Stocks Love April Wednesday, March 31, 2021 “History doesn’t repeat itself, but it often rhymes.” Mark Twain What more can we say other than few months have been kinder to stocks lately than the month of April. In fact, it was last year that saw the S&P 500 Index gain an incredible 12.7%, for one of the greatest one-month gains in history. We noted at the time that 10% or greater months tended to usually kick off strength, not mark the end of it like many were claiming last year. Once again, history looks to have rhymed. Just how strong has April been lately? “I had to double check, but sure enough, stocks have closed higher in April an incredible 14 out of the past 15 years,” explained LPL Financial Chief Market Strategist Ryan Detrick. “Other than my Cincinnati Bengals breaking my heart, few things are more consistent than stocks higher in April.” As shown in the LPL Chart of the Day, April is a great month for stocks across the board: Since 1950 it is the second best month The past 20 years it is the best month The past 10 years it is the second best month In a post-election year it ranks fourth out of 12 Taking it a step further, here’s what the average April looks like. It sprints out to impressive gains the first 18 days or so, then it coasts in like Usain Bolt in a race.
Stocks and Inflation Wednesday, March 31, 2021 As we continue LPL Research’s Inflation Week, today we will examine how stocks have historically done at different inflation levels. For more color on our views on inflation, please read here and here, and look out for tomorrow’s blog, where we’ll examine some of the factors that have kept inflation low and that will likely continue to put a lid on inflation in the future. Looking at S&P 500 Index returns going back to 1950, stocks have tended to like low inflation. As shown below, the lower inflation is, the better the S&P 500 Index returns tend to be, although the strong performance for negative inflation may be due to markets rebounding off of lows. Taking it a step further, if inflation is trending lower, then stocks do much better (18.8% on average) versus if inflation is trending higher (6.4% on average). “You can’t argue with history, as it sure appears that inflation that’s under control is a tailwind for stocks,” explained LPL Chief Market Strategist Ryan Detrick. “It is when inflation starts to turn higher that it can knock stocks down. Given our base case is for modest inflation, this is another feather in the cap for the bulls.” Looking at a scatter plot of inflation and the S&P 500, there is a fairly wide dispersion in some cases, so this is by no means a perfect indicator. Still, the regression line moves from the upper left to the lower right, suggesting lower inflation indeed historically has benefitted stocks more than higher inflation. The inflation question is one that isn’t going away, especially as the US continues to add more fiscal and monetary stimulus. Although this isn’t a very consensus call, we think inflation will be capped once we get past 2021 and this should help stocks overall.
A Semi Snap Back Mon, Apr 5, 2021 Headed into the long weekend, the Semiconductors (SMH) had been on a very impressive run over the prior five days. As shown in the snapshot of the US Groups screen in our Trend Analyzer, the group was the top performer (up just under 10%) in the five days ending last Thursday. That move brought it from well below its 50-DMA to deep into overbought territory. While the Semiconductor ETF (SMH) is up again today, it is still over 1% below its highs from mid-February. Meanwhile, the Philadelphia Semiconductor Index (SOX) has already broken out to a new record intraday high this morning. Today's gain for the SOX adds to a 9.5% gain for the index last week. As shown in the chart below, that 9.5% rally is historically large, especially relative to the past several years. In fact, the five-day gain through Thursday's close stands in the top 5% of all five-day runs for the index. While there was another occurrence as recently as the five days ending March 15th, moves of this size have been fairly uncommon in the past decade. Prior to the most recent and March occurrences, the only other recent instances were in November and the spring of last year. Prior to 2020, the past decade only saw a small handful of other instances of rallies in the 95th percentile or better. Conversely, the volatility of the Financial Crisis and the late 1990s and early 2000s led to more frequent clusters of top 5% moves. In the charts below, we show the performance of the semiconductor index following rallies that rank in the top 5% of all 5-day changes without another occurrence in the prior two weeks. The results show that there's typically a near-term cool-down period after such a sharp one-week rally. One and two weeks later have both tended to underperform the norm (by 42 bps and 90 bps respectively), averaging declines with positive returns less than half the time. While there has been some near-term weakness, one month and a quarter out have both tended towards outperformance.
As Close to a Perfect Year For Equities as You Can Get Wed, Apr 7, 2021 Every day in our Morning Lineup, we provide a technical snapshot of the market looking at various metrics. One chart we show is the relative strength of stocks (S&P 500) versus bonds (US Treasury Long Bond Future) over the trailing 12 months (chart below). Whenever the line is in the green area, it indicates that stocks are outperforming bonds relative to the start date, while readings in the red zone indicate bonds outperforming stocks. What stood out about the chart in this morning's report was the fact that relative to one year ago (4/1 close), stocks have been outperforming bonds every day since. Sure, there have been periods in between where bonds outperformed stocks (falling line), but from a longer-term perspective, it has been about as perfect a year for stocks relative to bonds as you could imagine. The chart below shows the performance of both asset classes individually over the last year. If you think the divide between political parties in the US has ripped wider, it has nothing on the growing divide between stocks and bonds. While the S&P 500 is up over 50%, the US Treasury Long Bond Future is down 14%. If we had to bet on which divide will start to narrow sooner, is there anything closer to a sure thing than taking the stock vs bond divide over the Democrat vs Republican divide?
Blowout Q1 Harbinger For More Gains Photo credit: Smith-Watkins: Designer and Maker of HM The Queen’s Herald Fanfare Trumpet https://heraldfanfaretrumpets.com/en/ Well-above average Q1 gains for DJIA and S&P 500 bode well for continued gains in 2021. DJIA’s 2021 Q1 gain of 7.8% is significantly higher than its historical average of 2.0% and the 17th best Q1 gain since 1949. S&P’s 5.8% gain was also substantially higher than its average of 2.1% and the 19th best since 1949. NASDAQ was the laggard up only 2.8% in Q1 this year, which is actually below its average of 4.1% since 1971 and the 28th best since 1971. In any event positive Q1 returns have been a harbinger for continued market gains for the year as whole. As you would imagine, subsequent Q2 and Q3 returns during the Worst Six Months are not as strong as Q4 at the outset of the Best Six Months. As you can see in the tables below, Q2 and Q3 post positive average numbers, but returns are lower than Q1 and Q4 and there are more losers. Further gains for the year as a whole failed materialized for DJIA in 1956, 1971, 1979, 1981 1987, 2002, 2011 and 2012 with lackluster performance for the remainder of the year in 1976 and 1992. S&P failed to produce additional gains in 1956, 1981 1987, 2000, 2011 and 2015 with weak gains for the rest of 1971, 1986 and 2012. NASDAQ failed to add to Q1 gains in 1974, 1981, 1986, 1987, 2000, 2011, 2012 and 2018 with paltry showings for balance of 1975, 1983, 1988, 2006 and 2015. Overall positive returns for Q1 resulted in full-year gains for: DJIA 40 out of the last 42 times with an average gain of 16.4% (median 16.3%); S&P 41 out of 45 times with an average return of 16.4% (median 15.6%), and NASDAQ 28 of 34 with an average gain of 18.9% (median 17.0%).
Sentiment Running Hot Thu, Apr 8, 2021 With the major US indices pressing to new record highs, sentiment has picked up considerably in the past week. Bullish sentiment measured in the AAII weekly sentiment survey came in the top 5% of all prior weekly readings after rising by 11.1 percentage points to 56.9%. That makes for the largest one-week increase since the week of November 12th when bullish sentiment leaped 17.88 percentage points to 55.84%. This week also surpassed that November reading to make for the highest level of bullish sentiment since the first week of 2018 when 59.75% of respondents reported as bullish. Bearish sentiment was already low headed into this week, but the reading fell another 2.8 percentage points to 20.4%. That is marginally lower than the reading of 20.6% from two weeks ago making for the lowest level of bearish sentiment since April 2019. The big jump in bullish sentiment borrowed more heavily from the neutral camp. The percentage of respondents reporting as neutral collapsed 8.3 percentage points to 22.7%. Similar to bullish sentiment, that was the biggest single-week decline since November 12th and the lowest reading since that same week. These moves mean sentiment now largely favors the bullish camp. In fact, the bull-bear spread rose to 36.5 which is the highest level since the first week of 2018.
LPL Market Signals: Raising Economic and Market Forecasts…Again Wednesday, April 7, 2021 On the LPL Market Signals podcast, Equity Strategist Jeff Buchbinder and Asset Allocation Strategist Barry Gilbert update forecasts based on how the economy’s recovery from the pandemic, aided by vaccine distribution, massive stimulus, and the desire to return to normal, continues to surpass expectations. Strong March jobs report. The US labor market grew the most in seven months in March, as the economy added 916,000 jobs, trouncing the median economists’ estimate for a 660,000 gain (source: Bloomberg). Segments of the labor market most dependent on in-person interaction saw the greatest gains, notably hospitality and leisure. We expect to see bigger job gains in the coming months, potentially over one million per month into the summer, helping to close the gap on the more than eight million jobs still needed to get back to the pre-pandemic peak. Raising U.S. and global economic growth forecasts. An accelerating vaccine rollout, American’s desire to resume somewhat normal lives, and massive stimulus set the stage for booming growth in the U.S. economy this year. Our 2021 U.S. GDP growth forecast goes from 5—5.5% to 6.25—6.75%. A stronger U.S. growth outlook pushes LPL Research’s expectations for growth in emerging markets and globally higher as well. Raising our 2021 S&P 500 earnings estimate. With more economic growth comes more revenue opportunities for corporate America. Companies have been doing a tremendous job of adapting the pandemic, innovating, and generating efficiencies. We are leaving our year-end fair value target for the S&P 500 Index unchanged at 4,050—4,100 for now in anticipation of lower stock valuations as interest rates rise. Raising our year-end target range for the 10-Year U.S. Treasury yield. Stronger economic growth and more stimulus spending may put further upward pressure on yields. We have raised our forecast for the US 10-year Treasury yield from 1.25—1.75% to 1.75—2.00%.
Global Growth Expectations on the Rise Thursday, April 8, 2021 Before the pandemic we had begun to warm up to international stocks. Valuations relative to the U.S. markets had become increasingly attractive after a long stretch of outperformance by U.S. stocks compared with those in Europe and Japan. We had also anticipated that a weaker U.S. dollar would enhance international stock returns for U.S.-based investors. Then the pandemic hit. Since then we have maintained our preference for U.S. stocks over their developed international counterparts. In 2020 the U.S. market benefited from its heavy concentration in technology, digital media, and e-commerce stocks that are well positioned for the stay-at-home and work-from-home environment. More recently, as the Eurozone has struggled to contain COVID-19, our conviction in our U.S. preference has increased. “As the end of the pandemic has come closer into view and value stocks do better in anticipation of a full reopening, the environment should theoretically be better for international stocks,” said LPL Financial Equity Strategist Jeffrey Buchbinder. “But the global dominance of the U.S. market has continued in 2021, in part due to sluggish vaccine distribution in Europe, and LPL Research continues to favor U.S. stocks over those in Europe and Japan.” A look at consensus expectations for economic growth around the world supports our preference for the U.S. As shown in the LPL Chart of the Day, not only is gross domestic product (GDP) growth in the U.S. expected to outpace Europe, the UK, Japan, and the broad emerging markets this year, but the U.S. has also seen the biggest increase in consensus expectations for GDP growth year to date—an increase of 1.9 percentage points to near 6% (source Bloomberg). Earlier this week we upgraded our U.S. GDP growth forecasts for 2021 to 6.25%—6.75%, while maintaining our growth forecast for developed international economies at 3.75%—4.25%. The reopening of the U.S. economy amid the accelerating pace of vaccine distribution is certainly a big driver of the increase in growth expectations this year. But massive fiscal stimulus—now over $5 trillion—is another key part of the story. The chart below illustrates how massive this stimulus is relative to the size of the U.S. economy (about 26%), and also how much larger it has been than the response to the Global Financial Crisis in 2008-2009. While U.S. stimulus is comparable in size to Europe’s, U.S. stimulus has included more direct payments and spending, and therefore has been more impactful than stimulus in Europe, which has included more loan guarantees. We continue to recommend investors focus their regional tactical allocations on the U.S. and underweight developed international equities. We also recommend a modest allocation to emerging market equities, where suitable, to take advantage of a strong economic growth outlook and attractive valuations.
A Goldilocks First Quarter Has Bulls Smiling Friday, April 9, 2021 Stocks have kicked off the year in a strong fashion, and history shows this may give reason to be optimistic for the rest of the year. After a solid—but certainly turbulent—year in 2020, the S&P 500 Index has continued to set new all-time highs in 2021, returning 5.8% in the first quarter. “Momentum breeds momentum, but you may not want too much of it,” said LPL Financial Chief Market Strategist Ryan Detrick. “Hitting singles and doubles has historically been the sweet spot for first quarter returns.” As shown in the LPL Chart of the Day, returns between 5-10% have been the “Goldilocks” level in the first quarter, with an average return of 12.4% through the rest of the year. Returns through the rest of the year have historically been the worst when the S&P 500 is negative in the first quarter, averaging just 3.1%. However, too much momentum in the first quarter may not be ideal, either. When the S&P 500 has returned more than 10% in the first quarter, returns through the rest of the year have averaged 6.5%. 1987 is a year that is often referred to as the year of the “blow-off top,” as the S&P 500 returned over 40% through its peak in August, with over a 20% return in the first quarter alone. This was the only year with a first quarter return greater than 10% that was negative through the rest of the year, but removing 1987 from the data only raises the average to 8.7%, not enough to beat the 5-10% return group.
Typical April Trading: Strength from Start to Finish Over the recent 21 years April is the top-ranked month for DJIA, S&P 500 and Russell 1000. April ranks #2 S&P 500 and NASDAQ. Average gains over the period range from a low of 1.91% by NASDAQ to a respectable 2.30% by DJIA. The first half of April used to outperform the second half, but since 1994 that has no longer been the case. In fact the second half of April is just as strong over the recent 21-year period. Early April trading is usually positive for the first 4 days then flattens off around the seventh trading day. At which point, there is just a hint of weakness heading into mid-month. Then the market tends to resume its charge higher through month’s end. DJIA tends to close out the month strongest with NASDAQ closing weakest. This year the market is enjoying above average gains so far this April. NASDAQ is strongest, up 4.40% as of yesterday’s close. Russell 2000 is the laggard, up a modest 0.99%.
Growth a Market Cap Story Mon, Apr 12, 2021 Last week, we repeatedly noted how there has been rotation back into growth-oriented sectors like Technology and Consumer Discretionary. For example, mega-cap names like Tesla (TSLA), Apple (AAPL), and Amazon (AMZN) have been some of the top performers in the second quarter whereas they were some of the worst performers in Q1. As a result of the strong performance of these names which all have heavy weights in the S&P 500 Growth ETF (IVW), the ETF has undergone some notable price action over the past couple of weeks. At the start of April, IVW finally broke back above its 50-DMA after repeatedly failing to do so throughout March. Last week, that rally continued as the ETF also broke out above its February highs. That sort of strong technical picture is not true for all growth stocks though. Instead, it is more of a market cap story. The Russell 2,000 Growth ETF (IWO) has been stuck in a downtrend over the past few months with another failed attempt to change that last week. Whereas IVW is extremely overbought (at least two standard deviations above its 50-DMA) as of Friday's close, IWO is trading below its 50-DMA. In the chart below we show small-cap growth relative to large-cap growth through the ratio of IWO to IVW. Throughout the fall and winter, small-cap growth had been outpacing its large-cap peers as the ratio shot higher. But in mid-February, the ratio peaked and in the past month, it has more sharply pulled back as a rotation into large-cap growth has taken place. In fact, the ratio has fallen over 10% in the past month! As shown in the second chart below, there have not been many times since the two ETFs began trading in 2000 in which the ratio has fallen as sharply in such a span of time. The most recent instance was one year ago during and in the immediate aftermath of the bear market. Before that, it was almost a decade since the next most recent occurrence. With just five prior occurrences, there is not a particularly large sample size for these types of moves, but returns have tended to be strong following past times that the ratio of IWO to IVW has fallen by at least 10 percentage points in a single month. For both ETFs, returns have been stronger than their relative norms over the following weeks and months. Small-cap growth has perhaps performed slightly better on average although that is due to smaller declines following the late 2000 instance. In other words, big outperformance of large-cap growth in the past has been generally good for growth stocks.
April Monthly Option Expiration Week Historically Bullish: DJIA Up 32 of Last 39 April’s monthly option expiration is generally bullish across the board with solid gains on the last day of the week, the entire week and the week after. Since 1982, DJIA and S&P 500 have both advanced 25 times in 39 years on expiration day with an average gain just above 0.2%. Monthly expiration day used to be stronger, but four or five declines in the last seven years has taken on a toll on the longer-term record. Nonetheless, expiration week has a bullish track record over the past 39 years even factoring in recent weakness on the last day. Average weekly gains are 1% or better for S&P 500, DJIA and NASDAQ. The bullish bias of April monthly expiration also persists during the week after although average gains have not been as strong.
Hard to Hate This Week's Claims Thu, Apr 15, 2021 Among the many strong economic data points out this morning, jobless claims was one of the more impressive ones. Last week's print was revised upwards to 769K from 744K. This week's number was anticipated to fall back down to 700K, but the actual results were far better as seasonally adjusted initial claims fell by 193K to a pandemic low of 576K. That is the biggest one-week drop since a 219K decline at the end of July. Additionally, this week's decline also brings claims back below the pre-COVID record high of 695K from October 1982. On a non-seasonally adjusted basis, the picture was just as impressive. Regular state claims dropped 152.9K to 612.9K. Again this was the lowest level of the pandemic. The same can be said for Pandemic Unemployment Assistance (PUA) too. Although the 20K decline is on the smaller side for the past several weeks' moves, claims from this program reached a new low of 131.98K. PUA claims are now down to around a quarter of where they stood just two months ago. Over the past several months, continuing claims have consistently been making new lows for the pandemic. Since the high in claims last May, there have only been 8 weeks in which continuing claims did not fall with this week being one of them. Claims rose by a meager 4K from last week's downwardly revised reading of 3.727 million. That snapped a streak of 12 consecutive weeks of declines. Additionally, outside of the week of September 11th when claims went unchanged, the 4K increase this week was tiny relative to other moves of the past year. Overall, while continuing claims increased, it came in the context of a long, albeit slowing, streak of declines. Including all other programs creates another week's lag for the data meaning the most recent reading is through the final week of March. Taking a look at continuing claims in this light, there were broad improvements with the only program to see an uptick being the very small State Additional Benefits which rose from 1.8K to 2.15K. As for the larger and more impactful programs, regular state claims fell by half of a million while PUA claims were not far behind dropping 474.7K. The third-largest program, Pandemic Emergency Unemployment Compensation (PEU), also saw a significant decline falling by 174.4K. That was the program's fourth-largest week-over-week decline of the past year. Altogether, total continuing claims across all programs fell to 16.96 million. That is the second-lowest level of the past year. In addition to the drop in the overall level of claims, another improvement comes from the composition of claims. Over the past several months we have noted how an increased share of claims are on account of programs that extend benefits past the expiration of various programs. In other words, a larger share of people on unemployment have been out of work for extended periods of time. For the time being, that trend has peaked. The most recent week showed further improvements with respect to those programs as they now account for a combined 34% of all claims. That is down for a third week in a row since the high of 36.9%.
Explosive Empire Thu, Apr 15, 2021 Manufacturing businesses in the New York area are roaring back to life this spring. After some readings showing only modest growth at the end of 2020 and at the start of this year, the New York Fed's monthly manufacturing survey results released this morning showed the headline index rising to 26.3 which is the strongest level since October 2017. That indicates the region's manufacturing sector is growing at a rapidly accelerated rate. In fact, only 12.2% of businesses reported worse overall business conditions in April which is the lowest level in nearly a decade (since May of 2011). Given the strong reading in the index of General Business Conditions, every other area of the report also showed impressive readings. For the current conditions indices, every index is in expansionary territory with higher month-over-month moves. Some of these like those for Delivery Times, Prices Received, Prices Paid, and Unfilled Orders are also at or just off record highs after massive moves higher in the past month. Expectations generally remain positive although some indices are at less extreme places within their historical ranges while three of the indices were also lower versus March. Beginning with a look at demand and production metrics, New and Unfilled Orders both surged in April rising 17.8 and 17.2 points, respectively. For New Orders, that month over month rise stands in the top 5% of all monthly moves and brings the index to its highest level since October 2009. That compares to last month when the index was essentially in the middle of its historical range. Meanwhile, Unfilled Orders had been elevated even before this report, but with the most recent surge in New Orders, Unfilled Orders are now at the second-highest level on record behind the reading of 36.5 from September 2001 when the fulfillment of existing orders was likely impacted by the September 11th attacks. While demand has been very strong, firms have seen no lack of trying to fulfill those orders. Inventory levels were notably higher as that index rose to 11.6 which is in the top 2% of all readings and the highest since last February. The index for Shipments rose 3.9 points to 25 which is the highest level since August 2018. While that is a historically healthy reading, given the surge in unfilled orders and inventories it does indicate that the region's manufacturers still have plenty of product to get out the door. One likely reason for the weaker reading in shipments relative to orders and inventories is record length in delivery times. That index not only experienced the second-largest increase of any month on record (behind September 2001), but it also reached the highest level ever. At 28.1, the index surpassed the previous record by 11.9 points. On top of—and likely because of—those supply chain disruptions, prices continue to rise at a record clip. Prices Paid came in at the second-highest level on record behind July 2008. Those price increases are also being passed onto customers as Prices Received rose to a record high. Additionally, businesses do not appear to see much of a chance for these trends to reverse as six-month expectations are also at very high levels. After a very strong nonfarm payrolls report at the start of the month and on the same day that initial jobless claims came in at a new low for the pandemic, this report also gave a rosy outlook for the labor market. The index for the Number of Employees was higher alongside Average Workweek meaning businesses took on more employees and increased hours for existing workers, but the real move was in expectations. Expectations for Number of Employees ripped higher to a new record of 40.1. That willingness to hire paints a very optimistic picture for the region's labor market. That sort of optimism extends beyond the workforce though. Six-month expectations for Capital Expenditures and Technology Spending were also higher, rising to the top 15% of all readings.
B.I.G. Tips - Boom Goes the Retail Sales Thu, Apr 15, 2021 After a lousy report for the month of February when freak weather across the south temporarily shut down several areas of the south, Retail Sales bounced back with a vengeance in March as vaccine rollouts accelerated and stimulus checks were spent. The moves higher in Retail Sales over the last few months have been incredible. As shown below, while it took 40 months to make a new high following their pre-Financial Crisis peak, COVID only caused a five-month drought without a new high. From the low in April 2020, Retail Sales have bounced 50%! Even more impressive, though, is not only are total Retail Sales above their pre-COVID peak, but they are more than 17% above that peak just 14 months ago. The second chart shows the 14-month rate of change in Retail Sales since 1992. While the post-COVID decline was the steepest on record, the 14-month gain is the highest on record. Ironically, had it not been for COVID and the stimulus it resulted in, there is no way Retail Sales levels would be where they are now.
Four Reasons The Future Looks Bright For The Bulls Wednesday, April 14, 2021 “I look to the future because that’s where I’m going to spend the rest of my life.” George Burns The bull market continues, with the S&P 500 Index now up more than 10% in 2021. With stocks up more than 80% from the March 2020 lows, the reality is a well-deserved break or consolidation could happen at any time. Looking to the future, as George Burns said above, we would be a buyer of any material weakness, as we believe this bull market is alive and well as we’ll discuss more in this blog. Here are four bullish stats we’ve found recently that indeed suggest this bull market could still have plenty of life left. First, the S&P 500 Index was up just under 6% in the first quarter, an area we’d call the sweet spot. Looking back since 1950, when the S&P 500 was up between 5-10% in the first quarter, the rest of the year (so the final three quarters) gained another 12.4% on average and was higher 86.7% of the time. Compare this to when the S&P 500 was up >10% in the first quarter and the returns drop to 6.5% the rest of the year. Lastly, if the first quarter was negative, then the rest of the year was up only 3%. Sweet spot indeed. Second, the December Low Indicator has bulls smiling. This was created by Lucien Hooper, a Forbes columnist in the 1970s, and it simply says that if the S&P 500 closes beneath the December low during the first quarter then future weakness could be in the cards. But if this critical level holds, then higher prices could be around the corner. As the LPL Chart of the Day shows, stocks held above the December lows in 2021 and this could mean continued higher prices, as the S&P 500 was up more than 18% on average previous years when this level held and incredibly was higher 33 out of 35 years. Third, the S&P 500 was up nearly 54% in the 12 months ending March 2021, one of the largest yearly gains ever. Looking at previous times that had significant 12-month returns shows the potential for weak returns 1, 3, and 6 months later. This makes sense, as stocks could need some time to catch their breath. The good news? One year later the S&P 500 was higher more than 90% of the time, with only the year after the 1987 crash in the red. “It might seem counterintuitive to most investors, but big rallies like we’ve seen tend to mark the start of bull markets, not the end, so we wouldn’t bet on this bull market ending anytime soon,” explained LPL Financial Chief Market Strategist Ryan Detrick. Lastly, overall market breadth is extremely strong. Again, this could suggest near-term there could be an exhaustion point, but this isn’t what you see at the end of bull markets, in fact, it tends to usually happen at the start of new bull markets. Currently, more than 95% of the components in the S&P 500 are above their 200-day moving average, a level only seen two other times, in December 2003 and September 2009. Looking back at 2004 and 2010, 2004 saw consolidation a good part of the year, while 2010 had a well-deserved 16% correction after the huge gains off the March 2009 lows. But the key point is after extreme market breadth like we are seeing now, overall higher prices and the bull market lasted for many more years. Looking to the future, as George Burns said, we believe it could be a bright one for equity investors, particularly when we consider the return potential for stocks compared to cash and high-quality bonds.
March Housing Data Rebounds Fri, Apr 16, 2021 Data on Housing Starts and Building Permits for the month of March came in better than expected on Friday morning. That provided some relief to the concerns that surfaced from February's weak and weather-impacted report. With March's rebound, Housing Starts are now back at their highest levels since 2007. Building Permits still remain below January's peak but also managed to rebound. We pay a lot of attention to trends in residential real estate because it is such a large part of the US economy, and therefore has done a good job tracking trends in the overall economy. The chart below shows the 12-month average of Housing Starts relative to recessions going back to 1967. Looking at the chart, it's easy to see how leading up to every prior recession, Housing Starts always started to roll over in advance of the recession. That didn't happen leading up to the current recession, but given the suddenness of the contraction, there was really no way to anticipate it. Conversely, coming out of prior contractions, the recession was usually over before the 12-month average started to rebound. Here again, the current recession re-wrote the script. Not only did starts never meaningfully rollover, but they are also back at new post-financial crisis peaks. In the periods leading up to, during, and now after this current recession (even though the NBER hasn't officially called, the COVID recession is over), the patterns of Housing Starts looks nothing like the trends we have seen in prior periods. Taking a closer look at the current period, the chart below shows the 12-month average for Housing Starts and Building Permits going back to 2010. While Permits weren't as strong as Starts in March, their 12-month average is actually considerably higher as both series climbed to new post-housing bubble highs. Within both the Housing Starts and Building Permits data, we have also broken out the trends in single-family units. In terms of their economic impact, single-family units are thought to have more of an economic impact than a multi-family unit. Here again, the current trend remains positive as both series reached their highest levels of the post-financial crisis period in March.
One of The Strongest Weeks of the Year Mon, Apr 19, 2021 While earnings are likely to be a key catalyst over the next few days, from a seasonal perspective, the current week of the year has historically been one of the best. As shown in the snapshot from our Seasonality Tool below, the current week of the year (April 19th through April 26th) has seen the S&P 500 post a median gain of 1.44% over the last ten years. Going out a bit further, the one-month return is only slightly better with a median gain of 1.47%, which is more middling relative to all other one-month periods throughout the year. The same can be said for the 3-month period although it is a stronger period of the year which stands in the top quartile of all three month periods. Expanding this beyond just the S&P 500, in the chart below we show the median performance across all sectors and market cap indices for the next week (4/19-4/26) based on the last ten years of trading. As shown, Technology is right in line with the S&P 500 with a 1.44% gain while the small-cap Russell 2,000, the Energy sector, and Consumer Discretionary have notched slightly stronger performance. While mid-caps (S&P 400), Utilities, and Financials have all managed to also typically rise over 1%, there has historically been some weakness from Communication Services and the Dow Transports as both have median declines. Consumer Staples has only marginally moved higher with a 3 bps gain. Taking a bit more of a granular look at this period, in the chart below we show the intra-month performance of the S&P 500 so far in April this year as well as a comparison to the historical average for the month of April since 1983. With the S&P 500 already up around 5% on the month, performance thus far is better than the average gain of around 1.5% by this time. Even though the next week has historically been a very strong time of the year from a seasonal perspective, the S&P 500 is starting off trading lower today. But we would note that it is not necessarily unusual. As shown below, even though it has been a strong period, the first couple of days typically have seen the S&P 500 drift lower before reversing higher in a move that typically lasts through the end of the month.
What Happens After The First Rate Hike? Wednesday, April 21, 2021 “Don’t fight the Fed.” Old investment saying One of the popular questions we’ve received lately is what do stocks do after the first rate hike? Let’s be clear, we think the Federal Reserve Bank (Fed) will leave rates low until at least 2023, but what if we get a sudden dose of inflation? This isn’t our base case, but a rate hike could potentially happen sooner in that situation. After all, the first rate hike in 2015 set off a huge sell-off into early February 2016, as the market was quite upset and let it be known that it felt the Fed acted too soon. In fact, the first hikes of 2004 and 1999 also saw losses the first three months after the first hike, but eventually stocks were in the green a year later. “The first hike in recent cycles has indeed brought with it some selling pressure, but hikes usually take place in strong economies, so it isn’t surprising to see returns turn green once you go further out,” explained LPL Financial Chief Market Strategist Ryan Detrick. “But let’s not sound any alarms yet, we don’t see a rate hike for a couple of years. Still, it’s good to know what the playbook could be once it happens.” As shown in the LPL Chart of the Day, that initial rate hike can cause some hiccups the first three months, but returns turn much better 6- and 12-months later.
Revisions Bring The Streak Back to Life Thu, Apr 22, 2021 Last week saw an impressive reading for jobless claims falling to 576K. While that was revised slightly higher to 586K this week—which would still be well below the previous low for the pandemic—today's release saw further improvements with initial claims dropping another 39K from that revised level to 547K. That brings the total decline over the past two weeks to just under 200K; the largest since the first week of August when claims first fell back below one million. On a non-seasonally adjusted basis claims likewise continue to fall which is normal given the time of year. The current week of the year (week number 16) has only seen unadjusted claims rise week over week 13% of the time going back to 1967 when the data begins. In other words, the improvement in claims comes alongside seasonal tailwinds as non-seasonally adjusted initial jobless claims fell to 566.5K this week from 623K last week. The picture for Pandemic Unemployment Assitance was not as positive as the program experienced a small uptick from 131.7K to 133.3K. Nonetheless, that is the second week in a row with a very low count in claims for this program. Continuing jobless claims had been on an impressive streak of 12 straight weeks of declines, but that appeared to end last week after rising to 3.731 million. Fast forward to today's release and that reading was revised down significantly by 23K to 3.708K. Given that was below the prior week's 3.717 million reading and the most recent reading fell further to 3.674 million, the streak of consecutive week-over-week declines has been brought back to life, extending to 14 weeks long. As shown in the second chart below, that makes for the longest streak of consecutive declines on record. Overall, the continuing claims picture continues to consistently improve as continuing claims are well below the pre-pandemic record from the last recession. Granted, current levels are still historically elevated around levels of past highs like those in the early 1990s and 2000s. When factoring in all programs, the most recent data is for the first week of April. Based on the latest results, we saw an uptick in total continuing claims across all programs rising just under 500K to 17.4 million. While regular state claims and the Extended Benefits program both saw declines of more than 100K, they were offset by 265.2K and 447.7K respective increases in PUA claims and Pandemic Emergency Unemployment Compensation (PEUC) claims. Those increases bring these programs' claim counts back up to similar levels as a month ago. Meanwhile, Extended Benefits claims are at their lowest level since early October, and regular state claims are at the lowest of the pandemic. As for the composition of claims, those moves meant a significant share (35%) of total claims still come from extension programs like PEUC and Extended Benefits. While that is below the highs from last month on a combined basis, breaking this down further, the PEUC program's share of total claims reached 32.2% in the most recent week's data; a new high for the pandemic. Meanwhile, the Extended Benefits program's share fell to the lowest level since October. There is a similar dynamic for PUA and regular state claims with the former accounting for a growing share of total claims and the latter accounting for the smallest share of the pandemic.
