Chart of the Day – Historic Tumble in Global Equities
Bespoke’s Morning Lineup – 8/6/24 – Calming Down
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“Fear is the most contagious disease you can imagine. It makes the virus look like a piker.” – Warren Buffett
Below is a snippet of commentary from today’s Morning Lineup. Start a two-week trial to Bespoke Premium to view the full report.
After falling 12% on Monday, Japan’s Nikkei bounced back 10% on Tuesday, and US equity futures are currently set to open higher by about 0.75% as of 8 AM ET. As shown below, the carnage from the past few weeks has now left the S&P 500 in extreme oversold territory (>2 standard deviations below its 50-DMA). These are areas where you typically start to see some upside mean reversion, although it’s certainly not a guarantee.
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Defense Outperforms
Losses are accelerating as the S&P 500 (SPY) has, as of this writing, fallen 8% since the July 16th high. That move has occurred on a rotation out of former market leaders like the mega caps as markets contend with a number of factors ranging from recession fears to rising geopolitical tensions abroad. While breadth has been rough in that time, it hasn’t been a total wash with roughly a third of the index having risen since July 16th. On a sector level, the groups with the largest share of stocks rising since 7/16 come from defensive sectors like Utilities (83.9%), Consumer Staples (63%), Real Estate (61%), and Health Care (57%).
What is impressive is that in looking only at the S&P 500’s 20 best performing stocks since the 7/16 high, the two sectors with the largest representation are Health Care and Industrials. However, looking more closely, a number of those Industrial stocks are also in the Aerospace & Defense industry with stocks like Lockheed Martin (LMT), Northrop Grumman (NOC), and RTX (RTX) all posting double digit gains.
As a result, the S&P 500 Aerospace and Defense Industry index has risen 1.4% since the July 16th high compared to the high single-digit percentage decline in the broader market. Looking at the 14-trading day performance spread of the industry and the broader market, that 9.5 percentage point difference is a 99th percentile reading dating back to 1990. While not every spike in this spread is due to geopolitical tensions (for example in the spring of 2020 it surged as equities recovered from the Covid Crash), this spread has tended to rise sharply around tense periods for geopolitics. This current spike surpasses that from when Hamas attacked Israel on October 7th and is now the most elevated reading since November 2022 (North Korea missile launches and Russia/Ukraine war was underway) and when Russia invaded Ukraine in early 2022 before that. Prior to 2020, the only other time defense stocks outperformed the S&P 500 by such a wide margin was in the late 19990s and early 2000s. More specifically, the current reading would be the highest since February 2002 in the early days of the War on Terror when these companies began to receive large contracts from the US government.
While the industry as a whole has outperformed the S&P 500 by a decent margin, under the hood it actually hasn’t seen the best breadth. Of the dozen stocks belonging to the industry, just four defense names are higher since 7/16, and each one has earnings to thank. As shown in the charts below, those four stocks all rose sharply in late July in the wake of their latest earnings reports. Impressively, the reaction to earnings for Northrop Grumman (NOC) and RTX (RTX) were both the best on record for their respective earnings histories based on data from our Earnings Explorer tool. Howmet Aerospace’s (HWM) gain after reporting the most recent quarter also ranks highly as their third best reaction on record, however, it has not been immune from selling over the past few sessions meaning that gap has since nearly been filled. Lockheed Martin’s (LMT) saw its sixth best reaction to date. In other words, while some are arguing that the defense group is up due to geopolitics, it has really been a few strong reactions to Q2 earnings reports.
Chart of the Day: Gauging the Sell-Off
Bespoke’s Morning Lineup — 8/5/24 — The Best Laid Plans…
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“The best laid plans of mice and men often go awry” – Robert Burns
Below is a snippet of commentary from today’s Morning Lineup. Start a two-week trial to Bespoke Premium to view the full report.
The Fed decided to hold rates steady once again last week while indicating that it was highly likely to cut rates at its next meeting in September. Since that decision, markets have decided that the Fed got too cute. As shown below, with risk assets plummeting around the world this morning, the odds of at least 50 basis points of rate cuts by the September meeting are now at 100%.
Suddenly the Fed Funds Rate all the way up at 5.25-5.50% looks wildly out of line with where the 10-year and 2-year Treasury yields are trading at around 3.75%.
Brunch Reads – 8/4/24
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.
Anne Frank’s Arrest: On August 4, 1944, Anne Frank, a Jewish girl born in Frankfurt, Germany, and her family were captured by the Gestapo, the Nazi secret police, after hiding for over two years in a secret annex in Amsterdam. Acting on a tip from an unknown informant, the Nazis raided the space where the Frank family, along with the Van Pels family and Fritz Pfeffer, had sought refuge. The arrest led to their deportation to concentration camps where they later passed away. Otto Frank, Anne’s father, was the only family member to survive the Holocaust and ended up publishing her discovered diary. Anne began writing the diary on her 13th birthday, detailing her thoughts, fears and hopes during one of history’s darkest periods. Anne wrote about everyday occurrences, her longing for freedom, and her aspirations to become a writer. When her diary was finally published, she did just that. It’s been translated into numerous languages and remains one of the most widely read accounts of the Holocaust.
The genAI boyfriend business is booming (Axios)
More women are turning to AI chatbots for connection and comfort. Allegedly, they find simulated AI empathy more reliable than humans. That idea clashes with stereotypes about AI use and suggests an alarming shift in human social behavior. AI companion apps are rapidly gaining popularity as user engagement outpaces other categories. Users can customize their chatbot experiences, and some apps, like Replika and Nomi, have garnered attention for their personalized interactions. Despite the emotional support these apps offer, the potential erosion of human relationships and privacy risks associated with the usage of sensitive data is something to consider seriously. [Link]
The antithesis of the Olympics: Using AI to write a fan letter (NPR)
A recent ad featuring Google’s AI assistant, Gemini, shows a father using AI to craft a fan letter to Olympic hurdler Sydney McLaughlin-Levrone for his daughter. The AI-generated letter ends up lifeless and uninspiring, one of the shortcomings of AI in capturing genuine human emotion and creativity. After all, is there anything better than a handwritten note from the heart? The article argues that true admiration and expression come from personal, imperfect efforts, not from relying on artificial intelligence to replace human touch and sincerity. [Link]
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The Bespoke Report – 8/2/24 – Bad News Is Bad News
To read our weekly Bespoke Report newsletter and access everything else Bespoke’s research platform has to offer, start a two-week trial to Bespoke Premium. Below we show our Asset Class Performance matrix covering major ETFs recent returns. We discuss this and much more in the full newsletter.
This Week’s Can’t-Miss Analysis — 8/2/24
We publish a lot of market-related content each week, and we want to make sure you don’t miss the most important topics. Below are some charts and tables we view as “can’t miss” from the last week.
Chair Powell and the Fed left rates unchanged on Wednesday and signaled that they’d likely be cutting rates at the September meeting. Then all hell broke loose. Since 3 PM ET when Powell had his post-FOMC press conference on Wednesday, the S&P 500 is down 3.5%, the Nasdaq 100 is down 5%, and the small-cap Russell 2,000 is down 8.3%. A series of very weak economic indicators, a failure to post strong enough beats from a few mega-caps, and more Presidential election volatility all of a sudden has investors shaking in their boots. Treasury yields have plummeted in a sign of weakening economic expectations, and Powell and the Fed don’t have another meeting until September 18th. Oh, and August and September are historically two of the worst months of the year for the market from a seasonal perspective, so there’s that to deal with as well.
It’s amazing how the market can go from thinking the Fed has everything under control to suddenly appearing way behind the curve. That’s how it always seems to work, though, doesn’t it?
As shown below, the CNN Fear & Greed index, which looks at several volatility and sentiment figures to gauge investor skittishness, has ticked into “Extreme Fear” mode. (If you’re a contrarian, you love to see it.)
As we move into August, below is a reminder of the seasonal weakness that August and September typically bring. Over the last 50 years, August and September are the only two months that have seen the Dow average declines. September is the worst month by far with an average decline of 1.28% and positive returns only 36% of the time.
To continue reading the rest of this week’s “Can’t-Miss” analysis, which includes another dozen or so important market-related topics, sign up for one of our two membership levels with our Dog Days of Summer special below!
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STOCK MARKET SUMMER CAMP FOR STUDENTS
If you or any of your friends or colleagues have children, grandchildren, nieces, or nephews, please take note!
Here at Bespoke we’ve been following the stock market 24/7 for more than two decades, so based on the “10,000 hour” rule, we can confidently say that we are market “pros”.
At the same time, traditional education across grades K-12 doesn’t focus on the stock market, investing, and how it all works.
For years, we’ve thought about addressing the “stock market literacy gap” for students across the country. Now, we’ve come up with a plan!
From August 12th-16th, we’ll be running our Stock Market Camp for students in grades 5-8!
Bespoke’s Stock Market Camp will run for five days from Monday-Friday with each live Zoom class lasting roughly 75 minutes. Camp will be fun, engaging, and interactive, and by the end of the week, students will have a basic understanding of how the stock market and investing works! If a live class is missed, a recording will be available.
We don’t have to tell you how valuable knowing this information at a young age can be! Instead of kids playing video games, scrolling through TikTok, or messing around on Snapchat, we think our five-day Stock Market Camp will pay major dividends down the road!
For now we are making our Stock Market Camp available to students that are referenced by Bespoke readers. We already ran a one week of camp for high school students (grades 9-12) from July 22nd-26th, and our next one is for middle school students (grades 5-8) from August 12th-16th. Each weekly camp is capped at 40 students max, so please sign up ASAP to reserve your student’s spot. You can purchase as many spots as you’d like or forward this email to colleagues and have them sign up.
SIGN UP YOUR STUDENT OR STUDENTS TODAY AS THE CAMPS ARE LIMITED TO JUST 40 ATTENDEES!
We will touch base after sign-up to gather the pertinent information. If you sign up and the student cannot attend during the dates listed above, we can either provide access to a full recording of the camp or a credit for a future camp. Refunds will be provided upon request if we are notified at least one week before the camp’s start date.
Please reach out if you have any questions about Bespoke’s Stock Market Camp. The camp is for informational and educational purposes only, and there will be no investment advice or recommendations provided. All discussions will be impersonal and historical in nature. There will be no forward-looking analysis or discussion.
Don’t forget to go check out our Bespoke Threads site to pick up some super-soft Bespoke merch!!!
Have a great weekend!
Treasury Rally Enters its Fourth Month
After three months in a row of gains already, long-term US Treasuries have picked up in August right where they left off in July. In just the first two trading days of August, the iShares 20+ Year Treasury ETF (TLT) has already gained close to 3% to trade at its highest level since February 1st, riding a seven-day winning streak. Despite the surge in price, TLT is only now just bumping up against a downtrend line that has been in place since its summer peak right around this time last year.
Along with the rally in price, the yield on the 10-year Treasury has plummeted for each of the last seven trading days. Going back to 1962, streaks of this length haven’t been particularly uncommon. Since 1962, there have been 44 other streaks of at least seven trading days. If the streak continues into next week, it will join more rarified territory. Of the 44 prior streaks, just 18 stretched into an eighth day, and of those, only six lasted nine days.
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Bespoke’s Morning Lineup – 8/2/24 – A Slap in the Face
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.
“The more you sweat in peace, the less you bleed in war.” – Norman Schwarzkopf
Below is a snippet of commentary from today’s Morning Lineup. Start a two-week trial to Bespoke Premium to view the full report.
Welcome to August. Global stock markets have been slapped in the face by a brutal August sell-off driven by weak earnings reports, concerns over the economy, and a generally overbought technical condition. If that wasn’t bad enough, the July employment report was entirely weaker than expected. Non-farm payrolls increased by just 114K vs a 175K forecast. The Unemployment Rate came in 0.2 higher than expected (4.3% vs 4.1%). As if that wasn’t bad enough, both average hourly earnings and the average workweek were weaker than expected. After being down by 1.2% heading into the print, S&P 500 futures are now indicated to open down by over 1.5% while the Nasdaq is down 2.3%. Going the other way are treasury yields where the 10-year yield is below 3.8% and near the lowest level since last July!
As mentioned above, August has started on a poor note, and based on where futures were trading at 8 AM, the S&P 500 was on pace for a decline of 2.5% in the first two trading days of August. Since 1954, only three other years – 1998, 2002, and 2011 – have started weaker. Interestingly, though, in the late 1960s/early 1970s, there was consistent weakness to kick off the month.
In terms of how weak starts to August play out for the rest of the month, buckle up. In 1998, the S&P 500 went on to crater another 10.7% while in 2002, it surged 6.0%. Both of these moves make the 2.8% decline for the rest of August in 2011 seem sleepy.
And for the rest of the year? In 2011, that 10%+ decline fully reversed and turned into a gain of 14.7%, but in 2002 and 2011, the S&P 500 was also up but by less than 2% each time.
