Small Businesses Less Concerned With Inflation Tue, Aug 8, 2023 In an earlier post, we noted the improvement to small business sentiment per the latest data from the NFIB. The report also includes survey responses as to what small businesses perceive to be their biggest problems. The July report showed that small businesses have begun to take notice of easing inflation. As shown below, throughout 2022 and into portions of 2023, inflation has ranked as the number one problem among small businesses. But in July, Quality of Labor retook the number one spot as it had temporarily back in May. Meanwhile, there has been a rise businesses saying that government requirements and red tape are their number one problem, tying cost of labor for the fourth most pressing issue. Obviously, as it still occupies the number two spot, inflation remains a major problem. Even though it is a big improvement from 37% exactly one year ago, there continues to be 21% of firms that report inflation as their biggest problem. That is also well above any reading observed pre-pandemic. On a combined basis, cost and quality of labor are the most commonly reported problem for small businesses at 33% of responses. Unlike inflation which is hitting new lows, that is in the middle of the past few years' range. Historically, the NFIB survey has had sensitivities to politics with a bias towards being more optimistic during Republican administrations and vice versa. Since the Biden Presidency began, government related problems have been on the backburner given that inflation has been playing a more pressing role. However, there has been a steadily rising number of responses once again reporting government red tape or taxes as their biggest issues. That has come hand in hand with an increase in the survey's Economic Policy Uncertainty Index which experienced a pronounced 4 point jump month over month in July. Finally, we would note very few firms are reporting sales as their biggest problem. That is a significant disconnect from the index on actual sales changes which hit new lows in July.
Looking for a Mid-August Bounce After Weak Start Despite modest gains yesterday by DJIA, S&P 500 and NASDAQ, all the major indexes we track were down over the first eight trading days of August. As of yesterday’s close, August 10, NASDAQ was the weakest, off 4.24% this month. Russell 2000 was the second weakest, down 4.02%. S&P 500 slipped 2.62% while DJIA was down 1.08%. Compared to past pre-election year August performance since 1950, this August has tracked closely. Should the market continue to track the historical pre-election year August pattern, a mid-month bounce could begin soon. This historical mid-month move is shaded in yellow in the following chart.
Why We’re Not Too Worried About Rising Bankruptcies Posted on August 15, 2023 Consumer credit card has recently been in the news after it hit a record $1 trillion. However, Ryan walked us through several reasons why this eye-popping number is not that concerning. On the business side, rising bankruptcies have also been making headlines month after month, as chapter 11 filings this year exceed what we saw last year. There were 402 bankruptcy filings over the first seven months of 2023, close to double the 2022 rate and the highest since 2010. The blame has landed on higher interest rates and a tough operating environment. Bond Markets Don’t Seem Concerned Interest rates have certainly risen thanks to an aggressive Federal Reserve looking to push inflation lower. However, bond investors don’t seem worried about a potential rise in bankruptcies and associated loan defaults, even for below investment-grade borrowers. One way to monitor this to look at spreads for “high-yield” borrowers. These spreads represent the interest rate premium that companies rated below investment-grade companies have to pay over risk-free Treasury interest rates. Typically, if investors expect economic hardship, and a higher likelihood of default, they will charge these companies higher interest rates on loans. That would result in larger spreads against Treasury rates. The good news is that high-yield spreads are currently at 3.8%, which is in just the 28th percentile across the data going back to 1997. The average spread across the entire period is 5.4%. The current spread is also below what we saw last June, which is when the Federal Reserve signaled they were going to get a lot more aggressive. Notably, as you can see in the chart below, the current level remains well below what we’ve seen ahead of prior crises, including in 2000 and late 2007. Bond investors typically sniff out hard economic times for companies well ahead of other investors. And right now, they don’t see any signs of that. Banks Aren’t Seeing Elevated Risk Either The other group that deeply cares about potential defaults are banks, since their entire business model is based on lending money out and getting paid back interest and principal. There are always some loans that default but the goal is to minimize these. The good news is that delinquency rates on business loans have been falling for a couple of quarters now, and as of Q1 they’re just under 1%. Delinquency rates were at 1.1% before the pandemic, and historically, they’ve averaged about 2.7% outside of recessions. The Federal Reserve also collects “charge-off” data from all commercial banks – these are losses on loans that a bank recognizes, after they consider any recovery on defaulted loans. As a percent of average loans outstanding over a quarter, the “charge-off rate” in the first quarter was just 0.28%. This is obviously lagging data but that’s still well below the pre-pandemic non-recessionary average of 0.72%. We’re a long way below that right now. Entrepreneurship Is Rising The other side of bankruptcies is entrepreneurship, especially entrepreneurs who plan to turn payroll. The Census Bureau tracks monthly business applications. Especially useful is a category called business applications with “planned wages.” These are applications that include a first wages-paid date on the IRS form SS-4, indicating a high likelihood of transitioning into a business with payroll. There were more than 293,000 such business applications in the first half of 2023, which is 2% higher than what we saw last year. It’s also 21% higher than what we saw in the first half of 2019, the year prior to the pandemic. Entrepreneurship kicked into overdrive after the pandemic, as people ended up with more money in their pockets – thanks to federal aid and money saved from limited spending during lockdowns. Applications jumped in 2020 and 2021 to an average of 582,000 a year, which was a 17% increase from the average we saw in the previous decade. And the good news is that we didn’t see a huge falloff in 2022 despite aggressive rate hikes by the Fed. It looks like applications are picking up again in 2023. Score that against rising bankruptcy data, and yet another data point to put things in perspective.
Markets Are Coming to Terms with the Fact That the Economy is Strong Posted on August 18, 2023 Another month, another slew of economic data that not only shows that the economy is resilient, but it may in fact be accelerating. Here’s a quick recap. Retail sales and food services rose 0.7% in July. One month may be noisy, but even if you take a 3-month average, retail sales rose 7% at an annualized pace. By the way, inflation was up just 1.9% over this period. Which means inflation-adjusted retail sales rose at a 5% annualized pace and leaves it 7% above the pre-pandemic trend. That’s incredible and it tells you how strong households are. There are four positive stories on the manufacturing front as well, all of which are tailwinds for the economy. Vehicle production has rebounded to the highest level since 2018 (which means it’s even higher than at any point in 2019). Even with that, we’ve yet to make up for a cumulative shortfall of 5 million vehicles due to pandemic shutdowns, which means production is likely to remain strong. Production of medium and heavy trucks is also moving up, rising 14% this year. The aerospace industry is also seeing a boom, with production up 4% this year. High tech equipment production (computers, communication equipment, semiconductors) is surging once again, rising more than 7% over the first seven months of this year, and up 20% since February 2020 (pre-pandemic). Suffice to say, none of this is what we’d expect to be seeing if the economy was heading into a recession. These are all large investments companies have to make, and it tells you that they believe future demand is going to be strong. Overall, this is positive for current activity and GDP growth near-term. But its also positive in two other important ways: Inflationary pressure may be reduced as supply increases Productivity may rise in the future on the back of investments made today We also received data from the housing market that shows single-family construction continues to rebound. Housing starts rose almost 7% in July and are up 22% since last November. Building permits, which are a sign of future supply, rose just under 1% and are up 24% since December. It tells you how homebuilders are viewing potential demand, despite mortgage rate rising above 7%. This is another tailwind for GDP growth, as we wrote in our Mid-Year Outlook. All this has sent the Atlanta Fed’s nowcast of Q3 GDP growth to a whopping 5.8%. A month and a half ago, the median expectation for Q3 growth was zero! Which meant half of the polled economists were expecting negative growth. It’s hard to believe GDP will rise close to 4%, let alone 6% (this is after adjusting for inflation) – and we do have a long way to go before the quarter closes out. But the direction should tell you a lot about how the economy is doing. Higher Interest Rates for Longer, Much Longer Equity markets have pulled back despite this run of strong economic data. Of course, this is a period that has historically been weak for equities, as Ryan has pointed out. It’s ironic that this is happening even as a lot of bearish analysts are throwing in the towel and switching their estimates to less bearish outcomes. But it’s the bond market that has my attention. Investors are not expecting the Fed to raise rates any further despite the strong economic data. So, the fed funds rate is expected to peak around 5.4%. A 5.4% peak makes sense because inflation seems to be rolling over, and there’s potentially more disinflation in the pipeline, with vehicle and shelter inflation easing further. What’s interesting, is that longer-term bond yields have been surging even as short-term rate remain steady. Some of this is because of a potentially increased supply of Treasuries, as the government looks to cover a rising deficit. But investors’ expectations of what may be coming has also changed. Rising long-term yields mean investors expect the Fed to keep rates on the higher side long-term. The run of strong economic data, including employment, has surprised a lot of investors. As a result, expectations for future growth are shifting higher as the economy proves its resilience in the face of an aggressive Fed and higher interest rates. Investors do expect the Fed to cut rates by about 1-1.25% in 2024, in the face of lower inflation. But not much more after that. A month ago, they expected the Fed to keep rates around 3.2% into 2027. That’s now almost up to 4%, which is well above Fed officials’ own “long-run” forecast of 2.5%. This long-run expectation is similar to what the Fed expected over the last decade, and so they’re definitely anchored to that. Yet, investors see it different. They’re saying that the economy is resilient, and its likely to remain that way. But it also means that interest rates will have to be higher than what we saw over the past decade.
Claims Improve Ahead of Nonfarm Payrolls Thu, Aug 31, 2023 Ahead of tomorrow's nonfarm payrolls report (which is expected to show a deceleration in jobs growth), initial jobless claims have been reversing lower in the past few weeks and are back down to the low end of the past several months' range. At 228K, the seasonally adjusted number came in well below expectations which were anticipated to rise to 235K. Overall, claims continue to indicate a historically healthy labor market albeit with almost a year in the rearview since the absolute best levels. On a non-seasonally adjusted basis, claims came in below 200K for a second week in a row. At 192.5K, claims are near similar levels to the comparable weeks of last year and 2017 through 2019. From a seasonal perspective, this week or next is likely to mark the annual low for claims before drifting higher through year end. Unlike initial claims, continuing claims were higher this week rising to 1.725 million which was a much larger increase than was forecasted. Regardless, claims remain at healthy levels even after rounding out a bottom and beginning to trend higher more recently.
Three Reasons Stocks Might Shine in the Usually Weak September Posted on September 5, 2023 “If you torture numbers enough they will tell you anything.” -Hall of Fame and Yankee great Yogi Berra After the best start to a new year over the first seven months for the S&P 500 since 1997, stocks finally fell in August, ending a five-month win streak. In the end the S&P 500 was down only 1.8%, but had fallen close to 5% before a late month rally. This seasonal weakness wasn’t a surprise to us, as we expected stocks to potentially take a bit of a break after the huge rally as we discussed in Stocks Don’t Like August, Now What? The good news is weakness was normal for this time of year. The bad news is the worst month of the year historically is now upon us. As you might have heard 50,000 times by now, September has historically been the weakest month of them all. Since 1950, it has been down an average of 0.66%. But it doesn’t stop there, as it was also the worst month of the year during a pre-election year, over the past 20 years, and the past 10 years. You can’t ignore this, as we might not be out of the woods just yet, but there are some signs September could be better this year. Digging into the data a little more closely we found three reasons to think stocks could actually gain in this usually rough month. Of course, as Yogi told us in the quote above, if we torture the data enough it’ll give us what we want to hear. Still, we’d at least say the chances of a huge September drop like last year is quite low. The first thing that stood out to us is that years that were down big heading into September tended to see some of the worst returns. For example, last year’s 9.3% drop in September after stocks were already down 17% for the year through August. In fact, the last five times the S&P 500 was down at least 10% heading into September going back 50 years, the month saw absolutely massive drops. The good news is stocks are on firm footing this year, likely mitigating the risk of a banana peel month for the bulls. In fact, when stocks were up more than 10% heading into September, but on the heels of a red August, September has been higher 8 out of 10 times with some great returns, while the rest of the year has never been lower, up 9.0% on average from September through December. The second reason we think September could be better than expected is we found that when stocks gained more than 15% after the first seven months and then fell in August (like ’23) the chances of a strong September were quite high, with stocks higher eight out of nine times with some very solid returns. Even better news is stocks have never been lower the rest of the year (from September through December) with an average gain of more than 11%. Another 11% from here would put us at new all-time highs for the first time since January 3, 2022, something we think is still quite possible. The last reason to think stocks could have a better-than-expected September is looking way back at what happened in January. We noted back then that a strong January usually meant a strong full year, and that has played out quite well so far, but it also could be a clue that September and the rest of the year could be strong. When you have a 5% gain or more for stocks in January, along with an August drop (like ’23) we found September was higher six out of eight times with some nice gains, while the rest of the year was higher all eight times and up 9.4% on average. Despite a clouded history, the odds of a huge drop in September like we saw last year are quite low. We could still see some seasonal choppiness of course, but the odds favor the potential for some green this September as well.
The 20 Most Loved Stocks by Wall Street Analysts Wed, Sep 6, 2023 In the large-cap Russell 1,000, there are more than 18,800 individual analyst ratings, meaning the average stock in the roughly 1,000 member index has more than 18 analyst recommendations. It's widely known that there are way more "buy" ratings than "sell" or "hold" ratings, but to put a number to it, right now 54.5% of all analyst ratings in the Russell 1,000 are "buy" ratings. (A "buy" rating includes terms like "outperform" or "overweight" that some firms prefer to use.) Today we wanted to provide you with a list of the current stocks in the Russell 1,000 that have the highest percentage of "buy" ratings. These could be considered the most loved stocks by Wall Street analysts. (To be included on the list below, the stock needed to have at least five analyst ratings.) Starting at the top, there are nine stocks that have 100% buy ratings, and the name with the most number of buys is Alexandria Real Estate (ARE) at eleven. WillScot Mobile (WSC), Royalty Pharma (RPRX), Liberty Media Sirius XM (LSXMA), Kirby (KEX), Curtiss-Wright (CW), Churchill Downs (CHDN), Service Corp (SCI), and Howard Hughes (HHH) are the eight other stocks with 100% buy ratings. The remaining eleven stocks shown have at least 93% buy ratings, and the most notable are two mega-caps with $1+ trillion market caps: Amazon (AMZN) and NVIDIA (NVDA). At the moment, 61 of 64 analyst ratings for Amazon (AMZN) are buys, while 59 of 63 ratings for NVIDIA (NVDA) are buys. NVIDIA (NVDA) has already surged 232% in 2023, so it's pretty remarkable that analysts are still this bullish on the name. It may be hard to believe, but the average analyst price target for NVDA has moved up to $638/share. NVDA's current share price is 26.6% below that price target. The average stock in the Russell is only 14% below its consensus price target, so analysts expect more gains for NVDA than they do for the average name in the index. Remember, from a contrarian's perspective, a stock with an extremely high percentage of buy ratings may be a name to avoid. After all, once you get to 100%, there's no more room for analysts to get more bullish!
Claims Notch New Lows Thu, Sep 7, 2023 The latest update of jobless claims was broadly positive with both initial and continuing claims moving lower by more than expected. Although initial claims were revised up by 1K to 229K last week, this week's reading fell down to 216K. That means claims have broken down out of the past several months range, notching the lowest levels since the end of January. Before seasonal adjustment, claims are even more impressively low at 190K. That marks the third week in a row below 200K, however, that is still above the comparable readings for the same weeks of the year in 2018, 2019, and 2022. Additionally, as we show in the second chart below, the current week of the year has historically been the one to see claims put in their annual low meaning from a seasonal perspective, claims will face headwinds from here on out. Switching over to seasonally adjusted continuing claims, like initial claims the latest reading is back down to the low end of the recent range. Claims have been fluctuating around 1.7 million over the past couple of months, but at 1.679 million this week, continuing claims are tied with the week of July 15th for the lowest reading since January 21st.
Sell Rosh Hashanah Buy Yom Kippur Sets Up Sell Rosh Hashanah, Buy Yom Kippur is aligning quite well this year with late September seasonal weakness and the notoriously treacherous week after quarterly options expiration, AKA Triple Witching. It’s a few days before FOMC with a market jittery on hotter inflation data. Rosh Hashanah lands on Saturday 9/16 this year so our stats us the close the day before. This is right at the mid-month peak of the typical September pattern. Yom Kippur falls on 9/25 which is the 16th trading day of the month, right around the seasonal monthly low point. The thesis is that folks sell positions on Rosh Hashanah the first of the Days of Awe to rid themselves of financial commitments and then return to the market after Yom Kippur, the Day of Atonement. It is no coincidence that this coincides with the seasonal September/October weakness. The market has been tracking the 4-year cycle and seasonal trends to a T this year and the past 3. So this should make a great entry for the Q4 pre-election year rally.
Claims Back the Hawks Thu, Sep 21, 2023 Among the reasons given for yesterday's "hawkish hold" at the FOMC meeting was that employment readings "remain strong". This morning's release of weekly jobless claims backed that up. Seasonally adjusted initial claims have begun to fall back down towards recent lows in the past few months, and today's print brought it to a new short-term low of 201K. That compares to expectations for an increase of 4K up to 225K. The recent decline brings claims down to the lowest level since January and just 21K above the multi-decade low reached almost exactly one year ago. On a non-seasonally adjusted basis, claims are also very healthy. Claims were little changed week over week, remaining near the annual low. Relative to the comparable week of the year in years past, the most recent reading is above that of last year, but right in line with levels from 2018 and 2019. Entering Q4, jobless claims will begin to face some seasonal headwinds and will likely head higher through the end of the year. As for continuing jobless claims, recent trends have been much calmer as they have not seen any sort of dramatic swing lower. That's not to say, however, that continuing claims have not improved. The reading has continued to trend lower and at 1.662 million it is at the lowest level since January.
October Almanac: Bear-Killer, Bargain Month, Turnaround Month Seasonally Speaking, October is the time to buy stocks, especially late October and especially tech stocks and small caps. October can evoke fear on Wall Street as memories are stirred of crashes and massacres. We use the term “Octoberphobia” to describe the phenomenon of major market drops occurring during the month. Market calamities can become a self-fulfilling prophecy, so stay on the lookout. October has been a turnaround month—a “bear killer” if you will, turning the tide in thirteen post-WWII bear markets: 1946, 1957, 1960, 1962, 1966, 1974, 1987, 1990, 1998, 2001, 2002, 2011 (S&P 500 declined 19.4%), and 2022. DJIA was first to bottom in 2022 on the last day of September. S&P 500 ended its bear market on October 12 while NASDAQ did not reach a final closing low until December 28. Eight of these were midterm years. While not in an official bear market this year, the market is suffering through typical seasonal weakness which could once again come to an end in October. Pre-election year Octobers are ranked second from last for DJIA, S&P 500 and NASDAQ while Russell 2000 is dead last with an average loss of 1.5%. Eliminating gruesome 1987 from the calculation provides only a moderate amount of relief. Should current weakness persist into October it is likely to provide an excellent buying opportunity, especially for depressed technology and small-cap shares.
Why Stocks Should Rally In The Fourth Quarter Posted on September 28, 2023 “Wake me up when September ends.” -Green Day Good riddance to what has been a very rough month for stocks. In fact, both August and September saw weakness, living up to their reputation as a potentially troublesome timeframe based on seasonality. Most might not remember it now, but the first half of 2023 was one of the best starts to a year ever for stocks. We classify this type of weakness as perfectly normal and likely necessary for stocks to catch their breath before a new surge higher. Here’s the good news, seasonality has played out quite well the past year and if this continues, we predict a strong fourth quarter. Think about it, midterm years usually aren’t great for stocks, but they tend to see an October low. Then pre-election years tend to be strong, with most of those gains happening early. That sound familiar? Here’s a chart we’ve been sharing for well over a year now and it showed that the past three quarters were supposed to be strong, and they were (up 7.1%, 7.0%, and 8.3%). This ran counter to nearly all the strategists on TV telling us that the first half of the year was going to be rough and the second half better. We took the other side, saying to expect strong gains in the first half of the year. This brings us to now and the third quarter of a pre-election year wasn’t expected to do well and that sure played out again. Lastly, the fourth quarter of a pre-election year usually bounces back, something we expect to happen this year. Breaking it down by months, the upcoming three months tend to be quite strong. October is known as a month for extreme volatility (think 1987 and 2008), but it is usually a pretty decent month overall, with November and December historically very strong. As most investors know, but is important to remember, the fourth quarter is the best quarter of the year, up nearly 80% of the time and up more than four percent on average, twice as much as the next best quarter. The next two charts tell similar stories that it is perfectly normal to see chop and weakness right now. Below we share the average pre-election year for the S&P 500 and years that are up more than 10% the first six months of the year. The good news is it would be perfectly normal to see strength and new highs to end the year, something we expect to happen again. Here are two more examples of why we see a late-year rally. When the S&P 500 is up between 10-20% for the year heading into the normally strong fourth quarter, then we can expect an even better fourth quarter, up more than 5% on average and higher more than 84% of the time. In other words, a strong year tends to end strongly. Adding to reasons to look for a rally, when stocks fall more than 1% in both August and September, a big bounce back in October is normal, as is a great fourth quarter. The last three times that happened, October bounced back a very impressive gain of 10.8%, 8.3%, and 8.0%, respectively. Turning to the fourth quarter, it has been up 12 out of 13 times and up more than 7.0% on average. In other words, when we see the seasonal August/September weakness it is also normal to see a strong end-of-year rally. I will leave with this; the credit markets aren’t showing any stress in the system. To keep this simple, if the riskiest companies were in trouble, then we’d expect spreads to be higher, as investors would be worried about being paid back. If you don’t expect to be paid back on a company’s debt, then you’d charge more. Well, looking at BBB spreads shows a somewhat shocking situation, as the spreads are hitting their lowest level of the year currently. To us, this is another clue that the recent weakness isn’t a new monster under the bed, but more normal seasonal weakness after a great start to a year.
Labor Demand Holds Up Tue, Oct 3, 2023 This morning we received two of the latest updates on labor market demand with the release of the August JOLTS report in addition to postings data from Indeed through the end of September. The JOLTS report came in well above expectations (9.61 million versus 8.83 expected) indicating a solid rebound in labor market demand headed out of the summer. In spite of that positive reading, the overall trend of lower openings remains in place and is echoed by Indeed's data. As shown below, the more timely and higher frequency postings data has also been trending lower since the end of 2021. That being said, the summer has seen those declines decelerating with postings only slightly lower over the past three months. Modeling the JOLTS number on the less lagged Indeed data would predict that postings would remain around these levels next month. In tonight's Closer, we will provide a full rundown of the latest JOLTS report. In addition to national reads on job postings, the Indeed data also provides geographic breakdowns by US metro, and in the table below, we highlight the 25 MSAs (metropolitan statistical area) that have seen the best and worst postings growth relative to pre-pandemic baselines as well as how far they have fallen from their respective peaks (we highlight when each of those peaks were as well). Many of those with the highest number of openings relative to pre-pandemic are also those with smaller populations. Conversely, many of the largest metros have seen job postings fall off the most. There have also been a growing number of cities where postings are now below pre-pandemic levels. San Francisco is the worst of these with postings down nearly 20% from baseline.
That’s Cracked! Consumers May See Relief at the Pump Despite High Oil Prices Posted on October 3, 2023 It seems like there’s always one shoe or another ready to drop on the economy. There were fears over a government shutdown (punted for now) which Ryan wrote about, along with the restart of student loan payments and strikes. Other issues that have investors worried are another bank crisis (like Silicon Valley Bank), or a commercial real estate crash. I don’t want to minimize these issues but often, it’s things that most people are not talking about that could potentially have a greater impact. One thing that could upset the economic apple cart is an energy price shock. Falling energy prices have been the main force driving inflation from 9.1% in June 2022 to 3.7% as of August, as measured by the Consumer Price Index (CPI). However, oil prices have been rising since July, and a month ago I wrote about an energy price shock being my biggest concern. The problem with rising energy prices is that they can adversely impact the economy in several different ways. The most immediate impact is via higher pump prices, especially if that forces consumers to cut back elsewhere. Then you have the impact of higher diesel prices on freight and even food prices. Higher jet fuel prices can raise airfares. All of which could lead the Fed to tighten policy a lot more. We saw this happen last year when inflation-adjusted incomes fell while energy prices surged. The bad news is that oil prices have surged about 14% since I wrote that piece, taking West Texas Intermediate crude (WTI) to above $90 a barrel. That’s the highest level since last November. However, we’ve caught a lucky break. Nationwide average gas prices at the pump have more or less remained flat over the last couple of months. This has surprised a lot of people, but there’s a good reason why gas prices haven’t surged. Oil prices are not the only thing that determine gas prices, or even diesel prices. Another major factor (and a volatile one) is refining spreads, which is directly tied to refiners’ margins. Refining or “crack” spreads are the price difference between crude oil and refined product. Here’s a schematic from the Energy Information Administration (EIA) showing what makes up prices at the pump. Oil prices account for just about 50%, while refining spreads make up 20-25% of the rest. The chart below shows crack spreads for gasoline, and a few things stand out. Spreads spiked last summer, contributing to high inflation. They pulled back soon after that but started to rise again over the first seven months of this year. Which is part of the reason gas prices at the pump also climbed over the same period. However, crack spreads have crashed 74% since the end of July, falling all the way down to pre-pandemic levels. This has offset the recent surge in crude oil prices. In fact, signs suggest that there may be more relief coming at the pump, with gasoline futures falling 15% over the past month. That’s going to be a tailwind for households. Of course, gas prices can just as easily go up again, especially if oil prices continue to climb and crack spreads reverse. This is something I’m keeping an eye on because it matters to the economy. For now, we continue to overweight the energy sector in our portfolios, and hold energy commodities as well, which works as a hedge in the event of an energy shock.
More Healthy Claims Data Thu, Oct 5, 2023 Following up on a disappointing ADP employment number yesterday, today's release of weekly jobless claims also indicated a modest deterioration in labor market data. Seasonally adjusted initial claims have risen in back-to-back weeks up to 207K. On the bright side, that was below expectations and is only a minor increase as claims remain below their range from throughout the spring and summer this year. Additionally, in the low 200K range, claims are still at a historically healthy level. Before seasonal adjustment, claims were actually lower at 172.78K. In one sense, that lower reading is not exactly surprising as week-over-week declines have been observed roughly 70% of the time historically in the current week of the year. However, what is now more unusual is that it sets a new low on the year. As we have frequently noted in recent weeks, this time of year typically sees claims put in an annual low, but the new low this week is a bit later than normal. In fact, outside of the pandemic years (2020 and 2021) when claims were historically volatile, the last time an annual low occurred this late in the year was 2014. Prior to that, 1967, 1980, 2000, and 2011 were the only other years with an annual low in the 39th week or later. In other words, claims have remained strong, and seasonal headwinds haven't yet seemed to come into play in any impactful way. Like initial claims, seasonally adjusted continuing claims came in stronger than expected at 1.664 million. That is a tiny drop from 1.665 million the previous week but is still off of the low of 1.658 million from two weeks prior. In all, that leaves claims at historically strong levels with a modest multi-month downtrend still in place.
