In last night’s Closer, we highlighted the diverging performance of two industries that have often been considered leading groups for the broader market: the Philadelphia Semiconductor index (SOX) and the Dow Jones Transportation Average. As of this writing, that divergence has continued today with the Transports gaining another 1% while the more new age semiconductors are down 0.7%.  As a result, the ratio of the transports to the semis has continued to rally off its recent lows.

In fact, the five-day rate of change of that ratio has now risen into the double digits as it sits 12.23% above last week’s levels. Surges in the ratio like we have seen over the last week have historical precedence, but very little following the dot com era. The only recent increases that were as large or larger than the current run were in March of last year (2021) and December 2017.

In the table below, we show each time since 1994 (when the Philly Semiconductor Index begins) that the ratio mentioned above has risen by at least 10% in a one-week span without another occurrence in the prior 3 months. The current run higher in the ratio has been on the larger side of those prior instances.

However, that outperformance has not necessarily carried forward.  The next week has consistently seen the Dow Transports turn lower whereas the semis have consistently posted solid gains.  Looking at performance in the medium to longer term, again the semis tend to outperform with more consistently positive moves that are also much better than the norm.  For example, three and six-month performances for the semis have, on average, been around three times larger than the norm for all periods. Transports, meanwhile, have seen performance that is more in line with the historical norm. Click here to learn more about Bespoke’s premium stock market research service.

The NFIB released its latest small business survey this morning with data as of the month of September.  As we discussed in today’s Morning Lineup, the report showed sentiment rebounded in September although labor market indicators decelerated further.  That was also reflected in the report’s survey of what businesses consider to be their most important problem.  While those reporting ‘cost of labor’ as the biggest problem went unchanged, the percentage of respondents reporting quality of labor as their biggest concern dropped four percentage points to 22%. While there was an even lower reading as recently as July, it was the biggest drop since last December, and the current level has fallen out of the top decile of historical readings.

While the lower reading in labor market-related problems seems to reaffirm the slowing employment situation, inflation concerns ramped up modestly in September.  30% of businesses (versus 29% in August) reported inflation as their biggest concern.  Additionally, another inflation-adjacent reading also rose with 5% reporting the cost or availability of insurance to be their biggest problem.

On a combined basis, government-related concerns saw a net lower reading last month as well.  Concerns around requirements and red tape rose up to a 5% share of responses, but those gains were offset by a two percentage point drop in the share of respondents seeing taxes as their biggest issue.  With inflation and labor concerns remaining front and center of small business problems, government-related concerns continue to be muted to a historic degree.

While the bulk of responses view labor or inflation as their biggest issues—62% of combined responses report one of these to be their biggest problem—there was a considerable pickup in those choosing “other” as their response last month. That reading rose from 5% to 8% bringing it from a 14th percentile reading all the way up to the 65th percentile. That is now the highest reading since May when it came in at an elevated 11%. Unfortunately, the report does not provide further detail as to what those “other” concerns specifically are but geo-political issues are likely part of the mix. Click here to learn more about Bespoke’s premium stock market research service.

As the weakness in equities continues, we wanted to provide an update on where the major averages stand relative to their pre-COVID highs in February 2020. In the case of the S&P 500 and Nasdaq, they’re both still up, but the gains are quickly fading. It has now been just about two and a half years since the pre-COVID high for the S&P 500, and from that peak to this morning, the S&P 500 is up just 5.5% and the Nasdaq is up 5.6%.  On an annualized basis, that works out to less than 2.5%. What’s that phrase people kept saying about irrational moves in stock prices?

As if equity market returns relative to the pre-COVID high weren’t pedestrian enough, keep in mind that once you take the impact of inflation into account, investors are actually now solidly in the red.  The charts below show the performance of the S&P 500 and Nasdaq on an inflation-adjusted basis by adjusting historical prices based on headline CPI. After adjustments, the S&P 500 and Nasdaq are both down 7.7% from their February 2020 highs.  As bad as the investing backdrop has been for equities, long-term US Treasuries have fared much worse than that.  On a nominal basis, long-term US Treasuries have declined 28%, and after adjusting for inflation, the declines have been well over 30%. Click here to learn more about Bespoke’s premium stock market research service.