The Dow Transports have historically been considered a good leading indicator of the global economy given that the companies in the group are responsible for moving goods across the country. While we wouldn’t completely dismiss the Dow Transports as an economic barometer, as the economy has migrated away from manufacturing over the years, the sector’s relevance has declined. In an interview earlier this week, we argued that because semiconductors are central to every aspect of the globally connected economy and even to many analog aspects of the economy, they could be considered the 21st century equivalent of the Dow Transports. Every investor is entitled to their opinion of whether the Transports still carry the same weight as they have in the past as an economic or market barometer, or if the Semiconductor group has the same sort of relevance. One thing everyone can agree on, however, is that right now the sectors are telling two very different stories.
The chart below compares the relative strength of the S&P 500 Semiconductor Group and the Dow Transports to the S&P 500. For each chart, a rising line indicates outperformance versus the S&P 500, while a falling line indicates that the S&P 500 is outperforming. From last March right up through the later stages of 2018, both sectors saw their relative performance versus the S&P 500 decline. Beginning in November, though, semis began to turn things around while the Transports have continued to lag, and in recent weeks their performances couldn’t be more opposite. Just today, the semis are trading at their best levels since early October while the Transports are still trending lower. Only time will tell which sector is giving a more accurate picture of the economic backdrop, but semis have had more recent history on their side.
After falling last week down to 32.42%, bullish sentiment as seen through the AAII’s survey of individual investors rebounded right back to where it was a couple of weeks ago with today’s release coming in at 37.3%. This uptick is not too surprising following the bounce back from the first week of significant declines of 2019.
Bearish sentiment, on the other hand, saw the largest decrease since the first week of February falling to 23.41% from 31.06% last week. While not falling to new lows—earlier this month, bearish sentiment fell all the way down to 20%—this week’s reading is certainly at the lower end of the range it has been at for most of the past few years. In spite of this, it is not quite reaching extreme levels.
Neutral remains the most popular opinion for the second week in a row. 39.2% of individual investors reported having neutral sentiment this week, up from 36.52% last week. Neutral sentiment has been relatively elevated since the market staged its recovery from the Q4 2018 sell-off. For seven weeks in a row now, it has been higher than the historical average. Since the start of the year, bullish and bearish sentiment, by comparison, has come in higher than average about half that amount; nor have they seen nearly as large of streaks of doing so.
Initial jobless claims declined this week falling down to 221K from last week’s reading of 230K and below consensus forecasts of 225K. This week marks the 211th week that claims have come in below 300K. In other words, in spite of short term fluctuations, jobless data is still at healthy levels. 221K sits right within the range of the last month (221K – 230K), indicating that jobless claims seem to have stabilized following big fluctuations around the government shutdown.
Similarly, the less volatile four-week moving average has also found a degree of stability after drifting upwards since the final weeks of 2018. This week the moving average rose 1K to 225K, and it has now been an entire month since it last hit a 52-week high. Again in the past month, the moving average—like the SA number—has been pretty much sideways.
Finally, turning to the non-seasonally adjusted data, claims saw a drop consistent with seasonal patterns to 194.1K. That is down from 209.4K last week. This was also the lowest reading for the current week of the year for the current cycle and the lowest week’s number since early October. Additionally, this was far below the average of 307K for the current week of the year going back to 2000.
Marlboro Friday” refers to a day back in 1993 when Philip Morris (MO) announced drastic cuts in cigarette prices in order to better compete with the cheaper prices being offered by generic makers. As a result of the move, the company’s stock immediately dropped over 25%. Fast forwarding a quarter century, today could go down in the annals of history as ‘Biogen Thursday’ as the company announced that it was discontinuing trials for its experimental treatment of Alzheimer’s disease as the initial results have been ineffective. As a result of Biogen’s (BIIB) announcement, the stock, like MO back in 1993, is trading down over 25%.
In the case of MO back in 1993, the stock did a whole lot of nothing for the next six months. From the initial decline on 4/2/1993, MO dropped an additional 10% over the following four weeks and then moved sideways through the Fall. From there, the stock generally trended higher and first briefly traded above its pre-Marlboro Friday levels on 10/27/94, but didn’t convincingly break above those levels until the following March, or nearly a full two years after the initial decline. While this morning is no doubt a painful one for BIIB shareholders, as was the case with Philip Morris in the early 1990s, the hope is that a little (or lot depending on your level of patience) time will also heal the sting from today’s “Biogen Thursday”.
Yields on long-dated Treasuries have dropped sharply over the last week as prices have spiked. As shown in the “Fixed Income” section of our Trend Analyzer tool below, Treasury ETFs like IEF and TLT have moved up into extreme overbought territory.
Mortgage rates have become much more attractive lately as well. In 2018, it looked like the multi-year period of extremely low mortgage rates might be coming to an end as the 30-year fixed ticked up near 5%. This spike in rates really did a number on homebuilder stocks as they traded down more than 40% from highs at one point last year. The spike in mortgage rates only proved to be temporary, however.
As shown below, we’ve seen a dramatic drop in the 30-year fixed mortgage rate over the last several months. As of yesterday, the interest rate stood at just 4.17%.
Below is a longer-term look at Bankrate.com’s national average 30-year fixed mortgage rate. While we may not get back down to 3.32% again (you never know!), it’s important to remember that 4.17% is still an extremely low rate to pay on a home mortgage relative to history.
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“Marlboro Friday” refers to a day back in 1993 when Philip Morris announced drastic cuts in cigarette prices in order to better compete with the cheaper prices being offered by generic makers. As a result of the move, the company’s stock dropped over 25% in a single day. Fast forwarding a quarter century, today could go down in the annals of history as ‘Biogen Thursday’ as the company announced that it was discontinuing trials for its experimental treatment of Alzheimer’s disease as the initial results have been ineffective. As a result of Biogen’s announcement, the stock, like Philip Morris back in 1993, is trading down over 25%. In the case of Philip Morris back in 1993, the stock did a whole lot of nothing for the next six months and took around two-years to get back to its pre-Marlboro Friday levels. BIIB shareholders are no doubt hoping that a little time will also heal the sting from today’s decline.
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Bespoke Morning Lineup – 3/21/19
In broader market news this morning, the Bloomberg US Dollar Index is attempting to bounce following yesterday’s breakdown in the wake of the FOMC’s dovish tone. Heading into today, the index was down in eight of the prior nine sessions and just yesterday broke out of its short-term uptrend that had been in place since the FOMC started to pivot dovish late last year/early this year. Was the FOMC dovish enough this time around to really push the dollar lower?
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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 106.7 percentage points. Through today, the “Bespoke 50” is up 211.2% since inception versus the S&P 500’s gain of 104.4%. Always remember, though, that past performance is no guarantee of future returns.
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Looking for deeper insight on markets? In tonight’s Closer sent to Bespoke Institutional clients, as the Fed came out with an increasingly dovish tone today, cutting rate hike estimates to zero for the rest of 2019, lowering growth expectations, and announcing a stop to asset purchases within the year, we provide a summary to the market’s reaction. Next, we delve a bit deeper into the Fed’s summary of economic projections (SEP), which using the Taylor Rule, backs up their policy decisions to keep rates neutral. Then we cover weekly fund flows which continued to see equity outflows as there were massive inflows into bonds. We finish with an updated look at EIA’s big increase in petroleum inventories.
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This week’s fund flows from the Investment Company Institute showed an ongoing desire to reduce equity exposure from mutual fund investors. As shown below, domestic, international, and total equity fund categories have seen outflows over the last week, month, quarter, and year. All categories of domestic equity funds have seen net outflows over the past week, month, quarter, and year as well, while EM equities are the only sliver of inflows. It’s the complete opposite for bonds, where inflows have been enormous, including record inflows to mutual funds owning municipal bonds and strong government bond fund inflows.
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Searching for ways to better understand the fixed income space or looking for actionable ideals in this asset class? Bespoke’s Fixed Income Weekly provides an update on rates and credit every Wednesday. We start off with a fresh piece of analysis driven by what’s in the headlines or driving the market in a given week. We then provide charts of how US Treasury futures and rates are trading, before moving on to a summary of recent fixed income ETF performance, short-term interest rates including money market funds, and a trade idea. We summarize changes and recent developments for a variety of yield curves (UST, bund, Eurodollar, US breakeven inflation and Bespoke’s Global Yield Curve) before finishing with a review of recent UST yield curve changes, spread changes for major credit products and international bonds, and 1 year return profiles for a cross section of the fixed income world.
In this week’s report we discusses the unusual term structure of US interest rates at the front of the curve, relative to the rest of the world.
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