The Bespoke Report – It’s the Geo-Political Unrest, Stupid
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Daily Sector Snapshot — 10/27/23
Bespoke’s Morning Lineup – 10/27/23 – An Up Day to End the Week?
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“If you could kick the person in the pants responsible for most of your trouble, you wouldn’t sit for a month.” – Theodore Roosevelt
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It’s getting to the point where if you want to see the market trading higher, set your alarm an hour or two earlier. Dow futures were firmly in the green very early this morning but reversed sharply a couple of hours ago as oil prices spiked following news that the US had launched airstrikes on certain targets in Syria. You know what that means; we’re heading into another weekend with a ton of uncertainty over what’s going to happen in the Middle East. There’s very little incentive to take much of a stand heading into an over 60-hour lull where the equity market will be closed for trading. Therefore, how the market manages to finish the day today will give a good idea of how sentiment looks after a rough couple of weeks of trading. Not including today, the S&P 500 has been down on five of the last six Fridays.
While Dow futures are now firmly in the red, S&P 500 futures are hanging onto positive territory (for now), and the Nasdaq is indicated to open firmly higher. Whether those gains hold will depend in part on how this morning’s economic data comes in relative to expectations. At 8:30, we got updates on Personal Income (weaker than expected) and Personal Spending (stronger than expected) as well as the PCE Deflator on both a headline (higher than expected) and core (inline) basis. At 10:00, the University of Michigan will give us updates on overall consumer sentiment and inflation expectations. Of the reports, Core PCE and the inflation expectations components of the Michigan survey are the two we’ll be paying closest attention to.
The last five trading days have been painful for US stocks, but the weakness has been global in nature. The snapshot below from our Trend Analyzer shows the performance of regional global equity ETFs and where they stand relative to their trading ranges. Outside of Europe, which is still oversold, every other ETF in the snapshot closed yesterday at ‘extreme’ oversold levels. Declines have been widespread around the globe with every ETF trading down at least 1.5% over the last week and all but two are at least 5% below their 50-day moving averages.
Looking a little closer at the returns in the last week, US equity ETFs have been hit especially hard with declines of more than 3% while most of the other ETFs are down closer to 2% or less. The underperformance of US equity-based ETFs is mostly a reflection of the weakness in mega caps this week. Mega caps have been big drivers of US outperformance this year, but now investors are getting a taste of the process working in reverse.
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Chart of the Day – Stock-Bond Correlations
Bespoke’s Weekly Sector Snapshot — 10/26/23
New Lows for S&P and Sentiment
The S&P 500 having made fresh lows in the past week has justified a continued decline in bullish sentiment per the latest AAII survey. As shown below, only 29.3% of respondents reported as bullish this week compared to 34.1% last week. Although sentiment has quickly reversed, the last week of September actually saw an even lower bullish reading of 27.8%.
Bearish sentiment, on the other hand, rose up to 43.2% which was the highest reading since the first week of May. Bearish sentiment rose 8.6 percentage points week over week which was the largest single-week increase since February.
Given the new high in bearish sentiment and drop in bulls, the bull-bear spread tipped deeper into negative territory. Bears now outnumber bulls by 13.9 percentage points. That is the widest margin since May.
While the AAII survey has shown an expressly negative turn, other sentiment surveys are more mixed. For starters, the NAAIM Exposure Index echoed the AAII results. The index tracking equity exposure of fund managers echoed the pessimistic tones of the AAII survey as it dropped to the lowest level since the week of October 12th last year. Meanwhile, the Investors Intelligence survey of newsletter writers has managed to hold onto a more bullish tone. That survey’s bull-bear spread has been more steadily above its historical average over the course of the past couple of months.
Continuing Claims Rising Rapidly
Although much of the morning’s data topped expectations, one of the areas of weakness was jobless claims. Initial jobless claims were slightly higher than expected coming in at 210K versus expectations of 208K. Additionally, last week’s sub-200K print was revised up to 200K. While that doesn’t steal from the fact that jobless claims have pulled back to some of the stronger levels of the year, the past few weeks are now looking a bit more choppy than they were only a week ago.
On a non-seasonally adjusted basis, claims have begun to tick higher as could be expected for this time of year. At 191.89K, claims are 7.34% higher than they were the comparable week last year. However, that is roughly in line with readings from a couple of years prior to the pandemic.
Albeit higher, initial jobless claims remain at historically healthy levels and are not deteriorating too rapidly. The same cannot be said for continuing claims. Rising to 1.79 million through the week of October 14th (continuing claims are lagged an additional week versus the initial claims number), continuing claims have risen for five straight weeks. That is the longest streak of increases since a 12-week run ending in early December last year, and claims are now at the highest level since May 20th.
It has only been five weeks since the recent low of 1.658 million. In that span, continuing claims have risen almost 8%. As shown below, there are plenty of examples of even larger five-week increases in continuing claims counts, the most recent being in Q4 2022, however, it is still a historically rapid rise. The recent increase ranks in the top 5% of all five-week moves on record. Historically, prior increases of that size have mostly (though not always) occurred in the context of a recession. While not exactly covering like-for-like periods, that makes this recent rise in claims even more unusual when compared with GDP data released at the same time showing an impressive 4.9% QoQ annualized growth rate.
Bespoke’s Morning Lineup – 10/26/23 – “Costanza Mode”
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“I’ll be back” – Arnold Schwarzenegger, The Terminator
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39 years ago today, The Terminator, one of the most iconic Arnold Schwarzenegger movies of all time, hit the screens, and a small line that no one thought would amount to anything during production ended up turning into one of the most recognizable movie quotes of all time. After being denied entry into an LA police station to find Sarah Connor, The Terminator sized up the room and matter-of-factly said, “I’ll be back” and casually walked out. Seconds after leaving, a car comes crashing through the walls and then The Terminator gets out and proceeds to destroy everyone in his path. When faced with a roadblock, The Terminator didn’t mess around.
I wish the same could be said for the bull market that peaked in late July. Don’t get me wrong, the rally through the summer was impressive, and issues like record debt issuance from the US Treasury and war in the Middle East are more than just potholes. But the current pullback of close to 9% in the S&P 500 has been going on for close to three months now, and throughout it all, the best resistance that the bulls have been able to muster is two countertrend rallies of 3%. The small-cap Russell 2000 has been even more pathetic. It’s down 17.5% since the summer high, and through it all, the largest rally has been barely more than 4%. Terminator? The bull market’s reaction to this pullback reminds us more of George Costanza at the birthday party when he pushed all the kids out of the way trying to get out of the apartment when the fire alarm went off.
The market remains in ‘Costanza mode” this morning as futures sell-off in follow-through from yesterday’s shellacking. The primary culprit has been rising rates (what else is new), but earnings results have also been lackluster as many more companies are lowering guidance than raising guidance. As if that wasn’t enough to contend with, the economic calendar this morning is jam-packed with GDP, Core PCE, Durable Goods, Initial Claims, Pending Home Sales, and the KC Fed Manufacturing report among the more notable reports. On the geopolitical front, an Israeli ground invasion of Gaza seems imminent.
Of the data that was just released, GDP topped expectations (4.9% vs 4.5%), Durable Goods Orders were much better than expected (4.7 vs 1.9%), Core PCE was slightly lower than expected (2.4% vs 2.5%), and jobless claims were mixed. While initial claims were pretty much right in line with forecasts, continuing claims surged to 1.790 million which was the highest reading since May. In reaction to the data, treasury yields declined while equity futures got less worse.
Yesterday’s 2.5% decline for the Nasdaq 100 was the index’s worst day of the year. That’s notable because it’s extremely uncommon for the index’s worst day in a calendar year to fall this late. The scatter chart below shows the day (x-axis) and magnitude (y-axis) of the Nasdaq 100’s worst day in each calendar year. Yesterday’s 2.5% decline ranks as the third latest day in a year that the index had its worst day, trailing only 1997 and 1991. 2018 was also close, but the worst day in that year was a day earlier.
There are still two months left in the year, so we could conceivably have an even worse day for the Nasdaq 100 between now and year-end. However, if yesterday ends up being the Nasdaq 100’s worst day, it will also rank as the third mildest worst day of a year for the index trailing only the 2.3% declines in 2005 and 2013.
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The Closer – Business Employment Dynamics, New Home Sales, Earnings – 10/25/23
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Looking for deeper insight into markets? In tonight’s Closer sent to Bespoke Institutional clients, we begin with a look at the latest earnings reports and news from the Middle East (page 1). We then provide commentary on the House Speaker selection and the quarterly Business Employment Dynamics report (page 2). Next, we dive into the latest new home sales (page 3) before reviewing the large cap stocks with the trailing earnings yields most above and below their long term averages (page 4). We finish with a rundown of today’s horrible 5 year note auction (page 5) and the latest EIA data (page 6).
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