High Rates Dampen Expansion Expectations
Early this morning, the NFIB published their latest read on small business sentiment. The headline index fell to 91.3, 0.2 points lower than expectations. Sentiment continues to sit near some of the lowest levels of the past decade, albeit off of the worst post-pandemic period when it had reached a low of 89.0 this past spring.
With the decline in the headline index, it is just shy of the bottom decile of its historical range reinforcing the point that small businesses are historically pessimistic. Breadth in this month’s report was fairly mixed with five inputs to the composite falling month over month, three rising, and two going unchanged. As for the other indices, five rose and the remaining three fell.
Employment metrics are some of the areas that have remained somewhat elevated versus history. For example, while many categories are in their bottom deciles of historical readings, job openings hard to fill, compensation, and compensation plans all rank in the 93rd percentile or better. Even plans to increase to increase employment have held up in the top quartile of its historical range. Although current readings would indicate a healthy labor market, conditions have not necessarily improved. As shown below, most of these categories have been trending lower for some time meaning small business labor markets have cooled. However, compensation plans spiked by 5 points in August which is tied for the fifth largest month over month jump on record.
Expectations for changes to sales remain in negative territory meaning that on net more small businesses expect their sales to fall than rise. In August, that reading worsened, and at -14, the index is in the bottom 3% of all readings on record. As with the headline number, although that is a disappointing result, it is off of recent lows. Conversely, actual sales changes are hitting more new lows with the weakest readings since the spring of 2020 and late 2012 before that.
The share of respondents reporting now as a good time to expand their business is another category where readings are at the low end of their historical range without any improvement or further deterioration in August. The NFIB provides a breakdown into the reasons responding firms report their expansion outlook. As shown below, the vast majority report poor economic conditions as the reason which checks out when compared to a very low reading on expectations for the economy to improve. Behind economic conditions, interest rates are the next most quoted reason. That lends to some evidence that the Fed’s rate hikes are working as intended.
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Bespoke’s Morning Lineup – 9/12/22 – Low Energy
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The negative tone in futures this morning is largely attributable to the negative reaction to Oracle’s (ORCL) earnings after the close on Monday. The stock is trading down over 10% which put the stock on pace for its most negative reaction to earnings since December 2011. Besides ORCL, the focus is on Apple (AAPL) which will unveil the new iPhone early this afternoon. In economic news, the only report on the calendar was the NFIB report on small business sentiment. The headline index for that report came in slightly weaker than expected (91.3 vs 91.5) and declined modestly from last month’s reading of 91.9.
In yesterday’s email, we noted the absolute and relative strength of the Energy sector in the first five trading days of September. When the opening bell rang on Monday, it looked as though that strength would continue to start the week. Within the first few minutes of trading, the Energy sector was up just under 1% and trading at a YTD high, but from there it ran out of gas and proceeded to drift lower all day. By the time they rang the closing bell, the Energy sector finished the day down well over 1%.
When a stock or index makes both a higher high and a lower low relative to the prior day’s range, technical analysts refer to it as an outside day, and it is considered a signal of a potential reversal in the prior trend. The actual record of these patterns playing out as expected is mixed, but we would note that the S&P 500 had a similar outside day right at the high in late July and has yet to get back to those levels in the seven weeks since.
Getting back to the Energy sector, in its history since 1990, yesterday was just the sixth time that the sector had an outside reversal day that was comprised of an intraday high of at least 0.5% relative to the prior close but where it closed the day down over 1%.
In today’s Morning Lineup post, we looked at how the sector performed following prior reversals like Monday’s, and if you sign up for a two-week trial to Bespoke Premium to you can check out the full details.
The Closer – Bank Conference, Call in SAVE, NY Fed, CoT – 9/11/23
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Looking for deeper insight into markets? In tonight’s Closer sent to Bespoke Institutional clients, we begin with a look at a number of individual stock news from some of the biggest banks (page 1) and Spirit Airlines (SAVE) (page 2). We then dive into the latest data from the New York Fed’s Consumer Expectations Survey (pages 3 and 4). Next, we recap today’s disappointing 3 year note auction (page 5) before closing out with a rundown of the latest positioning data (pages 6-8).
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Daily Sector Snapshot — 9/11/23
Chart of the Day: Best and Worst One-Day Moves
August 2023 Headlines
Dreamforce Kick Off
Salesforce (CRM) kicks off its annual Dreamforce Conference tomorrow. Honing in on the buzzword of the year, AI innovation will be front and center with CEO March Benioff’s keynote scheduled to focus on the company’s usage of AI in its customer relationship management (CRM) platform. Leading up to the conference, Salesforce has been one of the top performing Tech stocks in the S&P 500, rallying 69% year to date. Historically, CRM has often risen in the six months ahead of the conference and has also risen more often than not in the short-term leading up to the start of the event. Once the Dreamforce Conference begins, CRM has historically averaged a 1.24% gain over the three-to-four-day span with positive returns a little over half the time. From there, CRM usually gives up some of its gains one week later, but the following months are once again positive, although it’s worth pointing out that the stock has traded lower in the three months after Dreamforce in each of the last three years.
Compared to the Tech sector, using the S&P 500 Tech ETF (XLK) as a proxy, performance in the lead up to the conference over the past twenty years has usually been positive. In fact, returns in the six months leading up to the conference have been positive 80% of the time. Unlike CRM, when the conference is underway, the Tech sector has fallen more than half the time with an average drop of 0.15%. The weakness has also been prevalent one week after the conference with an average drop of 0.65%. However, that weakness tended to be short-lived with gains on an average basis one, three, and six months after the conclusion of the conference.
Bespoke’s Morning Lineup – 9/11/23
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After a weak start to September, futures are heading into the new week on a positive note. There’s a handful of important economic reports this week, including CPI (Wed), PPI (Thur), and Retail Sales (Thur), but the week will start off quietly as there are no economic or earnings reports on the calendar. One notable release today, though, will be the NY Fed’s survey of Consumer Expectations which has become a widely watched gauge for inflation expectations.
The last five trading days, which also encompass all of September, have been weak for US stocks as nine out of eleven sectors are down month to date and seven of them are down over 1%. Despite the weakness, the losses have been relatively contained as Industrials is the only sector down more than 2%. Behind Industrials, Technology, the most important sector in the market given its weighting, is down 1.63%. To the upside, the only two sectors positive this month are Utilities (+0.35%) and Energy (+3.52%). In a market environment preoccupied with inflation, it shouldn’t be a surprise that when the Energy sector rallies over 3%, the rest of the market may struggle.
Looking at the Energy sector, ever since late June, the sector ETF (XLE) has been steadily trending higher moving from oversold to overbought territory, and it is now less than 2% from its 52-week high in November and less than 10% from its all-time high in 2014.
The Industrials sector has been weak (like the rest of the market) of late, and on Friday it closed right at the lower end of a short-term trading range, but even of that level breaks, the sector ETF (XLI) is trading comfortably above the high end of its trading range from 2023.
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