Daily Stock Market Articles

A CPI Silver Lining
Tue, Feb 13, 2024

We get it. Today's CPI was exactly what the market wasn't looking for. On all accounts, inflation came in higher than expected. That put the nail in the coffin on a March cut and even took the chances of a May cut down to nothing much better than a coinflip. While disappointing, the trend for both headline and core CPI continues to move in the right direction. Headline CPI came in at 3.1% year/year which is only just slightly above its post-COVID low of 3.0% from last June. Core CPI, meanwhile, fell to a new post-COVID low - technically speaking. The reason we say technically is that while the reported reading of Core CPI was 3.9% y/y and unchanged from December, if stretched out to two decimal places, it fell from 3.91% down to 3.87%.



It may not have been much, but January’s decline in Core CPI extended the streak of monthly declines in the core y/y reading to ten months. Going back to 1960, there has only been one other period where core CPI experienced as long of a streak of monthly declines in its y/y reading. Back in 1975, the y/y reading fell from 11.86% down to 6.73% from February through December. That was a much larger magnitude of decline, but the current period started from a much lower base (5.56%). In the entire history of the series, there have only been five other periods when y/y core CPI declined for eight months in a row. As shown in the chart, most of them occurred very early on in an expansion. That makes sense when you think about it as prices shouldn’t be going down as the economy is strengthening. It’s also why the Fed finds itself in such a difficult position caught between trying to keep a lid on inflation while at the same time avoiding an economic slowdown.

 

Sentiment Slump From the Little Guys
Tue, Feb 13, 2024

The NFIB published its latest Small Business Economic Trends report covering sentiment among small businesses this morning. As discussed in the Morning Lineup, at the headline level the report came in weaker than expected with optimism dropping to 89.9 versus expectations of an increase to 92.3. That leaves sentiment at the lowest level since last May.



Under the hood, that weaker sentiment number was a result of overall bad breadth including a couple of sizeable moves. The single largest move in January was the drop in expected real sales. That index went from a reading of -4 down 12 points to -16. That month-over-month decline is the largest since June 2022 and ranks as the ninth largest in the history of the survey. Actual earnings changes also marked a significant decline falling 5 points month over month. Conversely, two indices rose month over month: inventories and plans to increase inventories.



As previously mentioned, sales metrics were notably weak with sales expectations dropping significantly. Actual sales changes (which is not a component of the optimism index whereas sales expectations are) are still in contraction and in the bottom decile of all periods on record, but the January reading was unchanged month over month. That clashes with actual earnings changes which fell to -30 which is down at the low end of the past several years' range. Ironically, that worsening of earnings comes despite firms reporting an easing in inflation. The higher prices index fell 3 points to 22. That is now out of the top decile of readings and at the lowest level in three years.



Prices are not the only area hitting a new local low. Hiring plans have continued to collapse with back-to-back declines over the past two months. That index is now at the lowest level since May 2020. While that reading marks a deterioration in labor conditions versus earlier in the post-pandemic period, we would note that current levels are still above the historical median. Additionally, actual employment changes came in at zero meaning firms on a net basis neither hired nor fired. Meanwhile, compensation has appeared to have bottomed for the time being. Compensation plans, on the other hand, have peaked, but are still elevated indicating. Finally, we would note that the percentage of respondents reporting openings as hard to fill is down to a three-year low.



Overall, the report was a bit of a mixed bag if not leaning slightly negative. The share of respondents reporting now as a good time to expand reflects this with a reading that is still historically low albeit unchanged at multi-month highs in January. Digging deeper, economic conditions are overwhelmingly the main culprit for this expansion outlook. The political climate is the next largest factor, although we would note that the NFIB survey has historically tended to be sensitive to politics and leans Republicans (historically during Republican administrations the expansion outlook is better than when Democrats are in power). Financials and interest rates also rank highly for those reporting a negative outlook. Granted, at 7% of responses, that is down significantly from 12% only two months ago.

 

Inflation Concerns Coming Down
Tue, Feb 13, 2024

In an earlier post, we discussed the latest findings per the NFIB's Small Business Economic Trends report. The report also surveys firms on what they consider to be their most pressing issues. In January, there were some minor shifts in these readings. Overall, cost or quality of labor (combined) accounts for the largest share of small business problems at 31% of firms. That is followed by government-related concerns like taxes or red tape. Again combined, those issues account for just under a quarter of responses.



Inflation also ranks highly among small businesses, but this reading has improved markedly since peaking at 37% in July 2022. Counter to the hot CPI print today, there was a 3 percentage point drop in January in the share of businesses saying inflation is their biggest problem. Of course, that remains at a historically elevated level, matching the 2008 peak.



Stealing from the share of businesses reporting inflation as the biggest problem, poor sales ticked up a percentage point. While not a particularly large or concerning increase (current levels still only rank in the bottom 6% of all months on record), it does bring the reading to the most elevated reading since the summer of 2021.



As we noted in the earlier post, of those businesses saying now is not a good time to expand, the share pointing the finger at interest rates as the main reason has fallen dramatically in the past couple of months. That being said, those saying interest rates are their most important problem hasn't budged. 5% of businesses reported this issue to be their biggest, unchanged versus December at the highest level in over a decade.

 

February Weak Seasonality & Frothy Market Selloff Sets Up Next Bull Leg

The big round number of S&P 5000 is proving to be resistant. It will likely take a few attempts to break through. February’s notorious seasonal weakness is bound to relieve the market’s obviously overbought condition. Much like January’s selloff as the market came to grips with the reality that it’s not getting a rate cut anytime soon, selling on January’s hotter-than-expected CPI suggests we are due for some further weakness. This is not out of the ordinary for February even into March. February is the weak link of the Best Six Months so expect some pullback.

Contrary to popular belief our outlook for the year remains bullish. This usually mild (and healthy) retreat (around 4% on average by S&P 500) from mid-February to mid-March in election years with a sitting president running for reelection could be a good opportunity to establish new or add to existing positions. Election year seasonal patterns suggest respectable full-year gains.

 

S&P 5,000 Is Here, Now What?


“It has happened before.” Coach Lou Brown on winning streaks in Major League II

Stocks have picked up right where they left off last year, with new highs across the board and the S&P 500 officially closing above 5,000 for the first time. Although on the surface there isn’t much of a difference between 5,000 and 4,999, it’s an important psychological milestone for investors. One year ago, investors were being bombarded by talk of the bear market and an imminent recession. But now we have a healthy economy, well-contained inflation, a Federal Reserve (Fed) set to cut rates, improving productivity, record earnings, and stocks at all-time highs. What a ride it has been, but investors were once again rewarded for sticking to their investment plans.

So, what now? At Carson, we remain overweight equities and expect this bull market to continue. But stocks have truly had a rally for the ages, so a well-deserved break or consolidation could happen at any time. A downturn would be perfectly normal, but higher prices remain likely to follow.

The chart below lists previous major S&P 500 milestones and the returns that followed. The good news is the S&P 500 was higher six months later every time and up a solid 8.0% on average, versus the average six-month return of 4.4%.



A Truly Historic Bull Move
The S&P 500 has finished higher 14 of the last 15 weeks, something it hasn’t done since early 1972. Over those 15 weeks it gained 22%. In its entire history, the S&P 500 has never been higher 14 out of 15 weeks and gained more than 20% over that time. If you’ve been invested these last 15 weeks, congrats, as it is safe to say you’ve been enjoying a historic stretch for the bull market.

After a 20%-or-better rally over 15 weeks, would you believe the market tends to see stronger longer-term returns moving forward? That’s right, this type of strength isn’t typical of the end of a bull market or the middle of a bear market. Instead, it’s more typical of the start to a longer-term bullish move.

We found 14 other times the S&P 500 gained 20% or more in 15 weeks. One year later the index had added another 12.5% on average and was higher 85.7% of the time.



Time for a Break?
We’ve been bullish, but we agree stocks can’t continue on a trajectory like this forever. But remember, a pause to refresh and let the bull catch its breath would be perfectly normal.

First up, February historically isn’t a very strong month and it is later in the month when most of the weakness tends to happen. Additionally, election years tend to be weak this month as well.



Next is our Carson Cycle Composite, which combines multiple different types of years to form one overall composite. Included are things like the average year, the past 20 years, the presidential cycle, the year after a 20% gain, and years with a positive January. Looking at this proprietary composite shows that the next six weeks or so could be ripe for a well deserved break. Take note, our Carson Cycle Composite worked very well last year.



Putting It All Together

The economy remains strong, earnings are expected to hit an all-time high this year, consumers are in great shape, the employment backdrop is solid, inflation is under control, productivity is soaring unlike anything we’ve seen since the mid to late ‘90s, the Fed will likely begin to cut over the coming months, and we don’t have to watch Taylor Swift every single Sunday anymore. Things really are good and should continue to stay that way.

But markets rarely work that way. When things are too good could be just the time for the rug to get pulled out from under it, even if it’s just a pause. We aren’t expecting a major correction here, but be open to a little more weakness than we’ve been spoiled by the past 15 weeks.

I’ll leave you on this note, the S&P 500 is up more than 5% for the year during the month of February. We would classify this as a good start to the year. 28 other years saw this happen, and the final 10 months gained 25 times and the full year 26 times, in both cases with much better than average returns as well. So should we see any well-deserved weakness in the near-term, it could be an opportunity to add before likely higher prices.

 

January Inflation Came in Hot, But Let’s Calm Down Here


Ouch! That was my reaction to the hotter-than-expected January Consumer Price Index (CPI) report, though that was mild compared to what happened in markets. The S&P 500 fell 1.4% on Tuesday. Bond prices fell as well, with 2-year and 10-year Treasury yields jumping 0.14%-points to 4.63% and 4.31%, respectively. This was on the back of a big shift in the narrative around Federal Reserve rate cut expectations – the timing of the first cut is now pushed out to June and investors are pricing in about 4 rate cuts in all of 2024, equivalent to 1%-point. A month ago, investors believed the first cut would happen in March and the Fed could cut 6-7 times in 2024. That’s a big shift in a relatively short period of time, and the January CPI data underlined the shift.



Headline CPI rose 0.3% month over month in January, above expectations for a 0.2% increase. Core CPI, excluding volatile food and energy components, rose 0.4%, above expectations for a 0.3% increase. Over the last three months, headline inflation is running at a 2.8% annualized rate and core inflation is at 4.0%, well above the Fed’s target of 2%.

Now for the qualifier, and I have a few.

For one thing, January is a very volatile month for inflation data, more so when inflation is relatively high – this was the case in 2022 and 2023, when we saw relatively large spikes. Even this time around, expectations were all over the place, reflecting the uncertainty. Seasonal adjustments help, but even that doesn’t remove the larger-than-normal start-of-the-year price spikes.

Two, CPI inflation is currently elevated mostly because of shelter (housing) inflation. If you exclude shelter, headline inflation rose just 0.1% in January. It’s running at an annualized pace of 1.1% over the last three months and 2.1% over the last six months. Over the past year, CPI excluding shelter is up just 1.6%.



What’s the Deal with Shelter Inflation?

It would be one thing if official shelter inflation data reflects what’s happening in reality. But it’s not. Ryan and I have been writing about this for close to a year and half now, and talked about it on our Facts vs Feelings podcast as well.

Shelter inflation within CPI is made up of two components:

• Rents of primary residences, which makes up 8% of CPI.
• Owners’ equivalent rent of residences (OER) makes up 27% of CPI. It’s the “implied rent” that homeowners would have to pay if they were renting their homes. It’s as if you, as an owner, are renting the home to yourself as a service. The “rents” in OER are determined using equivalent homes, and so they essentially track rents. It has nothing to do with home prices, or mortgage rates.

Immediately, you can see a problem. 66% of American households own their homes, which means the CPI basket (a quarter of which is made up of OER) misrepresents inflation experienced by most households. Keep in mind that the actual “servicing cost” of a home is mostly the mortgage, and the average effective mortgage rate paid by homeowners is about 3.5%.

In short, the large weight of shelter in CPI is a big problem. The Fed actually focuses on another inflation metric, the personal consumption expenditures index (PCE), of which shelter makes up just 15%, so the problem is not as big on that side. PCE is running well below CPI as a result.

The other issue with official shelter inflation relates to how it’s measured. Private market data usually tracks only new leases, whereas official data considers both new and existing leases. However, most leases are not up every month, and are instead negotiated for longer periods like 1-2 years. This creates a lag between official and actual market data. Another problem is that the Bureau of Labor Statistics (BLS) samples units only once in 6 months, and they smooth price changes over 6 months. So rapid shifts in the rental market can take a long time to show up in official data. The lag can be 12-18 months.

Apartment List’s national rental index has been decelerating since November 2021, and rents have actually been falling on a year-over-year basis for 8 months now. The good news is that official shelter inflation finally started decelerating last summer, but it’s been agonizingly slow.



Then January threw a further wrench into the data. Rents rose 0.3% in January, equivalent to an annualized pace of 4.2% — the slowest since September 2021. But OER surged to an annualized pace of 6.9%, the fastest since April 2023. It’s extremely rare for these two to diverge like this, and by itself the rents data is probably more meaningful. In all likelihood, the OER surge is not the start of an upward trend.



How to Make Sense of It All

The big picture is that disinflation is happening, but shelter inflation is keeping CPI elevated. Outside of shelter, services inflation is still relatively high, albeit, skewed by “start-of-the-year” January effects. However, this is being offset by falling commodity prices, even outside energy. Prices for used cars, apparel, household furnishings, and prescription medicines have been falling recently.

A year ago, headline CPI inflation was up 6.4% year over year. That’s now at 3.1%. We’ve made a lot of progress, without a slowdown in economic growth or an increase in unemployment. Nothing we see in other data suggests we’re at the start of another inflation surge. Ultimately, this report is likely to be just a bump in the strong downward inflation trend that began 18 months ago. By mid-2024, barring major surprises, core inflation, especially the Fed’s preferred metric of core PCE, should be very close to the Fed’s target of 2%.

With respect to policy, we still expect rate cuts in 2024. However, absent a recession, we were never in the camp that we’d see much more than four rate cuts in total. That’s where the market is now. Of course, there’s been a big shift, but here’s a big positive: the S&P 500 is up 4% year to date despite markets getting less optimistic about the rate cut path. Now, there may be some volatility over the next month or two. As Ryan wrote in his latest blog, February and March are historically weak periods for stocks. Stocks also just gained for 14 out of the last 15 weeks, and so a break is due. The January inflation report may have served as a catalyst right on cue. But at the end of the day, the economy is strong, and the stock market has momentum, which means the bull market is likely to continue.

 

A Full Deck for Bitcoin
Wed, Feb 14, 2024

The price of bitcoin took out its early January high and topped $52,000 for the first time since December 2021 today. Bitcoin’s price traded at a short-term peak in early January just as the ETPs tracking the largest cryptocurrency started trading. From that high on January 11th, prices pulled back over 21% in less than two weeks which, even for bitcoin, is a steep decline in such a short period.



As bitcoin pulled back from that early January high, it looked as though its price would follow a similar path to the one it tracked following other approval milestones. In December 2017, after bitcoin futures launched, prices almost immediately peaked and plunged more than 80%. Then again in October 2021, when the bitcoin futures ETF first launched, prices peaked shortly after once again, resulting in what was ultimately another decline of close to 80%.

As we noted a couple of weeks back, the one difference between the launch of the bitcoin ETPs in January and the other two periods was that while bitcoin’s price was at or right near record highs at each of those prior two points, it was still down over 30% from its all-time high. While “investors” may have been enthusiastic ahead of the launch, the level of excitement was not nearly as strong as it was in late 2017 and late 2021. Even after today’s run to multi-year highs, Bitcoin is still more than 25% below its all-time high.

 

Sturdy Sentiment
Thu, Feb 15, 2024

With the S&P 500 pulling back in the past week, sentiment has likewise taken a less optimistic tone. This week's AAII sentiment survey showed 42.2% of respondents report as bullish compared to 49% one week ago. Although that is lower, the bullish reading is still well above the historical average of 37.6% and is only at its lowest level since the end of January.



While sentiment currently holds a bullish bias, things are not exactly extreme. For example, back in December more than half of respondents reported as bullish and the current level of bulls only ranks in the 69th percentile of all weeks on record. What is perhaps more impressive is how consistently sentiment has stood at bullish levels. As shown below, over the past four months 87.5% of weeks have seen bullish sentiment come in above 40%. Such consistency of this level of bullishness has not been observed since April and May of 2021. Prior to that, you'd have to go back to January 2015 to find as elevated of a reading.



Meanwhile, bearish sentiment ticked up from 22.6% last week to 26.8% this week. That is the highest reading in a month, but inverse to bullish sentiment, it remains well below the historical average of 31%.



Given there has been consistent readings of bulls above 40%, there is also an impressive streak for bearish sentiment. This week marked the fifteenth consecutive time that bearish sentiment has come in below 30%. That is currently the longest streak since July 2021, and prior to that, there have only been a handful of other streaks that have lasted as long. There was another 15 week long streak that ended in January 2014 but you'd have to travel back another decade to find the next streak of similar length.

 

DJIA Up 11 of Last 13 Days Before Presidents’ Day Weekend

Trading before Presidents’ Day Weekend used to be miserable. However, there has been an improvement over the last 13 years. The longer-term track record of the market’s performance ahead of Presidents’ Day weekend from 1990 through 2010, shows DJIA, S&P 500 and NASDAQ suffered numerous and sizable declines especially on Friday. However, more recently, since 2011, the Friday before Presidents’ Day has been improving (shaded in light grey in table below). DJIA on Friday has the best record over the last 13 years, up eleven times with an average gain of 0.43%. S&P 500 has been nearly as strong, up ten times, but with a slightly softer average gain of 0.32%. NASDAQ trails both in average performance and frequency of gains with eight advances in the last thirteen years.

 

Up 7 of Last 12 After Presidents’ Day but Still Weak Long Term

DJIA, S&P 500 and NASDAQ are all up 7 of the last 12 years on the day after the Presidents’ Day market holiday with average changes ranging from -0.19% for DJIA to 0.01% for NASDAQ. Our February 2024 Strategy Calendar for members shows conflicting indications for this Tuesday, February 20, the day after Presidents’ Day. Over the most recent 21 years (2003-2023) the 13th trading of February has been down 61.9% of the time for S&P 500 with average loss of -0.28% earning the day our “Angry Bear” icon.

Yesterday’s post noted the improving trend of market performance ahead of Presidents’ Day weekend. As you can see in the table here the days after has modestly improved the past 12 years but the Wednesday after has not enjoyed the same turnaround and both days still display a fair amount of red. Since 1990, Tuesday after Presidents’ Day has been strongest for the S&P 500 with 18 gains and 16 losses with a median gain of 0.08% but with an average loss of –0.30%. DJIA is 50/50 on the Tuesday after, but NASDAQ is a net loser down 21 of 34 years with an average loss of –0.56% and a median loss of –0.32%.

Wednesday is all red for all three major averages. NASDAQ and S&P 500 have more losses, but DJIA is a loser as well. On the Wednesday after the Presidents’ Day holiday DJIA is down 18 of 34 with an average loss of –0.10% and a median decline of –0.16%. S&P 500 is down 21 of 34, average –0.08%, median –0.11% and NASDAQ is down 19 of 34, average –0.10%, median –0.14%.

Today’s hotter than expected PPI (combined with a similar CPI report earlier this week) is a stark reminder that inflation and higher interest rates could be around longer than the market had hoped.

 

Why the Consumer and Households Appear to Be in the Best Shape in Decades


“Not everything that can be counted counts.” -Albert Einstein

As you’ve probably heard many times by now if you follow the headlines, the US consumer is flush with debt and about to go under in a surge of bankruptcies and the end of civilization could be near. I’m joking, of course. We don’t think that’s actually true. But you still see that view plenty, unfortunately. Here’s one recent example.



Why does the consumer matter? Household consumption makes up close to 70% of our economy and if they are strong, safe to say a recession isn’t likely to happen.

Let’s not waste any more time here. The consumer actually appears quite healthy and we need to push back against the constant doom and gloom crowd.

Household Balance Sheets Are the Best They’ve Been in Decades
Yes, we have a lot of debt (liabilities), as we hear about all the time. But what they don’t tell us about is equity (assets) are significantly higher. Have you owned a home or stocks the past five years? Safe to say your overall wealth has increased substantially as a result.

Here’s a great chart from Sonu Varghese, Global Macro Strategist, that breaks down household balance sheets. He looked at assets (housing, stocks, cash, etc.), liabilities (mortgages, car loans, credit cards, student loans, etc.), and net worth, but as a percent of disposable income. Doing this showed that although we hear all the time about how much debt there is, it is right where it was in the late 1990s when looked at as a percent of disposable income (right near 100%). In fact, we might have more overall debt now than any time in history, but it is well off what we saw right before the Great Financial Crisis (GFC) started as a percent of disposable income (137% then versus 100% now). This happened because debt might be up, but disposable incomes are up substantially as well. (Many tend to focus on only the numerator, ignoring the denominator. We call this denominator blindness). Then as you can clearly see below, assets and net worth have increased more over time, suggesting household balance sheets are as good as they’ve been in decades. Again, this isn’t what the nightly news tells us when they talk about the consumer.



What About $17.5 Trillion in Debt?
Recent data from the New York Federal Reserve showed that overall total debt for US households was up to a record $17.5 trillion. How worried should we be? That’s a LOT of debt last I checked.



Overall debt has grown by $988 billion over the past year, consisting of:

• • Mortgage debt: +583B
  • Home equity: +$38B
  • Auto loans: +$83B
  • Credit card: +$204B
  • Student loans: +$27B

The pace slowed to a 1.2% gain in the fourth quarter from a 1.3% jump in the third quarter. But here’s the real interesting take on this – disposable income increased $1.33 trillion! or 6.9% last year, well above any inflation metric you want to use.

It is quite rare to see disposable income grow more than overall debt. Also, since disposable income is used to service debt, households became less leveraged last year.



Incomes Continue to Increase
Jobs are plentiful and wages are still paying more than inflation, which is a nice combo for the consumer. If people were worried about their jobs or their pay was taking a cut, it isn’t unreasonable to think the consumer could be in trouble. Fortunately, we aren’t seeing that currently.

In fact, incomes adjusted for inflation continue to move to new highs. We actually noted this a year ago as a reason not to expect a recession in ’23 and not much has changed.



Oh No, Credit Card Debt Is HIGH!
We hear this one all the time. Credit card debt is at an all-time high, over $1 trillion. Yes, this is a huge number, but again, you need to look at this number compared to other factors.



$1.13 trillion is a lot of credit card debt. But remember from above there is $17.5 trillion in total household debt (and we already put that in context), so credit card debt is only about 6% of overall debt, with mortgages making up most of it at more than $13 trillion.

Let’s think about this another way. People are worth a lot more over the past few decades. In fact, since 2000, net wealth is up more than 250% compared with credit card debt, which is up only 125%. Again, if you are worth more, you might have more debt.



Now back to disposable income. If you have more income coming in, you might have more debt. I know. I have three kids and one just got a car. I have more debt thanks to that auto loan, but fortunately over the years my disposable income has increased to help offset that new monthly payment and big jump in insurance!

Looking at credit card debt as a percent of disposable income shows we are simply back to pre-pandemic levels at around 5.5% versus 7-8% during the GFC.



Another thing we hear is consumers are maxing out their credit cards to keep things going, but looking at the data shows that simply doesn’t appear to be true. Looking at how much consumers use on their credit cards relative to their overall line of credit is called credit utilization. Would you believe this is running at 24%, the pre-pandemic average? Home equity credit utilization, meanwhile, is nowhere near previous levels. This could be another big positive for consumers down the line as they tap into the massive gains from their homes. It simply doesn’t appear that consumers are maxing out their lines of credit.



Payments Are Late or Are They?
One of the better ways to know how much trouble the consumer is really in is if they have stopped paying back debt. The chart below indeed shows we’ve seen a jump in credit cards that are in serious delinquency (90 plus days with no payment), potentially the canary in the coal mine.



But as we mentioned already, credit cards are only about $1 trillion of the overall $17.5 trillion in debt. Not to mention we’ve seen data suggest it is younger people who are getting in trouble with credit cards, not the high-income earners who move the needle on overall consumption.

Looking at all the debt out there shows a much better backdrop, as 96.9% of all payments are on time, compared with 95.3% at the end of 2019 (a solid economy) and 93.3% at the end of 2007 (right before massive trouble). Also note that the most severely derogatory balances are only 1.5% of all total balances. This was running close to 2.8% pre-pandemic and 3% before the GFC.



This data is updated by the New York Fed quarterly and we will continue to monitor it closely, but at this time we simply aren’t seeing any major cracks in the consumer.

Bankruptcies and Foreclosures Are Soaring
Well, no they aren’t is the quick answer. Here’s the truth.

• The number of consumer foreclosures rose from 36,100 to 40,220 in Q4, which was well below the Q4 2019 level of 71,420.

• The number of consumer bankruptcies fell from 115,660 to 113,600 in Q4. It was running at 201,820 in Q4 2019.

Let’s say that again: The number of bankruptcies FELL last quarter. Yes, this can change and change quickly, but until we see this actually start to increase, it is hard for us to say the consumer is doomed. Again, this all tells us how strong household balance sheets really are relative to history (even a fairly solid period like 2019).

 

Asset Class and Stock Performance Since 10/27/23
Fri, Feb 16, 2024

Below is an updated look at our popular table that highlights the performance of various asset classes using key ETFs (or ETPs) traded on US exchanges. For each asset class, we show its performance since COVID hit on 2/19/20, since the current bull market began on 10/12/22, and since the low last quarter on 10/27/23.

Since October 27th (less than four months ago), the S&P 500 ETF (SPY) is now up 22.8%. That's a big move. The Tech-heavy Nasdaq 100 (QQQ) is up even more at 25.95%, and interestingly, the small-cap Russell 2,000 (IWM) is up nearly the same amount at 25.58%.

At the sector level, we've seen Technology (XLK) and Financials (XLF) gain the most since 10/27/23, while Energy (XLE) is up the least at just over 2.7%.

Outside the US, we've seen China (ASHR) actually fall 2.3% since 10/27, while Israel (EIS) is up 38%. Natural gas (UNG) is by far the worst performer in our table with a drop of 47%.

Looking at fixed income ETFs, the 20+ Year Treasury ETF (TLT) is up 11.3% since 10/27/23, but it's still down 30.37% on a total return basis since COVID hit in February 2020.



Below is a quick six-month chart of SPY so you can see the sharp move higher seen since 10/27:



Within the large-cap Russell 1,000, we've seen 12 stocks gain more than $100 billion in market cap since 10/27/23, including a $794 billion gain for NVIDIA (NVDA).



In terms of percentage gainers, below are the 20 best performing Russell 1,000 stocks since 10/27/23. Coinbase (COIN), Affirm (AFRM), and Coherent (COHR) are the three stocks up more than 100%, while Lyft (LYFT), SentinelOne (S), Karuna (KRTX), Uber (UBER), and Crowdstrike (CRWD) are all up more than 90%.



Not everything is up, though. Below are the 20 worst performing Russell 1,000 names since 10/27/23. SSR Mining (SSRM) has been the worst with a decline of 65.2%, followed by agilon health (AGL) with a drop of 60.2%. New York Community Bancorp (NYCB) is down 46.6%, while AMC Entertainment (AMC) is down a hair less at 46.34%.



The huge rally we've seen in some areas of the market has left a large number of stocks trading above their consensus analyst price target. As of today, nearly 16% of Russell 1,000 stocks were trading above their consensus analyst price target, and below are the ones the farthest above.

Coinbase (COIN) has been the best performing stock in the Russell 1,000 since 10/27, and it's also now the farthest above where analysts think it should be trading. GameStop (GME) ranks second at 36.76% above its average analyst price target.



One last table...

Below is a list of stocks that have done well since 10/27 (up 20%+) but remain well below (20%+) their consensus analyst price target. These are names that have been rallying but analysts think there's more gas in the tank.

 

One Worry Right Now? The Calendar.


“I’ve been on a calendar, but I’ve never been on time.” -Marilyn Monroe

The S&P 500 fell slightly last week. It was probably due to happen, as this comes on the heels of the first time in history the index was higher 14 out of 15 weeks while advancing more than 20%. In other words, some type of a pause would be perfectly normal.

Looking at last week’s weakness, it was mainly due to large tech and communication services names, while areas like small and mid-caps actually gained on the week. We all know how well the largest tech names have done over the past year, so some potential weakness taking place is noteworthy. But then, there are always opportunities somewhere and if we do see continued rotation out of some of the highfliers we wouldn’t be surprised to see flows move to some of the under-loved areas of the market like small and mid-caps.

Take note that February is typically one of the weaker months of the year, but most of that weakness happens the second half of the month. Since the first half of February was strong, we’d suggest being open to possible weakness over the coming weeks.



Additionally, our Carson Cycle Composite suggests the potential for a break heading into late March is quite high. This composite looks at various types of years and combines them into one cycle. We look at the average year, average year the past 20 years, year four of the Presidential cycle, and year four of a new President, the year after a 20% gain, and years that had a higher January. As you can see here, combining all those years has the potential for near-term weakness on alert.



We Aren’t Alone Anymore

This time a year ago we would tell anyone who would listen that the economy was likely going to avoid a recession and stocks were going to have a great year. Not many agreed (it felt like no one agreed to be honest), but fortunately things played out as we expected. We are now noticing many others are coming around to our more optimistic views, which is why we called our 2024 Outlook Seeing Eye to Eye.

But in the near term, to see many bulls coming into the fold is a potential concern. I’ve even seen some of the more vocal perma-bears from last year claiming they are now bullish. Of course, they blame the Fed or United States Secretary of the Treasury Janet Yellen for the rally, as if they have some magic button that creates a bull market. They don’t and they surely don’t have an easy button that lets productivity grow at 3.9% annualized the past three quarters either. The stock market is strong because corporate profits are improving, the consumer is healthy, inflation is trending lower, and the Fed is likely going to start cutting over the coming months.

Multiple sentiment polls are indeed showing big jumps in optimism, which has my contrarian bell dinging. I’m a big fan of the Bank of America Global Fund Manager Survey and it just showed overall sentiment at the highest level in two years. Now note, this is still nowhere near previous peaks, which says we could have a ways to go before the ultimate peak, but this jump in optimism should be noted.



One more from that recent GFS that caught my attention was the number of managers looking for ‘no landing’ is jumping. If you’ve followed us then you know all of last year Sonu Varghese, VP, Global Macro Strategist, was saying the plane had plenty of fuel and never needed to land, but it appears others are finally catching onto what he was saying all along. This is fine, but from that contrarian point of view is worth noting. Since avoiding a recession is normal, falling concern about the economy isn’t contrarian in itself, but we do lose some of the potential extra fuel from bearish views unwinding.



The Valentine’s Day Indicator Flashes Green, Not Red

We want to be clear here. Should stocks take a well-deserved break, we would still expect likely higher prices by year end. The economy remains on a firm footing overall, we expect to see record earnings this year, profit margins are curling higher, business investment is strong, inflation overall remains in a downtrend, and the Federal Reserve Bank (Fed) will likely begin cutting over the coming months. We were bullish all of last year, when many others were forecasting a recession and a bear market. Fortunately, we continue to see many positives out there overall.

Here’s one more bullish bullet point. The S&P 500 was up more than 4% for the year on Valentine’s Day, which trigged a positive Valentine’s Day Indicator. We found 28 other times stocks were up at least 4% for the year on this day and the rest of the year was quite green, higher 26 times (92.9% of the time) and up more than 13% on average, compared with the average year up 7.5% and higher 73.0% of the time.

 

Par for the Course After Presidents' Day
Tue, Feb 20, 2024

As we noted in today's Morning Lineup, international equites were generally lower yesterday while US markets were shuttered in observance of President's Day. The US is continuing the negative tone today with the S&P 500 down roughly 50 bps as of this writing. Of course, seasonality is never the sole reason for ups and downs of the market, but we would note that today's weakness is basically par for the course coming back from Monday's holiday. In the charts below, we show the average daily change and percentage of time with a move higher for the S&P 500 during the week of Presidents' Day since 1970 when the stock market began to observe the holiday on the third Monday of February.

As shown, historically the S&P 500 has averaged an 18 bps decline the first day back from President's Day with positive performance less than half the time. Furthermore, assuming the declines hold through the close, today would mark the fifth year in a row that the S&P 500 fell on the Tuesday after President's Day. Wednesdays and Thursdays of the week of Presidents' Day have historically seen even more consistently negative price action albeit the average declines are much smaller at 2 bps and 3 bps, respectively. Finally, Friday tends to see a rebound with an average gain of 17 bps and positive performance 57% of the time.