Fed Days Flipping Script
The FOMC blackout period is now underway meaning there will be no communications from FOMC members until the day of the May meeting. As we detailed yesterday, performance outside of and during blackout periods has been pretty weak during the current roughly year-long tightening cycle. However, things have been improving more recently. As for Fed days themselves, the opposite has been true.
In the chart below, we show the performance of the S&P 500 on the day of FOMC rate decisions going back to 1994. Earlier in the current tightening cycle, Fed days offered the market a brief respite from selling. In fact, some of the strongest Fed days (in terms of S&P 500 performance) of the past few decades occurred last year as the rolling 10-meeting average hit a more than decade-long high in July. With that being said, that average has been rolling over with weaker reactions to the FOMC in the past few meetings. In other words, to some extent, S&P 500 performance during and outside of blackout periods and on Fed days has begun to flip the script in the past few FOMC meetings.
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B.I.G. Tips – “Buy the Dip” and “Day After” Trends
Discover the fascinating world of “buy the dip” investing and its rollercoaster journey through the years in our newest in-depth analysis. This BIG Tips report delves into the historical action of the S&P 500 tracking ETF (SPY) after up days versus down days and reveals some surprising findings that have shaped the market since 1993. Subscribe to Bespoke Premium now to access the full report!
Chart of the Day – 4/25/23 – Sour Sixteen
Bespoke’s Morning Lineup – 4/25/23 – Earnings Season Kicks Into Gear
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“I don’t think people understand there’s 100% correlation with what happens to a company’s earnings over several years and what happens to the stock.” – Peter Lynch
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.
After a slow start, earnings season has picked up pace with around 60 US companies reporting results this morning. These companies have combined sales of $350 billion, and the results have been very positive. The EPS beat rate is at 77%, while the revenue beat rate is still high at 73%. Additionally, only two companies have lowered their guidance, while five companies have raised theirs. It’s only one morning of results, but does this look anything like an earning collapse?
Despite this positive news, futures are lower, although not by a significant amount. Treasury yields have also decreased by 5 basis points or more across the curve. In the commodities space, crude, gold, and copper are all trading lower.
Even when you consider its volatile nature, bitcoin has had a notably strong six months, with its price almost doubling off the lows from last fall. The bulk of this rally occurred in the final months of 2022 and the first four months of 2023. However, there has been a moderate pullback in the last two weeks, as the rally lost momentum just as it was testing the 30,000 level. Over the past few days, bitcoin has been testing its 50-day moving average, which has held for now. If you are involved in crypto, it’s essential to watch this key level (~27,200).
Although bitcoin and the crypto space have little to do with the stock market, some traders monitor the space on the belief that they provide a good barometer of overall risk appetite. Trend changes in Bitcoin eventually bleed through to the equity market. Comparing the performance of the S&P 500 to the relative strength of Bitcoin versus the S&P 500 shows a loose but unconvincing link between the two series. The ratio of Bitcoin to the S&P 500 peaked about two months before the S&P 500’s peak in late 2021/early 2022. However, when the S&P 500 hit its recent low in October, it took another two months before the relative strength of Bitcoin began to pick up steam. Rather than leading moves in the stock market, shifts in the relative strength of Bitcoin tend to coincide with shifts in the S&P 500.
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The Closer – Last Republic, Broken Bills, Dallas Whif – 4/24/23
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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 First Republic (FRC) and other notable earnings (page 1) followed by a dive into the monster bid for bills maturing prior to debt ceilings (page 2). We also take a look at the Overnight Reverse Repurchase facility and bill issuance (page 3). We then switch over to an update of our Five Fed Composite (page 4), preview this week’s upcoming Treasury auctions (page 5), and the fresh low in S&P 500 positioning (pages 6-8).
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Daily Sector Snapshot — 4/24/23
Chart of the Day – Sell in May? It’s Complicated
Fed Blackout Begins
Saturday began the FOMC’s blackout period meaning there will be no communication from Fed officials for the next several days until the May 3rd meeting (Hooray). As of Monday afternoon, the CME’s FedWatch Tool is pricing in a nearly 90% chance of a 25 bps hike at that meeting.
In the chart below, we show the performance of the S&P 500 from the end of a Fed day until the start of the blackout period for each inter-meeting period since 1994 when the FOMC began announcing its rate decisions on the same day as the meetings. Since the current tightening cycle began a little over a year ago, most periods between meetings and blackouts have seen the S&P 500 turn lower with a median decline of 0.53%. One notable exception to that weakness was after the meeting last November when the S&P 500 went on to rally over 8% leading up to the blackout period. That was the strongest run for the S&P 500 from meeting to blackout since June 2009. As for more recently, the 5% gain from the March meeting through last Friday again stands out ranking as the second strongest of the current tightening cycle (out of ten).
In the chart below, we show the performance from the start of each past blackout period up through the last close prior to the FOMC meeting. Again, the current tightening cycle has tended toward weak performance for the S&P 500 with more declines than gains. However, the last blackout period in March saw the strongest gain for the S&P 500 since the runup to the June 2020 meeting.
Although there has been some strength during and leading up to blackout periods more recently (especially relative to earlier this tightening cycle), over the full history of the data, strong performance ahead of the blackout period is not a good explainer of performance during the blackout period itself. As shown below, there has historically been a wide dispersion of results without much in the way of a trend. In other words, the strong performance headed into the blackout period in and of itself does not mean it will continue as Fed speakers go quiet.
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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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Bespoke’s Morning Lineup – 4/24/23 – Earnings On Deck
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“It is not enough that we do our best; sometimes we must do what is required.” – Winston Churchill
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.
In what is sure to be a very active week with respect to earnings, it’s starting off on a very quiet note as equity futures are little change and trading just barely below the flatline. Outside of Japan, which finished the session modestly higher, Asian stocks started the week on a negative note while most European benchmarks are little changed with a slight positive bias. In the Treasury market, yields are lower. On the economic calendar today, the only two reports are the Chicago Fed National Activity Index at 8:30 AM and the Dallas Fed Manufacturing report at 10:30.
In last weekend’s Bespoke Report, we highlighted the massive outperformance of European stocks relative to the US since the October lows. While Europe may be outperforming the US, it hasn’t been a global trend. The snapshot below from our Trend Analyzer shows the performance of international regional equity markets and where they finished last week relative to their trading ranges. Right at the top of the list are three ETFs whose focus is on Europe. They were among the best-performing international ETFs last week, the best performers YTD, and are all the most extended relative to their trading ranges.
Europe may have been higher last week, but Emerging Markets sold off. As shown at the bottom of the list, ETFs associated with Emerging Markets and Latin America were all at the bottom of the list and declined more than 1.5% last week. They are also some of the worst performers YTD and among the only ETFs in the group that aren’t overbought relative to their short-term trading ranges. The hardest hit on the week was Latin America where Chile’s proposed nationalization of its lithium industry hasn’t helped investor sentiment towards that area of the world.
The MSCI Emerging Markets ETF (EEM) has been in pretty much of a sideways trading range all year, but the technical picture is leaning more negative than positive. While EEM finished off its lows on Friday, it closed below its 50-day moving average (DMA) and has now seen both a lower low and a lower high.
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Bespoke Brunch Reads: 4/23/23
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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AI
ChatGPT Can Decode Fed Speak, Predict Stock Moves From Headlines by Justina Lee (Bloomberg/Yahoo!)
Academic papers applying ChatGPT and similar large language models to finance are starting to roll out and the initial results are broadly promising with ChatGPT doing a serviceable job interpreting stock headlines and Fed statements. [Link; auto-playing video]
Nvidia’s top A.I. chips are selling for more than $40,000 on eBay by Kif Leswing (CNBC)
Graphics cards that are optimal platforms for AI development and deployment are going for as much as $46k on eBay. Tens of thousands of the prior generation of chips led to the development of ChatGPT by OpenAI. [Link]
Environment
Let’s talk about the biggest cause of the West’s water crisis by Kenny Torella (Vox)
The vast majority of the Colorado River’s water gets spread onto fields irrigating crops; only about one-fifth goes to all non-crop uses. Of those crops, the vast majority are dedicated to feeding cows, with livestock feed crops sucking down a staggering 1.05 trillion gallons per year. [Link]
Pacific Ocean Garbage Patch Is Bursting With Life by Nidhi Subbaraman (WSJ)
Massive patches of plastic waste in the world’s oceans is both a major threat to some species and a comfortable ecological niche for dozens of species. [Link; paywall]
Office Woes
Brookfield Defaults on $161 Million Office-Property Debt by John Gittelsohn (Bloomberg)
The owner of a large swathe of office building has defaulted on a commercial mortgage-backed security tied to a package of Washington, DC properties. Brookfield has previously walked away from the debt tied to two LA towers. [Link; soft paywall, auto-playing video]
Houston, Dallas lead the country in office attendance — and empty office space by Dani Romero (Yahoo! Finance)
While Texas markets have lots of people back in the office, that doesn’t necessarily mean they have low vacancy rates with coastal markets finding far more paying renters for their inventory. [Link; auto-playing video]
Housing
Home Prices Fell 3% in March—Biggest Annual Drop in Over a Decade by Lily Katz (Redfin)
The sales price of the median home in March was down 3.3% YoY, the fastest drop since at least 2012 as soaring prices in pandemic boomtowns ground into reverse. [Link]
More Flexible Zoning Helps Contain Rising Rents by Alex Horowitz and Ryan Canavan (Pew)
A subset of cities and towns that have eased zoning restrictions appear to have avoided the worst of the national surge in rent, despite robust growth in those cities over the last few years. [Link]
How To Spend It
2022 the United States Average Federal Income Taxes Paid (National Priorities Project)
While taxes don’t directly finance spending in a fiat money system, the breakdown of dollar amounts scaled to tax bills are nonetheless a helpful insight into the things our country prioritizes spending on. [Link]
End-Cretaceous Asteroid Caused Massive Global Tsunami, Peaking At A Mile High (AGU)
The massive impact which ended dinosaurs’ time as the dominant life from on earth and paved the way for mammals to supplant them generated enormous waves that would have soaked land almost a mile above sea level. [Link]
Food
McDonald’s is upgrading its burgers by Danielle Wiener-Bronner (CNN)
Small tweaks including softer buns, gooier cheese, onions on the grill, and more Big Mac sauce are all steps being taken to improve the core product at McDonalds. [Link]
The Amazing Story of How Philly Cheesesteaks Became Huge in Lahore, Pakistan by Kunwar Khuldune Shahid (Philly Mag)
The iconic cheesesteak has become one of the favorite foods of Pakistan’s second city, finding fans for their accessibility and fragrance. [Link]
Feeling Good
They’re the Happiest People in America. We Called Them to Ask Why. by Aaron Zitner (WSJ)
Among the roughly one in ten Americans who report that they are “very happy”, two-thirds are very or moderately religious, a similar percentage prioritize marriage, and few attach high importance to their personal finances. [Link; paywall]
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Have a great weekend!