Tech Selloff Sets Up NASDAQ’s Midyear Rally The week after June Triple Witching delivered its expected weakness, but this sets up NASDAQ’s 12-day midyear rally to a T. In the mid-1980s tech’s influence in the market began to grow and the market’s focus in early summer shifted to the outlook for second quarter earnings of technology companies. In anticipation of positive results, over the last three trading days of June and the first nine trading days in July, NASDAQ typically enjoys a rally. This 12-day run has been up 29 of the past 38 years with an average historical gain of 2.4%. Look for this rally to begin around June 28 and run until about July 14. After the bursting of the tech bubble in 2000, NASDAQ’s mid-year rally had a spotty track record from 2002 until 2009 with three appearances and five no-shows in those years. However, it has been quite solid over the last thirteen years, up eleven times with two losses. Last year, NASDAQ faltered during the 12-day span, but eventually took off in the second half of July, up 12.3%. Our strategy is to buy the close on Tuesday June 27 and sell July 14 or take profits on any sizable gain in between.
First Trading Day of July – S&P 500 Up 12 Straight Over the past 21 years from 2002-2022 July’s first trading has the second-best record up 85.7% of the time on the S&P 500 with an average gain of 0.35%. Only August’s third to last trading day has a better record up 19 of 21 with an average gain of 0.57%. DJIA’s first trading day of July has produced gains 76.2% of the time with an average gain of 0.31%. NASDAQ splits the middle up 81.0% (0.31% average gain) of the time. July’s first trading day is the third best performing first trading day of all twelve months based upon DJIA points gained with DJIA gaining a cumulative 1668.15 points since 1998. Looking back even further to 1989, S&P 500 has advanced 88.2% of the time (up 30 times in 34 years) with an average gain of 0.50%. DJIA has advanced 28 times in the same 34 years (82.4%) and NASDAQ has risen in 26 of those years (76.5%) with an average advance of 0.34% in all years. No other day of the year exhibits this amount of across-the-board strength, which makes a solid case for declaring the first trading day of July the most bullish day of the year over the past 34 years.
Why July Brings the Bulls Posted on June 30, 2023 “I am an optimist because I don’t see the point in being anything else.” -Abraham Lincoln And with that, the first half of the year is a wrap. What can we say other than all those calls for a recession and new bear market lows sure didn’t play out. We were one of the only places predicting there wouldn’t be a recession this year and to look for stocks to possibly gain 12-15% (and maybe more with some good news). It was a lonely call and we took a lot of heat for it, but we are noticing more and more shops are coming over to the no-recession camp. I noted in Why a Sunny Second Half of 2023 is Likely some reasons to expect more gains after the big start to this year. Well, here’s another angle on that. I looked at all the years that were up more than 10% at the midpoint of the year, but were also negative the year before. In other words, a potential slingshot move. Sure enough, stocks did even better when this took place, with the S&P 500 higher those final six months eight out of nine times and up a median of 12.4% – well above the median final six month return of 7.7% when those first six months gain more than 10%. So, can this surprise summer rally continue? As Honest Abe would say, might as well be an optimist and we think it can, as July historically is a strong month. Of course, it isn’t just about seasonals, as the realization the economy may not be going into a recession and a Fed that is likely done hiking are both also positives, which should keep things moving higher in July. For starters, stocks have gained 9 of the past 10 years in July, with no month sporting a better average return over the past decade than the 3.3% July gain for the S&P 500. Why is this you ask? The one thing I keep thinking about is July kicks off Q2 earnings season and in the past 10 years overall we’ve seen a lot of doubt out there. It is likely that earnings come in better than expected, calming many of the fears and allowing for a rally. We think that could happen once again this year. Let’s be clear though, July is usually a good month in the middle of the weak summer months. The chart below shows this nicely. Since 1950, stocks gain 1.3% on average in July, but this goes up to 2.2% in the past 20 years and 3.3% in the past decade. Pre-election years are a little weaker, up 0.9%. Lastly, when stocks gain more than 3% in the usually weak June (15 times since 1950), stocks gain only 0.8% on average and are higher only 8 times. So, there could be the chance June steals some of July’s gains. Lastly, we’ve shared the next chart many times the past few months, as it suggested the potential for a summer rally when very few expected it. We call this the Carson Cycle Composite, as it is a proprietary indicator that combines the past 20 years, pre-election years, the third year of a new President, and years that saw stocks gain at least 5% in January (like ’23). As you can see, a rally in July is normal and we don’t believe ’23 to be any different. We want to be clear, at some point stocks will take a well-deserved break. August, September, and October usually can see this volatility and it very well could happen again this year. But we remain overweight equities and we’d use any seasonal weakness as an opportunity to add to core equity exposure.
Small-caps Catch a Bid Tue, Jul 11, 2023 Small-caps have caught a bid over the last few days with the Russell 2,000 ETF (IWM) rallying more than 3% since last Thursday's close. Over the same time frame, the large-cap S&P 500 is up just 0.3%. While large-cap indices have recently traded to 52-week highs, small-caps are still well below 2023 highs made back in Q1. As shown below, though, IWM is currently attempting to break above the top end of the sideways range it has been in over the last month. If it can do that, the highs from earlier in the year will come into sight. The Russell 2,000 (IWM) chart looks pretty interesting over a multi-year time frame. As shown below, the pre-COVID high made in early 2020 has acted as strong support over the past year. While IWM fell sharply during the mini-banking crisis this March, it stopped going down once it reached this key support level, and then it traded sideways and consolidated throughout much of April and May. Going forward, it appears that the Russell has built a strong base over the past year to springboard off of if the bull market for US equities can continue. A chart that always captures our attention is the one below that shows Apple's (AAPL) market cap versus the combined market cap of all of the stocks in the small-cap Russell 2,000. Prior to COVID, Apple's market cap wasn't even close to the $2+ trillion market cap of the Russell 2,000. Since late 2021, though, the two have been battling it out. After its huge gain in Q2, Apple is currently in the lead at $2.96 trillion, but the Russell isn't too far behind at $2.81 trillion.
NASDAQ’s Midyear Rally Ends on Friday From its close on June 27 (the fourth from last trading day) through today, NASDAQ has gained 2.7% which makes this year’s NASDAQ midyear rally slightly better than average. Today’s gains were largely fueled by better than anticipated CPI reading. Provided this translates into a better-than-expected PPI report tomorrow, additional gains are likely before NASDAQ’s midyear rally officially ends on Friday, July 14. The end of the rally also coincides with the historical seasonal mid-month July market peak in pre-election years. Since 1950, the second half of July has been weaker than the first half.
S&P 500's Best and Worst Performers During a Monster Week Mon, Jul 17, 2023 After weaker-than-expected inflation data inflated the prices of just about every financial asset, there were some very big winners by the end of last week. The table below lists the 20 top-performing stocks in the S&P 500 last week, which includes eight stocks that rallied more than 10%. Double-digit gains are typically considered very good for an entire year, so when large-cap stocks move that much in a week, it's impressive. Topping the list, shares of Match (MTCH) gained nearly 14% followed by DR Horton (DHI), Domino's (DPZ), and MGM Resorts (MGM). Among these four top performers and the other stocks listed, it is a somewhat eclectic group of stocks. One well-represented group on the list is the homebuilders. Along with DHI, Lennar (LEN) and Pulte (PHM) both also made the list. In terms of YTD returns, though, last week's biggest winners weren't solely the ones that have been rallying all along or the losers playing catch up; there was actually a little bit of everything. Three of the stocks listed (Etsy, Newell, and Sealed Air) are still down by double-digit percentages YTD while four (Pulte, Align, salesforce, and Monolithic Power) are up over 50%! Besides those extreme movers, there are also a few stocks that merely had single-digit YTD percentage gains before last week's spikes higher. One thing that just about all of these stocks have in common now, though, is that they headed into this week at short-term overbought levels of a varying degree. In total, there were just 88 stocks in the S&P 500 that declined last week, and only 53 of those fell more than 1%. Of those 53 stocks, the table below lists the 20 worst performers which all fell more than 3%. This is also an eclectic group in terms of both their lines of business and their YTD performance heading into the week. The only stock down by double-digit percentages was Progressive (PGR) which now makes it down on the year as well. Right behind PGR, shares of Carnival (CCL) fell 9.5%, but unlike PGR, it's still up by over 100% YTD. Besides CCL, two other cruise operators (Norwegian Cruise Line and Royal Caribbean) also sank during last week's rising tide, but they have also seen huge rallies on a YTD basis. Financials are another sector that was well-represented on last week's loser list. Besides PGR, State Street (STT), Allstate (ALL), Northern Trust (NTRS), Bank of NY Mellon (BK), and Travelers (TRV) all bucked last week's bullish trend. Unlike just about all of last week's winners which are now overbought, many of the week's worst performers are still trading within normal ranges of their 50-day moving averages.
Employment Back and Prices Sliding in New York Mon, Jul 17, 2023 The economic calendar is having a quiet start to the week with only the Empire State Manufacturing Survey from the New York Fed released today. The headline reading was expected to fall from an expansionary reading of 6.6 back into contraction in July. Instead, the index remained in positive territory at 1.1 which implies the New York region's manufacturing economy grew modestly in July. Albeit growing, activity is weak with this month's reading registering in the 28th percentile of all months in the survey's history dating back to 2001. The month over month decline was driven by broad weakness across categories. In fact, only three moved higher month over month: New Orders, Number of Employees, and Average Workweek. Expectations indices similarly weakened with most categories at far more depressed levels by historical standards. Of the twelve categories, eight are in the bottom decline of readings. As noted above, New Orders stood out as one of the only readings to move higher. At 3.3, that reading is far from elevated or at a new high by any stretch. Meanwhile, Shipments indicated a major moderation compared to last month. In June, Shipments registered a reading of 22, which was surprisingly elevated relative to other categories. Falling 8.6 points month over month, now that index is more in line with other areas. The two other notably strong readings were with regards to employment. Since the end of the first quarter, Number of Employees and Average Workweek have both been making their way higher with the July readings tipping back into expansionary territory. In other words, on a net basis, businesses are once again hiring and increasing hours worked. However, businesses have also appeared to have slowed down their expected spending plans for technology and capex. On the back of cooling inflation data last week that sent stocks higher in hopes of a more dovish monetary policy, the Empire Manufacturing survey also provided a cheery look into the region's inflation picture. Both Prices Paid and Prices Received have continued to fall dropping over 5 points month over month resulting in new new lows for each one. With regards to Prices Paid, the index is now at its lowest level since August 2020. Prices Received is similarly at the lowest reading in three years.
The Dollar is Weakening – Why That’s Good for US Investors Posted on July 18, 2023 At the beginning of the year, we wrote in our 2023 Outlook that the US dollar was poised to weaken, creating tailwinds for Americans who invest in International stocks and S&P 500 earnings. We reiterated that this is starting to happen in our Mid-Year Outlook, “Edging Closer to Normal.” The chart below shows the recent swing in the ICE US Dollar Index, which measures changes in the US dollar against a basket of other currencies, including the euro, yen, British pound, and the Canadian dollar. It rose 27% between May ’21 and September ’22, but has pulled back 12% since then. A Boost for USD-Based International Equity Investors When an investor in the US uses dollars to buy a basket of international stocks, the interim step is first converting those dollars to the local currency, which introduces currency risk. Note that when you see quotes for international stock exchanges, like the Nikkei (Japan) or the DAX (Germany), those are in local currency terms. To buy European stocks, you must first convert dollars to euros. Your returns are not just dependent on what the European stocks do; it’s also dependent on what happens to the euro relative to the dollar. If the euro appreciates against the dollar, that’s a tailwind to your investment, whereas a stronger dollar acts as a headwind. From September 30th of last year through July 14th, the MSCI EAFE Index, which represents a basket of international stocks across developed markets, outperformed the S&P 500 Index. The MSCI EAFE Index gained 35.2% versus 27.4% for the S&P 500. But as you can see from the table below, that outperformance is because of a tailwind from a weaker dollar. Emerging market stocks have also seen a tailwind from a weaker dollar but have underperformed due to a murky economic picture in China. Even over the past month and half (May 31st through July 14th), the dollar took a renewed plunge, boosting returns for international stocks. A Tailwind for Earnings Over the last two decades, movements in the US dollar have negatively correlated with S&P 500 earnings changes. Excluding recessions and post-recession recoveries (since those skew the numbers significantly in either direction), earnings weakness for the S&P 500 has coincided with dollar strength, whereas a weaker US dollar has correlated with stronger earnings growth. This makes some intuitive sense once you realize that 40% of S&P 500 revenue comes from outside the US. The logic here is that if a company used to sell a machine abroad that generated the equivalent of $1,000 in the past, now that would be about $1,100 because the local currency rose 10% against the US dollar. So, while the US economy is very relevant for S&P 500 company earnings, much of it also hinges on what happens outside the US and what happens with the US dollar. Why Is the Dollar Weakening? It probably helps to understand why the dollar strengthened in the first place. The simplest explanation is that interest rate differentials between the US and other countries rose – the idea is that if interest rates are much higher in country A rather than country B, money will flow into country A, thus raising the value of that country’s currency. The chart below shows the dollar index on the top panel, while the bottom panel shows the difference between 1-year US treasury yields and EU government 1-year yields. You can see how the dollar has moved higher when interest rate differentials climb, most notably after 2014 and in 2022. In contrast, the dollar has pulled back when the differential falls, which is what happened in 2019-2020 and this year. Short-term interest rates, like 1-year yields, are an estimate of central bank target rates over the next year. 1-year yields in the US surged in 2022 because the Federal Reserve (Fed) raised rates to tame inflation. They were much more aggressive than their counterparts at the European Central Bank (ECB). You can see the difference between the Fed and ECB’s target interest rates below. The differential jumped in 2022 but it’s been pulling back recently. The Fed’s taken its foot off the gas, while the ECB remains aggressive. Since the beginning of the year, the Fed has raised rates by 0.75%-points, whereas the ECB has raised it by 1.5%-points. The reason is that US inflation has started to pull back, and is poised to fall further – see our blog from last week discussing this. In contrast, European inflation has remained stubbornly high, which has kept the ECB much more hawkish. In fact, core inflation (excluding volatile components like food and energy) is currently running at 6.8% year-over-year in the Eurozone. That compares to a 4.9% core CPI reading in the US. Up until September 2022, core inflation in the US was running higher than Eurozone core inflation – and then things switched, which shifted investor expectations and sent the dollar lower. We expect this dynamic to continue as US inflation eases further, while Europe deals with higher inflation and a more hawkish central bank. Tighter policy does create some headwinds for European equities, but that’s offset by a stronger currency. Combine this with the tailwind that a weaker dollar creates for S&P 500 company earnings, and we are keeping our overweight to US equities while maintaining International developed market stocks at neutral. Emerging markets remain at underweight.
