Lumber prices have continuously been in focus over the past several months as the commodity has gone on a historic run, but over the past month, front-month lumber futures have collapsed over 40% with an 11.7% decline in the past week alone.  Today the commodity is seeing a bit of a bounce after coming within 10% of its 200-DMA at the intraday lows and the bottom of the volatile uptrend of the past year.

As lumber prices have been on the decline, mortgage rates have also generally been on the decline, but that has done little to bolster homebuilder sentiment. While it is still at historically elevated levels, the NAHB’s reading on homebuilder sentiment has also been falling, dropping another 2 points in June to 81.  That is still well above any pre-pandemic record, but that drop in addition to the past few months of declines have brought it to the lowest level since last August.

The indices for present and future sales and traffic all experienced identical-sized declines in June.  While not to say it is a weak reading, the index for future sales is only in the 91st percentile of readings which is less elevated within its respective historical range than present sales or traffic.

Looking across each of the four regions highlighted in the report, it is more of the same story.  Sentiment remains at historically strong levels although off of records set several months ago.  The region that has held up the best has been the South.  While also lower month over month, the index tracking this region only fell 1 point in June and remains in the 97th percentile.  The Midwest saw an equal-sized decline, but that is in the context of a more consistent string of declines since late last year.

As for homebuilder stocks, as proxied by the iShares Home Construction ETF (ITB), there has also been a downtrend over the past month with the ETF dropping around 13.5% from its intraday high on May 10th.  At the moment, ITB is in a bit of no man’s land between its 50 and 200-DMAs and also has further downside until it tests the past year’s uptrend line.  Click here to view Bespoke’s premium membership options.

The first of the monthly regional Fed readings on the manufacturing sector was released this morning out of the Empire State.  The headline index fell to 17.4 from 24.3 in May.  While the 6.9 point decline sat in the bottom quintile of all monthly moves and it was a 5.3 point larger drop than had been forecast, the current level still would be the highest since November 2018 outside of the past few months.  Additionally, in spite of the decline in current conditions, expectations saw a significant uptick rising 11.1 points to the highest level in exactly a year.  Prior to last June, February 2018 was the last time the index has seen as strong of a reading.

Given the decline in the headline number, the vast majority of categories also declined in June, although almost all remained positive signifying that they continue to grow at a healthy clip. Of the current conditions indices, Delivery Times was the sole index to move higher, and that is not necessarily a good thing as higher readings indicate longer lead times.  Meanwhile, the declines for New Orders, Shipments, and Unfilled Orders were particularly large all ranking in the bottom decile of monthly moves.

Staying on the topic of these same indices, similar to the headline reading, although current conditions deteriorated, businesses reported pretty optimistic results for the future. Six-month expectations for New Orders and Shipments both saw sizeable month-over-month increases of 9.2 and 9.1 points, respectively, whereas the current conditions indices moved in the opposite direction. Those moves left each index at the high end of the past several years’ ranges.  Staying on the topic of expectations, the index for Unfilled Orders was particularly interesting.  The past few months have seen some of the highest readings on record in the current conditions index meaning businesses have been reporting massive builds in order backlogs.  While backlogs continue to grow with the current conditions index remaining positive, the index for expectations tipped negative for the first time since October meaning businesses foresee those backlogs to finally begin to decline in six months.  Additionally, businesses reported a draw in inventories for the first time since January.

One likely culprit of those backlogs is delivery times.  The index saw yet another record high in June. On the bright side, businesses seem to point to normalization in supply chains down the road as expectations plummeted by 14.5 points; the third-largest month-over-month decline on record behind March 2011 and September 2001.

Prices continue to rise at a rapid pace according to responding businesses, though, there was some deceleration in prices paid and received in June.  The only measure of prices that moved higher this month was expectations for prices received which rose to the highest level since the summer of 2008.

One other interesting part of the report was the response around employment metrics.  The index for current conditions for the average workweek remains around some of the highest levels of the past decade even after pulling back month over month. Businesses also slowed hiring as the index of the number of employees fell to 12.3. While that reading is still off pre-pandemic highs, expectations continue to surge, setting another record high. Together this seems to indicate that businesses have a desire and in the future expect to take on more workers in spite of actual progress in doing so more recently.  Click here to view Bespoke’s premium membership options.

It doesn’t look now like the S&P 500 will do it today, but so far this year, the S&P 500 has been making it a habit of closing at record highs.  Since the year started, last Friday was the 28th day of the year that the S&P 500 closed at a record high.  That works out to slightly more than 25% of all trading days or more than once a week.  With more than six months left in the year, the S&P 500 isn’t far from overtaking the total number of record closes in the last two years, and if the current pace of new highs continues (a big if given that a sell-off can really cause the pace of new highs to dry up quickly), this year would see 62 record closing highs.  That would tie the total for 2017 and trail only 1995 (77) and 1964 (65) for the most record closing highs in a given year. Click here to view Bespoke’s premium membership options.

It is a boring start to the week with nothing on the docket for earnings, Fed speakers, or economic data.  With regards to the latter, the slate will pick up tomorrow with several US releases including retail sales, PPI, industrial production, and more.  Expectations for tomorrow’s releases are a bit mixed relative to the prior readings in each indicator, but overall, recent US data has been beating expectations at a healthy rate.  The charts below show the Citi Economic Surprise indices for a variety of global regions and the US.  Positive readings in these indices indicate economic data is coming in above forecasts, and vice versa for negative readings.  Additionally, higher positive or negative readings would mean that economic data is exceeding or coming up short of those forecasts by a wider margin.

Currently, the US index is well off record levels from the past year, but it has bounced since the start of June.  The index has risen 42.7 points in the ten days from the end of May to last Friday.  That move stands in the top 2% of all 10-day changes since the index began in 2003. That also comes not even a full month after the index saw its first negative reading in a year.  While the negative reading was far from anything extreme, the sharp rebound has been impressive, leaving the index at a historically healthy level in the 83rd percentile.

The US is not alone in having seen a rebound.  Although it is similarly off the peak from last summer and generally trending lower since then, the global index has consistently sat at the high end of its historical range over the past year.  The current reading is still in the top 1% of all periods, and the move higher over the past ten days is again dramatic ranking in the top 5% of ten-day changes in the index’s history. While the jump in the US index has likely played at least some part in this, other regions around the world are also pulling weight having seen just as, if not more, significant moves.  Sticking with a look at the move over the past ten days, the gains for the indices covering APAC and Central/Eastern Europe, the Middle East, and Africa all rank in the 98th percentile while the move in the index tracking Latin American countries ranks in the top decile. Each of these indices now sits in the top 1% or 2% of their historical ranges. One outlier region not contributing to the pickup in the global index has been Europe.  While the Eurozone index is far from weak, it has not seen much of a move higher recently as other regions have.

Likely thanks to the weakness in Eurozone countries, a similar dichotomy can be seen comparing the indices for major developed economies (the G10 members) and emerging market countries.  While the index tracking major economies has simply held up at healthy levels, the emerging markets index has leaped to new record highs, breaking well above the previous records set earlier in the pandemic. BRIC countries in particular are some to thank for that sharp move higher as the index has seen one of its largest short-term moves on record.  Click here to view Bespoke’s premium membership options.

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.

While you’re here, join Bespoke Premium with a 30-day free trial!

Labor Markets

Employed in a SNAP? The Impact of Work Requirements on Program Participation and Labor Supply by Colin Gray, Adam Leive, Elena Prager, Kelsey B. Pukelis & Mary Zaki (NBER Working Papers)

Work requirements do little to increase employment among recipients, while pushing out beneficiaries who are entitled to benefits; the authors estimate that simply eliminating work requirements would be a more effective step than new programs to target low-income adults. [Link; soft paywall]

How Does the Dramatic Rise of CPS Non-Response Impact Labor Market Indicators? by Robert Bernhardt, David Munro, and Erin Wolcott (FRB Chicago/Middlebury College Working Paper)

Declining response rates for the Census Current Population Survey explain a significant share of the decline in labor force participation rates reported over the last couple of decades. [Link; 26 page PDF]

Teens

Summer Job Market for Teens Is Sweet by Patrick Thomas (WSJ)

With labor markets tight, employers are reaching down the age ladder to fill low prerequisite positions and have driven teen labor force participation to the highest levels since 2008. [Link; paywall]

Sixteen Years Old, $1.7 Million in Revenue: Max Hits It Big as a Pandemic Reseller by Sarah E. Needleman (WSJ)

Huge disruptions in supply chains and massive consumer demand have sent goods markets into a wild frenzy benefitting re-sellers and middlemen that can move quickly to arbitrage prices. [Link; paywall]

Big Shifts

On the Crisis and Inflation, Barron’s Shows How the Past Can Be Prologue by Matthew C. Klein (Barron’s)

A look at a pre-COVID analogue to the pent-up demand and tight supply chains which have sent prices of some goods soaring in recent months, using both data and the words of contemporaries in media reporting. [Link; paywall]

Farewell, Millennial Lifestyle Subsidy by Kevin Roose (NYT)

The combination of high demand, tight labor markets, and wind-downs of investor subsidies are turning the various on-demand apps which fueled a labor-intensive luxury lifestyle for young adults over the past decade into pricey options. [Link; soft paywall]

Cash Management

Banks to Companies: No More Deposits, Please by Nina Trentmann and David Benoit (WJS)

QE purchases have left the banking system flush with cash, and the liability on the other side of that asset is an ocean of deposits which have jammed bank balance sheets. [Link; paywall]

Cryptocurrency Comes to Retirement Plans as Coinbase Teams Up With 401(k) Provider by Anne Tergesen (WSJ)

A small 401(k) provider is partnering with Coinbase to allow workers to allocate up to 5% of their retirement savings to crypto assets. [Link; paywall]

Don’t Forget To Flush

This man spent last year flushing hundreds of toilets. The new fear as the pandemic wanes: Legionnaires’ disease by Elizabeth Weise (USA Today)

A side effect of emptied out buildings during the pandemic: stagnant water. Maintenance staff has spent untold hours simply running faucets and flushing toilets to prevent standing water from becoming a breeding ground for pathogens even deadlier than COVID. [Link]

Renewables

Plug In or Gas Up? Why Driving on Electricity is Better than Gasoline by David Reichmuth (The Equation)

As the US grid shifts to renewables, the emissions advantages of electric vehicles are extending their lead over gasoline-powered cars even accounting for the CO2 intensity of electrical generation. [Link]

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Have a great weekend!

Yesterday, the Federal Reserve updated its quarterly look at the balance sheets of macroeconomic sectors of the United States. One of the metrics we can use the data for is the aggregate exposure to the equity market of the household sector. In the charts below, we show the percentage of total assets and financial assets that households have put in the equity market, either via direct holdings of stocks or exposure to stocks via mutual fund ownership.

In the first chart, we show these data for the combined household and nonprofit sector. Data specific to the household sector only doesn’t go back as far, but the two different flavors of household equity exposure tell the same tale: households are highly exposed to stocks, with a record share of their financial assets and total assets sitting in the equity market at current market values.  Click here to view Bespoke’s premium membership options.

As the S&P 500 continues to trade in a relatively sideways range with a slow drift higher, we thought it would be interesting to look at years where the market saw its largest single-day gains and losses on this date in history.

Starting off with the bad, you don’t have to go back too far to find the worst June 11th for the S&P 500 as it was only last year.  After a nearly three-month rally off the March 2020 COVID lows, stocks were already starting to tread water, but on 6/11, the sellers won out as investors were forced to face reality.  The sell-off came one day after Federal Reserve Chairman Jerome Powell highlighted the difficulties facing the American economy, saying that “the pace of recovery remains extraordinarily uncertain.” These cautious comments as well as an escalation in coronavirus infections in the southern part of the United States brought into focus the precariousness of the situation of the time and that the reopening process would not be as smooth as investors once thought. In addition, a number of political polls showed then President Donald Trump falling further behind in polls.

By the time the bell closed last year on June 11th, the VIX surged nearly 50% and closed above 40 as the S&P 500 fell 5.89%. Reopening stocks in the travel/leisure, financial, energy, and industrials sectors fell the most, but no area of the market avoided the selling stampede, as Kroger (KR) was the only stock in the S&P 500 to finish the day higher.  Last June 11th no doubt caused a lot of stress for investors at the time, but looking at the move from a longer-term perspective, it was little more than a speed bump on the road to recovery.

In contrast to last year’s June 11th plunge, the best June 11th for US stocks was more than 80 years ago in 1940. Europe was already embroiled in war and things escalated when Italy joined the war effort of the Germans by declaring war on the French and attacking a British naval base in Malta. Despite the escalation of conflict, the market confidently rallied anyway.  The reason?  For starters, it was coming off a major plunge in May following the German attack of France and other areas of Western Europe.  Besides being extremely oversold, another catalyst for the rally was an address by President Roosevelt at the University of Virginia commencement which has come to be known as the “Knife in the Back” speech. In that speech, FDR ditched his prepared comments and instead called for an end to the United States’ isolationism in response to Italy’s actions. He commented that “On this tenth day of June, 1940, the hand that held the dagger has struck it into the back of its neighbor.”

FDR went on to stress that the US couldn’t’ continue its isolationist policy:

“Some indeed still hold to the now somewhat obvious delusion that we of the United States can safely permit the United States to become a lone island, a lone island in a world dominated by the philosophy of force.”

In reaction to FDR’s speech, the feeling on Wall Street was that the US would take on a more active role in the war effort which caused a surge in industrial, defense, and material companies that would benefit from the Allied war effort. The impact of FDR’s speech was so strong that not only did US equities surge nearly 5% on that day in 1940, but the record June 12th gain was also the following day. Again, though, the gains on 6/11 and 6/12, 1940 came following a 25%+ plunge in less than two weeks, a decline rivaling the COVID plunge in terms of both duration and magnitude.  Like the rally off the COVID lows, the equity market rallied sharply in the following weeks regaining more than three-quarters of its May decline over the following six months, but unlike the current period, the gains were fleeting as uncertainty over the war continued to act as a headwind.

Lastly, with inflation such a hot topic these days, we thought it would be fun to highlight some prices of goods in a number of ads we came across from the New York Times on that day in 1940.  Read them and weep.  Manhattan cocktails for a quarter ($4.81 in today’s dollars), dress shirts for under 2 bucks ($36 in today’s dollars), a new fridge for under $115 ($2,200 in today’s dollars), and a funeral for $150 ($2,885 in today’s dollars)?  A dignified funeral no less!  While prices are a lot higher now than they were then, so is the stock market.  Back in June 1940, the S&P was under 10.  Today, it’s 42,000% higher.  Click here to view all of Bespoke’s premium membership options.