So far, earnings season has been solid with above-average beat rates, guidance spread, and positive price reaction.  This has certainly played a factor in improved sentiment in this week’s AAII survey.  Bullish sentiment jumped 6.7% to 38.4%. Though it is still within a normal range, the percentage of investors reporting as bullish is now the highest since early May when it rose to over 43%. While earnings have likely positively impacted sentiment, we must also note that due to the timing of the survey, yesterday’s FOMC decision is likely to weigh little on this week’s results.

This week’s increase also ended a streak of eleven consecutive weeks that bullish sentiment remained below the historical average of 38.16%.  As we mentioned last week, this sort of streak may sound like a negative, but there has been plenty of historical precedents. Since the beginning of the survey, there have been 18 other streaks that have gone 11 weeks or more, four of which have ended right at 11 weeks just like the most recent one. While any extended streak of below-average bullish sentiment has typically lead to outperformance, those that have ended at the eleventh week have actually done even better.

With the increase in bullish sentiment, bearish sentiment has fallen back to the lower end of its range, settling at 24.06%.  This was the largest drop in the number of investors reporting as bears since June as the market rebounded from May declines.  Speaking of those May declines, the last time bearish sentiment was this low was in the first week of May.

While both bears and bulls saw significant changes, neutral sentiment held firm only moving a bit more than 1%.  At 37.5%, neutral sentiment continues to sit in the upper end of the past few year’s range and above the historical average of 31.52%. While bullish sentiment’s streak above its historical average may have come to a close, this week coincidentally marked the eleventh consecutive week of above-average neutral sentiment. The streak is even more impressive when taking into account the fact that the percentage of investors reporting as neutral has been elevated all year with 26 of the 30 weeks in 2019 seeing above-average neutral sentiment. Start a two-week free trial to Bespoke Institutional to access our interactive economic indicators monitor and much more.

The pace of growth in the manufacturing sector continued to show signs of a slowdown in July as the ISM Manufacturing Index came in at a level of 51.2 versus expectations for a reading of 52.0.  The last time we saw readings this weak in the ISM Manufacturing Index was nearly three years ago back in August 2016.  Not only did this month’s reading come in below expectations, but it was also the fourth straight monthly decline which is the longest such streak since the eight-month stretch ending in January 2016.  Talk about a rut!

As you might expect given the ISM Manufacturing Index’s move towards 50 (the dividing line between growth and contraction), the commentary from respondents in this month’s report is sounding increasingly cautious.  The frequency of terms like weakness, slowdown, and other terms like these have been on the rise in recent months.

In looking at the breadth of the ISM Manufacturing Index’s sub-indices, things were biased towards the downside as six components saw m/m declines and just four saw increases.  On a y/y basis, things were even worse as Customer Inventories was the only one higher versus a year ago.  Just as the headline index saw its lowest reading since August 2016, a number of the sub-indices are also at their weakest levels since 2016.  Both Production and Imports haven’t been this weak since August 2016, Prices Paid and Export Orders haven’t been this weak since February 2016, and Backlog Orders dropped to its lowest level since January 2016.  In order to not close on a down note, we would note that New Orders managed to show a slight increase rising from 50.0 to 50.8. Start a two-week free trial to Bespoke Premium to receive our best equity research on a daily basis.

Seasonally adjusted jobless claims rose after dropping last week to the lowest level in three months (which was revised up to 207K).  With a reading of 215K, claims came in slightly above estimates of 214K. While claims are currently at the lower end of the past year’s range, other than a few spikes higher and lower, there has been no significant consistent trend higher or lower over the past 12 months (gray shaded chart below). That does not mean the data has not been healthy though as claims have remained at or below 250K and 300K for record streaks of 95 and 230 weeks, respectively.

While it may not be evident in the weekly seasonally adjusted numbers, the four-week moving average has been continuing to trend lower. This week marked the fourth straight week with a decline in the moving average falling from 213.25K last week to 211.5K. This decline was largely a result of a recent high of 222K coming off of the average. This average is also now at its lowest level since mid-April’s multi-decade low and would need to fall another 10K to take out this low to help confirm the trend lower is still alive and well.

This time of year typically has favorable seasonality for jobless claims as a large drop is usually observed after a short term peak a few weeks prior. This year is following this pattern to a tee as NSA claims dropped to 177.9K from 196.4K last week and the recent peak of 243.6K the week before that. Seasonality aside, 177.9K is still the lowest print for non-seasonally adjusted claims for any week in ten months. At its current levels, NSA claims are also at the lowest level for the current week of the year for this cycle, but this year did see a much smaller degree of change year-over-year than previous years; a 2K decline versus declines of 20.9K and 18.9K for the comparable week in the past two years.

While claims are still at healthy levels, the trend lower has not been as strong as it has been in prior years.  Initial claims data has hinted at this but continuing claims are perhaps a more obvious example. Back in October of last year, continuing claims fell to a multi-decade low of 1649K.  Since then though, there has not been a new low despite coming close in April and May.  Since the spring, claims has been slowly grinding higher once again with another uptick to 1699K this week.  So overall, while labor market data still is healthy and low by historical standards, the rate of improvement has subsided a bit. Start a two-week free trial to Bespoke Institutional to access our interactive economic indicators monitor and much more.

The outperformance of the recent IPO of Beyond Meat (BYND), even after its secondary announcement, has been well documented over the last several weeks, but have you seen the performance of bonds?  The chart below shows the total return of the S&P 500 compared to long-term US Treasuries over the last year.  How many times in the last few weeks have you heard about how the rally in stocks has gotten way too far ahead of itself and is reminiscent of the late 1990s?  We’ll concede that 2019 has been an exceptionally strong year for equities so far, but over the last year, the S&P 500 is up less than 8% on a total return basis.  Meanwhile, long-term US Treasuries are up over 14%!  That’s nearly 80% more than equities. So, if stocks are a bubble what are bonds?

The chart below compares the one, two, five, ten, and twenty-year annualized returns for the S&P 500 going back to 1928.  The S&P 500’s performance over the last year is actually well below its historical average of 11.7% and ranks in just the 39th percentile relative to all other 12-month periods.  While two and five-year returns are both just modestly above their historical average and rank in the 52nd and 51st percentiles relative to history, the S&P 500’s ten-year annualized return is well above average (14.0% vs 10.4%) putting it in the 65th percentile relative to all other periods.  Keep in mind, though, that ten years ago was just four months removed from the financial crisis lows.  Expanding our window out to 20-years, the S&P 500’s current returns relative to average start to fall off a cliff again.  The 6.1% annualized return is almost five full percentage points below the historical average of 11.0% and ranks in just the 4th percentile relative to all other 20-year periods.  Continuous underperformance of almost five percentage points per year really starts to add up over time.  For example, while a 6.1% annualized return over a 20-year window translates to a total gain of 227%, an 11% annualized gain over that same time period works out to a gain of 706%!

While equity market returns have been well below average over the last year, bonds have performed extremely well relative to average.  At 14.1%, the one-year total return is in the 72nd percentile relative to all other one-year periods.  However, for every other time window (two, five, ten, and twenty years) returns have been consistently below-average ranking well below all other periods on a percentile basis. Keep in mind here, though, that unlike total return data for equities which goes back to the late 1920s, the total return series we used for Long-Term US Treasuries (Merrill Lynch Long Term Treasuries Index) only goes back to the mid-1970s.Start a two-week free trial to Bespoke Premium to receive our best equity research on a daily basis.

Fed Chair Powell’s press conference yesterday sparked a pretty large drop for US equities.  The S&P 500 finished the day lower by more than 1%, and as shown below, most of the index ETFs that we monitor were pulled back into neutral territory from overbought levels.  For now this can be characterized as simple mean reversion.

Looking at sectors, Financials and Communication Services are the only remaining ones in overbought territory, while Utilities and Health Care are the only two that have dropped below their 50-day moving averages.

International equities are in much worse shape given that many of the country ETFs we follow are now below their 50-day moving averages or outright oversold.  Spain (EWP), Mexico (EWW), Norway (NORW), and India (PIN) are actually in extreme oversold territory after sharp moves lower over the past week.  Start a two-week free trial to Bespoke Premium to receive our best equity research on a daily basis.