The Bear Thread

September Opens Typically Weak and Closes Weaker

Although the month used to open strong, S&P 500 has declined nine times in the last fifteen years on the first trading day. With fund managers tending to sell underperforming positions ahead of the end of the third quarter there have been some nasty selloffs near month-end over the years.

Recent substantial declines occurred following the terrorist attacks in 2001 (DJIA: –11.1%), 2002 (DJIA –12.4%), the collapse of Lehman Brothers in 2008 (DJIA: –6.0%), U.S. debt ceiling debacle in 2011 (DJIA –6.0%) and in 2022 (DJIA –8.8%).

Do not anticipate any major selloff and expect new highs around yearend. But expect some sort of surprise to send stocks into another mild correction before the Q4 rally ensues. Nobody wants to talk about it or hear about it, but inflation appears to be done cooling. Further hints at higher inflation will likely heat up the “higher-for-longer” chatter and weigh on stocks.

Concerned that we are poised for a September surprise in the financial sector. Would not be shocked if one of the rating agencies comes and announces a host of bank downgrades, perhaps starting at the top with a big bank. They did warn us back in March during the banking scare and most recently with the Fitch downgrade of the US credit rating.

Either way, expect any weakness to be temporary and for the market to continue to track the seasonal and 4-year cycle patterns illustrated in these charts as it has all year and since 2021.

 

September Quarterly Options Expiration Treacherous, Week After Awful

Since the S&P index futures began trading on April 21, 1982, stock options, index options as well as index futures all expire at the same time four times each year. Some call it Quadruple Witching or Quad Witch due to single-stock and ETF futures however, their impact on the market appears subdued to us and we continue to prefer using Triple Witching.

September’s quarterly option expiration week has been up 56.1% of the time for S&P 500 since 1982. DJIA and NASDAQ have slightly weaker track records with gains 51.2% of the time and 53.7% of the time respectively.

However, the week has suffered several sizable losses. The worst loss followed the September 11 terrorist attacks in 2001. In the last twenty years, S&P 500 and NASDAQ are tied for best record during September’s quarterly option expiration week, up thirteen times, but NASDAQ has been down the last five straight. Friday had been firm with all three indices advancing every year 2004 to 2011, but S&P 500 has been down ten of the last eleven since.

S&P 500 Down 26 of 33 Week After September Quarterly Options Expiration, Average Loss 1.01%

The week after September options expiration week, has a dreadful history of declines most notably since 1990. The week after September quarterly options expiration week has been a nearly constant source of pain with only a few meaningful exceptions over the past 33 years. Substantial and across the board gains have occurred just four times: 1998, 2001, 2010 and 2016 while many more weeks were hit with sizable losses. Last year DJIA and S&P 500 declined over 4% while NASDAQ fell 5.07%.

Full stats are the sea-of-red in the tables here. Average losses since 1990 are even worse; DJIA –1.07%, S&P 500 –1.01%, NASDAQ –0.98%. End-of-Q3 portfolio restructuring is the most likely explanation for this trend as managers trim summer holdings and position for the fourth quarter.

 

High Rates Dampen Expansion Expectations
Tue, Sep 12, 2023

Early this morning, the NFIB published their latest read on small business sentiment. The headline index fell to 91.3, 0.2 points lower than expectations. Sentiment continues to sit near some of the lowest levels of the past decade, albeit off of the worst post-pandemic period when it had reached a low of 89.0 this past spring.



With the decline in the headline index, it is just shy of the bottom decile of its historical range reinforcing the point that small businesses are historically pessimistic. Breadth in this month's report was fairly mixed with five inputs to the composite falling month over month, three rising, and two going unchanged. As for the other indices, five rose and the remaining three fell.



Employment metrics are some of the areas that have remained somewhat elevated versus history. For example, while many categories are in their bottom deciles of historical readings, job openings hard to fill, compensation, and compensation plans all rank in the 93rd percentile or better. Even plans to increase to increase employment have held up in the top quartile of its historical range. Although current readings would indicate a healthy labor market, conditions have not necessarily improved. As shown below, most of these categories have been trending lower for some time meaning small business labor markets have cooled. However, compensation plans spiked by 5 points in August which is tied for the fifth largest month over month jump on record.



Expectations for changes to sales remain in negative territory meaning that on net more small businesses expect their sales to fall than rise. In August, that reading worsened, and at -14, the index is in the bottom 3% of all readings on record. As with the headline number, although that is a disappointing result, it is off of recent lows. Conversely, actual sales changes are hitting more new lows with the weakest readings since the spring of 2020 and late 2012 before that.



The share of respondents reporting now as a good time to expand their business is another category where readings are at the low end of their historical range without any improvement or further deterioration in August. The NFIB provides a breakdown into the reasons responding firms report their expansion outlook. As shown below, the vast majority report poor economic conditions as the reason which checks out when compared to a very low reading on expectations for the economy to improve. Behind economic conditions, interest rates are the next most quoted reason. That lends to some evidence that the Fed's rate hikes are working as intended.

 

Sell Rosh Hashanah Buy Yom Kippur Sets Up

Sell Rosh Hashanah, Buy Yom Kippur is aligning quite well this year with late September seasonal weakness and the notoriously treacherous week after quarterly options expiration, AKA Triple Witching. It’s a few days before FOMC with a market jittery on hotter inflation data.

Rosh Hashanah lands on Saturday 9/16 this year so our stats us the close the day before. This is right at the mid-month peak of the typical September pattern. Yom Kippur falls on 9/25 which is the 16th trading day of the month, right around the seasonal monthly low point.

The thesis is that folks sell positions on Rosh Hashanah the first of the Days of Awe to rid themselves of financial commitments and then return to the market after Yom Kippur, the Day of Atonement. It is no coincidence that this coincides with the seasonal September/October weakness.

The market has been tracking the 4-year cycle and seasonal trends to a T this year and the past 3. So this should make a great entry for the Q4 pre-election year rally.

 

Large Decline in Homebuilder Sentiment
Mon, Sep 18, 2023

For a second month in a row, homebuilder sentiment slumped with the NAHB's Housing Market Index falling from its recent high of 56 in June down to 45 in August. That is the lowest reading since April and the first back-to-back declines since last December.



As shown below, double-digit drops in two month spans are far from unprecedented, but the most recent one is in the bottom 2% of all two-month moves since the start of the survey in 1985.



The declines in homebuilder sentiment were observed across the country with the indices of each of the four regions of the country falling. The charts are largely similar with each having come off of recent highs well below the prior peaks but still well off the lows put in place late last year.



As homebuilder sentiment has peaked, so too have homebuilder stocks. This group was a big winner in the first half of the year, but so far in Q3, the iShares Home Construction ETF (ITB) has made a series of lower highs and lower lows. In the process, it has fallen back below its 50-DMA and continues to trade below that level near its summer lows.



Again, relative to the broader market, ITB was a consistent winner throughout much of 2022 and the first half of 2023. But with weaker performance over the past few months, that outperformance relative to the broader market (indicated by the upward trending relative strength line below) has been put to the test.

 

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

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



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

 

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

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



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



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



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

 

Rocky Road Ahead?
Mon, Oct 2, 2023

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



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



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

 

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

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



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

 

Typical Octoberphobia! Brace Yourself

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

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

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

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

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

 

S&P 500 Slide Further Hits Sentiment
Thu, Oct 5, 2023

The S&P 500 has continued to hit new lows in the past week, and some sentiment readings have reflected that negative tone. The AAII sentiment survey was not necessarily one of those as this week saw a mixed result. For starters, bullish sentiment actually ticked up to 30.1% from 27.8%. That ends a streak of three straight weeks of declines as bullish sentiment was above 40% as recently as the first week of September.



While bullish sentiment went the other way of price action, bears did increase slightly from 40.9% to 41.6%. That brings the total increase in bears over the past three weeks to 12.4%, the largest three-week increase since late August.



That means that on net, AAII sentiment actually shifted slightly more bullish this week. The bull-bear spread continues to be negative (meaning more investors are reporting bearish than bullish sentiment), but that reading was higher at -11.5 this week.



Other sentiment surveys were not as hopeful. Both the NAAIM Exposure index and Investors Intelligence survey saw readings shift more bearish in the latest week's data. In fact, both of those surveys' readings have been more bearish week over week in each of the past three weeks. All plugged into our sentiment composite, that has outweighed the modestly more bullish reading in the AAII survey. As a result, the composite indicates sentiment levels are 0.69 standard deviations more bearish than what has historically been the norm. While not exactly an extreme, especially in the wake of the past couple of years, that is the most bearish read on sentiment in just over six months.

 

Continuing Claims Come in Worse
Thu, Oct 12, 2023

While CPI was the main focus of the morning's economic data, jobless claims were the other major release of the morning. Last week's reading on seasonally adjusted initial claims was revised up by 2K to 209K and this week's reading was unchanged from that level. That was slightly below forecasts which were calling for claims to rise further to 210K. Overall, claims have seen a rebound in the past few weeks, but that is still well below the range of readings from earlier this year.



Being the fourth quarter, seasonal tailwinds will shift to headwinds over the next few months. Prior to seasonal adjustments, initial claims saw a sizeable 22.8K week-over-week jump. Claims rising in the current week of the year is very normal as it has occurred 85.7% of the time historically. Given that increase, that would confirm last week as the likely annual low in unadjusted claims (at least for the time being). As we noted last week, that is a bit later than normal, but not exactly without precedence.



Relative to initial claims, continuing jobless claims have maintained a more consistent trend over the past several months. This year has seen continuing claims consistently grind lower, but that trend is not as strong as it once was as claims have appeared to round out a bottom. Continuing claims topped 1.7 million this week. That is the highest reading since the week of August 19th and was well ahead of expectations of 1.675 million. While claims are by no means weak (outside of the few years prior to the pandemic, current readings remain around some of the lowest since the early 1970s), both initial and continuing claims have seen modest deterioration recently.

 

Superstitious or not, Friday 13th in October has been historically bearish



For those that might be interested, we have looked at the S&P 500 performance on this date often associated with superstition. Since 1930, the S&P 500 has traded a grand total of 157 Friday 13th across all twelve months. The overall track record is 87 up days and 70 down days with a slightly bullish average gain of 0.05% on all Friday 13ths. The worst Friday 13th loss was 6.12% in October 1989. This day is often referred to as “Black Friday.” The best Friday 13th gain was 9.29% in March 2020. Digging deeper into the data reveals that October Friday 13th has been up 6 times, down 7 times with an average loss of 0.58%. Based solely upon average performance, October has been the worst month for Friday 13th. But the last four, October Friday 13th have been positive.

 

Near Record Volatility of Bonds Relative to Stocks
Mon, Oct 16, 2023

2022 was a year of extreme volatility for both stocks and bonds, and while things have quieted down a bit this year, volatility in the US Treasury market remains extremely elevated. The top chart below shows the average daily percentage move in the SPDR S&P 500 ETF (SPY) and the iShares 20+ Year US Treasury ETF (TLT) over a rolling 200-trading day period. Heading into 2022, volatility in both asset classes was very low after spiking to extremes in the early days of COVID, but once the Fed started to hint that it was starting to "think about thinking about" hiking rates, all hell broke loose. While the average daily change in SPY over a rolling 200-day period never exceeded its peak from the COVID crash, volatility in long-term US treasuries, as proxied by TLT, rose above +/-1% to its highest level since the first half of 2012. When treasuries are swinging up and down (mostly down) 1% on a daily basis, that's a very volatile environment!

While average daily swings in both stocks and bonds have declined this year, volatility has been much slower to subside in the treasury market than in the stock market. The second chart below shows the spread between the average daily percentage move in both ETFs (TLT minus SPY), and as of last Friday, the spread rose to 0.237%, which outside of ten trading days in August 2015, is the widest gap between the two ETFs since TLT was first launched in 2003. Elevated volatility in bonds usually accompanies volatility in stocks, but the current degree of volatility in the bond market relative to stocks is rarely this high.

 

Rates Hit Homebuilders
Tue, Oct 17, 2023

Among industrial production and retail sales, the other major economic release this morning was homebuilder sentiment from the NAHB. As shown below, the October report showed sentiment slid down to a new multi-month low of 40. That was a four point decline month over month on top of the September reading being revised one point lower to 44. That marks the third MoM decline in a row since sentiment peaked at 56 in July. That leaves the index 9 points above the post-pandemic low of 31 from last December.



The drop in the headline index was due to broad-based weakness throughout the report. As shown below, every component of the headline number was lower month over month and is now in the bottom quartile of historical readings. Those month-over-month declines in October were also historically large, each one with the exception of future sales ranking in the bottom decile of all month-over-month moves. That would imply the nation's homebuilders have seen significant deterioration in their businesses which the NAHB noted was on account of higher rates.



As for a regional look at homebuilder sentiment, each area also saw a lower reading month over month, however, there is a degree of variability in these readings. For starters, homebuilder sentiment in the Northeast is by far the healthiest with the October reading registering in the 58th percentile of all months since 2005. That compares to the next highest, the Midwest, which is only in the 38th percentile. Like the Northeast, the Midwest only fell by a single index point month over month, and that was dwarfed by the 7-point decline in the West and a 5-point decline in the South.



In addition to today's homebuilder sentiment data, one week ago the NAHB also published its quarterly survey on the remodeling market. Here too there has been a significant deterioration in conditions on account of higher interest rates. While the headline index remains bolstered and sits above the pre-pandemic range, it has pulled back significantly and is at the lowest levels since Q1 2020. Future market conditions, however, are back in line with pre-pandemic readings. Remodelers are also reporting new post-pandemic lows of smaller backlogs and fewer appointments for proposals. This trend was also reflected somewhat in the September Retail Sales report where housing-related sectors have seen some of the largest year-year declines in sales.



In addition to homebuilder sentiment having taken a hit, homebuilder stocks have also pulled back. Since the high at the start of August, the iShares Home Construction ETF (ITB) has fallen 13.9% having recently found support at its 200-DMA. While the group has found support, the past couple of months' downtrend remains firmly in place.

 

Housing Starts Muted Relative to Expectations
Wed, Oct 18, 2023

Following Monday’s weaker-than-expected report on homebuilder sentiment, actual data on residential construction data in the form of data on Building Permits and Housing Starts came in mixed relative to expectations. While Housing Starts missed expectations by 25K (1.358 million versus 1.383 million), Building Permits topped forecasts by 20K (1.473 million versus 1.453 million).

The table below breaks down both reports by the size of units and on a regional basis. In last month’s report, the big miss in Housing Starts was due to a sharp decline in multi-family units, but they drove the 7.0% m/m increase in September with a gain of 17.6%. On a y/y basis, though, multi-family units are still down 31.4%. On the multi-family front, Building Permits picked up where Housing Starts left off last month with a 14.3% decline on a m/m basis and a 29.7% y/y decline. On a regional basis, the Northeast experienced the largest m/m decline in terms of both Building Permits and Housing Starts.



Taking a longer-term look at Housing Starts on a 12-month average basis, they continued to roll over in September. At an average monthly rate of 1.4 million, Housing Starts are well off the COVID peak from mid-2022 but are still pre-COVID levels just below 1.3 million. So, on that measure and coupled with the spike in rates, one could make a valid argument that the level of Housing Starts has further to fall in the short term.



Looking at the 12-month average of Housing Starts and Building Permits from a shorter-term perspective shows that both indicators remain weak. While Housing Starts briefly stabilized this summer, they’ve resumed their downward trend in the last couple of months. Building Permits have been in a more pronounced downtrend where the 12-month average reading has declined for 14 straight months- the longest streak of declines since the Financial Crisis. Like Housing starts too, the current level of Building Permits is still above its pre-Covid peak.

 

Remembering the Crash of 1987


“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.



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.



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.

 

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%.



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%!



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.

 

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%.



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.