Daily Stock Market Articles

100 trading days and counting without S&P 500 daily loss of 1.5% or more



Yesterday the S&P 500 reached 100 trading days without declining 1.5% or more. Since 1950, S&P 500 has accomplished this milestone just 42 times. Its longest streak began in November 1963 and ran until June 1965, a full 399 trading days. The shortest was 101 trading days in 1990. The biggest gain during a streak was 42.00% from July 1984 through January 1986 while the average gain in all previous streaks was 13.43% with gains occurring a whopping 92.9% of the time. Clearly, past streaks of low volatility were bullish.

However, when the streak ended, and the current streak will end eventually, the pendulum quickly swung to the opposite side with volatility quickly returning. One week after the previous 42 streaks ended, S&P 500 was down 92.9% of the time with an average loss of 2.09%. Two weeks later, gains remained scarce with S&P 500 up just 19.0% of the time.

 

Another Powell Fed Day Sees Stocks Tank Into the Close
Wed, Sep 20, 2023

In Monday's Chart of the Day, we looked at how the stock market typically performs on Fed Days. Below is one of the charts highlighted showing the average intraday path that the S&P 500 has taken on Fed Days over the past year (8 Fed Days). As you can see, investors really seem to dislike what Chair Powell has to say, as the market has trended straight down in the final hour of trading once his press conferences come to an end.



Today's action was no different. It's actually pretty incredible how closely today's action tracked the normal Powell Fed-Day pattern. Take a look at the chart below. The red line shows the S&P 500's path today, while the blue line shows the average path that the S&P took over the prior eight Fed Days. Maybe Powell can change things up next time (unless this is the action he wants to see).

 

Sentiment Drops Ahead of the Fed
Thu, Sep 21, 2023

The latest weekly sentiment surveys would have missed any reaction to the FOMC yesterday due to timing of data collection. However, leading up to equities' drop in reaction to a hawkish Fed, sentiment was already headed in a pessimistic direction. As shown below, the American Association of Individual Investors weekly sentiment survey saw bullish sentiment drop for a second week in a row last week. At 31.3% bullish, sentiment is down to the lowest level since June.



Bearish sentiment rose from 29.2% up to 34.6%. That is only the highest reading in a month given neutral sentiment picked up a larger share of losses to bullish sentiment the previous week.



While the increase in respondents reporting as bearish has been somewhat tame, the inverse moves this week have resulted in the bull-bear spread dipping back into negative territory. That means there are currently more investors reporting as bearish than bullish.



Below, we take a rolling average of the past year's readings in bullish and bearish sentiment. By this measure, bears again hold the upper hand having averaged 38.0% in the past year whereas bulls have averaged 30.4%. In the case of bullish sentiment, that remains a historically low reading as the average has generally trended lower over the past two decades while the reverse is true of bearish sentiment. That being said, there has been some reversion over the past few months with bearish sentiment falling and bullish sentiment rising towards more historically normal readings. In other words, over time, sentiment has taken a structurally higher bearish tilt, and 2022 saw that nearly reach a pinnacle. This year, though, has seen somewhat more normal but still elevated sentiment.

 

Claims Back the Hawks
Thu, Sep 21, 2023

Among the reasons given for yesterday's "hawkish hold" at the FOMC meeting was that employment readings "remain strong". This morning's release of weekly jobless claims backed that up. Seasonally adjusted initial claims have begun to fall back down towards recent lows in the past few months, and today's print brought it to a new short-term low of 201K. That compares to expectations for an increase of 4K up to 225K. The recent decline brings claims down to the lowest level since January and just 21K above the multi-decade low reached almost exactly one year ago.



On a non-seasonally adjusted basis, claims are also very healthy. Claims were little changed week over week, remaining near the annual low. Relative to the comparable week of the year in years past, the most recent reading is above that of last year, but right in line with levels from 2018 and 2019. Entering Q4, jobless claims will begin to face some seasonal headwinds and will likely head higher through the end of the year.



As for continuing jobless claims, recent trends have been much calmer as they have not seen any sort of dramatic swing lower. That's not to say, however, that continuing claims have not improved. The reading has continued to trend lower and at 1.662 million it is at the lowest level since January.

 

100, 99, 98, 97...
Fri, Sep 22, 2023

Today marks the 265th day of the year, meaning there are just 100 days left in what still seems like a new year. Heading into the home stretch, the market certainly looks tired as stocks have erased much of the gains they posted in the late spring/early summer rally. If history is any use, though, equity performance in the final 100 days of the year tends to be positive. In the top chart below, we show the S&P 500's performance during the last 100 days of the year dating back to 1945, and for each year where the market was up over 10% heading into the last 100 days, we colored the bars dark blue. The overwhelming majority of the time, the S&P 500 traded higher during the last 100-day homestretch, but there were some big exceptions, notably 1987 (-22.7%), 2008 (-25.2%), and 2018 (-14.4%). In 1987 the S&P 500 was up 31% heading into the last 100 days, in 2008 it was down 18% heading into the last 100 days, and in 2018, it was up 9% before the plunge. In other words, a large plunge could come at any time.

Even taking the large plunges described above into account, the S&P 500's median gain in the last 100 days of the year has been a gain of 4.1% with positive returns 78% of the time, and for years when the S&P 500 was already up 10%, the rest-of-year returns are nearly identical. So as we get ready to wrap up 2023, the wind is at the market's back, although just because the winds are favorable doesn't mean the boat still can't spring a leak. Fair Winds and Following Seas!

 

Low Volatility Streak Ends at 102 Days – What’s Next?

Yesterday the S&P 500 daily streak without a greater than 1.5% daily loss came to end. What happens next? Expanding on our initial research we present the S&P 500 performance during the following three days after the last 42 “big down days” since 1950.

Historically the following day has essentially been a coin toss, up slightly more than half the time with an average gain of just 0.001%. The second day after is modestly more bullish, but still not overwhelmingly so, up 54.8% of the time with an average gain of 54.8%. The third day after has been bearish, down 59.5% of the time with an average loss of 0.19%. In the near term, it appears the S&P 500 tends to bounce around while trader and investors digest the full impacts to the catalyst that triggered the “big down day.” This time it was the Fed clearly stating that rates will be higher for longer and are likely to go higher yet.

Expanding the timeframe does not improve the near-term outlook. In the following monster table, performance on the “big down day” and to the subsequent low sometime during the next 90 calendar days have been added. “Big down day” losses are now excluded from the performance 1-week, 2-weeks, 1-month, and 3-months after.



Over the following 90 calendar days, the low on the “big down day’ was breached 88.1% of the time. Only five times did the S&P 500 not make a lower low, 1961, 1963, 1965, 1968 and 2017. The average decline was 5.44%. The lower low arrived within 2 weeks, 14 times, and took more than 2 weeks 23 times. This suggests the quicker the S&P 500 can shake off its current concerns, the better, but if they persist then more volatility and chop is likely along with sideways to lower trading.

We still anticipate additional weakness through September and potentially into October. September-Octoberphobia combined with inflation and rate fears is likely to trigger further market weakness over the next month or so. The potential for another federal government shutdown is also rising and could weigh on the market. We do, however, expect this weakness to be temporary, in the minor correction range of 5-10% from recent highs in July/early-August. And this should set up our perennial pre-election year Q4 rally and a solid “Best Months” Seasonal MACD Buy Signal.

 

Recent IPOs Arm (ARM), Instacart (CART), and Klaviyo (KVYO)
Mon, Sep 25, 2023

A couple of weeks ago, we highlighted how IPO issuance had finally begun to ramp up after a complete drought since late 2021. Arm Holdings (ARM) was one of the stocks to kick off that new slate of issuance. In a year of massive outperformance for its industry, the British semiconductor designer priced with the largest market cap of recent IPOs, currently valued at $52 billion. After initially pricing at $51/share, ARM exploded into the high $60s in its first two days of trading on the secondary market, but it gave up all of its post-IPO pop by the end of last week and was right back down near $51.



Grocery delivery app Instacart (CART) was the next offering. Debuting last Tuesday, CART similarly traded well above its IPO price of $30 in its first day of trading, but those high prices were only temporary. Like ARM, Instacart also gave up all of its post-IPO pop to trade right back down to its IPO price by the end of last week.



That left marketing automation platform Klaviyo (KVYO) as the most recent major IPO of the week. Similar to ARM and CART, the stock opened for trading well above its IPO price of $30. Shares then plummeted on an intraday basis to nearly touch its IPO price, but unlike ARM and CART, we saw some buyers step into KVYO towards the end of last week.

 

Buy Yom Kippur?
Mon, Sep 25, 2023

When it comes to seasonal patterns in the market, one less widely known pattern is related to the Jewish calendar regarding Rosh Hashanah (the Jewish New Year) and Yom Kippur (Judaism’s holiest day of the year). The old saying says to sell Rosh Hashanah and buy Yom Kippur as, often, it tends to be a weak time of year for the market. We’ll leave it to others to try and explain the reasons behind the axiom, but the actual results don’t refute the pattern.

The table below shows the performance of the S&P 500 from the close before the start of Rosh Hashanah to the closing price on the day Yom Kippur ends from 2000 through 2022. During that span, the S&P 500’s median performance during this period has been a decline of 0.50% (average: -0.79%) with positive returns less than half of the time (43%).

While equity market returns have been weak during the period between these high holy days of the Jewish calendar, market returns for the rest of the year have been positive. In the twenty-two prior years shown, the S&P 500’s median rest-of-year performance has been a gain of 6.07% with gains 74% of the time. In the table, we have also shaded those years where the S&P 500 bucked the market headwinds and posted positive returns during this period, but it tended to have no impact on performance for the remainder of the year

One word of caution behind the possible explanations for the equity market’s weakness in the period between Rosh Hashanah and Yom Kippur is that they also occur during September which is already a weak time of year for the market to begin with.

 

Ten Things to Know About a Government Shutdown
Posted on September 26, 2023

“I don’t make jokes. I just watch the government and report the facts.” -Will Rogers

As you’ve probably heard by now, the government is on the brink of shutting down unless Congress connects on a Hail Mary to pass a dozen spending bills before the September 30 funding deadline. The odds are this won’t happen and on October 1 the government will be at least partially shutdown.

What exactly does this mean for you, as investors? The good news is stocks tend to take shutdowns in stride, as we will discuss soon. Here are ten things to know about a potential government shutdown.

• The bottom line is the government can only spend on what is deemed essential services, like law enforcement and safety. The largest impact will be on hundreds of thousands of federal employees not receiving their regular paychecks. It will take a bipartisan deal to avoid a shutdown or to reopen it.
• Should we have a full government shutdown (the last time was in 2013), then all 1.9 million federal employees who don’t work on mandatory programs (like Medicare and social security) will be furloughed and sent home, not getting a check until things open back up. Essential employees will be forced to come to work (think TSA and air traffic controllers), but they also won’t be paid until things are back up and running.
• Active military pay will also be delayed, but veteran benefits will continue. The good news is once Washington gets going again, it is required by law to repay all federal workers and military. With the upcoming election getting closer, it is hard to think anyone wants to have military members not getting paid, as those headlines won’t be well received.
• Food stamps and other nutritional aid programs (think school lunches) will continue unaffected, while disaster relief will continue as well, but there is only so much saved in the Disaster Relief Fund, so an extended shutdown could lead to emergency funding. The post office continues (meaning you can still go stand in a long line if you like), as does Social Security and Medicare. The Internal Revenue Service (IRS) will continue to operate as normal and no workers there will be furloughed.
• Other areas impacted? Some government economic data will be delayed, so things like the monthly jobs data won’t happen. We saw delayed government data in the last shutdown in 2018/19. Given the Federal Reserve Bank (Fed) is data-dependent, this could cause more headaches the longer a shutdown goes.
• National parks or museums (think the Smithsonian) will also be shutdown. It was estimated that the full shutdown in 2013 lead to a loss of $500 million in spending at nation parks according to the National Park Services. The 2019 shutdown saw delays at airports, as traffic controllers weren’t crazy about showing up to work and not get paid. Lastly, good luck getting a passport quickly. I got a new one last year and it took forever when the government was actually open, so it’ll take even longer now.
• Libby Cantrill, head of U.S. public policy at PIMCO, estimates the impact on GDP to be 0.1% to 0.2% each week, but will be quickly reversed once government employees get paid. The 2013 shutdown was the last time we had a full government shutdown and it lasted only 16 days, but shaved 0.6% off GDP. The worry, of course, is this shutdown could also turn into a full shutdown and lasts longer than the 2013 shutdown. Libby thinks that a full shutdown is more likely than a partial shutdown at this point.
• Since 1976, we found 22 funding gaps, with only four times the government was fully shutdown, including 2013. The previous shutdown in 2018/19 was a partial shutdown which lasted 35 days (meaning some spending bills were passed). Speaking of 2013, it was both the last full shutdown, and the longest full government shutdown ever at 17 days, while the last shutdown was a partial shutdown and it lasted a record 35 days.
• As you can see below, most shutdowns didn’t last very long (median of 5 days) and fortunately stocks weren’t overly impacted either, with an average return of 0.3% during the shutdown. The truth is the market knows this will be resolved and tends to look forward, past the scary headlines. Also, don’t forget the previous shutdown was a record 35 days, yet stocks gained more than 10% during that shutdown. Yes, this was mainly due to Jerome Powell and the Federal Reserve Bank (Fed) turning dovish in late 2018, but it still showed that shutdowns don’t have to be bearish.

• Take one more look at the table above, as stocks were up 12.7% on average a year after the shutdown ended, reminding investors that stocks tend to go higher over time and once this shutdown is resolved will likely see better times as well.

 

Why The Student Loan Payment Restart Is Not Going to Crash the Economy
Posted on September 27, 2023

We’ve gotten a lot of questions about the potential impact of a government shutdown and the restart of student loan payments in October. Ryan wrote about the government shutdown yesterday, while today I will take a closer look at the student loan payments restarting. The fear is that a sudden resumption of payments will result in a sharp pullback in consumer spending and send the economy into reverse.

Student loans started accruing interest on September 1st, and payments become due starting October 1st. That’s after a long pause. The federal government paused payments for all federal student loans, with no interest accrued, soon after the pandemic hit in March 2020. Since then, both the Trump and Biden administrations have pushed back the resumption of payments. The Biden administration had also originally planned to forgive at least $10,000 in loans for about 43 million eligible borrowers. However, the Supreme Court struck this plan down over the summer.

It helps to take a look at the numbers to figure out the scale of the issue here. Americans paid an average $6 billion a month toward student loans in 2019.

Meanwhile, households spend about $1.5 trillion a month on consumption. The average monthly increase was about 0.3% in 2018-2019 (about $4.5 billion per month). Consumption has been running hot recently, averaging a 0.6% increase a month (about $9 billion).

The worry is that if households have to start paying $6 billion a month in student loans, that’s going to take a massive bite out of consumption growth each month, perhaps even wiping out all consumption growth for a few months. That would be a significant blow to an economy largely dependent on consumer spending.

However, there are reasons why this fear is likely unfounded.

Student Loan Payments Have Been Surging, Even Prior to Officially Restarting
The Department of Education has seen a surge of payments recently – Over the 30 days through September 21st, they have seen receipts of $9.4 billion. That’s well above receipts across any rolling 30-day period prior to the pandemic.



Interestingly, soon after the Supreme Court struck down the Biden administration’s forgiveness plan on June 30th, payments started to go up. Receipts totaled $2.1 billion in July, up from just $1.2 billion in June. Then in August, payments exploded higher to $6.4 billion. September receipts are on track to be larger, adding up to $5.6 billion over the first three weeks of the month.

It may be that borrowers are looking to pay off loans before the official restart, especially high-income earners. Also, borrowers enrolled in new income-driven repayment plans(IDR) may have already started payments. Borrowers who had automatic payments prior to the pause might have seen payments restart earlier than expected.

Whatever the reason, the big takeaway is that payments have surged, and more importantly, it hasn’t adversely hit consumption yet.

Take retail and food services sales: they rose 0.5% in July and 0.6% in August. That translates to an annualized pace of 6.3%, almost double the 2018-2019 pace of 3.2%. In fact, retail sales are 17% above the pre-pandemic trend, and rising. This is not exactly what you’d expect given the surge in student loan payments.



Other Factors Also Suggest We’re Not Facing a Consumption Cliff
In my opinion, payments were never going to go from $0 to $6 billion on October 1st for four reasons, though going by the data above, it looks like even a sudden surge didn’t put a dent into consumption.

1) Many borrowers continued to make payments even during the pause, thus reducing their principal. Payments averaged $1.2 billion a month over the first 6 months of this year, and averaged $2.3 billion in 2021-2022. So, a lot of borrowers continued to pay down their debt even when they didn’t have to, and with interest suspended those payments went entirely to reducing principal.

2) The Biden administration recently canceled $116 billion in loans for more than 3.4 million borrowers. These were borrowers on income-driven repayment plans, but there were mistakes on the administrative side that put borrowers further behind in paying off the loans. These borrowers typically had made 240-300 monthly payments already, or 20-25 years of a 30-year loan, so the rest of the debt was forgiven. About 1.1 million of them were misled by a for-profit college and granted relief under a program called borrower defense to repayment.

3) The administration is also implementing a loan on-ramp for those who will have to resume payments. It’ll allow consequence-free nonpayment for the first 12 months after restart, as nonpayers won’t be reported to collection agencies and credit bureaus. Though interest will continue to accrue.

4) The administration released a new plan (SAVE) that will benefit another 20 million borrowers. It is estimated that SAVE will cut payments in half for these borrowers, even as balances don’t grow from unpaid interest. Existing income-driven repayment plans are also becoming a lot more generous. SAVE raises the amount of money considered “non-discretionary,” which is protected from repayment requirements. This will lower payments significantly. For example, a borrower who makes $15 an hour will not make any payments. Borrowers earning more than this will save approximately $1,000 a year on payments. The plan also ensures that borrowers who keep up their minimum payments will not see their balances grow, i.e. additional interest above the minimum payment will not accrue to the balance.

There are a lot of details but the long and short of it is that we’re most likely not going from $0 to $6 billion in loan payments on October 1st. And based on the Department of Education receipts, and July-August, retail sales, it looks like even a sudden surge of payments wasn’t enough to put a dent into consumption.

We’re not saying there won’t be any impact on consumption when payments restart. Consumer spending will probably ease up in Q4. But it’s unlikely to be large enough to send the economy into a significant slowdown.

 

October Almanac: Bear-Killer, Bargain Month, Turnaround Month

Seasonally Speaking, October is the time to buy stocks, especially late October and especially tech stocks and small caps. October can evoke fear on Wall Street as memories are stirred of crashes and massacres. We use the term “Octoberphobia” to describe the phenomenon of major market drops occurring during the month. Market calamities can become a self-fulfilling prophecy, so stay on the lookout.

October has been a turnaround month—a “bear killer” if you will, turning the tide in thirteen post-WWII bear markets: 1946, 1957, 1960, 1962, 1966, 1974, 1987, 1990, 1998, 2001, 2002, 2011 (S&P 500 declined 19.4%), and 2022.

DJIA was first to bottom in 2022 on the last day of September. S&P 500 ended its bear market on October 12 while NASDAQ did not reach a final closing low until December 28. Eight of these were midterm years. While not in an official bear market this year, the market is suffering through typical seasonal weakness which could once again come to an end in October.

Pre-election year Octobers are ranked second from last for DJIA, S&P 500 and NASDAQ while Russell 2000 is dead last with an average loss of 1.5%. Eliminating gruesome 1987 from the calculation provides only a moderate amount of relief. Should current weakness persist into October it is likely to provide an excellent buying opportunity, especially for depressed technology and small-cap shares.

 

Home Prices Charging Back to New Highs
Thu, Sep 28, 2023

Case Shiller home price data published by S&P CoreLogic was released earlier this week for July 2023 (it comes out on a two-month lag). As shown below, 19 of 20 cities posted month-over-month gains, with the National index up 0.6% MoM and up 0.98% year-over-year. Las Vegas saw the biggest monthly gain at 1.12%, while Portland was the only city to see a monthly decline.

The big news from the report was that the National index and ten of twenty cities once again hit new all-time highs, erasing declines seen from mid-2022 through early 2023. The National index saw home prices fall 5% from its prior high last June to its low this January, but it has bounced back by 6% since then to notch new highs. The ten cities to also make new highs were: New York, Minneapolis, Miami, Detroit, DC, Cleveland, Chicago, Charlotte, Boston, and Atlanta.

Four cities remain 5%+ below their prior highs: Phoenix (-6.7%), Las Vegas (-7.2%), Seattle (-10.1%), and San Francisco (-10.8%).



Below is a look at how much home prices have jumped from their lows made either at the end of 2022 or earlier this year. As shown, San Diego, Detroit, and Chicago have seen home prices rally the most at 9%+, while Tampa, Las Vegas, and Phoenix have rallied the least at just 4%.



Below we show the actual home price index levels for the twenty cities plus Case Shiller's three composite indices. Cities highlighted in green are the ones that are back to all-time highs. With interest rates rising so far so fast from very low levels, existing mortgage holders have frozen up, which has frozen the market of homes for sale. The extreme lack of supply has caused prices to increase, not decrease, thus far, but barring a pretty big drop in mortgage rates. we don't see this as sustainable in the months and years ahead.

 

Why Stocks Should Rally In The Fourth Quarter
Posted on September 28, 2023

“Wake me up when September ends.” -Green Day

Good riddance to what has been a very rough month for stocks. In fact, both August and September saw weakness, living up to their reputation as a potentially troublesome timeframe based on seasonality. Most might not remember it now, but the first half of 2023 was one of the best starts to a year ever for stocks. We classify this type of weakness as perfectly normal and likely necessary for stocks to catch their breath before a new surge higher.

Here’s the good news, seasonality has played out quite well the past year and if this continues, we predict a strong fourth quarter. Think about it, midterm years usually aren’t great for stocks, but they tend to see an October low. Then pre-election years tend to be strong, with most of those gains happening early. That sound familiar?

Here’s a chart we’ve been sharing for well over a year now and it showed that the past three quarters were supposed to be strong, and they were (up 7.1%, 7.0%, and 8.3%). This ran counter to nearly all the strategists on TV telling us that the first half of the year was going to be rough and the second half better. We took the other side, saying to expect strong gains in the first half of the year.



This brings us to now and the third quarter of a pre-election year wasn’t expected to do well and that sure played out again. Lastly, the fourth quarter of a pre-election year usually bounces back, something we expect to happen this year.

Breaking it down by months, the upcoming three months tend to be quite strong. October is known as a month for extreme volatility (think 1987 and 2008), but it is usually a pretty decent month overall, with November and December historically very strong.



As most investors know, but is important to remember, the fourth quarter is the best quarter of the year, up nearly 80% of the time and up more than four percent on average, twice as much as the next best quarter.



The next two charts tell similar stories that it is perfectly normal to see chop and weakness right now. Below we share the average pre-election year for the S&P 500 and years that are up more than 10% the first six months of the year. The good news is it would be perfectly normal to see strength and new highs to end the year, something we expect to happen again.





Here are two more examples of why we see a late-year rally.

When the S&P 500 is up between 10-20% for the year heading into the normally strong fourth quarter, then we can expect an even better fourth quarter, up more than 5% on average and higher more than 84% of the time. In other words, a strong year tends to end strongly.



Adding to reasons to look for a rally, when stocks fall more than 1% in both August and September, a big bounce back in October is normal, as is a great fourth quarter. The last three times that happened, October bounced back a very impressive gain of 10.8%, 8.3%, and 8.0%, respectively. Turning to the fourth quarter, it has been up 12 out of 13 times and up more than 7.0% on average. In other words, when we see the seasonal August/September weakness it is also normal to see a strong end-of-year rally.



I will leave with this; the credit markets aren’t showing any stress in the system. To keep this simple, if the riskiest companies were in trouble, then we’d expect spreads to be higher, as investors would be worried about being paid back. If you don’t expect to be paid back on a company’s debt, then you’d charge more. Well, looking at BBB spreads shows a somewhat shocking situation, as the spreads are hitting their lowest level of the year currently. To us, this is another clue that the recent weakness isn’t a new monster under the bed, but more normal seasonal weakness after a great start to a year.

 

October’s First Trading Day Prone to Volatility, But S&P 500 Up 8 of Last 11

Based upon data in the soon to be available 2024 Stock Trader’s Almanac on page 90, the big gain on 10/3/2022 pushed the first trading day of October into 4th place for DJIA of all monthly first trading days since September 1997 based upon total DJIA points gained.

S&P 500 has been up 15 of the last 26 years and 8 of the last 11 on the first trading day of October. DJIA’s record is slightly softer with 12 declines and NASDAQ’s performance has been the worst of the group, down 13 times with an average loss of 0.15%. Impressive gains occurred in 2002, 2003 and 2022 while sizable declines happened in 1998, 2000 (NASDAQ), 2009, 2011. 2014 and 2019 also stand out for across-the-board losses exceeding 1%.

 

Rocky Road Ahead?
Mon, Oct 2, 2023

After a relatively dismal two months for stocks, the market kicked off what has historically been its strongest period of the year today. In the post-WWII period, the S&P 500's average performance in Q4 has been a gain of 4.1%, which is more than double the 2.0% average gains of Q1 and Q2 and ten times the average gain of Q3 (0.4%).



While Q4 has been positive for equities, the month of October has historically been volatile. Since 1945, the spread between the month's daily closing high and closing low has been 7.1%. While the average spread for every month except October fits within a 1.3 percentage point range of 4.7% to 6.0%, October is all alone at more than a full percentage point from the high end of that range.



With Q4 being the strongest quarter of the year and October being the most volatile month, they don't call October the month of market bottoms for nothing. In looking back at every market decline of at least 5% (without a rally of 5%+ in between), market lows have easily been the most prevalent in October. As shown in the chart below, 33 (14.4%) of the 'market lows' since 1945 have occurred in October, and the only two other months that account for even 10% of all market lows were March and September. Seasonality is on the side of bulls heading into Q4, but that doesn't mean the road is smoothly paved.

 

Labor Demand Holds Up
Tue, Oct 3, 2023

This morning we received two of the latest updates on labor market demand with the release of the August JOLTS report in addition to postings data from Indeed through the end of September. The JOLTS report came in well above expectations (9.61 million versus 8.83 expected) indicating a solid rebound in labor market demand headed out of the summer. In spite of that positive reading, the overall trend of lower openings remains in place and is echoed by Indeed's data. As shown below, the more timely and higher frequency postings data has also been trending lower since the end of 2021. That being said, the summer has seen those declines decelerating with postings only slightly lower over the past three months. Modeling the JOLTS number on the less lagged Indeed data would predict that postings would remain around these levels next month. In tonight's Closer, we will provide a full rundown of the latest JOLTS report.



In addition to national reads on job postings, the Indeed data also provides geographic breakdowns by US metro, and in the table below, we highlight the 25 MSAs (metropolitan statistical area) that have seen the best and worst postings growth relative to pre-pandemic baselines as well as how far they have fallen from their respective peaks (we highlight when each of those peaks were as well). Many of those with the highest number of openings relative to pre-pandemic are also those with smaller populations. Conversely, many of the largest metros have seen job postings fall off the most. There have also been a growing number of cities where postings are now below pre-pandemic levels. San Francisco is the worst of these with postings down nearly 20% from baseline.

 

Lower Daily Lows Becoming the Norm
Wed, Oct 4, 2023

While maybe not as relentless as the move higher in rates over the last two months, selling in equities has been pretty consistent. In the year-to-date chart of the S&P 500 tracking ETF (SPY) below, we show the last 50 trading days in gray to point out that there have been an extremely large number of days during this span where the day's intraday low was lower than the prior day's low. We highlighted this trend in a Chart of the Day last week, but it has remained pronounced since then. In total, 33 of the last 50 trading days have seen SPY make a lower low relative to the prior day's intraday low, and if SPY falls below $420.18 today, it would be a record 34 days in a trailing 50-trading day period where the ETF made a lower low relative to the prior day's low.



The chart below shows the number of days over a rolling 50-day period where SPY made lower lows, and at a level of 33, the current period is tied with three others (March 2022, October 2008, and March 2008) for the most since SPY's inception in 1993. You don't need us to tell you that none of these periods were positive for the market. What makes the current period unique is that the magnitude of the decline during this period has been relatively mild at less than 10%. During each of the three other periods, SPY was down at least 10% from a 52-week high and as much as 45% (October 2008).

 

Typical Octoberphobia! Brace Yourself

High interest rates have spooked the market in the very scary market month of October. But as we’ve told you: October is a bear-killer, bargain month and turnaround month. It looks like the anticipated correction is now upon us. As of today’s close, from the recent summer highs DJIA is –8.0%, S&P -8.5% and NASDAQ -9.9% respectively.

Everyone has been chattering about the coming big Q4 rally and how October is when stocks selloff. Well, here you are. Seasonal patterns have been tracking all year. And we’ve been on the sidelines in short term bonds and cash since our late June MACD Seasonal Sell Signal. Our Seasonal MACD Buy Signal is setting up extremely well. To Wit: Buy In October and Get Your Portfolio Sober!

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Over the last twenty-one years, the full month of October has been a solid month for the market, ranking #2 for DJIA and NASDAQ, #4 for S&P 500. DJIA, S&P 500, NASDAQ, Russell 1000 and Russell 2000 have all recorded gains ranging from 1.3% by Russell 2000 to 2.2% by NASDAQ. But these gains have come with volatile trading, most notably during the early days of the month.

October has opened softly with modest average gains on its first trading day. On the second day, all five indexes have been weak followed by a rebound on the third trading day before additional weakness pulled the market lower through the seventh trading day. At which point, the market has historically found support and begun to rally through mid-month and beyond.

In pre-election years since 1950, October has been stronger in the first half of the month and weaker in the second half. October 1987’s substantial declines heavily influence the pre-election year pattern.

 

That’s Cracked! Consumers May See Relief at the Pump Despite High Oil Prices
Posted on October 3, 2023

It seems like there’s always one shoe or another ready to drop on the economy. There were fears over a government shutdown (punted for now) which Ryan wrote about, along with the restart of student loan payments and strikes. Other issues that have investors worried are another bank crisis (like Silicon Valley Bank), or a commercial real estate crash. I don’t want to minimize these issues but often, it’s things that most people are not talking about that could potentially have a greater impact.

One thing that could upset the economic apple cart is an energy price shock. Falling energy prices have been the main force driving inflation from 9.1% in June 2022 to 3.7% as of August, as measured by the Consumer Price Index (CPI). However, oil prices have been rising since July, and a month ago I wrote about an energy price shock being my biggest concern.

The problem with rising energy prices is that they can adversely impact the economy in several different ways. The most immediate impact is via higher pump prices, especially if that forces consumers to cut back elsewhere. Then you have the impact of higher diesel prices on freight and even food prices. Higher jet fuel prices can raise airfares. All of which could lead the Fed to tighten policy a lot more. We saw this happen last year when inflation-adjusted incomes fell while energy prices surged.

The bad news is that oil prices have surged about 14% since I wrote that piece, taking West Texas Intermediate crude (WTI) to above $90 a barrel. That’s the highest level since last November.



However, we’ve caught a lucky break. Nationwide average gas prices at the pump have more or less remained flat over the last couple of months.



This has surprised a lot of people, but there’s a good reason why gas prices haven’t surged.

Oil prices are not the only thing that determine gas prices, or even diesel prices. Another major factor (and a volatile one) is refining spreads, which is directly tied to refiners’ margins. Refining or “crack” spreads are the price difference between crude oil and refined product. Here’s a schematic from the Energy Information Administration (EIA) showing what makes up prices at the pump. Oil prices account for just about 50%, while refining spreads make up 20-25% of the rest.



The chart below shows crack spreads for gasoline, and a few things stand out. Spreads spiked last summer, contributing to high inflation. They pulled back soon after that but started to rise again over the first seven months of this year. Which is part of the reason gas prices at the pump also climbed over the same period. However, crack spreads have crashed 74% since the end of July, falling all the way down to pre-pandemic levels. This has offset the recent surge in crude oil prices.



In fact, signs suggest that there may be more relief coming at the pump, with gasoline futures falling 15% over the past month. That’s going to be a tailwind for households.

Of course, gas prices can just as easily go up again, especially if oil prices continue to climb and crack spreads reverse. This is something I’m keeping an eye on because it matters to the economy. For now, we continue to overweight the energy sector in our portfolios, and hold energy commodities as well, which works as a hedge in the event of an energy shock.