The Energy sector has bounced along with the overall market today, but last week it was that sector’s turn to get taken to the woodshed.  Throughout the year, Energy was the only sector that worked, and less than two weeks ago it traded at 52-week highs.  From the high on June 8th through Friday’s close, though, the S&P 500 Energy sector fell over 20%.  The only other times since at least 1990 that the Energy sector fell more than 20% in an eight trading day span were in October 2008 and March 2020.  While the sector’s 50-day moving average didn’t hold in last week’s plunge, the sector was able to hold support at its late April lows.

In addition to falling over 20% in an eight-day span, the Energy sector’s 17.2% decline last week (5-days) was also one that was surpassed by only a handful of other periods (October 2008, August 2011, and March 2020) since 1990. While declines of last week’s magnitude have been very uncommon, Energy is a volatile sector, and as illustrated in the chart below, there have been a number of periods in the last thirty years when the sector fell 10% or more (red line) in a five-day span.

Of the periods mentioned above where the Energy sector dropped as much as it did in the five days ending last Friday, they were also periods of overall market weakness.  To help adjust for broader market moves, the chart below shows the rolling five-day performance spread between the S&P 500 Energy sector and the S&P 500 going back to 1990.  Last week marked just the sixth period in the last 30+ years that the Energy sector underperformed the S&P 500 by more than ten percentage points in a five-trading day span.  The other periods were April 1999, October 2000, November 2001, October 2008, and March and April 2020.  On a side note, one aspect of the chart below that really stands out is how untethered the Energy sector has become relative to the S&P 500.  Since 2020, the range of out/underperformance for the sector relative to the S&P 500 has widened out to an unprecedented range.

Separately, given the fact that Energy’s decline occurred as oil prices were only down a bit over 10% from their 52-week high (-11.4%), we were curious to see how far WTI was from 52-week highs following prior five-day periods where the Energy sector experienced massive underperformance.  Of the six prior periods, there was only one where crude oil was down less relative to its 52-week high than it was as of last Friday (April 1999).  Additionally, the only other time it was down by a similar amount was in October 2000.  In the remaining four periods, crude oil prices had already declined significantly relative to their 52-week highs with declines of at least 48% and up to 70%. Click here to learn more about Bespoke’s premium stock market research service.

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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Recession Watch

Housing Market Update: Share of Homes with Price Drops Reaches New High as Mortgage Rates Top 2008 Levels by Tim Ellis (Redfin)

Demand is cratering across the housing market per Redfin data measuring everything from buyer traffic to price cuts to pending sales indicating that surging mortgage rates have buried the housing market. [Link]

It’s hip to be bear: Business leaders join chorus of economic doomsayers by Jason Kirby (The Globe And Mail)

Prognosticators, pundits, strategists, fund managers, and all manner of other market participants are leaning heavily into a negative outlook for stock markets reeling amidst massive global monetary policy tightening and soaring interest rates. [Link; soft paywall]

Hedge Funds

JPMorgan Packed Its Wealthy Clients Into Tiger Global Fund for Private Bets by Sridhar Natarajan, Hema Parmar and Miles Weiss  (The Wealth Advisor/Bloomberg)

The most recent fund offered by collapsing hedge fund complex Tiger Global was stuffed full of investments from JPMorgan customers; total investments in Tiger and another similar fund a few months earlier neared $5bn just before the funds cratered. [Link]

Hedge Fund Selling Was Never More Furious Than in Last Two Days by Lu Wang and Melissa Karsh (Yahoo!/Bloomberg)

Goldman Sachs prime brokerage clients in the equity hedge fund space liquidated more equity exposure over two days in the past week than at any point since 2008. The good news, we suppose, is that this kind of liquidation event is often the sort of even that tags market lows rather than the other way around. [Link]

Prices

Why Gas Prices Are So High by Ella Koeze and Clifford Krauss (NYT)

High crude prices and insufficient new production are the most important driver of the surge in prices at the pump that consumers are suffering through this summer. [Link; soft paywall]

Cruise-Line Pricing Is Lost at Sea by Laura Forman (WSJ)

Eye-watering hotel prices are making seaborne trips a lot more attractive, with room rates roughly 10% below what’s on offer from mid-scale hotels. The industry’s rebound might be dependent on consumers biting at the bargain. [Link; paywall]

Plague & Pestilence

Ancient DNA solves mystery over origin of medieval Black Death by Willy Dunham (Reuters)

The discovery of bubonic plague victims who died in 1338 or 1339 are the earliest ever documented from the Black Death pandemic, all but confirming the plague originated in Central Asia and spread to Europe and the rest of Asia via trade routes. [Link]

New Tools Can Make Our Covid Immunity Even Stronger by Deepta Bhattacharya (NYT)

A recap of the new technologies which have boosted COVID immunity, and a proposal for maximizing population immunity long-term, including deploying vaccines through the mouth or nose instead of via a shot. [Link; paywall]

Single beaver caused mass internet, cell service outages in Northern B.C. by Kaitlyn Bailey (CTV)

One pesky beaver got a little bit too interested in the wrong aspen tree and ended up cutting a large swathe of British Columbia off from the internet in the process. [Link]

Crypto

What were all those 6,200 Coinbasers doing anyway? by Alexandra Scaggs (FTAV)

An investigation into the downright perplexing personnel decisions of one of the world’s largest crypto exchanges. [Link; registration required]

Crypto Hedge Fund Three Arrows Capital Considers Asset Sales, Bailout by Serena Ng (WSJ)

One of the largest pools of crypto investment capital has seen positions blown up a scramble for liquidity amidst brutal market conditions across the blockchain. [Link; paywall]

Marriage

Marry Your Like: Assortative Mating and Income Inequality by Jeremy Greenwood, Nezih Guner, Georgi Kocharkov, and Cezar Santos (NBER)

An estimate that assortative mating (that is, marriages that pair people with similar incomes and socioeconomic backgrounds) was responsible for much of the increase in US income inequality over the past half century. [Link; 26 page PDF]

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Have a great weekend!

Piggybacking off of another contractionary reading in the Empire Fed survey yesterday, the neighboring Philly Fed’s Manufacturing survey also saw its headline reading print a negative number for June.  The index for General Business Conditions has fallen sharply over the past three months, now having shed 30.7 points in that time.  This month was the smallest month-over-month drop of those months, though, with the index falling from a barely expansionary reading of 2.6 in May to -3.3. Despite the small drop, that is still the first negative reading since May 2020. As for expectations, this month also saw the index fall into contractionary territory, a first since December 2008.

Whereas the Empire Fed report had some silver linings with pretty mixed breadth, this report saw large and broad declines across nearly all categories.  Multiple month-over-month moves ranked in the bottom few percentiles of all monthly changes on record in data going all the way back to 1968.  There were also three indices (excluding the headline number) that fell from expansion into contraction.

Following up on a retail sales report yesterday that showed the US consumer has cooled off, regional Fed reports are also showing decelerating demand; perhaps even more dramatically so.  The Philly Fed’s New Orders index not only fell into contraction and the weakest levels since the spring of 2020, but the 34.5 point decline month over month ranks in the bottom 1% of all monthly moves on record.  In fact, that move was large enough to bring the index from the top quartile of its historical range all the way down to the bottom decile.  Shipments and Unfilled Orders did not see drops down to quite as extreme levels, but each one went from the 96th percentile to 35th percentile in just one month.  Again, their month-over-month declines were some of the largest on record.

Expectations are in even worse shape with similarly large declines. New Orders expectations not only saw the first negative reading since 2008, but at -7.4 it is at the lowest level since 1995. Unfilled Orders expectations have been negative for some time now meaning firms have been expecting to unwind massive backlogs built up during the pandemic due in part to supply chain disruptions. But considering the inflow of New Orders is and is expected to continue declining, Unfilled Orders expectations are at the lowest level since the start of 1974.

As we noted yesterday with the Empire Fed Manufacturing report, the decline in unfilled orders is both bad and good. With regard to the former, it is bad because it appears to in part be due to cooling off of demand. But on the bright side, it also appears to be thanks to massive improvements in supply chains.  Not only did the current conditions index for Delivery Times fall sharply in June, but expectations have completely collapsed bringing it to a record low.

Another welcome sign of the report was cooling inflation as fewer respondents reported higher Prices Paid and Prices Received.  Both of these readings have plateaued in recent months alongside expectations.

Employment metrics were mixed this month with the Number of Employees rebounding slightly after a big drop the prior month.  Expectations, on the other hand, saw a massive 18.7 point decline.  Not only was that one of the biggest declines on record but it follows two other sizeable declines in April and May. That indicates the region’s firms are expecting that hiring will moderate significantly in the coming months.  Meanwhile, the Average Workweek has been pulling back with current conditions still at a historically healthy level. Click here to learn more about Bespoke’s premium stock market research service.

More hawkish monetary policy and the S&P 500 hitting the bear market threshold have given sentiment plenty of reason to turn lower, and that’s exactly what has happened. After reaching a short-term high of 32% only two weeks ago, the percentage of respondents to the AAII survey considering themselves bullish has fallen back below 20% this week.  That may not be as extreme of reading as those in the mid-teens from back in April, but, it is still a historically low reading and in the bottom 2% of all weeks going back to the start of the survey in 1987.

While bullish sentiment has declined, this week’s 1.6 percentage point decline was actually much smaller than the 11 percentage point drop last week.  An even bigger decline occurred for those reporting neutral sentiment.  That reading fell 9.9 percentage points from a recent high of 32.1%. Now at 22.2%, the percentage of neutral respondents is back down to the lowest level since the start of May.

With both bullish and neutral sentiment falling, the bearish camp picked up the difference.  Heading into this week, bearish sentiment was already elevated at 46.9%.  The 11.4 percentage point bump this week means that well over half of respondents are now bearish with the current reading just 1.1 percentage points shy of the 59.4% high from the end of April. That ranks as the eleventh highest reading of all weeks on record.

That also means the percentage of bears outweighs bulls by an astounding 38.9 percentage points and is the lowest reading since the last week of April.

Not only do bears outweigh bulls by a large margin, but it has also been a historically long length of time that this has been the case.  Smoothing out the reading by taking a four-week moving average of the bull-bear spread, the average has been below -10 (in other words on average over a four-week span bearish sentiment has been at least 10 percentage points higher than bullish sentiment) for 21 straight weeks.  That surpassed another long 18-week streak in 2020 and is now only five weeks short of the record stretch of 26 weeks in the early 1990s.

Not only has the AAII survey showed souring sentiment, but so too have the weekly NAAIM Exposure Index and the Investors Intelligence surveys. This week, the NAAIM index showed investment managers only have 32.2% long equity exposure. Meanwhile, the Investors Intelligence survey saw the most negative bull-bear spread in a month.  Normalizing each of these three sentiment indicators, the average reading is now 1.28 standard deviations from the historical norm. That is not as bad as last month, but it remains a historically pessimistic reading on sentiment.  Click here to learn more about Bespoke’s premium stock market research service.

Jobless claims have been trending higher off of multi-decade lows, indicating a moderating labor market.  This week, initial claims would have gone unchanged week over week at 229K if it were not for a modest upward revision to 232K to last week’s number.  In other words, claims were little changed this week as they continue to gradually head higher.  At these levels, claims remain at the high end of the range from the few years prior to the pandemic.

On a non-seasonally adjusted basis, claims have begun to experience the typical upward swing for this point of the year and that is likely to continue over the next month and change.  NSA claims topped 200K this week for the first time since the last week of April which is right in line with the readings from the comparable weeks of the year of 2018 and 2019.

Continuing claims are lagged an additional week to initial claims but this reading has also been making its way off the lows. Granted, the move off the lows for continuing claims has been much more modest than initial claims (only 6K for continuing claims versus 66K for initial). Seasonally adjusted continuing claims rose for the second week in a row this week to 1.312 million which is only the highest level in a month.  Click here to learn more about Bespoke’s premium stock market research service.