The preliminary reading of the European Commission’s Eurozone consumer confidence for September fell for the fourth month in a row to -2.9 from -2.0 in August. Although not as big a miss as August’s report, this was the second weaker than expected report in a row. The last time consumer confidence was this low was in May of 2017.
Consumer confidence further confirms the undertows of worsening European economic activity; echoing the weaker Eurozone retail sales and industrial production report from earlier this month. If this release is any indication, no one should hold high expectations for next month’s retail sales. While the level of the confidence index is still very strong relative to recent history, and therefore is no reason to panic about the end of the Eurozone’s economic expansion, the direction it’s moving definitely represents slowing consumer spending prospects.
Every Thursday, Bespoke publishes its “Bespoke 50” list of top growth stocks in the Russell 3,000. Our “Bespoke 50” portfolio is made up of the 50 stocks that fit a proprietary growth screen that we created a number of years ago. Since inception in early 2012, the “Bespoke 50” has beaten the S&P 500 by 102.9 percentage points. Through today, the “Bespoke 50” is up 215.9% since inception versus the S&P 500’s gain of 113.0%. Always remember, though, that past performance is no guarantee of future returns.
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The stock market is back at record highs, but don’t tell that to individual investors. In the latest survey of individual investor sentiment from AAII, bullish sentiment declined (ever so slightly) for the third straight week, dropping from 32.09% down to 32.04%.
Interestingly enough, bearish sentiment came in at the exact same level as bullish sentiment this week, dropping from 32.84% down to 32.04%. The last time both gauges of sentiment were at the exact same level was in June 2016.
With both bearish and bullish sentiment at the same levels and neutral sentiment right around a third as well, can individual investors be any more indecisive? We do have to say that the last three days of gains for the US equity market have caught a lot of people off guard.
With the headline index falling to a 21-month low in August, last month’s Philly Fed was a bit of a disappointment. However, with an overall strong reading in the ISM in early September, the weak reading in Philly was considered more of a one-off anomaly than anything else. With this month’s report for September, that reasoning was confirmed as the index saw a nice rebound, rising from 11.9 up to 22.9. Now, the question is which region is right? Philly with its strong report in September, or the New York report, which was weak.
Looking through the various sub-indices of the report, New Orders saw a sharp rebound, followed by Unfilled Orders and Delivery Times. In terms of the Labor market, both the Number of Employees and Average Workweek components also saw modest increases. To the downside, Inventories saw the sharpest decline, but Prices Paid and Prices Received weren’t far behind. With regards to Prices Paid, after hitting the highest level in a decade two months ago, that component has pulled back quite a lot in the last two months (chart below).
The US current account deficit may seem fantastically large, with over $100bn in payments flowing out of the US relative to inbound payments each quarter, but that works out to less than 2% of GDP at an annual rate; during the last economic expansion, that deficit was as large as 6.3% of GDP.
The US hasn’t run a current account surplus since 1991. To help understand why, it’s worth looking at the composition of the US current account. Any current account balance is made up of debits (payments flowing out) and credits (payments flowing in) in three basic categories: trade (exports are credits, imports are debits), primary income (“earned” income by labor or capital, with US ownership of overseas assets or US workers overseas a credit, and overseas ownership of US assets or foreign workers in the US a debit), and secondary income (“transfers”, which are typically remittances to home countries by residents to relatives overseas, and sometimes foreign aid).
The Sankey chart below helps show how all the credits and debits stack up, with debits much larger than credits and hence the US current account being in a deficit. Since there’s a lot of information in the graph, it may be helpful to click it and enlarge.
As shown, the US current account deficit is driven mostly by the US trade deficit. While primary and especially secondary income is relatively small in the scope of gross payments, the US actually enjoys a surplus in primary income and secondary income flows are tiny. The primary plus secondary income categories collectively have a small surplus, all of which is consumed by trade deficits and specifically goods trade deficits. Taking all current account payments together except goods trade, the US actually runs a surplus of over $100bn. In other words, trade deficits in goods are so large that they overwhelm relatively robust surpluses in services and primary income, less small deficits in the modestly sized secondary income category.
In the 6 major categories of goods trade (food/feed/beverages, industrial supplies/materials, capital goods ex autos, autos/parts, consumer goods ex auto, and other), the only US surplus is in the food/feed/beverages category, with the largest deficit ($106bn) coming from consumer goods other than autos. Automotive and parts trade has a deficit about half as large, while industrial supplies and capital goods combine to bring a $200bn swing in the overall current account from goods trade balances.
In their quarterly conference call on Thursday, Darden (DRI) CEO Gene Lee noted that the “workforce pool in the US is shrinking,” and this week’s Jobless Claims report confirmed that sentiment. While first time claims were expected to come in at an absurdly low level of 210K, the actual reading was even lower at 201K. That’s getting awfully close to a ‘1’ handle on the weekly print, which is a level we haven’t seen since November 1969. With this week’s print, claims have now been at or below 300K for a record 195 straight weeks, at or below 250K below for 50 weeks (longest streak since January 1970), and at or below 225K for eleven straight weeks (longest streak since 1969).
With this week’s low print, the four-week moving average also ticked down to a new multi-decade low of 205.75K from 208K last week. The last time the four-week average was this low was in December 1969.
Finally, on non-seasonally adjusted (NSA) basis, claims ticked modestly higher, rising from 162.3K up to 168.3. For the current week of the year, this is the lowest reading since 1969, and it’s nearly 120K below the average for the current week of the year dating back to 2000.
From our Trend Analyzer, 8 of the Major US Index ETFs are overbought, 6 are neutral and none are oversold. Much like earlier in the week, most of the overbought ETFs are not deep in overbought territory, with the exception of the Dow (DIA). In terms of change from one week ago, DIA has more than doubled the next best performer. It is also the most overbought out of the US Index ETFs.
While the DIA has outperformed, the rest of the group has fallen behind, especially small to mid-cap focused ETFs. The S&P MidCap 400 (MDY), Core S&P Mid-Cap (IJH) and Core S&P Small-Cap (IJR) are all down from one week ago alongside the Russell 2000 (IWM) and the continuously week Micro-Cap ETF (IWC). The Russell Mid-Cap (IWR) is barely positive over the last week.
What was looking like just modest gains a couple of hours ago is now looking more like another rally. Dow futures are indicating a gain of 130 points, while S&P 500 futures are up 10 points. Even the Nasdaq, which underperformed yesterday, is indicated to open up half a percent in spite of Red Hat’s (RHT) disappointing earnings report. There’s a lot of economic data coming up today, though, so those results are likely to have some impact on the general tone ahead of the open
We mentioned this in the Closer report earlier this week, but since the streak has continued it warrants mentioning again. While the Industrials sector just barely closed above its opening price yesterday, the fact that it did extended its streak of daily closes above the opening price to a record 13 trading days.
Since intraday data for the sector begins back in 2002, there has never been a streak even close to the same length as the current one. As shown in the chart below, the prior record was nine trading days and happened three other times (April 2004, September 2009, and January 2018). Just like that, investors can’t get enough of the Industrials sector.
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Looking for deeper insight on markets? In tonight’s Closer sent to Bespoke Institutional clients, we take a look at notable market developments in markets: the dollar holding up better than small caps would suggest they should be, tentative signs of life in EMFX, real yields nearing cycle highs, and breadth in US large caps. We also break down the US current account balance, updated for Q2 today by the BEA. Finally, we finish with a review of EIA petroleum market data and energy market price action.
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Below is an updated look at the performance of various asset classes using key ETFs tracked in our Trend Analyzer tool. For each ETF, we show its total return month-to-date, quarter-to-date, and year-to-date.
While September has been an up month so far for the S&P 500 (SPY), we’ve seen some rotation out of the strategies that were working in 2018 prior to the start of the month. You’ll notice that areas like the Nasdaq 100, the Technology and Consumer Discretionary sectors, and small-caps are all down in September, but they’re also the areas that are still up the most year-to-date. Conversely, the Dow 30 (DIA) has been the weakest of the three big US indices (Dow, S&P 500, and Nasdaq 100) in 2018, but it’s doing the best of the three in September.
Outside of the US, we’ve seen big moves higher for Italy (EWI), Japan (EWJ), Mexico (EWW), Spain (EWP), and Russia (RSX), while India (PIN) and Australia (EWA) have both fallen. Brazil (EWZ) and China (ASHR) remain as the worst international performers on a year-to-date basis.
The commodities ETF (DBC) is pretty much flat on the month along with oil (USO) and gold (GLD), while Treasury ETFs are down across the board. The 20+ Year Treasury ETF (TLT) has been one of the worst performing asset classes in September with a drop of 3.37%.