Next Bump in Post-Election Year Rally Could Be in May As of yesterday’s close, DJIA was up 10.5% year-to-date. S&P 500 was up 10.1% and NASDAQ was at 7.0%. Compared to average post-election year historical performance since 1950 graphed in the charts above and below, DJIA, S&P 500 and NASDAQ are all still comfortably above past post-election year average performance for this point of the year. Due to Covid-19, 2021 so far has been more volatile than the average post-election year. Aside from larger magnitude swings in performance, we have observed the return of seasonality with choppiness in February and weakness in March following monthly options expiration. Strength this April is also aligning with historical in post-election year April strength. Historically, the next area of potential concern for the current rally is just after mid-May. This is also right around the time Q1 earnings season is beginning to wrap and focus shifts to Q2 estimates, graduations, and other early summer activities.
Leading Indicators Suggest an Accelerating U.S. Economy Friday, April 23, 2021 The economic reacceleration is underway in the U.S., as the expanding vaccination campaign, lifting of mobility restrictions, and infusion of fiscal stimulus combined to lift the Conference Board’s Leading Economic Index (LEI) in March. The LEI grew 1.3% month over month, ahead of Bloomberg consensus forecasts of 1%, raising the Conference Board’s gross domestic product (GDP) expectations to 6% on a year-over-year basis. After a weaker-than-expected February release that was primarily disrupted by the winter storm, data in March snapped back in a strong fashion. All ten components of the LEI rose in March, while jobless claims were the largest contributor to the growth of the index. Labor market data has continued to improve since the measurement period, as weekly jobless claims have posted back-to-back pandemic lows. The ISM New Orders Index was the second largest contributor to the LEI, which climbed to its highest levels since 2004. The Conference Board revised the February data lower, however, snapping what was a 10-month streak of growth for the index. As shown in the LPL Chart of the Day, the LEI is back on the rise, suggesting further economic momentum in the coming months: “Momentum breeds momentum, and we expect the U.S. economy will continue to improve in the coming months as we move forward with reopening plans,” noted LPL Financial Chief Market Strategist Ryan Detrick. “As the rest of the world continues to improve as well, we expect some spill-over effects to also benefit the US economy.” The U.S. is currently vaccinating around 3 million people per day, according to the Center for Disease Control (CDC), and over half of the adult population has received at least one dose of the vaccine. Meanwhile, over 80% of the population above the age of 65—the most at-risk age segment of the population—has received at least one dose of the vaccine. The improving vaccination data has helped embolden policymakers to lift restrictions, and prompted us to upgrade our GDP forecast for the U.S. to 6.25-6.75% in our recent Weekly Market Commentary.
S&P 500 and DJIA Up Last 9 Post-Election Year Mays May officially marks the beginning of the “Worst Six Months” for the DJIA and S&P. To wit: “Sell in May and go away.” Our “Best Six Months Switching Strategy,” created in 1986, proves that there is merit to this old trader’s tale. A hypothetical $10,000 investment in the DJIA compounded to a gain of $960,943 for November-April in 70 years compared to just $1,656 for May-October. The same hypothetical $10,000 investment in the S&P 500 compounded to $788,997 for November-April in 70 years compared to a gain of just $10,145 for May-October. May has been a tricky month over the years, a well-deserved reputation following the May 6, 2010 “flash crash”. It used to be part of what we once called the “May/June disaster area.” From 1965 to 1984 the S&P 500 was down during May fifteen out of twenty times. Then from 1985 through 1997 May was the best month, gaining ground every single year (13 straight gains) on the S&P, up 3.3% on average with the DJIA falling once and two NASDAQ losses. In the years since 1997, May’s performance has been erratic; DJIA up twelve times in the past twenty-three years (four of the years had gains in excess of 4%). NASDAQ suffered five May losses in a row from 1998-2001, down – 11.9% in 2000, followed by thirteen sizable gains in excess of 2.5% and five losses, the worst of which was 8.3% in 2010. Post-election Year Mays rank near the top, registering average gains on DJIA and S&P 500 of 1.3% and 1.7% respectively. DJIA and S&P 500 have advanced in every post-election year May beginning in 1985. Russell 1000 has been up ten years straight in post-election year Mays.
Where Do President Biden’s First 100 Days Stack Up Versus President Trump? Wednesday, April 28, 2021 President Biden’s 100th day in office is tomorrow, on April 29. Hard to believe it has been 100 days already, but overall the economy continues to improve and stocks have done very well under our new President. We’ve heard the question many times: Where does the Biden rally rank? That is what we will look at today. The term “hundred days” was first used on July 24, 1933, on the radio by President Franklin D. Roosevelt (FDR). He was discussing the 100-day session of the 73rd U.S. Congress, but over time this term has changed to refer to the first 100 days of a new president. Per Ryan Detrick, Chief Market Strategist, “President Biden has been quite kind for stocks, with the Dow up nearly 10%, which is on pace for the best first 100 days in office since FDR in the early 1930s. Then toss in the cherry on top that stocks had one of their greatest rallies ever from Election Day until the inauguration and it is clear that although maybe everyone might not like President Biden, but the stock market doesn’t have many issues with him.” As shown in the LPL Chart of the Day, the Dow has averaged 4.3% the first 100 days of a new President, while it has been higher the first 100 days in office for five of the past six Presidents. In fact, President Biden’s return currently ranks as the third best since 1900, with only Taft and Roosevelt better. Lastly, breaking it down by political party and the first 100 days under a Democratic President was much stronger, up 10.3% on average versus down 0.2% for a Republican President. Here’s a chart we shared earlier this year that shows that stocks did amazingly well from Election Day until the inauguration under President Biden. What can we glean from those first 100 days? Is there any pattern that might suggest how stocks will do during the rest of the time President Biden is in office? You can look for yourself below, but there doesn’t appear to be any clue as to what might happen. President Eisenhower had a weak first 100 days, then a big rally over the remainder of his time in office. Conversely, President Taft saw a big rally during the first 100 days, only to have negative returns for the remainder of his time in office. In the end, fundamentals, valuations, and technicals drive long-term equity returns. The good news is only once since the Great Depression did that mean lower returns for the remainder of time in office after the first 100 days.
Continuing Claims Streak Of Declines Back On The Ropes Thu, Apr 29, 2021 Over the past few weeks, initial jobless claims have seen a significant improvement falling to pandemic lows in the 500K range. Even with last week's reading getting revised up by 19K to 566K and this week's print missing expectations coming in 3K above estimates of 550K, the picture of the US labor market broadly remains positive. This week marked the first streak of three sequential weekly declines since November. At 553K, claims are also at the lowest level since the first half of March of last year and are below the peaks of past recessions. Including the other major unemployment insurance program, the Pandemic Unemployment Assistance Program (PUA), the picture is the same. Non-seasonally adjusted claims between the regular state programs and PUA claims are at a new low on a combined basis dropping below 700K for the first time. Regular state claims have consistently accounted for a majority of initial claims and that has increasingly been the case over the past few months. PUA claims dropped 11.6K week over week to a new low of 121.75K which only accounts for roughly 17.5% of all initial claims. That compares to an average of 32.23% since the program first began to be tracked last year. In spite of the pace of new claims entering the system having slowed recently, continuing jobless claims data has plateaued. Last week, we noted how a revision had brought back to life a record streak of consecutive sequential declines in continuing jobless. This week that streak once again looks like it has come to an end as continuing claims rose 9K to 3.66 million. Although that streak is over (barring any revisions down the road), it is in the context of a massive and rapid improvement in claims in a relatively short span of time. For starters, in the 50 weeks since the high in claims last May, there have only been seven weeks including the current one in which claims did not experience an improvement. Additionally, since falling below the 6.635 million level that had marked the pre-pandemic record high in claims from the Global Financial Crisis, claims have dropped another nearly 3 million in just under 6 months. By comparison, after the GFC peak, it took 128 months or over two and a half years for claims to move from that peak to a similar level as to now. Including all programs adds some lag to the data meaning the most recent data is for the week of April 9th. Continuing claims across all programs fell 846K to 16.587 million. That is the second-lowest reading of the pandemic behind the first week of the year's 16.05 million reading, although that week comes with the caveat of some irregularities on account of the timing of the signing of the spending bill. Essentially every program saw lower claims counts with the biggest drop coming from Pandemic Emergency Unemployment Compensation (PEUC) which fell by over 400K. Since the fall, this program as well as others that extend benefits beyond normal expiration have accounted for an increased share of total claims meaning a growing number of the unemployed have been facing long-term unemployment. Over the past several weeks, though, this reading has also been improving.
S&P 500 Up Over 10% First Four Months – Preceded Flat May to late-October As of yesterday’s close, S&P 500 was up 11.5% year-to-date. Provided these gains hold through the end of April, this year will be just the seventeenth time since 1950 that the S&P 500 has finished the first four months of the year with a gain exceeding 10%. The best January to April span occurred in 1975, up 27.3% (S&P 500 was in the early stages of a new bull market following the bear ending 10/3/1974 in which the S&P 500 declined 48.2%). The next best year was, 1987 (most will remember what happened later that year) and the most recent year was 2019 (a solid year from beginning to end). In the above chart we have plotted all 17 previous years in which the S&P 500 was up over 10% January through the end of April. Along side for comparison is “All Years,” “Post-Election Years,” and 2021 through yesterday. In the previous 17 years, gains tended to fizzle in early-May before gaining some additional ground from around mid-June to mid-July before once again stalling out till late September with more weakness lasting until late-October. On average, by late-October arrived, gains from the previous three months were given back and since the start of May S&P 500 gained around 2.5% on average. You don’t have to go away in May but considering the historically modest gains from early-May to late-October, it may not quite be worth sticking around.
U.S. Economy Jumps Out of the Gate in 2021 Thursday, April 29, 2021 In what was initially expected to be one of the slower quarters of the year, the U.S. economy jumped out of the gates in 2021, with gross domestic product (GDP) growing 6.4% quarter over quarter. A faster than expected vaccination program, nearly $3 trillion in fiscal stimulus—including direct payments to consumers—and faster than expected job growth helped fuel a surge in personal consumption—the largest portion of GDP. As shown in the LPL Chart of the Day, personal consumption grew 10.7% on an annualized basis in the first quarter, the second highest level since the 1960’s: “The U.S. economy is off to a great start in 2021, and this should set the stage for solid growth in the remainder of the year as pent up demand continues to flow through the economy,” added LPL Financial Chief Investment Officer Burt White. “Many areas of the country are still facing restrictions on activity, so we don’t think growth will just be limited to the first quarter.” However, the growth story in the first quarter wasn’t solely about direct stimulus payments. While personal consumption has understandably gained a lot of attention, federal non-defense spending added the most to GDP in nearly 60 years, a segment of the economy unaffected by transfer payments like stimulus checks. Digging into the numbers even further, spending on services grew a modest 4.6%, which should accelerate in the second and third quarters as remaining restrictions are lifted in response to falling cases and rising vaccinations. As of April 28, the US is averaging around 2.5-3 million vaccines administered per day, which has helped over half the adult population receive at least one dose of the vaccine, while nearly 40% of adults are fully vaccinated, according to the Center for Disease Control and Prevention. The U.S. vaccination program has helped pull the economy forward, but net trade was a modest drag on growth in the first quarter, where domestic growth pulled in imports at a faster pace than the recovery outside of the U.S. lifted exports. As the rest of the world gets better control of COVID-19, rebounding economic growth overseas should provide an additional tailwind for U.S. economy. We upgraded our forecast for U.S. GDP in our recent Weekly Market Commentary from 5–5.5% to 6.25–6.75%, and we expect to see the economy continue its pace in the second quarter as restrictions are lifted and activity normalizes.
Here Comes Sell In May Friday, April 30, 2021 “The sun was warm but the wind was chill. You know how it is with an April day. When the sun is out and the wind is still, you’re one month on in the middle of May.” American Poet Robert Frost One of the best known investment axioms is to “sell in May and go away.” This is largely because the six months from May through October have historically been some of the weakest months of the year for stocks. As you can see below, the next six months have tended to be on the weak side. As shown in the LPL Chart of the Day, the next six months have indeed been the worst six months of the year, up only 1.7% on average. To add insult to injury, we are leaving the six most bullish months of the year. In fact, the S&P 500 Index is set to gain close to 30% during these most bullish six months, one of the best six-month gains ever. “Stocks are up more than 87% from the March lows, suggesting a well-deserved pullback during these troublesome months is quite possible,” explained LPL Financial Chief Market Strategist Ryan Detrick. “But with an accommodative Fed, fiscal and monetary policy, along with an economy that is opening faster than nearly anyone expected, we’d use any weakness as an opportunity to add to positions.” Here’s the catch, isn’t there always a catch? Stocks have actually been higher during these worst months of the year eight of the past ten years.
May’s First Trading Day: S&P 500 and NASDAQ Higher 69.6% of the Time Next Monday, the first trading day of May, has a bullish history over the past 23-years. DJIA, S&P 500 and NASDAQ have all averaged around 0.4% on the day. S&P 500 and NASDAQ have the best record, up 16 times or 69.6% of the time since 1998. With an average gain of 0.18%, Russell 2000 is slightly weaker. All four indexes have been down the last two years (DJIA four in a row).
Let’s Talk About Stocks And Higher Taxes Wednesday, May 5, 2021 “Our new Constitution is now established, everything seems to promise it will be durable; but, in this world, nothing is certain except death and taxes,” Benjamin Franklin First off, we hope everyone has a happy and safe Cinco de Mayo! One of the big discussions lately has been about how will higher taxes potentially impact the stock market. We’ve known since President Biden won the presidency and the Democrats secured control of the House and Senate that higher taxes were coming, likely in the form of higher corporate taxes and higher capital gains taxes on the wealthy—though probably not until 2022. It is worth noting though that stocks haven’t been fazed at all by all the higher taxes talk, as we just saw the best first 100 days for stocks under a new president since FDR. With proposals for the $1.8 trillion American Families Plan (AFP) and $2 trillion plus infrastructure bill (known as the American Jobs Plan or AJP), higher taxes are needed to help finance the new spending. Let’s be clear though, with a 50/50 Senate (Vice President Kamala Harris breaks ties) and historically slim Democratic majority in the House, we think these final numbers will likely come in less than $3 trillion combined, as these initial numbers from the Democrats are starting points for negotiations. Higher capital gains taxes on the wealthy are one way to pay for things, with the AFP proposing to increase the top tax rate on ordinary income to 39.6% from 37%, and capital gains and dividends taxes on those who earn more than $1 million to a maximum of 43.4% from the current 23.8%. Fun stat, only 0.32% of the population makes more than $1 million a year, so the truth is this won’t impact the other 99.68% of the population. “We’ve known higher taxes were coming so this shouldn’t be a surprise to anyone at this point,” explained LPL Financial Chief Market Strategist Ryan Detrick. “Now here’s the catch, looking back at the times that taxes increased amid a strong economy, stocks did just fine. Given the strong economic outlook this year, you’d have to think history could repeat once again.” As shown in the LPL Chart of the Day, in 1986 and 2013, capital gains taxes increased, but the economy was on firm footing back then, compared with the 1970s hikes, which saw an economy marred by higher inflation and sluggish growth. Not surprisingly, the two more recent hikes saw solid stock market performance, while the 1970s hikes didn’t. Is it as simple as how the economy is doing? It very well could be. Corporate taxes are currently 21% and President Biden has discussed increasing the level to 28%. Although we think in the end the level will be more like 25%, the bottom line is higher corporate taxes are likely coming, which could knock a few percentage points off of future S&P 500 Index earnings growth. So what happens after corporate taxes are raised? As the table below shows, muted returns a year out are normal, but interestingly stocks have consistently been in the green the three months before the official date of the tax increase, suggesting investors weren’t very worried about higher taxes on the horizon. It’s always possible that higher taxes slowly take a bite out stock market returns over a longer time period than just a year, but if the concern is what all the talk about higher taxes may mean for markets over the next year, there’s not much historical evidence pointing to the potential for a bad outcome. The picture is murkier, though, with corporate taxes, which isn’t surprising, since stock prices are ultimately tied to earnings growth. But is often happens, markets seem to be more attuned to larger economic forces.
Claims Finally Break Below 500K Thu, May 6, 2021 Last week's number for seasonally adjusted initial jobless claims was revised higher by 37K. That means that while the original print of 553K was the lowest level of not only April but also of the entire pandemic, the revised reading actually changed that to make for the highest level of claims in three weeks. In spite of this, in the most recent week's data, jobless claims dropped by 92K to 498K. That is the first reading below 500K of the pandemic era and is now down over 90% from the high in claims just over a year ago. This week's reading is also for the first time less than double the reading from just before the massive upswing in claims in March of last year. While there is the added factor of seasonal tailwinds—every week from the second week of April through the end of May has historically averaged a week over week decline in SA claims—on a non-seasonally adjusted basis, the data was just as positive. Although claims did not take out the 500K level by this measure, they did fall over 100K to 504.7K which also marked a pandemic low. PUA claims dropped around 20K to just above 100K. Again, that makes for the lowest level of claims both for this program and on a combined basis since the start of the pandemic. Lagged an additional week to initial claims, continuing claims continue to look less positive. As we mentioned last week, though it doesn't take away from the fact that there have been massive and consistent improvements in just a year's time, continuing claims have experienced a significant deceleration in improvements over the past few months. The past couple of weeks have been the pinnacle of this. Last week's reading was revised lower by 7K meaning the print only saw a 1K increase WoW, but that still snapped a 14 week-long streak of consecutive sequential declines. Pair that with the 37K increase to 3.69 million this week, and continuing claims have experienced the first back-to-back increases since last May when jobless claims were rising by well above 1 million per week. Even though continuing claims via the regular state programs have plateaued, that gives an incomplete picture. Including all other programs helps to solve that, though it does create an additional week's lag to the data meaning the most recent week is through April 16th. Including all programs, the tone is more optimistic. Total claims across all programs fell by 404K to 16.185 million. Barring the irregular drop in the first week of the year to 16.048 million when some plans had lapsed due to the timing of the signing of the spending bill, that makes for the lowest level of claims since the first week of last April. Considering the lack of improvements in regular state claims and the fact that the program accounts for a smaller share of total claims than earlier in the pandemic, the main drivers of the overall decline in total claims were significant drops in PUA claims and the Pandemic Emergency Unemployment Compensation (PEUC) program.
Individuals, Writers, and Managers All Still Bullish Thu, May 6, 2021 The major indices are broadly lower in the past week with the exception of the Dow which has risen just over 1%. The Nasdaq on the other hand has been the worst performer falling almost 3%. Even though the major indices are split in terms of performance, sentiment has gone the way of the Dow as bullish sentiment as measured through the AAII weekly survey rose 1.7 percentage points to 44.3%. While not a particularly large increase, this week did mark the first time bullish sentiment has risen in a month. With bullish sentiment higher, fewer respondents reported as bearish. Only 23.1% of investors reported pessimistic sentiment; down 2.6 percentage points versus last week's reading. Just like bullish sentiment, that was not a particularly large change, and it leaves the reading in the middle of the past several weeks' range. The inverse moves in bullish and bearish sentiment resulted in the bull-bear spread climbing 4.3 points to 21.2. While that is still at the high end of the past few years' range, it is 11 points below where it stood only two weeks ago. Looking at another sentiment survey from Investors Intelligence which targets equity newsletter writers, the bull-bear spread also rose slightly week over week leaving the spread well below levels from only a couple of weeks ago. In other words, sentiment has moderated recently, but it has not dramatically shaken a historically bullish tone. Perhaps the most notable reading in this week's AAII survey was the reading on neutral sentiment. Up 0.7 percentage points from the prior week, it was not a particularly large gain especially compared to the 5 and 5.2 percentage point gains the previous two weeks. Regardless, moving higher once again neutral sentiment hit the highest level since the first week of March. Other than that week and the current one, there has only been one other week in the past year (second to last week of 2020) in which neutral sentiment was as high as it is now. Even though this week's reading is elevated relative to the past year, compared to the rest of the history of the survey, it is pretty unremarkable. On average over the life of the survey, neutral sentiment has averaged a reading just 0.9 percentage points lower than this week's reading. The NAAIM Exposure Index is yet one more sentiment reading that also has shown some moderation but remains at a generally bullish level. This index reflects the average exposure to US equities of members of the National Association of Active Investment Managers. Readings of 200 would indicate they are leveraged long on average, 100 would be fully invested, 0 would be market neutral, -100 would be fully short, and -200 would be leveraged short. Last week saw this index tip above 100 for the first time since mid-February which also ranked in the top 2% of all readings going back to 2006. This week it fell 15.93 points. That stands in the bottom decile of weekly moves and was the largest drop since late March, but at 87.79, the index still points to historically bullish positioning among active managers.
Impressive Initial Claims; Anticlimactic Continuing Claims Thu, May 13, 2021 Last week's initial jobless claims number had been the first break below 500K since the pandemic began. Although that no longer applies this week after a 9K revision higher to 507K, initial claims continue to impress as the most recent print saw a more considerable break below 500K. Claims this week fell 34K to another new low of 473K. In total over the past two weeks, initial jobless claims have now fallen 117K. On a non-seasonally adjusted basis, regular state claims combined with claims from the Pandemic Unemployment Assistance (PUA) program totaled 590.97K this week; another pandemic low. The lion's share of these claims are of the regular state programs as only 103.57K are PUA claims. That reading was ever so slightly higher this week (up 1.76K) and remains just off the lowest level of the pandemic. While initial claims have seen great progress over the past several weeks, continuing claims continue to be a bit more disappointing. For the first time since the week of April 9th, seasonally adjusted continuing claims did finally fall, dropping 45K to 3.655 million, but that was 5K less than the decline that had been penciled in by economists. Overall, the general trend remains the same. Whereas there were massive improvements throughout much of 2020, the pace of those improvements slowed last fall. From the end of 2020 through the end of March, claims had averaged around a 100K decline per week. Since the start of April, it has slowed even further with claims averaging only a 14K decline over the past four weeks as shown in the second chart below. The picture is slightly better when including all programs (although this data is lagged by an extra week). Through the week of April 23rd, total continuing claims across all programs rose 697K to 16.884 million. While lower than most of the pandemic, that had erased the prior two weeks moves lower and was the largest one-week uptick since the first week of March. That uptick was driven almost entirely by PUA claims and Pandemic Emergency Unemployment Compensation.
Door is Open For Developed International Stocks Thursday, May 13, 2021 We’ve warmed up to developed international stocks recently for several reasons. For one, the U.S. stock market has staged a tremendous rally—this week notwithstanding—since last March which has prompted us and others to start looking for other opportunities that aren’t pricing in so much optimism. Valuations, though not great timing tools, are more attractive in Europe and Japan. And we expect the US dollar to weaken which could boost non-US stock returns. Another reason to take a closer look at international is the recent resurgence of value stocks. The developed international equity market (mainly Europe and Japan) is much more value-focused than the U.S. market, based on the MSCI EAFE Index and the S&P 500 Index. As shown in the LPL Chart of the Day, the relative performance of value stocks versus their growth counterparts has been well correlated to the relative performance of developed international stocks compared to those in the U.S. In other words, international tends to work when value works. “Should strong performance by value stocks continue—and we suspect it might—international stocks will have their best chance in over a decade to sustain outperformance,“ explained LPL Equity Strategist Jeffrey Buchbinder. “The strength in cyclical value stocks such as financials, industrials and natural resources, coupled with tech sector weakness, gives European and Japanese markets a fighting chance of keeping up with the U.S. as those economies fully reopen.” We can see how developed international stocks are more value-focused when looking at sector breakdowns for key indexes. As shown in the graphic below, the U.S. equity market (represented by the S&P 500 Index) has a much higher technology sector allocation, making it a more growth-oriented index than the MSCI EAFE Index benchmark for developed international equities. If digital media (think Google and Facebook, which are categorized as communication services) and e-commerce (think Amazon, which is in consumer discretionary) are included in this sector comparison, the technology gap widens even further. In essence, for international to outperform, U.S. technology leadership needs to hand the baton over to cyclical value. That transition has been happening over the last couple months and very well could continue. At this point the primary factor holding us back from upgrading our view of developed international stocks to neutral from our current negative view is the pandemic. As Europe and Japan fully reopen and see the accelerating economic growth that the U.S. is seeing now, those markets may be in an even better position to outperform. Until then, we maintain our slight preference for U.S. stocks over developed international.
May Manufacturing Starting Off Strong Mon, May 17, 2021 The first manufacturing data for May came out this morning with the release of the New York Fed's Empire State Manufacturing Survey. General business conditions remain at historically strong levels although there was some slowing in May as was expected. After hitting the highest level since October 2017 last month, it was expected to fall to 23.9 in May. The index did in fact decline, but only to 24.3. While lower, that is still around some of the strongest levels (excluding last month) in three years as more businesses continue to report improvements in business conditions than weakness. Breadth in this month's report was pretty mixed; namely with regards to current conditions versus expectations. Every index is still showing an expansionary reading with particular strength out of the indices for the present situation. In fact, most of those indices still sit in the top decile of their historical range with a few like those for unfilled orders, delivery times, and prices even at or just off of record highs. But there were a handful that moved lower: delivery times, inventories, and number of employees. Regarding expectations, it was much harder to find an increase. Delivery times and technology spending were the only two of these indices to rise month over month. While many indices for expectations still sit at historically strong levels, there are more that are middling within their respective historical ranges. Overall, the report showed that New York area firms have seen a peak in optimism even as they continue to report strong conditions. Demand certainly appears to be one area without much in the way of weakness. New orders rose 2 points month over month to 28.9. That is the highest level in just over 15 years and the only other readings as high occurred throughout late 2003 to mid-2004. Those orders are making their way out the door at an increased rate too as shipments climbed to 29.7. That index has been making a vertical climb since the winter as it reached its highest level since August 2007. Despite this, NY area firms are not fulfilling orders fast enough. Last month saw the Unfilled Orders index rise by one of the largest amounts in a single month on record, and it continued to climb albeit by a much smaller 0.2 points in May. The only month on record with a higher reading in unfilled orders was September 2001. Inventories were one of the few current condition indices to fall in May, although the reading still indicated growth. In other words, those unfilled orders are not necessarily drawing down on inventory levels. Supply chains are one of the main areas that are likely holding things back. Higher readings in the delivery times index mean that businesses are reporting that it takes longer for products to reach their destination. Even after falling 4.5 points in May off of the April record, the current level sits well above the prior record high of 16.2 from March 2018. In addition to taking longer for products to get to where they are going, the price point is on the rise. Both indices for prices paid and received rose to record highs in May. In fact, over the past two months, there has not been a single respondent to have reported a decrease in prices paid. That is the first time that has occurred since February and March 2012. Last week saw a blockbuster job openings report and the Empire Fed survey is showing a similar willingness to take on more workers. The current conditions index for the number of employees continues to show that businesses are on net increasing their workforce, though at a slowed pace from April. Additionally, the index is at a much less elevated part of its range (the 81st percentile) relative to other indices within the report, but the much more elevated reading in expectations (98th percentile) would indicate the businesses would like to take on far more workers. That is, there appears to be a bit of a disconnect between the actual number of new hires and businesses' expectations to take on more workers. Potentially as a result of an inability to hire enough workers, the average workweek has continued to climb. At 18.7, the index is at its highest level in a decade.
Homebuilder Sentiment Holds Steady Mon, May 17, 2021 The national average on a 30 year fixed rate mortgage currently sits around 3.06%, little changed over the past month. Homebuilder sentiment as measured by the NAHB Housing Market Index similarly went unchanged in May staying at 83. Although it has been six months since the record high of 90 without much of a push back up to those record levels, homebuilder sentiment continues to come in well above anything observed prior to the pandemic. Commentary from the NAHB noted that the strong reading on homebuilder confidence is thanks to the low housing inventories, low rates, and strong demand, despite the headwinds of rising costs. While that could have played into the small decline in traffic, future sales did tick higher. Whereas the headline number was flat on the month, readings based on each region saw much more variety. By far the largest move was for the Northeast. Since running back up to the record high back in February, homebuilder sentiment in the Northeast has fallen for three straight months and is now at the lowest level since January. The decline in sentiment in the Northeast is relatively recent. Whereas the region tied its record high earlier this year, the other regions all peaked out in the fall. For the Midwest, the declines have kept coming with 3 point declines in each of the past three months alone. The West and South, on the other hand, have found some respite. The South has ticked higher by 2 points in back-to-back months as it reached the highest level since December. Meanwhile, the West was unchanged at 91 in May. As for homebuilder stocks, the iShares US Home Construction ETF (ITB) had been trading in overbought territory throughout most of the spring but in the past couple of weeks, it has come back down to Earth. Last Wednesday, ITB successfully tested its 50-DMA with a small bounce at the tail end of the week. So far today, it has turned lower alongside the broader market with a 1.35% decline. While that means Friday's close marks a lower high, for the time being, the uptrend is still intact.
PUA Claims Below 100K As States Plan To Drop The Program Thu, May 20, 2021 Recent jobless claims prints have seen the readings on initial claims consistently fall to pandemic lows while continuing claims have been a bit weaker moving sideways or even slightly higher. This week, it was more of the same. Initial claims came in at the lowest level since the week of March 13th of last year; the last week before the pandemic caused claims to rise by the millions per week. At 444K this week claims dropped by 34K from last week's revised level of 478K (original of 473K). That was also better than expected as forecasts were calling for a decline to only 450K. Initial claims have now fallen three weeks in a row with the drop totaling 146K in that time. On a non-seasonally adjusted basis, claims were likewise lower for a third week in a row coming in at 454.6K which again is the strongest reading since last March. With regards to Pandemic Unemployment Assistance (PUA), there have been several states to recently announce that they are to various extents doing away with certain programs like PUA early even though on a federal level the American Rescue Plan extended benefits through September. Without getting into the weeds on the implications of this, we would note those announcements do come in the context of very small inflows into auxiliary claims programs like PUA. This week, PUA claims fell below 100K for the first time after falling 8.6K to 95.09K. In spite of decelerating inflows into the unemployment insurance systems, the continuing claims picture continues to worsen. Continuing claims were expected to fall from last week's revised reading of 3.64 million to 3.62 million, but instead, they rose 111K. That brings continuing claims to the highest level since mid-March and makes this week's increase the largest in a single week since the last week of November. Factoring in all other programs for a more complete picture adds an extra week's lag to the data. By this measure, things look better than looking purely at regular state claims. Total claims across all programs fell to just above 16 million at the end of April compared to 16.891 million the week before; a new low for the pandemic. PUA claims contributed the most to that overall decline with the program seeing 678.7K fewer claims week over week. At 6.6 million, continuing PUA claims reached the lowest level since the first week of May of last year. Regular state claims and Pandemic Emergency Unemployment Compensation (PEUC) had the next biggest contributions to the overall decline with drops of 81.9K and 150.2K, respectively.
Mid-Cap Growth Picking Up Mon, May 24, 2021 In the five days ending last Friday, by far the best performing major US index ETF in our Trend Analyzer was the Micro-Cap ETF (IWC) with a 1.65% gain. That also places it in the top spot in terms of YTD performance. In spite of that outperformance, it finished last week as one of just three ETFs in the screen that is below its 50-DMA. Up another 0.59% so far today, IWC is continuing to close in on getting back above its 50-DMA. While micro-caps have done well, other small-cap indices like the Russell 2000 ETF (IWM) and the Core S&P Small-Cap ETF (IJR) have done far worse. Yet worse still were S&P 500 Mid-Cap ETFs (IJH and MDY) which found themselves at the bottom of the list in terms of 5-day performance. But not all mid-cap indices were the biggest losers last week. The broader measure of the mid-cap space, the Russell Mid-Cap ETF (IWR)—which tracks the 800 smallest stocks in the Russell 1000 whereas the S&P mid-cap ETFs track the S&P 400—was likewise lower over the five days ending last Friday, but its loss was much smaller at 18 bps versus the over 1% decline for IJH and MDY. Breaking that down further, growth was the key to this stronger performance for the Russell mid-caps. The Russell Mid-Cap Growth ETF (IWP) saw a standout performance with a 1.28% gain last week compared to a 0.83% decline in the value counterpart, the Russell Mid-Cap Value ETF (IWS). Other growth ETFs like the Russell 2000 Growth ETF (IWO), Russell 1000 Growth ETF (IWF), and the broader Growth ETF (VUG) were the only other tickers in the US Styles screen of our Trend Analyzer that were in the green last week, though, they all were up by a full percentage point less. Again, in spite of also tracking mid-caps, the S&P's ETF also underperformed with the S&P Mid-Cap Growth ETF (IJK) falling 0.69%. One possible reason for the outperformance of the Russell Mid-Cap Growth ETF could be a rotation into what has been this year's losers. Although it outperformed in the past week, IWP is still the worst performer on the year with other growth ETFs not far behind. Below we show the ratio of Russell Mid-Cap Growth (IWP) versus the value counterpart (IWS) and the broader Russell 1000 (IWB) over the past five years. When the line is trending higher it indicates mid-cap growth is outperforming and vice versa when the line is trending downward. In the first half of last year, growth took off relative to value but from the second half of 2020 into early 2021, that outperformance trailed off as the line moved sideways. Since February, there has been a sharp reversal with two significant legs lower with the most recent one lasting from the end of April through earlier this month. The recent bout of strength from mid-cap growth in the past week is basically just a blip within those declines, but it does mark a bounce from around the past few year's trend in the ratio. It is a similar story relative to the broader Russell 1000 as well. Taking a look at IWP's chart, last week's solid performance appears to be carrying into this week with IWP up another 1.15% today which puts it on pace to move back above its 50-DMA. But even though there has been strength in the very short term, IWP's longer-term trend still has plenty of room for improvement. The 50-DMA has been trending sideways as the ETF has been in consolidation for most of the year since hitting a 52-week high in February. Currently, at its 50-DMA, IWP is right in the middle of that consolidation range.
Jobs As Plentiful As They Were Right Before the Pandemic Tue, May 25, 2021 Consumer Confidence took a rest in May as the headline index dropped slightly falling from 117.5 (revised down from original 121.7) to 117.2 and more than a point and a half below consensus forecasts of 118.8. Despite the weaker than expected report, confidence levels have recovered more than half of the declines from the pre-COVID highs. One very strong aspect of the report this morning was the Jobs Plentiful index which surged 29% versus April, marking the third straight m/m gain of over 19% during which time the index has doubled. That's easily the largest ever three-month gain in the index. Jobs are so plentiful now that the index is actually higher than it was back in February 2020 when people were still figuring out what COVID was right before the WHO declared it a pandemic in March 2020. With a record number of job openings per the JOLTS survey and consumers viewing the ability to find a job just as easy now as it was before the pandemic, it once again leads back to the question of why there are 8.2 million fewer Americans working now than there were in February 2020? On another note, it's really just a matter of semantics at this point, but since the mid-1960s there has never been another period where the Jobs Plentiful index erased this much of its losses and the economy was still in a recession. The NBER is the organization in charge of dating recession start and end dates, and while it isn't meant in any way to be a timing indicator, at this point the recession is not only over, but it has been for about a year now. Going back to 1980, the median number of days between the end of a recession and when the NBER makes the official announcement is 476 days. Based on that, we could expect the NBER announcement to come out sometime later this Summer.
Three Things Investors Can Learn From Phil Mickelson’s Win Wednesday, May 26, 2021 Congrats to Phil Mickelson on his amazing victory on Sunday at the PGA Championship at the age of 50, officially the oldest person to ever win a golf major championship. This was Lefty’s 6th major victory, leaving him just a win at the U.S. Open from completing golf’s Grand Slam and winning all four majors. He turns 51 the day before teeing off at Torey Pines for next month’s U.S. Open where he will try to join Gene Sarazen, Ben Hogan, Gary Player, Jack Nicolaus and Tiger Woods as the only players to ever complete the Grand Slam. First things first, does the victory tell us anything about future equity performance? “Of course his victory is totally random in regards to stock performance, but we think it is worth at least noting that stocks gained each of the previous 5 years he won a major,” explained LPL Financial Chief Market Strategist Ryan Detrick, “So at least it isn’t a bad sign!” You have to hand it to Phil for his amazing victory at the age of 50, beating golfers half his age, while also hitting it further than most of them. His physical transformation is astonishing. Thanks to his new diet (he fasts 36 hours a week!) and exercise, he has turned back the clock and is in the best shape of his life at 50. He has also played in at least one major every year since 1990, which is the type of experience you simply can’t read in a book. What can investors take away from Phil’s amazing victory? First off, we think it is being open to change. He changed his entire lifestyle to be able to compete with much younger athletes. But change isn’t always positive. One of the best ways to show that things will change and you better be ready for it is this great chart from Credit Suisse that shows the size of various country stock markets relative to the rest of the world at the end of 1899 and then at the start of this year. Here are some major takeaways. The U.S. stock market made up 15% of the global market in 1899 and rose to 55.9% by 2021. The UK was the largest stock market in the world at 24% in 1899 but fell to only 4.1% in 2021. Japan’s stock market is 7.4% of the global market now but wasn’t even on the board back in 1899. Change is inevitable and investors can benefit from being open to it and prepared for it. Being close-minded won’t help you in your personal life or in your investments. Experience is the second big takeaway from Lefty’s win. He knew how to react to the pressure, as he’s been there many times over the years. What is something that experienced investors might know that a novice doesn’t? We’d say it is knowing your history. Experienced investors understand that markets move in major cycles that can last decades or more. As shown in the LPL Chart of the Day, the S&P 500 Index can make new highs for decades at a time and then it can go nearly just as long without a new high. Some interesting stats on the chart above: The S&P 500 made no new highs for 24 years after the peak in 1929. From 1954 to 1968 the index made 371 new highs. Then the next 11 years it made only 35 new highs. This kicked off the bull markets of the 1980s and 1990s, which resulted in 509 new highs over the next 20 years. From 2000 through 2012 though the S&P 500 made only 13 new highs. We are now nine years into a cycle of new highs with 301 new highs, which history would say could be followed by many more years of new highs. The final takeaway from Phil’s win is time can be your friend. “It all depends on your investment horizon, but it is important to remember that if you invest for the long-term, you’ll probably make a positive return on your investments,” according to Ryan Detrick. “In fact, the S&P 500 has been higher nearly two-thirds of all years, but that goes up to 80% over three years, and the index has never been lower over any 25-year investment timeframe.” How many people sold stocks during the depths of the pandemic last March, even though they likely didn’t need that money for many years, or even decades?
