New 52-Week Highs in 2023 Mon, Feb 13, 2023 20% of stocks in the large-cap Russell 1,000 have made 52-week highs at some point so far in 2023. However, about 23% of stocks in the index made their last 52-week highs in February 2022. Across the entire index, the average stock made its last 52-week high 156.9 days ago. Real Estate stocks made their 52-week highs an average of 202.2 days ago, the furthest back of any sector, while Energy stocks on average made their 52-week highs 106.9 days ago (the most recent of any sector). Below is a list of Russell 1,000 stocks with market caps above $50 billion that have made new 52-week highs at some point in 2023. Of the 28 stocks that made the list, there's representation from eight of eleven sectors. That's pretty spread out. The only sectors that aren't represented are Materials, Real Estate, and Utilities. Health Care, Industrials, and Technology each have six stocks that made the list. The largest stocks include names like Exxon Mobil (XOM), Eli Lilly (LLY), Merck (MRK), Mastercard (MA), Oracle (ORCL), and Visa (V).
Inflation Expectations Trending Lower Mon, Feb 13, 2023 The monthly survey of consumer expectations from the New York Federal Reserve was released this morning and showed that ahead of January's CPI report on Tuesday, consumer expectations towards inflation are generally stable and trending lower. On a one-year basis, inflation expectations dropped ever so marginally falling from 4.99% down to 4.95%. Three-year inflation expectations dropped from 2.99% down to 2.71%, and the only increase was in five-year expectations which increased from 2.4% to 2.5%. Regarding expectations for the next five years, it's hard to read too much into the trend since the NY Fed has only been surveying consumers on this time frame for a year. For the one and three-year time frames, however, we have close to 10 years worth of monthly responses so we can get a better read on how things stand now versus the past. Starting with expectations for the next year, consumers expect inflation to continue to trend lower from the peak of 6.78% last June, and at the current level of 4.95%, they're at the lowest level since July 2021 even as they remain well above the historical average of 3.34%. Inflation expectations for the next three years are more interesting. While expectations peaked at 4.21% in October 2021, January's reading came in at 2.71%, which was the lowest since October 2020, but more importantly, below the historical average of 2.99%. In other words, consumers expect less inflation over the next three years than they have across the majority of other times in the last ten years.
8 Principles of Equities Posted on February 13, 2023 The stock market is many things: It is the greatest wealth creator known to humanity It funds some of the most innovative companies in the world It changes lives It is intensely competitive, humbling even the sharpest minds There are many ways and styles to navigate this beautiful yet treacherous terrain. One is not always better than the other. However, these are the eight principles that govern our attitude, style, and focus for the greatest prediction machine ever known – the stock market. Why 8? This is a special number for the Carson Equity team. In numerology, 8 symbolizes wealth, abundance, and achievement. It also represents the ability to make decisions. In some cultures, it’s considered a lucky number. But, if you flip it on its side, it becomes ∞, the symbol for infinity, representing the long-time horizon that these assets are valued upon and the duration that all great companies aspire for. All of these are important characteristics of compounding wealth in equities. Nothing beats long-run equity returns. Not bonds. Not housing. Not gold, oil, or copper. Frankly, it’s not even close. Sure, there are periods of exception, but they haven’t lasted long. Whether 200 years, 100, 50, or 25, no other asset class has generated as much wealth as the stock market. The stock market is built to recover. It’s seen wars, recessions, depressions, pandemics, terrorist attacks, and speculative bubbles. Some of these have caused nasty declines that lasted years. Yet, not only did the stock market recover from the worst drawdowns in its history, but it did so in dramatic fashion. Human ingenuity and capitalism are a powerful combination that has stood the test of time. Permabears beware. Reward takes risk. But doesn’t everything good in life? Stocks are volatile, which is just one aspect of risk. There are many types, but arguably the most significant risk is the permanent loss of capital due to not having a plan. The stock market can be a wealth-generation machine but humbles even the brightest. Patience & perspective pays. The stock market is a reflection of human emotion. It can bring joy and pain, fear and hope, pride and shame, anger, and comfort. Staying grounded and managing these inevitable emotions are key to compounding wealth over the long term, which of course, takes a long time. Respect the market’s complexity. Sometimes it seems like equity investing is so easy that a cave dweller can do it. Innovations like online trading, ETFs, passive and factor investing, etc., have greatly benefited our industry and helped democratize access to this excellent wealth machine. However, investing is hard. Don’t oversimplify it. While there are many ways to make money in the market, it’s never as easy as saying “High P/E. Sell” or “Quality. Buy.” Even if we choose to ignore its complexity, respect that it is there. Stocks are forward-looking. Apologies to all chartists, technicians, and quants, but equities represent the present value of a company’s future cash flows. Unlike bonds, stocks don’t expire, so their future can be a long time. Predicting tomorrow isn’t easy, but accurately forecasting coming years and even decades is near impossible. This is why stocks are so volatile and why some gyrate more than others – the market believes that certain stocks have clearer futures. Equities care little about yesterday. Fundamentals lead, but price matters. Fundamentals drive long-term returns, but the price you pay matters. Some of the most significant investment errors are forgetting one without the other. Many value managers lead with “cheap” but fail to acknowledge a compromised business. Growth managers can be guilty of buying “growth at any price” only later to realize sharp losses as future expectations become grounded. A good company doesn’t always equal a good stock; a struggling firm can bring handsome rewards. Match numbers with narrative. Equity investing is more than numbers, charts, and equations. Instead, these are helpful tools to understand where a company or sector has been and, more importantly, where it may be going. Investing in narratives alone can be dangerous. However, it can be constructive if matched against numbers. Expressing a thesis with both a story and math helps keep investors honest, especially when considering the pros and cons of any decision.
Inflation Concerns Easing Tue, Feb 14, 2023 As we noted in an earlier post, this morning's release of the NFIB Small Business Survey showed fewer and fewer respondents observing price increases. Similarly, while still high, fewer respondents to the survey are reporting inflation as their biggest problem. While the issue remains historically elevated and the predominant issue for small businesses, the percentage of respondents reporting inflation as their biggest issue fell to 26% in January. That compared to a peak of 37% last summer. As shown below, this reading still has a long way to fall to get back to pre-COVID norms, but at least it's trending in the right direction. In the table below, we break down the percentage of small business respondents that reported various issues as their most pressing this month. As mentioned above, inflation remains the single most commonly reported issue and that reading is also the most elevated with regards to its historical range. However, the six point decline month over month ranks in the bottom 1% of all month over month moves. At the same time, fewer respondents reported costs of insurance to be an issue. Government requirements and red tape also pulled back, albeit that was offset with a 4 percentage point jump (a 95 percentile month over month move) in the share reporting taxes as their biggest issue. When it comes to "poor sales," only 4% of small businesses listed this as their number one problem -- the same level it was at last month and in the bottom percentile of all readings in the survey's history. When it comes to recessionary indicators, we would expect small businesses to list "poor sales" as their number one problem when things really start to slow down, and that simply hasn't happened yet.
Time Is Your BFF When It Comes to Investing Posted on February 14, 2023 “You can learn a lot by looking.” Yogi Berra Did you know that the S&P 500 is up about a coinflip of the time on any one day? That’s right, since 1950, the S&P 500 has closed green 53.0% of the time. So the secret that nearly everyone knows but few uses to their advantage is that time is on your side when it comes to investing. As Brett noted yesterday, one of our principles is that long-term stock gains are simply one of the best ways to create wealth and beat inflation. And if you have a long enough time horizon, history shows the odds favor that you’ll be in the green over time, potentially by a lot. Or, as Yogi told us in the quote above, you don’t always have to do much other than be patient and look around. So, let’s do that; let’s take a longer-term look at things. If your average day is up 53% of the time, the good news is that the average week is up 56.6% of the time, the average month is up 60.4% of the time, and the average year since 1950 has been higher 71.4% of the time. So, the longer you hold, the more likely it is to sport gains. What about taking it out even longer? This is where it really pays to have patience, as the S&P 500 was higher 80.8% of the time every five years, 90.4% every decade, and it has never been lower if your holding period was 20, 25, or 30 years. Here are some other important stats to know. The worst 30-year return for the S&P 500 was 226.7% in 1958. That shouldn’t be surprising; if you bought 30 years earlier, you’d be buying right near the peak before the Great Depression. In other words, you could have bought in front of the worst stock market and economy in U.S. history, yet 30 years later, you’d still be up more than 200%. Think about that. Oh, and the best 30-year period? From the end of 1974 to the end of 2004, the S&P 500 added 1767.7%, on the heels of the huge ‘80s and ‘90s bull run. Here is a chart breaking down the best and worst returns based on how long you are willing to hold things. Jack Bogle once said, “The stock market is a giant distraction to the business of investing.” I like that, and when you think about how strong these long-term returns are, it sure makes you want to think twice the next time we have a worry du jour. Trust us, there are always worries and reasons to be concerned. But for most investors, especially those with a potential multi-decade time horizon in a retirement account, any pullback or weakness should be viewed as an opportunity, not a time to panic. Let’s think about that great 30-year run one more time. It would mean you’d have the fortitude to buy in 1974, which was on the heels of one of the worst bear markets ever in ‘73/’74 when stocks were cut in half. They say the stock market is the only place things go on sale, yet people run out of the store screaming. I agree, and we need to remember this the next time stocks are in a vicious bear market. If you can buy (or not panic and sell) during those scary times and hold for a few decades, the market gods might just grant you some spectacular gains for going against the masses telling you to sell. Over the past 25 years, we’ve seen the tech bubble implode, 9/11, the financial crisis, multiple flash crashes, the worst global pandemic in 100 years, generational inflation, numerous economists touting deflation, multiple major global wars, horrible NFL ref calls in big games (ok, this might not fit the others, but it is true), yet those investors who used two 50% bear markets and a 25% bear market as an opportunity to add, and not panic, are the ones that are simply smiling right now. I’ll leave you with this. Warren Buffet once said, “It is not necessary to do extraordinary things to get extraordinary results.” I get to work with Advisors and their clients every single day. Some of the happiest investors I ever see are the ones that continued to put money into their 401(k) and savings accounts like clockwork over the past 25 years. They simply ignored the news, trusted their advisor’s advice, and stuck with their long-term financial plan. Many others got cute and sold at poor times or went all-in on gold, crypto, or some other latest fad. Almost like they have some superpower… In reality, all they are doing is just looking … like Yogi told us.
Homebuilder Sentiment Pops Wed, Feb 15, 2023 Wednesday's release of homebuilder sentiment from the NAHB showed a significant rebound in sentiment as the headline reading has risen in back-to-back months from the low of 31 in December up to 42 this month. While that is not a screaming endorsement of strength from homebuilders (in the past decade, the only times the index was this low was the past few months and the start of the pandemic), it does mark an improvement in sentiment that is consistent with the recent turnaround in mortgage rates and the rise in weekly mortgage applications. While sentiment has risen in back-to-back months, the moves from January to February were historic across the report. The only index to not experience a monthly move that ranks in the top decile of all periods was the Midwest. Future Sales was the most impressive with its 11-point jump tied with November 1988 for the second largest month-over-month increase on record. As for the headline index, the 7-point increase was the largest increase since the months of May, June and July 2020 when sentiment began to recover from the pandemic plummet. Prior to 2020, June 2013 was the last time sentiment has risen by as much. Click here to learn more about Bespoke's premium stock market research service.
DJIA and S&P 500 Up 10 of Last 12 Days Before Presidents’ Day Weekend Trading before Presidents’ Day Weekend used to be horrible. However, there has been a big improvement over the last 12 years. The longer-term track record of the market’s performance ahead of Presidents’ Day weekend from 1990 through 2010, shows DJIA, S&P 500 and NASDAQ suffered numerous and sizable declines especially on Friday. However, more recently, since 2011, the Friday before Presidents’ Day has been improving (shaded in light grey in table below). DJIA on Friday has the best record over the last 12 years, up ten times with an average gain of 0.43%. S&P 500 has been nearly as strong, also up ten time, but with a slightly softer average gain of 0.37%.
Inflation Progress Stalls as the Economy Accelerates Posted on February 15, 2023 January inflation data hit the nose on expectations. Headline CPI rose 0.5% and is up 6.4% year-over-year, while core CPI (ex-food and energy) rose 0.4% and is up 5.6% year-over-year. The fact that inflation is coming in at expectations is in and of itself a victory. That’s a sharp contrast to last year when inflation kept surprising to the upside. With that, here’s the big picture: Inflation’s much lower than it was last year. For example, over the 18 months from May ’21 through Oct ’22, headline CPI was running at 7.6% and core at 6.2%. Over the past three months, headline has slowed to 3.5% and core to 4.6% (annualized rates). Inflation is still elevated, and we’re not seeing further deceleration. Yet. hah It’s worth understanding why the deceleration has seemingly stalled. The devil’s in the details As the chart below shows, headline CPI slowed from 9.1% in June to 6.5% in December. And that came on the back of falling energy prices (dark red bars) and falling used car prices (dark yellow bars). The problem is that we didn’t have either of those in January. Energy prices rose 2%, with higher pump prices and surging utility prices. The big declines in pump prices are over for now, though we should see utility prices pull back (thanks to falling natural gas prices). Used car prices fell 2%, which was positive. The problem is that the Bureau of Labor Statistics (BLS) reduced the weight of used cars in their latest update by almost a full percentage point to 2.7%. So, expect the disinflation drag from used cars to be modest from here on. If at all, since auction prices are rising again – the Manheim used car price index was up 2.5% in January. The single biggest driver of elevated inflation right now is rents – represented by the dark green bars in the previous chart. Rents have been running at an annualized pace of just under 10% over the past three months, while “Owner’s equivalent rents” (what homeowners “pay themselves”) are running close to 9%! These are massive numbers. On top of that, the BLS just increased the weight for “Shelter” by more than a percentage point to 33%. So, you had items with falling prices getting a lower weight and items with high inflation getting a larger weight… The good news is that shelter disinflation is in the pipeline. Market rents have decelerated significantly in recent months. The bad news, as we’ve written before, is that official data will not capture this dynamic for another eight months or so. It’s coming, but until that happens, core inflation will probably remain above 3%, perhaps closer to 4%. A strong economy is putting upward pressure on prices As the economy was recovering from Covid, there was an expectation that Consumers would pull back spending on core goods, like household stuff, apparel, etc And they would shift toward services, as they “revenge-spend” on everything they missed amid the lockdowns. But even that would be temporary, with consumption eventually normalizing to pre-pandemic trends. Well, neither has happened. And that is a direct result of a stronger economy. Or, more specifically, a strong employment market and strong wage growth. Combine that with falling inflation, and consumers are seeing “real incomes,” i.e., incomes adjusted for prices, rise once again. That’s a tailwind for consumption. We discussed this dynamic in our 2023 Outlook – one of the biggest reasons we believe the economy can avoid a recession this year. Now the other side of this is that there’s upward pressure on goods and services you’d expect consumers to spend more money on if they were feeling good about their finances. Including eating out, going to movies/concerts, recreational activities, buying clothes and household goods, spending more on personal care services (including dry-cleaning), and child care. I’m “guilty” of engaging in some of this as recently as this past weekend, as my wife and I hired a babysitter to look after our 6-year-old twins while we went to watch Avatar (which was phenomenal). Avatar, by the way, has made more than $2 billion in sales – not something you’d expect in a weak economy! So that’s a lot of movie tickets, popcorn, and babysitters. The chart below shows inflation over the past three months for several core goods and services categories. As you can see, they’re all running well above the pre-pandemic trend. The categories listed below comprise about 17% of the CPI basket. It’s not insignificant. Strong consumption is good for an economy that is highly reliant on it. We believe consumption patterns will normalize as the year progresses, especially as wage growth decelerates – and there are strong signs of that, as we discussed after the latest employment data were released.
Claims Still Below 200K Thu, Feb 16, 2023 Jobless claims continue to impress in the new year. For the fifth week in a row, seasonally adjusted initial claims have come in with a sub-200K reading. That is the longest streak since a 10 week long stretch ending in April of last year. Although claims have remained at a healthy level, there hasn't been much in the way of improvement over the last few weeks with claims yet to move below the 183K low at the end of January. On a non-seasonally adjusted basis, the first few months of the year tends to see a sharp unwind in claims, albeit with some moderation during the current week of the year which is being observed currently with fairly flat readings in claims over the past few weeks. At current levels, this year's reading was roughly in line with the comparable week of the past several years with the exception of the much more elevated reading in 2021. While not to say the reading is at unhealthy levels, continuing claims have not been as strong as initial claims. Claims have risen in each of the past two weeks, totaling 1.696 million in the most recent print. That is the highest level since the week of December 24th. Overall, both initial and continuing claims continue to show healthy readings without much in the way of rapid improvement or deterioration.
American Consumers: Have Money, Will Spend Posted on February 16, 2023 “American Consumers: Have money, will spend“ That, in a nutshell, is the story of the economy right now. Retail sales and food services surged 3% in January, making a mockery of expectations for a 1.7% gain. This is the largest monthly increase since March 2021, but that came on the back of stimulus checks. So excluding the 2020/2021 recovery period (when we saw large drops and gains), you have to go back to October 2001 to find a month with larger gains. And even that was a rebound after a depressed September. Such a large number should immediately get your antennae up, and there certainly are seasonality issues. For three years, we’ve seen retail sales drop in December only to surge in January. But don’t miss the big picture: consumption is running strong Vehicle sales were the big driver, accounting for over a third of the overall gain. But there was broad strength everywhere, including general merchandise stores, e-commerce, clothing stores, and even furnishings (despite the slowdown in housing activity). Spending at restaurants and bars rose by a whopping 7.2%, and it wasn’t because of prices (up 0.6% last month). “Real” retail sales and food services, i.e., after adjusting for inflation, rose 2.4% in January. It’s currently running 9% above the pre-pandemic trend. Make all the seasonality-related adjustments you want—no denying that consumption is strong. The only surprise really is how strong goods consumption is running, even as we get further away from the pandemic. The expectation was that consumption patterns would normalize by now, and goods spending would head back towards trend. Consumption is strong because real incomes are rising It really doesn’t get much simpler than that. January is a great example. Aggregate weekly payrolls, which should give you a sense of income earned by private workers across the economy, rose 1.5% in January. This was on the back of: Rising employment (remember the massive jobs report?) More hours worked Strong wage growth Meanwhile, inflation was up “only” 0.5%. After adjusting for prices, aggregate payrolls have now been rising since last June at an annualized pace of almost 5%. For perspective, this measure of aggregate income ran at an annual pace of just over 2% before the pandemic. The current pace is hot, to put it mildly, so don’t be surprised if we get a pullback. But if employment continues to rise, wage growth remains strong, and inflation doesn’t surge, real incomes should continue trending higher. And that’s a tailwind for consumption and the economy. Of course, the other side of solid consumption is that many of the categories where we see strong consumer spending are seeing upward price pressures. I wrote about this after the January inflation report was released – the fact that inflation is running hot in several service sectors and core goods like apparel and furnishings is another indication that demand is strong, especially in those areas. Good news is good news, finally Hot inflation in the service sector is precisely what the Federal Reserve is worried about. So, it isn’t a surprise that markets have repriced their expectations for monetary policy, now taking the Fed at their word that they’ll get to the 5.0-5.25% range for the federal funds rate. And stay there for longer. That repricing is not great for bonds, but unlike last year, the good news is that stocks have held up quite strong in the face of that. This is positive in that good news about the economy is good news for stocks.
Up 7 of Last 11 After Presidents’ Day But Still Weak Long Term DJIA, S&P 500 and NASDAQ are all up 7 of the last 11 years on the day after the Presidents’ Day market holiday with average changes ranging from -0.12% for DJIA to 0.24% for NASDAQ. In our February 2023 Strategy Calendar for members shows conflicting indications for this Tuesday, February 21, the day after Presidents’ Day. Over the most recent 21-year history this 15th trading of February has been down 61.9% of the time for S&P 500 with average loss of -0.29% earning the day our “Angry Bear” icon. Earlier this week noted the improving trend of market performance ahead of Presidents’ Day weekend. As you can see in the table here the days after has improved the past 11 years but the Wednesday after has not enjoyed the same turnaround and both days still display a fair amount of red. Since 1990, Tuesday after Presidents’ Day has been strongest for the S&P 500 with 18 gains and 15 losses for median gain of 0.09% but with an average loss of –0.24%. DJIA also has more gains than losses on the Tuesday after, but NASDAQ is a net loser down 20 of 33 years with an average loss of –0.51% and a median loss of –0.30%. Wednesday is all red for all three major averages. NASDAQ and S&P 500 have more losses, but DJIA is a loser as well. On the Wednesday after the Presidents’ Day holiday DJIA is down 17 of 33 with an average loss of –0.10% and a median decline of –0.10%. S&P 500 is down 20 of 33, average –0.08%, median –0.10% and NASDAQ is down 19 of 33, average –0.11%, median –0.18%. Big losses two days just before and after President’s Day 2022 fueled by the escalation of belligerent rhetoric and military buildups right before Russia invaded Ukraine have worsened the record. Prior to the invasion the market was already dropping in the face of hot inflation and expectations of coming aggressive Fed rate hikes.
The Valentine’s Day Indicator Sees Green In 2023 Posted on February 17, 2023 First things first, this is a three-day weekend for many of us and I hope everyone enjoys the long President’s Day weekend. And if you need to buy a mattress, this is your Super Bowl weekend, good luck out there. Speaking of the Super Bowl, this is our yearly reminder that someone should run for President, and their whole platform should be to make sure that the Super Bowl is always over President’s Day weekend. Who wouldn’t want the day after the big game off? I swear they’d win …. But I digress. We’ve noted many times this year some of the rare yet bullish developments taking place for stocks that should continue to lead to strong performance in 2023. For example, we discussed why the strong January, amid a negative year the year before, could be a very good thing in The Trifecta of Bullish. Here’s one of the tables from that blog. Higher nine for nine and up 27% for the year would make many bulls smile. Let’s take another look at the strong start to 2023, but this time wrap in Valentine’s Day. I hope everyone had a nice Valentine’s Day earlier this week. Mine was a winner, as my wife got me a Reese’s Take 5 candy bar, my favorite for sure. Do you know who also had a nice Valentine’s Day? The bulls. I know, I know, Valentine’s Day is known for red; well, the Valentine’s Day Indicator is flashing green. 2023 was the 11th-best start to a year ever for the S&P 500 as of Valentine’s Day, up a very impressive 7.7%. What happened next, looking at the best ten starts to a year? Nine out of 10 times the rest of the year was green, with an average return of nearly 11% and a median return of 12.5% – both well above the average returns. Momentum can be a wonderful thing for investors, and the Valentine’s Day Indicator does little to change that. I joined Becky Quick and CNBC’s Squawk Box yesterday to discuss the Valentine’s Day Indicator. You can watch the full interview here. Speaking of momentum, here’s an interesting study I did when stocks gained more than 5% during a month (like what happened in January). A year later? Stocks are up 13.5% on average and higher 83% of the time, way better than average. I also broke it up by which month the big gains took place. When January gained more than 5%, the next twelve months are up 12.8% on average and higher 83.3% of the time. Maybe we should be rooting for a 5% gain in May or June, as stocks have never been lower a year later. Or maybe in September, when they gained an incredible 20% on average a year later? I will leave you with this. February historically isn’t a very strong month for stocks, and it is the second half of February when trouble tends to arrive. We are still quite optimistic about how well stocks could do the rest of 2023, but it won’t be a straight line. Just be aware that the next three or four weeks historically aren’t very strong, and some well-deserved seasonal weakness could be perfectly normal and healthy.
Week After February Monthly Option Expiration NASDAQ Best, Up 8 of Last 11 February has historically been a challenging month for the market and frequently the weakness has arrived late in the month notably in the week after monthly options expiration. Since 1990, only NASDAQ and Russell 2000 have advanced more often than declined. Average performance during the week is negative across the board due to sizable losses in multiple years. The worst decline was in 2020 when Covid-19 arrived. More recently, since 2012, performance has modestly improved. DJIA and S&P 500 have advanced 7 times in 11 years, while NASDAQ has risen 8 times.
