One of the Most Remarkable Market Trips in History

Global equity indices marked new record highs last week, capping off what has truly been one of the most remarkable market round trips in history. The Bloomberg World Equity Index fell over 30% in a month last spring and went on to rally 45% over the following five months. The S&P 500 came within a whisper of its February high on an intraday basis with smaller caps and cyclicals (industrials, energy, materials) leading the way as participation continued to broaden out. Treasuries had a rough week with long yields climbing nearly 20bps in a steepening yield curve. Gold snapped a nine-week win streak, falling 4.3%.

Market Anecdotes

• Bespoke noted last week marked 100 days since the March lows during which the S&P 500 rallied 51.3%, a 100-day rally magnitude that we’ve not seen since 1933.
• While U.S. markets are back at record high levels, Europe’s STOXX 600 is still down more than 10% from its 2020 high (local FX terms) and the Nikkei is 5% below its January high.
• It sounds bizarre but technology is the sixth best performing sector here in 3Q with industrials (transports), materials, and consumer discretionary leading the way. Act IV?
• 2Q earnings season is largely behind us with over 90% of companies reporting. With an e-beat rate over 80% we can firmly categorize the quarter as far better than expected.
• Real estate casualties of COVID are beginning to emerge. Manhattan apartment vacancies hit a record 4.33% in July, new leases in NW Queens fell 60% with median rent rates falling 15%. Macys is expected to vacate its Mag Mile location in Chicago.
• CRE loans are much more pronounced in smaller regional and community banks (28%) than they are for larger banks (13%) according to the FDIC.
• The leveraged loan index has recovered from the high 70’s to the low 90s since March but default rates have climbed from 0.87% to 3.70% while high yield bond defaults have climbed above 6%.
• POTUS executive orders last week assured markets and should garner goodwill at the polls, but legality, practicality and efficacy are in question. There is only $44 billion of available federal money for unemployment benefits and states wherewithal to fund the rest makes clear the need for congress and the senate to act to avoid fiscal tightening.
• Strategas notes global central bank balance sheets are growing 33% YoY, driven mostly by the ECB and BoJ (Fed has stalled at around $7b since middle May). Additionally, money supply (M2 YoY) is growing at a 23% clip.
• COVID trends in the U.S. continue to drift lower including a 7.31% positivity rate (lowest since July 1st), average daily rate of new cases (lowest levels since 7/7), while deaths and hospitalizations decline as well. Meanwhile, other countries have started to see renewed upticks including India, Japan, Germany, France, and Spain.

Economic Release Highlights

• U.S. retails sales growth of 1.2% missed expectations for 2.1% growth but put spending back to pre-COVID levels and actually beat on ex-Autos (1.9% v 1.3%) and ex-Autos & Gas (1.5% v 1.0%). June was also revised notably higher as well from 7.5% to 8.4%.
• The JOLTS (Job Opening and Labor Turnover Survey) showed an increase in U.S. job openings in June, rising to 5.9mm, only 5.288mm was expected. Initial jobless claims of 963k is the first time we’ve been below 1mm since March.
• NFIB Small Business Optimism registered 98.8, shy of expectations of 100 and last month’s 100.6 reading.
• UofM consumer sentiment changed little, moving from 72.5 to 72.8 in early August.
• CPI headline and core came in slightly higher than expectations with readings of 1.0% and 1.6% respectively.
• PPI came in higher than expected (0.6%a vs 0.3%e) but was shrugged off and didn’t have any impact on futures markets.

W E E K E N D I N G  8 / 14 / 2 0

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MARKET ANALYSIS

 

Equity Markets Post Healthy Gains Closing Strong

Last week, equity markets bolted on to some already pretty gaudy results of the past several weeks, coming within 1% of February’s record high on an intraday basis. The first full week of August felt pretty bullish with all U.S. equity classes and sectors posting healthy gains and only Brazil was left out of the non-U.S. equity market rally. Market internals last week favored cyclicals (industrials, financials, energy) over defensives (health care, utilities, consumer staples).

Market Anecdotes

• DC negotiators failed to reach a stimulus deal and remained pretty far apart (trillions of dollars and different sets of facts). POTUS executive orders were expected to bridge the gap over the weekend which is why markets are remaining calm for now.
• COVID data seems to be taking a modestly positive turn over the past two weeks. Confirmed cases have fallen 18% since July 23 while positivity rates, deaths, and hospitalization rates are falling as well.
• Despite a significant mega cap tech rally late last week, this week saw value and smaller caps lead the way.
• Earnings season is maintaining a clear positive skew with earnings and sales beat rates of 68% and 62%. A net guidance spread of +18.6% is also extraordinarily positive.
• Ned Davis pointed out, on average, the stock market bottoms four months prior to the end of recession and earnings/revenue bottom six and nine months after the end of recession.
• Bloomberg highlighted at least 25 major retailers have gone BK this year. Chapter 11 allows them to walk away from leases translating to CMBS delinquencies, now 16% from 3.8% in Jan.
• A 2Q NY Fed report shows total household debt declining for the first time since 2014. Credit card balances fell $76b, the steepest margin on record while mortgage balances fell by $63b.
• The big story on Tuesday was the 2% rally in gold that pushed the December futures contract to a new record high of $2,027.30. Negative real rates, particularly with the U.S. joining that club have factored materially into the picture for gold.
• The USD is down 10% from its March highs, now below 93 for the first time since May 2018.
• The BCA Pipeline Inflation Indicator has troughed suggesting bond yields have limited downside risk looking forward.

Economic Release Highlights

• The July jobs report was solid at 1.76mm (1.675mm expected) and the unemployment rate falling to 10.2%. U-6 under-employment rate fell to 16.5% and participation stalled out at 61.4%.
• All but three of eleven major global services and manufacturing PMIs moved back into expansionary territory.
• July PMI (50.9a vs 51.3e) and ISM (58.1a vs 55e) manufacturing indices both marked improvement over the prior months, now both officially residing in expansionary territory.
• July PMI (50.0a vs 49.6e) and ISM (54.2a vs 53.5e) services indices both marked improvement over the prior months, now both officially residing in expansionary territory.
• The ISM commodities survey pointed to upside price risk across the commodity markets with a +20 net reading, the highest since October 2018 and the fourth highest ‘short supply’ response (24) on record.
• Initial jobless claims (weekly) declined to 1.186mm from last week’s 1.435mm but still sit two-times higher than what we saw during the GFC.
• July motor vehicle sales of 14.5mm (11.2 domestic) grew handily over June’s 13.1mm and came in well over expectations of 14.0mm.

 

W E E K E N D I N G  8 / 07 / 2 0

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MARKET ANALYSIS

US Markets Close Out July on Strong Note

Equity markets closed out July on a strong note with the S&P 500 up 1.7% while international and emerging markets were down. European stocks fell 3% on the week. Mega cap growth stocks plowed through Congressional interrogations and posted strong earnings to lead markets higher but cyclical areas of the market (energy, materials, financials) lagged. A federal fiscal stimulus renewal package remained elusive to and through expiration of enhanced benefits on Friday. Commodities lost 0.64% driven by oil moving back toward the $40 range but gold continued its march higher, +3.3% last week. Rates moved lower in a parallel fashion leaving the 10yr UST at 0.55% and the USD fell 1.15%.

Market Anecdotes

• The stock market shrugged off fiscal inaction in DC, sustained CoVid-19 wave data, and a grilling of tech execs in DC, giving way to encouraging earnings and economic reports.
• Virus news seems to be slowly transitioning to a less threatening trajectory with new case averages and CoVid-19 doctor visits finally turning back down.
• Over 700 companies had reported through Thursday. FactSet is reporting earnings beat rate of 84% on a -35.7% bottom line.
• Fiscal stimulus negotiations missed the 7/31 soft deadline, as Congress adjourned last Thursday. Recess ends 8/3 and the hope is they make quick work of meeting in the middle.
• While the negative incentive of increased unemployment benefits is clear, that assumes employers are hiring with ample job openings but job openings are currently 23% lower than the beginning of the year, making a strong case for demand stimulus checks of any sort.
• Does the parabolic increase in government debt portend disaster with gold rallying and the USD falling? Not yet says BCA. If disaster was imminent, it is highly unlikely we would have a 0.55% 10yr and 1.20% 30yr UST yields. Inflation recalibrating? Probably.
• Last week saw gold eclipse the prior record high of $1920.7 back in September 2011.
• The Fed meeting last week produced no surprises. QE forever, a twinkie will decompose before they raise rates, and they see no negative implications of these policies whatsoever.
• The Fed balance sheet has stalled at around $7tn, actually declining $15.7b since May 13th.
• More positive homebuilders news with DHI beating by 31% on the bottom line and 3.6% on the top with encouraging closings, orders, and backlog data as well.
• The tech sector weighting is now over 27%, just shy of the ‘99 29.18% high water mark. Energy slipped to 2.5%, a new record low and far below the 13.14% weight in 2008.
• ICI released MF/ETF flows through June, confirming bond product took in flows of over $100b, a record amount.
• AAII bullish sentiment fell to 20.23%, a lower level than at any time during the CoVid-19 crisis. Bearish sentiment sits at 48.47%, just 3.6% below the 3/26 reading which climbed over 50%.

Economic Release Highlights

• Q2 U.S. GDP dropped a record 9.5% QoQ and 32.9% YoY in what the IMF has coined “The Great Lockdown”.
• June personal income fell 1.1% in June (after -4.4% in May) but consumer spending increased +5.6% on the month.
• Initial jobless claims moved higher last week to 1.4mm in the July 25th week and continuing claims rose to 17.0mm (for the week prior).
• Durable goods orders rose 7.3% in June (only 5.4% expected), driven by a surge in vehicle orders. Ex-transports and ex-aircraft both rose a more modest 3.3%.
• Real-time activity data such as mobility data, restaurant reservations, airport travel stats, and the NY Fed weekly index have faded in July alongside the CoVid-19 resurgence.
• UofM consumer confidence softened in July to 72.5.

W E E K E N D I N G  7 / 31 / 2 0

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MARKET ANALYSIS

 

Stimulus Push Benefits Risk Markets Early.

Risk markets benefited early in the week from another stimulus push. Encouraging reports on three potential coronavirus vaccines resulting in the S&P 500 marking a new post-CoVid-19 high but ended up limping into the weekend on concerns surrounding stimulus negotiations in DC and some unfavorable earnings from several technology names. Tech and communication services (FB, GOOG, NFLX) were particularly soft last week while cyclical sectors posted healthy gains. Commodities posted gains as oil moved over $41 while the USD and interest rates moved lower.

Market Anecdotes

• FactSet’s blended 2Q S&P 500 earnings growth rate stands at -42% and revenue growth of -10.1%. Beat rates and forward guidance (spread of +10%) have also been encouraging.
• Last week saw an interesting and forceful rotation in market internals as Tues/Wed/Thurs was the largest 3-day outperformance for value over growth since May of 2001.
• A primary driver of risk markets early last week were positive developments from an extended EU summit resulting in a €1.8 trillion stimulus package.
• Another interesting market internal last week were clear signs of healthy market breadth despite the decline in the headline indices.
• CDS saw a 1 standard deviation move in credit spreads in both Europe and the U.S., confirming stock market behavior early in the week.
• Silver jumped 17% last week alone, buoyed by the weak USD and increasing industrial demand expectations resulting from the global economic recovery.
• Vaccines under development from Oxford, Astra-Zeneca, Pfizer, and BioNTech, and CanSino Biologics all reported encouraging results (responses) in limited human trials.
• An outlook for a structurally weak USD and emergence of cyclical leadership globally make a case for overweight international equities over U.S. equities over a 12-36 month timeframe.
• Bespoke made note of some encouraging observations from the Atlanta Fed’s weekly update of business applications which have been rising rapidly in sympathy with the CoVid-19 recovery.

Economic Release Highlights

• June existing home sales of 4.72mm (+21% MoM) showed improvement and was in line with expectations. New home sales figures were very impressive and crushed expectations.
• Markit flash PMIs (C, M, S) in the U.S. (50, 51.3, 49.6), EZ (54.8, 51.1, 55.1), and Japan (43.9, 42.6, 45.2) have shown clear improvement and are in or drawing closer to expansionary readings.
• Weekly jobless claims of 1.416mm rose WoW for the first time since March and came in higher than expectations. Continuing claims dropped for a seventh consecutive week, by over 1mm, to 16.197mm.
• The weekly AAII Bull-Bear spread remained in negative territory (-20.7%) for a 22nd consecutive week, now tied for the longest net negative reading on record.

W E E K E N D I N G 7 / 2 4 / 2 0

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MARKET ANALYSIS

Equity Markets Climb the Steep Wall of Worry.

Equity markets climbed the wall of worry last week, finishing up 1%-3% across the cap spectrum. The push-pull of the virus, positive vaccine news, and rebounding economic data left the S&P right at the resistance level that it has held since early June. Healthcare and the cyclicals drove the rally with some interesting internals where tech and consumer discretionary actually lost ground in an up week. Commodities and rates were both flat on the week, but the USD again lost ground (0.73%). Fiscal policy is front and center beginning Monday as team D and team R enter into negotiations on one of the biggest pillars underpinning the financial market recovery (policy).

Market Anecdotes

• Last week’s move in the S&P 500 brought it back to flat for the year, now +47.12% from the March 23rd low and less than 5% from the February 19th closing high.
• The 2Q earnings season kicked into full gear last week with only 9% of S&P 500 names reporting so far. Blended earnings and revenue growth rates stand at -44% and -10.5% respectively. • Bespoke noted an important distinction between U.S. and European (Stoxx 600) market composition with the U.S. clearly more top-heavy (23.56%) and tech-oriented whereas the Stoxx 600 is less top-heavy (8.84%) and more diversified across pharma, food, and tech.
• Both positive and concerning CoVid-19 developments last week. Encouraging vaccine news offset by concerning hospital loads and the Rt number moving back over 1 in 42 of 50 states.
• The three-month annualized deficit through June is running at 40% of GDP due to a surge in outlays and an evaporation of tax revenues.
• Last week saw ample cooing from the Fed with more talk of yield curve control (YCC) and more aggressive long-term forward guidance. Inflation expectations, as measured by 10yr real UST yields are approaching record lows at -0.87%.
• One clear result of Fed activity is the MOVE index. We are seeing extreme low implied volatility readings across UST futures, actually ranking in the bottom 0.5% of all readings.
• The Fed’s 4.18t UST holdings are now greater than all other foreign central banks combined.
• Longer-term forward breakevens (5y5y) trade around 1.4%, with some swings back and forth but a rock-solid sideways trend over the last 3 months.

Economic Release Highlights

• June retail sales grew 7.5%, an expected moderation from the stimulus enhanced May number but strong growth across both headline and core measures.
• Housing starts (1.186mm vs 1.190mm) and building permits (1.241mm vs 1.294mm) were both near estimates and increased over the prior month. NAHB home builder sentiment rose from 58 to 72 as homebuilding rose in June by the most in four years.
• June industrial production moved higher by 5.4% (4.4% expected). The manufacturing sub-component jumped by 7.2% (5.5% expected).
• The NFIB Small Business Optimism index came in higher than expectations (100.6 vs 97.8), moving back above 100 and well above the 94.4 reading last month. • UofM consumer sentiment declined to 73.2 from 78.1 last week. Headline, current conditions, and future expectations all declined, now in the bottom 20% of all readings since 1978.
• The July reading from the NY Fed manufacturing index delivered a third consecutive monthly increase, its first expansionary reading of the crisis, and registering its highest level since November 2018. The Philly Fed general conditions index declined however from 27.5 to 24.1.
• Weekly jobless claims declined for a fifteenth consecutive week but posted the smallest sequential decline (1.3mm from 1.301mm) since the recovery began.
• June headline and core CPI rose by 0.6% and 1.2% respectively, and nobody cares.

W E E K E N D I N G 7 / 1 7 / 2 0

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MARKET ANALYSIS

4th of July Week Markets End With a Healthy Bang.

Fourth of July fireworks continued into last week with strong bookends (M&F) delivering healthy gains driven once again by larger cap and tech-oriented names. The S&P 500 finished up 1.8% while small caps lost 0.64%. Strength at the top end of the market cap weighted S&P 500 continued to be pronounced. Commodities posted a respectable 1.52% gain on the back of a rally in industrial and precious metals (WTI was flat). Neither rates nor credit spreads moved meaningfully either way but the USD lost ground for a third consecutive week.

Market Anecdotes

• FactSet reports the estimated 2Q earnings decline is -44.6% which, if met, would mark the largest year-over-year decline in earnings reported by the index since Q4 2008 (-69.1%). The forward 12-month P/E ratio for the S&P 500 is 21.8.
• BCA made an interesting case that combining analysts’ expected temporary decline in earnings with the actual decline in real bond yields translates to a 15% increase in S&P 500 fair value since 12/31/19.
• Bespoke dissected the market rally since March 23 lows into three distinct ‘Acts’, the initial rally (3/23-5/13), the reopening rally (5/13-6/8), and a renewed tech/FAANG rally.
• An amazing testament to the turnaround rally is seen in the NASDAQ 100 (QQQ) which was up 10% on the year into February, collapsed over 30% on CoVid-19 developments in March, then went on to rally to a 20% YTD gain by mid-July.
• Tesla, not even a member of the S&P 500, surpassed Toyota this week as the world’s largest global automobile company (by market cap).
• Citadel indicated retail volume is now approximately 15% of volume but surges to nearly 25% during market peaks.
• Put/call ratio has plummeted since late March leaving the five-day average in the bottom 1% of all readings since 2001, according to Bespoke.
• The Philly SOX made a convincing breakout through prior resistance levels (February and June).
• The NY Fed WEI improved for a tenth consecutive week last week after enduring twelve consecutive weeks of deterioration ending with a new low water mark of -11.48 on April 25th.
• Google search trends (vacation, used car, RV, dentist, hotel, salon) show consumers are ready for some self-care and travel, just not by air or water.
• While we expect posturing aplenty in DC over the next two weeks, we caution investors that it was a mistake to bail in March and every time the debt-ceiling issue came to the forefront in the past.
• U.S. Treasury released details on the PPP last week claiming the program retained over 31mm jobs across a wide range of industries.
• China’s stock market has made both headlines and substantial gains over the past few weeks. The Shanghai Index is +16% over the past 20 days, helped in part by an SOE newspaper making a strong case for domestic investors not to miss out on the ‘bull market.’

Economic Release Highlights

• The June PMI Service index improved from May’s 37.5 read to 47.9, above consensus and outside of the top end of forecasted range.
• June’s ISM Non-Manufacturing Index improved from May’s 45.4 to a 57.1, above consensus and outside of the top end of forecasted range.
• June’s ISM Composite Index jumped to 56.6, its highest level since February 2019.
• May’s JOLTS was expected to show openings falling 3% to 4.9mm (after April’s 16% drop),but instead increased to 5.397mm.

 

W E E K E N D I N G  7 / 1 0 / 2 0

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MARKET ANALYSIS

NASDAQ Finishes at New Record as Markets Rally.

Markets shrugged off the prior week of rising coronavirus anxiety, instead choosing to embrace encouraging economic reports during last week’s holiday shortened 4-day trading session. The NASDAQ posted its biggest weekly gain since early May, finishing at a new all-time high while the S&P 500 tacked on over 4% with all sectors finishing in the black. Commodity markets benefited from a 5% rally in oil prices which closed over $40, longer term interest rates moved slightly higher, and the USD weakened marginally primarily against commodity currencies.

Market Anecdotes

• Bespoke noted the 33% decline in 33 calendar days leading to March 23rd was followed by a 40% rally in 100 calendar days that followed, the strongest 100-day return since 1933.
• FOMC meeting minutes and the speaking circuit shone a light on conversations surrounding yield curve control and stronger forward guidance on the part of the Fed.
• The impact of recent Fed activity in the financial markets made several headlines last week as they became a top 5 holder of some of the most prevalent publicly traded fixed income ETFs.
• Bespoke made note of the cycle of U.S. to international equity markets, highlighting longer term trends, technical support levels, and fundamental cases for some mean reversion.
• Acceleration of real M1 growth in Europe is consistent with a sharp pickup in economic activity in late 2020 and early 2021. This, combined with better CoVid-19 wave risk management, improves the outlook for European GDP relative to the U.S.
• Pfizer gave markets a boost of Covid19 confidence on positive news surrounding their leading vaccine trials. Globally 17 vaccines are in human trial stages with 130 others in development.
• Don Rissmiller from Strategas suggested Covid-19 recession #1 (March-May) is over, while the lingering effects of high unemployment and economic costs of rolling coronavirus waves pose challenges to the second phase of the business cycle recovery.
• Historically economic shocks lead to surges in nationalism and policy uncertainty. After an unprecedented surge in globalization, conditions in China, India, and Russia may determine the global course more so than the U.S.
• The D’s renewed stimulus proposal is worth $3 trillion, plus an infrastructure bill that nominally amounts to $500 billion over five years.
• BCA projects the U.S. consumer fiscal “cliff” created by the one-time stimulus checks will require close to $1t boost to personal income to prevent falling below February levels.
• The PPP deadline was extended last week to allow more time for businesses to complete registration while the MSLP, launched 6/15, has seen only sparse interest on behalf of lenders.
• U.S. WTI inventories fell 7.2mb last week, far more than the 100,000 forecasted, supporting oil prices in spite of KSI threats of commencing a price war with non-compliant members. Economic Release Highlights
• Consumer confidence jumped from 85.9 to 98.1, far surpassing consensus calls for 90 and improved in both present situation and expectations sub-components.
• April’s Case-Shiller HPI rose 0.3% MoM and 4% YoY, both relatively in line with expectations.
• June’s U.S. PMI manufacturing index jumped to 49.8 from 39.8 the prior month.
• June’s U.S. ISM manufacturing index jumped into expansionary territory of 52.6 from 43.1 the prior month.
• June payrolls of 4.8mm (3.0mm forecasted) followed up May’s shocking upside surprise report of 2.5mm. The unemployment rate dropped to 11.1% from 13.3%.
• Pending home sales in May increased 44.3%, far in excess of the 11.3% expectation.
• AAII weekly sentiment survey registered just a 22.15% bullish reading, a fourth consecutive weekly decline leaving it at its lowest level since October 2019.

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MARKET ANALYSIS

Weekly Newsletter April 1, 2019

Weekly Newsletter March 18, 2019

Weekly Newsletter March 11, 2019