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Discussion in 'Stock Market Today' started by bigbear0083, Mar 17, 2023.

  1. bigbear0083

    bigbear0083 Administrator
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    Remembering the Crash of 1987
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    “It felt like the world was ending.” -Economist Chris Rupkey on the Crash of 1987.

    October is known for many things, with incredible market crashes likely being at the top of the list. The Crashes of 1929 and 1987 stand out for many investors and who could forget the selling and volatility of October 2008?

    In honor of the anniversary of the largest drop in stock market history, we’ll take a closer look today at the crash of 1987. On Monday, October 19, 1987, the Dow fell 22.6% for the largest one-day drop in its more than 126-year history. To this day it is still the largest percentage drop ever, although it now ranks as only the 97th largest point decline. But it’s the percentage change, not the point change, that matters for investors.

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    The good news is we don’t see another crash coming anytime soon, as I wrote last week in Four Reasons We Believe Stocks Won’t Crash in October.

    So what caused the Crash of 1987? The funny thing is that 35 years later I’m not sure everyone can officially agree. Here are some things to know about the Crash of 1987:
    • For starters, stocks were in the midst of a huge run off the August 1982 lows, with the Dow up more than 40% for the year in early August 1987, amounting to one very overstretched rubber band.
    • Then consider Alan Greenspan took over the Federal Reserve Bank in August and was hiking rates to cool things off. Talk about a bad time to start a new job. Not to mention during the morning of the crash he was on a plane and no one could get ahold of him, only adding to the stress of the day.
    • Over the weekend, Nancy Reagen was rumored to have cancer. She was more than the First Lady; she was the President’s rock.
    • Program trading was blamed as well, with Louis Rukeyser pointing out that program trading problems were already coming up the Friday night before the crash. (Simply put, program trades were set to automatically liquidate stocks as certain levels were hit. It worked fine until stocks began to fall more than ever expected, leading to an avalanche of more selling as prices dropped.)
    • Currency markets were on edge as well, as the U.S. wanted Germany to weaken their currency due to the latest trade deficit numbers. The back and forth was all over the media as recently as the Sunday before the crash.
    • There were other issues getting media and market attention as well: Germany was proposing a change in taxes, adding to worries they would reduce US Treasury purchases. Japan was considering a huge tax on real estate to slow speculation. There were even rumors of U.S. planes in Iran. Put it all together and there were many worries that all added up to one big problem.
    • Negative selling momentum was already building before October 19. The three days before the crash the Dow was down 3.8%, 2.4%, and 4.6%, making it safe to say investors were on edge all weekend for how things might open on Monday morning.
    • Markets were much less efficient in 1987 and the circuit breakers we have in place today to slow panic selling didn’t exist yet.
    In the end, the Dow fell a then record 508 points for a 22.6% one-day decline, topping the previous largest one-day decline of 20.5% in December 1914, when the Dow began trading after being halted for nearly five months due to World War I.

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    Something most investors might not know is that stocks still finished the year in the green in 1987. Sure, they were well off their highs and the huge volatility was too much for many investors to handle, but if all you saw was the yearly gain of 2% in 1987, you’d think it was a boring year!

    We might not know what caused the Crash of 1987, but we also still don’t completely understand what caused the 2010 Flash Crash either. The Flash Crash occurred on May 6 2010, when many stocks and ETFs rapidly plummeted, major indexes losing near 7%, in just fifteen minutes, only to regain the losses by the close for one wild few minutes of trading. The truth is with more and more computers involved, we are due to get big swings periodically. March 2020 saw some of the largest swings of all time, with seven of the 10 largest point declines ever, putting major stress on the system.

    Today we do have circuit breakers in place to help calm nerves should we see another major decline in prices, but it’ll take a huge drop for those to kick in. (S&P 500 trading is halted after drops of 7%, 13%, and 20%.)

    In the end, volatility is the price of admission for participating in stock markets. Fortunately, stocks are well off their lows from a year ago and aren’t that far away from all-time highs. Should we all have the privilege to invest long enough, there will likely be another day stocks fall significantly. And when they do, just remember that the Dow started trading on May 24, 1896, and it has seen wars, famines, pandemics, inflation, deflation, booms, busts, and more. Yet, it has always eventually come back to new highs and we don’t think this time will be any different.
     
  2. bigbear0083

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  3. bigbear0083

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    Continuing Claims Conflict With Initial Claims
    Thu, Oct 19, 2023

    The back half of September into the first couple of weeks of October saw jobless claims rebound off their lows. Last week saw that rebound grow with a modestly upward revision to 211K. However, there was a substantial improvement this week with claims dropping to 198K and back below 200K for the first time since the last week of January. That compares to expectations for a reading of 210K.

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    On a non-seasonally adjusted basis, that improvement is even more impressive. Claims totaled a meager 181K. For the comparable week of the year, the only years with lower readings were 1967 through 1969. While the one-week move is impressive and indicates claims remain at historically strong levels, this time of year has historically seen claims drift higher into year's end.

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    While initial jobless claims had a positive move, continuing claims are sending a conflicting signal. After seasonal adjustment, continuing claims have risen for four weeks in a row and are now at the highest levels since early July.

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  4. bigbear0083

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    Bulls and Bears Back Down
    Thu, Oct 19, 2023

    The S&P 500 has fallen over the past week, and that has given sentiment reason to shift lower. The latest sentiment survey from AAII showed only 34.1% of respondents reported as bullish this week, down from 40% last week. That 5.9 percentage point decline is the largest single-week drop in a month although bullish sentiment is still above levels from two weeks ago.

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    Even though bullish sentiment dropped, those losses did not flow into bearish sentiment. In fact, bearish sentiment also fell by 1.9 percentage points. On top of the 5.1 percentage point decline in the prior week, at 34.6% bearish sentiment is unchanged versus one month ago.

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    The larger drop in bulls versus bears did result in the bull-bear spread shifting back into negative territory. While not a wide margin, bears outnumber bulls.

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    Neutral sentiment came in with the lowest reading in a year last week implying increasingly polarized investor sentiment. However, the declines in both bulls and bears this week resulted in neutral sentiment to climb up to 31.3% which is the highest reading in three weeks and right back in line with the historical average.

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  5. bigbear0083

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    The Most Volatile Stocks on Earnings
    Thu, Oct 19, 2023

    Earnings season has begun with the release of quarterly results of the big banks and the first of the mega caps, Tesla (TSLA), this week. However, the slate doesn't truly ramp up until next week and the week after. That is in terms of both the number of stocks reporting and their collective market caps. In the chart below, we show the cumulative market caps of Russell 1,000 stocks reporting each day from this week through the end of November. As shown, next Tuesday is the single most important day by market cap thanks to both Microsoft (MSFT) and Alphabet (GOOGL) reporting on the same day. That is followed by Meta Platforms (META) on Wednesday and Amazon (AMZN) on Thursday. While AMZN makes up a massive portion of the market cap reporting next Thursday, it is also one of the busiest days of earnings season in terms of number of companies reporting. That day, 126 Russell 1,000 members will release earnings. The only busier day will be the following Thursday with 129 stocks reporting. From there, earnings season will wind down but there will still be a couple more big reports like Berkshire Hathaway (BRK/B) on November 6th then NVIDIA (NVDA) on November 21st.

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    In yesterday's Chart of the Day, we highlighted some stocks that have historically been the top performers on Q3 earnings. In a similar vein, below we show the Russell 1,000 members with at least three years of earnings history that have historically averaged the largest absolute daily move in reaction to earnings. For each stock, we also show its historical beat rates (% of time the stock has beaten consensus analyst EPS and sales estimates) and the percentage of the time that it has raised guidance.

    As shown, BILL.com (BILL) tops the list as the most volatile stock on earnings with an average one-day change of +/-18.1%. Across its 15 quarterly reports as a public company, BILL has beaten revenue estimates every single time and missed EPS estimates just once. It has also raised guidance on 8 of its 15 quarterly reports. In addition to BILL, some other stocks that have been extremely volatile on their earnings reaction days include Roku (ROKU), Trade Desk (TTD), Pinterest (PINS), Unity Software (U), AppLovin (APP), Wayfair (W), Netflix (NFLX), Etsy (ETSY), Under Armour (UAA), Twilio (TWLO), and Zoom Video (ZM). This list is a who's who of many stocks that both surged during the post-COVID bull market in 2020 and 2021 and then plummeted during the bear market of 2022.

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  6. bigbear0083

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    November Almanac: Historically a Top Month, But Softer in Pre-Election Years
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    November begins the “Best Six Months” for the DJIA and S&P 500, and the “Best Eight Months” for NASDAQ. Small caps come into favor during November, but don’t really take off until the last two weeks of the year. November is the number-two DJIA and NASDAQ (since 1971) month. November is best for S&P 500 (since 1950), Russell 1000 (since 1979), and Russell 2000 (since 1979). Average performance in all year ranges from 1.7% from DJIA and S&P 500 to a solid 2.3% by Russell 2000.

    In pre-election years, November’s performance is noticeably weaker. DJIA has advanced in 10 of the last 18 pre-election years since 1950 with an average gain of 0.5%. S&P 500 has been up in 11 of the past 18 pre-election years, also gaining on average a rather paltry 0.5%. Small-caps and techs perform better with Russell 2000 climbing in 7 of the past 11 pre-election years, averaging 1.4%. NASDAQ has been up in 8 of the last 13 pre-election year Novembers with an average 1.2% gain. Contributing to pre-election year November’s weaker performance are sizable declines in 1987, 1991 and 2007.
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  7. bigbear0083

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    Checking Up on the Transports and Semis
    Fri, Oct 20, 2023

    The Transports and the Semis are two groups typically viewed as "leading" indicators for the broader market. Below is a check-up on how the two have done since the S&P 500's bear market low was made on October 12th, 2022. As shown, while the Transports (Dow Transportation Index) are now up 15.3% compared to the S&P 500's gain of 19.5%, the Semis (Philly Sox Index) are still up significantly more than both with a gain of 54.1%.

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    Below is a look at the performance spread between the S&P 500 and the Semis since the 2022 bear market low. While the steepness of the outperformance for Semis faltered a few months ago, we haven't quite seen the bottom of the uptrend channel break down yet either. It's getting very close, though, so this relationship is one to watch in the near term.

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  8. bigbear0083

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    Average S&P 500 Stock Down 9.9% Since July Peak
    Fri, Oct 20, 2023

    As the market approaches the final three hours of the trading week (are there really still three hours left?), the average decline of the S&P 500’s individual components since the index’s closing high on 7/31 is now at -9.9%, but many stocks are down much more than that. While less than one in five stocks in the index are up during this period, 81 stocks are down 20% or more, while another 166 are down between 10% and 20%.

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    In terms of the sector breakdown, the only sector with average gains among its components is Energy (+5.4%). In addition to Energy, Communication Services, Financials, and Technology have all held up relatively better than the index itself while stocks in the Consumer Staples, Consumer Discretionary, and Real Estate sectors are down the most in aggregate. While economic data seems to suggest the consumer is holding up, the performance of consumer stocks is telling a different story.

    The second chart shows the percentage of components in each sector that have posted positive returns since the 7/31 high. In five different sectors, less than 10% of components have posted gains, whereas Energy is the only sector where more than a third of components are up. In fact, it’s closer to 90%!

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    Overall, there’s not a lot of positive things to say when it comes to equity market returns since the end of July, but the table below lists the 21 stocks in the S&P 500 that have rallied 10% or more since the close on 7/31. Topping the list is Eli Lilly (LLY) which has gained 30% on optimism over its weight loss drugs. Behind LLY, Progressive (PGR), and Arista Networks (ANET) are the only other stocks with gains of more than 20%.

    In terms of sector representation, it’s not surprising that Energy is among the leaders with five different stocks on the list. Along with Energy, though, both Financials and Health Care each have five stocks as well. Overall, seven different sectors are represented, while four (Consumer Discretionary, Consumer Staples, Industrials, and Materials) are completely absent from the list. Not surprisingly, all four of these sectors have been among the worst performers since the 7/31 peak.

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  9. bigbear0083

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    Nasdaq Corrections
    Mon, Oct 23, 2023

    After a lower open to start the week, stocks have staged a pretty big intraday recovery (so far). One catalyst for the rally was a tweet by Bill Ackman saying his firm had covered its Treasury short, citing too much geo-political risk and an economy weakening faster than current economic data suggests. Why a weaker economy would spur a rally in stocks is a legitimate question, but we’ve all certainly seen stranger things in the market, and when markets become oversold, sometimes it doesn’t take much to spark a rally. Monday’s rebound also coincided with the Nasdaq’s decline from the July closing high crossing the 10% threshold, and it’s not uncommon for an index in the midst of a decline to bounce at these round numbers as they are where bargain hunters will look to deploy some dry powder.

    The Nasdaq is no longer officially in correction territory as we write this (10%+ decline from a closing high without a 10% rally in between), but we wanted to take this opportunity to look at historical trends for past Nasdaq corrections and see how the current period stacks up. For starters, since hints of the current rate hiking cycle began, there have been four prior Nasdaq corrections. Three of the four were deep with declines of more than 20%, while the most recent before the current period was more tame at just 11%.

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    Looking at Nasdaq corrections from a longer-term window, the scatter chart below shows corrections in terms of their magnitude (x-axis) and length (y-axis). Overall, the median decline of corrections since 1971 has been a drop of 16.6% over a median length of 61 calendar days. Through today’s close, the current decline is only around 10%, so it’s been a lot milder, but at 96 days, it’s already been 57% longer than the typical correction. If the current decline in the Nasdaq were to reach the median level for a correction, that would take it down to just below 12,000.

    The Nasdaq is known for being more volatile than the S&P 500, and when it comes to corrections, they have tended to be steep as opposed to gradual. Even with respect to the corrections during the current rate-hike cycle, three of the four prior ones were shorter than the current period. The only one that was longer lasted 115 days from 11/19/21 through 3/14/22.

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  10. bigbear0083

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  11. bigbear0083

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    Energy Energizes M&A Activity
    Mon, Oct 23, 2023

    The past few weeks have seen a boom in merger and acquisition news. For starters, what was approaching a two-year-long process of Microsoft (MSFT) buying Activision-Blizzard finally went through in what would be one of the largest M&A deals of the past five years and the largest in Microsoft's history. On top of that, there have been a number of new announcements this month, primarily in the energy space. Earlier this month Exxon Mobil (XOM) proposed a $60 billion bid for Pioneer Natural Resources (PXD), and Chevron (CVX) followed suit today with a $53 billion bid for Hess (HES). Additionally, while nothing is official yet, last week there were reports that Marathon Oil (MRO) and Devon Energy (DVN) have been in talks.

    In the charts below, we show the pending counts and nominal dollar values of M&A deals by month over the past decade. As shown, the past few months have seen the number of deals ramping up with a record amount of activity based on dollar values. Perhaps more impressive has been the dominance of the Energy sector in these M&A announcements. As shown in the second chart below, they have accounted for over 80% of the value of these deals, the highest amount of the past decade.

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  12. bigbear0083

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  13. bigbear0083

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    Breadth Bombs
    Tue, Oct 24, 2023

    A frequent point of discussion this year has been breadth, or more specifically, the massive impact of mega caps on the market-cap-weighted S&P 500's year-to-date performance (something we discussed in yesterday's update of our Sector Weightings report). We often use the 10-day advance-decline (A/D) line to measure how breadth is evolving in the near term; highlighting these readings for the S&P 500 and its eleven sectors daily in the Sector Snapshot. This indicator essentially shows the average net percentage of daily advancers versus decliners in an index over a two-week period.

    In the chart below, we show the S&P 500's 10-day A/D line (expressed as standard deviations to clarify overbought/oversold levels) over the past year. The past week has seen a monumental shift in breadth. Just one week ago, the 10-day A/D line was deeply overbought sitting 1.72 standard deviations above the historical average, but as of yesterday's close, it has fallen all the way into oversold territory; a 2.9 standard deviation drop in only four days.

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    Looking back to the start of our data in 1990, that is one of the largest four-day declines on record. In fact, the last time the line fell by such a degree or more was in September 2022 when there was a record decline.

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    While two-standard deviation declines have been uncommon, even fewer have resulted in the 10-day A/D line going from overbought to oversold. In the table below, we highlight those nine prior instances that have occurred with at least 3 months having passed since the last occurrence. The current period holds one of the higher starting readings in the 10-day A/D line. In fact, only November 2011 saw a higher reading.

    As for S&P 500 performance going forward, returns have generally been mixed. One week after big 'breadth bombs' the index has actually risen better than three-quarters of the time, however, one month out has averaged a decline with positive returns less than half the time. Three months out to one year on have all averaged positive returns, but those are all weaker than the norm.

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  14. bigbear0083

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    Large vs Small Gap Keeps Widening
    Wed, Oct 25, 2023

    With each passing day this year, it seems as though the underperformance of small caps relative to large caps keeps getting wider. While the small-cap Russell 2000 is currently down over 30% from its post-Covid highs and within 1% of a multi-year low, large caps have held up relatively well as the S&P 500 is less than 12% from its post-Covid high. As a result of the divergence, the large-cap S&P 500 is outperforming the small-cap S&P 600 by more than 15 percentage points in 2023.

    Just like the overall indices, the performance gap between the two is also wide across most sectors. The chart below compares the YTD performance of large (S&P 500) and small-cap (S&P 600) sectors so far this year. Amazingly, while the large-cap Communication Services and Technology sectors are both up over 30% YTD, their smaller-cap peers are either slightly down or just marginally higher. Within the Consumer Discretionary sector, there has been a similar pattern although to a less extreme of degree.

    Outside of those three sectors, there really isn’t much in the way of gains for other large-cap sectors, but even if they are flat to down on the year, they’re still outperforming their smaller-cap peers. Of the eleven sectors, the only three where small caps are outperforming large caps are Consumer Staples, Energy, and Industrials. In the two latter sectors, not only are they outperforming, but they’re also the only two sectors in the S&P 600 with gains on a YTD basis. Imagine that, gains in small caps!

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  15. bigbear0083

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    Late October Low Lines Up
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    I’ve been banging my seasonal weakness drum through Q3 warning of Octoberphobia, volatility, late-October lows and turnarounds. Today’s negative action aligns with that narrative. Best Six Months start next week. Rising 10-year yields, some notable earnings season misses and turmoil in the Mideast have conspired with seasonal weakness to knock the market down. But at least we now have a Speaker of the House.
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  16. bigbear0083

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    Continuing Claims Rising Rapidly
    Thu, Oct 26, 2023

    Although much of the morning's data topped expectations, one of the areas of weakness was jobless claims. Initial jobless claims were slightly higher than expected coming in at 210K versus expectations of 208K. Additionally, last week's sub-200K print was revised up to 200K. While that doesn't steal from the fact that jobless claims have pulled back to some of the stronger levels of the year, the past few weeks are now looking a bit more choppy than they were only a week ago.

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    On a non-seasonally adjusted basis, claims have begun to tick higher as could be expected for this time of year. At 191.89K, claims are 7.34% higher than they were the comparable week last year. However, that is roughly in line with readings from a couple of years prior to the pandemic.

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    Albeit higher, initial jobless claims remain at historically healthy levels and are not deteriorating too rapidly. The same cannot be said for continuing claims. Rising to 1.79 million through the week of October 14th (continuing claims are lagged an additional week versus the initial claims number), continuing claims have risen for five straight weeks. That is the longest streak of increases since a 12-week run ending in early December last year, and claims are now at the highest level since May 20th.

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    It has only been five weeks since the recent low of 1.658 million. In that span, continuing claims have risen almost 8%. As shown below, there are plenty of examples of even larger five-week increases in continuing claims counts, the most recent being in Q4 2022, however, it is still a historically rapid rise. The recent increase ranks in the top 5% of all five-week moves on record. Historically, prior increases of that size have mostly (though not always) occurred in the context of a recession. While not exactly covering like-for-like periods, that makes this recent rise in claims even more unusual when compared with GDP data released at the same time showing an impressive 4.9% QoQ annualized growth rate.

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  17. bigbear0083

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    New Lows for S&P and Sentiment
    Thu, Oct 26, 2023

    The S&P 500 having made fresh lows in the past week has justified a continued decline in bullish sentiment per the latest AAII survey. As shown below, only 29.3% of respondents reported as bullish this week compared to 34.1% last week. Although sentiment has quickly reversed, the last week of September actually saw an even lower bullish reading of 27.8%.

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    Bearish sentiment, on the other hand, rose up to 43.2% which was the highest reading since the first week of May. Bearish sentiment rose 8.6 percentage points week over week which was the largest single-week increase since February.

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    Given the new high in bearish sentiment and drop in bulls, the bull-bear spread tipped deeper into negative territory. Bears now outnumber bulls by 13.9 percentage points. That is the widest margin since May.

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    While the AAII survey has shown an expressly negative turn, other sentiment surveys are more mixed. For starters, the NAAIM Exposure Index echoed the AAII results. The index tracking equity exposure of fund managers echoed the pessimistic tones of the AAII survey as it dropped to the lowest level since the week of October 12th last year. Meanwhile, the Investors Intelligence survey of newsletter writers has managed to hold onto a more bullish tone. That survey's bull-bear spread has been more steadily above its historical average over the course of the past couple of months.

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  18. bigbear0083

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  19. bigbear0083

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    10 Things You Might Not Know, but Should
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    “It’s not what you look at that matters, it’s what you see.” -Henry David Thoreau (writer)

    Here are a few things that caught my attention the past week or so. A few I’m guessing a lot of people don’t even know, but they should.

    Profit Margins Are Increasing
    One of the more obvious things we’ve been told would happen all year was that profit margins would be pressured lower. Well, you might be surprised to know that profits margins have held firm and forward 12-month profit margins on the S&P 500 are trending higher. Just like everyone said.

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    Earnings Should Hit An All-Time High Next Year
    Yes, earnings have been lower year-over-year the past three quarters, but there’s a good chance that ends this quarter. What might surprise most investors is forward 12-month S&P 500 earnings are expected to hit a new all-time high next year, as the next few quarters should see solid growth. We’ve long been in the camp there is no recession coming and we still feel the odds of one in 2024 are quite low (more on that below), which should support solid earnings growth.

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    Student Loan Payments Coming Back Could Crush the Consumer
    Yes, many suspended student loan payments have resumed, but this doesn’t mean the consumer will stop spending. In fact, if you look at the actual data and not the fear-mongering in the media, we see that some continued to pay their debt this whole time, while if you are struggling to pay now, the government has many ways to help.

    The bottom line is that despite student loan payments starting again, we’ve seen virtually no slowdown in spending. In fact, in some cases, we’ve seen more spending. Here’s what Visa’s CFO, Vasant M Prabhu, had to say yesterday at their earnings call: “As we said consistently, we’re not economic forecasters, and so at a macro level, we are assuming no recession in our outlook. We’re also not factoring in any impact from student loan repayments because…we’ve yet to see any meaningful impact.”

    Lastly, here’s retail and food sales running 5% above pre-pandemic levels and showing no signs of slowing down.

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    Manufacturing Is Solid
    We’ve heard time and time again how poor many of the manufacturing sentiment surveys have been, suggesting a meaningful slowdown. Well, once again, a simple look at the actual hard data (versus survey data which is called soft data) shows a much different story.

    Would you believe that manufacturing is up 2.1% this year? If all you followed was the headlines and media, you’d never realize this. Now, to be clear it isn’t like up 2.1% is soaring, but it still paints a better picture than what we’ve been hearing and one that we expect will continue to improve over the coming quarters.

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    No, A Recession Isn’t Around the Corner
    Several big names out there are still calling for a recession, but the data doesn’t confirm that at all. Of course, this might sound like a broken record, as we’ve been hearing this for a year now. The National Bureau of Economic Research (NBER) is the group that oversees calling recessions.

    Turns out, they don’t just look at GDP, which explains why we didn’t have a recession at the beginning of last year, even with consecutive negative GDP prints. They instead focus on things like employment, industrial production, consumption, income, and wholesale and retail sales.

    Looking at the six indicators they use for a recession shows we are clearly not in a recession, not even close. Employment and incomes are a tad below pre-pandemic levels, but we’ve seen surges in industrial production and retail sales.

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    Stocks Can Go Lower, but They Can Also Go Higher
    After the best first six months to a year ever for the Nasdaq and the best first seven months for the S&P 500 since 1997, stocks have seen what we consider to be normal seasonal weakness. But for some reason this has confused many investors. It isn’t fun, but to see weakness in August and September isn’t abnormal. But stocks tend to do much better near the end of October.

    Here’s a table I’ve shared many times and it has played out quite well this year. It shows the return 10-days after a particular day. All those reds boxes in August and September fit with what we experienced this year, along with the early parts of October. Well, the good news is some of the very best 10-day returns of the year are coming up now and again over the next two months. Don’t give up hope for a fourth-quarter rally just yet.

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    No New Highs Could Be a Good Thing
    Our friends at Day Hagan Asset Management tweeted this interesting stat out and I wanted to make sure you saw it. They found that years the S&P 500 didn’t make a new high (like 2023 potentially) saw big jumps the following year, up a median return of 13.1%, while years with more than 35 new highs saw a median return of only 5.8% the following year.

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    Bears Are Back in Town
    Several big names are back in the news calling for a recession. Bill Gross (the founder of bond giant PIMCO) was in the news just this week calling for a recession by the end of the year. We already shared above how that simply isn’t likely, but the point I want to make is to never follow any one person blindly. Mr. Gross also called for the ‘death of the cult of equities’ back in the middle of 2012, right before stocks doubled the following seven years as you can see here.

    The Consumer Is in Really Good Shape
    One of the reasons we haven’t had a recession in the face of higher interest rates and still elevated inflation is people are worth more. If you owned a house or had stocks in the last decade, you’ve seen your net wealth increase, in many cases substantially. Things aren’t perfect, but for some reason, many economists ignored the impact of wealth on the whole equation of how the economy would do. For more on this important concept, be sure to read the blog Sonu Varghese, VP, Global Macro Strategy, wrote yesterday in Here’s Why the Economy Has Defied Recession Forecasts.

    Here’s a nice table that shows how net worth has increased widely across the board, but this decade it has actually been the lower earners that saw the largest jumps in wealth. That is something you sure won’t hear in the media. Lastly, the Fed found that household net worth increased by 37% in the past three years, the fastest pace since they started tracking this data.

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    Monday Isn’t That Bad
    Last one is… Did you know stocks just had a 15-day win streak on Monday? That’s right, the S&P 500 was higher 15 Mondays in a row! I’m not sure what in the world it means, but only a 22-day Friday win streak in 1955 saw a longer win streak for any specific day of the week.

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    Conclusion
    So, there you go, some things you might not have known, but should. I even made it through this whole blog without pointing out that Michigan is just a bunch of cheaters! But we all knew that already, so nothing new there really

    To me, the bottom line remains things aren’t as bad as we keep hearing. Yes, we have many legitimate worries and concerns, but the odds of a recession are quite low, the Fed is likely done hiking, profits should remain strong, and the consumer is healthy. Those aren’t the worst pillars for investors as we move into 2024.
     
  20. bigbear0083

    bigbear0083 Administrator
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    The Energizer Bunny Economy and What Comes Next
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    You just can’t put this economy down. There are expectations and then there’s reality. Earlier this year, expectations were for a “mild recession” in the second half of 2023, and then that got revised to a more optimistic outlook as time went by (and data came through). On the eve of the third quarter GDP release, expectations for growth had risen as high as 3.8%. The actual reading blew past those expectations, with the economy growing 4.9% in Q3. That’s after adjusting for inflation.

    Sit with this: Real GDP growth has grown faster than what the Congressional Budget Office (CBO) projected just before the pandemic, in January 2020. They also projected that the unemployment rate in 2023 will be 4.4%. It’s at 3.8% now.

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    It’s important to keep perspective as well, because the economy has grown more than expected (in real terms) in the face of 3 massive shocks:
    • A worldwide pandemic that killed millions of people, resulting in massive job losses and businesses going under.
    • An energy price shock that sent inflation to the highest level in 40 years. Historically, energy shocks have pushed the U.S. into a recession, but not this time.
    • The most aggressive Fed tightening cycle since the early 1980s. Surging interest rates crushed the housing market in 2022, which was not unexpected. Historically, housing downturns have preceded recessions, but not this time.

    Keep in mind that the trajectory of economic growth was not a given, considering the scale of the shocks. In fact, most other developed market economies have seen economic scarring from Covid and its aftermath, with significant output loss relative to pre-pandemic expectations. The US is the odd one out, with output running above pre-pandemic expectations.

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    Even better, the inflation trajectory in the US is a lot better than in most other places. Despite pushing a lot more fiscal stimulus into the economy, inflation in the US is now running below a lot of other developed economies. The chart below shows core inflation – excluding food, energy, and owners’ equivalent rent – enabling cross-country comparisons.

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    So, What Comes Next?
    A big reason for GDP growth coming in close to 5% in Q3 was because businesses rebuilt their stock of inventories – it added 1.3 percentage points to the headline number. But inventories (along with net exports) can be volatile from quarter to quarter. It helps to expand the horizon a bit. What’s incredible is that the economy has grown faster than the 2017-2019 pace of 2.8%. Over the last year, it’s grown 2.9%, and over the last two quarters, it’s grown 3.5% (all in real terms). That should give you an idea of the current underlying speed of the economy.

    Powering this are two major components that make up just over 60% of the economy, which should help us think about what could come ahead.
    • Services consumption (45% of the economy) is running ahead of its pre-pandemic pace.
    • Government spending (17% of the economy) is also running strong on the back of federal government nondefense and defense spending and investment, as well as state and local government spending.

    More recently, housing has also gone from being a massive drag on the economy to a slightly positive contributor. Residential investment contributed to GDP growth in Q3 for the first time in 10 quarters. Incredibly, that’s come in the face of mortgage rates north of 8%. What’s happening is that high mortgage rates are locking a lot of homeowners in their homes, so the inventory of existing homes is low. That’s pushing a lot of potential homebuyers into the new homes market, boosting single-family housing construction. In any case, this dynamic is likely to continue and even if housing doesn’t contribute a lot to GDP going forward, it’s unlikely to drag on the economy as much as it did in 2022.

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    Coming Next for the Big Two: Services Spending and Government Spending.
    Stronger spending is a direct result of stronger incomes across all workers in the economy. Overall income growth is running around 5% right now, thanks to strong employment gains, strong hourly wage growth, and hours worked running similar to what it was pre-pandemic. Plus, as I pointed out in a prior blog, household balance sheets are in good shape. Median net worth rose 37% between 2019 and 2022. So, households feel less urgency to save and solidify their balance sheets, unlike what happened after the stock market and housing crash in 2008. Yet another tailwind: gas prices are falling. Nationwide average gas prices have fallen from about $3.90 a gallon to $3.50. Food inflation is also easing. That’s going to be a boost for household wallets.

    With respect to government spending, it’s unlikely more money for nondefense gets authorized by Congress given the political makeup. However, there’s plenty left in the tank within the Bipartisan Infrastructure Act, CHIPS Act, and IRA – only a fraction of the spending authority given by Congress has been exercised to date. There’s more to come.

    Defense spending rose at an annualized pace of 8% in Q3, the fastest pace since 2020 Q4. Defense spending is currently just 3.6% of GDP, close to an all-time low. It’s likely this will move higher going forward.

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    State and local governments spending makes up 11% of the economy, which is significant. They cut back significantly between 2020 and 2022, in preparation for a storm. But they’re starting to ramp up spending and investment, and this likely to continue over the next few quarters. Sales taxes and property taxes are likely to remain strong if spending remains strong (likely if we avoid a recession, as we expect), and we avoid a housing market crash (also likely given demand dynamics). This is in sharp contrast to the post-Financial Crisis period when states struggled and cut back on spending for several years.

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    What Does This Mean For the Fed?
    There are two key pieces to how this data matters for the Fed.
    • Economic strength solidifies the idea of higher for longer. That’s likely to continue until we see some softness in the data, which is coming given the torrid pace of growth in Q3 is unlikely to continue.
    • However, slower inflation will probably stay their hand from raising rates further. Core inflation, as measured by the personal consumption expenditures index, clocked in at 2.4% in Q3. That was softer than expected and the slowest pace since the end of 2020.
    Equity markets appear to be struggling to come to terms with the idea of elevated interest rates. But ultimately, higher rates are mostly just reflecting a stronger economy, and that’s good news for profits. Ryan Detrick, Chief Market Strategist, just wrote about how forward estimates of profits and profit margins are rising. It’s just that we’re currently experiencing a “good news is bad news” dynamic – that’s likely to shift eventually.