Bespoke Stock Scores — 9/26/23
Chart of the Day – The Two-Headed Monster of Rising Rates and Rising Crude
Bespoke’s Morning Lineup – 9/26/23 – Getting Real
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“Humankind cannot bear very much reality.” – T.S. Eliot
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Rising yields and oil prices have been two major headwinds to equity prices over the last two months, but this morning both are lower, and equity futures still don’t care. After some sizable losses overnight in Asia and Europe this morning, investors see little incentive to step up and buy. Especially when the CEO of the country’s largest bank says that the market may not be ready for 7% interest rates. Other drivers of the weakness in Asia were news that Chinese real estate developer Evergrande missed an interest payment, higher-than-expected inflation data out of Japan, and a much weaker-than-expected report on Industrial Production out of Singapore. On the docket this morning in the US, we’ll get July home price data at 9 AM and then New Home Sales and Consumer Confidence at 10 AM.
We’ve talked about the weakening breadth of the US equity market frequently since the summer peak, but things have also been weakening on an international level as the declines from the summer highs start to get real. For example, we’ve seen a winnowing of the number of major international equity benchmarks trading above the 200-day moving averages. The chart below shows the current price versus the 200-DMA spread of the benchmark equity indices of the world’s 25 largest economies. At 3.4% above its 200-DMA, the US ranks relatively well trailing only Brazil, India, Japan, Russia, Turkey, and Argentina. While the double-digit percentage spreads of Argentina and Turkey look impressive, keep in mind that inflation in these two countries is in the range of 60% to 130% on a y/y basis. On the downside, China is the only country trading more than 5% below its 200-DMA, but Belgium and the Netherlands are getting close.
Overall, just over half of the 25 countries shown above are trading above their 200-DMAs which is down from over 100% in late July. Interestingly, while there have been plenty of times when every index was trading above its 200-DMA, there hasn’t been a period since 2000 when all of them were trading below their respective 200-DMAs. Again, though, that’s partially a reflection of the fact that when you have some countries dealing with near triple-digit inflation, it’s hard not to have a rising stock market, unless the country is completely imploding.
What’s notable about the current level of indices trading above their 200-DMAs is that we have now gone 218 trading days with more than half of all indices above each of theirs. As shown in the chart below, since 2000, there have only been seven other periods where the percentage was above 50% for even longer. Unless global markets turn higher in the next couple of days, it’s highly likely that we’ll drop below 50% at some point soon. That probably wouldn’t be looked at as a positive development, but sometimes you need the market to break a little bit before it can get back on track.
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The Closer – ECB Chatter, Duration Collapse, 5 Fed, Treasury Auction Previews – 9/25/23
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Looking for deeper insight into markets? In tonight’s Closer sent to Bespoke Institutional clients, we begin with some commentary from ECB officials regarding the path of rates (page 1). We then move to duration pressure and historical drawdowns in long-term treasuries (page 2) followed by a discussion of the move in term premiums and how it has affected real yields and risk assets (page 3). Next, we updated the Five Fed Manufacturing Index based on three of the five September reports that have been released so far (page 4). As shown in the chart below, manufacturing activity is starting to show signs of bottoming. In tonight’s report, we also previewed this week’s Treasury auctions (page 5) and provided updates on the latest Commitments of Traders report (page 6).
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Daily Sector Snapshot — 9/25/23
B.I.G. Tips – Google Search Trends
Buy Yom Kippur?
When it comes to seasonal patterns in the market, one less widely known pattern is related to the Jewish calendar regarding Rosh Hashanah (the Jewish New Year) and Yom Kippur (Judaism’s holiest day of the year). The old saying says to sell Rosh Hashanah and buy Yom Kippur as, often, it tends to be a weak time of year for the market. We’ll leave it to others to try and explain the reasons behind the axiom, but the actual results don’t refute the pattern.
The table below shows the performance of the S&P 500 from the close before the start of Rosh Hashanah to the closing price on the day Yom Kippur ends from 2000 through 2022. During that span, the S&P 500’s median performance during this period has been a decline of 0.50% (average: -0.79%) with positive returns less than half of the time (43%).
While equity market returns have been weak during the period between these high holy days of the Jewish calendar, market returns for the rest of the year have been positive. In the twenty-two prior years shown, the S&P 500’s median rest-of-year performance has been a gain of 6.07% with gains 74% of the time. In the table, we have also shaded those years where the S&P 500 bucked the market headwinds and posted positive returns during this period, but it tended to have no impact on performance for the remainder of the year
One word of caution behind the possible explanations for the equity market’s weakness in the period between Rosh Hashanah and Yom Kippur is that they also occur during September which is already a weak time of year for the market to begin with.
Chart of the Day: No Man’s Land
Recent IPOs Arm (ARM), Instacart (CART), and Klaviyo (KVYO)
A couple of weeks ago, we highlighted how IPO issuance had finally begun to ramp up after a complete drought since late 2021. Arm Holdings (ARM) was one of the stocks to kick off that new slate of issuance. In a year of massive outperformance for its industry, the British semiconductor designer priced with the largest market cap of recent IPOs, currently valued at $52 billion. After initially pricing at $51/share, ARM exploded into the high $60s in its first two days of trading on the secondary market, but it gave up all of its post-IPO pop by the end of last week and was right back down near $51.
Grocery delivery app Instacart (CART) was the next offering. Debuting last Tuesday, CART similarly traded well above its IPO price of $30 in its first day of trading, but those high prices were only temporary. Like ARM, Instacart also gave up all of its post-IPO pop to trade right back down to its IPO price by the end of last week.
That left marketing automation platform Klaviyo (KVYO) as the most recent major IPO of the week. Similar to ARM and CART, the stock opened for trading well above its IPO price of $30. Shares then plummeted on an intraday basis to nearly touch its IPO price, but unlike ARM and CART, we saw some buyers step into KVYO towards the end of last week.
Bespoke’s Morning Lineup – 9/25/23 – It’s Almost Over
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“Parents of young children should realize that few people, and maybe no one, will find their children as enchanting as they do.” – Barbara Walters
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The September sag continued this morning as equity futures, which were higher overnight, steadily drifted lower to their lows of the session. The culprit this morning once again is higher yields where the 10-year yield has moved back above 4.5% even as the 2-year yield is basically flat. The threat of a government shutdown, which now looks increasingly likely, hasn’t helped either. Not all the news is bad this morning, though, as Hollywood writers have reached a tentative deal, and even the UAW has announced progress in talks with the Big 3 automakers.
There’s still a week left in the month that can’t end soon enough, but if you think this September’s 4.2% decline has been bad so far, remember that last year at this time, the S&P 500 was down 6.6% and then fell an additional 2.9% in the last week of the month. The year before (2021), the S&P 500 was down 1.6% at this point (before falling 3.2%) in the last week, and in 2020, the index was down 7.5% month to date (MTD) through 9/23 before rebounding 3.9% in the last week of the month.
The chart below summarizes the historical performance since 1952 (when the five-day trading week in its current form started) of the S&P 500 in the last week of September based on how the index performed MTD up until the last week. Unfortunately for bulls, the weakest returns to close out the month have come in years when the index was already down by as much or more than it is now. In the 16 years that the S&P 500 was down 3%+ MTD, its median performance in the last week of the month was a decline of 0.67% with positive returns less than 40% of the time. That’s more than twice the decline of the next closest category (up 3%+) and is the only performance range where the index was up less than 40% of the time.
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