In spite of the S&P 500 gaining back some ground in the past week, sentiment has continued to shift in an increasingly pessimistic direction.  For a second week in a row, less than a quarter of respondents to the AAII sentiment survey reported a bullish.  At 22.5%, however, current levels are still slightly above the low of 19.2% from one month ago.

Bearish sentiment meanwhile climbed another 4 percentage points with just under half of respondents reporting as such.  Albeit elevated, bearish sentiment is not as high as the 50%+ readings reached in January and February.  As for another reading on bearish sentiment from the Investors Intelligence survey, bearish sentiment is at the highest level since the March 2020 COVID low.

The bull-bear spread is extremely low at -27.3 but that is not quite as low as those past couple of weeks when over half of respondents reported as being bearish.

Not all of the increase to bears came from bulls.  As shown below, neutral sentiment fell from 30.2% down to 27.8%.  That is only the lowest level since the end of February. While bullish and bearish sentiment are both over a full standard deviation away from their historical averages, neutral sentiment is much more inline with its own historical average.  Whereas all weeks since the start of the survey has seen neutral sentiment average a reading of 31.4%, this week’s reading was only a few percentage points away.  Click here to view Bespoke’s premium membership options.

The latest data on residential housing for the month of February generally came in better than expected today and showed some positive longer-term trends.  Starting with the actual numbers, Housing Starts increased 6.8% m/m, and while growth in multi-family units was higher than the headline number, single-family units still showed healthy growth of 5.7%.  Building Permits actually showed a modest decline in February, falling 1.9%, but single-family units barely even declined.  On a regional basis, despite weaker sentiment from homebuilders in the Northeast in yesterday’s report from the NAHB, both Housing Starts and Building Permits in the Northeast grew more than 20% m/m which was easily the strongest showing of any region.

From a longer-term perspective, the 12-month average of Housing Starts made another post-financial crisis high in February rising to its highest level since March 2007.  Typically, this reading starts to roll over well in advance of a recession, so the fact that it’s hitting multi-year highs now should provide some relief to those who are concerned about the flattening of the yield curve.

It isn’t just Housing Starts that are making new highs on a 12-month average basis.  The 12-month average of Building Permits also ticked up to the highest level since February 2007.

Finally, the chart below shows the 12-month average of single-family Building Permits and Housing Starts.  For much of the last year, the average of single-family units was starting to show signs of rolling over as supply chain issues slowed down activity in the sector.  Given housing’s leading nature relative to the business cycle, this was somewhat concerning, even if the issue was more supply rather than demand-driven.  February’s report, though, was encouraging in that both Permits and Starts showed increases again in their 12-month averages.  Click here to view Bespoke’s premium membership options.

Seasonally adjusted jobless claims continue to ping back and forth within their recent range between 200K and 300K.   Still off the sub-200K readings from the end of last year, jobless claims fell from 229K to 214K this week. That is the lowest level since the last week of 2021 when they were 7K lower. Even though there has been no new notable low, the current level is still healthy and consistent with pre-pandemic levels that had not been observed at any other period after the early 1970s.

Jobless claims continue to have seasonal tailwinds at this point of the year and typically do not seasonally bottom until several weeks later. The current week of the year has historically been one of the strongest in terms of consistency of declines in the non-seasonally adjusted number. Since 1967, 92.7% of the time claims have fallen week over week during the current week of the year, and this year was no exception. At 202.9K, it was only slightly above the low of 196K from two weeks ago.  That level is also still slightly above the readings for the same week of the year prior to the pandemic (2018 and 2019).

Delayed an additional week making the most recent reading through the first week of March, seasonally adjusted continuing claims fell to a fresh low of 1.419 million. That is the strongest reading on continuing claims since February 1970. Click here to view Bespoke’s premium membership options.

After a small and brief pullback at the start of the month, the national average for a 30-year fixed rate mortgage has continued to press higher hitting 4.46% as of the most recent reading from Bankrate.com.  That is now the highest level of a 30 year fixed mortgage since the start of 2019.  While the costs to finance a home have risen drastically, homebuilder sentiment has continued its decline. The NAHB’s headline number on the subject fell another 2 points to 79 in March marking the third monthly decline in a row.  While the decline in present sales was modest and traffic was actually up 2 points, futures sales were the major drag, falling 10 points to the lowest level since June 2020.  That ties November 2018 for the third-largest month-over-month decline on record. The only two months with larger drops in this index were December 1987 (12 points) and April 2020 (39 points).

Regionally, it was a similar picture in which one index saw far weaker results than the others. Homebuilders in the Northeast have seen sentiment collapse all the way down to 60 which is again the weakest reading since June 2020.  While sentiment in the South has also fallen, it is nowhere close to as significant of a low. Meanwhile, the Midwest and West actually saw unchanged to improved sentiment.Click here to view Bespoke’s premium membership options.

Today, Starbucks (SBUX) announced that Howard Shultz would assume the reins of CEO for the third time. When the company IPO’d in 1992, Shultz was at the helm and remained there until 2000, when he passed the torch to Olin Smith. In 2005, Jim Donald assumed the role, before Shultz returned as CEO in the heart of the great financial crisis (2008). In 2017, Shultz passed the role on once again, and Kevin Johnson became CEO.

Today’s news has the stock up sharply, and when looking at the historical performance of SBUX when Schultz was at the helm, today’s rally makes sense.  During his first stint as CEO, SBUX booked an annualized return of 37.8% (not including dividends), which is the highest of any CEO in the company’s history. His first successor, Orin Smith, also saw strong gains during his tenure, but when Smith left, the stock’s performance under Jim Donald was lousy with an annualized decline of nearly 12%.  With SBUX seemingly losing its way, Howard Schultz stepped back into the CEO chair, and the stock surged with annualized gains of 22.2% from 2008 until he handed the reins over to Kevin Johnson in 2017.  Performance under Johnson’s tenure, however, has been lacking with annualized gains of ‘only’ 7.4%.

Below is a graph summarizing the performance of SBUX relative to each CEO’s tenure. As you can see, Kevin Johnson would have done quite well if not for the massive pullback that occurred over the last few months. Due to factors beyond Johnson’s control, SBUX is currently over 29.3% off its highs. Shultz has worked through broader market pullbacks before, and after stepping back into the CEO role in 2008, the stock performed incredibly well until news hit that he would be leaving the helm again.

Although the above chart is relevant, there were a multitude of economic and political factors that affected performance during each CEO’s tenure. To help adjust for market moves, we also looked at the relative strength against the S&P 500 to determine a truer sense of each CEO’s strength as a leader. Shultz’s last tenure in office was astoundingly strong relative to the performance of the S&P 500. Johnson has struggled to deliver the same alpha as Shultz, only passing him on a relative strength basis for a brief time. The current relative strength reading is below that of the last day of Shultz’s last tenure, which may explain Shultz’s return and the fact that the stock is rallying on the news. Jim Donald is the only other CEO to have seen a loss in relative strength during his tenure. Click here to try out Bespoke’s premium research service.

None of the information in this post or any opinions expressed constitutes a solicitation of the purchase or sale of any securities or commodities. This is not personalized advice. Investors should do their own research and/or work with an investment professional when making portfolio decisions. Past performance of any investment is not a guarantee of future results. Bespoke representatives or clients may have positions in securities discussed or mentioned in its published content. See our full disclaimer at bespokepremium.com/interactive/legal/.

With volatility becoming an aspect of daily life for investors, the Nasdaq 100 has traded down by over one percent in six of the eight last sessions, resulting in a total drawdown of 8.4% during that span.  Although the index is in the green for today (at least for now), the pattern of continuous selling is notable. The last time there were six 1%+ declines in the span of eight trading days (with no other occurrences in the last month) was on January 25th of this year. As you can see from the chart below, a large percentage of the prior occurrences since the index was launched (1985) are clustered between the years 2000 and 2002 (8 occurrences). Overall, these events tend to occur during periods of drawdowns (2000 to 2002 was a long drawdown) but occasionally mark a bottom as the sellers become washed out.

Forward performance following these occurrences is generally mixed, but the period of time with the largest cluster of occurrences (2000 – 2002) also experienced consistent continued weakness.  Overall, forward returns were greater than that of all periods for almost every period we looked at (apart from three months),.  However, positivity rates are lower across the board compared to normal trading environments, apart from the next week. In 72.2% of occurrences, the market turned higher the following week, resulting in a median return that is eight times higher than the median of all periods.

As you can see from the chart below, we have experienced far worse 8-day drawdowns than the current period, but it is worth noting that this 8-day drawdown is in the 98th percentile of all periods since 1985.Click here to try out Bespoke’s premium research service.

Past performance is no guarantee of future results.

You don’t need us to tell you how confusing this market and economy have been.  On Friday, the March preliminary read on sentiment from the University of Michigan showed lower levels of optimism than at the depths of the COVID crash.  Despite the pessimism, though, on Monday, the New York Fed’s monthly Survey of Consumer Expectations showed that wage growth expectations for the next year broke out to 3.04% which is the highest level in the history of the survey.

If consumers are expecting wages to grow at the fastest pace in at least a year, why are they so negative?  Doesn’t seem to make sense, does it?  The reason for the disconnect can be summed up in one word.  Inflation. In that same monthly survey of consumer expectations from the NY Fed, inflation expectations for the next year came in at a record high of 6.0%.

You don’t need a calculator or a chart to figure out that earnings growth of 3% isn’t enough to offset the impact of 6% inflation, but we’ll show you anyway.  Below, we show the spread between the monthly readings of year ahead wage growth expectations versus inflation expectations.  From the start of the New York Fed’s consumer survey in 2013 right up to before COVID, the spread between the two oscillated in a band of -1.25 to +0.5 percentage points.  Once the initial phases of the COVID lockdowns passed and the economy started to reopen, though, all hell broke loose.  For the last year, inflation expectations have been rising much faster than earnings growth expectations, resulting in the widest gap in the history of the survey.  American consumers have found it hard enough over the years to climb the income ladder in normal times, but with inflation surging over the last year, even moderate levels of wage growth haven’t been enough for consumers to no longer feel as though they’re running up the down escalator.  Click here to try out Bespoke’s premium research service.