Daily Stock Market Articles

Stocks and Bonds Part Ways
Fri, May 19, 2023

Ever since the Federal Reserve started talking about hiking rates at the start of 2022, stocks and bonds have been joined at the hip. Using the iShares 20+ Year Treasury ETF (TLT) as a proxy for the bond market, the correlation between its closing prices and the S&P 500 (using SPY) has been +0.79, implying a very strong correlation. Visually, it’s also easy to see the relationship as the two sold off throughout most of 2022 and then bottomed out early in the fourth quarter. From those lows through early April, the positive correlation between the two continued, but ever since then, the paths of the two ETFs have diverged. Since April 6th, TLT is down 6.8% while the S&P 500 is up 2.7%. As the sell-off in Treasuries has picked up steam in recent days, market watchers have been expecting stocks to start following suit. Bulls, on the other hand, are hoping that this is the start of an amicable separation between the two.

 

Russell 2000 Best Week Before Memorial Day, Up 75% of the Time

Top image curtesy of https://www.asomf.org/the-history-of-memorial-day/

In the table we went back to 1971, the year the Uniform Monday Holiday Act took effect, moving Memorial Day and most other federal holidays to Monday. The Friday before Memorial has become getaway day on The Street and volume can be diminished and trading uninspired. However, this has not stopped the market from making some sizable moves for the week. Last year, DJIA, S&P 500, NASDAQ, and Russell 2000 all jumped over 6%.

DJIA is the weakest in the week before Memorial Day up 27 of the past 52 years and a paltry 0.13% average gain. S&P is a bit better, up 63.5% of the time with an average gain of 0.32%. NASDAQ is up 65.4% of the time, averaging a gain of 0.41%. But the Russell 2000 small cap index takes the lead ahead of the official kick-off to summer up 75.0% of the time with an average gain of 0.73%.

 

The Leading Indicator That’s Pointing Away From a Recession
Posted on May 19, 2023

It’s hard to get away from continued recession calls, even as several data points suggest the opposite. For example:

• Employment: running strong
• Retail sales: rebounded in April
• Manufacturing: signs point to a turnaround, especially vehicle production
• Housing: a turnaround seems to be happening

I want to focus on housing in this blog.

Residential investment makes up under 5% of the economy, but it’s been a drag on economic growth for eight straight quarters.



Over the four quarters through Q1 2023, real GDP grew about 1.6%. But that’s after accounting for a 0.6-0.7%-point drag from residential investment. That’s a lot!

The cause shouldn’t be a surprise. The Federal Reserve (Fed) began its most aggressive policy tightening cycle in 40+ years as they looked to get on top of inflation. That sent mortgage rates from 3% to 7% in less than a year, freezing the housing market. Affordability collapsed due to higher rates and elevated home prices.

Amid decreasing demand, builders reduced their involvement in new construction projects. As a result, there was a notable 27% decline in single-family construction, which comprises approximately 40% of residential investment in GDP. Brokers’ commissions, accounting for just over 20% of residential investment, experienced a 28% decrease due to a significant drop in sales activity. Home improvements also fell, primarily because many households had already completed their projects during the 2020-2021 pandemic period. The sole positive aspect within the housing sector was the continued strength in multi-family construction.



Declining housing activity has foreshadowed past recessions
Between 1980 and 2010, we had five recessions, and each one was preceded by a huge decline in single-family housing starts.

Housing starts measure the start of construction on a new residential unit. This precedes sales of new homes as well as spending on appliances, furniture, and other home goods. It tells you a lot about builders’ sentiment for investing in new projects and how consumers view their personal financial situation (since buying a house is a big deal).

You can see why it’s an important metric for gauging where the economy is going.

I looked at single-family housing starts across the five recessions that preceded the pandemic-led 2020 recession, including 1980, 1981-’82, 1990-’91, 2001, and 2007-’09. As you can see in the chart below, single-family starts declined significantly prior to each of those recessions. And these were typically preceded by aggressive Fed tightening.

The mildest decline was in 2000 when starts declined “only” 17%. The 1999-2000 period saw the Fed raise the federal funds rate by about 1.75%-points. The other periods saw rates go up by 4.0%-points or more.



Here’s what’s interesting, however. The chart also shows that housing historically bottomed prior to the end of a recession and has typically led the economy out of one. It typically coincided with the Fed reducing interest rates in response to a slowing economy.

This brings us to the current cycle.

A turnaround begins
The chart below shows single-family housing starts and permits. Permits count authorized permits to build new housing units and are a leading indicator of future supply.

Thanks to aggressive Fed rate hikes, single-family starts crashed 35% over the 12 months through November 2022. Permits plunged 40% over the 11 months through December 2022. No wonder residential investment was such a big drag on economic growth. However, unlike what we saw in the past, the economy was able to avoid a recession.

And now there’s good news. Starts and permits appear to be turning around. Starts are up 5% since November 2022, while permits have already increased 14% over the three months through April.



Builders are feeling a lot better about the housing market
Builders’ confidence in the housing market is growing. Since the start of 2023, the NAHB Housing Market Index, a gauge of builders’ confidence, has been steadily recovering. It’s still got a long way to go to get back to pre-crash levels, but the upward trend is encouraging.



In fact, earnings and revenues for the nation’s largest builders have been beating estimates by a big margin in the most recent quarter. More importantly, they’ve been very positive about what lies ahead. This comment from the Chairman of D.R. Horton, the nation’s largest homebuilder, best captures it:

” Although higher interest rates and economic uncertainty may persist for some time, the supply of both new and existing homes at affordable price points remains limited, and demographics supporting housing demand remain favorable.”

Here’s a summary of what’s happening:

• Due to high mortgage rates, most homeowners (who probably bought their homes or refinanced at low rates) are “locked in.”
• So, there’s not much inventory in the existing home sales market.
• However, there’s a lot of pent-up demand due to a record number of people in the 25-34 year age cohort, which is the prime home-buying age.
• These potential homebuyers are being pushed into the new homes market.
• That is very positive for builders and the economy since new home demand matters a lot for economic growth.

The final chart to underline all this: the SPDR S&P Homebuilders ETF, which is a basket of homebuilder stocks, just hit a new 52-week high, and is at the highest level since February 2022. The ETF is up more than 21% this year through May 18th.



Investors are starting to treat the housing market as an early cycle recovery story, even as several commentators call for a cycle-ending recession. Not us, though. We’ve been saying the economy can avoid a recession since last year.

 

Copper Under the Weather
Mon, May 22, 2023

Earlier Monday in our Morning Lineup post, we highlighted the recent short-term weakness in gold just days after it hit all-time highs. While the declines are disheartening for gold bulls, they can take comfort in the fact that at least gold has been doing better than copper.

Copper prices rallied in the second half of 2022, but that rally stalled out in early January at just over $4.30 per pound, below its highs from last May. Since then, prices have experienced little in the way of positive momentum, falling below both the 50-DMA and 200-DMA. Copper is now down over 15% from its YTD high, and it's testing the bottom of its longer-term uptrend channel.



On a five-year basis, you can see again how copper prices are currently testing a long-term uptrend after carving out a downtrend that has been shorter-term in length.



A look at the relative strength of copper is where the relationship between the two commodities really gets interesting. From May 2018 through May 2020, copper prices consistently underperformed gold, and this was a period that included what was a US manufacturing slowdown ahead of what became a full-blown economic shutdown during COVID. As governments and central banks flooded the economy with stimulus, the roles of copper and gold completely reversed, and in the span of under a year erased two years of underperformance. Then, from late February 2021 through June 2022, the two commodities performed roughly in line with each other as there was little movement in the relative strength of the two commodities.

In the first half of 2022 as the FOMC started ratcheting up the rate hikes, copper started to lose ground versus gold, and just in the last few weeks, copper’s relative strength has dropped to its lowest level since the start of 2021! If copper’s performance is a sign of the strength or weakness in the global economy, someone better start heating up the chicken soup.

 

Two More Bullish Pieces of Evidence
Posted on May 23, 2023

“No amount of evidence will ever persuade an idiot.” -Mark Twain

We been pointing out signs of an early cycle revival in the economy and many bullish signals that indeed suggest the upward trend in stocks since October is alive and well. Well, here’s a blog on two more things that recently triggered and both could be nice signs for both the economy and stocks going forward.

First up, this past earnings season was really good relative to expectations. According to Factset, about 95% of S&P 500 companies have reported first-quarter earnings and a very impressive 78% beat expectations. Yes, earnings are set to come in down 2.2% versus the first quarter last year, but this is much better than the 6.6% drop that was expected this time seven weeks ago. Also, all 11 sectors came in better than expected, with tech (the largest component) really impressing. Lastly, the average company beat earnings by 6.5%, one of the best beats in years, while the average small cap stock beat by an even wider margin.

Thanks to data from our friends at Ned Davis Research, MSCI U.S. trailing 12-month earnings have officially bottomed and are now heading higher. Given nearly 80% issued increased revisions (the left side of the chart below), this makes sense that this would stop going down and start going up. All in all, this is a very strong signal that all the worries about the impending recession have been greatly exaggerated and corporate America likely sees better times coming.



The other thing that no one is pointing out is the S&P 500’s 200-day moving average has officially turned higher. This is a longer-term trendline and it tends to catch significant trends. Right now, it’s rebounding off a bottom and that is another feather in the cap for bulls.

Some previous times the 200-day turned higher after trending lower for an extended period were July 2016, August 2009, June 2003, and March 1991. For those who remember their stock market history, all of those times indeed took place after significant lows were already formed (in other words, no new lows took place) and continued strong gains occurred. I eyeballed 10 times this turned higher and all 10 were nice times to own stocks.



Our friends at Bespoke looked at this and they found 20 times the 200-day moving average made a new 52-week low and then moved at least 1% off that level within three months, so a clear signal that the lower trend in stocks had ended. Sure enough, going back to 1928, they found the S&P 500 was higher a year later 20 out of 20 times, with a solid average gain of 18.2%. 20 out of 20!

One thing I’ve seen the past few months though is many of the perma-bears have really dug their heels in, likely costing many investors a good deal of gains and future gains. Take another look at the Mark Twain quote at the beginning. We’ve been sharing a lot of evidenced-based investment data this year showing better times could be coming and fortunately, it has been taking place for investors. The vast majority of what we see continues to look quite positive and we expect more solid gains from stocks the rest of this year, with an economy that will avoid a recession and surprise to the upside.

 

Thursday Best Day Ahead of Memorial Day

Friday before Memorial Day has become getaway day on The Street and trading can be lackluster with light volume. Dow is down 12 of 23, averaging a loss of –0.07%. S&P has a slightly better record, but still averages a loss of –0.02%. NASDAQ is up 14 of 23 and averages a modest 0.10% gain. Russell 2000 has been down 11 and up 11 (no change in 2013), averaging a 0.16% gain on Friday.

Average performance on Wednesday and Thursday has generally been better, but volume is often diminished and trading uninspired. Thursday posts the best numbers across the board led by Russell 2000, up 17 of 23 with an average gain of 0.49%. DJIA and S&P 500 have been up 15 of the last 23 with average gains of 0.16% and 0.23% respectively.

 

Government Debt Has Exploded Higher. Should We Worry?
Posted on May 24, 2023

The fight over the debt ceiling in Washington D.C. has focused attention on the size of U.S. government debt. And it’s not pretty to look at. From the end of 2019 through the end of 2022, government debt has increased by a whopping 35% to $31.4 trillion. That translates to a dollar increase of $8.2 trillion!



The debt-to-GDP ratio jumped from 108% before the pandemic to 120% at the end of 2022. The only solace is that it’s fallen from 135% in the second quarter of 2020 – primarily because GDP increased by $4.4 trillion since then. Note that the denominator in the ratio is “nominal” GDP, i.e. it’s not adjusted for inflation. Nominal GDP has been increasing rapidly over the past two years thanks to inflation, rising 12% in 2021 and 7% in 2022. So, one way in which debt-to-GDP can fall is with higher inflation.



The problem with inflation is that the Federal Reserve is likely to react aggressively to bring it down, which is what happened last year. They raised benchmark interest rates from near 0% to above 5% over the past 14 months to clamp down on the highest inflation in 40+ years.

Higher interest costs for the government were a direct consequence of this. Interest payments on the federal debt have risen by $359 billion since the end of the pandemic through the first quarter of 2023.



But here’s the good news …
One thing that is weird about the debt-to-GDP ratio is that you’re comparing the “stock” of outstanding debt to GDP, which is a “flow”, i.e. the total dollar value of all finished goods and services produced within the country over a quarter.

It’s akin to looking at your mortgage balance as a percent of your monthly or quarterly income. A better measure of financial stress, or lack thereof, is mortgage debt service costs as a percent of income.

We can do the same thing for the government, in which case “income” is tax receipts.

As I noted above, debt-to-GDP fell over the last couple of years because nominal GDP grew. The other side of higher nominal GDP is that tax receipts for the government have also surged. Tax receipts have risen from about $2.2 trillion at the end of 2019 to $3.2 trillion by the end of 2022, an increase of $1 trillion.



This is the other side of government spending that kept the economy afloat in 2020-2021. Stimulus checks, PPP loans, and expanded unemployment benefits ensured that consumer spending held strong – the downside was higher inflation, as the pandemic shut down a lot of supply even as demand recovered immediately. Nevertheless, one person’s spending is another person’s income, and income is taxed.

The other reason tax receipts surged, especially in 2021, was an increase in capital gains receipts thanks to rising asset prices. This was less so in 2022. However, 4.8 million more people gained jobs in 2022, which helped push tax receipts higher.

The chart below shows government interest costs as a percent of tax receipts, and right now it’s just under 27%. It’s gone almost straight up over the last few quarters but remains slightly below where it was in 2019, which was right along the historical average of 27.3%.



Things don’t look too concerning when you look at the chart above. Ultimately, if the economy is growing, the debt-to-GDP ratio should remain stable (or fall), and tax receipts will continue to rise.
Recession is a real concern because that’s when tax receipts fall amid a rise in unemployment. This is why the ratio between interest costs and tax receipts jumped to over 50% in the early-to-mid 1980’s. Fed Chair Paul Volcker had raised interest rates sharply to combat high inflation, which resulted in:

• Higher interest costs on the federal debt
• A recession, which meant there were fewer tax receipts as spending and employment fell

Right now, we don’t believe we’re in a similar situation, and our base case is that the U.S. can avoid a recession this year.

 

Tech In Orbit
Fri, May 26, 2023

The S&P 500 has been closing in on new 52-week highs as the index gains another 1.3% headed into the long weekend. Although the index has been moving higher, looking at relative strength lines across the S&P's eleven sectors, it would be hard to tell. Indicating what has broadly been mediocre breadth at best, the only two sectors with relative strength lines that are currently moving higher are Tech and Communication Services. The former has made a vertical move higher over the past few days in the wake of the surge in NVIDIA (NVDA), while the climb in Communication Services has been more steady. As for the other sectors, relative strength lines have been falling off a cliff for everything except Consumer Discretionary, which has been flat.



Again, Tech has led the way higher with a sharp move this week. The sector is now extremely overbought, trading 3.23 standard deviations above its 50-DMA; the fifth most overbought reading on record. Since 1990, there have only been a handful of times in which the S&P 500 Tech sector has traded at least 3 standard deviations overbought, with the most recent being roughly six years ago. But to find the last time the sector was as extended as it is today, you'd have to go all the way back to early 2004!

 

Market Weaker After Memorial Day Recent Years

The week after Memorial Day performed quite well 1971-95. DJIA & S&P up 68% of the time, averaging 0.8% – DJIA up 12 in a row 1984-95. NAS was up 72% of the time, average 0.6%, up 10 straight 1986-95. Since 1979 R2K was up 88.2% of the time, average 0.9%, up 13 straight 1983-95.

Starting in 1996 the week after Memorial Day performance diminished. DJIA was up only 40.7% of times, average loss 0.02%, down 9 of last 13. S&P, NAS & R2K all gained ground less than 56% of the time, down 7 of last 13. Huge gains during the week in 2000 do skew the averages.

2023 Stock Trader’s Almanac page 100 tracks behavior before & after holidays since 1980. Days after Memorial Day show positivity. But weakness has increased the last 22-years the 3 days after Memorial Day. Day after Memorial Day DJIA & NAS down 6 of last 8, S&P down 7 of last 8.

 

Why a Strong First 100 Days Is a Good Thing
Posted on May 25, 2023

“It’s not how you start the season, it’s how you finish.” -Albert Pujols, 11-time All Star professional baseball player

Can you believe it, today is the 100th trading day of the year. In the face of mounting worries about the economy, Fed policy, stubborn inflation, an earnings recession, the manufacturing recession, the war in Ukraine, poor market breadth, signing Joe Burrow to a long-term NFL deal, and more, stocks have had a really strong start to 2023. Ok, that Joe Burrow part is more of a personal worry, but the man needs to be paid and we need to keep him in Bengal stripes, so it is a worry of mine in 2023.

So, what exactly does a good start to a year as of Day 100 mean? Well, the 7.2% gain as of yesterday would be the best start to a year since 2021 with 2019 and 2017 before that. In other words, recently strong starts have meant continued gains for the bulls out there who recall those fun years.

Looking at all the years to gain at least 7% by Day 100 showed that the rest of the year was higher by 9.4% on average and up 88.5% of the time. Anyone up for another 10% from here? Unless you are a permabear, I bet most readers would be ok with that. Lastly, the full year has never closed the year lower when up more than 7% on Day 100. Yes, 1987 is in here, so we know that stocks can indeed go lower from here, but to have a red year in 2023 would truly be rare.



That isn’t the only good news though. In fact, here are two more recent occurrences that should bode well for continued strong returns from stocks this year.

First up, the S&P 500 hasn’t made a new 52-week low since the mid-October lows last year. That is more than seven months without a new low and history would say that a move right back beneath those October lows would be quite rare. As you can see from the chart below, usually this is a sign that ‘the lows’ indeed are in and in many cases strong continued gains were possible.



Here are all the instances of a new 52-week low and then seven months in a row without a new low. A year later? Stocks were up 12.6% on average and higher 86.4% of the time. Looking at things over the past 50 years and only twice (out of 14 times) did stocks go on to make new lows after seven months without a new 52-week low. Those were in 2002 (and the vicious three-year bubble bursting bear market) and then right ahead of a 100-year pandemic. Let’s hope now isn’t like those two and we don’t think it is. The other 12 times the lows were indeed in place. We remain in the camp that the lows from October are it and the bear market ended then. We’ve been saying that since late last year and many more are coming around to this opinion now. This study does little to change our views here.



Lastly, we’ve seen strong leadership from large cap technology this year, after a horrible year last year it should be noted. This is the lifeblood of bull markets, changing leadership and we have seen it this year. Turning to the NASDAQ-100, it recently made a new 52-week high for the first time since before Thanksgiving in 2021 …. Nearly 18 full months! As bad as that was, the good news is when it goes at least six months without a new 52-week high and finally makes one (like last week), the future returns can be quite strong. As we show below, the NASDAQ-100 was higher a year later 14 out of 14 times and up 16.8% on average along the way. We don’t expect this to be 14 out of 15 this time next year is all I will say.



With all of that, I must ask you, why are you even reading this right now? We are right before a holiday weekend and I hope you can get a break, eat some good food, and spend time with family and friends this Memorial Day weekend. The stock market is having a nice year, bonds are doing ok, or at least way better than last year, the economy is firming, the Fed is likely done hiking, and the Bengals are inching closer to signing Joey B. Have a great weekend, everyone!

 

Home Prices Bounce in Hardest Hit Areas
Tue, May 30, 2023

March data on home prices across the country were released today with updated S&P CoreLogic Case Shiller numbers. Case Shiller home prices had been falling rapidly in many of the twenty cities tracked, but in March we actually saw a pretty big month-over-month bounce in some of the hardest-hit areas like San Diego, San Francisco, LA, Denver, and Phoenix. Some cities still saw declines, however. Las Vegas saw a m/m drop of 0.93%, while Miami fell 0.41%, and Seattle fell 0.28%.

On a year-over-year basis, Miami is still up the most with a gain of 10.86%. As shown in the table below, Miami home prices are up 59.87% from pre-COVID levels in February 2020, and they're only down 2.9% from post-COVID highs. Only Tampa is up more than Miami from pre-COVID levels (+61.04%), but Tampa prices are down more from their post-COVID highs (-4.70%) than Miami (-2.90%).

Four cities are down more than 10% from their post-COVID highs: San Diego (-10.12%), Las Vegas (-10.95%), San Francisco (-16.35%), and Seattle (-16.50%). New York is down the least from post-COVID highs of any city tracked at just -2.9%.







Below we include charts of home price levels across all 20 cities tracked by Case Shiller along with the three composite indices. We've included a vertical red line on each chart to highlight pre-COVID levels. When looking through the charts, you can see this month's small bounce back in most cities after a 6-9 month pullback in prices from peaks seen early last year.

 

Some Good Inflation News
Tue, May 30, 2023

While the market prices in a much higher likelihood of a rate hike at the June meeting, there was actually some decent news on the inflation front today. Starting with the Conference Board's Consumer Confidence report, in this month's update, the inflation expectations component fell to 6.1% from a peak of 7.9% fifteen months ago in March 2022 (first time reading touched 7.9%). Looking at the chart below, this reading was also at 6.1% fifteen months before that first peak. In other words, for all the talk about how inflation has been stickier, the pace of decline in this indicator on the way down has been the same as the pace of increase on the way up.



Another notable report was today's release of the Dallas Fed Manufacturing report. The Prices Paid component of that report showed a decline from 19.5 down to 13.8 which was the lowest reading since July 2020. For the month of May, two of the five components (Empire and Philadelphia) showed modest m/m increases from multi-month lows, and three showed significant declines to multi-month lows. The chart below shows a composite of the Prices Paid component using the z-scores for each of the five individual components going back to 2010. The peak for this component was 19 months ago in November 2021. Unlike the inflation expectations of the Conference Board survey, this reading hasn't declined quite as fast as it increased in the 19 months leading up to the peak, but at -0.2, it is still below its historical average dating back to 2010 and back down to levels it was at right before the COVID shock hit the economy in early 2020.

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