Brunch Reads – 7/28/24
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.
Robespierre’s Reign: Maximilien Robespierre, a key figure in the French Revolution and mastermind behind the Reign of Terror, met his end on July 28th, 1794, executed by guillotine in the Place de la Révolution, now known as Place de la Concorde. His advocacy for the rights of the common people and his uncompromising stance against the enemies of the revolution marked Robespierre’s rise to power. However, his strict policies and the ruthless political purges he enforced turned many against him. He was arrested by the National Convention who feared his strengthening grip, prompting the chaotic scenes in Paris leading up to his execution when Robespierre and his allies tried to resist but quickly were overpowered by troops loyal to the Convention. Following his execution, an ironic death for a man who saw the guillotine come down on around 16,000 during the Reign of Terror, the Thermidorian Reaction ensued, a period of backlash against his policies and a move towards a more moderate government.
Chinese companies offer to ‘resurrect’ deceased loved ones with AI avatars (NPR)
Chinese tech executive Sun Kai has turned to an AI-generated avatar of his late mother for emotional support, using a service by Silicon Intelligence that creates digital clones of deceased loved ones. This kind of thing is increasingly popular in China. While these avatars offer solace, ethical concerns are present, such as potential emotional harm and the risk of addiction to these digital simulations. Companies like Silicon Intelligence and Super Brain need extensive data to create lifelike avatars, which is often lacking. [Link]
X-ray technology could be newest scam in sports cards (cllct)
Recent videos show the use of X-ray technology to see inside sealed trading card packs, a method that worries many collectors. The technology allows peeking through layers of cards to identify valuable hits, potentially leading to fraud in the $227 billion sports memorabilia market. Although not illegal, this practice could enable sellers to cherry-pick valuable cards and undermine the hobby’s integrity. On the flip side, there’s also potential for X-rays to be used for good and authenticate sealed products. [Link]
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The Bespoke Report – 7/26/24 – All the Small Things
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Bespoke’s Morning Lineup – 7/26/24 – Let the Games Begin
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“I Didn’t Set Out to Beat the World; I Just Set Out to Do My Absolute Best.” – Al Oerter
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 opening ceremonies of the 2024 Summer Olympics will kick off in less than four hours, and markets are already in a celebratory mode. Futures are sharply higher across the board with the Russell 2000 leading the way with indicated gains of over 1.5%, the Nasdaq looks to open higher by just over 1%, and even the S&P 500 stands to open with a gain of 0.75%.
There’s no specific catalyst to point to for the gains, but strangely enough, futures did get a bounce when news came out that former President Barack Obama and his wife Michelle are supporting Kamala Harris’ run for President (people didn’t think they would throw their support behind Trump did they?). The positive tone heading into the last day of the trading week is welcome, but we still have some important economic data to get through, and barring a monster rally beyond current levels, it’s looking like US equities will close out the week lower for the second week in a row.
Outside of equities, crude oil is modestly lower as WTI trades below $78 per barrel and natural gas is only 1% from a ‘one-handle’. Gold and bitcoin are higher, though, and treasuries are looking at modest gains with the 10-year yield down 2 bps and the 2-year yield down one basis point.
This morning’s economic data was mostly in line with forecasts. Personal Income was weaker than expected at 0.2% versus 0.4% expected, but Personal Spending was right in line with estimates. PCE data was right in line with expectations on both a headline and core basis. Not surprisingly, there has been little reaction in equity futures.
The table below is from last Friday’s Bespoke Report and shows the historical performance of the S&P 500 during every summer Olympics in the post-WWII period. Below that we included a bar chart showing performance during each two weeks of competition. Overall, the S&P 500 has averaged a gain of 1.13% with positive returns just over half the time. That average, however, is skewed by the 9.4% gain in the Summer of 1984 when the US dominated. On a median basis, the S&P 500 has gained a more modest 0.47%. We’d also note that performance since those 1984 games has also been strong with gains eight out of ten times.
Chart of the Day – Factory Construction Boom
Big Decline But No Bad Breadth?
On Wednesday, the S&P 500 shed 2.3%. As we noted on X, that snapped a 356-trading day stretch without seeing a one-day decline of at least 2%. The major key to this weakness, which we detailed in last night’s Closer, was how the Magnificent 7 had a historically bad session given poor reactions to earnings of Tesla (TSLA) and Alphabet (GOOGL). Those declines on earnings were a drag on the rest of the mega-cap space and in turn the broader index. Yesterday was another example of the topic that has consistently been discussed in recent years in which the concentration of the largest stocks in the S&P 500 had an outsized impact on the index’s moves regardless of what the rest of the market has done.
Delving deeper into yesterday, in the chart below we show all days where the S&P 500 fell at least 2% since 1990 and compare those price moves to each day’s daily net advance decline reading (this is the number of stocks that rose on the session minus the number that fell). While it may not come as any surprise, typically when the S&P has fallen 2% or more, the number of declining stocks drastically outnumbers advancers. In fact, on a median basis these days have typically seen a meager 33 stocks finish the day higher versus 465 decliners (median net daily advance decline reading of -432).
Looking back on this sample of down days, if overwhelmingly weak breadth is the rule, yesterday was an exception. In spite of the over 2% decline, nearly a third (165) of the S&P 500’s members finished Wednesday with a gain. That is a five times stronger daily breadth reading than what has been the norm historically! That also made for a daily net advance/decline reading of -171 which ranks as the fifth strongest of any day since 1990 when the S&P has fallen at least 2%. The most recent examples prior to yesterday in which the market fell on such strong (albeit negative) breadth were all the way back in November and October of 2000. There was another instance of even better breadth on a +2% decline in May of 2000, and in April of that same year, there were even a pair of days when the S&P 500 managed to fall by that much on positive breadth! We haven’t seen this kind of price versus breadth action for the S&P 500 since the Dot Com Bubble was bursting.
Bespoke’s Morning Lineup – 7/25/24 – Lower Yields Despite Better Data
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“Democracy is beautiful in theory; in practice it is a fallacy.” – Benito Mussolini
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 mid-July seasonal headwinds have come in right on schedule this year. Earlier this month, we noted that the three-month period from mid-July through mid-October has historically been the weakest three-month period of the year, and since its closing high on 7/16, the S&P 500 is down over 4% in a little over a week! We usually stress the inadvisability of investing based solely on seasonal trends, but as the last week has illustrated, these trends are important to be aware of.
This morning, futures are lower again as international markets have been under pressure overnight and this morning. Japan was down over 3%, and major European benchmarks are down over 1%. Crude oil and gold are also firmly lower with declines of well over 1% while copper is on pace for its ninth down day in a row. The only asset trading higher is treasuries where yields are firmly lower.
It’s a big day for economic data this morning as we just got the first read of Q2 GDP, Personal Consumption, and PCE. In addition to those reports, weekly jobless claims, and Durable Goods were also released. GDP and jobless claims came in better than expected, and while headline Durable Goods Orders were much weaker than expected, taking out Transportation, the report was better than consensus forecasts. Additionally, the GDP Deflator rose less than expected, so overall, this was a good batch of data. The only other report on the calendar for today is the KC Fed Manufacturing report at 11 AM Eastern.
As equities have come under pressure in the last several days, yields have declined with the two-year yield trading down to its lowest level since February 1st and the 10-year yield in a well-defined short-term downtrend since its yield peaked at 4.70% in late April. This morning, the yield is down to 4.22%, or nearly 50 bps below that peak.
As shown in the chart above, 2-year yields have been falling at a faster pace than the 10-year yield as the market prices in rate cuts in the months ahead. As a result of that faster decline at the short end of the curve, the spread between the two has narrowed quickly. The 10-year vs 2-year yield curve is now inverted by less than 15 basis points (bps), the flattest it has been in more than two years.
At the very short-end of the curve, we’ve also seen some large moves in the last two weeks. The chart below shows the 3-month US Treasury yield plotted with the mid-point of the Fed Funds target rate. As of this morning, the 3-month yield is now further below the mid-point of the Fed target rate than it has been at any point since the Federal Reserve’s last rate hike of the cycle last July.
Chart of the Day – Call the Doc for Dr. Copper
Bespoke’s Morning Lineup – 7/24/24 – First of the Mag 7 Comes Up Short
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“They were building a Ferrari for every launch, when it was possible that a Honda Accord might do the trick.” – Elon Musk
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 kickoff to earnings season for the Mag 7 didn’t start well last night as Alphabet (GOOGL) and Tesla (TSLA) traded lower in reaction to earnings. GOOGL is currently down just over 4% while TSLA is down around 8%. In terms of ‘typical’ reactions to earnings, the 8% decline in TSLA is more ‘normal’ as the stock typically moves up or down around 8% in response to earnings while GOOGL’s average one-day move in reaction to earnings is a bit over 5%. The weakness in these two stocks has dragged futures lower with the Nasdaq leading the way with a decline of just over 1% while the S&P 500 looks to open down by about 0.70%. For now, small caps are holding up better with the Russell 2000 looking to open down by 0.40%.
Given the weakness in equities, treasury yields are lower with the biggest moves at the short end of the curve. Oil and gold, however, are higher, along with bitcoin which is back above $66K. On the economic calendar this morning, we’ll have Wholesale Inventories at 8:30 followed by flash PMI readings from S&P 15 minutes after the open, and New Home Sales at 10 AM Eastern.
Many of the equity market trends in place for months reversed in the last couple of weeks. Small caps took over the leadership from large caps, value outperformed growth, homebuilders outperformed semis, etc. Along these lines, since international stocks have underperformed the US for what seems like forever, we would have expected to see them get a lift during this turnaround period. That hasn’t been the case.
The chart below shows the relative strength of the S&P 500 versus Europe’s STOXX 600 (on a dollar-adjusted basis) over the last twelve months. In the chart, a rising line indicates outperformance on the part of US stocks and vice versa for a falling line. While US equities aren’t quite at their highest levels in a year relative to the STOXX 600, they are very close, and there hasn’t been any reversal of the trend of outperformance that has been a place. A pause? Maybe. But not a reversal.
The chart below shows the relative strength of the S&P 500 versus the STOXX 600 dating back to 2000. Again, there has been no reversal of US outperformance relative to European stocks. In mid-June, the S&P 500 broke above the prior relative performance peak from September 2022, and as recently as last week, the S&P 500’s relative strength hit a new peak.
Chart of the Day – Sentiment Extremes
Bespoke’s Morning Lineup – 7/23/24 – Mag 7 Goes For Gold
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“Success is not the key to happiness. Happiness is the key to success. If you love what you are doing, you will be successful.” – Bela Karolyi
Below is a snippet of commentary from today’s Morning Lineup. Start a two-week trial to Bespoke Premium to view the full report.
In today’s world, “The Magnificent 7” often refers to the tech giants Microsoft, Apple, Nvidia, Alphabet (Google), Amazon, Meta Platforms (Facebook), and Tesla. However, the original “Mag 7” were a different kind of legend, made up of Borden, Chow, Dawes, Miller, Moceanu, Phelps, and Strug. These were the seven women of the 1996 US Women’s Gymnastics Team, led by coaches Martha and Bela Karolyi. The August 13, 1984 cover of Sports Illustrated had a picture of Mary Lou Retton with the caption, “Only You, Mary Lou”, but the 1996 Women’s Olympics gymnastics team was stacked with a deep roster of talent and high hopes of winning the gold- something never done before in US women’s gymnastics history.
Battling it out with Russia and Romania, on July 23, 1996, it all came down to the vault, and the US needed a solid score to clinch the gold. First up for the US, Dominque Moceanu slipped on each of her vault attempts leaving it to Kerri Strug. On her first attempt, Strug also slipped and ‘heard something snap’ as she fell to the mat wincing in pain. Despite the burning in her ankle, Strug swallowed the sting and gathered herself at the start of the mat. Strug sprinted down the 75-foot runway, launching into a round-off back handspring onto the vault before soaring into a one-and-a-half twist. Coming back down from orbit, she stuck the landing (on one foot) and turned towards the judges to finish the routine. Not a second later, she collapsed to the mat and crawled off the mat in agony.
Strug scored a 9.712 which was enough for gold. The picture of Bela Karolyi carrying Strug to the medal stand because she couldn’t walk has become one of the most memorable pictures in Summer Olympics history. Nearly as iconic is the picture of each of the original Mag 7 standing on the gold medal platform in their warmup suits…except for Strug in the second from the right position who couldn’t get the pants over her brace.
Alphabet (GOOGL) and Tesla (TSLA) will kick off earnings season for the tech-heavy stock market Magnificent 7 after the close today. Heading into the reporting period, the last several days haven’t seen a gold market performance from any of them, as they’ve all stumbled to varying degrees in the last week. Apple (AAPL) and Amazon.com (AMZN) have both seen declines of at least 4%, while Nvidia (NVDA) isn’t far behind with a decline of 3.8%. The only one of the seven not down more than 1% during this span is TSLA, but it’s also up the least YTD with a gain of 1.22%. Outside of TSLA, the other Mag 7 stocks remain up at least 15% YTD while GOOGL and Meta Platforms (META) hold on to gains of over 30% and Nvidia (NVDA) leaves the rest of them in the dust with a YTD gain of nearly 150%.
Relative to their trading ranges, AMZN and META have broken below their 50-DMAs which would be viewed negatively in the short term from a technical perspective. Meanwhile, AAPL and TSLA have remained at overbought levels bucking the trend of the rest of the group and the broader market. The fact that these stocks have experienced weakness leading up to their earnings reports isn’t necessarily such a bad thing as rallies into earnings would only have the potential to set the bar unrealistically high. It doesn’t take a gymnast to know that the lower the bar, the easier it is to get over it.
Looking at the charts of each Mag 7 stock, even after their recent pullbacks, they mostly all remain in uptrends of varying degrees of steepness. While TSLA may not be in an uptrend, it’s still more than 25% above its 50-day moving average even as it deals with resistance from its late 2023 peak.
