Bespoke’s Weekly Sector Snapshot — 9/21/23
Claims Back the Hawks
Among the reasons given for yesterday’s “hawkish hold” at the FOMC meeting was that employment readings “remain strong”. This morning’s release of weekly jobless claims backed that up. Seasonally adjusted initial claims have begun to fall back down towards recent lows in the past few months, and today’s print brought it to a new short-term low of 201K. That compares to expectations for an increase of 4K up to 225K. The recent decline brings claims down to the lowest level since January and just 21K above the multi-decade low reached almost exactly one year ago.
On a non-seasonally adjusted basis, claims are also very healthy. Claims were little changed week over week, remaining near the annual low. Relative to the comparable week of the year in years past, the most recent reading is above that of last year, but right in line with levels from 2018 and 2019. Entering Q4, jobless claims will begin to face some seasonal headwinds and will likely head higher through the end of the year.
As for continuing jobless claims, recent trends have been much calmer as they have not seen any sort of dramatic swing lower. That’s not to say, however, that continuing claims have not improved. The reading has continued to trend lower and at 1.662 million it is at the lowest level since January.
Sentiment Drops Ahead of the Fed
The latest weekly sentiment surveys would have missed any reaction to the FOMC yesterday due to timing of data collection. However, leading up to equities’ drop in reaction to a hawkish Fed, sentiment was already headed in a pessimistic direction. As shown below, the American Association of Individual Investors weekly sentiment survey saw bullish sentiment drop for a second week in a row last week. At 31.3% bullish, sentiment is down to the lowest level since June.
Bearish sentiment rose from 29.2% up to 34.6%. That is only the highest reading in a month given neutral sentiment picked up a larger share of losses to bullish sentiment the previous week.
While the increase in respondents reporting as bearish has been somewhat tame, the inverse moves this week have resulted in the bull-bear spread dipping back into negative territory. That means there are currently more investors reporting as bearish than bullish.
Below, we take a rolling average of the past year’s readings in bullish and bearish sentiment. By this measure, bears again hold the upper hand having averaged 38.0% in the past year whereas bulls have averaged 30.4%. In the case of bullish sentiment, that remains a historically low reading as the average has generally trended lower over the past two decades while the reverse is true of bearish sentiment. That being said, there has been some reversion over the past few months with bearish sentiment falling and bullish sentiment rising towards more historically normal readings. In other words, over time, sentiment has taken a structurally higher bearish tilt, and 2022 saw that nearly reach a pinnacle. This year, though, has seen somewhat more normal but still elevated sentiment.
Chart of the Day – Global Easing Cycle Under Way
Bespoke’s Morning Lineup – 9/21/23 – Stormy Seas
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“It was something devastating — and unreal — like the beginning of the end of the world — or the end of it”
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There’s a post-Fed hangover in the market this morning and dark clouds over Wall Street. After the market followed the recent Fed day script nearly step for step yesterday, international markets continued the downward trend overnight, and US markets are picking up right where they left off yesterday with the S&P 500 down nearly 1% and the Nasdaq down over 1%. Not surprisingly, investor sentiment has taken another hit as the latest data from the American Association of Individual Investors (AAII) showed that bullish sentiment declined to 31.3% from 34.4% and the lowest level since late May.
Besides the Fed, there’s been a ton of other central bank activity overnight, so read all about it in today’s report. On the economic calendar, initial jobless claims came in lower than expected falling to 201K compared to forecasts for a level of 225K. Continuing claims also came in 30K lower than consensus forecasts. Lastly, the Philly Fed manufacturing report dropped to -13.5 which was the lowest level since April and was well below consensus forecasts of -2.
If you told us that the above quote described an event that occurred on this same day in a prior year, 2008 would immediately come to mind, and you would think it came from someone on the former Lehman Brothers trading floor or another investment bank. Lehman had just filed for bankruptcy, and AIG, along with the rest of the financial sector, was teetering on the brink of collapse. At least that’s the way most remember it. What you may be surprised to hear, though, was that while the S&P 500 closed at 1,251.70 on the Friday before Lehman filed for bankruptcy, the Friday after, it closed at 1,255.08 for a gain of 0.27%. Not much to brag about, but not bad considering the largest bankruptcy in US history.
The market always looks forward, and by the time Lehman failed, the S&P 500 had already dropped 20%. Anyone who went home that Friday after Lehman probably breathed a sigh of relief thinking the worst had passed, but the calm of “Lehman week” was only the eye of the storm. Over the course of the next 115 trading days, the Financial Crisis would knock another 44% from the S&P 500 before finally heading out to sea.
So, when is the quote from, and who said it? It was none other than Katherine Hepburn, and she was describing the “Long Island Express” hurricane which struck eastern Long Island on this day in 1938. Hepburn wasn’t even on Long Island at the time, but instead in Connecticut at her family’s summer home in Old Saybrook on the Long Island Sound. Below is the entire quote.
“It was something devastating — and unreal — like the beginning of the end of the world — or the end of it” — and I slogged and sloshed, crawled through ditches and hung on to keep going somehow — got drenched and bruised and scratched — completely bedraggled — finally got to where there was a working phone and called Dad,” – Katherine Hepburn
The “Long Island Express” surprised just about everyone at the time. Back then, there was no radar, satellites, or weather buoys, and forget about hurricane hunters. The only way to detect a tropical storm or hurricane was if it hit land or if a ship encountered out at sea. On a side note, it’s also a reason that storms appear to be more numerous now than they did over time. Back then, if it was out of sight, it was out of mind.
While ships out at sea had encountered the storm, forecasters were anticipating a track towards Florida, but then the storm turned, and on 9/20/1938, the AP reported that it was headed out to sea. The morning of 9/21/1938 was sunny in Long Island, and people were eager to enjoy a day outside after what had been days of rain. The only hint of unsettled weather was a forecast from the Weather Bureau which noted that “The tropical storm will be attended by rain in New England and portions of New York and the Middle Atlantic States tonight”. The part about rain they got right, but they completely missed the direct hit of a category 3 hurricane on Long Island and southern New England. It was a hurricane so strong that it permanently altered the geography of the coastline it encountered.
The chart below shows the path of the 1938 hurricane which took it right over the Hamptons on Long Island, which is home to some of the most expensive real estate in the United States, and into Connecticut and Rhode Island. There hasn’t been a direct hit of a hurricane on the coast of Long Island since 1985, and when Superstorm Sandy hit the New Jersey coast in 2012, its maximum winds were 80 mph. A category three storm like the one in 1938 packs winds in a range of 111 to 129 mph. The financial impact of the storm totaled $620 million which translates to nearly $14 billion in today’s dollars. That may sound like small change compared to a storm like Hurricane Katrina which caused nearly $200 billion in damage, but think about how much less the region was built up back in 1938 versus now. Also, real estate building codes in the region aren’t nearly as strict when it comes to hurricanes as in an area like Florida or even other coastal areas in the southeast or along the Gulf Coast. It’s been a while, but that doesn’t mean the threat is any lower, and as we all know from experience, problems tend to pop up when they’re least expected.
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Bespoke Baskets Update — September 2023
Daily Sector Snapshot — 9/20/23
Another Powell Fed Day Sees Stocks Tank Into the Close
In Monday’s Chart of the Day, we looked at how the stock market typically performs on Fed Days. Below is one of the charts highlighted showing the average intraday path that the S&P 500 has taken on Fed Days over the past year (8 Fed Days). As you can see, investors really seem to dislike what Chair Powell has to say, as the market has trended straight down in the final hour of trading once his press conferences come to an end.
Today’s action was no different. It’s actually pretty incredible how closely today’s action tracked the normal Powell Fed-Day pattern. Take a look at the chart below. The red line shows the S&P 500’s path today, while the blue line shows the average path that the S&P took over the prior eight Fed Days. Maybe Powell can change things up next time (unless this is the action he wants to see).
Chart of the Day: Is It the Best or Worst Time of the Year?
Bespoke’s Morning Lineup – 9/20/23 – Place Your Bets
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“There is one kind of prison where the man is behind bars, and everything that he desires is outside; and there is another kind where the things are behind the bars, and the man is outside.” ― Upton Sinclair, The Jungle
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It’s Fed Day, and while these are always eventful days for the markets, there is basically zero chance that the Federal Reserve makes any change to rates this afternoon, so the real focus will be on the Summary of Economic Projections (SEP) and Powell’s press conference at 2:30. Outside of the Fed announcement, there is no economic data on the calendar, but we will get earnings reports from FedEx (FDX) and KB Home (KBH) after the close. Heading into the opening bell, equity futures are higher, while yields, the dollar, and crude are all modestly lower.
Investors are on tenterhooks this morning waiting for the latest economic projections and statement on interest rates from the Federal Reserve. With control over the cost of credit and supply of money in the economy (and a nice marble building), the Federal Reserve is in a powerful position. However, even the most powerful people can’t predict the future, and the ability of the men and women who make up the committee to predict where the economy is going probably falls somewhere between Jimmy the Greek’s record on Sunday NFL games in the early 1980s and Pete Rose’s betting percentage on the 1987 Reds. Despite that reality, when the statement and economic projections hit the tape in a few hours, billions in capital will be shifted based on their contents, and traders will make and lose fortunes based on how they were positioned heading into the announcement. Play ball!
It was just over two months ago that headline CPI for June dropped to 3.0% and investors thought some real progress had been made on inflation. With that progress, the view has increasingly been that the Fed would move to the sidelines taking a wait and see approach towards interest rate policy. Unfortunately, for fixed income investors, though, interest rates have done nothing but go up. Since 7/13, the day after the June CPI report, yields have been higher across the curve to levels not seen in at least 15 years. At the very short end of the curve, the 3-year yield is up just 5 basis points (bps), but two-year yields are up 34 bps, and 10-year yields have shot up 50 bps.
In terms of how those higher yields impact price, the iShares 20+ Year Treasury ETF (TLT) is down 8% and back down near its lowest levels since 2011. Talk about a lost decade!
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