Chart of the Day: Decile Analysis Since the Mid-August High
B.I.G. Tips: Bear Market Patterns – The Third Leg Lower
Bespoke’s Morning Lineup – 9/21/22 – Washington in Focus
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“The worst of COVID may be behind us, but the economic challenges we face are no less daunting.” – Jane Fraser
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Despite some bellicose comments from Putin overnight regarding the war in Ukraine, futures are higher this morning as US Treasury yields are modestly lower and oil prices trade moderately higher. There’s also been some positive earnings news as General Mills (GIS) reported better than expected EPS and raised guidance, while Coty (COTY), a smaller company, raised Q1 guidance and sees full-year estimates inline with forecasts. You can read all you want into these early moves, but it’s likely to all be irrelevant by the end of the day after the FOMC rate decisions and Powell’s press conference.
The comments above come from the prepared remarks of Citibank CEO Jane Fraser in testimony to Congress today. Mid-term elections are just over a month away, so our elected representatives need some campaign soundbites. What better way to do that than bring a bunch of bank CEOs to DC in person and give them a good scolding? Anyways, the prepared remarks of Citibank CEO Jane Fraser and JP Morgan Chase CEO Jamie Dimon, who will say that “many Americans are being crushed by high inflation eroding real incomes, particularly from higher prices on gas and food,” don’t paint a very positive picture for the economy. Whatever happened to the roaring 20s we were supposed to have after COVID?
On the same day that bank CEOs present these dour economic forecasts, the FOMC will announce what is expected to be an increase of at least 75 basis points (bps) in the Fed Funds rate which would be the third straight increase of at least that magnitude. Not only that but Powell is widely expected to set the stage for more rate hikes to come. How much more in rate hikes that follow today’s meeting may depend on what the stock market does. In an article earlier this week, Nick Timiraos at the Wall Street Journal reported that Fed officials were unhappy with the market’s positive reaction following the July rate hike of 75 bps. Powell’s displeasure with the market rally was so intense that he scrapped his prepared Jackson Hole speech in favor of a more direct and forceful message that the FOMC would “Keep At It” and do everything it could to bring inflation down.
Powell got exactly what he wanted from the market following that speech as stocks have been cratering ever since. Minneapolis Fed President Neel Kashkari reinforced the Fed’s intent to get stock prices lower when he remarked that “I was actually happy to see how Chair Powell’s Jackson Hole speech was received…I certainly was not excited to see the stock market rallying after our latest Federal Open Market Committee meeting”.
Investors always discuss the Fed’s dual mandate of maximum employment and stable prices, and lately they have questioned whether the Fed has shifted to focus on a single mandate of stable prices. With Powell taking the unusual step of completely ditching his Jackson Hole speech last month and then Kashkari outright endorsing the negative market reaction to Powell’s speech, the idea of a single mandate Fed – one intent on lower stock prices – now seems accurate. Now, if only we knew how much of a bear market would satisfy the Fed’s new mandate.
When you have members of the Federal Reserve openly rooting for lower stock prices, you can’t be surprised by the performance of equities this year, but when you put it in a historical perspective, 2022 ranks right up there with the worst of them. Yesterday, the S&P 500 fell more than 1% for the 45th time this year. That works out to 25% of all trading days, or more than one 1% decline a week. Since the five-trading day week started in 1952, the only other years with a higher percentage of 1% down days were 1974, 2002, and 2008. With declines of 29.7%, 23.3%, and 38.5%, respectively in those years, this year’s decline of 19.10% seems pedestrian.
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The Streak is Over
After falling every day since June 14th, the average price of a gallon of gasoline in the United States, according to AAA, rose yesterday. That ends what was the second-longest streak of consecutive declines going back to at least 2005. Had the streak lasted another three weeks, it would have gone down as the longest on record, exceeding the 117 days from back in 2015, but it’s ironic that this streak began back in mid-June when the Federal Reserve started to panic about inflation and leaked plans to hike rates by 75 bps at its June meeting to the WSJ and is now ending on a day when the Fed is expected to hike rates by at least 75 bps for an unprecedented third straight meeting.
While the streak is over, it still doesn’t diminish the fact that prices at the pump have been in freefall since that peak in June, falling by 27%. Prices at the pump are down close to 4% in September alone. While the national average price has only been higher at this time of year two other times (2008 and 2012), the 3.9% decline this month is larger than average. Even more surprising is the fact that with prices at the pump up 12% YTD, they are actually up less YTD than average for this time of year. There’s no dismissing that inflation continues to be a major problem, but most people probably wouldn’t believe that gas prices are up less this year through 9/20 than they are in the average year. Click here to learn more about Bespoke’s premium stock market research service.
Daily Sector Snapshot — 9/20/22
Chart of the Day: Fed Day Performance Not What It Used to Be
Bespoke Stock Scores — 9/20/22
Worse Before It Gets Better
For those checking in on our Seasonality Tool in the past week, the current point of the year can either look like one of the worst, middling, or best times of the year depending on the time frame. As shown below, the median one-week performance of the S&P 500 from the close on 9/20 over the last ten years has been a decline of 95 bps loss which ranks in just the fourth percentile of all days of the year. Extending out to look at the S&P 500’s median one-month performance, the 105 bps median gain is about smack dab in the middle of the range of historical one-month returns. Moving out to three months, the S&P 500’s median gain of 578 bps ranks in the top 5% of all days.
To look at seasonality in another way, the charts below show the average S&P 500 5-day performance (including a smoothed look via a 7-day moving average) and the percentage of time the index has traded positively at each calendar day of the year going all the way back to 1945. The current week of the year has averaged some of the worst one-week returns for the S&P 500 across all years of the post-WWII period while the index has tended to fall more often than not.
Again, contrary to short-term seasonal weakness, taking a similar look but using a 3-month performance window, we are entering one of the best times of the year. As shown below, the second half of September into October sees the average 3-month performance rocket higher and by early October has tended to be the strongest of any point of the year. Click here to learn more about Bespoke’s premium stock market research service.
Housing Starts and Permits Mixed But Still Trending Lower
Relative to expectations, Tuesday’s report on Building Permits and Housing Starts was mixed, but overall, it was pretty lousy. Housing Starts exceeded expectations by over 100K, but Building Permits missed expectations by nearly 100K, and as shown in the table below, both are currently down on a year/year basis. Within the better-than-expected Housing Starts report, practically all of the strength was in multi-family units which increased 28% m/m. Single-family units were also positive but increased at just a fraction of the rate of multi-family units. Building Permits were a more gloomy part of the report with the headline reading down 10% m/m and 14.4% y/y. On a regional basis, Permits were down across the board with weakness concentrated in the Northeast and South.
As we have highlighted frequently over the years, Housing Starts have been an excellent leading indicator of the economic cycle. With the exception of the COVID crash, every other recession since the mid-1960s was preceded by a rollover in the 12-month average of Housing Starts (even ahead of COVID, Housing Starts technically rolled over from a peak, but nothing of the magnitude like they did ahead of prior recessions). The current magnitude of decline from the recent peak is by no means near the severity of rollovers leading up to prior recessions, but there has been a clear trend of weakness in this reading with four straight months of declines in the 12-month moving average.
Looking more closely at the post-financial crisis trends in Housing Starts and Building Permits, both appear to have reached at least a short-term peak. Building Permits had been holding up in the months leading up to August’s report, but with a current reading of 1.517 million replacing a reading of 1.772 million from 12 months ago, the one-year average took a sharp turn lower. In fact, the last time it dropped as much as it did this month was back in mid-2009.
Finally, with the release of each month’s Housing Starts report, a phrase you increasingly hear is something along the lines of “but all the strength was in multi-family units”. As noted above, that was the case again this month and so much so that multi-family starts accounted for over 40% of all starts. Relative to recent history, that’s a very high percentage, and outside of one month in June 2015 when the reading was distorted due to the expiration of a tax break for multi-family units in New York, it’s the highest reading since 1985. Given their smaller size, multi-family units aren’t considered to be nearly as economically impactful as single-family units and therefore suggests that the strength of the August report wasn’t as much as it looked at the surface. Click here to learn more about Bespoke’s premium stock market research service.
Bespoke’s Morning Lineup – 9/20/22 – Weak Start as Fed Meeting Begins
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“The sea is dangerous and its storms terrible, but these obstacles have never been sufficient reason to remain ashore.” – Ferdinand Magellan
Below is a snippet of content from today’s Morning Lineup for Bespoke Premium members. Start a two-week trial to Bespoke Premium now to access the full report.
Just like yesterday, futures are lower this morning as interest rates continue to make new multi-year highs while crude oil is marginally higher. The major news event of the overnight session was a 100 basis point rate hike from Sweden’s Riksbank. That was the largest rate hike for the central bank since 1992. In economic news, Germany’s headline PPI increased 7.9% month over month. Yes, you read that right- month over month. In the US, Building Permits and Housing Starts came in mixed relative to expectations. Housing Starts were expected to come in roughly unchanged at 1.45 million, but the actual reading came in at 1.575 million. Building Permits, however, missed expectations by just about as much as starts beat (1.517 million vs 1.610 million consensus forecast).
As has been the case for most of the year, interest rates are on the rise again this morning. The 2-year and 10-year US Treasury yields are up about 4 basis points (bps) pushing both up to new multi-year highs. What’s somewhat notable about the moves in the last 24 hours is that for the first time in just over three months, both the 2 and 10-year yields are at 52-week highs.
In the case of the 2-year yield, its yield has been hitting 52-week highs pretty much every day since Labor Day, but the 10-year yield only took out its June highs yesterday. No matter how many times we say it, it’s hard to imagine that less than nine months ago, ten-year yields were at 1.5% while two-year yields were less than 0.75%.
Our Morning Lineup keeps readers on top of earnings data, economic news, global headlines, and market internals. We’re biased (of course!), but we think it’s the best and most helpful pre-market report in existence!
Start a two-week trial to Bespoke Premium to read today’s full Morning Lineup.