The Bespoke Report – 5/13/22 – Down, Down, Down, Down, Down, Down & Quarterly Macro Outlook
This week’s Bespoke Report newsletter is now available for members.
For both the S&P 500, Nasdaq, and the Russell 2000, 52-week lows were the norm this week, and in the case of the Nasdaq and Russell 2000, the recent plunges took them back to levels not seen since around the November 2020 election. Who would have ever thought that coming out of COVID would prove to be more difficult for markets than COVID itself?
Following up on last week’s Pros and Cons presentation, for this week’s report, we are including a macro update on global markets and the economy that was put together by our macro strategist George Pearkes. Therefore, this week’s Bespoke Report provides just an abbreviated recap of markets this week.
The current backdrop could easily be the most complicated backdrop that investors have ever faced, so our hope is to put things into perspective. The bottom line? Supply chains and inflation remain in flux, but there are signs that these issues could start to work themselves out in the second half. If they do, a less hawkish FOMC could be the market surprise for the second half. A key risk, though? Economic activity remains strong, but there are legitimate signals that demand has peaked.
In addition to this week’s Bespoke Report, we have also included our updated quarterly macro overview (“Capped Inflation & Capped Hike Pace Uncap Returns”). To read this week’s full Bespoke Report and access everything else Bespoke’s research platform has to offer, start a two-week trial to one of our three membership levels.
S&P 500 Up 2% At Noon
After a tumultuous week, the S&P 500 gapped higher this morning and continued to rip throughout the morning. As of noon, the S&P 500 was up 2.2%, a much-needed rally after a week of pain. Since the start of 1983, the S&P 500 has been up by 2%+ at noon 110 different times, 22 of which have occurred in the pandemic era. There has been only one occurrence this year (3/9) and two in 2021 (3/1/21 and 12/7/21). On a median basis, the S&P 500 averages a noon-to-close gain of 54 basis points (bps) when it rallies 2%+ in the morning, which is over ten times the median of all periods (5 bps). However, looking at just Friday occurrences, the S&P 500 has had a median drawdown of 9 bps from noon to the close, which is 11 bps weaker than that of all periods. Additionally, Friday was the only weekday with median noon-to-close returns below that of all periods when the index had gained at least 2% by noon.
Friday is also the only day of the week with lower than average positivity rates following 2%+ morning rallies. Thursday is the strongest with a positivity rate of 83%. Overall, the index has performed positively from noon to close 70% of the time following these occurrences. click here to become a Bespoke premium member today!
Stocks Near Pre-COVID Highs – 5/13/22
Two days ago, we outlined the percentage of stocks in each S&P 500 sector that were below their pre-COVID highs to show that many of the stocks that surged due to pandemic effects have significantly fallen off, netting long-term holders a negative return since the onslaught of the pandemic. Over the course of the next few weeks, we will be outlining the S&P 500 stocks that are breaking below/above their pre-COVID highs, as we did yesterday. Yesterday, the S&P 500 fell by 10 basis points to close at a new 52-week low, but the index is still up over 15% relative to pre-COVID highs. As of yesterday’s close, 40.4% of S&P 500 stocks were below this critical level, an 80 basis point improvement relative to the close on 5/11. 71.4% of utilities and 66.7% of communication services stocks were below their respective pre-COVID highs as of yesterday’s close. On the other hand, only 18.5% and 23.8% of S&P 500 stocks in the materials and energy sectors were below their respective highs between the start of 2019 and the end of February 2020. Additionally, 7.8% of S&P 500 stocks were between 0-5% above their pre-COVID highs (39 members).
Only one stock crossed below its pre-COVID highs for the first time since breaking above that level: MGM Resorts (MGM). However, the stock gapped higher by over 3% today, thus returning above this level. The weak performance as of late is due to a variety of factors including China’s zero-Covid policy, the broader market drawdown, and a weak reaction to the latest earnings report, even though the company beat on the top and bottom line.
One stock traded lower to enter a +2% channel relative to pre-COVID highs for the first time in a couple of months: Jack Henry (JKHY). JKHY is a payment processing and lending firm and competes with the likes of Block (SQ) and Toast (TOST). To gain access to our chart scanner tool, click here to become a Bespoke premium member today!
Stocks Near Pre-COVID Highs
Yesterday, we outlined the percentage of stocks in each S&P 500 sector that were below their pre-COVID highs to show that many of the stocks that surged due to pandemic effects have significantly fallen off, netting long-term holders a negative return since the onslaught of the pandemic. Yesterday, the S&P 500 by 1.6% to a new 52-week low on a closing basis, but the index was still up over 15% relative to the pre-COVID highs. Along with this move from the broader index, three stocks broke below their pre-COVID highs for the first time. As things currently stand, 41.2% of S&P 500 members are now below their pre-COVID highs, and an additional 18 stocks (3.6% of members) are just 2% or less above their closing high prices between the start of 2019 and the end of February 2020.
Below we show the six-month price charts of the three stocks that traded below their pre-COVID highs for the first time yesterday. Click here to view Bespoke’s premium membership options.
As mentioned above, there are 18 stocks that were trading within 2% of their pre-COVID highs as of yesterday’s close, and charts of each one are highlighted below. Looking through them, some have already traded well below their pre-COVID highs but have since rebounded while a number of others haven’t traded at these levels in months. In fact, six of them closed at new six-month lows yesterday (AOS, BR, LEN, MGM, NVR, and SYK).
Sentiment Just Like Bear Markets
The past week may have seen the S&P 500 and other major US indices breach to fresh lows on steep declines that are nearing bear market territory, but the AAII sentiment survey has not fallen to its own lows as might have been expected. Bullish sentiment fell back below 25% this week but is still several percentage points above the lows in the teens from only a few weeks prior.
Historically, when the S&P 500 has hit 52-week lows as it has in the past week, bullish sentiment has usually been even higher with an average reading of 29.15%. The chart below shows the levels of bearish, bullish, and neutral sentiment in the AAII survey at the time the S&P 500 first traded into bear market territory (down 20% from a prior peak) for each bear market since the survey began in 1987. At 24.3% now, the current reading of bullish sentiment is on the low side compared to prior bear markets. The only two bear markets where bullish sentiment was lower were July 2008 and February 2009.
Although bullish sentiment declined, bearish sentiment also pulled back below 50% for the first time since the week of April 20th. Even with the decline, though, bearish sentiment remains at a historically high level.
Given the moves, the bull-bear spread was higher for a second week in a row after it had reached the lowest level since March 2009 two weeks ago. Again, in spite of those improvements, the current level remains in the bottom 5% of all weeks on record.
The year is already a third over, and sentiment has found no respite after multiple months of declines in equity prices. In fact, bullish sentiment has not seen a single week with a reading above its historical average, and there has only been one such week for bearish sentiment. In the charts below, we show the average bullish and bearish sentiment reading by year since the start of the survey in 1987. While there’s still a lot of time left for things to change, with an average bullish sentiment reading of just 24.42% at this point in 2022, this year ranks as the worst year for bullish sentiment in the history of the survey (since 1987), although 1988 and 1990 have come close with average readings of around 27%. Meanwhile, the average reading on bearish sentiment has been 44.3% this year. 2008 is the only other year with a higher average reading at 45%. In other words, it is hard to find a comparable year since the late 1980s where optimism has been this low and pessimism this high. Click here to learn more about Bespoke’s premium stock market research service.
The Bespoke 50 Growth Stocks — 5/12/22
The “Bespoke 50” is a basket of noteworthy growth stocks in the Russell 3,000. To make the list, a stock must have strong earnings growth prospects along with an attractive price chart based on Bespoke’s analysis. The Bespoke 50 is updated weekly on Thursday unless otherwise noted. There were no changes to the list this week.
The Bespoke 50 is available with a Bespoke Premium subscription or a Bespoke Institutional subscription. You can learn more about our subscription offerings at our Membership Options page, or simply start a two-week trial at our sign-up page.
The Bespoke 50 performance chart shown does not represent actual investment results. The Bespoke 50 is updated weekly on Thursday. Performance is based on equally weighting each of the 50 stocks (2% each) and is calculated using each stock’s opening price as of Friday morning each week. Entry prices and exit prices used for stocks that are added or removed from the Bespoke 50 are based on Friday’s opening price. Any potential commissions, brokerage fees, or dividends are not included in the Bespoke 50 performance calculation, but the performance shown is net of a hypothetical annual advisory fee of 0.85%. Performance tracking for the Bespoke 50 and the Russell 3,000 total return index begins on March 5th, 2012 when the Bespoke 50 was first published. Past performance is not a guarantee of future results. The Bespoke 50 is meant to be an idea generator for investors and not a recommendation to buy or sell any specific securities. It is not personalized advice because it in no way takes into account an investor’s individual needs. As always, investors should conduct their own research when buying or selling individual securities. Click here to read our full disclosure on hypothetical performance tracking. Bespoke representatives or wealth management clients may have positions in securities discussed or mentioned in its published content.
Continuing Claims Reach More Multi-Decade Lows
Initial jobless claims came in weaker than expected this week rising to 203K instead of the expected decline to 193K. Additionally, last week’s print was revised up to 202K. While that brings claims back above the 200K level for the first time since February, the current level remains historically impressive.
On a non-seasonally adjusted basis, claims still have seasonal tailwinds at their back, though, the winds will shift in the next few weeks. On an unadjusted basis, claims are still below 200K, dropping another 6.6K w/w to 191.8K. Behind the 182.3K reading from late March, that is the strongest reading on initial claims since 2019 and is in line with the readings for the comparable week of the year in the few years prior to the pandemic.
Unlike initial claims, continuing claims have continued to head lower unabated. Claims fell to 1.343 million in the most recent week marking the fifth consecutive weekly decline. Claims have not been at such a low level since late 1969/the first weeks of 1970. Click here to learn more about Bespoke’s premium stock market research service.
Precious Metals Harden Up
Little has been safe from heavy selling pressures recently including assets normally considered “safe havens” like precious metals. Gold is currently down over 9% from its March high while silver is down roughly 20% since its spring high. Today, both metals are bouncing from notable levels. For gold, it is finding support at its 200-DMA which also coincides with the rough uptrend line of higher lows of the past year. In addition to dramatic underperformance versus gold, silver’s test of support is perhaps a bit shakier. It is well below its moving averages, but today’s rebound is happening right around the lows from September and December. Granted, on an intraday basis, both yesterday and today’s lows breached those levels.
Given silver’s much larger decline, the ratio of gold to silver has ripped higher in the past month. In fact, the ratio has risen over 10% in the past month. The most recent 10% or larger surges were as recent as this past December with two even larger ones in the spring and fall of 2020. Prior to the pandemic, though, these sorts of rapid increases in the gold to silver ratio have been rarer. Before 2020, the only other instances of the past decade were in the springs of 2013 and 2017. Click here to learn more about Bespoke’s premium stock market research service.
Over 40% of S&P 500 Stocks Below Pre-COVID Highs
The world changed dramatically with the onslaught of the COVID pandemic in early 2020. Businesses were forced to digitize, consumers saved at historic rates, the Federal Government and Federal Reserve flooded the economy with cash, new hobbies were picked up faster than a dropped hundred dollar bill, and consumers emerged from the lockdowns financially stronger than ever. Long story short, COVID appeared to permanently alter the ways in which consumers and businesses interact, and companies that stood to benefit from the new way of life saw their stocks surge while the old-economy stalwarts were crushed. That was then.
This is now. As the economy has emerged from COVID, the cost of inputs has skyrocketed, real buying power has diminished, supply chains have become strained, and geopolitical tensions are hot. Not only that, but whereas the rate of fiscal and monetary stimulus was stronger than ever during the pandemic, the headwind from their removal is as intense as it gets.
Given the shifts, a number of stocks that originally surged in the COVID world have been hit hard in the post-Covid environment, and some of the biggest COVID losers during the lockdowns have turned into market leaders. As things currently stand, 40.6% of S&P 500 members are below their pre-COVID highs (closing high price from the start of 2019 through the end of February 2020), even as the index is up 18.0% from its pre-COVID closing high on 2/19/20. Besides the fact that four out of every ten S&P 500 stocks are below their pre-COVID highs, 8.1% of the index members are within 5% of their pre-COVID high and another 7.1% are within 10% of their pre-COVID highs.
At the sector level, three sectors – Communication Services, Real Estate, and Utilities- have more than half of their components trading below their pre-COVID highs. In addition to those three sectors, in both the Consumer Discretionary and Financials sectors, more than 40% of components are below their pre-COVID highs, and another 10% of each sector’s components are within 10% of those former highs. At the other end of the spectrum, the original ‘losers’ from COVID like Energy and Materials have fewer than a quarter of their components trading below their pre-COVID highs. While it seems some days like COVID will never go away, the rallies that a large number of stocks experienced are now nothing more than memories. Click here to view Bespoke’s premium membership options.
The Nasdaq’s Three Day 10% Drop
As of yesterday’s close, the Nasdaq declined more than 10% in the span of just three trading days. Selling pressure has been consistent as well as the Nasdaq notched declines of more than 1% on each of the three trading days. The last time the Nasdaq dropped 10%+ in the three days span with all three days experiencing drops of at least 1% was back in September 2020. Since the Nasdaq Composite started in 1971, there have only been eighteen other occurrences, and nine of those occurred during the bursting of the dot-com bubble.
Performance following these prior occurrences has not been very consistent. In the table below, we list each of the 9 occurrences in the chart below that took place without another occurrence in the prior month. One day and one week later, the Nasdaq’s median gain is better than the average and median returns for all periods since 1971. Moving further out though, median performance over the following one and three months has been weaker and less consistent to the upside than the average returns for all one and three-month periods. As has been the case with a lot of analyses lately, while short-term returns have been mixed, the one constant has been volatility. Click here to view Bespoke’s premium membership options.
