Chart of the Day – More Inflation ‘Tepee’ Charts
Bespoke’s Morning Lineup – 6/14/23 – Time Changes Everything
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“They always say time changes things, but you actually have to change them yourself.” – Andy Warhol
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Futures are mixed this morning, but the Nasdaq is indicated to open higher, and the May read on PPI hasn’t hurt sentiment. Headline PPI fell 0.3% m/m versus expectations for a decline of 0.1%. Ex Food and Energy, they increased 0.2% which was right inline with expectations. On a y/y basis, headline PPI was up just 1.1% compared to forecasts for an increase of 1.5%, and ex Food and Energy, they rose 2.8% versus forecasts for an increase of 2.9%. PPI certainly isn’t as closely followed by markets as CPI, but these numbers suggest that the headwind of inflation pressures continues to wane.
A year ago today, the S&P 500 was just entering bear market territory following what was a sharp sell-off due to the Fed signaling to investors that not only were rate hikes coming, but they were coming in big bites. After a Michigan Confidence report showed consumer inflation expectations were rising more than expected, the FOMC went on to hike rates by an unprecedented 75 basis points for four consecutive meetings.
The snapshot from our Trend Analyzer below shows where the major US equity index ETFs stood relative to their trading ranges as of the close on 6/13/22. Leading the way to the downside, the Nasdaq 100 was down over 30% YTD, but nine indices were down over 20%. The week leading up to June 13th had been especially painful as every index ETF in the screen was down over 7% in the prior week, and most were at least 10% below their 50-day moving averages (DMA) and trading at ‘extreme’ oversold levels.
What a difference a year makes. As we head into the June FOMC rate decision this year, the Fed has signaled that after ten straight meetings where they hiked rates, today will be the first time in over a year that the committee leaves rates unchanged. Instead of inflation expectations surging, this week’s NY Fed Survey of Consumer Expectations showed that one-year inflation expectations are at the lowest level since May 2021, and three-year expectations are actually slightly below their ten-year historical average.
From a market perspective, whereas the S&P 500 was just entering bear market territory at this time last year, it is now just entering bull market territory as the S&P 500 finally closed 20% above its October 12th closing low last Thursday. Contrast the way the snapshot of index ETFs from our Trend Analyzer one year ago looked with the way it looks as of today. Now, the Nasdaq 100 is leading the way to the upside with a gain of over 30%. All but three of the index ETFs are up over 2% in the last week, and most of them are trading at least 5% above their 50-DMAs, and every single one of them are trading at ‘extreme’ overbought levels.
Historically, the market’s reaction to short-term ‘extreme’ oversold levels is very different in magnitude to how it responds to short-term ‘extreme’ overbought levels but given the sharp rally of the last couple of weeks, it shouldn’t be a surprise, if the rally we’ve seen experiences at least a pause for the next several days.
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More Balanced June
Heading into the month of June, stock market performance this year was a clear case of the haves and the have-nots. The chart below shows the performance of S&P 500 sectors on a YTD basis through the end of May. As of 5/31, just three sectors – Technology, Communications Services, and Consumer Discretionary – were outperforming the S&P 500 YTD, and the eight other sectors were not only underperforming the S&P 500’s YTD gain of 8.9%, but they were also all down on a YTD basis.
The flip of the calendar has seen the trend of uneven YTD returns flip as well. Besides the fact that every sector is up on a MTD basis, the number of sectors outperforming the S&P 500’s 4.6% MTD gains are much more evenly split with five sectors outperforming and six underperforming. Surprisingly, one of those sectors lagging behind the S&P 500 is Technology! Uneven market returns have been a key complaint of bears all year. If the pattern of June continues, though, what will they blame next?
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B.I.G. Tips – Fed Day Performance Trends
The FOMC is set to announce its next interest rate policy decision tomorrow at 2 PM ET. After ten straight hikes, futures markets are currently pricing in a 91.9% chance that the Fed will leave rates unchanged for the first time since its January 2022 meeting, according to the CME’s FedWatch Tool.
We do a ton of analysis on historical performance around major market-moving events like Fed days. One data point you may or may not have noticed is that US equities have really struggled on Fed days recently. In fact, the S&P has averaged a one-day decline of more than 1% across the last six Fed days, and as shown in the chart below, those declines have primarily come in the final hour of trading following Fed Chair Powell’s press conferences.
In our newest B.I.G. Tips report for Bespoke Premium and Bespoke All Access subscribers, we provide an in-depth examination of the S&P 500’s performance on past Fed days since 1994. From the market’s resilience on Fed days during the 2022 bear market to the recent late-day slides on Fed days during the current bull, the narrative is as surprising as it is informative. This premium post offers not just important data but insightful charts that visualize the S&P’s average change and intraday paths on Fed days broken down by rate decision. We also explore the love-hate relationship the market has had with Fed Chair Jerome Powell as well as the late-day selling tendencies that have characterized his tenure. Unlock the rest of our newest B.I.G. Tips report with a one-month trial to Bespoke Premium for just $1. With Bespoke Premium, you’ll also receive our pre-market Morning Lineup, our daily Chart of the Day, our weekly Sector Snapshot, and our Bespoke Report newsletter published every Friday. Get started for just $1 today!
Chart of the Day – Inflation Discovers Gravity
Bespoke’s Morning Lineup – 6/13/23 – 11 in a Row
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“There are so many worlds, and I have not yet conquered even one” – Alexander the Great
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Futures are little changed, and that’s understandable given the focus on the release of May CPI. Outside of the US, the PBoC lowered its 7-day reverse repurchase rate by 10 basis points, and there are reports of other policy decisions under discussion. Oil prices are higher, but with WTI at $68 a barrel, it’s hard to say that prices are rallying. Ahead of the May CPI, small business sentiment from the NFIB came in slightly higher than expected at a level of 89.4 versus expectations for a reading of 88.5. In individual stock news, shares of Zions Bancorp (ZION) are down 2% after the company noted at an investment conference that they expect loan growth to moderate.
The May CPI report just hit the tape, and both the headline and core readings were right in line with forecasts on a m/m basis. On a y/y basis, headline CPI was one-tenth lower than expected (4.0% vs 4.1%) while the core reading came in a tenth higher at 5.3% versus the 5.2% forecast. There’s been little change in markets in reaction to the report, and there’s nothing here to suggest that the Fed can’t pause tomorrow, although the hotter-than-expected y/y reading in the core reading is probably more negative than the fact that the lower-than-expected headline reading is positive.
With the release of the May CPI, the pace of increase in y/y inflation has now declined for eleven straight months. In the history of the report dating back to the early 1900s, this is just the third time that the y/y reading has decelerated versus the prior month’s reading for ten or more months. This month’s decline topped the ten-month streak that ended in July 2012, and the only streak that was longer lasted 12 months and ended in June 2021 just after WWI and the Spanish flu epidemic. During that 12-month streak, the y/y rate of inflation dropped from a peak inflation rate of 23.7% to deflation of 15.8%. Talk about a reversal. In the current streak, the rate of inflation has only declined just over 5 percentage points from a peak of 9.1% to May’s reading of 4.0%
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Chart of the Day: CPI Coming Up
Lucky Seven for the Nasdaq
It wasn’t by much, but the Nasdaq rallied 0.14% last week and extended its streak of weekly gains to seven. That’s the longest streak of weekly gains for the index since November 2019. To find a longer streak, you have to go back to February 2018 when the Nasdaq had ten straight weeks of gains. As shown in the chart below, since the Financial Crisis lows in May 2019, there have now been seven different periods where the Nasdaq rallied for at least seven weeks in the row.
The chart below shows the performance of the Nasdaq since the start of 2009, and we have included red dots to show each time the Nasdaq was up for seven straight weeks (for each period, the dot represents the Friday of the seventh positive week). While there were two periods (2010 and 2012) where the Nasdaq clearly experienced a moderate pullback fairly quickly after its seventh positive week, following the others, it doesn’t appear as though the rally was tripped up at all.
Looking at forward performance after a seven-week winning streak in more detail, the chart below shows the maximum drawdown for the S&P 500 in the three months after seven straight weeks of gains in the Nasdaq. Here again, it’s easy to see the large declines that followed the 2010 and 2012 streaks, but in the four other streaks, the S&P 500 never even pulled back 4%. In two of those periods, the maximum decline never exceeded 0.41%. For reference, the average ‘max drawdown’ over any three-month period for the Nasdaq since the start of 2009 has been 5.33%
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Bespoke’s Morning Lineup – 6/12/23 – A New and Much Different Week
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“That wall has to come down. That’s what I’d like to say to them.” – Ronald Reagan
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Continuing the trend from last week and the last several months for that matter, equity futures are indicated higher this morning with the Nasdaq leading the way. The S&P 500’s bull market was confirmed last Thursday when it closed 20%+ from its October 12th low, but it will quickly face a big test this week with important inflation data and a Fed meeting culminating on Wednesday.
There hasn’t been a whole lot of economic data overnight in Asia or Europe, but Japan did report a larger-than-expected decline in PPI, and Machinery Tool Orders were down over 22% y/y in May after falling 14.4% in April. With data suggesting slower economic activity than expected, treasury yields are lower with the biggest moves at the short end of the curve, and crude oil is back under $70 per barrel to $68.43.
Barring an epic collapse in stock prices today, the S&P 500 will have gone eight months without hitting a new low after falling 20% or more from a 52-week high. We discussed how this period compares to prior periods and how the market performed going forward in this weekend’s Bespoke Report, but the chart below compares the S&P 500’s performance in the eight months coming off October’s lows to the eight months that followed each of the prior lows.
With a gain of 20.2%, the S&P 500 just barely moved into official bull market territory last week and avoided being just the third period (along with 1947 and 1957) of the fourteen in which the S&P 500 did not reach the 20% threshold for a bull market in the first eight months of a rally off the lows. You’ll see in the chart that the S&P 500 was also up less than 20% eight months after the September 2001 low, but in that period, it had already rallied 20% and was in a new bear market once the eight-month anniversary of the September low occurred. While the S&P 500 managed to make it into bull market territory last week, its gain in the first eight months of the rally is just over ten percentage points weaker than the average for all fourteen prior periods which helps to explain why, if you don’t have exposure to Technology and Communication Services, it may not exactly feel like a bull market.
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Bespoke’s Brunch Reads – 6/11/23
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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Technology and Science
Why AI Will Save the World (Andreessen Horowitz)
Typical with the new and relatively unknown, there is certainly fear surrounding AI and its potential capabilities. Andreessen discusses what AI is and is not by giving historical context and providing examples that illustrate how the technology can improve quality of life for everyone. Furthermore, he assesses a list of risks commonly associated with AI and argues why the thinking is flawed. [Link]
As AI-Enabled Cheating Roils Colleges, Professors Turn to an Ancient Testing Method (WSJ)
Cheating remains a critical issue for colleges and universities, particularly due to the rise of AI and its ease of use in written exams and other online assignments. To avoid degrees losing their value because of illegitimate grades, professors are turning back towards oral exams. Yes, oral exams combat the rise in cheating and use of AI, but professors have found several other benefits in the exam format. [Link]
Retailers are gamifying shopping with virtual storefronts to boost engagement, loyalty (CNBC)
Amongst several other big retail names, J. Crew is the latest to launch a virtually immersive shopping experience for its 40th anniversary. Obsess is behind the project, a platform that creates 3D, virtual stores. J. Crew’s virtual beach house is expected to boost engagement in the company’s products and therefore its checkout rate, as seen in several other brands Obsess works with. [Link]
Urban Decay
Owner of San Francisco’s largest hotels not paying property loan, plans to exit the city (MSN)
The city of San Francisco faces some serious issues, and ones that business executives like CEO of Park Hotels and Resorts Thomas J. Baltimore Jr. have decided to step away from completely as they close doors. Among these issues are street conditions, record high office vacancies, and an overall slow pandemic recovery. The Bay Area Council is hopeful that AI and other industries can help the city make a comeback. [Link]
NYC sues Hyundai for negligence in wake of TikTok car thefts (Engadget)
Following a viral car theft TikTok trend that started in 2022, dubbed the “Kia Challenge,” Hyundai has agreed to pay $200 million to settle a class action lawsuit. The trend exposed the automaker for what New York City called “sacrificing public safety for profits,” referring to the market-specific choice to not install common anti-theft tech in certain US models. [Link]
Bill to stop employees confronting shoplifters passed by California Senate (Newsweek)
California passed controversial legislation banning employees from stopping thieves. In the weeks leading up to the bill, a Home Depot security guard was shot during an attempted robbery while Lululemon CEO Calvin McDonald has been criticized for firing employees who attempted to stop thieves. Many oppose the legislation, suggesting that it serves as an open invitation to “come in and steal.” [Link]
Economy
West Coast dockworkers making $200K demand higher pay (FreightWaves)
The International Longshore and Warehouse Union is demanding higher wages and benefits for dockworkers, citing the COVID-era import boom that has resulted in the decrease in wages as a share of revenues. The argument against them: these workers are already some of the highest paid in the country. [Link]
What All the Single Ladies (and Men) Say About the Economy (NYT)
Signet Jewelers shared a new metric to express impact of the COVID-19: sale of engagement rings. The company said it has sold fewer this year in comparison to their usual levels, pointing to the idea that singles in lockdown during the pandemic were disrupted in terms of their dating lives. Moreover, consumers are also feeling economic pressures in the current environment, pushing them away from the purchase of these rings. [Link]
Work From Home
Martha Stewart says America will ‘go down the drain’ if people don’t return to office (CNN)
The famous TV personality says hybrid work culture isn’t nearly as productive and in office, and warns that America could “go down the drain” if people don’t get back to in person work. [Link]
To fill offices, Google issues ultimatum while Salesforce tries charity (Washington Post)
Since the pandemic, the structure of work has changed. Executives are now fighting to get employees who have grown fond of their flexible work-from-home lifestyles back in the office. Google has told employees that lack of attendance could negatively impact their performance reviews while Salesforce is trying a different tactic, offering to donate to charities for each day their employees come to the office. Corporate America continues to grapple with this issue despite the pandemic being in the rear-view mirror. [Link]
Geo Politics
Serbia backs ammunition shipments to Ukraine in westward pivot (Financial Times)
The president of Serbia said he is not opposed to selling ammunition to parties who then go on to sell it to forces in Ukraine indicating that Russia may be losing an ally in the region. The Serbian president also noted that he no longer speaks to Putin once every three months and hasn’t spoken to the Russian President in over a year. [Link]
Markets
Binance lawyers allege SEC Chair Gensler offered to serve as advisor to crypto company in 2019 (CNBC)
Before becoming the SEC Chair in 2021, Gary Gensler was teaching at MIT when he offered to serve as an advisor to Binance’s parent company. Since becoming SEC Chair, he has cracked down on crypto, suing companies for allegedly selling unregistered securities. [Link]
ETF Providers Rush to Tap Into AI Investing Craze (WSJ)
With all the frenzy surrounding AI, ETF providers are looking to cash in. The ten funds tracked by ETF.com with artificial intelligence in their names have all recorded inflows this year. The interest in AI investing has also increased demand for single-stock ETFs that track Nvidia (NVDA). [Link]
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