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“The erosion of our confidence in the future is threatening to destroy the social and the political fabric of America.” – Jimmy Carter
Below is a snippet of commentary from today’s Morning Lineup. Start a two-week trial to Bespoke Premium to view the full report.
Paul Hickey appeared on CNBC’s Power Lunch yesterday to discuss markets and the Fed. To view the segment, click on the image below.
After a late-day swoon to close out the quarter, equity futures are rebounding in early going today, with the S&P 500 indicated to open up 0.3% while the Nasdaq is up 0.5%. That strength comes despite higher oil prices, with WTI up over 1%, and Brent is back above $100 per barrel. Treasury yields are little changed, which these days pretty much qualifies as a rally. Gold prices and Bitcoin are fractionally higher.
Higher oil prices didn’t seem to bother Asian markets overnight. The Nikkei rallied more than 3%, while the Kospi gained just under 2% and China was closed. More important than rates and energy prices during the session was Micron’s (MU) earnings triple play, which lifted tech stocks in both Japan and South Korea. In terms of economic data, manufacturing PMIs for both Japan and South Korea showed accelerating levels of activity.
Europe is taking a much different path than Asia to kick off October. The STOXX 600 is down 0.6%, and every major benchmark in the region is lower, with the UK and Italy leading to the downside. Europe has little tech exposure, so unlike in Asia, the good news for MU barely makes a ripple, leaving more room for oil and yields to have an impact. While equities in the region are lower to start the month, manufacturing PMIs beat expectations across the board.
Here in the US, it’s another busy session for economic data. We just got weekly jobless claims, which came in slightly lower than expected on both an initial and continuing basis. Still coming up, we have S&P Manufacturing PMI at 9:45 and the ISM version at 10. In addition to the data, there are several Fed speakers on the calendar. The odds of a rate hike at the October meeting have dropped sharply in the last few days as investors don’t expect the Fed to hike rates ahead of the election, but there’s still a lot of time between now and the meeting at the end of the month.
With September behind us, we can officially say that it was a historic month of underperformance of the S&P 500 equal-weight index (RSP) versus the cap-weighted index (SPY). As shown in the chart below, SPY outperformed RSP by 4.6 percentage points in September, and since both ETFs started trading in 2003, there are only two other months (March 2023 and March 2020) when RSP underperformed SPY by a wider margin.
What really stands out about the chart, though, is how volatile the monthly performance spread has become in the post-Covid era. During the financial crisis, there were wild swings in the performance spread on a month-to-month basis for less than a year. Since Covid, though, a period now lasting more than six years, wild month-to-month shifts have become almost constant.
Despite the massive outperformance of SPY versus RSP in September, on a YTD basis, SPY is outperforming RSP by less than 3.5 percentage points. In other words, it was underperforming RSP heading into September. Throughout the year, there have been four waves of performance shifts between the two ETFs.
Starting off the year, it was RSP’s chance to shine, but when the Iran war started and oil prices surged, SPY started to take a leadership role. In mid-May, when there were hopes that an MOU would lead to a lasting ceasefire and opening of the Strait of Hormuz, the market broadened out, allowing RSP to outperform. Once oil prices started to leg higher again in August, though, the broadening trade was stopped in its tracks and investors started to rotate back into the megacaps. If you want the broadening trade to start working again, you’d better start rooting for lower oil prices.
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