual categories of the survey, breadth was mixed with six of the ten inputs to the optimism index moving higher month over month. Multiple sub-indices sit in the bottom decile of their historical ranges, while a handful of others, namely those centered around employment and inflation, are more elevated.
One index that has been well below historical norms has been the outlook for general business conditions (top left chart below). That index plummeted since the fall of 2020 (likely in large part thanks to political sensitivities of this survey), and the rebound over the past few months hasn’t been enough to bring it back up to pre-pandemic record lows. Alongside that rebound, there has been only a very minor jump higher in the share of respondents reporting now as a good time to expand.
As we noted in today’s Morning Lineup, employment metrics in aggregate significantly slowed last month. Hiring plans fell 2 points down to 18; the weakest reading since February 2021. On net, there have also been more firms reporting declines than increases in employment. Given companies appear to be pulling back on hiring, the lowest share reported job openings are hard to fill since April 2021. Not only does it appear that firms are hiring less, but they are also raising compensation less. Both indices for compensation and compensation plans fell sharply in November.
Inventories are yet another area of jarring declines last month. On net 4% more companies reported plans to decrease inventories in the next three to six months making for the lowest reading on inventory accumulation since the depths of the pandemic: April 2020. While there is the potential silver lining that the decline in the reading is a result of improvements in supply chain pressures, it is paired with obvious deterioration in demand. Given this, for the first time since the spring of 2020, a higher share of respondents are reporting their current inventory levels are too high versus too low. Click here to learn more about Bespoke’s premium stock market research service.
Bespoke’s Morning Lineup – 12/13/22 – Most Important Two Days of Month
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“It’s a proprietary strategy. I can’t go into it in great detail.” – Bernie Madoff
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One day short of 14 years after Bernie Madoff surrendered to authorities for his Ponzi scheme, Bahamian authorities arrested Sam Bankman-Fried yesterday in connection with his massive fraud in the cryptocurrency markets. Now that he’s behind bars, we can only hope that the nonstop media tour he has been on will come to an end.
We’ve got two very important days ahead for the markets with today’s November CPI and tomorrow’s FOMC rate decision. Futures are sharply higher heading into this morning’s release after a strong day yesterday, but hopefully, the markets haven’t set the bar too high.
While there is optimism among investors that the worst of inflation is behind us, the sentiment from two sectors that stand to benefit the most from inflation – Energy and Materials – has been mixed. The charts below show the relative strength of the S&P 500 Energy (XLE) and Materials (XLB) sectors versus the S&P 500 over the last ten years (top chart) and just the last year (bottom two charts).
Starting with the long-term picture, after years of underperformance, both Energy and Materials made a trough relative to the S&P 500 in 2020. While they have both stopped the bleeding, the rebound in Energy has been much stronger than the improvement in Materials (which never underperformed as much in the first place).
Over the last year, both sectors have significantly outperformed the market. Starting with Materials, its outperformance peaked in the spring and then came crashing back down to earth in the summer. The sector started outperforming again this fall, but in recent weeks it has started to run out of steam again.
The Energy sector has seen a much steadier trend out of outperformance this year, and its relative strength actually peaked in early November. While the sector has been under pressure relative to the market for the last month now, its relative strength uptrend has remained intact.
In the case of both sectors, their relative strength in recent weeks hasn’t been nearly as strong and steady as it was in the first half of 2022, but they are also far from collapsing reflecting the fact that while inflation pressures have not been as intense as they were earlier in the year, they still haven’t gone away.
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Bespoke’s Morning Lineup – 12/12/22 – Small Problems
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“The best is yet to come.” – Frank Sinatra
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Futures are in the green to start the week, but with less than 15 trading days left in 2022, any hopes for anything but a bad year in the stock market can be put to bed. The bulls have pretty much run out of time. This week is starting out on a quiet note with little in the way of economic or earnings-related news, but it’s a major week for global central banks, including the FOMC, and the tone of these meetings will also likely be dictated at least in part by Tuesday’s CPI report for the month of November.
We’ve never fully adhered to the idea that small caps lead the broader market. When an entire index like that Russell 2000 is only 22% larger than the largest single company in the S&P 500 (Apple – AAPL), it’s hard to say that it leads the entire economy. Whether they are a leading indicator or not, though, small-cap stocks are widely followed, and recent trading in the space hasn’t been particularly bullish.
Starting with the Russell 2000, the IWM ETF has been range bound now since early November, but in Friday’s decline it barely closed out the week above its 50-DMA after closing below the 200-DMA earlier in the week.
Trading in micro-cap stocks has been even weaker. Not only did the Micro-Cap ETF (IWC) never trade above its 200-DMA in the last several weeks, but on Friday, it opened and closed below its 50-DMA as well.
Looking at all US index ETFs in our Trend Analyzer, the indices that track the largest market cap companies are generally the farthest above their 50-DMAs, and then as you go down the market cap scale, the closer they get to their respective 50-days with the micro-cap ETF (IWC), the only one actually trading below that level.
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Bespoke Brunch Reads: 12/11/22
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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Foreign Affairs
Tiny Lithuania Could Change How The World Handles China by Akbar Shahid Ahmed (Huffpost)
Chinese diplomats have made pulling tiny Lithuania to heel a major policy priority, but the tiny Baltic state, used to domination from its large neighbor, is having none of it. [Link]
TSMC founder Morris Chang says globalization ‘almost dead’ by Cheng Ting-Fang (Nikkei Asia)
At an event in Phoenix, Arizona marking the first equipment installation at a $40bn advanced chip fab that represents years of effort to onshore critical industries to the US, the Taiwanese industrialist blamed geopolitics for shifts away from free trade. [Link; soft paywall]
Selling
Surging retail theft could force Walmart to close stores and raise prices, CEO Doug McMillon warns by Thomas Barrabi (NYPost)
A vague gesture towards closing stores is part of a retail industry effort to highlight dollar increases in “shrinkage” or inventory lost to thieves. National data suggests shrinkage has not risen as a percentage of revenue in recent years. [Link; auto-playing video]
Auto Dealers Gird for Softening Demand Amid Higher Rates, Uncertain Outlook by Nora Eckert and Mike Colias (WSJ)
After a two year boom fueled by low rates and soaring demand, auto dealers are facing a big shift that has dealers preparing for the worst: higher payments, too much inventory, and a weak economy are all potential problems. [Link; paywall]
Congress
Sinema leaves Democratic Party, registers as independent by Daniela Altimari and Herb Jackson (Roll Call)
In a desperate bid to save her seat, Arizona Democrat Sinema has retreated from the Democratic Party (though she will keep her committee assignments). She has a lower approval rating with her own party than the rest of the Arizona electorate. [Link]
How Kevin McCarthy Could Lose The Election For Speaker Of The House by Nathanial Rakich (538)
An unusually tight House majority and an unruly caucus could keep frontrunner Kevin McCarthy out of the Speakership and cast the body into chaos at the start of the year. [Link]
Building Permits
A Sense of Where You Are by Devin Bunten (Unplanned Ideas)
The current makeup of American cities and suburbs is a direct function of policy choices made 70 years ago today, themselves driven by the need to meet a massive shortfall in housing construction, a desire for racial segregation, and a new technology in the form of the automobile. [Link]
Climate Hawks Should Have Given Joe Manchin His Pipeline by Eric Levitz (NYer)
Progressive politicians and lobbyists likely made the wrong choice (even based on their own policy goals) when they declined to trade allowing more fossil fuel infrastructure for a failed effort to make decarbonized infrastructure easier to build. [Link]
Food
Is Chicken Birria Authentic? by Javier Cabral (L.A. Taco)
By far the most famous form of birria is the Jalisco-derived braised goat recipe that taco eaters adore. But more unusual – and no less authentic – forms of birria can be found all over Mexico. [Link]
Social Media
Twitter’s Rivals Try to Capitalize on Musk-Induced Chaos by Kalley Huang (NYT)
Social media sites ranging from upstart Post to open source Mastodon are trying to move into the real estate put at risk by antics of Twitter’s new CEO Elon Musk. [Link; soft paywall]
Kids Don’t Want Cash Anymore–They Want ‘Robux’ by Sarah E. Needleman and Sarah Donaldson (WSJ)
Wildly popular online gaming platform Roblox is a key destination for pocket money these days as children prefer buying digital goods to heading down to the store. [Link; paywall]
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Bespoke’s Morning Lineup – 12/9/22 – PPI on Deck
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“I’m lazy. But it’s the lazy people who invented the wheel and the bicycle because they didn’t like walking or carrying things. ” – Lech Walesa
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With an important PPI report about to be released plus Michigan Confidence at 10 AM, futures have still managed to post gains heading into the opening bell. Weaker inflation data out of China could be setting the tone for the positive start as CPI rose just 1.6% y/y which was down from 2.1% in October. All of this will become irrelevant, once the US data is released, though. Stay tuned.
Russia’s invasion of Ukraine caused massive disruption in the global economy, but nowhere was it more pronounced than in Europe. Commodity prices soared resulting in massive inflationary pressures in both food and energy. The negative impacts were also felt in the performance of European stocks. From the time of Russia’s invasion in February through late September, the SPDR Euro Stoxx 50 ETF (FEZ) was down over 25% and nearly double the decline in SPY over that same span. Making matters worse, summer was barely over. Heading into the winter heating season things were only going to get worse.
Well, that’s not exactly what happened. Over the last several weeks, stocks in both the US and Europe have rallied, but with the dollar also declining, European stocks have seen much stronger returns on a dollar-adjusted basis. In fact, through Thursday’s close, FEZ is now outperforming SPY since Russia invaded Ukraine in February. Ten months after Russia’s invasion of Ukraine, crude oil is down, and European stocks are outperforming the US. Now, all we need is natural gas to continue falling.
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