It’s been a volatile start to 2022 so far.  With an average intraday trading range of two percentage points, the S&P 500’s average intraday range in the first 41 trading days of the year has been the widest since 2009, and the only other year besides 2009 where the average range was wider was 2008.

High levels of intraday volatility tend to coincide with periods of elevated uncertainty among investors and typically occur during periods when the market is lower. When the average daily range of the S&P 500 has been more than 1.5 percentage points during the first 41 trading days of the year, the average YTD performance of the S&P 500 was a decline of 5.7% (median: -4.3%). This significantly trails the average gain of 1.3% (median: 2.0%) of all years since 1983. So far this year, the S&P 500 has had the second-worst start since 1983 trailing just 2009, when the S&P 500 tanked 25.3% in the first 41 trading days.

Regarding forward returns after these volatile starts, returns vary.  Although performance over the following one and three months tended to be better than average and more consistent to the upside, over the following six months and for the rest of the year, performance was more mixed.  Click here to view Bespoke’s premium membership options.

Jobless claims were expected to fall to 225K this week, but the decline was even larger as first-time claims fell to 215K.  That marked an 18K decline from last week’s slight upwardly revised number of 233K and is the lowest level of claims since the final week of 2021.

On a non-seasonally adjusted basis, it was a very impressive week.  Claims dropped to 194.7K, and after revisions, it is the first sub 200K print since March 2020. That also makes for the lowest level of the current week of the year on record.  The 21.3K improvement from last week is also seasonally unusual. The current period of the year has historically marked a temporary low in the average reading on claims (second chart below).  Additionally, the current week of the year has infrequently seen claims fall as they did this week. Throughout history, the ninth week of the year has been one of the most consistent periods in the first half of the year to experience week over week increases in claims. In fact, historically the current week of the year has seen claims rise WoW over 70% of the time and prior to this year, the last time the current week of the year saw a lower reading on claims was 2011.

Continuing claims were less impressive this week. While last week’s reading was revised down by 2K to 1474K, this week’s number was slightly higher at 1476K.  That compares to estimates of further declines down to 1420K. Even though the most recent reading disappointed, the current level of claims is still well below the range of readings from the past several decades. Click here to view Bespoke’s premium membership options.

As COVID becomes endemic, levels of anxiety across the country have been declining. At the beginning of the pandemic, uncertainty in the political climate caused by riots and pandemic-related restrictions pushed Americans to rush to their local sporting stores to purchase firearms, resulting in a y/y percent increase in background checks that was second only to the spike seen after Obama’s second term began. In July 2020, FBI background checks spiked by 79.2% y/y, just two percentage points less than the increase seen in January of 2013. However, the absolute number of checks in July of 2020 was 1.14 million higher than the figure from January 2013 (3.64 million vs 2.50 million). In March 2021, background checks topped out at 4.69 million, the highest monthly figure on record. The number of background checks has somewhat normalized since then, resulting in just 2.55 million checks being run in February, albeit a slightly shorter month. Click here to view Bespoke’s premium membership options.

On a full-year basis, 2021 saw total background checks decline by 9.0% to 31.1 million. However, this came off of a record year in 2021, in which checks increased by a whopping 41.6% to 34.2 million. In the first two months of 2022, total background checks have declined by 358,669 YTD or 6.5%.

As you may have assumed, the pullback in background checks does not bode well for the gun manufacturing stocks. Below are the charts of Sturm Ruger (RGR) and Smith and Wesson (SWBI) over the last 12 months. RGR is currently 19.9% off of its high but has rebounded since Russia’s invasion of Ukraine. As the international geopolitical situation becomes increasingly uncertain, firearm sales will likely increase, which has been represented in RGR’s 13.7% upside move in the last week. SWBI is performing far worse, down 54.6% from its 52-week highs. The stock has moved 12.4% higher in the last week but remains deep in the hole. In addition, both of these stocks have been impacted by the legal ruling that could hold gun manufacturers liable for incidents involving their firearms. Previously, these companies were entirely immune from litigation.

As expected, there is a high correlation between the performance of RGR and the number of background checks run over the last twelve months. Since 2000, the correlation coefficient between these two data sets is 0.90, which signifies a strong positive relationship. Should the Ukrainian conflict boost background checks, look for continued strong performance from the gun manufacturers.

While Financials are the best performing sector so far in today’s session, leading into today it was the worst-performing sector over the past week thanks in large part to a 3.7% decline on Tuesday; the sector’s worst single day since June 2020. Looking more specifically at bank stocks, using the SPDR S&P Regional Banking ETF (KRE) as a proxy, yesterday saw an even more dramatic decline of 5.47% marking the largest decline since November 2020. That drop also ranks in the bottom 1% of all daily changes on record since the ETF began trading in 2006.  The over 3.5% rebound today, meanwhile, ranks in the top 5% of all days on record as yesterday’s decline was not quite enough to drop the industry below its 200-DMA; a support level that has now held multiple times in the past year.

As previously mentioned, it is rare for KRE to fall over 5% in a single day. Excluding yesterday, there were 68 other times this happened but only a dozen of those occurred with at least 3 months between the prior instance.  In the table below, we show the performance of KRE after each of those periods.

While it is far from the case today, typically, the next day has often seen KRE fall further after a 5% drop.  Instead, today it is seeing the second-best next-day performance of these instances.  As for where things go from here though, returns have been weaker than the norm one week and one month following these past occurrences. KRE has then tended to outperform all other periods three, six, and twelve months out. Click here to view Bespoke’s premium membership options.

While the past week has seen Treasury yields fall sharply, mortgage rates have continued to rise as has been the case consistently over the past few months with the FOMC slated to begin raising rates. At current levels, various measures on the national average for a 30-year fixed-rate mortgage like the longer-dated weekly series from Freddie Mac or the higher frequency series from Bankrate.com have now reached the highest levels since 2019.  For the rate from Freddie Mac, as of the most recent update last Thursday, the national average for a 30-year fixed-rate mortgage stood at 3.89%.  For the more recent and higher frequency reading from Bankrate.com, each day of the past week has seen readings at or above 4.25%.

As previously mentioned, the recent changes in US Treasuries have been the opposite of mortgage rates.  Quantifying this, in the ten days since the February 15th high in the 30-year US Treasury, the yield has fallen 25.26 bps through yesterday’s close.  Meanwhile, the 30-year fixed-rate mortgage from Bankrate.com has risen 6 bps. For mortgages, that is far from the largest 10-day change as that reading recently was above 40 bps in mid-February, but regardless, relative to the decline in the 30-year yield, yesterday saw a 31 basis point spread between the two rates’ 10-day changes.  As shown in the chart below, that stands in the 98.8th percentage of all periods going back to the start of the mortgage rate data in 1998.  June of last year and the COVID crash were the most recent periods to see such a divergence in the moves in 30 year Treasury and mortgage rates.

Given it continues to get more expensive to finance a home, purchase applications from the MBA fell again this week (albeit the 1.76% WoW decline was far less severe compared to the previous week’s 10.14% decline) as the index is now at the lowest level since May 2020.

Refinance applications were actually slightly higher this week, but in spite of that small respite, the index still hovers around some of the lowest levels of the past two years. Click here to view Bespoke’s premium membership options.

Both oil and gold futures hit 52-week highs in the last week, largely due to Russia’s invasion of Ukraine. Gold is viewed as the classic store of value, which explains the commodity’s recent uptick. Investors are increasingly pursuing hard assets, which spikes the demand for gold while supply remains relatively consistent. Oil futures have sky-rocketed due to a few factors. First, demand for the commodity has increased as the economy has fully reopened and travel has begun to recover. At the same time, we are in a supply-restricted environment as sanctions on Russia have hurt supplies given its status as the world’s second-largest producer.

Although the price of these commodities has risen substantially, equities with direct exposure to these prices have reacted differently relative to the underlying commodity. Starting with oil, the energy sector benefits from increased oil prices as margins expand, thus propping up EPS and allowing for more cash to be returned to shareholders. However, while oil has risen by 15.3% in the last month as of yesterday’s close, the energy sector has only gained 2.7%. This has resulted in a lower ratio between energy stocks and the price of oil, which is pictured below. Since 1990, the performance of the S&P 500 Energy sector and WTI crude oil has been highly correlated, with a correlation coefficient of 0.88 between their closing prices. However, over the last month, the coefficient is just 0.52 and is slightly below the average trailing month correlation coefficient since 1990, which is 0.59. Currently, the ratio of the price of the Energy sector to oil is 5.3, which is well below the median ratio of 6.4 (since 1990). The last time oil topped $100 per barrel was between 2011 and 2014, and we saw the ratio of energy stocks to oil remain at roughly our current level throughout this time period. Once oil definitely broke through the $100 level, the ratio increased.

When looking at the ratio of the price of gold vs gold mining stocks, we are seeing the opposite pattern play out. While the price of an ounce of gold has increased 8.4% since the start of February (as of yesterday’s close), the price of the VanEck Gold Miners ETF (GNX) has appreciated by 17.5%. Since we emerged from the global financial crisis in 2008, this ratio has remained elevated, as the performance of the gold miners has not been as strong as the performance of the underlying commodity. It is worth noting that GNX was launched in mid-2006, so for the chart below we used a contiguous index, using pricing data from Newmont Corp. (NEM) for the period from 1990 through mid-2006. Since 1990, the performance correlation of the two assets has been relatively minimal, holding a correlation coefficient of 0.42. However, over the last month, this reading has ticked higher to 0.97. The rolling one-month correlation coefficient between gold and the miner stocks has had an average 0.72 (median: 0.81), meaning that the miner stocks are more correlated to the movements of gold than they typically have been since 1990. The current price ratio of 15.2 is much higher than the median since 1990 (5.2) but is essentially in line with the ratio since the start of 2014 (15.6).

To summarize, while a number of factors will impact the price of energy and gold related stocks besides just the price of the underlying commodities they deal in, energy stocks have been less correlated in recent history than they have in the past, but we see the opposite in gold miners relative to the price of gold. Additionally, energy stocks have underperformed oil over the last month, and the inverse is true for gold mining stocks relative to gold. Click here to view Bespoke’s premium membership options.