Chart of the Day – Index Effect Incoming for Super Micro (SMCI)?
Bespoke’s Morning Lineup – 3/13/24 – Another Weak Breadth Rally
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“I tend to approach bad news as a problem that can be worked through and solved, something I have control over rather than something happening to me.” – Robert Iger
Below is a snippet of commentary from today’s Morning Lineup. Start a two-week trial to Bespoke Premium to view the full report.
With earnings season pretty much out of the way and a sparse economic calendar, there’s not a lot going in markets this morning. While they are off their overnight lows, futures are little changed with a slightly negative bias, and treasury yields are slightly higher. Asian stocks also lacked much conviction overnight, although India was down over 1%. Europe has a more positive tone with the STOXX 600 trading up 0.2% and is being led higher by Spain (+1.3%) and Italy (+0.6%). That strength comes even as Industrial Production on the continent fell more than expected (-3.2% vs -1.8% forecast).
Yesterday was another one of those days in the market where the market rallied, and breadth stunk. While the S&P 500 was up 1.1%, the net advance/decline for the S&P 500 was a paltry +78, and 48 of those advancers were from the Technology sector. Just for the sake of reference, on Monday, when the S&P 500 was down fractionally, the net A/D line was slightly higher at +83!
You would prefer to see more stocks participating as the market rallies than less, but based on the last five years of trading, it hasn’t particularly mattered. Over the last five years, there have been 216 trading days where the market rallied more than 1%, and the average net A/D reading on those days was +344. In the chart below, we show the ten days when the S&P 500 rallied at least 1% that had the weakest daily breadth readings. On these days, the daily breadth reading ranged anywhere from -54 (8/26/20) to +156 (2/2/23). Looking at the chart, these relatively weak breadth readings weren’t a warning sign for the broader market. The only one where the market immediately fell notably was after the February 2023 occurrence, which ironically was the strongest breadth reading of the ten.
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The Closer – Profits and Populations, CPI and CRE – 3/12/24
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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 the relationship between equity performance, population growth, and corporate profits (page 1). We then dive into the CPI release (page 2) and commercial real estate valuations (page 3). We finish with a rundown of today’s 10 year note reopening (page 4).
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Chart of the Day – Inflation Waves
Labor: Not The Problem It Used to Be
In an earlier post, we discussed the latest NFIB survey of small businesses. While optimism was weak, a particular area of concern was employment. What businesses reported to be their most important problems reiterated this. As shown below, of all problems highlighted, labor took a backseat in February with a five percentage point decline in the share of businesses reporting quality of labor as their biggest problem.
When combining with the share reporting cost of labor to be their biggest problem, 27% of businesses reported these labor concerns as their most pressing. As shown below, that combined reading ties June and December 2020 for the lowest since May 2020.
As for what picked up the difference, the percentage of respondents reporting inflation as their biggest problem jumped back up to 23% versus the fresh low of 20% last month. At that level, inflation is once again the single most important issue among small businesses. That increase is also a bit contrary to the report’s index on higher prices which fell to fresh lows in February.
While the increase in February in the share reporting inflation as their biggest problem doesn’t exactly disrupt what has been an overall trend lower in inflation readings, one more pressing increase has been for poor sales. As inflation jumped to the forefront in the past few years, the share of businesses reporting poor sales as their biggest problem fell to historically low levels. While it is still low, the past year has seen a steady climb back up to 7%.
Small Businesses Cut Employment and Spending
Ahead of this morning’s CPI release, the NFIB updated their Small Business Optimism Index. The headline reading dropped to 89.4 in February compared to 89.9 in January. That result is the reverse of what was expected as forecasts were penciling in the index to tick up to 90.5. With the lower reading, small business optimism returns to the low end of the past decade’s range and is only 0.4 points above the post pandemic low set last April.
Diving into the individual categories of the report, breadth was weak. As shown below, of the inputs to the headline number, there were only two categories that increased month-over-month: Expected Real Sales and Expected Credit Conditions. As for the categories that are not inputs, every single one fell versus January. Given these declines, many areas are sitting in the bottom decile of their historical ranges.
One category in which declines are not exactly a bad thing in the current environment are the share of businesses reporting higher prices. While not an input to the headline index, the higher prices index fell another point down to 21. That is now the lowest reading in just over three years.
Outside of the drop in the inflation reading, some declines in other categories were less reassuring. As we discussed in today’s Morning Lineup, employment metrics were particularly weak. Hiring plans have fallen for three months in a row and are now at the weakest level since May 2020. The drop in compensation plans was even more dramatic falling 7 points month-over-month. In the history of the data going back to early 1986, the only time this index has fallen by more in a single month was April 2020.
While businesses appear to be significantly curtailing plans for hiring and wages, the actual changes have been a bit more robust. The actual employment changes remains negative as it has throughout the post-pandemic period, and implying small businesses are on net firing rather than hiring. The compensation index is at the lowest level since May 2021, however, that level is basically consistent with the high end of the pre-pandemic range. The same would apply for those reporting job openings as hard to fill which came in at the lowest level since January 2021.
Employment is not the only area that small businesses are reportedly cutting back on. Expenditure readings were also weak in the most recent report. For starters, Capital Expenditure Plans have reverted downwards to multi-month lows alongside actual changes to cap ex. Meanwhile, a net 7% of businesses report plans to cut down on inventories. That is a historically low reading in the bottom 1.5% of all months on record. Finally, we would note that small businesses have some of the highest expectations for credit conditions since mid-2022.
The report also offers a look at the type of capital expenditures small businesses are making. That recent drop in capex appears to be driven in part by the largest category: equipment. Only 35% of respondents reported making such capital expenditures in the past six months, the lowest amount since April through December of 2020. Prior to that you’d need to go back to May 2014 to find as low of a reading.
Bespoke’s Morning Lineup – 3/12/24 – Mixed CPI
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“It is your problem no less than it is mine. Together we cannot fail.” – Franklin D. Roosevelt
Below is a snippet of commentary from today’s Morning Lineup. Start a two-week trial to Bespoke Premium to view the full report.
February CPI was just released and while the headline reading was right in line with forecasts, Core CPI came in at 0.4%, just ahead of the 0.3% consensus forecast. While the initial reaction was a sell-off in equity futures, we’ve seen a bounceback since then as treasury yields are down on the day. The reason? Supercore CPI declined. We’ll see how things shake out as the market digests the data. The biggest thing to keep in mind is that even if the hotter data pushes out the timetable for rate cuts, the Fed still isn’t hiking.
There was a period earlier this year where breadth in the market was narrowing in terms of the percentage of stocks trading above their 50-day moving averages, but as shown in the chart below, the last few weeks have seen a notable upswing. After bottoming out at less than 52% on 2/13, there’s been a steady increase in the percentage of stocks trading above their 50-DMA with yesterday’s level reaching just under 80% (79.5%). It’s still below the 90%+ levels we saw earlier this year, but 80% is a healthy number.
At the sector level, Technology has a slightly higher percentage of stocks trading above their 50-DMAs (82.8%) than the overall market, but it’s no longer leading. At the top of the list now, over 96% of stocks in the Materials sector are above their 50-DMA along with 91% of stocks in the Energy sector. In other words, it’s been a good run for commodity-related stocks. At the other end of the list, just half of the stocks in the Communication Services sector are above their 50-DMA, and it is also the only sector where less than two-thirds of the components are below that level.
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Chart of the Day: 15 Years
Chart of the Day: Analysts Keep Pace with NVIDIA Gains
Bespoke’s Morning Lineup – 3/11/24 – Inflation Week
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“A written constitution is needed to protect values against prevailing wisdom.” – Antonin Scalia
Below is a snippet of commentary from today’s Morning Lineup. Start a two-week trial to Bespoke Premium to view the full report.
Happy inflation week. While the week starts off on a quiet note in terms of economic data, it will be a busy one related to inflation-related reports. Things start off today with the New York Fed Survey of Consumer Expectations and its section on inflation expectations. Tomorrow, we’ll get the February read on CPI which is expected to increase 0.4% m/m and 3.1% y/y. That report will be followed up with PPI on Thursday and Import and Export Prices on Friday.
Although the magnitude was modest (-0.26%), last week was a rare down one for the S&P 500. As shown in the Sector Snapshot below, though, most sectors were higher. Leading the way, Utilities surged over 3%, followed by Real Estate, Materials, and Energy which all rallied over 1%. These aren’t the types of sectors that can drive the market higher, and when large sectors like Consumer Discretionary (-2.55%), Technology (-1.62%), and Communications Services (-0.54%) fall, it’s going to be hard for the major indices to post gains. Even with last week’s declines at the index level, though, every sector except for Consumer Discretionary remains at overbought levels.
Looking ahead, one factor bulls have working in their favor is seasonality. As shown below, whether we look at the next week, month, or three months, the S&P 500’s median returns rank in the 75 or highest percentile relative to all other periods throughout the year.
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