Jul 25, 2022
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“It’s a recession when your neighbor loses his job; it’s a depression when you lose yours.” – Harry Truman
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The weather has been hot across much of the country the last several days, and that heat will move to the markets this week with a busy schedule of economic data, peak earnings season, and the FOMC announcing its latest policy decision.
Ahead of the kickoff of trading, equity futures and bond yields are modestly higher along with crude oil and copper. On the downside, Bitcoin is down over 3% while gold is flat. Over in Europe, Germany’s ifo index tracking the business climate fell more than expected as a recession looks increasingly likely.
Today’s Morning Lineup discusses earnings news out of Europe and the Americas, economic data from around the world, and much more.
With all the earnings and economic data on the calendar this week, investors will likely have a much better read on the economy and its direction on Friday. Several indicators have already pointed to the increased likelihood of a recession, and the yield curve has also been indicating a more precarious economic picture. While the spread between the yields on the 10-year and 2-year US Treasuries has been negative for three weeks now, the spread between the 10-year and the 3-month yields has yet to move to inverted levels. A few months ago, the relative steepness of the Fed’s preferred yield curve measure was cited as a reason why a recession was not in the cards. However, after flattening by nearly 200 bps to just 40 bps in the last three months, even this part of the curve (light blue line) looks much less comforting.
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Jun 14, 2022
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“He says we’re going the wrong way.”
“Oh, he’s drunk. How would he know where we’re going.” – Planes, Trains & Automobiles
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After four days of basically getting their faces beat inside out, bulls are trying to make a comeback this morning aided in part by a PPI report that wasn’t stronger than expected. Small business sentiment also managed to come in slightly better than expected, although it remains weak. One item covered in today’s Morning Lineup commentary is the fact that inflation expectations in the latest ZEW survey didn’t show a pickup in inflation expectations for the US or Eurozone.
In today’s Morning Lineup, there’s a lot covered as we discuss trading in APAC and European markets (pg 4), whether or not the Fed will go 50 or 75 bps tomorrow (pg 5), overnight economic data in Asia and Europe (pg 6), and much more.
Over the last two years or so, the market has come full circle. In February and March of 2020, there was that five-week period where the only direction the market would move was lower. Shortly after, the Federal Government and Federal Reserve unleashed massive amounts of stimulus, and the market started to turn around. By early 2021, the market had completed a complete 180, and the only direction it could move was higher. Then, late last year as government stimulus started to dry up and the Federal Reserve started to get religion on inflation, cracks in the market started to emerge. By early this year, we were calling it a one-step forward and two-step backward market where every positive day was offset by at least two bad days taking the market to progressively lower levels in the process.
As painful as the one-step forward and two-step backward market felt, at least there were some positive days. Over the last few days, it has become a one-directional market, and the direction has been extreme in the wrong way. Over the last four trading days, the net advance/decline (A/D) reading for the S&P 500 has been negative 400 or lower meaning that in each of the last four trading days there have been 400 more stocks that traded lower on the day than higher. To give you some perspective on how extreme this type of streak is, since 1990, there have been ten years where for the entire 12 months there weren’t even four days where the net A/D reading for the S&P 500 was at negative 400 or lower. As shown in the chart below, there has never been a streak of similar duration, and the only time there were even three consecutive days of -400 readings was in August 2015 at the height of concerns over the Chinese yuan devaluation.
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Jun 2, 2022
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“We should take comfort that while we may have more still to endure, better days will return.” – Queen Elizabeth II
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The quote above from Queen Elizabeth was from a speech in the early days of COVID, and with life getting back to ‘normal’ in most western economies, she was definitely right. The Queen’s comments from two years ago can also be attributable to the current market environment. 2022 hasn’t been enjoyable, and it’s more likely than not that investors will still have further volatility and losses to endure, but better days will come, even if – like COVID – those better days take longer than expected to return.
It’s been a busy morning of economic data today with ADP Employment missing expectations and showing the smallest level of job growth since April 2020. Unit Labor Costs were also revised more than a full percentage point higher, while the revision of Non-Farm Productivity showed a slightly less negative number. Jobless Claims were also just released, and on both an initial and continuing basis, the reported readings were lower than expected.
Heading into this morning’s data, futures were already higher, but they’ve given up some of those gains as interest rates ticked higher following the releases.
In today’s Morning Lineup, we discuss recent trends in the oil market (pg 4), activity in Asian and European markets (pg 4), and selected economic data from Asia and Europe, and the US (pg 5).
When it comes to semiconductors, we typically focus on the group’s relative strength versus the S&P 500 as a leading indicator for the broader market. This morning, however, we wanted to highlight the actual price chart of the Philadelphia Semiconductor Index (SOX). The group has been a steady outperformer in recent weeks, and unlike the major averages which are nowhere near their 50-day moving averages (DMA), the SOX has actually traded above that level in each of the last three trading days. The only problem is that it also closed below that level all three times. In market downtrends, declining moving averages often act as resistance, so the failed rallies of the last three days leave the bulls somewhat discouraged.
We were curious to see how common it is for the SOX to repeatedly run into resistance at its 50-DMA, so the chart below shows streaks where the index traded above its 50-DMA intraday but finished the day below that level. The current streak of three trading days is the longest streak since August 2018, and to find a longer streak you have to go all the way back to August 2007. While the current period has often been compared to the early 2000s, bulls can take some solace in the fact that there was never a similar streak in the years from 2000 through 2003.
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May 18, 2022
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“Inflation is a form of tax, a tax that we all collectively must pay.” – Henry Hazlitt
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This week the tax of inflation is being felt most by retailers as two of the nation’s largest retailers have gotten absolutely destroyed in the last two days. Futures are indicated lower this morning, but one could make the case, given the plunge in Target (TGT) shares this morning, that it could even be worse. Oil prices are also trading up close to 2%, the ten-year yield is back up to 3%, and the dollar is trading lower.
On the economic front, we’re about to get the latest updates on Housing Starts and Building Permits for April, but if mortgage data is any indication, the data isn’t likely to be very strong.
In today’s Morning Lineup, we recap the continued developments in retail earnings (pg 4), market action in Asia and Europe (pg 4), economic data in Asia and Europe (pg 5), and a lot more.
If you thought yesterday’s 11% pounding of Walmart (WMT) was bad, meet Target (TGT). After reporting significantly weaker than expected earnings on better than expected revenues, shares are trading down more than 20% in the pre-market. The company blamed ‘unexpectedly high costs’ that it faced throughout the quarter for the earnings miss, and didn’t provide much additional detail in its release. Investors aren’t waiting for further clarity, though. With margins falling more than 400 basis points (bps), the stock is trading down more than 20% in the pre-market and is easily on pace for not only its worst earnings reaction day in at least 20 years, but also its worst one-day drop since the 1987 crash.
Yesterday, WMT had its largest one-day decline since the 1987 crash and now TGT is on pace to do the same! The experiences of both companies further reinforce the point that we are operating in one of the most complicated macro environments that any company or investor has had to deal with. Few companies are so entwined into so many aspects of the US economy as WMT and TGT, and their logistics and supply chain operations rival or exceed those of most other companies. If they’re having these types of issues keeping up with the rapidly changing environment, who isn’t?
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May 10, 2022
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“It always seems impossible until it’s done.” – Nelson Mandela
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It’s been a painful three days for US equity investors, and they’re looking to catch a break today as S&P 500 futures are indicating a rally of about 1% at the open. Investors have been fooled enough times this year already by a strong tape at the open, so you can’t fault them for viewing this morning’s rally with a fair amount of skepticism.
Treasuries are also rallying this morning as the 10-year yield is back below 3%. The only economic news on the calendar this morning was the NFIB Small Business Optimism report which was unchanged from March and slightly ahead of expectations.
Over in Europe, economic sentiment came in better than expected whole Industrial Production in Italy managed to come in unchanged versus forecasts for a decline of 1.9%.
In today’s Morning Lineup, we recap the recent developments in stablecoins (pg 4), overnight earnings (pg 5), economic data out of Asia and Europe (pg 6), and a lot more.
After breaking below support to close last week, the bottom fell out of the Nasdaq 100 yesterday as the index dropped to another 52-week low and its lowest level since November 2020.
With the Nasdaq 100 at 52-week lows, we wanted to check in on its valuation and how it looks relative to the S&P 500. The chart below shows the historical premium in the Nasdaq 100’s P/E ratio relative to the S&P 500. For the last ten years, there has never been a point where the Nasdaq 100 traded at a cheaper valuation than the S&P 500, and the average premium during that span has been 23.1%.
Towards the end of 2019, right before COVID, the Nasdaq 100’s premium valuation to the S&P 500 was right in line with its historical average, but that premium exploded higher during COVID reaching as much as 50% in late 2021. Through a combination of earnings growth and rapidly falling stock prices, much of the air has come out of the Nasdaq 100’s premium relative to the S&P 500, but it still remains elevated relative to the historical average.
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