Daily Stock Market Articles

Chipping In: The Future of US Manufacturing
Posted on March 30, 2023

Here’s something really positive about the US economy
It’s hard to get away from the negative headlines that have accompanied the Silicon Valley Bank crisis. Recession calls have seen a renewed uptick since the crisis unfolded, whereas they were dying down prior to that, thanks to positive economic data in February and early March. Note that what little real-time data we’ve seen since then isn’t pointing to a sudden stop for the economy. Of course, we’ll continue to track the data, but at this point, we continue to believe that the economy can avoid a recession this year.

The biggest positive that the economy currently has going for it right now is employment. Payroll growth has averaged just over 350,000 over the past three months, and the unemployment rate is at 3.6%, close to 50-year lows. Weekly initial claims for unemployment benefits remain low, suggesting that employment growth continues to run strong even in March.

Nevertheless, even when discussions of the labor market arise, Tech sector layoff announcements loom disproportionately large. We wrote about this over a month ago, putting these layoffs in perspective. The companies making these announcements saw payrolls surge after the pandemic, and now they’re retrenching.

In any case, there’s something else that you don’t hear a lot about amid all the negative headlines.

A potentially bigger story
As good as the labor market is right now, what’s interesting is that American companies reshored a record 365,000 manufacturing jobs in 2022. These numbers, reported by the Reshoring Initiative, include jobs that had previously been done in other countries and jobs created by foreign-owned companies here in the US.

The 2022 number is a 53% increase from 2021, which itself saw a 54% increase from 2020. These numbers are typically volatile, but the sheer magnitude of the increase over the last few years suggest we have the making of a trend.



The report points out that the increase was driven by a surge in electric vehicle batteries and chips, along with a continued uptrend in industries like electrical equipment, chemicals, transportation equipment, and medical equipment.

The increase from 2020-2022 was partly due to companies recognizing that supply chains extending across the world are vulnerable to disruptions and geopolitical events.

The other big reason is that manufacturing investment in the US is surging after Congress and the President passed last year’s “Inflation Reduction Act” (IRA) and the “Chips and Science Act.” We wrote at the time that the IRA was poorly labeled, but it was a big deal, including:

• Taking a practical, all of the above approach, to the energy transition, with money for clean energy but also nuclear power and the oil and gas industry.
• Tax credits and subsidies for clean energy companies, with even traditional infrastructure companies (like midstream pipelines) benefiting.
• Provisions designed to revive US manufacturing and counter China, with the US engaging in industrial policy on a scale we haven’t seen in recent decades.

We wrote at the time that this could potentially incentivize investment in technology and increase productivity, which would be good for all workers, let alone economic growth and corporate profits.

It’s nice to see that it’s happening on the ground. Electric vehicle batteries were the most active product to be reshored in 2022!

And there’s even more evidence.

Manufacturing construction is booming
The construction industry has clearly taken a hit from the Federal Reserve’s aggressive interest rate hikes. Mortgage rates surged as a result, and that froze home-buying activity. Single-family housing starts collapsed 32% year-over-year in February 2023. Multi-family housing is holding on, but that’s because a lot of units remain under construction, and rental demand is high thanks to low housing inventory.

And now, with the bank crisis, commercial real estate has come under the microscope. Small banks make a lot of loans to this sector, and a pullback in lending will hurt. Though commercial and office construction had already been slowing before the crisis. You just have to walk across the downtown of any major metro in America to realize that offices are not in great demand.

Yet, here’s what’s interesting and important:

The total dollar value of all private construction spending rose about $61 billion over the year through January, representing a 4.4% y/y increase. Of this, almost $49 billion came from manufacturing construction spending.

As of January, manufacturing construction spending in dollar terms is up 54% y/y and it is up 90% from 2 years ago.



A year ago (Jan ’22) manufacturing construction made up just about 6.5% of total private construction in the US. It’s risen to almost 10% now (Jan ’23).

And this is almost entirely being driven by the computers and electronics industry, including investment in semiconductor plants, where construction spending is up 158% y/y and a whopping 723% over the last 2 years!

Construction spending across the rest of the manufacturing industry is up 17% y/y – not too shabby by itself, but pales in comparison to what’s happening on the computers and electronics side.



Of course, a lot of this is driven by subsidies and tax credits, and that’s not going to continue year after year.

But investment spending tends to feed on itself, especially since that can boost productivity. That’s potentially a huge positive for the American economy over the next decade.

Sometimes it helps to pull back and look at the bigger, and longer-term, economic picture.

 

Claims Spend Another Week Below 200K
Thu, Mar 30, 2023

Initial jobless claims took a step higher this week rising by 7K to 198K. With last week's number also going unrevised, claims have now been below 200K for 10 of the last 11 weeks. That being said, this week's reading was the highest since the 212K print in the first week of March.



Before seasonal adjustment, claims were once again higher rising by over 10K week over week to 223K. Although that is not a concerningly high reading nor is it a large jump, the increase was peculiar in that it went against expected seasonal patterns. Prior to this year, jobless claims have only risen week over week in the current week of the year 16% of the time; the most recent instance prior to 2020 (right as claims surged at the onset of the pandemic) was in 2017.



Although initial jobless claims modestly deteriorated, it has not exactly been a worrying increase as claims remain at historically healthy levels. The same goes for continuing claims. This week saw continuing claims rise by a modest 4K to 1.689 million. That is only the highest level since the end of February when claims totaled over 1.7 million.

 

Sentiment Still Bearish...Or Is It?
Thu, Mar 30, 2023

The S&P 500 has made a press back up towards the high end of the past month's range this week, but sentiment has yet to reflect the moves higher in price. The past several weeks have seen the AAII sentiment survey come in a relatively tight range between the high of 24.8% on March 9th and a low of 19.2% the following week. That is in spite of the recent updates to monetary policy and turbulence in the banking industry. Today's reading was smack dab in the middle of that recent range at 22.5%.



Given there have not been any major developments with regard to sentiment, the record streak of below-average (37.55%) bullish sentiment readings has grown to 71 weeks.



While bullish sentiment was modestly higher this week rising 1.6 percentage points, bearish sentiment shed 3.3 percentage points to fall to 45.6%. That is only the lowest reading in three weeks as bearish sentiment has sat above 40% for all of March.



The predominant sentiment reading continues to be bearish. The bull-bear spread has been negative for six weeks in a row following the end of the record streak of negative readings in the bull-bear spread in February.



Taking into account other sentiment surveys, the AAII reading stands out as far more pessimistic at the moment. In the chart below, we show the readings of the AAII bull-bear spread paired with the same spread in the Investors Intelligence survey and the NAAIM Exposure index. Whereas the latter two surveys have basically seen readings return back to their historical averages, the AAII survey sits 1.6 standard deviations below its historical average. In other words, overall sentiment might not be as pessimistic as the AAII survey would imply.

 

Here Come the April Flowers
Posted on March 31, 2023

It was anything but smooth, but stocks are set to begin 2023 with a solid start, with the S&P 500 up more than 5% for the year with one day to go in the first quarter. Although we continue to hear how bad things are, we’d like to note that these gains came on the heels of a 7.1% gain for stocks in the fourth quarter of 2022. Most investors probably have no idea stocks have done so well, given the barrage of negative news out there.

Here’s a chart we’ve shared a lot, but it is playing out nicely. If you look at a four-year Presidential cycle, we are in the midst of the strongest period for stocks. In fact, historically, the second quarter of a pre-election year is up a solid 4.8% on average and higher 72.2% of the time. Given the overall negative sentiment, an economy that continues to defy the skeptics, and this positive seasonality, we’d be open to a continuation of the rally off the October lows last year.



Take one more look at the above. Last quarter was higher, making that 18 out of 19 times that stocks gained in the first quarter of a pre-election year.

Turning to April, turns out stocks have historically been higher this month during a pre-election year an incredible 17 out of 18 times since 1950, with only a 1.2% drop back in 1987, the only blemish. As you can see below, only January has a higher average return during a pre-election year, which played out this year with a huge 6.2% gain in January 2023. Why is April usually strong? It could be a combination of springtime buying, good riddance to winter, or putting tax refunds to work. But the bottom line is that this is something we’d rather know than ignore.



But it isn’t just pre-election years when April does well. Since 1950, it is the second-best month (only November is better); for the past 10 years, it ranks fourth, and for the past 20 years, it has been the best month of the year.



The elephant in the room is that April last year was terrible, with the S&P 500 down 8.8%, for the worst April since 1970. Of course, back then, the start of the war, higher inflation fears, a Fed just starting to hike, and economic worries lead to the historic drop.

We remain overweight stocks and expect the lowered expectations amid a better economy to have the potential to drive higher stock prices in 2023, with gains that could reach between 12-15% this year.

 

DJIA, S&P 500, NASDAQ and Russell 2000 Historically Strong Before Good Friday

Good Friday is the one NYSE holiday with a clear positive bias before and negativity the day after (Stock Trader’s Almanac 2023, page 100). DJIA, S&P 500, NASDAQ, and Russell 2000 all have solid average gains on the three days and full week (shortened) before Good Friday. NASDAQ has been notably strong, up 20 of the last 22 days before Good Friday with an average gain of 0.79%. NASDAQ declines occurred in 2017 (–0.53%) and 2022 (–2.14%).

However, the day after Easter has a weak longer-term post-holiday record. The S&P 500 was down 16 of 20 years from 1984-2003 on the day after Easter while it has been up 12 of the last 19 years. Post-Easter weakness has been generally short-lived with solid average gains 2- and 3-days after.

 

3 Reasons the Dollar Isn’t Going Away Anytime Soon
Posted on April 4, 2023

There’s always been talk about the U.S. dollar (USD) losing its dominant currency status globally, but lately, the chatter seems to have increased, especially since Russia’s invasion of Ukraine, which saw the US impose severe and expansive sanctions on Russia and Russian officials – enabled by the fact that the US treasury has jurisdiction over any transaction that involves the flow of USD. Rising tensions between the US and countries like China and Saudi Arabia have also raised concerns that these countries could price oil sales in Chinese yuan, denting the USD’s dominance in the global oil trade. Never mind the fact that these talks have been going on for several years now.

The reality is this: the USD’s dominant role is not going to end any time soon, especially since there’s no good alternative. Let’s walk through 3 reasons why, using some great data from a recent Federal Reserve report.

1. The World has confidence in the US, and thereby the U.S. dollar
This confidence doesn’t come out of nowhere. As the Fed report notes, a key function of a currency is:

“A store of value which can be saved and retrieved in the future without significant loss of purchasing power.”

The US has the world’s deepest and most liquid financial markets thanks to the following:

• The size of the US economy
• The strength of the US economy
• Open trade and capital flows, with fewer restrictions than a lot of other countries
• Strong rule of law, and property rights, with a history of enforcing them

This is why, despite the US making up just about 25% of the world economy, about 60% of global foreign currency reserves are denominated in USD. This has fallen from about 71% in 2000 but is still far ahead of other currencies, including the euro (21%), yen (6%), British pound (5%), and Chinese renminbi (2%). And the decline has been taken by various other currencies, as opposed to a single other one.



2. Network effects: The USD is dominant in trade invoicing and international finance
The USD is the world’s most popular medium of exchange when it comes to trade, even beyond North & South America. Outside of Europe, where the euro is naturally dominant, more than 70% of exports are invoiced in US dollars. That’s not likely to change anytime soon, especially with so many countries and companies involved.



It shouldn’t be a surprise that the popularity of the USD as a medium of exchange means it almost automatically becomes the dominant currency in international banking. Think of all the USD flowing across global banks as companies/customers make payments to each other. 60% of international foreign currency banking claims, i.e., bank deposits denoted in foreign currency, and loans are USD. That’s been fairly stable since 2000 and has increased over the last few years. The euro is second but makes up just about 20%.



Network effects can be extremely hard to dislodge. It won’t be easy to convince people across the world that they have to move their assets from the US dollar to another currency, let alone make the switch without any risk.

3. Most important reason is: The US is willing to maintain massive trade deficits
Here are a couple of statistics (as of Q4 2022)

• The rest of the world held about $7.4 trillion in US treasury securities
• The rest of the world held about $1 trillion in USD banknotes, which is about 46% of all USD banknotes out there

These are all “liabilities” of the US government, i.e., loans to the US government. But the real question is, why do foreigners hold so much of these in the first place?

Part of the answer lies in the first two reasons, but here’s another big one. Foreigners sell a lot of stuff to Americans, about $3.3 trillion worth in 2022 alone. And they got USD in return for all that.

In an ideal world, foreigners would turn around and use those dollars to purchase stuff made in the USA, and trade would be “balanced”.

But they don’t. Instead, they bought about $2.1 trillion worth of goods from the US last year.

Which means there was an extra $1.2 trillion that foreigners had. What do they do with it?



The US is willing to supply the rest of the world with treasuries & banknotes
U.S. dollars can only buy goods and financial assets in the US. Foreigners could buy something in Europe or China, but they’d have to convert the USD to euros/yuan first, and then someone else is left holding USD, and then they have to figure out what to do with those USD.

Instead, foreigners turn around and buy the safest, most liquid security in the world: US treasuries. Some of them also simply hold USD in cash (or deposits in their local bank). As I noted above, these are liabilities of the US government that the US is more than willing to issue. No other country, including the Eurozone, looks remotely capable or willing to do that anytime soon.

Which is why there are so many dollars and treasuries held by the rest of the world.

Could that change as countries decide to trade in their own currencies instead of the USD? Sure, but there’s a problem.

Take Saudi Arabia and China, for example. The former could sell oil to China in yuan, but then the Saudis have to figure out what to do with those yuan. They’d have to buy assets in China – but there aren’t too many of that, especially Chinese government bonds.

China has capital controls as well. which means it may not be easy for the Saudis to pull their money out of China in the future, especially during a crisis when the Chinese want to limit outflows. Capital controls are how the Chinese control their currency, and it’s hard to see them letting go of that lever anytime soon.

In sharp contrast, the Fed is willing to act as the global central bank, supplying dollar liquidity to the rest of the world when there’s a crisis.

The global economic model is unlikely to shift
The Chinese could decide they don’t want extra dollars. So instead of selling all the extra stuff they produce to Americans, they could sell it to Europe, the rest of Asia, and Africa. But the thing is, those countries don’t want too many of those goods either – because consumption is not as big a part of their economies (like the US).

Now, the Chinese could decide not to produce as much, but that is not a recipe for economic success.

Ideally, their own citizens would buy all the extra stuff they produce. But here’s the problem: Chinese households don’t earn enough to buy all those extra goods, and they save a lot more than Americans. They have to since there’s nothing like Social Security or Medicare there. China then channels these savings into investment, which leads to a lot of buildings, infrastructure, and industrial production, which is what drives their economy.

The Chinese government could “fix this,” but that involves a significant shift in how their economy works – essentially redistributing national income away from the government and businesses to households. A massive political project that’s unlikely to happen anytime soon.

It’s not just the Chinese. It’s the Germans, too, along with countries like Taiwan and South Korea, all of whom are reliant on exports to drive their economies.

A shift away from the economic model that these countries are reliant on to a model that is consumption-led is very difficult. As the previous chart shows, its actually gotten worse over the last few years as US trade deficits grew even more.

In fact, it would be better for US manufacturers if other countries do switch their economic model. Because that would mean they could buy more stuff that’s made in the US. And trade would be more balanced.

In any case, there’s no practical alternative to the U.S. dollar right now, and its dominance is likely to remain in place.

 

Looming Debt Ceiling Crisis 2011 Déjà Vu

Let’s not forget about the looming debt ceiling crisis. It is the same political set up as pre-election year 2011: Democratic President with a split Congress composed of a Democratic Senate majority and a Republican House majority.

The banking crisis may have been averted, at least for the time being. War in Ukraine drags on, but it still appears more like a protracted Cold War 2.0 scenario that the market has shrugged off. The earnings trough may indeed be ending. But! Let’s be devil’s advocates here.

The standoff in 2011 between the White House and House Republicans is eerily similar to what’s developing in 2023. Markets topped out on the last trading day of April 2011 and entered a mini-bear phase with S&P down 19.4% on a closing basis before bottoming on October 3.

2011’s Worst Six Months were negative with the Dow down 6.7% and S&P down 8.1%. NASDAQ’s Worst 4 Months July-October were down 3.2%. S&P finished the year essentially flat at -0.003%, Dow was up 5.5%, NASDAQ was off 1.8% on the year.

Uncertainty & headwinds can take a bite out of usual pre-election year gains. Heeding our Best 6 Months MACD Sell Signal when it triggers will likely be the prudent course of action. Review your portfolio. Get prepared to lock in these BSM gains, sell losers & tighten stops.

 

Claims Get Revised
Thu, Apr 6, 2023

Jobless claims were in focus this morning as seasonally adjusted initial claims were surprisingly high at 228K versus expectations of 200K. Previously, adjusted claims had consistently come in well below 200K with 10 readings below that level in the last 11 weeks. However, that large increase in the most recent week's data was matched with large revisions to the past couple of years' data as the BLS updated its seasonal adjustment methodology. The net impact of those changes was to redistribute claims throughout the year, revising up readings from Q1 and Q4 while Q2 and Q3 were revised down; total or average annual readings were not changed. As discussed in greater detail on the BLS website and we will review in more depth in tonight's Closer, there are two methods for seasonal adjustment: multiplicative or additive. Most of the time the claims data has used multiplicative seasonal factoring, but periods like the first year of the pandemic in which the indicator experiences unusually large level increases means an additive approach becomes more apt. This week, the BLS applied a new hybrid approach with additive factoring applied from early March 2020 through mid-2021 and multiplicative factoring for all other periods.

As shown below, that change back to multiplicative factoring resulted in some large revisions for initial claims over the past couple of years. In turn, that has dramatically changed the picture jobless claims have painted. Previously (red line in chart below) claims had been more or less trending sideways after bottoming around a year ago, but after these revisions (blue line) claims are trending upwards and bottomed this past September. In addition, the upward revision to 247K to the print from two weeks ago would mark the highest level since January 2022.



As for the non-seasonally adjusted data, the story is much less noisy being unaffected by the aforementioned revisions. In other words, the overall picture for claims hasn't changed when looking at this series. Claims remain near historically healthy levels consistent with the few years prior to the pandemic. Granted, those are off the strongest readings from last year. At this point of the year, claims are also trending lower as could be expected based on seasonal patterns. The next couple of weeks may see claims move higher because of seasonality, though, that would likely prove to be a temporary bump in the road with claims resuming the trend lower through the late spring.



The revision likewise impacted continuing claims which rose to 1.823 million in the most recent week. That brings claims back up to the highest levels since December 2021 as they have risen sequentially for three weeks in a row.

 

Sentiment Back to Bullish
Thu, Apr 6, 2023

Sentiment saw a huge rebound this week based on the latest AAII survey. With the S&P 500 taking out early March highs late last week, bullish sentiment jumped 10.8 percentage points to 33.3%. Although there was a higher level of bullish sentiment as recently as February 16th, this week's increase was the largest WoW jump since June of last year. Even though a double-digit jump in bullish sentiment sounds significant, S&P 500 performance has been unremarkable following similar instances historically.



The rise in bullish sentiment borrowed almost entirely from those reporting as bearish. Bearish sentiment fell 10.6 percentage points down to 35%. That is the lowest reading since mid-February and the first double-digit drop since November.



The huge shift in favor of bulls this week resulted in the bull-bear spread narrowing to -1.7 points. That is the least negative reading in the spread since February when the bull-bear spread had broken a record streak of bearish readings.



As we noted last week, the AAII survey has been a holdout in showing more optimistic sentiment readings. Whereas other sentiment surveys like the NAAIM exposure index and the Investors Intelligence survey had essentially returned to historical averages, the AAII survey saw firmly bearish sentiment readings with a bull-bear spread of 1.6 standard deviations from its historical average as of last week. Given the quick turnaround this week, the AAII survey is no longer weighing on our Sentiment Composite as it moved back into positive territory indicating bullish sentiment for only the fourth week since the start of 2022.

 

Full-Time Septuagenarian Workers Put in the Most Hours
Mon, Apr 10, 2023

We track US employment trends in our monthly Bespoke Consumer Pulse survey along with dozens of other interesting consumer and personal finance topics. Each month since 2014, we've asked our 1,500 survey participants (with balanced demographics according to the US census) whether they're employed or not along with how many hours they typically work each week.

When it comes to the average hourly work week, we get the results below when we break down our survey response data by age. The two age bands of employed workers that work the least are the youngest (18 to 24) and oldest (75 or older). Those aged 45 to 54 work the most each week at 38.5 hours, while the 35 to 44 group works the second most at 37.6 hours.



Of course, the youngest workers and oldest workers could be working part-time, which would bring down the average work week for these two age bands. We get some interesting results when we look at average weekly hours for full-time employees only. As shown below, the oldest full-time employees average by far the most weekly hours at 43.0, while the three age bands between ages 45 and 74 all average right around 41 hours. The youngest full-time workers average the fewest weekly hours of any age band at 37.7.

Why would 75+ year-olds be working the longest hours of any age cohort when they're supposed to be enjoying retirement? Is it work satisfaction? Work ethic? Economic reasons? This may be something we attempt to find out in future surveys!

 

2023 Still Tracking Pre-Election Year Pattern But Gains May Be Muted

Despite the recent selloff and volatility S&P 500 still tracks typical pre-election year market trends. However, uncertainties about rates, inflation, recession, banking and economic growth are likely to mute the usual pre-election year gains. A debt ceiling standoff could keep stocks under pressure during the Worst Six Months May-October.

 

Industry Performance and CPI
Tue, Apr 11, 2023

Tomorrow's release of March CPI is expected to show headline inflation cooling to 5.1% on a y/y basis from 6.0% in February. In the table below, we break down the average performance (in basis points) of each of the 24 industry groups in the S&P 500 on days of CPI releases since 2000 based on how the headline reading came in relative to expectations. There have been some notable shifts in reactions among groups to CPI reports in the pre and post-COVID (February 2020) periods. For example, in the pre-COVID period, the three best-performing industry groups on days when CPI was stronger than expected were Real Estate, Banks, and Semis. In the post-COVID period, though, these three industry groups have been among the market's worst performers on CPI beats with all three averaging one-day declines of at least 69 bps compared to the S&P 500's average decline of 62 bps. Interestingly, the disparity is a lot less apparent when we compare pre and post-COVID performance on days when CPI is weaker than expected.



To further illustrate this shift and how it has been much more notable on days when the CPI is stronger than expected, the scatter chart below compares industry group performance on CPI days in the pre and post-COVID periods when the headline reading comes in better and worse than expected. Starting with weaker-than-expected CPI days (red dots and red trendline), the trendline is positively sloped as groups that tended to perform best on weaker-than-expected CPI days are generally still performing the best while the industry groups that lagged on weaker-than-expected CPI days still tend to lag in the post-COVID period. The performance dynamic on stronger-than-expected CPI days (green dots and trendline), however, is the complete opposite as the trendline is negatively sloped indicating that the best-performing groups pre-COVID have tended to be the weakest in the post-COVID period and vice versa.

 

10-Year 10-Baggers
Wed, Apr 12, 2023

Peter Lynch's 1989 book One Up On Wall Street introduced investors to the word "ten bagger," which represents an investment that appreciates by 10x (1,000%) its initial purchase price.

Today we wanted to highlight the stocks that have been "ten baggers" over the last ten years. In the Russell 1,000, 33 names are up more than 1,000% since April 12th, 2013. Over the same 10-year period, the S&P 500 tracking ETF (SPY) is up 211%. As shown below, NVIDIA (NVDA) is up the most with a gain of 8,833%, followed by Tesla (TSLA) at 6,304% and then Plug Power (PLUG) at 5,477%.

There are 16 Technology stocks on the list of 33 ten baggers, which is the most of any sector. Other Tech stocks on the list include AMD, Enphase Energy (ENPH), Broadcom (AVGO), Fortinet (FTNT), Lam Research (LRCX), and even the two largest stocks in the US - Apple (AAPL), and Microsoft (MSFT). Netflix (NFLX) is also another notable on the list with a gain of 1,266%.

Some other notables include Industrials stocks like Axon -- the maker of Tasers and police body cameras, Industrials stocks like Builders FirstSource (BLDR) and Old Dominion Freight (ODFL), and Vince VcMahon's World Wrestling Entertainment (WWE), which is set to be bought by Endeavor Group (EDR).

Stocks that are already up 1,000%+ over the last ten years seem unlikely to repeat that over the next ten years. The obvious next question is: which stocks will be ten baggers over the next ten years? As Peter Lynch instructed, you'll have to do your research!

 

Typical April Strength Held Back by Recession Fears & Fed

As you can see in the above chart of the recent 21-year market performance in April, the month has been nearly perfect with gains steadily building from the first trading day to the last with only the occasional and minor blip along the way. So far this year, only DJIA has been able to exceed historical average gains at this point in April. S&P 500, NASDAQ, Russell 1000, and Russell 2000 are negative as of today’s close.

The first half of April used to outperform the second half, but since 1994 that has no longer been the case. The effect of April 15 Tax Deadline (April 18 for 2023) appears to be diminished with gains present on both sides of the day. Traders and investors appear to be more focused on first quarter earnings and guidance during April. Expectations are somewhat low for the upcoming earnings season; company guidance will likely be even more important.

 

The Good, The Bad, The Inflation
Posted on April 13, 2023
The March inflation report showed that CPI inflation rose only 0.1%, slightly below expectations. Over the past year, inflation is now up 5%, well off the peak 9% from June 2022. As you can see below, the big driver of lower inflation has been energy and food.



Energy makes up about 7% of the “inflation basket”, split almost equally into commodities (like gasoline) and services (like electricity and piped gas). Thanks to the pullback in oil prices, energy commodity prices are now below where they were in December 2021. The recent drop in natural gas prices has also sent services prices lower over the past couple of months.



Further good news: prices for “food at home”, i.e. groceries, fell 0.3% in March. This is the first price decline since September 2020, and bodes well even for prices and restaurants and such (which are still elevated).

Lower energy and food prices are a big deal, for consumption
Lower inflation, by way of lower energy and food prices, means “real” incomes, i.e. incomes adjusted for inflation, remain strong. More so if the labor market remains healthy, which looks to be the case as we wrote the other day.

The chart below shows annualized growth rates of disposable income, employee compensation (across all workers in the economy), and inflation. Over the past 3, 6 and 12 months, disposable income has run ahead of inflation. Part of this is because social security incomes got a big inflation-adjusted boost in January. But even employee compensation is running ahead of inflation. That’s really positive for consumer spending, which makes up 70% of the economy.



The big story: Housing inflation may finally be turning (lower)
Core inflation, excluding food and energy, rose 0.4% in March. Over the past 3 months, core inflation is up 5.1% (annualized pace) and its up 5.6% over the past year. So, not much of a slowdown.

Part of the reason is that housing inflation has been running high.

But we got very good news on that front. Rents of primary residences and owners’ equivalent rent (rental equivalent of owner-occupied homes) rose “only” 0.5%. While still high, that pace is the slowest monthly increase in a year. Over the past 9 months, housing inflation averaged about +0.7% per month, which translates to a whopping 9% annualized rate!

So, the slowdown in March is significant, and most welcome.

Of course, as we’ve written about in the past, we’ve already seen a sharp deceleration in market rents. It’s just that the official inflation data has been really slow to catch up to that reality. But that may be changing now and bodes well for core inflation to slow down across the rest of this year.



The bad news: Core inflation ex housing remains elevated
That was the good news, i.e. a slowdown in energy, food and housing inflation. However, the rest of it still looks to be elevated.

For one thing, vehicle prices are no longer falling as fast as they were. Vehicle prices, especially for used cars, was another big factor in pulling inflation lower over the last few months. Used car prices fell 0.9% in March, but that’s the smallest decline in 7 months. Private data suggests that used car prices are rising again. New vehicle prices also rose 0.4%, breaking a recent downward trend.

Outside of vehicles, a lot of goods and services that were initially hit by the pandemic are still seeing significant price increases. These include goods like household furnishings and apparel, and services like hotels and airlines fares.

Even beyond that, services such as day care, personal care, and recreation, are seeing inflation running well above what we saw before the pandemic.

All of which is a sign that demand for these goods and services remains strong.



What does this mean for the Fed?
Fed officials have explicitly said that they want to see core services ex housing decelerate. In short, they’re looking at inflation excluding energy, food and housing, the three categories where we’ve had positive news. Unfortunately, there’s not much evidence that this slice of the inflation basket is decelerating, yet. The good news is that it tends to be correlated to wage growth, and there’s strong evidence that wage growth is moving closer to what we saw pre-pandemic.

Now, the Fed is unlikely to continue raising interest rates much further from here, especially since we had a banking crisis, and they may want to play cautious. Plus, as we wrote a few weeks ago, banks tightening credit in response to the crisis is akin to rate increases.

At the same time, they are likely to keep rates where they are until they see convincing evidence of inflation falling, especially core services ex housing inflation.

This is not what investors expect. Instead, investors expect the Fed to start cutting rates in late summer, pricing in at least 3 rate cuts by the end of 2023. Indicating that bond investors believe a crisis or recession is likely in the near-term. That’s clearly not where Fed officials are right now. We’re not there either, for now.

Eventually, market pricing and Fed officials’ views must converge. In the meantime, expect volatility, especially in the bond market.

 

Three More Bullish Signals The Bears Don’t Want To See
Posted on April 14, 2023

“If you don’t know where you want to get to….it doesn’t matter which way you go.” -The Cheshire Cat to Alice in Alice in Wonderland.

Stocks have continued to stage an impressive rally off the mid-March lows, so much so that we have now seen multiple rare and potentially bullish signals trigger. Today, I’ll take a look at three of these signals. Yes, by itself any one of these signals could be noise, but when you start stacking them on top of each other, like the Cheshire Cat said in the quote above, stocks likely want to go higher and we should be ready to know where they could head.

First up, the S&P 500 had it’s best first quarter since 2019, up 7.0%, which came on the heels of 7.1% gain the quarter before. What happened after previous big first quarters? I found there were 16 other first quarters that gained at least 5% and the final three quarters of the year finished higher 15 times. Yes, the one year that didn’t work was 1987 and when people hear that year, they start to get worried. Well, stocks were up 40% for the year in August back then, so we’ll worry about having another 1987 if we see returns like that (which we don’t expect). Until then, this is another clue the bulls could have a nice 2023.



Next, we’ve heard a lot how only a few stocks are leading the overall markets higher. We don’t fully agree there and one way to show this is there was a recent sign of extreme buying pressure across many sectors and stocks. Using data from our friends at Ned Davis Research, more than 93% of the stocks in the NDR universe were recently above their 10-day moving average. All you need to know here is this is a rare sign of broad-based strength and a year later stocks were higher 23 out of 24 times with some very solid returns along the way.



Lastly, Marty Zweig is known as one of the best traders ever and he coined the Zweig Breadth Thrust (ZBT) indicator many years ago. Well, we just saw a rare trigger of this potentially bullish signal. To keep it simple, this signal looks at all the stocks on the NYSE and it looks for periods of extreme oversold periods moving to periods of extremely overbought in a short timeframe. Think of it as a washout and then heavy buying coming in, which tends to open the door to higher prices.

The table below shows the previous 14 ZBTs and what happened next. Wouldn’t you know it, but the S&P 500 was higher a year later every single time. That is 14 out of 14 and up 23.3% on average. Sure, the sample size isn’t probably as large as we’d like to consider this statistically relevant, but I’d sure rather know this than ignore it.



Finally, here’s a chart showing the ZBTs. Sometimes a picture tells the story and one look at this, and it would be quite rare for this signal to trigger and for stocks to simply drop right back to new lows. In fact, usually it happens ahead of periods of strength.

 

First Republic and Other Banks See Large Jumps in Short Interest
Fri, Apr 14, 2023

Short interest figures get published every two weeks, and movements in short interest are a helpful way to gauge bull/bear positioning on individual names as well as groups and sectors. When a stock has a high percentage of shares sold short, it means that a lot of investors are betting against it. If a highly-shorted company manages to produce better than expected results, however, shares will often see outsized gains as many of those shorts rush to cover.

With bank failures and deposit flight emerging in March, causing two S&P 500 bank stocks to fail and many other regional bank stocks to fall precipitously, we were interested to see how short interest levels changed during the month. End-of-month short interest figures for March were just recently published, and below is a table showing stocks in the S&P 1500 that saw the biggest increases in short interest as a percentage of float (SIPF) during the month.

As shown, the two stocks that saw the biggest increases in short interest were First Republic Bank (FRC) and PacWest Bancorp (PACW). At the end of February, FRC only had 2.71% of its float sold short, but by the end of March, that figure had spiked to 29.51%. PacWest's jump in short interest was slightly less extreme, but it was extreme nonetheless, rising from 3.59% up to 20.56% in March. Another nine Financials are on the list of the 30 S&P 1500 stocks that saw the biggest jumps in SIPF in March, while another five REITs made the list as well.



Below is a better look at just how much short interest spiked for First Republic (FRC) in March. While the bank did see a mini-spike in late 2018 when the broader market was struggling with another batch of Fed tightening, FRC's short interest normally sits between 0-5% of float. Now it's up to nearly 30%. For a stock that's down 94% from its highs, where do you think the risk/reward lies at this point?



In terms of the most heavily shorted stocks, only Big Lots (BIG) currently has a higher percentage of its float sold short than FRC in the S&P 1500.



Below is a chart showing the average change in SIPF for stocks in the S&P 1500 by industry group in the month of March. As shown, the Banks saw the biggest average jump at 0.78 ppts, followed by Telecom Services, Media & Entertainment, and REITs. Stocks in the Consumer Durables & Apparel group saw the largest decline in SIPF at -0.23 ppts.

 

Europe Treasure
Mon, Apr 17, 2023

For an area of the world that couldn't have been considered less attractive last summer, European equities have been on a tear since the October lows. The Euro Stoxx 50 Europe ETF has now rallied more than 50% off its October lows and broke out to 52-week highs last week.



The S&P 500, meanwhile, hasn't fared nearly as well. While it has formed a gradual uptrend from its October lows, SPY currently has three prior highs (February 2023, August 2022, and April 2022) standing between it and 52-week highs.



Other parts of the global equity market spectrum haven't been able to keep up with Europe either. Emerging markets, as tracked by the iShares MSCI Emerging Markets ETF (EEM), rallied sharply off its lows in October, but that rally ran out of gas in early February and hasn't been able to recover. Like the S&P 500, EEM remains well below 52-week highs from last April.



Since Europe accounts for a major share of international equity market cap, the MSCI All Country World Ex US ETF (CWI) is much closer to 52-week highs than EEM, but it still has a number of resistance points to clear.



The chart below compares the relative strength of all three ETFs (FEZ, EEM, CWI) to the S&P 500 (SPY) over the last three years and provides a clear look at how Europe has led the global rally. From April 2020 through April 2021, all three ETFs outperformed the S&P 500, but then they really started to underperform as the US economy reopened and the FOMC later started to hike rates. Last October was the major turning point for global stocks, though, as the relative strength for all three ETFs made multi-year lows. While they've all started to reverse, only Europe has managed to erase all of its underperformance from the post-COVID period and move into the black versus the S&P.