DJIA, S&P 500 & NASDAQ Higher 66.7% of the Time on First Trading Day of April According to the Stock Trader’s Almanac 2023, the first trading day of April is DJIA’s fourth weakest first trading day of all months based upon total points gained. However, looking back at the last 21 years, in the tables below, we can see DJIA, S&P 500 and NASDAQ have all advanced 66.7% of the time (up 14 of last 21) with average gains of 0.16%, 0.24%, and 0.26% respectively. The Russell 2000 is modestly softer, but it has still been up more frequently than down. Five declines in the last ten years (the largest in 2020) have weighed on performance.
A Big Win for the Bulls Posted on April 5, 2023 “We may not know where we are going, but we better know where we stand.” Howard Marks, Co-Founder of Oaktree Capital Management A little-known technical indicator triggered in the first quarter, and it could bring smiles to the bulls. This one is known as the December Low indicator, and it is fairly straightforward: when the S&P 500 doesn’t close beneath the December low close, good things have tended to happen the rest of the year. The opposite, of course, is when the December lows are violated in the first quarter. To refresh your memory, that is exactly what happened last year and was one subtle clue that the odds of a dicey rest of ’22 had increased. Given that stocks didn’t break their December low this year, this is one less worry for sure. Interestingly, since 1950, stocks held above the December lows 36 times while they broke the lows 37 times. Talk about even Steven. Those are some pretty big sample sizes, and sure enough, the results are quite conclusive. Those 36 times the December lows held? The full year was up an incredible 34 times and up an average of 18.6%. The times it failed? The full year was down 0.2% on average and higher less than a coin flip. If you wanted to investigate things closer, here are all 36 times it held above the December lows. I added what happened the rest of the year (so the next three quarters) as well, and once again, strong performance was quite normal. We get it. Anything could happen from here, but the truth is it would be quite abnormal to expect a massive bear market and a horrible year for stocks this year. Here’s the other side to things; what happened when the December low was violated? Once again, the full year and the next three quarters’ returns were much different and weaker. Just a quick glance and some of the worst years ever saw the December lows broken. Years like ’73, ’74, the tech bubble, ’08, and ’22 all made this infamous list. Odds are, as you read this, I will be on a beach in the Turks and Caicos for Spring Break. (You caught me, I wrote this last week.) So as of right now, I’m not overly concerned about this potentially bullish development; I’m more into those fruity drinks with umbrellas in them, but once I get back home, you better believe this will be one that I’ll be focusing on closely. Or, as Howard Marks said in the quote above, we don’t know where we are going, but we do know we stand on potentially a better backdrop for stocks than most think.
Sentiment Back to Bullish Thu, Apr 6, 2023 Sentiment saw a huge rebound this week based on the latest AAII survey. With the S&P 500 taking out early March highs late last week, bullish sentiment jumped 10.8 percentage points to 33.3%. Although there was a higher level of bullish sentiment as recently as February 16th, this week's increase was the largest WoW jump since June of last year. Even though a double-digit jump in bullish sentiment sounds significant, S&P 500 performance has been unremarkable following similar instances historically. The rise in bullish sentiment borrowed almost entirely from those reporting as bearish. Bearish sentiment fell 10.6 percentage points down to 35%. That is the lowest reading since mid-February and the first double-digit drop since November. The huge shift in favor of bulls this week resulted in the bull-bear spread narrowing to -1.7 points. That is the least negative reading in the spread since February when the bull-bear spread had broken a record streak of bearish readings. As we noted last week, the AAII survey has been a holdout in showing more optimistic sentiment readings. Whereas other sentiment surveys like the NAAIM exposure index and the Investors Intelligence survey had essentially returned to historical averages, the AAII survey saw firmly bearish sentiment readings with a bull-bear spread of 1.6 standard deviations from its historical average as of last week. Given the quick turnaround this week, the AAII survey is no longer weighing on our Sentiment Composite as it moved back into positive territory indicating bullish sentiment for only the fourth week since the start of 2022.
Inflation Concerns Continue to Ease Tue, Apr 11, 2023 In an earlier post, we mentioned the record-low reading in the percentage of small businesses perceiving now as a good time to expand. As for what these firms perceive to be their most pressing issues, inflation continues to be the single most prevalent answer at 24%, albeit the gap has narrowed dramatically. Quality of labor is now only a single percentage point behind at 23%, and when combined with cost of labor, the two issues account for over a third of small businesses' biggest problems. From a historical standpoint, those three readings all remain elevated and account for a massive share of the most pressing issues facing small businesses. The four percentage point drop month over month in the percentage of respondents reporting inflation as their biggest issue is the largest decline since January when it had fallen 6 percentage points. As a result, the category is only down to the lowest level since January 2022 which remains well outside the range of pre-pandemic readings. In other words, inflation appears to be improving compared to last July when it was top of mind for 37% of small businesses, but it is still nowhere near a non-issue. Picking up some of those losses has been government-related concerns. This series has historically held a political bias in which under Republican administrations small businesses are less concerned with red tape and taxes and vice versa during Democratic administrations. With the surge in inflation concerns during President Biden's tenure, this index has remained historically low but has begun to rise more recently as inflation has improved. Another area to see a rise in firms reporting it as their biggest problem has been poor sales. While the reading is far from flying, it has begun trending higher accounting for 5% of responses in March. That pairs with the index for actual reported sales changes which have remained firmly negative for nearly a year now.
Sentiment: Back to the 20s Thu, Apr 13, 2023 Whereas last week saw a huge rebound in bullish sentiment after the S&P 500's breakout above March highs, the more listless price action of the past week resulted in a modest turnaround in sentiment. The latest AAII sentiment survey showed only 26.1% of respondents reported as bullish compared to the recent high of 33.3% last week. The 7.2 percentage point decline was the largest one-week drop in bulls since the last week of February when it declined by 12.5 percentage points. That leaves bullish sentiment right in the middle of the range since the start of 2022. Although bullish sentiment fell, without any considerable push lower for the S&P 500, bearish sentiment went little changed falling just half of one percentage point down to 34.5%. Like last week, that remains the lowest reading since the week of February 16th. That means that all of the declines in bullish and bearish sentiment flowed to the neutral camp with a surge of 7.9 percentage points; the largest one-week increase since the first week of the year. At 39.5%, neutral sentiment is at the high end of the past few years' range and only 0.3 percentage points below the late February high. The AAII survey was not the only sentiment reading to take a more bearish tone this week. The NAAIM Exposure index's latest release today showed investment managers reduced equity exposure. Meanwhile, the Investors Intelligence survey's bull-bear spread has actually continued to rise resulting in the highest reading since the first week of 2022. Additionally, as we noted in Monday's Chart of the Day, the TD Ameritrade Investor Movement Index went unchanged in March after rebounding in the proceeding few months. In other words, across multiple readings, sentiment has improved but has yet to definitively shift to bullish.
DJIA Up 33 of Last 41 April Monthly Option Expiration Weeks April’s monthly option expiration is generally bullish across the board with respectable gains on the last day of the week, the entire week, and the week after. Since 1982, DJIA and S&P 500 have both advanced 26 times in 41 years on expiration day with average gains of 0.23% and 0.18%, respectively. Monthly expiration day was staging a comeback after four or five declines from 2014 to 2018 but took a hit in 2022’s bear market. Expiration week has a bullish track record over the past 41 years. Average weekly gains are right around 1% for S&P 500, DJIA and NASDAQ. The bullish bias of April monthly expiration also persists during the week after although average gains have not been as strong with selling pressure rising recently (since 2014).
Volatility Is The Toll We Pay Posted on April 18, 2023 “It’s a proprietary strategy. I can’t go into it in great detail.” – Bernie Madoff Although Bernie Madoff was quite vague when asked how he had a strategy that printed money month after month when no one else could match it, as investors we know one thing and that is markets don’t always go straight up. Burt White, our Managing Director and Chief Strategy Officer, likes to say that volatility is the toll we pay to invest. No one wants to pay a toll, but sometimes you just have to do it to get where you are going. When I lived in Charlotte and would drive back up to Ohio for holidays, I’d have to pay the great state of West Virginia $4.25 three different times on I-77. I didn’t like it, but Santa brought the kids presents up there and I had to do it. Getting back to the stock market, volatility is that toll that we pay for enjoying longer-term returns. Below is a great chart that sums it up and thanks to our friends at Ned Davis Research for helping us with the data. Here’s what you need to know regarding the S&P 500: Each year sees more than seven different 3% percent dips. More than three times a year do stocks correct 5%. About once a year on average sees a 10% correction. A 15% major correction happens every year-and-a-half. A 20% bear markets happens about every three years. Another quote I like is from Regis Philbin when he said, “I’m involved in the stock market, which is fun, but sometimes very painful.” Well, this year has been fun for investors, but last year was quite painful. After more than a 120% rally off the March 2020 lows, maybe the bear market we saw last year shouldn’t have caught as many investors off guard like it did? We didn’t quite see a 25% bear market happening last year, but we expected as much as a 15% correction at some point. With the historically aggressive Fed, inflation soaring, China lockdowns, the war, and supply chains in disarray, it was a perfect cocktail for a bear market. The truth though is we get spoiled by the good times and when the rough times hit, we are almost surprised that bad times ever happen. Well, they do happen and it is all part of investing, or the toll we pay to invest. Just know this, volatility and bear markets have happened before and will happen again. The good new though is after this bad times, likely better times will be coming!
Stocks are real assets Posted on April 19, 2023 Inflation is on everyone’s mind these days, but as we wrote last week, the good news is that inflation is on a relatively strong downtrend. As of March, CPI was up 5% over the past year, but well below the peak of 9.1% we saw last June. However, even 5% inflation is really elevated. No surprise that a popular question we get is “what is a good inflation hedge?” Over the short-run asset classes like commodities can provide a hedge against inflation, as they did last year. Not to mention they act as a diversifier, which is useful when stocks and bonds are faltering. CPI inflation was up 6.4% in 2022, while here are the returns for 3 main asset classes: Stocks (S&P 500): -18.1% Bonds (Bloomberg U.S. Aggregate Index): -13.0% Commodities (Bloomberg Commodity Index): 16.1% Another question we get: “what’s the best way to reduce portfolio volatility?” The simple, and common, answer is related to what I just mentioned above. Diversify your portfolio, with some assets that zig when others zag. Usually, bonds are the diversifier of choice but obviously that doesn’t work always, especially when interest rates rise like in 2022 when the Federal Reserve responded aggressively to tame inflation. So, you need other diversifiers, like commodities. However, my colleague Ryan Detrick had a wonderful blog yesterday where he quoted Burt White, our Managing Director and Chief Strategy Officer, who likes to say: “Volatility is the toll that we pay for longer-term returns” You can diversify away from stocks, and while that is a good idea to reduce volatility, the reality is that it does reduce long-term returns. Across asset classes, the maxim “more reward means taking more risk” holds true. But here’s something that is interesting: time diversifies risk. Ryan shared the following chart in a piece titled “Time is your BFF when it comes to investing”, showing that it really pays to have patience when investing in stocks. Looking at rolling 5-year periods over the past 70+ years he found that returns for the S&P 500 were positive 81% of the time. However, returns were positive 100% of the time when looking at rolling 25- and 30-year periods. Using S&P Composite data over the past 100 years, I calculated returns for stocks over rolling 1, 5, 10, 20 and 30-year rolling periods. As you can see below, the 1-year horizon has a lot of variability in annual returns, with a maximum return of 54% (1932) and a minimum return of -42% (1930). However, that variability reduces as you expand the time horizon. Over 10-year rolling periods, the worst return was -1%, while the average was 10%. Expand the time horizon to 30 years, and the lowest return over any 30-year period over the last 100 years was +8%! But there’s even better news. The story holds even after adjusting for inflation In a prior piece, I discussed how stocks are real assets whose prices rise with inflation. Also, corporate earnings move higher with inflation since companies can pass along rising input costs over time to customers (and don’t we know it, given what happened last year!). As Jeremy Schwartz at WisdomTree points out, this pricing power is evidenced by the fact that long-term earnings and dividend growth has outpaced inflation (even during the 1970s and 1980s when inflation was high). Here’s the thing: over time stocks have a high likelihood of generating positive returns, even after adjusting for inflation. I reproduced the previous chart, but this time the returns are adjusted for inflation, i.e. it shows “real” returns. As you can see, real returns are highly variable over short time horizons, especially 1- and 5-years. However, when you expand the time horizon to 20- and 30-years, there isn’t a single period over which real returns were negative. Turns out stocks work well for long-term inflation protection. In case you are curious, here are the stats for the most recent 30-year period, 1993-2022 Nominal return: 9.7% CPI Inflation: 2.5% Real return: 7.0% By the way, this is a period in which we saw 3 massive bear markets, including the Tech bubble crash, the Great Financial Crisis, and Covid. Ryan and I had Professor Jeremy Siegel on our podcast recently, who literally wrote the book “Stocks for the Long Run”. He first wrote the book in 1994 and showed that real returns on stocks from 1802-1992 was nearly 7%. He just wrapped up the 6th edition of the book (congratulations to our friend, Jeremy Schwartz, for co-authorship on that one). They updated the book with 30 more years of data and incredibly, the last 30 years had more or less the exact same return! I’ll give him the last word, which is apt: “It really is quite remarkable and shows the long-term persistence and stability of long-term stock returns!”
Bulls Keep Coming Back Thu, Apr 20, 2023 The S&P 500 has been little changed in the past week resulting in little change to sentiment according to the latest AAII survey. 27.2% of respondents reported as bullish this week, up 1.1 percentage points versus the previous week. Albeit higher, that does not result in any sort of new high as bullish sentiment sits right in the middle of the past year's range Bearish sentiment likewise picked up this week rising from 34.5% to 35.1%. That is only the highest level in three weeks as bearish sentiment remains relatively muted versus the significantly elevated readings of the past year. With that said, sentiment continued to favor bearishness with the bull-bear spread sitting at -7.9. This week marks the ninth in a row in which bearish sentiment outweighed bullish sentiment. Given both bullish and bearish readings rose, each group borrowed from the neutral pool which pivoted off of a recent high of 39.5% down to a still elevated 37.7%. Factoring in other sentiment surveys, there was more bullish tones. The NAAIM Exposure index indicated active managers added long exposure to equities and the Investors Intelligence survey showed the highest bull-bear spread since the first week of 2022. That leaves the AAII survey as the only one of the three with sentiment readings that are more bearish than historically normal.
Is Anyone Bullish? (Part 2) Posted on April 25, 2023 “Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.” -John Maynard Keynes Stocks have had a great start to 2023 and the economy continues to surprise to the upside, with China specifically showing a turn for the better. If one of the largest economies in the world is quickly improving, what does that do for the odds of a US recession? Our base case has always been the US would avoid a recession in 2023 and we still are in the camp, with a better Chinese economy doing little to change our views. For more of our views on the macro backdrop, but sure to read all the amazing work that Sonu has been doing. Here’s what is so fascinating about the current state of things, various signs of sentiment are showing over the top negativity. From a contrarian point of view, this type of negativity could be a very bullish catalyst. Think about it, if everyone is bearish, then they’ve already sold, leaving nothing but buyers. So any good news (or even less bad news) could spark a rally. If this sounds familiar, it is because we’ve been bullish for this very reason, everyone else was negative. In mid-December we moved to overweight equities, at a time when nearly everyone else was spouting the usual end-of-the-world scenarios. We wrote about this in Is Anyone Bullish? Now after a great start to the year for stocks, we are hearing some of the same negativity. Here are some things I’ve noticed recently which are all suggesting investors are a tad too pessimistic and this could be positive for stocks down the road. Net short positions on S&P 500 e-mini futures for non-commercial hedgers are at their highest level since 2011. This is more widely known as bets that hedge funds are making. This doesn’t mean they are outright bearish, they very well could be hedged to the tilt. Still, going back to 2011, it is clear when there are this many shorts, it has been a nice time to be looking for higher stocks, not lower. The recent Bank of American Global Fund Manager Survey showed the most underweight stocks relative to bonds since the Great Financial Crisis. This survey looks at more than 600 money managers and it is clear again the crowd is quite defensive here. Note how popular stocks were relative to bonds in January 2022, just as stocks peaked and went into a vicious bear market. Turning to flows, a recent Goldman Sachs report showed that flows were huge into safe assets versus risky assets. This is another way of showing very few investors are willing to step up and expect better times. JPM Morgan had this survey of institutional investors and it showed that 95% expected stocks to drop by the end of the year. Only 5% were looking for stocks to gain and virtually no one expected stocks to gain by the end of the year. This one amazes us, but shows just how much potential there is for a surprise rally the rest of 2023. Lastly, a CNBC survey showed public pessimism on the economy hit a new high. That’s right according to the latest CNBC All-American Economic Survey, 69% of those surveyed held negative views about the economy now and in the future, the most pessimistic ever. Also, just 24% said it was a good time to invest in stocks, the lowest in the 17-year history of the survey. In conclusion, think about the Keynes quote above. Most money managers were in the same camp at the start of the year and that was underweight equities and a big bear market was coming. Turns out, most are still in that camp. Who knows, maybe not all of them really thought it was even true, but when everyone else was doing it, it was easier to follow the crowd for the sake of their career. I’ve always lived by ‘if you do what is average, expect average returns’. At the Carson Investment Research team we aren’t about being contrary for the sake of being contrary, but when the macro backdrop, market technicals, fundamentals, and sentiment all line up in our favor, we will take the road less traveled and go against the herd. We continue to think the economy is on better footing than most expect, thanks to a strong consumer and healthy employment backdrop, while we also remain overweight equities in the models we run for our Carson Partners.
