The week before July 4th is often a quiet one for stocks as traders look to make it a vacation and tack on some days before or after the holiday.  That doesn’t mean it’s always quiet, though.  Throughout the S&P 500’s history,  there have been a number of big up and down days during the current week of the year.  Below we highlight one of the worst and best; one from 1933 and the other more recently back in 2009.

Starting off with one of the worst days back on July 2nd, 2009, with the market closed on Friday, July 3 rd in observance of the July 4th holiday, the release of the June Employment report was moved up to Thursday, but after the number was released, investors probably wished the report had been canceled altogether.  Economists expected total job losses of 365K in June, but the actual decline came in significantly higher at 467K compared to May’s loss of 322K, thus breaking a 4-month streak of lower job losses. The employment report had a raft of other record figures included within it as the unemployment rate climbed up to 9.5% – a level not seen since 1983.  The average length of unemployment increased to 24.5 weeks- the highest level since the government began tracking that statistic 1948- and the average workweek for rank-and-file employees in the private sector (80% of the workforce) slipped to 33 hours- the lowest level since the government began tracking that number in 1964.

June’s losses brought the total number of jobs lost since the beginning of the recession to 6.5 million, erasing the total number of jobs gained in the previous nine-year expansion.  The only other time that happened was back during the Great Depression. The weak employment numbers raised fears that the deepest and longest recession since the 1930s still had some time to go before a recovery would be underway, and investors looked at the data and questioned whether they had been too optimistic in bigging up stocks from the March 9th lows.

The S&P 500 opened lower and continued to sell off into the close as investors took profits ahead of the upcoming earnings season.  Economically sensitive areas of the market got hit the hardest with the Dow Transports dropping 3.7%.  After rallying 40% from its March low to its June high, the S&P 500 was down about 2.5% heading into the report, so the 7/2 decline brought the total decline to over 5%.  While a 3% decline is always painful, relative to the level of market volatility during that period, it wasn’t particularly extreme, and by July 13th, the S&P 500 was already back above its pre 7/2 highs, and it continued higher throughout the rest of the summer. Click here to view Bespoke’s premium membership options.

Chart watchers were greeted with a puzzling move on Monday, July 3rd, when the market opened with large blocks of rails and industrial issues trading substantially higher than Saturday’s close (yes, there was a time when the stock market was open on Saturdays).  Fundamental investors focusing on macroeconomic factors had a range of positive economic news to choose from, including reports of sharp increases in railway car loadings, copper inventories for 1933 being depleted at double the rate as 1932, as well as the moderate rise in prices not having affected the reports of Chain Stores. Volume was frantic at the open as the tape ran as much as ten minutes behind the floor’s transactions in the first hour.

A statement from President Roosevelt on the federal government’s position regarding the international currency measure proposals from the World Economic Conference in London released by Secretary of State Hull was interpreted as both nationalist and inflationist. “The sound internal economic system of a nation is a greater factor in its well-being than the price of its currency in changing terms of the currencies of other nations.” President Roosevelt continued by calling upon the World Economic Conference to direct its efforts to remove trade barriers and stressed the importance of a sound internal economic system in order to reach ultimate stability.

Roosevelt’s statement was met by both praise from supply-side economists like John Maynard Keynes and Irving Fisher and dismay from the gold-standard countries. The reaction of stock prices was far-reaching, with pivotal issues that had been sluggish, breaking out of their range to the upside.  Numerous rails and specialties rallied on large volumes while more defensive-oriented Utility stocks experienced more modest gains. Volume on the NYSE at the close was placed at 6,720,000 shares with 266 stocks hitting new highs for the year and zero new lows.

Many observers argued that inflation was behind the move in share prices as the President subordinated all efforts to his campaign for higher domestic price levels (including taking the dollar off the gold standard in April and introducing an amendment to the Agriculture Adjustment Act which drastically expanded the government’s power over monetary policy in May). However, indications that the inflation movement was not the sole inspiration for the advance could be seen in the action of the bond market where prices rose sharply and yields declined.  The rally from 7/3/33 didn’t last long, though, as the day’s gains were erased by 7/19/1933, and the S&P 500 didn’t trade meaningfully above those levels at any point in the next year.  While the S&P 500 stalled out around its July 1933 levels, keep in mind that in the months leading up to that date, the S&P essentially doubled. Click here to view Bespoke’s premium membership options.

Welcome to Bespoke Brunch Reads — a linkfest of the favorite things we read over the past week. The links are mostly market related, but there are some other interesting subjects covered as well. We hope you enjoy the food for thought as a supplement to the research we provide you during the week.

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The Fed

The Federal Reserve Is at the Nexus of the Inflation Debate. Here’s How It Works by Matthew C. Klein (Barron’s)

An excellent explainer on the institutional structure of the Federal Reserve. This is helpful reference material for understanding the basics of how the central bank operates. [Link; paywall]

Chips

Crypto-miners are probably to blame for the graphics-chip shortage (The Economist)

Data and explanation illustrating how the market for graphics processing units are being driven by prices for the cryptocurrency Ethereum over time, contributing to high prices for gamers and other GPU users. [Link; paywall]

Automotive chip suppliers gearing up for output ramp-up by Cage Chao (DigiTimes Asia)

After auto OEMs cancelled orders for chips en masse when COVID hit, production runs were shifted to other customers, creating huge headaches when car companies restarted orders. Now, vendors are restarting shipments, with customers being told they can expect a 30% increase in shipments in the second half. [Link; paywall]

Climate

Tiny Satellites Could Help Warn of the Next Big Hurricane by Meghan Herbst (Wired)

A small constellation of microsatellites will be used to keep an eye on the tropical zone that spawns hurricanes and cyclones which are so threatening to coastal areas in warmer lattitudes. [Link; soft paywall]

SEC Wants More Climate Disclosures. Businesses Are Preparing for a Fight. by Dave Michaels (WSJ)

Efforts to require companies to disclose climate change risks face a number of hurdles, including open questions about what the SEC is actually able to require companies to share with investors. [Link; paywall]

China

American Basketball Pro Spent Eight Months in Secretive China Detention by James T. Areddy (WSJ)

After being implicated in the death of a man, an American basketball pro spent 8 months in a Chinese detention facility that left him 40 pounds lighter. The case sheds critical light on the practice of residential detention in China. [Link; paywall]

Chinese Port Logjam Threatens Christmas Shipping Rush by Costas Paris (WSJ)

A COVID outbreak in the Yantian port in southern China has led to 50 container ships and more than 350,000 containers stranded in a backlog that has wreaked havoc on logistics for companies of all kinds. [Link; paywall]

‘Dragon Man’ Skull Discovery in China Tells Story of Unknown Human Ancestor by Robert Lee Hotz (WSJ)

In 1933, a farmer stashed a human skull in a well to keep it safe from invading Japanese forces. A study of the skull published this week suggests that near-human ancestors were resident in China 146,000 years ago. [Link; paywall]

Complex Systems

Stewardship of global collective behavior by Joseph B. Bak-Coleman et al (PNAS)

An effort to grapple with what the shift to algorithm-driven social media has meant for social stability; the authors focus on factors including scale and incentives, with social media networks operating with global reach and focusing on amplification of attention and engagement rather than accuracy. [Link]

History

“We believe in making treason odious:” U.S. Veterans of the Civil War Attack the Lost Cause (Angry Staff Officer)

The history of how Union veterans reacted to the rise of the Lost Cause ideology which did so much to flatter the treason of slave states against the United States during the Civil War. [Link]

EVs

Confessions Of A Sidewalk Charger by Joe Wachunas (CleanTechnica)

While it’s certainly possible and legal to charge your street-parked electric vehicle using an extension cord, sidewalk charging is safer and more effective with a proper installation. [Link]

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Have a great weekend!

In late 2020 and early 2021, although companies were reporting extremely strong top and bottom line numbers as well as raising forward guidance at a high rate, share prices were reacting very negatively to the news.  As shown below in the snapshot from our Earnings Explorer tool, 2,050 stocks reported earnings in the first quarter (1/1/21-3/31/21).  For both EPS and sales, 74% of companies beat consensus analyst estimates in Q1, while 15% of companies raised forward guidance versus just 5% lowering guidance.  Even with the strong earnings numbers, though, the average one-day share price change for the 2,050 stocks that reported was -0.69%.  On average, stocks that reported opened higher by 0.14% in reaction to the earnings news but then sold off by 0.81% from the open to the close of trading.

Although it’s currently the earnings off-season when only a handful of companies are reporting numbers each day, we’re seeing the tide turn lately when it comes to share-price reactions to earnings.  As shown in another snapshot below from our Earnings Explorer, 178 companies have reported earnings over the last month.  Beat rates remain incredibly strong with 84% of companies beating EPS estimates and 88% of companies beating sales estimates!  Guidance also continues to come in hot with a whopping 28% of companies raising guidance versus just 4% lowering.

And whereas strong earnings results were not being met with buying in Q1, investors look to finally be willing to “buy the news” again.  The 178 companies that have reported over the last month have averaged a one-day gain of 0.90% on their earnings reaction days.  If we break the reaction day up into the initial opening gap and the open to close change, we see that the average stock that has reported has opened higher by 0.76% in reaction to the earnings news and then continued higher by another 0.11% from the open to the close of trading.

As shown in the top-right chart in the snapshot below, we have a “stock price reaction” tracker in our Earnings Explorer that helps users see how companies are reacting to reports over time.  The reading shows the median one-day share price change for all companies that have reported earnings over the prior three months.  At the end of Q1, this reading had dipped to five-year lows, meaning stocks were reacting more poorly to earnings than at any time since at least 2016.  Over the last few months, this reading has been ticking higher and higher although it’s still negative.  As more reports from late March and April roll off the 3-month tracker, however, the reading should tick back into positive territory soon provided the current trend of more positive reactions continues.

Our Earnings Explorer also allows users to dive into how individual stocks have reacted to earnings reports over time.  We mentioned above that stocks that have reported over the last month have generally been reacting positively to the news.  Below we show the stocks that have seen the biggest one-day gains in reaction to earnings over the last month.  Furniture retailer Conn’s (CONN) had the best one-day move in reaction to earnings when it gained 27% back on June 3rd.  Titan Machinery (TITN) and Cloudera (CLDR) are two more stocks that gained more than 20% on their earnings reaction days within the last month.  Other names on the list below include DocuSign (DOCU), Dick’s (DKS), RH, Plug Power (PLUG), and Zscaler (ZS).  All of the stocks in the table below gained at least 10% on their recent earnings reaction days.

Even though the average stock has posted a nice gain in reaction to earnings over the last month, there have still been a few losers.  Below are the thirteen stocks that fell at least 10% in reaction to recent earnings reports.  The king of the meme stocks — GameStop (GME) — actually tops the list with a 27% decline experienced back on June 10th after reporting after the close on June 9th.  Click here to see how to gain access to our Earnings Explorer tool and the rest of our research package.