Initial Jobless Claims Only 150K Above Pre-Pandemic Levels Thu, May 27, 2021 For the fourth week in a row, initial jobless claims have made a move lower coming in at 406K. That is down 38K from last week's unrevised level of 444K. That brings claims to the lowest level of the pandemic, and just 150K above the last sub-one million print in March of last year. On a non-seasonally adjusted basis, the picture is equally as positive. Claims through the regular state program fell to 420.5K which is again the lowest level since the start of the pandemic. Including other programs no longer significantly increases the total claims count either. PUA claims came in below 100K for the second time in a row this week as they printed at 93.5K. As we noted last week, some states have announced plans to do away with programs like PUA, so this number will become more and more negligible. Relative to initial claims, seasonally adjusted continuing claims (which are lagged an additional week) have not been trending as positively over the past few months as the series has been moving sideways to even slightly higher. This week saw some respite in this trend as seasonally adjusted regular state continuing claims fell by 96K to 3.642 million. That is still 2K above the low from 2 weeks ago, but the week over week improvement was the largest since the week of March 12th when continuing claims had fallen 282K. Before seasonal adjustment, the picture is much better. Regular state claims through May 14th have fallen for 12 weeks in a row with the 150K drop this week the largest week-over-week decline since March 12th. Factoring in other programs for a more complete picture delays the data yet another week, but it does paint an even more optimistic picture. After rising at the start of the year, total claims across all programs peaked during the week of February 19th at 20.7 million. In the roughly three months since then, claims have generally ground lower having fallen by 4.9 million. While regular state claims have dropped by 1.18 million in that time, PUA claims have been a bigger contributor to the total decline having erased 1.87 million claims. Pandemic Unemployment Assistance and Extended Benefits programs have also been significant contributors to the overall decline in claims. Combined, these two programs have seen a 1.8 million drop. In other words, while it may not be apparent from the headline seasonally adjusted number, continuing claims are improving alongside initial claims.
Checking the Gauges: Economic Surprise Indexes Thursday, May 27, 2021 In terms of whether economic data is either beating or missing economists’ forecasts, it appears conditions may now be a bit better overseas. Driven by some improving COVID-19 trends, the economic backdrop has improved overseas, while high economic expectations have proved to be a more formidable hurdle here in the U.S. This improvement has helped to steady the foundation in many non-U.S. equity markets, and has caused us to improve our outlook for developed non-U.S. stocks. We believe the improving COVID-19 trends in Europe could be particularly sticky as vaccine distribution becomes more widespread. For several years now, being underweight European equities, relative to the U.S., has been a winning trade. A sea-change in that thinking could be approaching as value-heavy European indices have gotten some attention with the improvement from value, but a firm, constructive view of European equities may still be some ways off. The Citigroup Economic Surprise Index, or CESI, tracks how the economic data fare compared with expectations. The index rises when economic data exceeds Bloomberg consensus estimates and falls when data is below forecasts. As shown in the LPL Chart of the day, economically, global conditions remain rather strong, as evidenced by these indices, which remain above the zero line. This reflects economic data coming in better than expected in several geographic regions. The repair of global trade activity, as supply lines are reconnected, has been notably key in non-U.S. data outcomes. Looking ahead, we expect now elevated economic expectations, particularly in the U.S., may prove a tougher target. As a result “economic surprises,” both in the U.S. and abroad, may fade as we move through the year. However, the overall global growth trajectory is expected to continue to be robust through 2021. Global real GDP contracted 3.3% in 2020, and it is expected to rise to +6.0% in 2021, according to Bloomberg’s consensus estimate, before ticking down to +3.4% in 2022. “Although high U.S. economic expectations could be tough to beat for the remainder of 2021, we still believe U.S. stocks should make up a material portion of equity portfolios. And even though economic expectations are being more readily exceeded overseas, it is tough to overlook U.S. companies’ innovation and profitability advantages.” explained LPL Financial Director of Research Marc Zabicki
S&P 500 Returns Relative to History Wed, Jun 2, 2021 May has moved back to the rearview mirror and with that, we wanted to provide an update on how current long-term returns for the S&P 500 stack up relative to history. The chart below compares the trailing one, two, five, ten, and twenty-year annualized total returns of the S&P 500 to the S&P 500's historical average returns over those same time periods since 1928. We're starting to move away from the 'easy comps' in terms of market returns relative to the March 2020 lows, but the S&P 500 is still up more than 40% over the last 12 months which is nearly four times the historical average one year return. Over the last two years, the S&P 500's annualized return of 25.8% still comes in at more than twice the historical average of 10.6%. On a five and ten-year basis, the S&P 500's annualized gain also remains comfortably above 10%. All in all, the last decade has been very good for US equity investors. The only time period where the S&P 500 has experienced below-average returns is at the 20-year window where the 8.4% annualized gain clocks in at 2.5 percentage less than the historical average of 10.9%. The chart below compares the S&P 500's current returns over the last one, two, five, ten, and twenty years to all other periods on a percentile basis. With mostly above-average returns, it comes as no surprise that most of the percentile readings rank above the 50th percentile, and for most time periods, the percentile rank comes in well above 50%. The one-year total return of more than 40% actually ranks just above the 93rd percentile, while the two-year return isn't far from the 90th percentile either. Moving further out, each of the other readings going out to ten years are all well above the 50th percentile. The only percentile rank below the 50th percentile is the 20-year window and that reading isn't even close. On the one hand, the last ten years have been phenomenal for equity investors, but the last 20 years haven't even been mediocre. Throughout history, many investors have always worked under the assumption that long-term returns for the equity market are about 10%. History has shown that to be the case over the last decade at least, as the average annualized one-year gain of the S&P 500 has been well above 10%. With the S&P 500's current 20-year annualized gain currently at just 8.4%, though, what will it take for the S&P 500 to reach double-digit gains on an annualized basis over a 20-year window? For an idea, given the strong performance of the last ten years, a number of commentators suggest that the next ten years for equities will be weak with a reversion to the mean. Only time will tell, but if we operate under the (unlikely) assumption that the S&P 500 stays at the exact same level it is now going forward for the next ten years, its annualized twenty-year return would top 10% for the first time since August 2008 next September. After that brief period above 10% from September 2022 through March 2023, it wouldn't again top that level until February 2029. In spite of the fact that the annualized 20-year return would top 10% in those two periods, though, it still wouldn't get as high as the historical average of 10.9% in either of those periods. This reflects the fact that although the last ten years for US equities have been very strong, they also came shortly after one of the worst ten-year periods for US equities on record.
Initial Jobless Claims Now Below 400K Thu, Jun 3, 2021 It was just the start of last month that initial jobless claims fell below a half million for the first time since the start of the pandemic and a month before that marked the first reading below 600K. Another month in the books and it was another 100K milestone reached this week. For the first time since the pandemic began, seasonally-adjusted claims fell below 400K to 385K this week. That is now only 129K above the pre-pandemic level from last March; the last week before claims exploded above a million. While the drop below 400K may sound like a positive, it was entirely due to the seasonal adjustment as the actual level of claims rose to 425.5K from 419.4K. That is still at the bottom of the pandemic range albeit slightly off the lows. Additionally, while small, that week over week uptick is a bit unusual from a historical perspective as the current week of the year (22nd) has only seen a sequential uptick 18.5% of the time since the start of the data in 1967. In spite of the uptick in regular state programs, claims through the Pandemic Unemployment Assistance program continued to pick up the slack. The program saw another impressive drop with the program only totaling 76.1K claims. That is down roughly 17.5K from last week and sets more pandemic lows. On a combined basis, initial claims between the two programs now sit just above 500K. As we have frequently mentioned recently, while initial jobless claims keep coming in with impressive readings, continuing claims remain uninspiring. For the week ending May 21st, claims had risen by 169K to 3.77 million. That brings continuing claims to the highest level since the week of March 12 and the 169K WoW increase was the largest since the last week of November when they rose 254K. Overall, the picture at the headline level remains the same in which initial claims are strong and improving while continuing claims have hit a bump in the road. Whereas the non-seasonally adjusted picture was less positive for initial claims, there is yet another divergence compared to continuing claims. The NSA continuing claims reading that includes all programs is delayed two additional weeks to the most recent initial claims data. That means the most recent reading in the charts below is for the week of May 14th. That week saw another decline down to new lows of 15.46 million on a combined basis with the biggest contributors to that decline being regular state, PUA, and Extended Benefits programs. On the other hand, Pandemic Emergency Unemployment Assistance (PEUC) claims held things back as the program saw a 102K increase; bringing it to the highest level since mid-April. That meant PEUC claims' share of total continuing claims reached the highest level yet at 34.2%. That means although regular state continuing claims have been deteriorating, the broader picture continues to improve.
Main Street Sentiment Strongest in Over a Decade Thursday, June 3, 2021 The U.S. economy is opening up and overall sentiment on Main Street is the strongest it’s been since our earliest analysis in 2005, according to LPL Research’s proprietary Beige Book Barometer (BBB). The result is based on our analysis of the Federal Reserve’s Beige Book, a publication released two weeks before each Fed policy meeting that captures qualitative observations made by community bankers and business owners—what we like to think of as “Main Street” rather than “Wall Street.” The BBB gauges Main Street’s sentiment by looking at how frequently key words and phrases appear in the text. In the most recent Beige Book, “strong” words were near their highest since we first began tracking data in 2005 while weak words were their lowest on record, resulting in the strongest overall sentiment reading since inception. The strong reading is likely driven more by a change in direction than in overall activity, but even that is a welcome shift. “The country and the economy are going through a disruptive but positive change as most COVID-related restrictions are lifted and the economy reopens,” said LPL Financial Chief Market Strategist Ryan Detrick. “Sentiment is up and that’s a great sign for the direction of the economy.” This was an important Beige Book in other ways. Mentions of COVID-related words (virus, COVID, pandemic) fell to their lowest level since the March 2020 Beige Book, when the words first started to appear. More concerning, words related to inflation also rose to their highest level since our earliest analysis. The downside of the economy’s rapid acceleration has been a mismatch between demand, which can ramp up quickly, and supply, which comes on line more slowly, while labor markets have also been slow to keep pace with reopening. Overall, the fundamental backdrop for the economy remains positive. Supply chain disruptions can slow the pace of the economic rebound but are likely temporary, while we expect reopening to be enduring. There is still some risk around variants, however, and full supply chain relief will likely need support from accelerated global vaccine distribution. US economic acceleration will probably peak in the second quarter, but there’s still plenty of scope for growth to moderate and still remain above average. Much of the positive news is already priced in for equity markets, which are forward looking, and gains may not come as easily, but we still see solid potential for upside as the economy continues to rebound.
Big First 5 Months Gains Consolidate Over Worst Months S&P 500 is up an impressive 11.9% for the first five months of 2021. That is the 16th best gain for the first five months since 1950. As illustrated in the graph above, gains do beget gains and this bodes well for the year as a whole. But this does not diminish the seasonal pattern of consolidation and mostly sideways market action over the Worst Six Months May-October and even more so over the Worst Four Months July-October. We tabulated the gains for the top 20 first five month gains since 1950 and the gains for the last seven months of the year are still pretty solid averaging 9.4% vs. 14.7% for the top 20 first five months. But the bulk of those gains as you can see in the graph come from late-October to yearend.
A Closer Look At New Highs Wednesday, June 9, 2021 The S&P 500 Index is flirting with new highs unlike nearly any time in history. In fact, it has now gone nine days in a row closing within 1% of an all-time high without breaking through. “There’s an old saying about not shorting a dull market. Well, lately it has been about as dull as it gets,” explained LPL Financial Chief Market Strategist Ryan Detrick. “The catch is other times that saw long streaks without a new high, yet very close to one, actually didn’t perform as well as one might expect.” Taking things a step further, the S&P 500 has closed within 0.15% of an all-time high without closing at a new high for three straight days. In the history of the S&P 500, that has only happened one other time, in September 1964. Stocks were flat three months later then and up only 2.6% six month later, so although this is only a sample size of one, a sharp move higher in the near term appears less likely. We’ve shared this next chart before, but given we are talking about new highs it is important to point it out again. New highs usually happen in clusters that can last for a decade or more. Given this market has been making new highs since 2013, despite the 2020 bear market, history would suggest there could be several more years before this strong run is done. Take another look above. This year has a good amount of new highs already and it isn’t even half way over. In fact, 26 new highs over the first five months of the year is the most for any year during the first five months since 32 new highs in 1998. Another angle on this: Should the S&P 500 make a new high in June, it would make a new high every month for the first six months of the year. This rare feat last happened in 2014 and 1986 before that. The rest of the year those years added 5.0% and lost 3.5%, respectively. The S&P 500 is only 0.13% away from the last all-time high set back on May 7. Odds do favor another new high will eventually take place, which means this bull market continues. In the LPL Chart of the Day we show that this new bull market is already up 89% in just over a year, giving it one of the best annualized returns ever for a bull market, although bull markets do tend to have strong annualized returns early. What happens after stocks make new highs? Here’s a chart we shared last August. The bottom line is investors shouldn’t be scared of new highs, even though many are scared of heights. So there you have it, various looks at new all-time highs. Now we just have to make one!
Continuing Claims Finally Improve Thu, Jun 10, 2021 Initial jobless claims were expected to fall another 15K this week as forecasts were calling for a reading of 370K. While claims did not live up to those expectations, they did make another move lower falling 9K to 376K. That is now just 120K above the levels from last March, right before claims began to print in the millions. WIth another sequential decline, seasonally adjusted claims have now fallen for six weeks in a row. That is about half of the record streak of 13 weeks long that ended in early July of last year. Outside of that streak, there have only been six other streaks as long as the current one and only two of those, one in 1980 and the other in 2013, went on for seven weeks. Those improvements in initial claims were shared on a non-seasonally adjusted basis. Claims from regular state programs fell below 400K for the first time since last year reaching 367.1K. Pandemic Unemployment Assistance (PUA) also set a new low with claims totaling just 71.29K; down only about 2K from the prior week. Although that was a minuscule improvement, the PUA program has massively been unwound over the past few months as we close in on the end dates for the program in half of US states. In fact, this week will mark the exit of the program for Alaska, Iowa, Mississippi, and Missouri. In the most recent week's data, these four states accounted for 1.7K initial PUA claims and 72.3K continuing PUA claims, or 2.5% and 1.14%, respectively, of PUA claims nationally. Since the start of the year, the improvements in continuing claims had been decelerating, coming to a head over the past couple of months with multiple upticks. This week offered a sigh of relief as claims fell 258K to 3.499 million. That was not only the biggest one-week drop since March 12th's 282K decline, but it also brings claims to the lowest level since the week of March 20th last year. On a non-seasonally adjusted basis and factoring in all other programs (which creates another week's lag), the picture has been generally more positive. The most recent week's data through May 21st showed total claims across all programs fell from 15.473 million to 15.376 million, the lowest level of the pandemic. A small uptick in claims from regular state programs was offset by sizable drops in PUA, PEUC, and Extended Benefit claims.
Supply Chain Bottlenecks Push CPI Higher Thursday, June 10, 2021 Make that two consecutive months that CPI inflation has surprised meaningfully to the upside. The U.S. Bureau of Labor Statistics released its May inflation report this morning, June 10, revealing that the headline Consumer Price Index (CPI) rose 0.6% month over month and 5% year over year. The core CPI, which strips out food and energy, rose 0.7% month over month, and 3.8% year over year. Given strong base effects from rolling off weak data from a year ago, we find the month over month data more informative. With that context, more volatile components that are heavily tied to the economic reopening had the largest effects on the monthly increases, most notably prices for used vehicles, airfare, and rental cars. We continue to see strong evidence that supply chain bottlenecks paired with a rapid demand rebound are causing major price increases. The most visible example is in used car and truck prices, which surged 7.3% in May following a historic 10% rise in April. The supply of new vehicles is constrained in the near term because of semiconductor chip shortages, and as a result, used cars and trucks are being bid up in the secondary markets. The good news is that we expect these market imbalances to largely resolve themselves with time as supply, which has a longer ramp-up time than demand, recovers. “The inflation outlook has rightfully been top of mind since last month’s blowout report,” explained LPL Financial Chief Market Strategist Ryan Detrick. “Under the hood, though, we think the picture is a bit more sanguine than the headlines would suggest, and still believe inflation will be relatively well-contained over the intermediate-to-long term.” As seen in the LPL Chart of the Day, owners’ equivalent rent of primary residences, a measure of rents for non-rent-controlled residences in urban areas, has bounced off depressed levels. The move thus far, though, is likely best described as returning to the pre-pandemic trend rather than threatening to break away to new heights…for now. This measure is critical for future inflation prospects, as it is one of the largest components of CPI and is considered to be less volatile than other components. Movements observed in the series are, therefore, viewed as more structural in nature and thus have the potential to be “stickier.” At the moment, we do not believe that the rent component poses an imminent threat to the broader inflation picture, and is merely displaying an increasing willingness for consumers to rent following a massive shift in preference to own brought on by COVID-19. Market-based measures of inflation expectations have also retreated from their fever pitch last month. 10-year breakeven inflation expectations, derived from the differences in nominal and real Treasury yields, have actually fallen since last month’s CPI report, not risen. And while we are hesitant to call that the peak in inflation expectations given ongoing bottlenecks in supply chains, there was a distinct air of a “buy the rumor, sell the news” dynamic to us. Taken altogether, we believe the Federal Reserve (Fed) will view today’s inflation data generally as confirmation of its preexisting stance that the majority of excess inflationary pressures will be transitory. In a vacuum, despite the headline inflation beat, this likely does little to change the Fed’s timetable for tapering asset purchases, and the market reaction for now looks to be confirming that view. The coming months will be telling, though, as we are now entering the “show me” phase of the inflation debate where market participants will be increasingly anxious for the Fed to prove its assertion that higher inflation will be transitory.
Advance/Decline Lines Support New Highs One of our favorite charts to get a quick read on the overall health of the market is a simple comparison of DJIA, S&P 500, NASDAQ and Russell 2000 performance to cumulative advance/decline lines. From late October’s low through mid-February all four indexes moved nicely higher essentially in unison. Advance/decline lines were also all trending higher. It was in mid-February that NASDAQ turned briskly lower. Its advance/decline line also turned lower. When NASDAQ turned and its advance/decline began trending lower, DJIA, S&P 500 and Russell 2000 essentially went nowhere and traded in a range. Bullishly, it appears NASDAQ’s advance/decline line appears to have bottomed in mid-May and is on the verge of eclipsing its peak from February. Broad participation across all the major indexes is a bullish sign and is generally indicative of a healthy move higher is underway. S&P 500 closed at a new all-time high today. DJIA, NASDAQ and Russell 2000 are closing in on their respective all-time highs. In the near-term, new all-times are likely. However, June is the last month of NASDAQ’s “Best Eight Months” and historically soon after the start of the second half of the year, around mid-July, markets have stalled out and tended to slip into a sideways to lower trend. Inflation trends and the Fed are two possible catalysts that could clip the market’s wings this year. Inflation could prove to be more than just transitory and at some point, perhaps sooner than expected, the Fed will likely begin tapering asset purchases.
Citi Surprise Indices Surging But Not Everywhere Mon, Jun 14, 2021 It is a boring start to the week with nothing on the docket for earnings, Fed speakers, or economic data. With regards to the latter, the slate will pick up tomorrow with several US releases including retail sales, PPI, industrial production, and more. Expectations for tomorrow's releases are a bit mixed relative to the prior readings in each indicator, but overall, recent US data has been beating expectations at a healthy rate. The charts below show the Citi Economic Surprise indices for a variety of global regions and the US. Positive readings in these indices indicate economic data is coming in above forecasts, and vice versa for negative readings. Additionally, higher positive or negative readings would mean that economic data is exceeding or coming up short of those forecasts by a wider margin. Currently, the US index is well off record levels from the past year, but it has bounced since the start of June. The index has risen 42.7 points in the ten days from the end of May to last Friday. That move stands in the top 2% of all 10-day changes since the index began in 2003. That also comes not even a full month after the index saw its first negative reading in a year. While the negative reading was far from anything extreme, the sharp rebound has been impressive, leaving the index at a historically healthy level in the 83rd percentile. The US is not alone in having seen a rebound. Although it is similarly off the peak from last summer and generally trending lower since then, the global index has consistently sat at the high end of its historical range over the past year. The current reading is still in the top 1% of all periods, and the move higher over the past ten days is again dramatic ranking in the top 5% of ten-day changes in the index's history. While the jump in the US index has likely played at least some part in this, other regions around the world are also pulling weight having seen just as, if not more, significant moves. Sticking with a look at the move over the past ten days, the gains for the indices covering APAC and Central/Eastern Europe, the Middle East, and Africa all rank in the 98th percentile while the move in the index tracking Latin American countries ranks in the top decile. Each of these indices now sits in the top 1% or 2% of their historical ranges. One outlier region not contributing to the pickup in the global index has been Europe. While the Eurozone index is far from weak, it has not seen much of a move higher recently as other regions have. Likely thanks to the weakness in Eurozone countries, a similar dichotomy can be seen comparing the indices for major developed economies (the G10 members) and emerging market countries. While the index tracking major economies has simply held up at healthy levels, the emerging markets index has leaped to new record highs, breaking well above the previous records set earlier in the pandemic. BRIC countries in particular are some to thank for that sharp move higher as the index has seen one of its largest short-term moves on record.
Empire Expectations Are Encouraging Tue, Jun 15, 2021 The first of the monthly regional Fed readings on the manufacturing sector was released this morning out of the Empire State. The headline index fell to 17.4 from 24.3 in May. While the 6.9 point decline sat in the bottom quintile of all monthly moves and it was a 5.3 point larger drop than had been forecast, the current level still would be the highest since November 2018 outside of the past few months. Additionally, in spite of the decline in current conditions, expectations saw a significant uptick rising 11.1 points to the highest level in exactly a year. Prior to last June, February 2018 was the last time the index has seen as strong of a reading. Given the decline in the headline number, the vast majority of categories also declined in June, although almost all remained positive signifying that they continue to grow at a healthy clip. Of the current conditions indices, Delivery Times was the sole index to move higher, and that is not necessarily a good thing as higher readings indicate longer lead times. Meanwhile, the declines for New Orders, Shipments, and Unfilled Orders were particularly large all ranking in the bottom decile of monthly moves. Staying on the topic of these same indices, similar to the headline reading, although current conditions deteriorated, businesses reported pretty optimistic results for the future. Six-month expectations for New Orders and Shipments both saw sizeable month-over-month increases of 9.2 and 9.1 points, respectively, whereas the current conditions indices moved in the opposite direction. Those moves left each index at the high end of the past several years' ranges. Staying on the topic of expectations, the index for Unfilled Orders was particularly interesting. The past few months have seen some of the highest readings on record in the current conditions index meaning businesses have been reporting massive builds in order backlogs. While backlogs continue to grow with the current conditions index remaining positive, the index for expectations tipped negative for the first time since October meaning businesses foresee those backlogs to finally begin to decline in six months. Additionally, businesses reported a draw in inventories for the first time since January. One likely culprit of those backlogs is delivery times. The index saw yet another record high in June. On the bright side, businesses seem to point to normalization in supply chains down the road as expectations plummeted by 14.5 points; the third-largest month-over-month decline on record behind March 2011 and September 2001. Prices continue to rise at a rapid pace according to responding businesses, though, there was some deceleration in prices paid and received in June. The only measure of prices that moved higher this month was expectations for prices received which rose to the highest level since the summer of 2008. One other interesting part of the report was the response around employment metrics. The index for current conditions for the average workweek remains around some of the highest levels of the past decade even after pulling back month over month. Businesses also slowed hiring as the index of the number of employees fell to 12.3. While that reading is still off pre-pandemic highs, expectations continue to surge, setting another record high. Together this seems to indicate that businesses have a desire and in the future expect to take on more workers in spite of actual progress in doing so more recently.
Why Inflation Worries Likely Just Peaked Wednesday, June 16, 2021 As nearly everyone knows by now, inflation has soared the past few months, with the May Consumer Price Index (CPI) coming in at 5.0% year-over-year, the highest since 2008, while the core CPI (excluding energy and food) was 3.8%, the highest since 1992. The Bloomberg consensus is calling for 3.4% headline CPI this year, which has many worried about potentially runaway inflation. We do not expect that to happen and we’d side with the actual number coming in lower than the current consensus. How much has inflation been in the news? A recent CNBC survey noted that inflation worries are now investor’s biggest worry, topping pandemic worries for the first time in 15 months. Adding to that, here is a Google Trends showing that searches for the word ‘inflation’ have never been higher going back to 2004 (the furthest back their data goes), again suggesting that higher inflation shouldn’t be a surprise. First off, why is inflation higher? Record stimulus, a big economic recovery, major supply chain issues, a surprisingly tight labor market, and negative CPI this time a year ago (so the baseline is quite low) are all reasons inflation has soared lately. As we’ve said many times in recent months, we think the jump in inflation is transitory, and inflation will come back to trend by mid-2022. Many of the big picture things that have kept a lid on inflation for more than a decade are still in place. Things like technological innovation, globalization, the Amazon effect, increased productivity and efficiency, automation, and high debt (which puts downward pressure on inflation) are all still firmly in play and should help keep inflation in check later this year and beyond. “Yes, this year could see inflation upwards of 3% or a tad more, but that isn’t exactly runaway inflation from the 2% inflation rate we saw most of last decade,” explained LPL Financial Chief Market Strategist Ryan Detrick. “Coming out of the worst recession we’ve seen in our lifetime, it makes sense that inflation could run hotter this year and maybe even into 2022, but the likelihood that we have a 1970s style inflation surge is quite slim.” What does the market think? Odds are nearly everyone realized inflation is higher as the Google Trends data showed. In case you don’t like to Google things, just go get gas or head to the grocery store, you’ll see higher prices. But the market has a funny way of looking ahead and pricing things in well before most people understand why. There very well could be a major peak in inflation fears but the market may already be starting to move on from this worry. Think about it, if the market was truly worried about inflation, would rates really drop in the face of that scary CPI data? Probably not. What about lumber? It has crashed 40% recently, yet another sign inflation worries may have peaked. Corn and soybeans appear to have also peaked. Even copper has peaked out recently. Recently, as we show in the LPL Chart of the Day, 10-year breakevens, a measure of market-implied inflation expectations, peaked the exact same week that Barron’s had a magazine cover talking about inflation. In other words, inflation fever had gripped us back in May and just as quickly the market had it priced in and stopped worrying so much about it. (Note – The 10-year breakeven rate measures the difference or gap between 10-year Treasury Bond and Treasury Inflation Protected Securities (TIPS). The 10 year breakeven rate serves as an indication of the markets’ inflation expectations over the 10-year horizon.) What does it all mean? There are clear signs that higher inflation is priced into the market. Yes, we’ll get higher inflation, but it won’t be a surprise anymore. For more of our thoughts on inflation, we discuss inflation (and many other things) in our most recent LPL Market Signals podcast.
Claims Rise But The Trend Remains Thu, Jun 17, 2021 Initial jobless claims were forecasted to extend the streak of consecutive declines to seven this week with a 16K decline penciled in. Instead, claims unexpectedly rose by 36K to 412K. Not only did this end a six-week streak of declines, but it was also the largest one-week increase since the last week of March bringing claims to the highest level in a month. While higher sequentially, the overall trend of lower claims remains in place. On a non-seasonally adjusted basis, regular state claims likewise rose back above 400K this week, although it was still one of the lowest readings of the pandemic. PUA claims were also higher with the national total rising to 118K from 71.3K last week. That increase comes in spite of the upcoming exit from the program by half of the country over the next month. On a state level, the main contributors to that increase in PUA claims were Maryland (+17.89K), Kentucky (+8.59K), Illinois (+5.46K), and California (+5.26K). Maryland interestingly is the only one of these states withdrawing from the pandemic era programs prior to the federal deadline of September. The state is currently scheduled to end support of the program in early July. Following a substantial decline last week, continuing claims were relatively flat in the most recent week's data. Nationally, continuing claims rose 1K to 3.518 million for the first week of June. Looking at the data on a non-seasonally adjusted basis and including all programs adds another week's lag to the data making the most recent print through the last week of May. Total claims across all programs have continued to fall, dipping below 15K for the first time in the most recent week's data. A 253.9K drop in PUA claims was the biggest contributor to that decline while regular state, extended benefits, and PEUC programs also all fell significantly.
Leading Indicators Continue to Forecast Growth Friday, June 18, 2021 As the economic focus has frantically shifted from inflation concerns to peak growth fears to the Federal Reserve’s (Fed) tightening timeline in recent weeks, it can be helpful to take a step back and assess the broad economic trend with a diversified set of indicators. Through this lens, we are encouraged by the latest reading of the Leading Economic Index (LEI), which strongly suggested that economic growth would continue at a strong clip in the near-to-intermediate term. On Thursday, June 17, the Conference Board released its May 2021 report detailing the latest datapoint for the LEI, a composite of ten data series that tend to lead changes in economic activity. Many economic data points are backward looking, but we pay special attention to the LEI, as it has a forward-looking tilt to it and spans many segments of the economy. The index grew 1.3% month over month, building on the strength seen in recent months since flirting with negative territory in February. “Three consecutive monthly gains in excess of 1% tend to be rare, and in fact, we never experienced that coming out of the 2008 recession,” said LPL Financial Chief Investment Strategist Ryan Detrick. “That we have seen this dynamic twice now exiting the trough of the most recent recession speaks to the speed and strength of the recovery. We certainly understand near-term jitters, but we expect broader economic trends to remain positive over the intermediate term, consistent with the LEI’s message.” As seen in the LPL Chart of the Day, the LEI has shown strong growth the last three months after limping through the second half of winter. Seven of the ten components grew in May, while two fell and one remained unchanged. Average weekly initial claims for unemployment insurance, the ISM New Orders Index, and the interest rate spread represented the three largest contributors. Building permits and manufacturers’ new orders for nondefense capital goods excluding aircraft detracted from the overall index’s performance, while average weekly manufacturing hours held steady. Strong breadth among the underlying components reinforces our view of continued economic strength. While supply chain bottlenecks and a slower-than-desired labor market recovery have acted as near term speedbumps, we expect those dynamics to largely self-correct and propel the economy further in the second half of the year. Reopening effects are snowballing, and we believe ever-increasing vaccination numbers, warmer weather, and the potential for strong employment growth later in 2021 warrant continued optimism for this economy.
Memory Lane: The Best and Worst Days of This Week Through History Mon, Jun 21, 2021 With a 500-point decline in the Dow last Friday and a 500-point gain today, volatility in the markets has picked up, but days like the last two pale in comparison to the most extreme up and down days of the upcoming week in market history. For these two extremes, we have to go all the way back to 1950 and 1931. The worst market day of the current week in the history of the S&P took place on 6/26/1950 when the S&P fell 5.4%. Stocks jolted downward that day on the uncertainty surrounding the Communist invasion in Korea with North Korean tanks crossing over the 38th parallel and invading the South Korean capital of Seoul. President Truman condemned the ‘latest aggression in Korea in defiance of the Charter of the United Nations' and pledged his full support of U.N. efforts to end the fighting. The nature of the support and whether American troops would be sent to Korea if the U.N. requested them, however, was left unanswered. The fact that the Soviets were considered responsible for this aggressiveness brought into focus the fact that like Korea, Germany was a split country with a lack of military force in place to prevent a Soviet-sponsored proxy invasion. The worrying implications of the invasion resulted in heavy price action reminiscent of the fall of France on 5/21/1940 (-9.14%) as volume surged to the highest levels since that day. The S&P's decline on June 26th, 1950 had been preceded by a year-long bull run marked by a resurgence of public participation in markets. At the market open, imbalances were so wide between bids and offers that it took certain issues upwards of an hour to open for trading, and once they opened for trading, selling was exacerbated by stop-loss orders. Liquidations continued to come through the market in waves, with trading periodically coming to a standstill only to be interrupted by larger volumes of even more aggressive selling, with the low of the day being the close. How bad was the selling? For the entire day, only 59 of the 1,256 (4.7%) issues traded were up on the day. Radio Corporation was the heaviest traded issue of the day on 124,000 shares, slipping 2 1/4 points to a price of 19 5/8, Chrysler lost 7 to 73, and General Motors fell 6 3/8 to 90 1/8. Selling in June 1950 continued right up through mid-July and the S&P dropped about 14% from its peak to trough. As bad as the day was, the market would erase this loss by 9/15, less than two months later, and it kept rallying from there. The best market day of the current week in the history of the S&P took place on 6/22/1931 when the S&P rallied 10.5%. Over the weekend of 6/21/1931, President Hoover unveiled a proposal to put a one-year moratorium on upwards of a quarter billion dollars of World War I reparations and war debts owed to the United States. Hoover noted that "The purpose of this action is to give the forthcoming year to the economic recovery of the world and to help free the recuperative forces already in motion in the United States from retarding influences from abroad." Wall Street initially loved Hoover’s plan to help alleviate the Great Depression in Europe, and investors, previously starved for good news, cheered the plan. Those Wall Street firms with international connections reported a surge in foreign demand for equities, and professional traders sought out the most shorted stocks and caught the shorts flat-footed squeezing them out of their positions. The brighter economic outlook also provided a lift to commodity prices. Unfortunately, the bullish party ended early, and just as the losses from 6/26/1950 were erased within two months, the gains from 6/22/31 were gone by early September. Hoover’s moratorium, which didn’t have anywhere close to universal support in the US and Europe, didn’t pass in Congress until that December. In that ensuing period, though, Germany would have not just a currency crisis but a banking collapse as well, and then soon after Great Britain abandoned the gold standard. As optimistic as Wall Street was on 6/22/1931, all of the gains were erased by 9/8 of that year, and the market continued its slide right up through mid-1932 when it made the final Great Depression lows - 70% below where it closed on 6/22/31!
July has been Top Month of Post-Election Years July historically is the best performing month of the third quarter however, the mostly negative results in August and September tend to make the comparison easy. Two “hot” Julys in 2009 and 2010 where DJIA and S&P 500 both gained greater than 6% and strong performances in 2013 and 2018 have boosted July’s average gains since 1950 to 1.3% and 1.1% respectively. Such strength inevitability stirs talk of a “summer rally”, but beware the hype, as it has historically been the weakest rally of all seasons (page 74, Stock Trader’s Almanac 2021). July begins NASDAQ’s worst four months and is the fifth weakest performing NASDAQ month since 1971, posting a 0.6% average gain. Dynamic trading often accompanies the first full month of summer as the beginning of the second half of the year brings an inflow of new capital. This creates a bullish beginning, a soft week after options expiration and some strength towards the end. Post-election year Julys rank at or near the top of all post-election year months. DJIA, S&P 500, and NASDAQ are ranked #1. Russell 2000 ranks #2. Delving deeper into this data revealed that many of these past “hot” Julys were preceded by a flat or down first half of the year so there is no guarantee that this July will live up to its historical post-election year record again this year.
New Orders Support Richmond Fed Manufacturing Tue, Jun 22, 2021 After disappointing readings from the Empire and Philly Fed releases last week, the Richmond Fed provided a sigh of relief for US manufacturing as this morning's release moved up to 22 versus estimates for an unchanged reading of 18. The four-point increase month over month brings the index into the top 5% of all readings since the survey began in 1993. That indicates the region's manufacturing sector continued to grow at a historically rapid rate in the month of June. In spite of the strong headline reading, breadth in the report was actually negative with almost twice as many sub-indices falling month over month versus making a move higher. A huge 17 point jump in New Orders was to thank for the stronger reading in the headline number making up for the broad declines across categories. Although many indices fell versus May, the vast majority remain in expansionary territory. Even those in which that was not the case, like those for Inventories and Availability of Skills, the negative readings are not necessarily signs of weakness either. As previously mentioned, New Orders ripped higher rising 17 points to 35, the joint highest reading on record alongside the September 1997 reading. As the component with the largest weight (40%), that bolstered the composite reading in a big way more than making up for the declines in Shipments and Number of Employees. Even though New Orders accelerated considerably, Order Backlogs saw a massive deceleration as that index dropped 14 points. Even with that decline, the index is still in the 99th percentile of all months. Although backlogs are growing at a historic pace, shipments have yet to pick up as that index fell 4 points to the lowest level in a year. As for why shipments are not growing at the same pace as orders, supply chain issues seem to be part of the problem. The Vendor Lead Times index (higher readings indicate longer lead times and vice versa) has backed off of the record high but is still far above any level with historical precedence. In addition to the improvement in current conditions for this category, expectations also saw a massive 18 point decline; ranking as the second-largest month-over-month decline on record behind a 23 point drop last June. That optimism in the improvement in supply chains was also likely the reason for the improvement in optimism for shipments. Diverging from the current conditions index, that optimism reading rose 11 points to the top 2.5% of all readings. Those long lead times are also impacting inventories which in turn is impacting shipments. Finished Good Inventories are at a record low after falling 11 points MoM while the Raw Material Inventories index bounced, but is also contracting at a rate unparalleled with any other period in the survey's history. Putting aside the supply chain headwinds, the need to rebuild those inventories should be a positive for growth going forward. Long lead times, low inventories, and strong demand can only mean one thing: higher prices. Input prices pulled back slightly but are still rising at an unprecedented 9.42% annualized rate. Those higher prices have been passed onto consumers with prices received growing at 5% annualized, though, that is lower than the 5.41% rate last month. Perhaps the most optimistic area of the report was in regards to employment. While the current conditions index fell, expectations for the Number of Employees index hit a record high in June. That disconnect between actual increases in employment and the desire to hire has to do with a lack of needed workers. The index for Availability of Skills rose 15 points month over month, one of the biggest one-month upticks to date, but that leaves the index well below the past eleven years' range when the Richmond Fed first began to survey on the topic. Taking action on that lack of labor supply, businesses are raising wages at one of the fastest clips on record, and expectations are not pointing to any slowdown in that trend.
NASDAQ’s Mid-Year Rally Begins Early In the mid-1980s the market began to evolve into a tech-driven market and the market’s focus in early summer shifted to the outlook for second quarter earnings of technology companies. In anticipation of positive results, over the last three trading days of June and the first nine trading days in July, NASDAQ typically enjoys a rally. This 12-day run has been up 28 of the past 36 years with an average historical gain of 2.6%. This year the rally may have begun early and could last until on or around July 14. After the bursting of the tech bubble in 2000, NASDAQ’s mid-year rally had a spotty track record from 2002 until 2009 with three appearances and five no-shows in those years. However, it has been quite solid over the last eleven years, up ten times with a single mild 0.1% loss in 2015. Last year, NASDAQ advanced a solid 4.7% during the 12-day span.
Bears in Hibernation Thu, Jun 24, 2021 The S&P 500's dip below its 50-DMA and the corresponding rally to new all-time highs did little to dramatically change investor sentiment. This week's survey results from the AAII saw bullish sentiment fall slightly from 41.1% last week to 40.4%. That is once again within the past several weeks' range at the lowest level since only two weeks ago. Bearish sentiment was also lower this week, falling by 2.9 percentage points to 23.3%. As with bullish sentiment, that is the lowest level in two weeks. From a longer-term perspective, bearish sentiment is more than 7 percentage points below its historical average of 30.5%. In other words, while sentiment is not exuberant, it continues to skew optimistic. The historically muted level of bearish sentiment also shows up in the Investors Intelligence survey of newsletter writers. This week, that reading fell half of one percentage point to 15.8%. That is the lowest percentage of respondents reporting as bearish since March 14th, 2018. Over the past 30 years, there have been only a handful of other periods with lower levels of market pessimism. Pivoting back to the AAII survey, with bearish sentiment historically muted, a larger share of investors are reporting as neutral. 36.6% of respondents reported as such this week, up 3.9 percentage points from the six-week low last week.
