Daily Stock Market Articles

DJIA Up Nine of Last Ten Years on June’s First Trading Day

According to the Stock Trader’s Almanac 2023 (page 90), the first trading day of June is the fifth weakest first trading day of all twelve months with DJIA gaining just 442.36 total points since 1998. Over the past 28 years, DJIA’s first trading day of June has produced gains 74.1% of the time with an average gain of 0.04% in all years. Sizable losses in 2002, 2011 and 2012 limit overall performance. S&P 500 has advanced 60.7% of the time. NASDAQ has been slightly weaker at 53.6%. Russell 2000 has advanced 64.3% with the best average performance of 0.20%. Following three straight losses from 2010 to 2012, DJIA has advanced on nine of the last ten first trading days of June.

 

How Worried Should We Be About Consumer Debt?
Posted on May 31, 2023

A very common question we get these days is whether we’re concerned about the massive increase in consumer debt.

Short answer: No. Well, not yet anyway. But let’s walk through it in 6 charts.

The New York Federal Reserve (NY Fed) releases a quarterly report on household debt and credit, and the latest one that was released last week came with the headline:

“Household Debt Hits $17.05 Trillion in First Quarter.”
But let’s look at the details. Household debt increased by $148 billion in Q1. That translates to a 0.9% increase, which is the slowest quarterly increase in two years. Most of the increase in debt was from mortgage originations ($121 billion) – mortgage debt makes up $12 trillion of the total $17 trillion in debt. The rest was auto loan and student loan balances.

Here’s something interesting: credit card balances were flat in Q1, at $986 billion. The fact that overall balances are higher than where they were in 2019 ($927 billion) should not be surprising given we just experienced a lot of inflation. Prices rose at the fastest pace in 40 years, and so you should expect card balances to increase. However, incomes rose as well.



When you think debt, the key question is whether households are able to service that debt. A good measure of that is to look at debt service costs as a percent of disposable income. As of Q4 2022, that’s at 9.7%, slightly lower than what it was before the pandemic and well below the historical average.



There’s even better news: disposable income grew 2.9% in the first quarter of 2023. Significantly higher than the 0.9% increase in total household debt, let alone interest costs!

Part of that includes the large boost to social security income due to inflation adjustments in January. Also, tax brackets were adjusted higher, resulting in more money in household wallets.

But even if you exclude these one-off increases, disposable income growth has been strong between February and April, rising at a 5% annualized pace. In fact, employee compensation by itself has risen at a 3.9% annualized pace over the past three months. Meanwhile, inflation is running just about 3% – which means households are seeing real income gains (adjusted for inflation).



This is why consumers don’t feel the need to borrow to the extent they did before the pandemic. Credit utilization rates measure credit card balances as a percent of available credit. As you can see in the following chart, utilization rates for both credit cards and home equity lines of credit are well below pre-pandemic averages.



Lack of stress showing in delinquency data as well
Another way to look for signs of consumer stress is to look at the debt delinquency data. As of the first quarter, the NY Fed survey showed that the percent of loan balances that were more than 90 days delinquent was stable around 1.5%. That’s down from 1.9% a year ago, and quite a bit below the 3% average in 2019.



Even third-party collections are at record lows, with just over 5% of consumers having collections against them as of the first quarter. This is down from 6% a year ago and below the 2019 average of 9.2%. The average collection amount per person is $1,316, which is lower than the $1,452 average in late 2019. This is surprising because just with inflation you’d have thought the amount would be higher.



All in all, the data on consumer finances is not showing much cause for concern. So, count us in the “not worried” camp. At least, not yet.

 

May and YTD 2023 Asset Class Performance
Thu, Jun 1, 2023

May 2023 is now behind us, and below is a look at how various asset classes performed during the month using US-listed exchange-traded products as proxies. We also include YTD and YoY total returns.

May was a month of divergence where Tech/AI soared, and the rest of the market fell. Notably, the Nasdaq 100 ETF (QQQ) gained 7.88% in May while the Dow Jones Dividend ETF (DVY) fell 7.7%. That's a 15 percentage-point spread!

At the sector level, it was a similar story. While the Tech sector (XLK) rose 8.9%, sectors like Energy (XLE), Consumer Staples (XLP), Materials (XLB), and Utilities (XLU) fell more than 5%. In total, 8 of 11 sectors were in the red for the month.

Outside the US, we saw pullbacks in most areas of the world other than Brazil, India, and Japan. China, Hong Kong, France, Canada, Italy, Spain, and the UK all fell more than 5%.

All of the commodity-related ETFs/ETNs were in the red for May, with oil (USO) and natural gas (UNG) falling the most at more than 10% each.

Finally, fixed-income ETFs also fell in May as interest rates bounced back. The aggregate bond market ETF (AGG) was down 1.14% in May, leaving it up just 2.6% YTD and down 2.2% year-over-year.

 

NASDAQ and Russell 2000 Lead June Pre-Election Strength

Over the last 21 years, June has been a rather lackluster month. DJIA, S&P 500 and Russell 1000 have all recorded average losses in the month. Russell 2000 has fared better with a modest average gain. Historically the month has opened respectably, advancing on the first and second trading days.

From there the market then drifted sideways and lower into negative territory just ahead of mid-month. Here the market rallied to create a nice mid-month bulge that quickly evaporated and returned to losses. The brisk, post, mid-month drop is typically followed by a month end rally led by technology and small caps.

Historical performance in pre-election years has been much stronger with all five indexes finishing with average gains. June’s overall pattern in pre-election is similar to the last 21-years pattern with a brief, shallow pullback after a solid start.

In pre-election years the mid-month rally has been much more robust beginning around the sixth trading day and lasting until the fifteenth. Followed by another modest retreat and rally into the end of Q2.

 

The June Swoon?
Posted on June 1, 2023

Stocks did it again, as the S&P 500 gained 0.2% in the month of May, making it now 10 of the past 11 years that stocks finished green in May. Of course, it gained only 0.01% last year and only 0.25% this year, so the recent returns weren’t off the charts by any measure.

Looking specifically at this year, tech added more than 9% in May, thanks to excitement over AI and Nvidia, with communication services and consumer discretionary also in the green, while the other eight sectors were lower.

Specifically, turning to the month of June, stocks historically have hit a bit of trouble here. Since 1950, up 0.03% on average, the fourth worst month of the year. Over the past 20 years, only January and September have been worse and in the past decade, it is again the fourth worst month. The one bit of good news is during a pre-election year is it up 1.5%, the fifth-best month of the year.



Here’s another chart we’ve shared before, but years that gained big in January (like 2023) tend to see some periods of consolidation in late May/early June, but eventually experience a surge higher into July. Given the flattish overall May, this could be playing out again.



What if stocks were having a good year heading into June? Since 1950, if the S&P 500 was up more than 8% for the year going into June (like this year), the month of June was up an impressive 1.2% on average versus the average June return of 0.03%, while in a pre-election year the returns jumped to 1.8%. The percent of the time where returns were higher gets better as well, from 54.8% in your average June to nearly 74% if up 8% or more for the year heading into June, to 80% of the time higher if up 8% for the year in a pre-election year.



Overall, it has been a very nice run for stocks this year and we remain overweight stocks in the Carson Investment Research House Views. June could potentially cause some volatility, but when all is said and done, we wouldn’t bet against more strength and higher prices in June.

 

June Better in Pre-Election Years


Since 1971 June has shone brighter on NASDAQ stocks as a rule ranking eighth best with an 0.8% average gain, up 29 of 52 years. This contributes to NASDAQ’s “Best 8 Months” which ends in June. Small caps also fare well in June. Russell 2000 has averaged 0.6% in June since 1979 advancing 63.6% of the time.

June ranks near the bottom on the Dow Jones Industrials just above September since 1950 with an average loss of 0.2%. S&P 500 performs similarly poorly, ranking ninth, but essentially flat (0.02% average gain).

Despite being much stronger S&P 500 pre-election year June ranks fifth best. For the rest it is just sixth best. Average monthly gains in pre-election year June range from DJIA 1.1% to a respectable 2.4% for NASDAQ. Russell 2000 has been the most consistently bullish in pre-election years, up 8 of the last 11 (72.7% of the time).

 

A Resilient Labor Market = A Resilient Economy
Posted on June 2, 2023

Another month, another employment surprise. Should we be surprised anymore?

Economists expected payrolls to grow by about 187,000 in May. That’s still a solid job growth number, but a stepdown from what we’ve seen this year through April. However, actual payroll growth beat expectations for the 14th straight month.

The economy created 339,000 jobs in May, close to double expectations. Better still, payroll growth in March and April were revised higher by a total of 93,000!

• March payrolls were revised up by 52,000, from 165,000 to 217,000
• April payroll were revised up by 41,000, from 253,000 to 294,000

We’ve got two months of payroll data since the Silicon Valley Bank crisis in March, and nothing suggests weakness arising from that banking crisis.

Over the first five months of the year, the economy’s added 1.5 million jobs. That in a nutshell tells you how the economy is doing. For perspective, the average annual payroll growth between 1940 and 2022 was 1.5 million. During the last expansion, 2010-2019, average annual payroll growth was 2.2 million per year.



But what about the unemployment rate?
The unemployment rate did rise from a 50-year low of 3.4% to 3.7%. This does raise some cause for concern but digging through the data suggests it may be noise more than anything else.

It probably helps to understand that the job growth and unemployment rate data come from different sources. The former comes from asking about 120,000+ businesses how many people they hired. The latter comes from asking about 60,000 households about their employment status. No surprise, the latter is noisier.

A big reason for the weak household survey (and rising unemployment rate) is that more than 400,000 people who were self-employed said they were no longer employed. As you can see in the following chart this is very noisy data, but the recent trend seems to be toward lower self-employment. It’s basically reversing the surge we saw in 2021, when self-employment surged. So, what we’re seeing now may simply be normalization of the labor market as more workers move from self-employment to W2 jobs with an employer.


Also, the unemployment rate can be impacted by people leaving the labor force (technically defined as those “not looking for work”) and an aging population. I’ve discussed in prior blogs how we can get around this by looking at the employment-population ratio for prime age workers, i.e. workers aged 25-54 years. This measures the number of people working as a percent of the civilian population. Think of it as the opposite of the unemployment rate, and because we use prime age, you also get around the demographic issue.

The good news is that the prime-age employment-population ratio dropped only a tick, from 80.8% to 80.7%. This still leaves it higher than at any point between 2002 and 2022.


All in all, the labor market remains strong and resilient, despite all the recession calls. Perhaps its not as strong as the headline payroll growth number of 339,000 suggests, but any number above 150,000 would be good at this point. And we’re certainly well above that.
In fact, looking at the job growth and employment-population data, this labor market is probably the strongest we’ve seen since the late 1990’s. Our view since the end of last year has been that the economy can avoid a recession this year, and nothing we’ve seen to date suggests we need to reverse that view. Far from it.

 

Welcome to the New Bull Market
Posted on June 6, 2023

“If you torture numbers enough, they will tell you anything.” -Yogi Berra, Yankee great and Hall of Fame catcher

Don’t shoot the messenger, but historically, it is widely considered a new bull market once stocks are more than 20% off their bear market lows. This is similar to when stocks are down 20% they are in a bear market. Well, the S&P 500 is less than one percent away from this 20% threshold, so get ready to hear a lot about it when it eventually happens.

I’m not crazy about this concept, as we’ve been in the camp that the bear market ended in October for months now (we started to say it in late October, getting some really odd looks I might add), meaning a new bull market has been here for a while. Take another look at the great Yogi quote above, as someone can get whatever they want probably when talking about bear and bull markets.

None the less, what exactly does a 20% move higher off a bear market low really mean? The good news is future returns are quite strong.
We found 13 times that stocks soared at least 20% off a 52-week low and 10 times the lows were indeed in and not violated. The only times it didn’t work? Twice during the tech bubble implosion and once during the Financial Crisis. In other words, some of the truly worst times to be invested in stocks. But the other 10 times, once there was a 20% gain, the lows were in and in most cases, higher prices were soon coming. This chart does a nice job of showing this concept, with the red dots the times new lows were still yet to come after a 20% bounce.



Here’s a table with all the breakdowns. A year later stocks were down only once and that was during the 2001/2002 bear market, with the average gain a year after a 20% bounce at a very impressive 17.7%. It is worth noting that the one- and three-month returns aren’t anything special, probably because some type of consolidation would be expected after surges higher, but six months and a year later are quite strong.



As we’ve been saying this full year, we continue to expect stocks to do well this year and the upward move is firmly in place and studies like this do little to change our opinion.

 

Our Leading Economic Index Says the Economy is Not in a Recession
Posted on June 7, 2023

We’ve been writing since the end of last year about how we believe the economy can avoid a recession in 2023, including in our 2023 outlook. This has run contrary to most other economists’ predictions. Interestingly, the tide has been shifting recently, as we’ve gotten a string of relatively stronger economic data. More so after the latest payrolls data, which surprised again.

One challenge with economic data is that we get so many of them, and a lot of times they can send conflicting signals. It can be hard to parse through all of it and come up with an updated view of the economy after every data release.

One approach is to combine these into a single indicator, i.e. a “leading economic index” (LEI). It’s “leading” because the idea is to give you an early warning signal about economic turning points.

Simply put, it tells you what the economy is doing today and what it is likely to do in the near future.

The most popular LEI points to recession
One of the most widely used LEI’s is released by the Conference Board, and it currently points to recession. As you can see in the chart below, the Conference Board’s LEI is highly correlated with GDP growth – the chart shows year-over-year change in both.

You can see how the index started to fall ahead of the 2001 and 2008 recession (shaded areas). The 2020 pandemic recession was an anomaly since it hit so suddenly. In any case, using an LEI means we didn’t have to wait for GDP data (which are released well after a quarter ends) to tell us whether the economy was close to, or in a recession.



As you probably noticed above, the LEI is down 8% year-over-year, signaling a recession over the next 12 months. It’s been pointing to a recession since last fall, with the index declining for 13 straight months through April.

Quoting the Conference Board:

“The Conference Board forecasts a contraction of economic activity starting in Q2 leading to a mild recession by mid-2023.”

Safe to say, we’re close to mid-2023 and there’s no sign of a recession yet.

What’s inside the LEI
The Conference Board’s LEI has 10 components of which,

• 3 are financial market indicators, including the S&P 500, and make up 22% of the index
• 4 measure business and manufacturing activity (44%)
• 1 measures housing activity (3%)
• 2 are related to the consumer, including the labor market (31%)

You can see how these indicators have pulled the index down by 4.4% over the past 6 months, and by -0.6% in April alone.



Here’s the thing. This popular LEI is premised on the fact that the manufacturing sector, and business activity/sentiment, is a leading indicator of the economy. This worked well in the past but is probably not indicative of what’s happening in the economy right now. For one thing, the manufacturing sector makes up just about 11% of GDP.

Consumption makes up 68% of the economy, and we believe it’s important to capture that.

In fact, consumption was strong in Q1 and even at the start of Q2, thanks to rising real incomes. Housing is also making a turnaround and should no longer be a drag on the economy going forward (as it has been over the past 8 quarters). The Federal Reserve (Fed) is also close to being done with rate hikes. Plus, as my colleague, Ryan Detrick pointed out, the stock market’s turned around and is close to entering a new bull market.

Obviously, there are a lot of data points that we look at and one way we parse through all of it is by constructing our own leading economic index.

An LEI that better reflects the US economy
We believe our proprietary LEI better captures the dynamics of the US economy. It was developed a decade ago and is a key input into our asset allocation decisions.

In contrast to the Conference Board’s measure, it includes 20+ components, including,

• Consumer-related indicators (make up 50% of the index)
• Housing activity (18%)
• Business and manufacturing activity (23%)
• Financial markets (9%)

Just as an example, the consumer-related data includes unemployment benefit claims, weekly hours worked, and vehicle sales. Housing includes indicators like building permits and new home sales.

The chart below shows how our LEI has moved through time – capturing whether the economy is growing below trend, on-trend (a value close to zero), or above trend. Like the Conference Board’s measure, it is able to capture major turning points in the business cycle. It declined ahead of the actual start of the 2011 and 2008 recessions.

As of April, our index is indicating that the economy is growing right along trend.



Last year, the index signaled that the economy was growing below trend, and that the risk of a recession was high.

Note that it didn’t point to an actual recession. Just that “risk” of one was higher than normal. In fact, our LEI held close to the lows we saw over the last decade, especially in 2011 and 2016 (after which the economy, and even the stock market, recovered).

The following chart captures a close-up view of the last 3 and half years, which includes the Covid pullback and subsequent recovery. The contribution from the 4 major categories is also shown. You can see how the consumer has remained strong over the past year – in fact, consumer indicators have been stronger this year than in late 2022.



The main risk of a recession last year was due to the Fed raising rates as fast as they did, which adversely impacted housing, financial markets, and business activity.

The good news is that these sectors are improving even as consumer strength continues. The improvement in housing is notable. Additionally, the drag from financial conditions is beginning to ease as we think that the Federal Reserve gets closer to the end of rate hikes, and markets rally.

Putting the Puzzle Together
Another novel part of our approach is that we have an LEI like the one for the US for more than 25 other countries. Each one is custom built to capture the dynamics of those economies. The individual country LEIs are also subsequently rolled up to a global index to give us a picture of the global economy, as shown below.



I want to emphasize that we do not rely solely on this as the one and only input into our asset allocation, portfolio and risk management decisions. While it is an important component that encapsulates a lot of significant information, it is just one piece of the puzzle. Our process also has other pillars such as policy (both monetary and fiscal), technical factors, and valuations.

We believe it’s important to put all these pieces together, kind of like putting together a puzzle, to understand what’s happening in the economy and markets, and position portfolios accordingly.

Putting together a puzzle is both a mechanistic and artistic process. The mechanistic aspect involves sorting the pieces, finding edges, and matching colors, etc. It requires a logical and methodical approach, and in our process the LEI is key to that.

However, there is an artistic element as well. As we assemble the pieces together, a larger picture gradually emerges. You can make creative decisions about how each piece fits within the overall picture. Within the context of portfolio management, that takes a diverse range of experience. Which is the core strength of our Investment Research Team.

 

Why Low Volatility Isn’t Bearish
Posted on June 8, 2023

“There is no such thing as average when it comes to the stock market or investing.” -Ryan Detrick

You might have heard by now, but the CBOE Volatility Index (better known as the VIX) made a new 52-week low earlier this week and closed beneath 14 for the first time in more than three years. This has many in the financial media clamoring that ‘the VIX is low and this is bearish’.

They have been telling us (incorrectly) that only five stocks have been going up and this was bearish, that a recession was right around the corner, that the yield curve being inverted was bearish, that M2 money supply YoY tanking was bearish, and now we have the VIX being low is bearish. We’ve disagreed with all of these worries and now we take issue with a low VIX as being bearish.

What exactly is the VIX you ask? I’d suggest reading this summary from Investopedia for a full explanation, but it is simply how much option players are willing to pay up for potential volatility over the coming 30 days. If they sense volatility, they will pay up for insurance. What you might know is that when the VIX is high (say above 30), that means the market tends to be more volatile and likely in a bearish phase. Versus a low VIX (say sub 15) historically has lead to some really nice bull markets and small amounts of volatility.

Back to your regularly scheduled blog now.

The last time the VIX went this long above 14 was for more than five years, ending in August 2012. You know what happened next that time? The S&P 500 added more than 18% the following 12 months. Yes, this is a sample size of one, but I think it shows that a VIX sub 14 by itself isn’t the end of the world.

One of the key concepts around volatility is trends can last for years. What I mean by this is for years the VIX can be high and for years it can be low. Since 1990, the average VIX was 19.7, but it rarely trades around that average. Take another look at the quote I’ve used many times above, as averages aren’t so average.
This chart is one I’ve used for years now and I think we could be on the cusp of another low volatility regime. The red areas are times the VIX was consistently above 20, while the yellow were beneath 20. What you also need to know is those red periods usually took place during bear markets and very volatile markets, while the yellow periods were hallmarked by low volatility and higher equity prices. Are we about to enter a new period of lower volatility? No one of course knows, but if this is about to happen (which is my vote), it is another reason to think that higher equity prices (our base case as we remain overweight equities in our Carson House Views) will be coming.



Lastly, I’ll leave you on this potentially bullish point. We like to use relative ratios to get a feel for how one asset is going versus to another. We always want to be in assets or sectors that are showing relative strength, while avoiding areas that are weak.

Well, stocks just broke out to new highs relative to bonds once again. After a period of consolidation during the bear market last year, now we have stocks firmly in the driver seat relative to bonds. This is another reason we remain overweight stocks currently and continue to expect stocks to do better than bonds going forward.