Daily Stock Market Articles

Tech Selloff Sets Up NASDAQ’s Midyear Rally

The week after June Triple Witching delivered its expected weakness, but this sets up NASDAQ’s 12-day midyear rally to a T.

In the mid-1980s tech’s influence in the market began to grow and the market’s focus in early summer shifted to the outlook for second quarter earnings of technology companies. In anticipation of positive results, over the last three trading days of June and the first nine trading days in July, NASDAQ typically enjoys a rally. This 12-day run has been up 29 of the past 38 years with an average historical gain of 2.4%. Look for this rally to begin around June 28 and run until about July 14.

After the bursting of the tech bubble in 2000, NASDAQ’s mid-year rally had a spotty track record from 2002 until 2009 with three appearances and five no-shows in those years. However, it has been quite solid over the last thirteen years, up eleven times with two losses. Last year, NASDAQ faltered during the 12-day span, but eventually took off in the second half of July, up 12.3%.

Our strategy is to buy the close on Tuesday June 27 and sell July 14 or take profits on any sizable gain in between.

 

July Historically Opens Strong, But Fades After Mid-Month

July is the third month of DJIA’s and S&P 500’s “Worst Six Months” and the first month of NASDAQ’s “Worst Four Months.” Dynamic trading often accompanies the first full month of summer as the beginning of the second half of the year brings an inflow of new capital. But by around mid-month, inflows have faded and the market’s performance in July usually peaks. This tends to create a strong open and first half. In all the years examined the major indexes tend to reach a peak around mid-month and then drift sideways to slightly lower for the remainder of the month. In pre-election years since 1950, the mid-month peak and second half declines have more pronounced especially for NASDAQ and Russell 2000.

 

There's Something About June 29th
Thu, Jun 29, 2023

There must be something about June 29th. Besides being a significant day of the year from a seasonal perspective (as discussed in Wednesday's Chart of the Day), two crucial events related to some of the most significant business stories of the past two decades took place on this day, two years apart. The first involved Bernie Madoff, who infamously orchestrated the largest Ponzi scheme in history, although it is worth noting that Madoff once described the Federal Government as another Ponzi scheme, so by his logic, he would have only overseen the second largest Ponzi scheme ever. On this day in 2009, Madoff, once a highly respected and well-loved figure on Wall Street, stood alone in a Manhattan courtroom, devoid of any familial or friendly support, and received a sentence of 150 years in prison.

On a much brighter note, two years earlier in 2007, Apple fans lined up and, in some cases, camped outside of stores for days to be among the first to get their hands on the first-generation iPhone. The fact that people were willing to pay over $500 for a heretofore unproven smartphone should have been all we needed to see to know that this was going to usher in a revolution in the entire computing industry.

Given the success of the iPhone and the scandal of Madoff, you would think that the launch of the iPhone would have been a positive market event and the Madoff sentencing would be associated with a negative market environment. As the chart below illustrates, though, the exact opposite was the case. The first iPhones didn’t just go on sale within four months of any ordinary market peak; the formal launch preceded a 56%+ peak-to-trough drop in the S&P 500 that was the largest drawdowns since the Great Depression. Conversely, Madoff’s sentencing came less than four months after that same largest drawdown since the Great Depression ended.

We’ve said it before and we’ll say it again, but investing based on the headlines can be one of the worst investment strategies known to man.

 

This is a Big Deal: Business Investment is Rising Again
Posted on June 29, 2023

We’ve been getting a string of “economic surprises” from the consumer side for several months now. Employment data is a prime example, with monthly payroll gains coming in above expectations for 14 straight months. For a change, we just got some good news from the business side, particularly business investment.

The Census Bureau collects data on manufacturers’ shipments and new orders for durable goods – big ticket items like transportation equipment (including vehicles and aircrafts), machinery, computers and electronic products, electrical equipment, and appliances, etc. New orders are particularly useful because it tells us how businesses are viewing current and future economic conditions and investing accordingly. It also tells us about future production commitments for manufacturers.

Well, new orders rose 1.7% in May, even as economists expected orders to decline almost 1%! New orders are now up 5.4% since last year, and this pace is higher than what we saw at any point in 2019.

A large part of this is because of nondefense aircraft orders, which surged 32% in May, and a whopping 61% over the past year. This is huge for America’s aircraft industry – the recent uptrend stands in sharp contrast to what we saw in 2018-2019 when aircraft orders were declining amid Boeing’s 737-Max woes.



However, as you can see above, aircraft orders are really volatile. It helps to strip them out, along with new orders from the defense industry (which can also be quite volatile).

What’s left is a key economic datapoint – a category called nondefense capital goods ex aircraft, which is really a proxy for business investment, or capital expenditures (“capex”). This rose 0.7% in May, yet another datapoint that beat forecasts (expectations were for a 0.1% increase). New orders for these “core capital goods” are now up 2.1% from last year and rising at a 3.2% annualized pace over the first 5 months of this year.

Now, this data is nominal, in that it’s not adjusted for prices. And we’ve had a lot of inflation over the past year and a half. But even after you adjust for inflation, this proxy for business investment rose 0.3% in May, following a 0.5% increase in April. Investment in real terms has been falling since the beginning of 2022, and so the 0.8% uptick over the past two months is very welcome.

Here’s something a lot of people don’t talk about when they compare today’s economy to the pre-pandemic economy, which is widely recognized as strong: business investment collapsed in 2019, amid a lot of uncertainty around the trade war, and escalating tariffs. Hopefully, the recent uptick not only reverses the downtrend from last year, but also the pre-pandemic downtrend.



We do recognize that two months do not make a trend. But other data also corroborate the fact that businesses are investing again.

Something big is happening in America
Nonresidential construction is booming, mostly thanks to manufacturing construction. I discussed what was happening a few months ago, but there has been no slowdown in the data since then. Even after adjusting for inflation, manufacturing construction is up 84% over the past year through April. Most of this is being driven by a 233% increase in construction in the computers, electronics, and electricals sector, i.e. semiconductor and electrical vehicle battery plants.

The chart below shows how manufacturing construction was stagnant across most of the past decade, but it seems to have broken out now. There was an inflection point last summer after Congress passed the CHIPS Act, and the Inflation Reduction Act (which had less to do with inflation and more to do with promoting investment via subsidies and tax credits). Also interesting, this is a phenomenon that is happening only in the US – other developed countries like Germany, Japan, UK, and Australia are not seeing a similar surge.



Finally, if you look at just S&P 500 companies, capital expenditure expectations over the next 12 months have been rising consistently this year. Forward-looking capex expectations are up almost 4% over the first six months of this year, and up 7% compared to a year ago.

This is not something that would be happening amid a slowdown, let alone a recession. The chart below shows how capex expectations were stagnant in 2019 amid higher uncertainty. That’s not the case today, even amid all the recession forecasts.



Business sentiment has been quite poor, perhaps because of all the headline-grabbing recession forecasts. However, the hard data suggests that businesses are investing and looking to expand capacity – a sign that they view future economic conditions positively when it comes to putting money to work.

 

First Trading Day of July – S&P 500 Up 12 Straight

Over the past 21 years from 2002-2022 July’s first trading has the second-best record up 85.7% of the time on the S&P 500 with an average gain of 0.35%. Only August’s third to last trading day has a better record up 19 of 21 with an average gain of 0.57%.

DJIA’s first trading day of July has produced gains 76.2% of the time with an average gain of 0.31%. NASDAQ splits the middle up 81.0% (0.31% average gain) of the time. July’s first trading day is the third best performing first trading day of all twelve months based upon DJIA points gained with DJIA gaining a cumulative 1668.15 points since 1998.

Looking back even further to 1989, S&P 500 has advanced 88.2% of the time (up 30 times in 34 years) with an average gain of 0.50%. DJIA has advanced 28 times in the same 34 years (82.4%) and NASDAQ has risen in 26 of those years (76.5%) with an average advance of 0.34% in all years. No other day of the year exhibits this amount of across-the-board strength, which makes a solid case for declaring the first trading day of July the most bullish day of the year over the past 34 years.

 

DJIA has declined 9 of last 12 on day after July 4th


Trading ahead of the July 4th Independence Day holiday has historically been stronger than the day(s) after the holiday. This has become more pronounced in recent years and was the case again this year. However, over the past twelve years since 2011, trading after Independence Day has softened notably. DJIA has declined nine times in 12 years on the day after. S&P 500 has slipped seven times. Average performance remains fractionally positive. NASDAQ and Russell 2000 have been modestly better.

 

Why July Brings the Bulls
Posted on June 30, 2023

“I am an optimist because I don’t see the point in being anything else.” -Abraham Lincoln

And with that, the first half of the year is a wrap. What can we say other than all those calls for a recession and new bear market lows sure didn’t play out. We were one of the only places predicting there wouldn’t be a recession this year and to look for stocks to possibly gain 12-15% (and maybe more with some good news). It was a lonely call and we took a lot of heat for it, but we are noticing more and more shops are coming over to the no-recession camp.

I noted in Why a Sunny Second Half of 2023 is Likely some reasons to expect more gains after the big start to this year. Well, here’s another angle on that. I looked at all the years that were up more than 10% at the midpoint of the year, but were also negative the year before. In other words, a potential slingshot move. Sure enough, stocks did even better when this took place, with the S&P 500 higher those final six months eight out of nine times and up a median of 12.4% – well above the median final six month return of 7.7% when those first six months gain more than 10%.



So, can this surprise summer rally continue? As Honest Abe would say, might as well be an optimist and we think it can, as July historically is a strong month. Of course, it isn’t just about seasonals, as the realization the economy may not be going into a recession and a Fed that is likely done hiking are both also positives, which should keep things moving higher in July.

For starters, stocks have gained 9 of the past 10 years in July, with no month sporting a better average return over the past decade than the 3.3% July gain for the S&P 500. Why is this you ask? The one thing I keep thinking about is July kicks off Q2 earnings season and in the past 10 years overall we’ve seen a lot of doubt out there. It is likely that earnings come in better than expected, calming many of the fears and allowing for a rally. We think that could happen once again this year.



Let’s be clear though, July is usually a good month in the middle of the weak summer months. The chart below shows this nicely. Since 1950, stocks gain 1.3% on average in July, but this goes up to 2.2% in the past 20 years and 3.3% in the past decade. Pre-election years are a little weaker, up 0.9%. Lastly, when stocks gain more than 3% in the usually weak June (15 times since 1950), stocks gain only 0.8% on average and are higher only 8 times. So, there could be the chance June steals some of July’s gains.



Lastly, we’ve shared the next chart many times the past few months, as it suggested the potential for a summer rally when very few expected it. We call this the Carson Cycle Composite, as it is a proprietary indicator that combines the past 20 years, pre-election years, the third year of a new President, and years that saw stocks gain at least 5% in January (like ’23). As you can see, a rally in July is normal and we don’t believe ’23 to be any different.



We want to be clear, at some point stocks will take a well-deserved break. August, September, and October usually can see this volatility and it very well could happen again this year. But we remain overweight equities and we’d use any seasonal weakness as an opportunity to add to core equity exposure.

 

Factory Orders Go Negative
Wed, Jul 5, 2023

The last 24 hours have been rough for economic data both in the US and around the world as most indicators released have been weaker than expected. It started with weaker-than-expected PMI readings for the services sector in China but has since spread to weaker PMI readings for most major economies in the Eurozone as well. Here in the US, PMI data on the services sector will not be forthcoming until tomorrow morning, but Factory Orders released this morning were a big miss. At the headline level, orders for the month of May increased 0.3% which was a half percentage point below consensus expectations. Not only that but April’s reading was also revised down from growth of 0.4% down to 0.3%. After stripping out Transportation, Factory Orders declined 0.5% while April’s reading was revised from a decline of 0.2% down to a drop of 0.6%.

On a year/year basis, Factory Orders also dipped into negative territory for the first time since October 2020. The chart below shows the historical y/y change in Factory Orders since 1960. While readings were negative during every recession, there were plenty of other periods where they also declined on a y/y basis and the economy was nowhere near a recession. Not only that but there were also many other periods during economic expansions where Factory Orders dropped by a much larger amount on a y/y basis.



While the magnitude of the decline in Factory Orders hasn’t been extreme, what is unique about the current period is how long the rate of change in Factory Orders has been declining. The chart below shows streaks where the y/y change in Factory Orders increased (blue line) or declined (red line). With May’s report, the rate of change in Factory Orders on a year/year basis has declined for a record eight straight months, breaking the prior record of seven months that was seen during recessions in the mid-1970s, early 1980s, and during the Financial Crisis. The fact that prior streaks of similar duration all occurred during recessions isn’t exactly reassuring. What makes it less worrisome, though, is that the decline is coming after Durable Goods experienced record growth and consistency of growth coming out of the COVID crash.

There's plenty of evidence out there to cite as reasons why the US economy is teetering on the edge of a recession or merely in a slowdown, and parts of today's Factory Orders report could honestly be used to help justify either viewpoint.

 

Big Picture: The Economy is Normalizing
Posted on July 6, 2023

We started this year discussing how the economy has been at the “edge of normal” in our 2023 outlook. The good news is that we have slowly but surely moved towards normal since then, even in the face of a banking crisis and debt ceiling drama. The “soft” economic data from sentiment surveys have been poor, but the “hard” data that measure actual employment, sales, and production, have painted a much brighter picture.

We discussed last month how we combine a lot of the economic data into our own proprietary leading economic index (LEI), which we produce for 30 countries around the world, each one custom-built to capture the dynamics of those economies. The individual country LEIs are also subsequently rolled up into a global index to give us a picture of the global economy. The idea is to give us an early warning signal about economic turning points. Simply put, it tells us what the economy is doing today and what it is likely to do in the near future.

For example, our index for the U.S. includes 20+ components, including consumer-related indicators (which make up 50% of the index), housing activity, business and manufacturing activity, as well as sentiment and financial markets data. This contrasts with other popular LEIs, which are premised on the fact that the manufacturing sector and business activity/sentiment are leading indicators of the economy. This worked well in the past but is probably not indicative of what’s happening in the economy right now.

Right now, our LEI suggests the US economy is growing along trend, or slightly above it. The economic picture looks even better than it did at the end of 2022. Six months ago, the risk of recession was higher, though even then, the LEI didn’t say that we were in a recession, or even very close to one.



However, we’re seeing some interesting dynamics under the hood.

2022 Headwinds are Fading
As I mentioned above, our LEI has been consistently saying that the U.S. economy is not in a recession. That was almost entirely thanks to a resilient consumer, with strong employment gains powering incomes and consumption. Pushing against this was an aggressive Federal Reserve and tighter financial conditions. Consequently, the sector that took the biggest hit last year was housing, followed by a slowdown in business spending and manufacturing activity.

But a turnaround looks to be happening now.

As you can see below, the LEI has been rebounding over the last few months. That’s come on the back of declining headwinds from housing (yellow), business/manufacturing activity (green), and financial conditions.



In fact, housing has moved to being a positive contributor! We’ve written about how why we believe housing will no longer be a drag on the economy after 8 straight quarters of pulling GDP growth lower. Even business activity is exerting a lower drag on the economy – we just wrote last week about how investment has been rising recently, hopefully signaling a bottom.

Financial conditions appear to be easing, especially with the Fed moderating the pace of rate hikes and interest rates inching close to their terminal level for the cycle.

Most importantly, consumption remains positive, though less so than a few months ago. This is not really a concern in my opinion (at least, not yet), as it simply indicates that consumption trends are normalizing. The latest contribution from consumption to our LEI is equivalent to its pre-pandemic contributions.

Ultimately, the big picture is that the economy looks to be finally normalizing after a few years of being whipped around by the pandemic, and its after-effects.

 

Stellar NASDAQ 1st Half Dampens July and Q3 Performance

NASDAQ finished the first half of 2023 with a stellar 31.7% gain. This is NASDAQ’s third best first half ever. Only 1975 and 1983 were better. In the following table we compiled all years since 1971 when NASDAQ was up 20% or more in the first half. Reviewing the table, we observed only two times out of the past eleven where the second half of the year was better than the first half (1999 and 2003). July and Q3 were also below average following a 20%+ first half gain while Q4 was better than average.

This reinforces our existing tepid outlook for Q3. Today’s much stronger than anticipated jobs data has increased expectations for another Fed interest rate hike and added more uncertainty as to when the Fed will eventually pause. Increasing uncertainty is likely to lead to more volatility and a sideways to possibly lower market during the historically weak third quarter.