With under two weeks left to go in the quarter, Q2 2018 is shaping up to be a good one for US equities. S&P 500 stocks have posted an average gain of 5.7% so far this quarter with over three-quarters of the index in the black. So much for the weak breadth argument! In terms of top performers, the 34 stocks listed below are all up 20% or more QTD. Leading the way higher is Advanced Micro (AMD), which is up an unbelievable 113%. Trailing way behind in AMD’s dust, the next best-performing stock on the list is Flowserve (FLS), which is still up a respectable 38% followed by Arconic (ARNC), QUALCOMM (QCOM), HCA Healthcare (HCA), and PerkinElmer (PKI), which are all up over 30%.
In terms of the FANG stocks, you have to go down to position number – wait. There are no FANG stocks on the list of top performers! 😱😱😱😱😱 In fact, in order to include even one FANG stock on this list, we would have to extend it to the top 100 stocks (AMZN – 95th). For the list to include two FANG stocks we would have to extend it to the top 300 names (GOOGL – 287th), and finally to include all the FANG stocks, we would simply have to show all the stocks in the S&P 500, as Facebook (FB) is all the way down at position number 490 in terms of its QTD rank. That’s right, only ten other stocks in the S&P 500 have done worse this quarter than Facebook.
As interest rates have risen over the last few months, we have seen a number of charts similar to the one below comparing the yield on the 3-Month US Treasury (UST) to the dividend yield on the S&P 500. Up until just a couple of months ago, this entire bull market has occurred during a period where short-term interest rates have been lower than the dividend yield on the S&P 500. After over two years of rate hikes from the FOMC, though, short-term interest rates rose above the S&P 500’s dividend yield this summer and have continued higher ever since. With yields crossing this key inflection point, there’s been a decent amount of chatter that the higher yield on cash makes it more attractive than equities given their lower yield.
While any trader under the age of 30 (or algorithm using just ten years worth of history) has never known a world during their career where the dividend yield on equities was less than the yield on short-term Treasuries, those who are older or familiar with market history know that it is much more common for equities to yield less than short-term Treasuries. The chart below is the same as the one above except that instead of going back to just the start of 2009, it goes all the way back to 1970. As shown, prior to 2009, instances, where short-term Treasuries yielded less than the S&P 500 were few and far between. After all, unless you have some short-term needs for the capital, who would want to own an asset with zero upside potential (short-term treasury) if held through maturity that pays a lower coupon than equities, which outside of a couple of periods have always increased in value?
Below we compare the spread between the yield on the 3-month UST to the dividend yield of the S&P 500. While short-term Treasuries currently yield nearly 31 basis points (0.31%) more than the dividend yield of the S&P 500, that spread is still more than 150 bps below the historical average. Furthermore, even when the spread has been above the historical average, it has hardly represented a warning sign for equities. Throughout the entire mid to late 1990s period and nearly all of the 1980s (two very strong periods for equities), the spread was not only positive but well above the long-term average as well. The only thing that makes cash look less trashy when it is yielding marginally more than the S&P 500 is when it follows an outright garbage period of years where it yielded less.
From our proprietary Trend Analyzer tool, most major US Index ETFs have moved closer to neutral levels (from overbought) if they have not already reached it. As shown below, 8 index ETFs are just barely overbought, 6 are neutral, and none are oversold.
While most ETFs have moved lower towards their 50-DMAs over the last week, only the Micro-Cap ETF (IWC) has actually gone below the 50-DMA. IWC has been declining all of September but is still up 10.97% on the year. The Core S&P Small Cap ETF (IJR), Russell 2000 ETF (IWM), and Nasdaq 100 (QQQ) are the other prominent movers back toward their 50-DMAs. Conversely, the Dow Jones Industrial Average (DIA) has seen the biggest gain in the last week at +0.79%. It is also the highest above the 50-DMA, but it should be noted that’s it’s still not strongly overbought.
After dropping in post-market trading yesterday, US futures have turned things around overnight and are now firmly in the green. As shown in our overnight world equity market composite chart from the Morning Lineup, the reversal in markets occurred right at the open of Asian equity markets. The latest turnaround is just another example in the ongoing trade war saga where investors have sold the rumors of tariff announcements and bought on the news.
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Looking for deeper insight on markets? In tonight’s Closer sent to Bespoke Institutional clients, we review a recent rip in Industrial stocks, new cycle highs for 5 year real yields, and 52-week lows for agriculture prices. We also discuss upcoming Brazilian elections, the New York Fed’s Empire Manufacturing survey, and again-weakening core loan growth.
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2017 was one of the least volatile years ever for the US equity market. The S&P 500 averaged an absolute daily change of just 0.30% last year.
Due to a pick-up in volatility during the S&P’s correction in the first quarter, the average absolute daily change for the index is more elevated this year at +/-0.64%, but more recently we’ve seen a pretty big drop in the action. As shown in the chart below, the S&P has averaged an absolute change of just +/-0.40% over the last 50 trading days, which is well below the average of 0.70% seen throughout the current bull market.
From a seasonal perspective, September and October have historically been the most volatile months of the trading year, but so far this September, the S&P has averaged a daily move of less than 0.24%. It’s starting to feel like 2017 all over again!
Recent speeches of FOMC members have leaned very slightly towards dovishness over the last few months, but that doesn’t mean there haven’t been active arguments between hawks and doves! For instance, Atlanta Fed President Bostic (a voter) has tilted more dovish lately, wanting only 1 more hike and no further hikes once the Fed reaches “neutral” (i.e., a rate that won’t either support or hold back economic growth). St. Louis Fed President Bullard has fretted about the yield curve and argued there’s little upside risk to inflation in recent speeches. On the other hand, Governor Brainard argued the Fed needed to think about raising rates above neutral in the longer-run last week, a relatively hawkish perspective given most speakers want to hit neutral and re-assess. Finally, ardent dove Evans of the Chicago Fed (a non-voter) had a speech last week arguing for “normalized” rates, a hawkish sign. At the end of the day, though, all of this discussion has basically been a wash with the Bespoke Fedspeak Monitor index in roughly the same very slightly dovish position over the last few months.
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The latest read of the NY Fed Manufacturing report didn’t give such a great preview of economic activity for the month of September. At the headline level, the General Business conditions index dropped from 25.6 down to 19.0 versus expectations for a decline to 23.0. Similar to the current conditions index, the index tracking expectations for six months from now also declined by a similar amount, falling from 34.8 down to 30.3. As shown in the lower chart, plans for Cap Ex and Technology Spending also saw modest declines.
The table below breaks down this month’s report by each of the sub-categories for the Empire Manufacturing report and how their measurements for current conditions and expectations changed relative to August. As shown, in terms of both Current Conditions and Expectations, the majority of categories declined. In terms of Current Conditions, Shipments showed a sizable decline, falling 11.4 points.
On the inflation front, Prices Paid increased in terms of both Current Conditions and Expectations with the latter index rising to its highest level since May 2012.
Within Prices Paid, there was a pretty wide disparity between Current Conditions (down) and Expectations (up).
Finally, with respect to the Average Workweek, manufacturers reported slight increases in the present but are expecting declines going forward as that index dropped into negative territory for the first time in two years.
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.
How tech jobs helped Rust Belt become house-flipping hotspot by David Randall (Reuters)
As tech firms spread their hiring footprint into old Rust Belt cities, condos and single family homes near downtown centers are becoming hot markets for home flipping. [Link]
Las Vegas is booming again, and bracing itself for next slump by David Randall (Reuters)
Trying to diversify away from gambling is a big challenge but Las Vegas has more than just the Strip going for it: health care, start-ups, and anything but construction. [Link]
Real Estate Busts
New York’s World Trade Center Struggles to Fill Office Space by Peter Grant (WSJ)
Despite a long and strong economic recovery, the high end of the New York City office market is underperforming and that’s the primary reason why the World Trade Center is 20% unfillled. [Link; paywall]
Building Boom Unravels, Deepening Turkey’s Economic Crisis by Georgi Kantchev (WSJ)
The massive building boom that fueled a Turkey’s economy for years has run out of foreign funding thanks to the collapse in the lira, and as a result projects are being halted with disastrous consequences for would-be buyers. [Link; paywall]
Trader blows €100m hole in Nasdaq’s Nordic power market by Philip Stafford and David Sheppard (FT)
Live by the vol, die by the vol. In extremely volatile Nordic and German electricity markets, one trader had such a bad run that stability funds in Nasdaq clearing have run up nine figure losses cleaning up the mess of horrible trades. [Link; paywall]
The Incredible Shrinking Hedge Fund by Katherine Burton, Melissa Karsh, and Sam Dodge (Bloomberg)
Very large firms that used to dominate the landscape with $10s of billions in assets are now shadows of their former selves, battling against industry-wide outflows as well as underperformance. [Link; soft paywall]
Stephanie Kelton Wants You to Rethink the Deficit by Ben Walsh (Barron’s)
A profile on the public face of modern monetary theory, an economic argument that government deficits matter much less than we usually think. [Link; paywall]
Whither Labor Force Participation? by Rene Chalom, Fatih Karahan, Laura Pilossoph, and Giorgio Topa (NY Fed Liberty St Economics)
Labor force participation has flattened out, despite an aging workforce. Per this analysis by NY Fed economists, since 2016 more than half of the trend has been due to labor market tightening. [Link]
Can Anyone Other than the U.S. Fund a Current Account Deficit These Days? by Brad W. Setser (Council on Foreign Relations)
The vast majority of current account deficits around the world are found in emerging markets, where currencies are collapsing in a fine that they can’t be funded. Is the US the only one that can still fund a deficit? [Link]
Author of ‘How to Murder Your Husband’ arrested for allegedly killing her husband by Storm Gifford (SunSentinel)
Life is apparently just as strange as fiction; 27 years earlier, accused murderer Nancy Crampton-Brophy penned an essay “How to Murder Your Husband”. [Link]
Meet the other empty nesters. They’re dogs and they miss the kids, too by Beth Teitell (The Boston Globe)
Won’t someone think of the pups? When children head off to college or homes of their own, family pets often feel the sting of an empty house just as much as parents. [Link]
Unlikely weapon: petanque balls help disarm Paris attacker by Thomas Adamson (AP)
Petanque, which is similar to bocce or lawn bowls, is apparently a highly effective supply of weapons for citizens defending themselves against a knife-wielding attacker. [Link]
Hackers Can Steal A Tesla Model S In Seconds By Cloning Its Key Fob by Andy Greenberg (Wired)
While Tesla may have made remote access to its systems more secure, if a hacker were to gain access to a car’s key fob, they would be able to clone it and get access to the care very quickly – not so different from traditional car keys. [Link]
The Sports Pages’ New Clothes by Aaron Gordon (Slate)
The Athletic is making what is old (paid coverage of local sports) new again, hiring local talent and charging users for very high quality reporting on the teams that they follow. [Link]
Athlete Banned From All-You-Can-Eat Restaurant for Eating All That He Could by Tim Forster (Eater)
A German triathlete plunked down about $19 for an all-you-can-eat sushi dinner, consuming 100 plates or about 18 pounds of sushi. [Link]
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Have a great Sunday!
Outside of financial markets, we’re sports fans here at Bespoke just like most people. With new legal sports betting avenues now available across the US, we figured we’d have some fun and pick each NFL game versus the spread (as of Saturday evening). Let’s see how we do…On to Week 2:
2018 NFL Week 2 Bespoke Picks:
Carolina at Atlanta (-6): Carolina +6
LA Chargers (-7.5) at Buffalo: LA Chargers -7.5
Minnesota at Green Bay (Even): Minnesota Even
Houston (-3) at Tennessee: Tennessee +3
Cleveland at New Orleans (-9.5): New Orleans -9.5
Miami at NY Jets (-2.5): NY Jets -2.5
Kansas City at Pittsburgh (-5): Kansas City +5
Philadelphia (-3) at Tampa Bay: Philadelphia -3
Indianapolis at Washington (-6): Indianapolis +6
Arizona at LA Rams (-13.5): LA Rams -13.5
Detroit at San Francisco (-6): San Francisco -6
Oakland at Denver (-6.5): Oakland +6.5
New England (-1.5) at Jacksonville: Jacksonville +1.5
NY Giants at Dallas (-3): NY Giants +3
Seattle at Chicago (-3): Chicago -3
Week 2 Picks: 7 Favorites, 7 Dogs, 1 Even; 7 Home, 8 Away
Week 1 Results (9-5), Overall (9-5):
2018 NFL Week 1 Bespoke Picks:
Pittsburgh (-3.5) at Cleveland: Pittsburgh -3.5 (Loss)
Cincinnati at Indianapolis (-2.5): Cincinnati +2.5 (Win)
Tennessee (-1) at Miami: Tennessee -1 (Loss)
San Francisco at Minnesota (-6.5): Minnesota -6.5 (Win)
Houston at New England (-6.5): Houston +6.5 (Loss)
Tampa Bay at New Orleans (-9.5): New Orleans -9.5 (Loss)
Jacksonville (-2.5) at NY Giants: NY Giants +2.5 (Loss)
Buffalo at Baltimore (-7.5): Baltimore -7.5 (Win)
Kansas City at LA Chargers (-3.5): Kansas City +3.5 (Win)
Seattle at Denver (-3): Seattle +3 (Push)
Washington (-1.5) at Arizona: Washington -1.5 (Win)
Dallas at Carolina (-2.5): Carolina -2.5 (Win)
Chicago at Green Bay (-7): Chicago +7 (Win)
NY Jets at Detroit (-7.5): NY Jets +7.5 (Win)
LA Rams (-4.5) at Oakland: LA Rams -4.5 (Win)