The July Respite
After what had to be one of the worst combined first halves of a year for stocks and bonds on record, July provided a respite as the S&P 500 rallied more than 9% and long-term treasuries, as measured by the BofA/Merrill 10+ Year US Treasury Index, jumped over 3%. Even after those rallies in July, though, trailing 12-month returns for both asset classes remain firmly in negative territory and well below the historical average.
The chart below compares the S&P 500’s annualized total return over the last one, two, five, ten, and twenty years to the historical average for all other periods since 1928. Historically, the S&P 500’s average annual total return has been a gain of 12.0%. With a decline of 4.6% over the last year, the current period ranks in just the 19th percentile relative to all other one-year periods. While one-year returns have been below average, it follows a period of strength for stocks which is evident by the fact that two, five, and ten-year returns are all still at least two full percentage points above their historical averages. Over a 20-year window, however, the S&P 500’s annualized total return of 10.0% is nearly one percentage point below the historical average of 10.9%. The last year has been bad for stocks, but it follows what has been a very good period for investors. Click here to learn more about Bespoke’s premium stock market research service.
The experience of fixed-income investors has been an entirely different story. While bonds, and US Treasuries specifically, are supposed to be considered a safe asset class, over the last year, long-term US Treasuries are down over 17.5%, and the two-year annualized performance is a decline of 14.2%. Yup, that’s a cumulative decline of 26.4%- in Treasuries! Longer-term, the performance of long-term US Treasuries isn’t negative, but with annualized gains of less than 2% over the last five and ten years and just 5.2% over the last twenty years, calling the recent history of investing in this asset class the dark ages, wouldn’t be an understatement.
Big Moves in Treasuries
It’s the way things always work out in the market. Just when everyone starts to think one thing, the complete opposite occurs. It happened in the US Treasury market yesterday when the yield on the 10-year traded down near 2.5% prompting some sell-side firms to suggest a move to 2% was in the cards. 24 hours later, though, yields have reversed higher, and at just under 2.8%, the 10-year yield is now closer to 3% than 2.5%. After starting out the week with a rally of 2.22%, the iShares 20+ Year US Treasury ETF (TLT) pulled back over 2% Tuesday. You may be used to back-to-back 2% moves in the stock market, but they’re much less common in long-term US Treasuries. Before this week, the last time TLT had 2%+ daily moves on consecutive days was all the way back in March 2020 at the depths of the COVID crash, and since TLT was launched in 2002, there have only been 16 other periods where the ETF had back-to-back moves of 2%. Of those, just six went on for a third day, and only two of those (both in March 2020) went on to more than three days. Click here to learn more about Bespoke’s premium stock market research service.
The red dots in the chart below show every time that TLT had a 2%+ daily move on back-to-back days. Of the prior occurrences, the majority all took place during and in the year or two after the Financial Crisis, but besides that, the only other occurrences were in June 2016 (Brexit) and the COVID crash. We probably don’t need to spell it out, but prior back-to-back 2%+ moves in TLT have occurred during periods of short and/or long-term stress in the markets. Click here to learn more about Bespoke’s premium stock market research service.
It isn’t just individual days where Treasuries have experienced volatility lately. TLT’s average daily move over the last 50 trading days has now moved to above 1% (red line), and since its launch in 2002, the only periods where its average daily move was higher was during the Financial Crisis (Q4 2008 through Q4 2009), after the US debt downgrade (Q3 2011 to Q1 2012) and during the COVID crash (Q1 2020). If you were looking for an August slowdown, Treasuries don’t look like they’re ready to chill.
Bespoke’s Morning Lineup – 8/3/22 – Yields on the Move
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“Economics is extremely useful as a form of employment for economists.” – John Kenneth Galbraith
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Normally on the first Wednesday of the month, we’d be discussing the release of the ADP Private Payrolls, but that report is still on the DL as economists work on revising its methodology to make it a more accurate gauge of payroll trends in the economy. The only reports on the calendar today are Durable Goods, Factory Orders, and the ISM Services report which will all be released at 10 AM Eastern. It’s been another busy day for earnings, and the results continue to surprise to the upside with EPS and revenue beat rates that are higher than most analysts and strategists would have expected heading into earnings season.
Equity futures are higher this morning, oil is higher as OPEC+ only agreed to a small increase in daily output, and Treasury yields are continuing their steep run higher which began yesterday morning at right around this time. After trading well below 2.6% yesterday, the yield on the 10-year is now pushing 2.8%.
Today’s Morning Lineup discusses earnings and market news out of Europe and the Americas, Pelosi’s visit to Taiwan, a detailed look at PMI and economic data from around the world, and much more.
As oil prices have pulled back in the last couple of months, stocks in the Energy sector have also experienced a hiccup as growth-oriented names have enjoyed some time in the sun. Technology is one sector that has experienced a rebound, and that bounce has shown up in the chart of Energy’s relative strength versus the Technology sector. From the summer of 2020 through late last year, there was a push and pull with lots of noise between the two sectors, but neither one had anything to show for it as they essentially performed in line with each other during that entire period. Beginning in late 2021, though, when the Fed apparently got religion with respect to surging inflation, tech stocks plunged while energy names surged. That run essentially continued uninterrupted right up to mid-June. In the span of under two months, though, Energy has given up 40% of its outperformance versus Technology. Easy come easy go.
Given its outperformance in the years coming out of the Financial Crisis, there’s almost a Pavlovian instinct for investors to look towards the technology sector for outperformance. Over the last two years, though, the sector has essentially generated zero alpha. Comparing the sector’s relative strength to the S&P 500, Technology is barely positive versus August 2020.
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Firearm Background Checks Decline
Although not a widely-utilized indicator, we like to look at the number of firearm background checks conducted by the NICS every month to gauge geopolitical uncertainty and volatility within the US. In uncertain times, firearm background checks tend to increase, as individuals increasingly acquire the means to protect themselves in a worst-case scenario. On the contrary, when times are ‘good’, background checks tend to decline. An additional factor that impacts background checks is the outlook on firearms legislation. When the populous fears that they may not be able to purchase certain firearms in the future, they will step up purchases in the short term to ‘stock up’. At the end of June, the Supreme Court ruled against the state of New York in regards to carry laws, which could help to expand demand for firearms, at least in that part of the country. Click here to learn more about Bespoke’s premium stock market research service.
In the month of July, firearm background checks declined by 6.5% sequentially and by 16.6% year over year continuing a recent trend of sharp declines. While checks are down, it followed a period of surging demand in 2020 as geopolitical unrest ran rampant throughout the US (BLM protests, claims of election fraud, COVID lockdowns, etc.). Nonetheless, background checks have declined by 33.9% on a two-year stack.
However, background checks are still in a longer-term uptrend. At 2.4 million, July’s background checks rank in the 16.2% of all months since NICS began reporting this data in 1998, and outside of late 2019 and into early 2021, there were only a few months that the number of checks was higher. Still, they are down 48.8% from the all-time high in March 2021. This may be because demand was pulled forward, but it could also be due to a more normalized domestic situation.
Through July, the 22.4% YTD decline in background checks in July versus December has actually been smaller than average. Background checks in July are practically always lower than in December, and the only year where that wasn’t the case was in 2020 when the country was gripped by riots in cities nationwide. Going back to 2000, background checks in July were typically more than a third (-33.8%) lower than in December. Click here to learn more about Bespoke’s premium stock market research service.
There are two publicly traded stocks directly exposed to these trends: Sturm Ruger (RGR) and Smith & Wesson (SWBI). The monthly performance of these two stocks tends to be highly correlated to trailing twelve-month NCIS background checks, as this is a clear read into the demand picture for these two companies. Just like background checks in general, both stocks are still in sustained downtrends. Click here to learn more about Bespoke’s premium stock market research service.
Rotating in August
Following the best July of the post-WWII era, equities have been getting off to a slower start in August with the Russell 3,000 experiencing a modest decline yesterday and the index fighting to move into the green as of midday today. Most of the move to start August appears to a degree to be rotational in nature. In the chart below, we show the average performance of deciles of Russell 3,000 stocks grouped by their performance in the month of July. As shown, both the best and worst performers last month have rallied in early August with the deciles of the worst performers seeing slightly larger gains. The losers this month have been in the middle of the performance spectrum as deciles 4 through 7 are each flat to lower over the past couple of sessions.
Equities bottomed in mid-June and have been in rally mode ever since. As for how performance the past couple of days relates to the first half of the year’s declines, again the worst performers have generally been outperforming. However, by this measure, the top performers from the 52-week high just after the New Year through the low in June have continued to fall this week. Click here to learn more about Bespoke’s premium stock market research service.
Bespoke’s Morning Lineup – 8/2/22 – Oil’s Not Well
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“The more you sweat in peace, the less you bleed in war.” – Norman Schwarzkopf
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With Speaker Pelosi reportedly en route to Taiwan as we type this, markets are on edge this morning as China has threatened military action if the planned trip takes place. Only Chinese authorities know exactly what the response will be, but we would expect more bluster than bite. After a relatively slow day of earnings news yesterday, today will be a busy day, and there have already been a number of important reports this morning from the likes of Caterpillar (CAT), Uber (UBER), and Marriot (MAR) among others. After the close, among others, we’ll hear from AMD, Gilead (GILD), Occidental (OXY), PayPal (PYPL), and Starbucks (SBUX).
Today’s Morning Lineup discusses earnings news out of Europe and the Americas, the rate hike in Australia, a detailed look at other economic data from around the world, and much more.
32 years ago today, Iraq invaded Kuwait, spurring a monumental surge in oil prices. In the first five trading days of August alone, WTI surged more than 35% and nearly doubled in price through the fall as tensions in the region boiled over. There are still more than enough geopolitical issues around the globe today to worry about, but unlike in August 1990, crude oil prices have been moving in the opposite direction.
After briefly trading above $130 per barrel earlier this year, crude oil has declined nearly 30% from its peak to under $95 per barrel, and just yesterday, closed below its 200-DMA for the first time in over six months.
As shown in the chart below, yesterday’s close below the 200-DMA ended what was the 12th longest streak of consecutive closes above the 200-DMA for WTI since the early 1980s. The streak that just ended was the longest since the 269 trading day streak that ended last November. That streak was the third longest on record trailing only the 276 trading day streak that ended in April 2000 and the 330 trading day streak that ended in August 2008.
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Bespoke Market Calendar — August 2022
Please click the image below to view our August 2022 market calendar. This calendar includes the S&P 500’s average percentage change and average intraday chart pattern for each trading day during the upcoming month. It also includes market holidays and options expiration dates plus the dates of key economic indicator releases. Click here to view Bespoke’s premium membership options.
Gas Prices Continue to Decline
In 2022, extremely elevated gas prices have been impacting the economy, as every product-producing company has seen energy and transportation costs increase, forcing price hikes on the part of businesses simply to keep margins flat. Although there are a variety of factors affecting CPI readings, high gas prices certainly apply upward pressure. Today, gas prices are still extremely elevated compared to historical levels. At the AAA current national average of $4.22, just 1.8% of all days since the start of 2005 have seen a higher national average high, and all of them occurred this year. Click here to learn more about Bespoke’s premium stock market research service.
The national average price per barrel is still up 32.75% y/y, but this is actually the smallest y/y increase so far in 2022 and comes as the national average price has declined for 48 consecutive days. That’s the fourth longest streak on record. This streak is certainly notable, but gas prices are still at a level that is wearing on consumers.
The 40-day rate of change in average gas prices (-15%) has been notable as well, with only six other periods seeing a larger decline on a percentage basis. The most recent occurred during the COVID crash when it became clear that demand was going to deteriorate due to government-imposed mandates across the globe. Consumers will hope for further declines as we begin to near the $4.00 per gallon level. Not only have prices been falling lately, but they have also been more volatile than usual, as the current 50-day standard deviation (26 cents) is 3.2 times higher than the average since 2005. Click here to learn more about Bespoke’s premium stock market research service.
Strongest July in Post-WWII Era
On Friday, the S&P 500 closed over 140 basis points higher on the back of favorable earnings from Apple (AAPL), Amazon (AMZN), Chevron (CVX) and Exxon (XOM). This was the third straight day in which the S&P 500 gained at least one percent, allowing bulls to breathe a sigh of relief after a tough start to the year. These moves came even as a second consecutive quarter of negative real GDP growth was reported and the Fed hikes rates by 75 basis points.
Friday’s move helped the S&P 500 post its best July in the post-WWII era, finishing with a gain of 9.2%. Although the index is still close to 14% off of its early January highs, the market looks more inviting than it did at the beginning of the month, when the YTD declines were above 20%. As investors, we could just give ourselves high fives for the month, but it’s vital to remain forward-looking. Following July gains of 5%+, the S&P 500 has averaged a gain of 0.6% in August (median: +1.4%), performing positively 60 percent of the time. Between the start of August and the end of the calendar year, the index has averaged a gain of 8.0% (median: +10.0%), gaining 80% of the time. Over the following twelve months (starting in August), the index has averaged an impressive gain of 15.6% (median: +15.4%), rallying 87% of the time. Based on past history, bull runs in July tend to bode well for the market for both the rest of the year and over the following twelve months. Click here to learn more about Bespoke’s premium stock market research service.
Bespoke’s Morning Lineup – 8/1/22 – The Real World
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“Ladies and gentlemen, rock and roll.” – John Lack
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41 years ago today, teens, pre-teens, and other people resembling the cast of “Stranger Things” watched “Video Killed the Radio Star” as MTV revolutionized the entertainment industry by making music both a listening and viewing experience. Eleven years later, in 1992, MTV mixed things up again with the launch of “The Real World” in what ultimately became the start of the reality TV revolution. The life cycle of MTV has been interesting to watch. What started as a network intended solely for ‘watching’ music, has become a network that now shows little or no music at all. MTV’s experience also shows the importance of adapting and changing with the times. Peter Drucker may not have had MTV in mind, but the phrase most famously applied to him still applies. Innovate or die.
Futures started off the month of August with losses last night but have erased much of the weakness so far this morning. Treasury yields are only marginally higher, crude oil is lower, while gold is higher. The big economic indicator of the day is the ISM Manufacturing report at 10:00 AM Eastern. Economists expect the headline reading to come in at 52.2 versus June’s reading of 53.0. Any reading under 53.0 would be the weakest reading in two years (June 2020).
Today’s Morning Lineup discusses earnings news out of Europe and the Americas, global PMI data for July, a detailed look at other economic data from around the world, and much more.
There may not be an official start date, but August represents what many consider the dog days of summer when, for a lot of people, the market is the last thing on their minds. Historically, there have been a number of calamitous events that began or transpired in August, but overall stock market returns during this time of year have been middling. The snapshot below from our Seasonality tool shows that over the last ten years, the S&P 500’s median performance from the close on 8/1 over the next week, month, and three months has ranked between the 50th and 60th percentile. For the next week, the S&P 500’s median gain has been 0.40%. The next month has had a median gain of 1.15% while the next three months have seen a median gain of 2.75%. Nothing especially notable, but the way this year has gone, a gain is a gain!
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