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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BABY’s Back

Since mid to late-2019 when interest rates really started to fall, the dividend yield on the S&P 500 consistently provided a higher yield than the two-year US Treasury.  With a higher payout plus the potential for price appreciation, equities looked more attractive to many investors. The period from the Financial Crisis through 2017 also saw a similar setup where the S&P 500’s dividend yield was higher than the yield on the 2-year, but before the Financial Crisis and the FOMC’s zero-interest-rate policy, it was extremely uncommon for the S&P 500 to yield more than the two-year Treasury.  This year has caused a tidal shift in the balance of power in yield between the S&P 500 and the two-year Treasury.  As the Fed came to the conclusion that inflation wasn’t as transitory as originally thought and found itself behind the inflation curve, it shifted from a much more accommodative stance to one that was more biased towards tightening, and that shift resulted in one of the most rapid increases in two-year Treasury yields in decades.  In the process of this spike in rates, back in February, the yield on the two-year rose back above the dividend yield of the S&P 500 for the first time since 2019.

S&P 500 Yield vs two-Year treasury

As Treasury yields have continued to spike, the premium in yield of two-year Treasuries relative to the dividend yield of the S&P 500 reached an important milestone last Friday (4/8).  As shown in the chart below, the spread between their yields widened out to 110 basis points (bps), taking out the high of 108 bps from 2018.  At these levels, the spread between the two is now the widest it has been in fourteen years since the Financial Crisis.  It started with long-term Treasury yields, but as the overall trend in rates has been higher, most of the Treasury yield curve is now yielding more than the S&P 500.  For years now, investors have had a TINA (There Is No Alternative) relationship with the stock market, but as interest rates have shot higher, TINA is taking a backseat to BABY (Bonds Are Better Yielders).  Click here to try out Bespoke’s premium research service.

S&P 500 vs 2-year yield spread

B.I.G. Tips – Earnings Season Ahead

Earnings season kicks off this week as the major banks and brokers start to report their first-quarter numbers.  BlackRock (BLK) and JP Morgan Chase (JPM) will kick things off on Wednesday, followed by Citigroup (C), Goldman Sachs (GS), and Morgan Stanley (MS) leading the charge on Thursday.  On Friday, the equity market is closed in observance of Good Friday, but Bank of America (BAC), Bank of New York (BK), and Charles Schwab will all report next Monday (4/18).  While it will be a busy few days for Financials, the heart of earnings season doesn’t really get rolling until later this month.  The five largest companies in the S&P 500 (AAPL, AMZN, FB, GOOGL, and MSFT) won’t report until the last week of April.

For a more detailed rundown of the earnings schedule for the upcoming season, please see our Earnings Explorer Tool (available to all Institutional clients) on the Tools section of our website, and to see our quarterly preview of the upcoming earnings season with respect to analyst sentiment heading into it, start a two-week free trial to either Bespoke Premium or Bespoke Institutional.

earnings season report

Defensives Propping Up New Highs

The S&P 500 has fallen in four of the past five sessions continuing to pull back from its lower high, but surprisingly, the net percentage of the index hitting new 52-week highs actually saw one of the strongest readings of the year on Friday as we show in the chart from our Sector Snapshot below.  To cap off last week, a net 11% of S&P 500 stocks were at new 52-week highs; the highest reading since January 5th which was only a couple of days after the index’s last all-time high. Typically, we look at net new highs as a way to confirm moves in the broader market. In other words, it is viewed as better to see a larger number of stocks trading at new highs versus new lows. While net new highs are so far lower today, Fridays’ double-digit positive reading was unusually high for a down day.  Historically going back to 1990, the average net new high reading when the S&P 500 has been lower on the day has only been 1.6%. It was even a strong reading compared to the average for up days (4.77%) as well.

52-Week Highs

As for how new highs have held up relatively well as the broader market has pulled back, defensive sectors—Consumer Staples, Health Care, Utilities, and Real Estate—are almost entirely the ones to thank.  To illustrate this, below we show the daily percentage of S&P 500 stocks hitting new highs that are from one of the four defensive sectors just mentioned.  There is plenty of precedent in the past several years for these four sectors to account for all of a day’s new highs including several days in late January and early February. At the high last Wednesday, over 90% of S&P 500’s new highs came from defensive sectors. On a 50-DMA basis, this reading is now at the highest level since the spring of 2020.

Defensive Sector 52-Week Highs

In other words, defensives have been a notable pocket of strength recently. As for just how large of a run they have been on, in the charts below we show the rolling one month change of these sectors going back to 1990 (2001 for Real Estate).  While the rates of change have peaked, Health Care and Utilities are up double digits in the past month while Consumer Staples and Real Estate have risen high single-digit percentage points.  For all sectors except for Real Estate, those rallies rank in the top 3% of all monthly moves since 1990 and Real Estates is still in the top decile of all monthly moves going back to 2001.   Click here to view Bespoke’s premium membership options.

Defensives Propping Up The Market