The Bespoke Report – 7/14/23 – Everybody Is A Winner
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Bespoke’s Morning Lineup – 7/14/23 – Positive Earnings Cap Off a Positive Week
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“You don’t reason with intellectuals. You shoot them.” – Napoleon Bonaparte
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For all the talk about how the discourse has become so much more violent in recent years, we have nothing on Napoleon. Shooting people you disagree with??? The only duels these days happen on Twitter.
After a brief scare last week from a stronger-than-expected ADP report, the bull market came back from July 4th vacation this week, and futures are poised for a flat to modestly higher open to close out what has been a very positive week. The only economic reports on the calendar this week are Import Prices at 8:30 (weaker than expected) and Michigan Sentiment at 10 AM. It’s been a busy morning for earnings, and so far, the reports have been positive as all seven of the companies reporting as we write this have reported better-than-expected earnings and five out of seven have topped sales forecasts. So far so good.
European markets are mixed so far this morning with the STOXX 600 essentially flat while France leads the way higher with a gain of 0.3% and Germany lag (-0.2%).
They say a dollar isn’t what it used to be, but it can still have a big impact on equity market performance. Take the recent performance of European stocks. The chart below shows the performance of Europe’s benchmark STOXX 600 index over the last year. After an extended period of sideways trading, the STOXX 600 sold off in late May and ever since has been making a series of lower highs and lower lows. A recent test of the 200-DMA held, but the index is currently bumping up against its downtrend and trying to reclaim its 50-DMA as we close out the week. From a technical perspective, it’s not the greatest picture for European stocks.
If you’re an investor in the US and looking at the performance of European stocks through the lens of the US dollar, you’re seeing an entirely different picture. Instead of lower highs and lower lows, it looks more like higher highs and higher lows as the STOXX just this morning broke above resistance from earlier this year and is now trading at 52-week highs. Technically speaking, the STOXX 600 in dollar-adjusted terms looks a whole lot better. What a difference the dollar makes!
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Chart of the Day – A Record 75 Years in the Making: CPI vs PPI Spread
The Bespoke 50 Growth Stocks — 7/13/23
The “Bespoke 50” is a basket of noteworthy growth stocks in the Russell 3,000. To make the list, a stock must have strong earnings growth prospects along with an attractive price chart based on Bespoke’s analysis. The Bespoke 50 is updated weekly on Thursday unless otherwise noted. There were no changes to the list this week.
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The Bespoke 50 performance chart shown does not represent actual investment results. The Bespoke 50 is updated weekly on Thursday. Performance is based on equally weighting each of the 50 stocks (2% each) and is calculated using each stock’s opening price as of Friday morning each week. Entry prices and exit prices used for stocks that are added or removed from the Bespoke 50 are based on Friday’s opening price. Any potential commissions, brokerage fees, or dividends are not included in the Bespoke 50 performance calculation, but the performance shown is net of a hypothetical annual advisory fee of 0.85%. Performance tracking for the Bespoke 50 and the Russell 3,000 total return index begins on March 5th, 2012 when the Bespoke 50 was first published. Past performance is not a guarantee of future results. The Bespoke 50 is meant to be an idea generator for investors and not a recommendation to buy or sell any specific securities. It is not personalized advice because it in no way takes into account an investor’s individual needs. As always, investors should conduct their own research when buying or selling individual securities. Click here to read our full disclosure on hypothetical performance tracking. Bespoke representatives or wealth management clients may have positions in securities discussed or mentioned in its published content.
Bespoke’s Morning Lineup – 7/13/23 – PPI Nears Deflation
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“The discipline of writing something down is the first step toward making it happen.” – Lee Iacocca
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Equities remain in rally mode again this morning as Dow, S&P, and Nasdaq futures are all firmly positive. Treasury yields are also firmly lower across the curve. The 2-year yield which was over 5% a week ago is now down to 4.67% while the 10-year yield which was over 4% is now down to 3.83%. Much of this really has been the result of benign economic data specifically related to inflation, but for it to continue we’ll need to see companies pick up the baton as they start to report earnings.
This morning’s earnings reports have been generally positive. The two biggest companies to report – Pepsi (PEP) and Delta (DAL) both handily beat EPS and sales forecasts, and PEP even raised guidance to complete the Triple Play. Conagra (CAG) also managed to top EPS forecasts but missed on the top line, while Fastenal (FAST) reported slight misses on both the top and bottom line. As one might expect given the results, both PEP and DAL are up over 2% in the pre-market while the other two are down roughly 2%.
Besides the earnings results this morning, it’s a busy day for economic data with June PPI and jobless claims coming out at 8:30. Initial Claims came in lower than expected at 237K versus forecasts for 250K while continuing claims were slightly higher than expected (1.729 mln vs 1.720 mln). The big report of the morning though was PPI and that came in at 0.1% at both the headline and core levels, which was lower than the 0.2% forecast.
Regarding PPI, as we’ve highlighted in recent months, the spread between consumer and producer prices has widened to historically wide levels. Last month, the spread between the y/y readings of CPI versus PPI widened to 2.9 percentage points which is the highest since at least 2011 when the current incarnation of PPI begins. Following this morning’s release, the spread remained at that record level of 2.9 suggesting that corporate profit margins remain healthy.
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Chart of the Day: More and More of the S&P Above 50-DMAs
Bespoke’s Morning Lineup – 7/12/23 – CPI
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“I don’t mind going back to daylight saving time. With inflation, the hour will be the only thing I’ve saved all year.” – Victor Borge
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We’re already in the middle of the week, but in many ways, it’s just beginning as June CPI is being released as we write this, a number of Fed speakers are on the calendar to speak, and then later in the week, we’ll get PPI, Jobless Claims, Michigan Confidence, and then the start of earnings season. Heading into the release of today’s CPI report, equity futures are higher following a mixed session in Asia, and a strong showing in Europe where most benchmark indices are up 0.5% or more. Interest rates are lower, and crude oil is up back above $75 per barrel.
In Asia, overnight data was positive as PPI in Japan unexpectedly declined 0.2%, and in China, the government pledged support for internet platform companies which could signal some thawing in the tensions between the communist government and the country’s most powerful executives.
There isn’t much in the way of specific catalysts to speak of explaining the rally in European stocks, although Spanish CPI increased 0.6% m/m which was right in line with expectations. What makes that report notable is that the y/y rate of inflation dropped to 1.9% from 3.2% making Spain the first EU member state to reach the 2% inflation bogey. Will the rest of the region follow suit?
The June CPI report was just released, and while economists were forecasting both the headline and core readings to rise 0.3%, the actual readings came in at 0.2% on both a headline and core basis. On a y/y basis, headline inflation dropped to 3.0%, the lowest level since March 2021 while core CPI dropped to 4.8, which is the lowest reading since October 2021. We’re definitely not at Mission Accomplished, but it’s still moving in the right direction. In response to the report, equity futures are higher with the Nasdaq leading the way gaining more than 1%.
Remember back when it seemed we couldn’t get a weaker-than-expected CPI reading? Well, that tide has turned in a big way. The charts below show the rolling 12-month total of the number of months that headline and core CPI came in higher than expected. At the headline level, there have only been two stronger-than-expected readings in the last year which is the fewest in a twelve-month span since November 2019. On a core basis, there have been just three stronger-than-expected monthly readings, and that’s the fewest since November 2020. In markets, just when you think a trend is entrenched, things have a way of turning on a dime, and that’s an important thing to remember for both investors and policymakers alike.
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Inflation Expectations Still on the Decline
Ahead of Wednesday’s CPI, the New York Fed’s Survey of Consumer Expectations (SCE) was released earlier this week and showed a continuation of the trend where consumer inflation expectations have been falling. Over the next 12 months, the Fed’s survey showed that the median expected rate of inflation fell from 4.07% down to 3.83%. While still above its historical average of 3.4%, consumer expectations for inflation over the next year are down to the lowest level since April 2021. Over a longer time horizon, inflation expectations haven’t fallen nearly as fast, but they didn’t rise anywhere near as much as short-term expectations either. In the June survey, the median expected rate of inflation over the next three years fell from 2.98% down to 2.95%. While that reading barely budged, we would note that current expectations for inflation over the next three years are slightly below the long-term average. Unlike the FOMC, which ditched the term transitory 18 months ago, consumers have remained on team transitory.
One issue which has the potential to push inflation higher is how consumers expect their incomes to change over time. In this month’s survey, the median expected rate of earnings growth increased from 2.80% up to 2.98% which is right around the high end of its range from the last two years. As shown in the chart below, while this series has tested the 3% level multiple times, it hasn’t been able to bust through it. As it pertains to inflation, that’s a good thing, because if consumers expect their incomes to increase, they’re probably also less likely to push back on higher prices. At the same time, the fact that this reading has settled into a new higher range relative to its long-term average suggests that getting back down to and staying at levels of inflation that prevailed before COVID may prove to be difficult.
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Chart of the Day: Amazon Prime Day
Small-caps Catch a Bid
Small-caps have caught a bid over the last few days with the Russell 2,000 ETF (IWM) rallying more than 3% since last Thursday’s close. Over the same time frame, the large-cap S&P 500 is up just 0.3%.
While large-cap indices have recently traded to 52-week highs, small-caps are still well below 2023 highs made back in Q1. As shown below, though, IWM is currently attempting to break above the top end of the sideways range it has been in over the last month. If it can do that, the highs from earlier in the year will come into sight.
The Russell 2,000 (IWM) chart looks pretty interesting over a multi-year time frame. As shown below, the pre-COVID high made in early 2020 has acted as strong support over the past year. While IWM fell sharply during the mini-banking crisis this March, it stopped going down once it reached this key support level, and then it traded sideways and consolidated throughout much of April and May. Going forward, it appears that the Russell has built a strong base over the past year to springboard off of if the bull market for US equities can continue.
A chart that always captures our attention is the one below that shows Apple’s (AAPL) market cap versus the combined market cap of all of the stocks in the small-cap Russell 2,000. Prior to COVID, Apple’s market cap wasn’t even close to the $2+ trillion market cap of the Russell 2,000. Since late 2021, though, the two have been battling it out. After its huge gain in Q2, Apple is currently in the lead at $2.96 trillion, but the Russell isn’t too far behind at $2.81 trillion.
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