The Closer – EM Policy Tailwinds, Food Prices, Housing Price Spike, Sentiment – 7/20/23
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Looking for deeper insight into markets? In tonight’s Closer sent to Bespoke Institutional clients, we start out with a review of the latest earnings reports (page 1) followed by a dive into emerging market central bank decisions (page 2). Next, we look at food prices (page 3) and existing home sales (page 4). We also provide an update on housing affordability (page 5). Afterward, we update our Five Fed Manufacturing Composite (page 6). We finish with reviews of the record setting 10 year TIPS auction (page 7) and surge in sentiment (page 8).
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Bespoke’s Weekly Sector Snapshot — 7/20/23
Seasonal Bump Absent in Claims Data
Among the many economic indicators updated this morning, seasonally adjusted initial jobless claims came in stronger than expected, falling to 228K. That reversed the recent jump in claims observed throughout the late spring.
Looking at the non-seasonally adjusted data helps to explain the recent decline in the adjusted number. As shown below, barring the pandemic years of 2020 and 2021, claims remain at one of the higher readings for the current week of the year in recent history. Typically, in late June and early July, seasonal headwinds cause a significant bump in claims. This year, that increase has been relatively modest.
Pivoting to continuing claims, the indicator had been on the decline since early April, but the first two weeks of July have seen a modest turn higher. At those levels, continuing claims remain in the middle of the range from the few years leading up to the pandemic.
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Bulls Dominate
The past week has provided some positive developments on the inflation front that in turn sent equities higher. In response, readings on investor sentiment have shown a dramatic positive turn. The latest AAII survey showed more than half of respondents reported as bullish for the first time since April 22, 2021. As we noted in today’s Morning Lineup, this week’s reading ended an over two-year-long streak without a reading above 50% which was the third longest such streak on record.
Given the elevated reading of bullish sentiment, a minor share of respondents are reporting as bearish. In fact, that reading fell to 21.5% this week which is the lowest reading since June 2021.
Last year saw a record streak of weeks where bearish sentiment outnumbered bullish sentiment. With the total reversal in sentiment, the bull-bear spread now heavily favors bulls. The spread reached 29.9% this week for the highest reading since April 2021.
The gains to bullish sentiment have not entirely come from bears. Neutral sentiment is also reaching new lows, registering just 27.1% this week. Unlike bearish sentiment, that is only the lowest level since the last week of 2022.
In tonight’s Closer we will discuss the surge in other sentiment indicators and what that has historically meant for S&P 500 performance.
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Chart of the Day – NASDAQ 100 Rebalancing
Bespoke’s Morning Lineup – 7/20/23 – Complacency Climbs
See what’s driving market performance around the world in today’s Morning Lineup. Bespoke’s Morning Lineup is the best way to start your trading day. Read it now by starting a two-week trial to Bespoke Premium. CLICK HERE to learn more and start your trial.
“If trouble comes when you least expect it then maybe the thing to do is to always expect it.” – Cormac McCarthy
Below is a snippet of content from today’s Morning Lineup for Bespoke Premium members. Start a two-week trial to Bespoke Premium now to access the full report.
The S&P 500 and Nasdaq have benefited from the performance of mega caps this year, but this morning, a 4% decline in Tesla (TSLA) in reaction to earnings is weighing on futures for both of those indices. At this point, though, the declines are minor. The real test will come in the next couple of weeks when the trillion-dollar club of companies starts to report.
Overnight, Asian stocks were mixed with Japan and China lower while India and Australia rallied as payrolls down under came in better than expected. Stocks are faring better in Europe this morning as major benchmarks are higher across the board as an ECB policymaker suggested that just one more 25 basis point increase in rates could be all that’s needed for the current cycle.
The focus now shifts to this morning’s economic data in the US with jobless claims (initial lower than expected, continuing higher) and the Philly Fed (weaker than expected) at 8:30 and then Existing Home Sales and Leading Indicators at 10 AM. While the earnings calendar has been busy this morning, the lineup after the close is relatively quiet with reports of note including Capital One (COF), CSX (CSX), and Intuitive Surgical (ISRG). Then tomorrow we close out the week with American Express (AXP), AutoNation (AN), and SLB.
With the market rising faster than the temperature this summer, we can’t say we were surprised this morning to see that individual investor sentiment as measured by the American Association of Individual Investors (AAII) has turned bullish. In this week’s survey, the percentage of bullish respondents increased from 41% to 51.4% which is the highest level since April 2021.
That plus-50% reading in bullish sentiment also ended a streak of more than two years (116 weeks) where bulls were never in the majority in the weekly AAII poll. In the history of the survey (since 1987), there have been just three other periods where bullish sentiment went more than 100 weeks without a 50%+ reading, and the just-ended streak ranks as the third longest of all time. What’s notable about this chart is that the three longest streaks without 50%+ readings in bullish sentiment have now all occurred in the last ten years, and during that ten-year stretch, there have only been 17 weeks (out of 520) of 50%+ bullish readings.
With so few weeks where bulls were in the majority, you would think that it was an unsettled time for equities, but during this period, the S&P 500 has put up annualized returns of over 10% (not including dividends). Like the Cormac McCarthy quote above, markets climb a wall of worry, and sometimes, the more issues that investors are worried about, the better the forward returns. Conversely, just when you think things can’t go wrong for the stock market, you get years like 2022. Complacency kills.
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The Closer – Single Family To Multifamily, Rates Factors, EIA, 20y Sale – 7/19/23
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Looking for deeper insight into markets? In tonight’s Closer sent to Bespoke Institutional clients, we kick off with a look at some of the major earnings reports out after the closing bell including those of Tesla (TSLA), Netflix (NFLX), United Airlines (UAL), and more. We then discuss the latest residential construction data, honing in on the switch from multifamily resilience to single family rebound. Afterward we perform a principal component analysis of developed market interest rates before closing with reviews of the latest EIA data and 20 year bond reopening.
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Daily Sector Snapshot — 7/19/23
Reality Check for Housing Starts
After a blockbuster report for May where Housing Starts and Building Permits both surged, there was a bit of a reality check in June. While Building Permits were expected to come in at 1.50 million, the actual reading came in at 1.44 million representing a 3.7% m/m decline and a drop of 15.3% y/y. One positive of this report, though, was that single-family units actually increased 2.2% and are only down 2.7% y/y even as multi-family units plunged 12.8% m/m and over 30% y/y. With respect to Housing Starts, the headline reading also missed estimates by 46K (1.434 mln vs 1.480 mln). Not only did June’s reading miss forecasts, but May’s reading was revised lower, so that the originally reported 231K beat was more like 159K. Even after that downward revision, though, Housing Starts declined 8.0% m/m and 8.1% y/y.
Following May’s report, we noted that the 12-month moving average of Housing Starts had broken its streak of 12 straight declines, but this month, the moving average resumed its downtrend and fell to its lowest level since February 2021. Similarly, the 12-month moving average for Building Permits declined below 1.49 million for the first time since December 2020 and posted its 11th straight decline.
Taking a longer-term look at the 12-month moving average for Housing Starts, it remains in its well-established downtrend. As shown in the chart below, prior periods where this average peaked and started to rollover usually preceded recessions.
A comparison of Housing Starts versus the performance of homebuilder stocks is a perfect example of how the market tends to trade in advance of events. Just as homebuilder stocks peaked four months ahead of the peak in Housing Starts, they bottomed five months in advance of the recent low in the three-month moving average.
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Our daily research consists of a pre-market note, a post-market note, and our Chart of the Day. These three daily reports are supplemented with additional research pieces covering ETFs and asset allocation trends, global macro analysis, earnings and conference call analysis, market breadth and internals, economic indicator databases, growth and dividend income stock baskets, and unique interactive trading tools.
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Fixed Income Weekly — 7/19/23
Searching for ways to better understand the fixed income space or looking for actionable ideas in this asset class? Bespoke’s Fixed Income Weekly provides an update on rates and credit each week. We start off with a fresh piece of analysis driven by what’s in the headlines or driving the market in a given week. We then provide charts of how US Treasury futures and rates are trading, before moving on to a summary of recent fixed-income ETF performance, short-term interest rates including money market funds, and a trade idea. We summarize changes and recent developments for a variety of yield curves (UST, bund, Eurodollar, US breakeven inflation, and Bespoke’s Global Yield Curve) before finishing with a review of recent UST yield curve changes, spread changes for major credit products and international bonds, and 1-year return profiles for a cross-section of the fixed income world.
Our Fixed Income Weekly helps investors stay on top of fixed-income markets and gain new perspectives on the developments in interest rates. You can sign up for a Bespoke research trial below to see this week’s report and everything else Bespoke publishes for the next two weeks!
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