The Bespoke Report — 4/22/22

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Early Thursday morning, investors were feeling pretty good about the trading week.  At that point, the S&P 500 was up 1% on the day and about 2.7% week-to-date, and the index had actually just pushed back above its 200-day moving average.

There was nothing we could identify in the news that caused the S&P to peak around 10 AM ET, but from that point through the closing bell on Friday, the index fell 5.3% in basically as straight of a line lower that you can draw.

Fed Chair Powell did, however, make comments in a speech at the IMF mid-day Thursday where he confirmed that a 50 basis point hike was “on the table” for the May meeting.  Markets have been pricing high odds for 50 bps hikes for some time now, but Powell’s comments basically cemented them (for now).

The Powell Fed is known for its jawboning and transparency when it comes to the path for rates.  The chart below of equities and fixed income in 2022 tells you what these two asset classes currently think of that jawboning:

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Average ARK Innovation (ARKK) Stock Down 70% From 5-Year High

While it is seeing a large bounce today currently up 5% as of this writing, Cathie Wood’s flagship fund, the ARK Innovation ETF (ARK), has had a rough go of it over the past year and change.  The ETF peaked in February of last year and has fallen over 60% in the months since then, erasing the entirety of the post-pandemic rally. As for the current holdings making up the ETF, everything has pulled back from post-pandemic highs which were mostly set either in early 2021 or late 2021. To highlight this, in the chart below we show each current holding’s change (in percentage terms) from its respective 5-year high.  The average holding is currently down over 70% from its high.  (ARKK holdings are released daily at ARK’s website.)

Average ARKK performance

Below is a snapshot of current ARKK holdings and where they’re trading relative to 5-year highs.  Year to date, only one stock in the ARKK ETF, Signify Health (SGFY), has managed a positive move as the average YTD decline currently stands at 40.8%. That being said, SGFY is still down over 60% versus its February 2021 high.  As previously mentioned, most other holdings similarly peaked in the first quarter of last year while many others peaked more recently last fall.  As shown in the table, the average peak date for all ARKK holdings was 3/11/21.

One of the stocks that hit a high last fall is the mega-cap EV giant Tesla (TSLA).  Since its November 4th, 2021 high, TSLA has fallen only 18.41%, and it is only down 5% year to date.  Even though hardly anyone would wish to see an investment lose nearly a fifth of its value, that is a substantially better result than most other ARKK holdings.  For example, Berkley Lights (BLI) down 94% from its 5-year high, while 43% of the ETF’s holdings have fallen by at least 75%. Given that TSLA is by far the largest ARKK holding with a 10.55% weight, its smaller decline relative to the rest of the ETF’s holdings has helped ARKK from falling even more.

With the average ARKK stock down 70% from its 5-year high, it’s going to take a huge rally in the “growth” space to get back to prior levels.  As shown at the bottom of the table, the average stock in the ETF now needs to rally 348% to get back to prior highs!  Click here to learn more about Bespoke’s premium stock market research service.

ARKK holdings

Bespoke Investment Group, LLC believes all information contained in this report to be accurate, but we do not guarantee its accuracy. None of the information in this report or any opinions expressed constitutes a solicitation of the purchase or sale of any securities or commodities. This is not personalized advice. Investors should do their own research and/or work with an investment professional when making portfolio decisions. As always, past performance of any investment is not a guarantee of future results. Bespoke representatives or clients may have positions in securities discussed or mentioned in its published content.

Small Business Disconnections

Sentiment on the part of small businesses deteriorated further in the month of March as the NFIB’s Small Business Optimism Index dropped 2.5 points to 93.2.  That took out the January 2021 level for the weakest print for the index since the start of the pandemic in the spring of 2020.

small business optimism index

Considering the headline index is only a couple of points above the pandemic low, last month’s reading is only in the 16th percentile of all months on record going back to the start of the report in 1986.  The month-over-month decline was also historically large ranking in the bottom decile of all monthly changes. The same could be said for multiple other categories. For example, expectations for the economy to improve and expectations for higher real sales came in at or close to record lows as the month-over-month declines were in the bottom 2% of all monthly moves.  This downbeat sentiment was a complete disconnect from the levels of actual sales changes (more on this below). On the other hand, there is a wide variation across categories with top decile readings for several indices like plans to increase employment, current inventories, job openings hard to fill, and compensation-related indices.

NFIB small business

Many of the strongest readings of the report are related to employment.  Plans to increase employment have pulled back significantly from pandemic highs and are back within the range of readings from the few years prior to the pandemic. Regardless, March’s reading was in the top decile of historical readings. Actual reported changes to employment, however, have continued to fluctuate around zero and were negative in March meaning small businesses saw a decrease in hiring. That lack of hiring comes as businesses continue to report historic difficulty in filling open roles. This reading too has been rolling over though. That is echoed by fewer businesses reporting the cost or quality of labor as their single biggest concern. That combined reading has fallen from a high of 40% in September of last year to only 30% today. As other issues (namely inflation) have taken precedent as the main concern of small business owners, cost of labor remains elevated with near-record but peaked readings in compensation and compensation plans.

NFIB small business

As employment metrics remain elevated but show signs of rolling over, readings on expectations for general conditions and sales remain weaker.  Outlook for general business conditions stands out as the weakest reading of the report as the index dropped another 14 points in March to set the bar even lower for a record low. Given the pessimism surrounding business conditions, the share of businesses reporting now as a good time to expand fell for the third month in a row to match the February 2021 low. One likely reason for the aforementioned pessimism is soaring prices shown through yet another record high set by the higher prices index.

Not only has the outlook for general business conditions soured, but so too have sales expectations.  Small businesses reported the worst expectations for sales since the spring of 2020. The only other period in the history of the data going back to 1986 with as weak of an optimism reading for sales was during the Great Recession. That stands in stark contrast with the actual reported sales changes.  Small businesses actually reported positive momentum for sales, though, higher costs are likely eating into profitability as actual earnings changes went unchanged at deeply negative levels. In the release, the NFIB highlighted that of those respondents who reported lower profits, 35% blamed higher material costs and 13% reported higher labor costs. Another 23% blamed weaker sales. Click here to view Bespoke’s premium membership options.

 

A Lot Can Change in a Year

It was a little more than a year ago that we remember reading the following article in The Wall Street Journal and articles like it all over the place:

COVID retirements

The gist of it was that COVID pushed older Americans out of the labor force in droves, and many of them weren’t coming back.  This exodus from the labor force would have major societal implications as it would weigh on overall economic growth, decrease worker productivity, and push labor costs higher. As one economist in the article noted, “Historically, the likelihood of seeing workers who decided to retire come back into the labor force is quite low, so we do think that some of the drop in the participation rate with older workers is likely to remain permanent.”

What a difference a year makes.  While inflation, which was supposed to be transitory, has ended up looking a lot more permanent, it appears as though the exodus of older Americans from the labor force, which was initially thought to be permanent, may end up being more transitory in nature.  The Wall Street Journal highlighted this trend today:

Rising costs alters labor force participation

While it may not be for the best reasons, many older Americans who left the labor force when COVID hit found that after accounting for inflation at multi-decade highs, their nest eggs will not be as supportive of their retirement plans as they originally thought, and that’s pushing them back into the labor force.

While the implication of workers leaving the labor force was for slower growth, lower productivity, and higher labor costs, an influx of workers should increase growth, increase productivity, and put downward pressure on labor costs.  It’s all about supply and demand.  The reason for workers returning back to the labor force may not be the most favorable for them, but amazingly, the exodus of older Americans from the labor force didn’t even last as long as the “farewell’ tours from the Eagles or The Who!  Click here to try out Bespoke’s premium research service.

Bespoke’s Morning Lineup – 4/12/22 – Inflation Not As Terrible As Expected

See what’s driving market performance around the world in today’s Morning Lineup.  Bespoke’s Morning Lineup is the best way to start your trading day.  Read it now by starting a two-week trial to Bespoke Premium.  CLICK HERE to learn more and start your trial.

“In spite of the cost of living, it’s still popular.” – Kathleen Norris

The CPI report that everyone was waiting for has finally arrived and as is usually the case when everyone expects the worst, the results weren’t as bad as feared (although they’re far from good).  On a headline basis, CPI rose 1.2% m/m which was right in line with forecasts.  Core CPI, however, rose ‘just 0.3%’ compared to forecasts for a gain of 0.5%.  Given the weaker than expected core reading, futures have shot higher with the Nasdaq up nearly 1%.  As equities have rallied, Treasury yields are falling but still high even relative to where they were last week!

Make no mistake, these readings are still very high relative to recent history.  For example, backing out the period since 2020, the 0.3% increase in m/m Core CPI would have been the highest since March 2006.  Compared to recent trends and what people were expecting, though, this morning’s report was a positive surprise.

Read today’s Morning Lineup for a recap of all the major market news and events from around the world, including the latest US and international COVID trends.

We all know that recent inflation data has been high, but the consistency of upward pressure has been incredible.  It’s a popular narrative that the Fed is behind the curve, but they’re not the only ones.  Economists have simply not been able to catch up and get ahead of the persistent trend of rising prices.  The chart below shows the rolling 24-month total of the weaker than expected m/m headline CPI reports going back to 2000.

During this span there have only been three months where headline CPI came in weaker than expected.  Three!. Going back to 2000, there has never been a period where weaker than expected CPI reports were as scarce as they have been in the last two years.

CPI below estimates

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