The latter part of September has historically been one of the weakest periods of the year for the S&P 500, and last year was especially painful.  The chart below shows the percentage of S&P 500 stocks that posted positive returns from the close on 9/18 through the end of September over the last ten years. Since 2013, there have only been two years where more than half of the index’s components managed to eke out a gain during this period.  The average over the last ten years was just 36% which is a pretty low number when you think about it.  Even that looks good, though, when you look at last year (2022) when just 2% of stocks in the S&P 500 managed to rally during the last twelve days of September!

The table below lists the seventeen S&P 500 stocks that have traded down from the close on 9/18 through month end at least nine out of ten times over the last ten years. Of those seventeen stocks, four – Viatris (VTRS), Sealed Air (SEE), Simon Property (SPG), and Johnson & Johnson (JNJ) have traded lower during this period in all ten of the last ten years.  That being said, the range of declines varies widely from a median decline of 5.89% for VTRS to less than 1% for JNJ.  Besides those four stocks, another 13 in the S&P 500 have traded lower during this period in nine of the last ten years, including names like Freeport-McMoRan (FCX), Discover (DFS), and CVS Health (CVS).

Some stocks have managed to buck the late September blues, though. O’Reilly Automotive (ORLY) was one of the few stocks to rally between 9/18 and the end of September last year, and it has traded higher during this period in eight of the last ten years for a median gain of 1.73%.  ORLY is the only stock to trade higher during this period in eight of the last ten years, but Automatic Data Processing (ADP), WR Berkley (WRB), and Tyler Technology (TYL) have traded higher 70% of the time, and just seventeen other stocks have traded up at least half of the time.  Some of the more well-known names in this cohort include Domino’s (DPZ), Chipotle (CMG), Cisco (CSCO), and IBM. Unless you’ve been heavily exposed to these stocks in the later part of September over the last ten years, you’re probably counting the minutes until October!

For a second month in a row, homebuilder sentiment slumped with the NAHB’s Housing Market Index falling from its recent high of 56 in June down to 45 in August.  That is the lowest reading since April and the first back-to-back declines since last December.

As shown below, double-digit drops in two month spans are far from unprecedented, but the most recent one is in the bottom 2% of all two-month moves since the start of the survey in 1985.

The declines in homebuilder sentiment were observed across the country with the indices of each of the four regions of the country falling.  The charts are largely similar with each having come off of recent highs well below the prior peaks but still well off the lows put in place late last year.

As homebuilder sentiment has peaked, so too have homebuilder stocks.  This group was a big winner in the first half of the year, but so far in Q3, the iShares Home Construction ETF (ITB) has made a series of lower highs and lower lows.  In the process, it has fallen back below its 50-DMA and continues to trade below that level near its summer lows.

Again, relative to the broader market, ITB was a consistent winner throughout much of 2022 and the first half of 2023.  But with weaker performance over the past few months, that outperformance relative to the broader market (indicated by the upward trending relative strength line below) has been put to the test.

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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On This Day in History:
“We are the 99%.” On September 17th, 2011, the first Occupy Wall Street protest ignited in New York City’s Zuccotti Park. What was born out of frustration with corporate greed, cronyism, and inequality quickly spread around the world. While the movement did not lead to immediate policy change, it succeeded in raising awareness about crucial concerns and sparked broader conversations about wealth distribution.

Technology & Social Media

AI just beat a human test for creativity. What does that even mean? (MIT Technology Review)
AI chatbots, including OpenAI’s ChatGPT and GPT-4, outperformed humans in a test commonly used to assess creativity. While the AI chatbots achieved higher average scores, the best-scoring human responses were rated higher, indicating that AI systems may excel at mimicking human behavior but may not truly exhibit original thought or creativity. These results could align with the belief expressed by Renaissance CEO Robert Mercer, as covered on Bespoke’s X account this past Wednesday, that “human intelligence, intuition, creativity, and finesse are nothing more than computation.” In his view, it’s only a matter of time before AI overtakes humans in these fields as well. Give us a follow @bespokeinvest! [Link]

I.R.S. Deploys Artificial Intelligence to Catch Tax Evasion (NYT)
The IRS is deploying artificial intelligence to investigate tax evasion among hedge funds, private equity groups, real estate investors, and law firms. Using AI to identify patterns, the IRS plans to conduct extensive audits on partnerships with over $10 billion in assets. This initiative is part of a broader focus on scrutinizing wealthy taxpayers, many with unpaid taxes, and investigating investments in digital assets and offshore bank accounts. Despite criticism regarding the use of AI and concerns about taxpayer data, the IRS believes this approach will enhance its ability to detect tax evasion and reduce unnecessary audits. [Link]

How Elon Musk Went from Superhero to Supervillain (The New Yorker)
Elon Musk is quite the character. From SpaceX to Tesla and now X, formerly Twitter, Musk’s life and career is full of remarkable achievements. The article delves into those achievements as well as his personal relationships, including his marriages and family dynamics which shed light on his complex persona. It also discusses Musk’s controversial and often provocative behavior on social media platforms like X. Musk perceives it as a means to combat what he calls the “woke-mind virus” and preserve civilization. [Link]

How Barstool Built an Empire by Swiping Sports Highlights (The Daily Beast)
Four years ago, Barstool Sports faced criticism for its methods used to profit from content it didn’t own using anonymous Twitter accounts that posted copyrighted sports highlights and viral clips. Barstool would then share those clips on official accounts to avoid strikes leading to suspensions or bans. Now, a new investigation by The Daily Beast found over 40 anonymous Twitter accounts that appear to be controlled by Barstool taking similar actions. [Link]

Electric Vehicles & Energy

Electric Vehicle Outlook Report 2023 (BloombergNEF)
EV sales are soaring thanks to government support, better batteries, more charging stations, and appealing new models. China still leads the global EV market, but sales are rising globally. EVs as a whole, are already displacing oil use by 1.5 million barrels daily (3% of road fuel). With EV sales climbing, rising battery demand strains the supply chain for materials like lithium, cobalt, and nickel. [Link]

Peak fossil fuel demand will happen this decade (Financial Times)
The International Energy Agency (IEA) predicts that global demand for fossil fuels (oil, gas, and coal) will peak in the coming years, driven by clean energy growth and changing economic factors. This shift (if it actually plays out), even without new climate policies, marks a significant turning point for the energy sector and climate action. [Link]

Insurance & Loans

A 3% Mortgage Rate in a 7% World? This Startup Says It Can Do That (WSJ)
Roam, a new real estate startup, aims to make “assumable loans” more popular as mortgage rates rise above 7%. Assumable loans allow sellers to transfer their mortgage loans to buyers, potentially giving buyers access to lower interest rates. The idea hasn’t gained much traction recently, partly because lenders are reluctant to process assumptions for less profit than originating new mortgages. Roam plans to help buyers and sellers navigate the assumption process and will recommend lenders for additional financing and collect a fee equal to 1% of the purchase price from buyers. [Link]

‘Almost All Loans Are Bad’—Why Banks Aren’t Lending (WSJ)
U.S. banks are finding it difficult to expand lending due to rising deposit costs, weaker loan demand, and increased regulatory requirements. Despite a strong economy, higher interest rates are making borrowing more expensive for consumers and businesses. Banks are also concerned about maintaining stable deposits to meet investor and regulatory expectations. They are also becoming more selective in their lending, prioritizing attractive loans for their top clients. The challenge lies in finding a sufficient number of high-quality borrowers to support loan growth. [Link]

IRS Shuts Door on New Pandemic Tax Credit Claims Until at Least 2024 (WSJ)
The IRS is taking steps to curb fraud from overstated claims for the pandemic-era tax break known as the employee retention credit (ERC).  Effective immediately, processing of all refund requests has been halted until at least 2024. It also plans to scrutinize the existing queue of over 600,000 ERC requests more rigorously. The ERC has led to an unexpected surge in refund claims and tougher measures aim to disrupt scams, but they will also delay payments to eligible businesses. [Link]

Byju’s Hid $533 Million in Hedge Fund Once Run From Miami IHOP, Lenders Allege (Bloomberg)
Lenders attempting to recover $533 million from Indian education tech firm Byju’s have alleged that the company hid the money in a hedge fund called Camshaft Capital Fund. Byju transferred the funds to Camshaft, despite the hedge fund’s seemingly unconventional principal place of business being listed as an IHOP pancake restaurant in Miami. Byju’s is currently trying to strike a deal with creditors and has proposed buying back the loan within six months. [Link]

Climate change causing an insurance crisis in Louisiana (Insurance Business)
Rising insurance costs due to natural disasters are causing significant economic and population challenges in Louisiana, making it one of the most expensive states for property insurance at three times the national average. Twelve insurers offering homeowners coverage in Louisiana went insolvent between July 2021 and February 2022, leading to a 6.7% increase in average premiums in 2021 and an 18.5% increase in 2022. Flood insurance rates are also rising, particularly affecting low-income individuals in vulnerable neighborhoods. [Link]

Health & Pharmaceuticals

Decongestant found in many cold, allergy medicines doesn’t actually work, FDA advisors say (CNBC)
An FDA advisory panel unanimously declared that oral forms of phenylephrine, a common nasal decongestant in medications like Nyquil, Benadryl, Sudafed, and Mucinex, are ineffective at relieving nasal congestion. This could lead to the removal of phenylephrine from the market, impacting manufacturers like Procter & Gamble and Johnson & Johnson, as well as retail pharmacy chains that generate significant revenue from such products. The question is, how many other drugs on the market are just as ineffective as phenylephrine. [Link]

Economic and Financial Trends

Banking industry faces ‘significant downside risks’: FDIC chair (Yahoo Finance)
FDIC Chair Martin Gruenberg has warned that the US banking industry faces significant downside risks from inflation and high interest rates, which could weaken profitability and credit quality. Overall, deposits declined for the fifth quarter in a row, putting pressure on banks to raise their funding costs to retain account holders. Gruenberg also expressed concerns about a weakening market for commercial real estate, as banks are major lenders to commercial property owners across the US. [Link]

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Have a great weekend!