Daily Stock Market Articles

Here We Go Again
Posted on July 11, 2023

“Here I go again on my own. Going down the only road I’ve ever known.”

-Here I Go Again by Whitesnake

One of the main reasons we came into 2023 overweight equities (when everyone else was talking recessions and bear markets) was the over-the-top negativity. Rarely is the crowd and obvious trade right when it comes to investing and we assumed should we get any good news, stocks could surprise to the upside. One of the most staggering signs of negativity was the median strategist in this Bloomberg survey was looking for negative stock returns in ’23.



As we noted in Is Anyone Bullish? (from December 11, 2022), we’d never seen strategists this bearish heading into a new year. Then layer on the fact that stocks were down close to 20% in 2022 and the odds greatly favored a big bounce back year, as stocks were rarely down two years a in a row. Not to mention, the macro backdrop was on much better footing than the M2 is crashing, LEI is down, and yield curve fearmongers were telling us.

All that happened was that the first six months of this year was the second best start to a year since 2000 for the S&P 500, best start for the NASDAQ in 40 years and the best start ever for the NASDAQ-100.

Where are we now? Well, similar to the great Whitesnake song in the quote above, here I go again, down the only road I’ve ever known.

Apparently, the only road these strategists know is doubling down on lower prices, as they expect the most bearish second half EVER. We’ll gladly take the other side to this, as we expect stocks to gain nicely the rest of this year, likely to new all-time highs.



Take note the other years they expected lower prices during the final six months of the year were 1999, 2019, 2020, and 2021. All the S&P 500 did those years was gain 7.0%, 9.8%, 21.2%, and 10.9%, respectively, over the final six months. That comes out to a very impressive 12.2% average, not bad, not bad.

What also has my attention? We have some big inflation data out this week, but we’ve already seen some nice signs that inflation could surprise to the downside. First up, used cars accounted for nearly a third of the jump in inflation the past few years, but it is crashing lower, with used car prices experiencing their largest monthly drop since COVID. Given light auto production is running close to pre-COVID levels, this is another sign supply chains are working again and price pressures are abating.



Speaking of supply chains, the New York Fed Global Supply Chain Pressure Index did jump last month, but it was coming off of the lowest level in history. Bottom line, supply chains are back to normal after years of disruptions.



Along with supply chains and used car prices improving, we expect to see shelter take a big dive the second half of this year. Remember, shelter makes up more than 40% of CPI and it has stayed stubbornly high lately. Well, we’ve seen drastic improvements from private data places like Apartment List and Zillow, suggesting that the government’s data will likely follow suit soon.



Lastly, we’ve been hearing a lot that the trillions of dollars in excess savings that consumers had over COVID was nearly all the way gone. The media are spinning this as a bearish event, as it means consumers aren’t saving anymore and they will run out of money to spend and keep the economy growing. Here’s the issue with that, the savings rate has been trending higher the past year and is more than two percent higher than it was in early 2022. The employment backdrop is still healthy, spending is solid and consumer confidence is improving. To us, all of that is positive.

 

Small-caps Catch a Bid
Tue, Jul 11, 2023

Small-caps have caught a bid over the last few days with the Russell 2,000 ETF (IWM) rallying more than 3% since last Thursday's close. Over the same time frame, the large-cap S&P 500 is up just 0.3%.

While large-cap indices have recently traded to 52-week highs, small-caps are still well below 2023 highs made back in Q1. As shown below, though, IWM is currently attempting to break above the top end of the sideways range it has been in over the last month. If it can do that, the highs from earlier in the year will come into sight.



The Russell 2,000 (IWM) chart looks pretty interesting over a multi-year time frame. As shown below, the pre-COVID high made in early 2020 has acted as strong support over the past year. While IWM fell sharply during the mini-banking crisis this March, it stopped going down once it reached this key support level, and then it traded sideways and consolidated throughout much of April and May. Going forward, it appears that the Russell has built a strong base over the past year to springboard off of if the bull market for US equities can continue.



A chart that always captures our attention is the one below that shows Apple's (AAPL) market cap versus the combined market cap of all of the stocks in the small-cap Russell 2,000. Prior to COVID, Apple's market cap wasn't even close to the $2+ trillion market cap of the Russell 2,000. Since late 2021, though, the two have been battling it out. After its huge gain in Q2, Apple is currently in the lead at $2.96 trillion, but the Russell isn't too far behind at $2.81 trillion.

 

Inflation Expectations Still on the Decline
Tue, Jul 11, 2023

Ahead of Wednesday's CPI, the New York Fed's Survey of Consumer Expectations (SCES) was released earlier this week and showed a continuation of the trend where consumer inflation expectations have been falling. Over the next 12 months, the Fed's survey showed that the median expected rate of inflation fell from 4.07% down to 3.83%. While still above its historical average of 3.4%, consumer expectations for inflation over the next year are down to the lowest level since April 2021. Over a longer time horizon, inflation expectations haven't fallen nearly as fast, but they didn't rise anywhere near as much as short-term expectations either. In the June survey, the median expected rate of inflation over the next three years fell from 2.98% down to 2.95%. While that reading barely budged, we would note that current expectations for inflation over the next three years are slightly below the long-term average. Unlike the FOMC, which ditched the term transitory 18 months ago, consumers have remained on team transitory.



One issue which has the potential to push inflation higher is how consumers expect their incomes to change over time. In this month's survey, the median expected rate of earnings growth increased from 2.80% up to 2.98% which is right around the high end of its range from the last two years. As shown in the chart below, while this series has tested the 3% level multiple times, it hasn't been able to bust through it. As it pertains to inflation, that's a good thing, because if consumers expect their incomes to increase, they're probably also less likely to push back on higher prices. At the same time, the fact that this reading has settled into a new higher range relative to its long-term average suggests that getting back down to and staying at levels of inflation that prevailed before COVID may prove to be difficult.

 

NASDAQ’s Midyear Rally Ends on Friday


From its close on June 27 (the fourth from last trading day) through today, NASDAQ has gained 2.7% which makes this year’s NASDAQ midyear rally slightly better than average. Today’s gains were largely fueled by better than anticipated CPI reading. Provided this translates into a better-than-expected PPI report tomorrow, additional gains are likely before NASDAQ’s midyear rally officially ends on Friday, July 14. The end of the rally also coincides with the historical seasonal mid-month July market peak in pre-election years. Since 1950, the second half of July has been weaker than the first half.

 

The Path to Lower Inflation is Now Clear
Posted on July 13, 2023

The June CPI report was a positive surprise, both in terms of the headline numbers as well as the underlying details.

Headline inflation rose 0.2% in June, which translates to a 2.2% annual pace. Over the past three months, inflation’s averaged about 2.7%, and over the last year it’s up 3.0%. That’s well off the peak pace of over 9% exactly a year ago.

In my opinion, the reason for the decline is obvious when you look at the chart below. Energy prices drove the inflation surge in 2022, especially after Russia’s invasion of Ukraine. Energy prices have now declined 17% over the past year, pulling inflation lower. The good news is that food inflation is also easing a lot, rising at an annual pace of just 1.3% over the past 3 months. Remember the surge in egg prices? Well, egg prices have fallen 21% over the past 3 months.



All this of course has been occurring for a few months now and shouldn’t be a big surprise.

The problem until now was that “core inflation,” i.e., inflation once you strip out energy and food prices, remained elevated. But we got good news on that front.

Core inflation rose just 0.16% in June, which translates to a 1.9% annual pace — the slowest monthly pace since August 2021! That’s great, but as you can see below, the 3-month pace remains above 4%. So, we’ve yet to see a consistent deceleration in core inflation, which is what the Federal Reserve is looking for.



Positive signs
We realize that one month does not make a trend, but a lot of the underlying details point to downward momentum. Let’s look at a few of these.

Used and new vehicle prices, which make up 9% of the core inflation “basket,” have reversed a lot over the past year. However, used car prices rose in April and May, reversing some of that momentum. But things look to have turned around once again, with used car prices falling 0.5% in June. In fact, prices are likely to fall further over the next few months based on private used car auction data (Ryan pointed this out in his previous blog as well).



Moreover, the auto production supply chain bottlenecks are being resolved, and therefore we’re seeing vehicle production increase. As a result, prices for new vehicles have fallen about 0.4% over the past three months, and that downtrend is likely to continue given increased supply.

The big one is housing inflation, which Ryan and I have been talking a lot about over the past year. Housing makes up 40% of core inflation, but importantly, it does not include home prices. Instead, it’s based on rents. The problem is that there is a significant lag between official rental inflation and private rents data. Private data from Apartment List shows that rents have decelerated from a peak of 18% year-over-year pace to zero as of June! Official data lags this data by about 12 months or so and it’s taken a while to reflect market reality.

The good news is that official rental inflation appears to be turning lower. Rental inflation was averaging a 9% annual pace between June 2022 and February 2023. However, that’s fallen to about 6% over the past 4 months. That’s still higher than the 2018-2019 average of about 3-3.5%. But given what we’re seeing in market rents, we expect housing inflation to continue decelerating and that’s going to pull core inflation down in a big way later this year and into 2024 as well.



What about the rest?
Fed Chair Powell has cited “core services ex housing” as still being elevated. We believe it’s their way of saying,

“Yes, we see vehicle prices heading lower, and acknowledge the lags in housing inflation data; but we want to see the rest of it fall”

But there’s good news on that front too.

The Atlanta Federal Reserve calculates something called the “Sticky Price CPI excluding food, energy, and shelter.” Simply put, it measures inflation for items whose prices typically don’t change frequently.

In June, this sticky price measure was flat. Over the past 3 months it’s running at a 1.4% annual pace, well below the peak of 7.3% we saw 15 months ago. A key piece of this is restaurant food prices, which have slowed down a lot recently on the back of falling food prices. But even things like airfares, daycare and pet care services inflation have been falling.



You can see why the June inflation report was positive from so many angles. A low reading is positive by itself, but it also confirmed what we know from other sources about what to expect going forward.

Perhaps the best news is that inflation is falling, and poised to fall even further, without a rise in unemployment and an economic slowdown. A year ago, Federal Reserve officials and many economists were saying that we probably need to go into a recession for inflation to slow down, and that aggressive rate hikes by the Fed would push us into one.

Instead, the unemployment rate is at 3.6%, close to 50-year lows. If real GDP growth clocks in around 2% for last quarter (as seems likely), that would mean the economy’s grown at a 2.5% pace over the past year. While inflation’s fallen from 9% to 3%. That’s huge!

 

NASDAQ Down 5 Straight During July Monthly Options Expiration Week

Since 1982, the Friday of monthly options expiration week has a bearish bias for DJIA declining 23 times in 41 years with two unchanged years, 1991 and 1995. On Friday the average loss is 0.23% for DJIA and 0.25% for S&P 500. NASDAQ’s record is even weaker, down 25 of 41 years with an average loss of 0.38%. DJIA posts the best full-week performance, up 24 of 41 with an average 0.37% gain. However, NASDAQ has been weakest, down 22 times and the last five straight. The week after monthly options expiration leans bearish for NASDAQ over the longer-term with an average loss. In recent years the track record had been improving until 2015’s across the board, greater than 2% loss.

 

S&P 500's Best and Worst Performers During a Monster Week
Mon, Jul 17, 2023

After weaker-than-expected inflation data inflated the prices of just about every financial asset, there were some very big winners by the end of last week. The table below lists the 20 top-performing stocks in the S&P 500 last week, which includes eight stocks that rallied more than 10%. Double-digit gains are typically considered very good for an entire year, so when large-cap stocks move that much in a week, it's impressive. Topping the list, shares of Match (MTCH) gained nearly 14% followed by DR Horton (DHI), Domino's (DPZ), and MGM Resorts (MGM). Among these four top performers and the other stocks listed, it is a somewhat eclectic group of stocks. One well-represented group on the list is the homebuilders. Along with DHI, Lennar (LEN) and Pulte (PHM) both also made the list. In terms of YTD returns, though, last week's biggest winners weren't solely the ones that have been rallying all along or the losers playing catch up; there was actually a little bit of everything. Three of the stocks listed (Etsy, Newell, and Sealed Air) are still down by double-digit percentages YTD while four (Pulte, Align, salesforce, and Monolithic Power) are up over 50%! Besides those extreme movers, there are also a few stocks that merely had single-digit YTD percentage gains before last week's spikes higher. One thing that just about all of these stocks have in common now, though, is that they headed into this week at short-term overbought levels of a varying degree.



In total, there were just 88 stocks in the S&P 500 that declined last week, and only 53 of those fell more than 1%. Of those 53 stocks, the table below lists the 20 worst performers which all fell more than 3%. This is also an eclectic group in terms of both their lines of business and their YTD performance heading into the week. The only stock down by double-digit percentages was Progressive (PGR) which now makes it down on the year as well. Right behind PGR, shares of Carnival (CCL) fell 9.5%, but unlike PGR, it's still up by over 100% YTD. Besides CCL, two other cruise operators (Norwegian Cruise Line and Royal Caribbean) also sank during last week's rising tide, but they have also seen huge rallies on a YTD basis. Financials are another sector that was well-represented on last week's loser list. Besides PGR, State Street (STT), Allstate (ALL), Northern Trust (NTRS), Bank of NY Mellon (BK), and Travelers (TRV) all bucked last week's bullish trend. Unlike just about all of last week's winners which are now overbought, many of the week's worst performers are still trading within normal ranges of their 50-day moving averages.

 

Employment Back and Prices Sliding in New York
Mon, Jul 17, 2023

The economic calendar is having a quiet start to the week with only the Empire State Manufacturing Survey from the New York Fed released today. The headline reading was expected to fall from an expansionary reading of 6.6 back into contraction in July. Instead, the index remained in positive territory at 1.1 which implies the New York region's manufacturing economy grew modestly in July.



Albeit growing, activity is weak with this month's reading registering in the 28th percentile of all months in the survey's history dating back to 2001. The month over month decline was driven by broad weakness across categories. In fact, only three moved higher month over month: New Orders, Number of Employees, and Average Workweek. Expectations indices similarly weakened with most categories at far more depressed levels by historical standards. Of the twelve categories, eight are in the bottom decline of readings.



As noted above, New Orders stood out as one of the only readings to move higher. At 3.3, that reading is far from elevated or at a new high by any stretch. Meanwhile, Shipments indicated a major moderation compared to last month. In June, Shipments registered a reading of 22, which was surprisingly elevated relative to other categories. Falling 8.6 points month over month, now that index is more in line with other areas.



The two other notably strong readings were with regards to employment. Since the end of the first quarter, Number of Employees and Average Workweek have both been making their way higher with the July readings tipping back into expansionary territory. In other words, on a net basis, businesses are once again hiring and increasing hours worked. However, businesses have also appeared to have slowed down their expected spending plans for technology and capex.



On the back of cooling inflation data last week that sent stocks higher in hopes of a more dovish monetary policy, the Empire Manufacturing survey also provided a cheery look into the region's inflation picture. Both Prices Paid and Prices Received have continued to fall dropping over 5 points month over month resulting in new new lows for each one. With regards to Prices Paid, the index is now at its lowest level since August 2020. Prices Received is similarly at the lowest reading in three years.

 

The Dollar is Weakening – Why That’s Good for US Investors
Posted on July 18, 2023

At the beginning of the year, we wrote in our 2023 Outlook that the US dollar was poised to weaken, creating tailwinds for Americans who invest in International stocks and S&P 500 earnings. We reiterated that this is starting to happen in our Mid-Year Outlook, “Edging Closer to Normal.”

The chart below shows the recent swing in the ICE US Dollar Index, which measures changes in the US dollar against a basket of other currencies, including the euro, yen, British pound, and the Canadian dollar. It rose 27% between May ’21 and September ’22, but has pulled back 12% since then.



A Boost for USD-Based International Equity Investors
When an investor in the US uses dollars to buy a basket of international stocks, the interim step is first converting those dollars to the local currency, which introduces currency risk. Note that when you see quotes for international stock exchanges, like the Nikkei (Japan) or the DAX (Germany), those are in local currency terms. To buy European stocks, you must first convert dollars to euros. Your returns are not just dependent on what the European stocks do; it’s also dependent on what happens to the euro relative to the dollar. If the euro appreciates against the dollar, that’s a tailwind to your investment, whereas a stronger dollar acts as a headwind.

From September 30th of last year through July 14th, the MSCI EAFE Index, which represents a basket of international stocks across developed markets, outperformed the S&P 500 Index. The MSCI EAFE Index gained 35.2% versus 27.4% for the S&P 500. But as you can see from the table below, that outperformance is because of a tailwind from a weaker dollar. Emerging market stocks have also seen a tailwind from a weaker dollar but have underperformed due to a murky economic picture in China.

Even over the past month and half (May 31st through July 14th), the dollar took a renewed plunge, boosting returns for international stocks.



A Tailwind for Earnings
Over the last two decades, movements in the US dollar have negatively correlated with S&P 500 earnings changes. Excluding recessions and post-recession recoveries (since those skew the numbers significantly in either direction), earnings weakness for the S&P 500 has coincided with dollar strength, whereas a weaker US dollar has correlated with stronger earnings growth.



This makes some intuitive sense once you realize that 40% of S&P 500 revenue comes from outside the US. The logic here is that if a company used to sell a machine abroad that generated the equivalent of $1,000 in the past, now that would be about $1,100 because the local currency rose 10% against the US dollar.

So, while the US economy is very relevant for S&P 500 company earnings, much of it also hinges on what happens outside the US and what happens with the US dollar.

Why Is the Dollar Weakening?
It probably helps to understand why the dollar strengthened in the first place. The simplest explanation is that interest rate differentials between the US and other countries rose – the idea is that if interest rates are much higher in country A rather than country B, money will flow into country A, thus raising the value of that country’s currency.

The chart below shows the dollar index on the top panel, while the bottom panel shows the difference between 1-year US treasury yields and EU government 1-year yields. You can see how the dollar has moved higher when interest rate differentials climb, most notably after 2014 and in 2022. In contrast, the dollar has pulled back when the differential falls, which is what happened in 2019-2020 and this year.



Short-term interest rates, like 1-year yields, are an estimate of central bank target rates over the next year. 1-year yields in the US surged in 2022 because the Federal Reserve (Fed) raised rates to tame inflation. They were much more aggressive than their counterparts at the European Central Bank (ECB).

You can see the difference between the Fed and ECB’s target interest rates below. The differential jumped in 2022 but it’s been pulling back recently. The Fed’s taken its foot off the gas, while the ECB remains aggressive. Since the beginning of the year, the Fed has raised rates by 0.75%-points, whereas the ECB has raised it by 1.5%-points.



The reason is that US inflation has started to pull back, and is poised to fall further – see our blog from last week discussing this. In contrast, European inflation has remained stubbornly high, which has kept the ECB much more hawkish. In fact, core inflation (excluding volatile components like food and energy) is currently running at 6.8% year-over-year in the Eurozone. That compares to a 4.9% core CPI reading in the US. Up until September 2022, core inflation in the US was running higher than Eurozone core inflation – and then things switched, which shifted investor expectations and sent the dollar lower.



We expect this dynamic to continue as US inflation eases further, while Europe deals with higher inflation and a more hawkish central bank. Tighter policy does create some headwinds for European equities, but that’s offset by a stronger currency. Combine this with the tailwind that a weaker dollar creates for S&P 500 company earnings, and we are keeping our overweight to US equities while maintaining International developed market stocks at neutral. Emerging markets remain at underweight.

 

Homebuilders Hopeful
Tue, Jul 18, 2023

Housing activity has been somewhat muted given a dearth of inventories, but the lack of available existing supply has been positive for homebuilders. The NAHB's monthly survey of homebuilder sentiment moved higher in July for its seventh straight monthly gain. Even after the rebound, the current level of 56 represents just a 13-month high and is below the range of readings from the few years prior to the pandemic and historic readings in two years before the pandemic.



The improvement in the headline index was primarily driven by increases in present sales and traffic. Geographically, the Midwest and South saw some modest softening in sentiment whereas the West and Northeast were much more impressive. The Northeast in particular saw an 8-point jump which ranks in the top decile of all monthly moves on record and brings the index into the top quartile of historical readings.



Although homebuilder sentiment has been rebounding solidly, it pales in comparison to the strength of homebuilder stocks. Proxied by the iShares US Home Construction ETF (ITB), homebuilders have continued to set new 52-week highs on a near-daily basis. The ETF has now risen 56% over the past year and has continuously traded in overbought territory (currently extremely overbought with a price more than 2 standard deviations above its 50-DMA).



Homebuilder earnings are also on deck in the next couple of weeks. Below, we show a screenshot from the Earnings Explorer function of our Custom Portfolios. As shown, all but three S&P 1500 Homebuilders are due to report through the first week of August. Of those, a vast majority have averaged positive moves on earnings.