Jobless Claims Seasonality Not What It Used to Be
Among a number of better than expected economic data points this morning was initial jobless claims. Seasonally adjusted claims were expected to rise to 205K from an upwardly revised level of 203K last week. Instead, claims were much healthier than expected, dropping all the way down to 187K. As shown below, that puts the indicator within 5K of the late September 2022 low of 182K. Zooming further out, that is also one of the strongest readings on record, ranking in the first percentile of all weeks since the start of the data in 1967.
In reality, before seasonal adjustment, claims are much higher at 289.2K as the reading is currently working off a seasonal peak. However, that is not to say claims are weak. As shown in the first chart below, versus comparable weeks of the year going back to 2004, this most recent reading was only slightly above where they stood this time last year. In fact, that reading last year currently stands as the record low for the second week of the year of all years going back to 1967. Looking ahead to next week, another week-over-week decline is more than likely given it is the week of the year with perhaps the strongest seasonal tendencies. Going over the history of the data, there has not been a single time that NSA claims have risen week over week in the third week of the year.
As previously mentioned, claims tend to spike to seasonal highs around now, and there has been only one previous time that NSA claims have been lower in the second week of the year, and that was in 2023. But looking back over the past several years shows that the strong reading on claims for this time of year even pre-dates COVID. As shown below, in the 50 years from 1967 through 2016, the second week of the year averaged 656.5K for NSA claims. But since 2017 (excluding 2021 when claims were an outlier with far more elevated readings due to the pandemic) those same weeks have averaged a significantly lower reading of 340.3K. Put differently, the seasonally elevated level that claims have begun the year at is not exactly what it used to be.
Looking at things from another angle, below we show the percent change in NSA claims during the period that the indicator has historically experienced its seasonal runup, lasting roughly from September through the first couple of weeks of the new year. As shown, since the late 1990s, that seasonal climb has been trending smaller and smaller in size. All together, that means there appears to have been some structural changes in seasonal patterns over the past couple decades (which could also have implications for the seasonally adjusted number understating). As a result of a smaller seasonal spike, claims have spent the first few weeks of the year at lower levels than may have been the case in the past.
Finally, we would note that in addition to strong initial claims, seasonally adjusted continuing claims have also continued to roll over, totaling 1.806 million last week. That was a solid decline versus 1.834 million the previous week compared to an expected increase to 1.84 million. That also sets a three month low in continuing claims.
Chart of the Day – Winners And Losers Abound Less Than Three Weeks In
Bespoke’s Morning Lineup – 1/18/24 – Strong Data
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“The man who wants to lead the orchestra must turn his back on the crowd.” – Captain Cook
Below is a snippet of commentary from today’s Morning Lineup. Start a two-week trial to Bespoke Premium to view the full report.
It’s looking like a much more positive start to the day than many others recently as the S&P 500 is indicated to open up by about half a percent, and the Nasdaq is looking at a 1% gain. A strong batch of economic data has put a little bit of a damper on things as rates ticked higher, but outside of the Dow where a large decline in UnitedHealth (UNH) is weighing in the index, the start of the trading day at least looks to be positive.
As far as the economic data is concerned, both Building Permits and Housing Starts came in better than expected, initial jobless claims dropped to 187K for the lowest reading since last January, continuing claims also beat, and even though the Philly Fed report was weaker than expected (-10.6 vs -6.5 expected), it wasn’t near the disaster that the Empire Manufacturing report was earlier in the week.
Anyone who was expecting a continued broadening out of the market in 2024 has been majorly disappointed by how the year has started. Eleven trading days into the year, the cap-weighted S&P 500 has declined 0.64%, but the equal-weighted version of the index is down much more with a decline of 2.55%. That puts the performance spread between the two indices at 1.91 percentage points and represents the widest performance gap eleven trading days into the year in favor of the market cap weighted index since at least 1990.
It may sound hard to believe, but this year’s outperformance on the part of the market cap weighted index ends a streak of three years where the equal weighted index outperformed the cap weighted index at the year’s outset. In two of those three years, the trend reversed for the remainder of the year as the cap weighted index outperformed the equal weighted index, including last year where the gap in favor of the cap weighted index was the second highest of any year since 1990 trailing only 1998. Looking more broadly, in the 34 years since 1990, the direction of the performance gap between the cap weighted versus the equal weighted index eleven trading days into the year continued in the same direction for the remainder of the year less than 60% of the time. In other words, it’s hardly set in stone that just because the cap weighted index came out of the year strong this year doesn’t necessarily mean it will continue for the remainder of the year.
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Bespoke Baskets Update — January 2024
Chart of the Day – Intraday Tops After Hours in 2024
Bespoke’s Morning Lineup – 1/17/24 – Busy Economic Calendar
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“We must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist.” – Dwight D. Eisenhower, 1/17/61
Below is a snippet of commentary from today’s Morning Lineup. Start a two-week trial to Bespoke Premium to view the full report.
It’s not a pretty morning for risk assets as Asian stocks, specifically China, were down sharply overnight, and Europe is down sharply this morning after ECB President Lagarde followed the lead of US central bankers when she noted that rate cuts aren’t likely to start until the Summer and UK inflation came in higher than expected. Here in the US, it’s a busy day of economic data. Retail Sales and Import Prices were just released, and they both came in higher than expected. On the docket, we have Industrial Production and Capacity Utilization at 9:15 and then Business Inventories and Homebuilder Sentiment at 10 AM.
When comments like the above are made today, the people making them are often written off by the mainstream as candidates being on the fringe, but President Dwight D. Eisenhower made the statement above as part of a nationally televised farewell speech from the Oval Office when his approval rating was just under 60%. Eisenhower’s concerns stemmed from the fact that after multiple major wars, the US defense industry was becoming a much larger share and player within the US economy, and he was pointing out that as its size grew, so too would its influence.
During Eisenhower’s last year in office (1960), total US defense spending, according to the World Bank, was $47 billion. Within 16 years, defense spending had doubled, and just six years later, it had more than doubled again to over $220 billion. Under Reagan, spending steadily increased and reached a short-term peak in 1990 at $325 billion. For the remainder of George H. Bush’s term through most of Clinton’s entire time in office, total spending actually drifted lower but then surged exponentially after 9/11. Spending then generally declined for most of Obama’s time in office and then ramped back up again after Trump came into office (“When I took over our military, we didn’t have ammunition”). As of 2022, the latest year of available figures, total defense spending in the US reached $877 billion, or more than 18 times the level during Eisenhower’s last year in office.
While it may look as though defense spending has only become a larger influence on the US economy since Eisenhower left the Oval Office for the last time, when measured as a percent of GDP, defense spending has generally been on the decline. During Eisenhower’s last year in office, total defense spending equaled about 9% of GDP, and through the decades steadily declined to a low of 3.09% of GDP in 1999 during Clinton’s second to last year in office. Again, spending ballooned as a percent of GDP during George W Bush’s Presidency after the 9/11 attacks, but then started to decline again after Obama came into office. While total dollar-spending surged after Trump came into office, as a share of the economy, the increase looks much more subdued.
In terms of the current US geo-political picture, it’s hard to remember a time when more fires were smoldering around the world, so you would think that it would be a great time for defense contractors. Based on the performance of the largest US defense contractors over the last year, though, that has hardly been the case. The chart below shows the one-year performance of the five largest defense contractors (market cap greater than $50 billion), and during that time, TransDigm (TDG) is the only one that is outperforming the S&P 500. Of the remaining four, two are up less than 4% while Boeing (BA) is down over 5% and RTX is down over 13%. BA is facing its own issues as the company tries to get its act together, but for the other companies rising geo-political instability hasn’t necessarily been good for their stocks.
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The Most Shorted Names Suffer
Equities have generally been consolidating to start out 2024, but one group that has gotten outright punished is those stocks that possess the highest levels of short interest. In the chart below we’ve broken the large-cap Russell 1,000 into deciles (10 groups of 100 stocks each) sorted by the stocks with the highest to lowest short interest as a percent of equity float as of the end of last year and show each group’s average performance year to date. Whereas the average stock in the index is down 2.34% so far this year, the 100 stocks in the index with the highest short interest levels are already down 8.76%. That is significantly more than the second most heavily shorted decile which has averaged a decline of only 2.81%. Notably, the decile of least shorted stocks is actually up 0.41% so far this year on average.
Looking more closely at the decile of most heavily shorted stocks, it’s filled with names that have already fallen in excess of 20-30% YTD like EV-related names Lucid (LCID), Chargepoint (CHPT), and Plug Power (PLUG). Solar stocks like Sunrun (RUN), crypto adjacent names like Coinbase (COIN), and meme stock mania names like AMC Entertainment (AMC) and GameStop (GME) also find themselves on this list and have already seen double digit declines year to date.
The most recent short interest data through the end of last year was released just last week. Below we show the average reading for each industry in the Russell 1,000. Across the whole of the index, the average stock has 3.87% of float shorted. Readings are close to or more than double that for Discretionary Retail and Autos at 9.1% and 7.6%, respectively. Media & Entertainment, Transportation, and Consumer Services are the only other sectors that average more than 5% of float shorted. Meanwhile, Insurance, Utilities, Banks, and Commercial and Professional Services are some of the least shorted industries.
As previously mentioned, some of the worst performing stocks this year have been those with the highest levels of short interest. In the table below, we show the 30 Russell 1,000 stocks that currently have the highest short interest as a percentage of float. Recent IPO Maplebear, or Instacart (CART), tops the list with almost 29% short. That is actually down versus the mid-December reading though back then it was again higher than any other Russell 1,000 member. There are seven other names with more than a quarter of float shorted: Sirius XM (SIRI), Plug Power (PLUG), Lucid (LCID), Kohl’s (KSS), Medicap Properties (MPW), Birkenstock (BIRK), and Celsius (CELH). One thing that is notable is that while many of these highly shorted stocks are underperforming, some exceptions are those that have more recently IPO’d. For example, CART, BIRK, and CAVA are some of the few from this list that are up on the year. Granted, their gains are not nearly as solid of Celsius (CELH) which has completely distanced itself from the rest of the pack, rising 11.4%.
Chart of the Day – Russell 2000 at it Again
Empire Collapses In Spite of Expectations
The economic data slate was light to kick off the holiday-shortened week with the only release of note being the NY Fed’s Empire State Manufacturing Survey. The report came in catastrophically worse than forecasted. Forecasts were calling for the index to improve from a reading of -14.5 in December up to -5 this month. Instead, the headline reading collapsed down to -43.7. As shown in the chart below, that’s the lowest level since the spring of 2020 and before that, there was never a lower reading in the 20+ year history of the survey.
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Taking a look under the hood, below we show a breakdown of each category of the report as well as its reading the previous month, the month-over-month change, and how those rank (as a percentile) versus all months of the survey’s history. Obviously, with only a couple of months with lower readings, the headline number is in the bottom 1% of all readings on record. The same goes for New Orders and Shipments which were the key drivers of weakness this month. Additionally, it is worth noting that each of those categories was already sitting at historically contractionary levels (ranking in or close to the bottom deciles of their respective historical ranges) in December. While the month-over-month decline was much smaller in January, Unfilled Orders is also down near record lows. That is not to say all areas of this month’s report deteriorated. Delivery Times, Prices Paid, and Number of Employees each rose month over month as did nearly all categories for six-month expectations.
Again, the two biggest declines in January were New Orders and Shipments. Like the headline number, the only period with lower readings was the spring of 2020. The fresh low in Unfilled Orders has surpassed the onset of the pandemic for the lowest reading since November 2010. Inventories are not exactly strong with the current level also in contraction, however, that category is much more elevated than others, currently ranking in the 30th percentile.
As previously noted, while current condition indices have collapsed, the same moves have not been observed for expectations. To quantify this dynamic, below we take the spread of each category’s current condition index and expectations index and average across each one. As shown, the January reading dropped significantly and is now at historic lows. Again the only comparable lows to draw from were early on in the pandemic as well as late 2001, only a few months into the survey’s history. That means New York area manufacturers have observed a material and significant slowdown in their businesses, but that has yet to show any impact on the level of optimism looking forward.
Bespoke’s Morning Lineup – 1/16/24 – Empire Crushed
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“The fault lies not with the mob, who demands nonsense, but with those who do not know how to produce anything else.” – Miguel de Cervantes, Don Quixote
Below is a snippet of commentary from today’s Morning Lineup. Start a two-week trial to Bespoke Premium to view the full report.
Futures are poised for a negative start to the US week as European and Asian equities generally traded lower while US markets were closed yesterday. Oil prices along with interest rates have been moving higher this morning, but the Empire Manufacturing report for January which was just released came in significantly weaker than expected, and that could help to keep a lid on rates. While economists were forecasting the headline reading to come in at around -3, the actual reading was much weaker falling to -43.70. Just to put some perspective on that number, the only time it was lower was during the depths of the Covid lockdowns in early 2020, and the only time the report missed expectations by a wider margin was in April 2020.
Atlanta Fed President Bostic was interviewed in the FT over the weekend, and he suggested that any potential rate cuts from the Fed would be unlikely until at least the summer. That has let some air out of the rate cut pricing balloon this morning relative to last Friday (blue vs yellow bars below), but only by a little bit. In the short-term, markets are pricing in 1.8 25 bps rate cuts between now and the May 1st meeting which is slightly less than where things stood at the January meeting but still well above where the market was at the end of October.
Longer-term, pricing of cuts remains aggressive with 6.4 25 bps cuts priced in between now and the 12/18/24 meeting. That’s down from 6.7 last Friday but still slightly above where things stood at the end of last year and well above the 5.9 cuts that were priced in as of December.
Bostic is a voting member of the FOMC this year, so his comments certainly carry weight and looking ahead, investors will be focused on a speech today at 11 AM Eastern where he will be speaking at the Brookings Institution on his economic and policy outlook. Back in November, Waller commented that he was confident that Fed policy was well positioned to slow the economy and get inflation back down to its 2% target and even envisioned a scenario where the Fed could be cutting rates within the next three to five months.
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