The S&P 500 is flat on the week but the index did tag record highs on Monday.  In spite of this, sentiment has turned lower as the AAII survey showed bullish sentiment fall four percentage points to 36.2% this week.  That took out the low of 36.4% from the week of May 27th to make for the lowest reading since the last week of October.

Some of those declines were picked up by bearish sentiment which rose to 26.8% from 24.5%.  Whereas bullish sentiment is at one of the lowest levels in months, that is only the highest level in bearish sentiment since May 13th.

With bearish sentiment having risen only slightly while bullish sentiment experiences a more significant decline, the bull-bear spread has fallen to 9.4.  That is at the low end of the past several months’ range.

Instead, the losses to bullish sentiment have been picked up by the neutral sentiment camp as this week’s reading topped 37%.  While late May and early June saw similar to slightly higher readings, that level of neutral sentiment is elevated relative to the historical average of 31.43%.

Overall, the AAII survey has shown individual investors have become increasingly less optimistic, albeit not outright bearish, over the past few weeks. And while that may be the case for this group, equity newsletter writers have been another story.  The sentiment survey from Investors Intelligence (II) covering this section of the market participants has maintained a more optimistic outlook. This week, 61.2% of respondents reported as bullish which is the highest reading since April. That also comes in the top 5% of all readings since the start of the survey in the early 1960s.

In the chart below, we show the spread in the bullish sentiment readings of the AAII and Investors Intelligence surveys. This week, that spread fell down to -25 (meaning the percentage of respondents reporting as bullish in the AAII survey is 25 points lower than in the Investors Intelligence survey).  That is the lowest reading in the spread since October and it is also in the bottom 5% of all periods.

There have been 20 times in which the spread has dipped below -25 without having done so in the prior six months.  As shown, these instances are not particularly rare with about a year or two between each one.  But what is notable about the current instance is how elevated the bullish sentiment readings are for each survey.  As for what this means for the performance of the S&P 500, in the near term performance has tended to have a negative bias, but moves higher are much more consistently seen in the months to a year after. Click here to view Bespoke’s premium membership options.

It was a busy morning of economic data with weekly jobless claims part of the onslaught of releases.  Overall, this week’s report was mixed. Last week’s reading on initial jobless claims was revised higher from 373K to 386K.  While this week’s number did mark an improvement falling to 360K, it was less than the expected decline to 350K. Regardless, that leaves claims at the lowest level of the pandemic and a little over 100K above the levels from last March; the last week before claims began to print in the millions.

While the decline in the seasonally adjusted number marked an improvement, we would note that actual claims were flat which was better than you would expect for this time of year.  Early July historically has seen a seasonal headwind to claims, and as such, seasonal factors would have suggested a 26.5K increase this week. But on a non-seasonally adjusted basis, claims were actually little changed (up only 0.6K).  At 383.2K, unadjusted claims still sit 20K above the pandemic low of 362.9K from two weeks ago. PUA claims meanwhile fell back below 100K as the withdrawal of individual states from pandemic era programs continue to apply to the data. Overall, claims continue to show improvement albeit at a slower pace.

While initial claims were worse than expected, continuing claims fell by 126K versus the expected 67K decline.  Seasonally adjusted claims now are at 3.241 million which is the lowest level since last March. That also marked the first back-to-back decline since the first two weeks of April which was part of a much longer 14-week streak of declines.

Pivoting back over to the unadjusted data, which includes all other auxiliary programs but creates an additional week of lag, the most recent week saw broad declines across all major programs resulting in total continuing claims to fall below 14 million.  The 372K decline this week also extended a streak of eight consecutive weeks of declines. As for the main drivers of that decline over the past couple of months, PUA and PEUC programs have by far been the biggest contributors, in part, due to the withdrawal of various states from the programs.  This week alone the two programs accounted for 90% of the decline, and over the previously mentioned eight-week span, the two programs account for 70% of the total decline.  Click here to view Bespoke’s premium membership options.

If you’ve been following the market over the last couple of months, you’ve likely noticed that the “mega-cap” stocks have been the main driver of the broad market’s move higher.  You can really see this trend when looking at the performance disparity between the cap-weighted S&P 500 (SPY) and the equal-weight S&P 500 (RSP).  (Just to be clear, the main S&P 500 index that’s tracked closely across the investment landscape is a cap-weighted index, meaning larger stocks have a bigger impact on its performance than smaller stocks.  The lesser-followed equal-weight S&P 500 weights all 500 stocks in the index equally.  In the equal-weight S&P 500, Apple (AAPL) — the largest stock in the index — and Unum Group (UNM) — the smallest stock in the index — have the exact same impact on the index’s performance.)

Yesterday was once again a bad day for most stocks as the equal-weight S&P 500 (RSP) fell more than 0.90% on the day.  At the same time, the cap-weighted S&P 500 actually closed slightly higher on the day.  As shown below, RSP has been stuck in a sideways pattern for the past two months, essentially going nowhere.  SPY, on the other hand, has experienced a nice leg higher and is now very extended above its 50-day moving average.  Over the last 12 trading days, SPY has closed at a new high 8 times while RSP has averaged a daily move of -0.02%.  While the mega-cap growth stocks spent the time from late 2020 through early 2021 in consolidation, it’s not the smaller cap stocks in the index that look to have fallen asleep.  Click here to view Bespoke’s premium membership options and sign up for a trial to any one of them.

While RSP has been trading sideways for the past couple of months, it’s actually still slightly ahead of SPY on a year-to-date basis.

As shown below, RSP’s YTD lead over SPY has been declining rapidly since peaking in May/June, however.

It’s the last two months that have caused RSP to give up nearly all of its 2021 outperformance versus SPY.  As shown below, RSP is only up 0.33% over the last two months, while SPY is up 4.64%.

The recent underperformance we’ve seen from RSP is definitely outside the norm.  Below we show the rolling 2-month performance spread between RSP and SPY since RSP began trading in 2003.  There have only been two other periods where we’ve seen the 2-month performance spread turn more negative for the equal-weight S&P versus the cap-weighted S&P.  The first was in late October/November 2008 when the entire market was falling rapidly during the Financial Crisis.  The second was in late March 2020 during the COVID Crash.  These two examples show that we normally see RSP significantly underperform SPY like this when the broad market is falling; not when it’s rallying to record highs on a seemingly daily basis.  Click here to view Bespoke’s premium membership options and sign up for a trial to any one of them.

Below is a look at the path that S&P 500 sectors have taken in 2021.  The Energy sector has been the clear standout from the start, taking a commanding lead early on and outperforming every other sector by more than 20 percentage points by the end of the first quarter.  Since Q1, Energy has traded flat, however, which has allowed other sectors to play catch up.  Even still, Energy is up 39% on the year, which is 12 percentage points better than the next best sector — Real Estate.  The Financials sector ranks third best with a YTD gain of 26%.  Utilities and Consumer Staples — both defensives — rank at the bottom of the pack with YTD gains of just 3-4%.

Looking back 12 months instead of on a year-to-date basis, Consumer Staples and Utilities remain the weakest, while it’s Financials that ranks first with a gain of 57%.  Industrials ranks second at +52%, while Energy ranks third at +48%.  Tech, Materials, and Communication Services have been the next best with gains of 43%.

Looking even further back to the start of 2020 just before COVID hit, we see that Technology moves to the top of the list with a gain of 65%.  Consumer Discretionary ranks second at +50%, followed by Communication Services at +49%.

While they’ve been some of the best sectors in 2021, Financials and Industrials are in the middle of the pack with gains of 20% and 27%, respectively, since the start of 2020.

Finally, the Energy sector — up 39% YTD and by far the best sector so far in 2021 — is actually still in the red with a decline of 13% since the start of 2020.  So even after a massive move higher off of the COVID-Crash lows in March 2020, those who owned the Energy sector prior to COVID aren’t even back to even yet.  Click here to view Bespoke’s premium membership options and sign up for a trial to any one of them.

The NFIB surveys small businesses each month asking respondents what the most pressing problem is for their business. In the May report, the most prominent problems were government regulations and taxes with 35% of businesses reporting as such.  The next biggest problems were the cost and quality of labor.  While labor-related issues remain a pressing concern for the bulk of businesses going unchanged at 34% in June, government-related problems fell off a cliff. The combined reading fell from 35% down to 29%.  The combined six-point drop was the largest since an identical-sized month-over-month decline from December 2014 to January 2015. Another area to see a significant decline was Competition from Big Business which fell 2 percentage points to 6%; the biggest one month decline in a year. That was matched by an increase in the number of firms reporting poor sales as their biggest issue.

In an earlier post,  we noted how the June NFIB survey of small businesses showed a surge in prices and wages. As such, the percentage of businesses reporting inflation as the biggest problem surged to the highest level in over a decade.  That index alone rose 5 percentage points to 13%. November 2008 was the only other month on record in which this reading rose by as much as it did in June. While it was a far less alarming increase, there was also an uptick in the percentage of businesses stating the cost/availability of insurance is an issue, although, the current reading is still below that of just a couple of months ago.

As previously mentioned, while businesses are less concerned with government-related problems, substituting for inflation concerns, the NFIB’s index of Economic Policy Uncertainty has been ticking higher over the past few months and is now at the highest level since around the time of the election although the current reading is still much more modest than back in the fall. Click here to view Bespoke’s premium membership options.

Early this morning, the NFIB released their June reading on small business sentiment.  The headline reading has historically been correlated with changes in the political landscape and exactly that happened following last year’s Presidential election.  However, the 2.9 point rise in June leaves the index fully recovered from its post-election losses as it came in at the highest level since September and October’s joint high of 104.

Breadth was generally strong across the categories of the report with seven of the ten inputs to the headline index rising month over month.  As we noted earlier in the Morning Lineup, the indicators regarding employment are some of the most impressive.  While actual employment changes remain negative, meaning more firms reported decreases than increases in hiring, hiring plans came in at a record high.  In other words, businesses would like to be hiring more workers than they can. To make up for that, they are raising wages with both the indices for Compensation and Compensation Plans coming in at or near records.  That appears to be enticing workers as there was a slight downtick in the number of firms reporting that openings are hard to fill in addition to the month-over-month uptick in the index for Actual Employment Changes.

Wages are not the only area of inflationary pressure though.  More broadly, a net 47% of businesses reported higher prices.  That is far and away above the normal historical range and marked the third month in a row with a record high.

Wages and prices were not the only areas to see a record.  The index of Inventory Satisfaction, which measures the net percentage of respondents saying current inventory levels are “too low” versus “too high,” is also at the highest level to date.  While not at a record high, that sentiment has brought Inventory Accumulation (the net percentage of companies reporting actual increases versus decreases in inventory levels) to the highest level since October which is in the top 1% of all months in the history of the survey.  While companies are investing in wages and inventories, capital expenditure readings are more muted.  The indices for Capital Expenditure Plans and Actual Changes in Capital Expenditures came in the 19th and 15th percentiles.  Click here to view Bespoke’s premium membership options.

The New York Fed released its monthly Survey of Consumer Expectations (SCE) earlier today, and expectations for inflation over the next year surged to the highest level (4.8%) in the history of the survey (since June 2013).  As shown in the chart below, inflation expectations have roughly followed actual levels of y/y CPI over the years, so with CPI surging to 5.0% in May, the spike higher in expectations shouldn’t come as too much of a surprise.

While the one year ahead forecast on the part of US consumers surged, expectations for the next three years have been more restrained, suggesting that consumers, like the Fed, expect these inflation pressures to be temporary.

In each month’s survey, respondents are also asked for their expected rate of earnings growth over the next twelve months.  In this case, there’s a pretty big divergence between expected inflation (4.8%) and expected earnings growth (2.64%). In fact, the spread between the two has now widened out to a record 2.16 percentage points (second chart). There’s only so long that inflation can grow at nearly twice the rate of earnings growth.

Among other questions, the SCE also asks consumers about their views towards the stock market.  In this month’s survey, only 40.2% of consumers expect stock prices to be higher one year from now. In an environment where most sentiment surveys are overwhelmingly bullish, this survey of stock prices seems somewhat restrained.  One interesting aspect of this part of the survey, though, is that in early 2020, when most sentiment surveys saw a spike higher in bearish sentiment, this one saw bullish sentiment surge to the highest level in the history of the survey.  Click here to view Bespoke’s premium membership options and to sign up for a trial to any one of them.

In the couple of years headed into the pandemic, the Russell 2,000 traded in a range having failed to take out its August 2018 high.  After falling harder than large caps during the COVID crash, the Russell 2000 surged off of those lows and rallied 128.5%.  Over the last six months, though, small caps have been stuck in another sideways range.  As shown below, while the index had been on a strong run at the end of 2020 and into January of this year, the push higher has stalled out over the past several months.

While positive over the last six months (top left chart below), the Russell’s 8.29% gain has been middling relative to history ranking in just the 58th percentile.  Further, with the index having trended sideways over the past few months, there has only been a 13.82% range between its 6-month closing high and low. That is actually at the low end (20th percentile) of the index’s historical six-month ranges. That lack of volatility comes after a historic move to the upside though.

As shown in the right-hand charts below, while current performance readings are coming back down to Earth given the past few months narrower range, the past year has seen record year-over-year changes. In fact, even after falling dramatically, the current reading is still in the top 3% of all year-over-year changes. The 52-week high/low range similarly hit record levels in the past year which have since cooled off but they too remain in the top decile of the index’s readings.  In other words, the Russell 2,000 has been somewhat flat over the past several months, but it should make sense following the past year’s historic move higher.   Click here to view Bespoke’s premium membership options.