Not Pessimistic But Not Optimistic Either Thu, Dec 9, 2021 The S&P 500 has made a quick recovery in the past week closing within a few basis points of a new 52-week high yesterday. In spite of that improvement to price, sentiment has yet to fully buy-in. The American Association of Individual Investors weekly sentiment survey only saw a modest improvement to the percentage of respondents reporting as bullish. Just under 30% of respondents reported bullish sentiment versus a level of 26.7% last week. That snapped a streak of back-to-back-to-back declines but still leaves bullish sentiment 4.1 points below where it was only two weeks ago. While the change in bullish sentiment was nothing to write home about, bearish sentiment plummeted 11.9 percentage points to 30.5%. That was the largest single-week decline since 10/17/19 when bearish sentiment collapsed an even larger 12.91 percentage points. Back then, that brought bearish sentiment to a similar level of 31.05%. In spite of bearish sentiment's big reversal lower, the bull-bear spread remains negative, albeit not by much. Considering bullish sentiment did not meet the big drop in bearish sentiment, neutral sentiment made up the difference rising 8.8 percentage points to 39.8%. That is the highest level of neutral sentiment since the first week of 2020 when it eclipsed 40%. While the AAII numbers showed a big reversal in bearish sentiment, other sentiment indicators took more pessimistic tones this week. The NAAIM Exposure Index collapsed further to the lowest level since mid-October while the Investors Intelligence survey saw the biggest one-week drop in bullish sentiment since October 2019 to the weakest reading since early April 2020. Bearish sentiment, meanwhile, saw the largest one-week uptick since June 2012. As a result of the combined moves across these indicators, our sentiment composite has continued to plummet and is now in negative territory and at the weakest level since late September/early October.
Strange Bedfellows: Technology, Energy, and Consumer Staples Lead Mon, Dec 13, 2021 Technology (XLK), Energy (XLE), and Consumer Staples (XLP) tend to trade quite differently from each other for a variety of reasons. The Consumer Staples sector tends to be more defensive in nature as spending on the 'essentials' tends to hold up better in times of uncertainty than spending on more cyclical goods. XLE is largely levered to the price of energy commodities but also acts as an inflation hedge. Technology, meanwhile, tends to do best in a bullish tape as investors gravitate towards sectors with the brightest growth prospects. Because these sectors have different exposures, it is uncommon to see weeks like last week where these three sectors top the leaderboard for a given week. In fact, this has only occurred 9 times since the start of 2000, and two of those occurrences were in back-to-back weeks at the end of 2007. In the table below, we show each of the prior weeks that Technology (XLK), Energy (XLE), and Consumer Staples (XLP) were the three top-performing sectors (without a prior occurrence in the last three months) along with the S&P 500's performance over the last following week, month, three months, six months, and one year. In more than half of the prior eight occurrences, the equity market was lower during weeks when this occurred, and in the two prior weeks where the S&P 500 was higher, it was up less than 1%. In other words, there has never been a week like the last one where the S&P 500 was up close to 3% and these three sectors topped the leaderboard. After the eight prior occurrences, the S&P 500 was consistently higher one week and one month later with positive returns six out of seven times. Moving further out, though, the consistency of positive returns was less. In fact, three months later, the S&P 500 was only higher four out of seven times, while six and twelve months later it was higher five out of seven times. Somewhat ominously, the worst forward returns came after the occurrence almost exactly fourteen years ago in December 2007 when the S&P 500 went on to decline 40% in the following year. One difference between that period and last week, though, was that instead of those three sectors leading the market in a week where the S&P 500 was up over 2%, in that week the S&P 500 was down over 2%.
Inflation Concerns Surging Tue, Dec 14, 2021 Small business sentiment picked up slightly in November with the NFIB's monthly reading rising 0.2 points as expected. As for what businesses reported to be their biggest problems, as we noted in today's Morning Lineup, labor concerns remain top of mind. A combined 38% of respondents reported either cost or quality of labor as their biggest issue. The former of which actually improved in November while the latter surged 5 percentage points. That was one of the largest one-month upticks to date and leaves it at a record high. Meanwhile, there have been been a couple of other indices hitting record lows: competition from big businesses and financial conditions and interest rates. Poor sales also came in the bottom 1% of readings. While the largest share of companies see cost or quality of labor as a concern and the combined reading was higher versus October, that was still below the peak of 40% set in September. Panning across the other problems, other than labor, inflation is the other key issue for small businesses. The percentage of respondents reporting inflation as their biggest issue has surged in recent months gaining another two percentage points to 18% in November. As shown below, the only other time in which as high of a share of respondents saw inflation as the biggest issue was in 2008. While there is not enough information to distinguish what the exact problems are, "other" also plummeted in November after a brief spike higher in October. Pivoting back to inflation, the massive jump in November means it tied taxes as the second most important problem for small businesses. In the chart below, we show the rankings of those two series as well as the quality of labor (which is currently the most important problem) over the history of the survey. The surge in inflation's importance is unprecedented in this data save for 2008 when it was briefly the most important problem.
Meme Stock Breakdown Tue, Dec 14, 2021 There have been plenty of market happenings and themes in 2021 but perhaps one of the more intriguing ones was the recurring bouts of meme stock mania. The first of these was the massive short squeeze in shares of GameStop (GME) in the first month of the year which pulled other highly shorted names higher along with it. One of those other stocks was AMC Entertainment (AMC) which would later become the poster child for another string of outperformance of heavily shorted names. In the time since then, these stocks have generally trended sideways maintaining huge gains on the year, but they are also well off their highs. And in the past few days, these stocks have fallen below support and below the past several months' ranges. Checking up on highly shorted stocks, last Thursday the latest short interest data through the end of November was released. As shown below, of the Russell 3,000 stocks, Prelude Therapeutics (PRLD) currently has the highest level of short interest with 85.67% of shares sold short. Couchbase (BASE) is the only other stock with over half of shares shorted. BASE is a very new stock, though, debuting in July, after the GME and AMC short squeezes. The same can be said for stocks like Xometry (XMTR), Torrid (CURV), and Verve Therapeutics (VERV). For the most part, the stocks that are currently the most heavily shorted are down dramatically on the year and since the short squeeze peaks/meme stock manias of earlier this year (1/26 for GME and 6/2 for AMC). The only one of the top 20 most heavily shorted stocks that is up year to date is Gogo (GOGO) with a 33.44% gain. Notably, those aforementioned meme stocks no longer find themselves high up on the list of the most heavily shorted stocks. In fact, of all Russell 3,000 members with 10% of float sold short, GME ranks as the 396th most heavily shorted today whereas it was by far the most shorted at the start of the year when 144.34% of shares were sold short. Given that decline, it is the stock that has seen the largest drop in short interest year to date. Dillard's (DDS), BigCommerce (BIGC), and Ligand Pharma (LGND) have also seen drops of more than 50 percentage points in short interest as a % of float. While there have been some huge declines in short interest, not all are necessarily a result of a short squeeze. For example, Acutus Medical (AFIB) and American Well (AMWL) have both seen a consistent grind lower this year that have left them with single-digit prices and year-to-date declines of 89% and 75%, respectively. Turning to the opposite end of the spectrum, in the table below we show the stocks that have seen short interest rise the most since the start of the year. PRLD is at the top of the list with a 67.46 percentage point increase. The next highest is Skillz (SKLZ) which has risen 37.82 percentage points. For the most part, these stocks that have seen short interest climb the most are down big on the year. There are a handful of exceptions though with Citi Trends (CTRN), AerSale (ASLE), Fisker (FSR), Big 5 Sporting Goods (BGFV), and Independence Realty Trust (IRT) having seen double digit percentage point jumps in short interest following big gains upwards of nearly 90% this year.
Claims Back Above 200K Thu, Dec 16, 2021 After hitting a multi-decade low last week, seasonally adjusted initial jobless claims rose back above 200K. While a minor deterioration, the current level of claims remains one of the strongest readings on record. While claims are at a healthy level, the seasonal adjustment has had a flattering effect recently. Unlike the SA number, on a nonseasonally adjusted basis, no recent week has seen a sub-200K reading with the current week falling to 267.5K from 283.9K the prior week. From a seasonal perspective, claims falling week over week is very much normal for the given week of the year (50th) with nearly 90% of years since 1967 experiencing such a decline. Only five other weeks of the year have seen claims fall WoW more consistently. Delayed one week to initial jobless claims, continuing claims hit a new low for the pandemic of 1.845 million in the first week of December. The marks the strongest reading since the week of March 13, 2020. Including all other programs creates an additional week of lag making the most recent data through the final week of November. Total continuing claims as of that week ticked higher to 2.46 million versus 1.95 million the previous week. That is the highest reading since the end of October. Even though pandemic era programs have now technically expired, the pickup in claims was broad across programs but regular state claims were the main driver of the overall increase.
Investor Sentiment Turning More and More Bearish Thu, Dec 16, 2021 The S&P 500 is hovering right near record highs but recent sentiment readings would have you thinking otherwise. The AAII's reading on bullish sentiment fell from 29.7% last week to 25.2% this week. That is the lowest reading on bullish sentiment since the week of September 16th when it was at 22.4%. Bearish sentiment, in turn, rose 8.8 percentage points to 39.3%. While that was the largest one-week uptick in bearish sentiment since mid-September, the actual level of bearish sentiment was even higher only two weeks ago. Neutral sentiment fell by a similar amount to bullish sentiment this week. After hitting one of the highest levels of the past couple of years last week, neutral sentiment moderated to 35.4% this week. While the AAII survey showed overall bearish tones this week, the NAAIM Exposure Index has taken an even more pessimistic turn. This index ranges from +200 (leveraged long) to -200 (leveraged short) and this week the index fell to 52.2. That indicates reporting investment managers' exposure to US equities is roughly 50%. That is the lowest reading since this past spring and prior to that, the spring of 2020 was the last time with as low of a reading. Given the rise of bearish sentiment across indicators this week, our sentiment composite has now fallen to the lowest level since May 2020. This composite averages across the current readings (normalized by standard deviations from the historical average) for the bull-bear spreads of the AAII and Investors Intelligence surveys and the NAAIM index.
December Volatility Spike Tue, Dec 21, 2021 December typically tends to be a month of lower stock market volatility following a period in late October and early November when volatility tends to peak. This year, however, has been quite different. As of yesterday's close, the one-month rolling average of one-day absolute moves for the S&P 500 was 1.06%. (This means the S&P 500 has been averaging a daily change of +/-1%+ over the last month.) As shown in the dark blue line below, this has actually been the most volatile one-month period for all of 2021. As the light blue line shows, daily volatility for the S&P 500 is usually plummeting at this time of year as traders typically slow down dramatically around the holidays. Since the 5-day trading week was established back in September 1952, December has historically been the least volatile month of the year, averaging an absolute daily change of 0.61%. This year, the average daily change since the start of December has been 1.07%, which is far above the next closest level seen in March 2021 (+/-0.83%). October, the month that has historically been the most volatile month of the year, ranked 6th in 2021. So what tends to occur when volatility inverses its seasonal trend in December? Since 1953, there have been five prior years where December was the most volatile month of the year: 1973, 1978, 1985, 1995, and 2018. Below we show how the S&P 500 performed in January following the five prior years listed, and we also show the full next-year change. As shown, January was positive in four of five instances, and the one January that saw a decline was in 1974 when it fell only 1%. In the most recent occurrence, the 9.2% decline in December of 2018 was followed by a 7.9% move higher in January of 2019. In the following year, the median performance of the S&P 500 was +14.6%.
Bears Still Outnumber Bulls Despite Rally Thu, Dec 23, 2021 The S&P 500 is currently at record highs, but recent sentiment readings are still relatively bearish. However, this isn't necessarily negative for markets, as it gives the opportunity for bears to shift their position, which would likely be accompanied by an increase in equity purchases. AAII's reading on bullish sentiment moved from 25.2% last week to 29.6% this week. This week's reading is still 6.7 percentage points below the average since 2009. In turn, bearish sentiment dropped from 39.3% down to 33.9%, which is only 1.8 percentage points higher than the historical average level. This week's reading was also the second-largest week-over-week decline in bearish sentiment since September 9th. Neutral sentiment ticked higher by 1.2 percentage points, resulting in 36.6% of respondents reporting a neutral view of the market. This is the lowest absolute change in a month and is 5.0 percentage points higher than the average level. The NAAIM Exposure Index moved higher this week alongside bullish sentiment. The index ranges from +200 (levered long) to -200 (levered short) and this week the index moved from 52.2 to 67.0, essentially erasing last week's significant drop. That indicates reporting investment managers' exposure to US equities is roughly 67%.
IPO Death Cross Wed, Dec 29, 2021 The past two years have seen an explosion in new equity issuance in terms of the number of deals, and especially in terms of the dollar value of those deals. According to Bloomberg data, US average monthly issuance has been $23.83 billion over the past year. That is well above any point in the past few decades including the late 1990s. The actual number of stocks hitting the market has also set records this year, surpassing the 1990s peak. While there has been a huge slug of new issuance, the performance of these names have been lackluster. The Renaissance IPO ETF (IPO) does not necessarily track every new name to hit the market, but it does act as a reasonably good proxy for the space. IPO reached an all-time high early in the year in February, but since then it has generally been rangebound fluctuating around its moving averages. Since the fall, and particularly in the past month and a half, the ETF has taken a significant leg lower. IPO has now fallen over 18% since the October 25th closing high, taking out its moving averages in the process. Today, IPO is setting up for what is typically viewed as a negative technical pattern: the death cross (when a downward sloping 50-DMA falls below a downward sloping 200-DMA). IPO does not have an extremely extensive history only going back to October 2013, and as such, there is only a small handful of prior examples of other death crosses without another instance in the prior three months. In the table below, we show those past instances. Albeit there is a small sample size, contrary to the name and pattern's reputation, prior death crosses have generally been followed by decent performance going forward.
Battered BRICS Breaking Down Wed, Dec 29, 2021 In the table below, we show a breakdown of US-listed ETFs for the equity markets of the 23 major global economies that we track in our Global Macro Dashboard. In 2021, the United States' S&P 500 (SPY) is headed out on top of the world with a year-to-date gain of 27.57%. December alone has been a solid month with a 4.7% gain as SPY reached a 52-week high only a few days ago. That being said, SPY's MTD gain pales in comparison to Mexico (EWW) which has rallied double digits in December for the 21st best month on record in its history dating back to March 1996. But that has not brought it to a new high. In fact, in addition to the US, only Taiwan (EWT) and Switzerland (EWL) have also hit 52-week highs this month and these two countries also rank as the runner-up and fourth-best performing country ETFs in 2021. At the moment, SPY and EWL are also the most overbought with EWL currently over 2 standard deviations above its 50-DMA. Panning across its peers, most country ETFs are below their own 50-DMAs with many down by at least a full standard deviation, though most have also been rallying this month. The BRIC countries have been a particular area of weakness for US investors lately. The Brazil (EWZ) and China (MCHI) ETFs have had a rough year with each being cut by around 25%. December in particular has seen sizable declines of 6.67% for MCHI and 5.52% for EWZ, which leaves it at a new 52-week low today. Russia (RSX) has been hit even harder though having declined over 7% month to date. India (INDA) too is lower, granted, it remains up double digits year to date.
ARK Innovation (ARKK) Now Underperforming QQQ Since the Pre-COVID Peak Wed, Jan 5, 2022 After further declines to start 2022, the ARK Innovation ETF (ARKK) is now up just 47.3% since the pre-COVID peak for the US equity market on 2/19/20 and is now only beating the S&P 500 by 6.66 percentage points since the pre-COVID high. Not only that, but it's also underperforming the Nasdaq 100 (QQQ) by 17.9 percentage points. ARKK was the envy of the industry in the year or so after the pandemic hit. Fund assets for the ARKK ETF went from $2.4 billion prior to COVID up to $28.5 billion at its peak last February. At its high, ARKK was absolutely crushing both SPY and QQQ. On 2/12/21, ARKK was outperforming SPY by 143 percentage points since the 2/19/20 pre-COVID peak for the stock market and beating the more tech-heavy Nasdaq 100 by 117 percentage points. Since its peak, ARKK has dropped more than 43%, allowing the more steady SPY and QQQ to catch up. Talk about a real-life "tortoise and the hare" scenario! Interestingly, if we look at ARKK's annualized price change from its launch in October 2014 through the pre-COVID peak for the stock market on 2/19/20, it's roughly the same as ARKK's annualized price change since the 2/19/20 pre-COVID peak: ~22.8%. Also, throughout its history, ARKK's annualized total return still stands at ~24.3%, which is nearly 10 percentage points better than SPY's annualized total return of 14.8% over the same time frame.
January Almanac: Typical January Weaker Last 21 Years January has quite a reputation on Wall Street as an influx of cash from yearend bonuses and annual allocations has historically propelled stocks higher. January ranks #1 for NASDAQ (since 1971), but fifth on the S&P 500 and DJIA since 1950. January is the last month of the best three-month span and holds a full docket of indicators and seasonalities. DJIA and S&P rankings did slip from 2000 to 2016 as both indices suffered losses in ten of those seventeen Januarys with three in a row, 2008, 2009 and 2010 and then again in 2014 to 2016. January 2009 has the dubious honor of being the worst January on record for DJIA (-8.8%) and S&P 500 (-8.6%) since 1901 and 1931 respectively. The early stages of the Covid-19 pandemic spoiled January in 2020 & 2021 as DJIA, S&P 500, Russell 1000 and Russell 2000 all suffered declines in 2020. In 2021, DJIA, S&P 500 and Russell 1000 declined. As you can see in the chart above of the Typical January Performance over the last 21 years diverging market performance across the major indexes like we saw today is not unusual behavior during January in recent years. Since 2001, the S&P 500, DJIA, Russell 1000 and Russell 2000 have all declined eleven times in twenty-one years in January. DJIA and S&P have posted minor average losses while R1K and R2K have posted fractional gains. Over the last 21 years, only NASDAQ has posted a full-month average gain of 1.0% up 12 of 21. All started January positive, only to surrender early-month gains by the end of the month. Weakness has historically accelerated just after mid-month, around the eleventh trading day. In midterm years, January ranks near the bottom since 1950. Large-caps have been the worst with S&P 500 ranking #10 (third worst) with DJIA and Russell 1000 ranking #9. Technology and small-cap shares fare slightly better in the rankings, but small-cap average performance is still negative and NASDAQ is only barely positive. On pages 112 and 114 of the Stock Trader’s Almanac 2022 we illustrate that the January Effect, where small caps begin to outperform large caps, actually tends to start in mid-December. Early signs of the January Effect can be seen when comparing iShares Russell 2000 (IWM) to SPDR S&P 500 (SPY) since around December 15. Historically, the majority of small-cap outperformance is normally done by mid-February, but strength can last until mid-May when indices typically reach a seasonal high.
Midterm Year Volatility Arrives Early as Fed Turns to Fighting Inflation Midterm election years are usually a volatile year for stocks as Republicans and Democrats vie for control for Congress, especially under new presidents. Incumbent presidents usually lose seats in the House of Representatives (see 2022 Stock Trader’s Almanac page 28) and with the razor thin margins Democrats have in both the House and Senate they could easily give up control of Congress in the midterms. The chart here of the “S&P 500 Midterm Election Year Seasonal Pattern Since 1946” does not paint a rosy picture for 2022. Along with the pattern for all years and all midterm years since WWII we have overlaid the patterns for 1st term midterm years, Democratic president midterm years as well as the 2nd year of new Democratic presidents. All midterm years average an S&P 500 gain of about 6%, Democratic president midterm years average about 4%, but 1st term midterm years average a loss of -0.6% and the 2nd year of new democratic presidents have been down -2.3% on average. All four tend to hit an early year high in April at the end of the Best Six Months with a low point during the Worst Six Months May-October.
Year End Claims Uptick Thu, Jan 6, 2022 Initial jobless claims data through the final week of 2021 was released this morning remaining above 200K versus expectations of a drop down to 195K. At 207K, seasonally adjusted claims were at their highest level since the last week of November when they were 20K higher. Although claims have not been improving in recent weeks, the current levels are in line with the low end of the range from prior to the pandemic which is also around the strongest levels in several decades. Looking back on 2021, it was an interesting year for the dataset. The first half of the year saw a steady and rapid decline in claims as they were continuing to come off of historic levels set earlier in the pandemic. By mid-year and continuing into the final quarter, they had essentially returned to levels consistent with the historical average. Then, whereas the final few months of the year have historically marked a time that claims rise into year-end, claims generally fell throughout the fall and only noticeably began to experience that seasonal uptick in November and December. That resulted in claims to finish the year well below the historical average for the current week of the year. Turning to continuing claims, which are delayed an additional week to the initial claims data, the week of December 24th saw a 36K increase to 1.754 million. While higher, the current level remains over 100K below the one from only two weeks ago. Pandemic era programs faced official expiration in September, but there were some residual claims reported in the following months. With that said, those levels declined, and by the final week reported (December 10th) total claims across PUA and PEUC programs only accounted for a combined 255.1K. With the new year, the Department of Labor is no longer reporting total national counts for these programs. With those changes over the past several months, that means the composition for continuing claims is comprised massively by regular state programs once again and the other major contributor, though to a much less impactful degree, is extended benefits programs. Total claims across all reported programs are now a fraction of their pandemic highs at only 1.73 million.
Sentiment Surveys Miss Meeting Minutes Thu, Jan 6, 2022 The news of the FOMC's hawkish meeting minutes and the subsequent declines in markets in reaction to the release likely was not fully captured in sentiment indicators this week due to the timing of collection periods. Nonetheless, respondents to the AAII survey did show a drop in optimism with only 32.8% of respondents reporting as bullish versus 37.7% last week. While back below the historical average, bullish sentiment is not extremely extended below or outside of the recent range of readings. Bearish sentiment picked up the larger portion of those losses rising from 30.5% last week to 33.3% which is only a few percentage points above the historical average (30.6%). As a result of these moves, the bull-bear spread dipped back into negative territory, albeit not by much, after last week saw the first positive reading in five weeks. Neutral sentiment picked up the difference rising 2.1 percentage points to 33.9%. As with bearish sentiment, even with that increase, the reading remains below levels from just two weeks ago. Out of three sentiment surveys—AAII, Investors Intelligence, and the NAAIM Exposure Index—the AAII reading is released the latest of the three, and as such was most likely to pick up any reaction to Wednesday's declines. As such, both the Investors Intelligence and NAAIM Index saw more bullish readings this week. In fact, the Investors Intelligence survey—which had its first release since before the holidays—saw the largest increase in bullish sentiment since June 2016. That meant for our sentiment composite (which is an average of how many standard deviations from the historical norm the NAAIM index and bull-bear spread for the AAII and Investors Intelligence surveys are), this week saw a continued recovery in bullish sentiment.
Midterm Year Volatility Arrives Early as Fed Turns to Fighting Inflation Midterm election years are usually a volatile year for stocks as Republicans and Democrats vie for control for Congress, especially under new presidents. Incumbent presidents usually lose seats in the House of Representatives (see 2022 Stock Trader’s Almanac page 28) and with the razor thin margins Democrats have in both the House and Senate they could easily give up control of Congress in the midterms. The chart here of the “S&P 500 Midterm Election Year Seasonal Pattern Since 1946” does not paint a rosy picture for 2022. Along with the pattern for all years and all midterm years since WWII we have overlaid the patterns for 1st term midterm years, Democratic president midterm years as well as the 2nd year of new Democratic presidents. All midterm years average an S&P 500 gain of about 6%, Democratic president midterm years average about 4%, but 1st term midterm years average a loss of -0.6% and the 2nd year of new democratic presidents have been down -2.3% on average. All four tend to hit an early year high in April at the end of the Best Six Months with a low point during the Worst Six Months May-October.
Differentiation Within Growth Mon, Jan 10, 2022 So far in 2022, growth stocks have broadly sold-off and the Russell 1000 Growth Index has declined by 6.9%. However, not all growth stocks are the same, and it may be inaccurate to say that "growth stocks" in general are getting hit with this market downturn. Within the Russell 1,000 Growth index, names with the most aggressive valuations and higher multiples have performed far worse than those will lower multiples. Certain groups of the Russell 1000 Growth Index members have outperformed the S&P 500 on a year-to-date basis. The 20% of members with the lowest price to earnings ratios have averaged a YTD decline of just 1.7% while the S&P 500 has lost 3.3% of its value. The 10% of stocks with the lowest price to book ratio have outperformed the market as well, declining just 1.8% this year. As you can see from the charts below, the higher the multiple, the worse the 2022 performance. The 20% of members with the highest P/B ratios have averaged a loss that is over three times that of the S&P 500 (10.5%). The 20% of stocks with the highest PE ratios in the index have averaged a reduction of 12.6%, almost four times the loss of the S&P 500. A similar trend is seen when comparing YTD performance against price to sales deciles. The 10% of members with the highest P/S ratios have averaged a 15.9% turn down in 2022, while the 40% of names with lower P/S ratios have averaged a decline of 3.5%. For investors looking for growth, there are two ways to look at this. The first line of thought is to believe that the most aggressive equities (think RIVN, PLUG, DOCU, CVNA, and UBER) have sold off at unreasonable rates, and there are presently buying opportunities. The other available option is to think that the outperformance from growth at a reasonable price stocks (i.e. OLN, RKT, OPEN, VRM, and GS) will continue moving forward as, among other factors, the fed hikes interest rates. Stay on top of market trends like growth versus value by becoming a Bespoke subscriber today. Of the 25 stocks with the lowest P/E ratios in the Russell 1000 Growth Index, the average YTD performance is -1.5% (median: -1.4%), which is far better than the broader market. The average stock on this list is off of its 52 week high by 20.6% (median: 18.0%) and returned 33.3% from price appreciation alone in 2022 (median: 33.7%). 48.0% of these names are positive on a YTD basis, which is impressive given the index has depreciated by 6.9% this year.
Another CPI Spike... Now What? Wed, Jan 12, 2022 As mentioned in today's Morning Lineup, the consumer price index (CPI) rose 7.0% year over year in December, the highest rate of increase since 1982. Consumers across America are paying higher prices for everything from bread to gas due to supply chain constraints, labor shortages, easy fiscal and monetary policy, and robust demand. Although this number was in line with estimates, the y/y increase is certainly notable. As shown in the chart above, there have only been four other periods since 1950 that y/y CPI reached 7.0% or more (1951, 1973, 1977, 1978), and in the table below we have summarized the performance of the S&P 500 during and after each of those prior periods. Overall, returns were mixed. In January 1951, the S&P 500 was just 0.4% off of its 52-week high when CPI first eclipsed 7%. During the seven months in which CPI remained above 7% on a y/y basis, stocks rallied 3.4%, and one year later, the S&P 500 was up 11.4%. The longest streak of 7%+ y/y readings occurred between 1978 and 1982 and spanned 46 months. During this streak, the S&P 500 gained just 15.1% over the course of almost four years and just 1.8% in the year following the first reading over 7.0% in May 1978. In between the 1951 and 1978 periods, there were two other occurrences where CPI eclipsed 7% on a y/y basis in 1973 (28 months) and 1977 (one month), and during both of these periods, equities traded lower. As you can see from the charts below, the S&P 500 has acted differently each time CPI topped 7.0% on a Y/Y basis. In the first half of 1951, it appeared to trade independently of the elevated inflation readings, moving sideways as CPI readings remained elevated. For much of the 1970's, however, CPI and the S&P 500 tended to move in opposite directions. Nonetheless, much of the gains experienced in the 70's were in periods when the rate at which prices were increasing was on the decline. Inflation has typically been considered a negative backdrop of equity prices but a key factor behind that performance is how long-lasting the inflation is. In the early 1950s, when the elevated level of inflation was short-lived, equities, which were already near 52-week highs, performed fine. In the 1970s, though, when inflation was more entrenched, the backdrop for equities was negative. Stay on top of market trends like growth versus value by becoming a Bespoke subscriber today.
Seasonal Peak in Claims Thu, Jan 13, 2022 After hitting multi-decade lows at the beginning of December, initial jobless claims have been on the rise with the most significant increase in that time occurring in the latest week. The seasonally adjusted reading increased by 23K to 230K this week which is the highest level since the week of November 12th. While there has not been much improvement in claims in the past month, current levels are still right around those from just before the pandemic. On a longer-term basis, these readings are also some of the strongest since the early 1970s. On a non-seasonally adjusted (NSA) basis, the current week of the year typically marks a seasonal peak in claims. In fact, the current week of the year has historically seen claims rise 85.2% of the time week over week. As such, NSA claims surged over 100K this week from 315.8K to 419.4K. In spite of that seasonal headwind alongside the additional issue of rising COVID cases—which we cannot parse out how much each factor is contributing to the rise in claims—that was actually slightly below the average weekly change of 111.6K for the current week of the year. Of course, the current level of claims is a major improvement from where things stood this time last year, but it is still decently above levels from comparable weeks of the few years prior to the pandemic. Assuming this week marks the seasonal high as it has in the past, claims will now have tailwinds combating any COVID headwinds in the coming months. Although initial claims were somewhat disappointing this week, seasonally adjusted continuing claims were very strong coming in at the lowest level since the week of 6/1/73. Claims by this measure are delayed an extra week to initial claims, but the most recent reading for the last week of 2021 showed only 1.559 million claims. The 194K week over week decline was the largest since mid-October when the reading fell by 241K.
Bulls Back Off Thu, Jan 13, 2022 The past week has seen the S&P 500 pull back to retest its 50-DMA which has put a dampener on investor sentiment. This week's AAII survey showed that less than a quarter of respondents reported bullish sentiment. That is down from 32.8% last week and the lowest since 9/16. Bearish sentiment picked up most of the difference rising five percentage points to 38.3%. This brings bearish sentiment to a fairly elevated level relative to its historical average of 30.56%, though, it is still within a standard deviation of that reading. While higher, this week's increase was actually only the biggest uptick and highest level of bearish sentiment since the week of 12/16. Given those moves in bullish and bearish sentiment, the bull-bear spread has fallen deeper into negative territory. At -13.4, the spread is now at the lowest level since mid-December. Whereas bearish sentiment jumped 5 percentage points this week, neutral sentiment has gained 5 percentage points after the back-to-back increases over the past two weeks. Neutral sentiment now stands at 36.8% which is the highest level since 12/9. As for other sentiment readings, both the Investors Intelligence survey and NAAIM Exposure index took more bearish tones in the most recent week. As a result, our Sentiment Composite, which combines the bull-bear spreads of the AAII and Investors Intelligence surveys with the NAAIM exposure index's reading, has fallen back below zero meaning overall sentiment is broadly bearish, but not to a degree in which it is outside the range of recent readings.
