Yes, There Were Clues That ’23 Would Be a Big Year for Stocks Posted on July 19, 2023 “You can learn a lot by looking.” -Hall of Fame catcher Yogi Berra Stocks had one of their best starts to a year ever after six months in 2023 and the fun has only continued so far in July. If you’ve followed us since late last year then you know that we expected a good year and said there likely wouldn’t be a recession either. By early November of last year, we were on record saying the bear was over. This was a widely despised call, as it was wildly out of consensus. Nearly everyone else said stocks would move back to new lows and most economists were talking about a near-certain recession. But were there clues? We’ve heard many say there were no warning signs that the bull was back. We’d disagree wholeheartedly, as there were many, many clues a big rally was coming. In this blog today I’ll share some of the exact same charts and tables we shared late last year and early this year that suggested a big rally was coming. One clue was the average bear market without a recession was 23.0%, right in line with the 25.4% bear market we had just experienced. Given we said there was no recession coming, it didn’t make sense to see stocks fall significantly further. We noted many times that October was a bear market killer, as six of the previous 17 bear markets ended in this month. Make that seven of the past 18. Stocks historically do really well the year after a midterm election, something we weren’t going to go against. In fact, stocks have never been lower going back to World War II. The odds of a recession were slim, given how strong the consumer and employment backdrop was. At the same time, recessions simply don’t start in pre-election years. Or at least we haven’t seen one start in a pre-election year going back to WWII. Speaking of pre-election years, stocks tend to do quite well here, up nearly 17% on average. But when the year before was negative (like 2022), the average return jumps to 24.6% and has never been negative. The S&P 500 gained more than 5% in back-to-back months in October and November. This isn’t what you see in the middle of a bear market, but something you tend to see at the start of new bull markets. Going back to midterm years and pre-election years. When a midterm year is lower, then expect some fireworks that following year. Another thing we knew was that the third year of a new President tends to see the very best returns. In late November the S&P 500 finally moved above the 200-day moving average after more than seven months beneath it. Historically, stocks tended to soar from this point, up nearly 20% a year later. What if October was the low, like we started to say in November? Well, enormous gains a year later wouldn’t be abnormal. Another chart we shared many times late last year was a year off of the mid-term year lows, stocks tend to gain a lot, to the tune of more than 32% on average and never lower. We knew October 12 was the closing low at the end of the year, so we could make a safe assumption that big gains would be in store a year after those lows. Inflation soared last year, but we expected it to come back this year. Simply put, stocks tend to do much better when inflation is lower than it was the year before. It is really rare for stocks to be lower two years in a row. The odds of a big bounce back were high. Not to mention when the previous year falls 20% or more, the move back the next year tended to be huge. Stocks didn’t quite lose 20% last year, but it was close, suggesting higher prices in 2023. So, everything I’ve said above were things we shared late last year, again, giving clues a bounce back was likely. Now we will look at things that happened in the early part of this year that added to the chances of a strong rally. When the first five days are up nicely, like this year, the full year has tended to go well. The bullish trifecta was met as well. This is when stocks are up during the Santa Claus Rally period, the first five days, and during the month of January. Following the trifecta, stocks are up 17% on average for the full year and higher 90% of the time. What if stocks fell the previous year and hit the trifecta? Things tended to get even better. We saw extreme buying pressure to start the year, with the 10-day total of advances versus declines on the NYSE above 2.1, a very rare signal. As you can see in the table we shared in mid-January, six months after this signal stocks had never been lower. Six months later this year, that is still true. Stocks gained in January and the gains were large, more than 5%, suggesting the full year was going to be up nicely. But if the year before was negative and stocks added 5% in January, the full year did even better, up close to 30% and never lower. Lastly, stocks tended to do quite poorly when a team from Philly won it all in baseball or football. With apologies to the great fans of the city of brotherly love, a narrow loss to the Chiefs in the Superbowl may just have given markets a little extra insurance. Sure, this is actually random and all, but I’m not arguing with history! So there you have it. I just shared 20 tables and charts that we shared from October through January, which all told a similar story. Go all the way back up to the top and the quote from Yogi. The clues were there and you could learn a lot by watching. If you watched what the Carson Investment Research team was saying, this historic rally shouldn’t be much of a surprise. This is a big reason why we moved our Carson House Views for equities from neutral to overweight all the way back in December. We expected markets to rebound in 2023, as we wrote in our 2023 outlook. If using an evidence-based approach to investing makes sense to you, please continue to follow us. And for more of our views on what could be next, be sure to read our just released Mid-Year Outlook: Edging Closer to Normal.
DJIA Advances for 8th Straight Day – Historically Bullish for Next 3 Months For the 54th time since 1950, DJIA has recorded a daily winning streak of at least eight days. This is DJIA’s first 8-day winning streak since 2019. During the current streak DJIA has advanced 3.93%. Of the prior 53 daily winning streaks lasting eight or more trading days, 26 ended at 8 days, 14 ended at 9 days, 8 made it to 10 days, while 2 made it to 11 and 12 days. DJIA’s longest daily winning streak of 13 days was in January 1987. DJIA also enjoyed an 8-day winning streak in July 1987. Based upon the last 53 streaks, there is only a modest 50.9% chance of the current streak continuing to 9 days or longer. Historically, daily winning streaks of 8-trading days or more have been bullish even after they ended. Over the 1-, 2-week, 1-, and 3-month periods after the daily winning streak ended DJIA was higher, 98.1%, 98.1%, 96.2% and 90.6% respectively. The only significant decline within 3 months of a daily streak end was a 19.22% loss in 1987.
Bulls Dominate Thu, Jul 20, 2023 The past week has provided some positive developments on the inflation front that in turn sent equities higher. In response, readings on investor sentiment have shown a dramatic positive turn. The latest AAII survey showed more than half of respondents reported as bullish for the first time since April 22, 2021. As we noted in today's Morning Lineup, this week's reading ended an over two-year-long streak without a reading above 50% which was the third longest such streak on record. Given the elevated reading of bullish sentiment, a minor share of respondents are reporting as bearish. In fact, that reading fell to 21.5% this week which is the lowest reading since June 2021. Last year saw a record streak of weeks where bearish sentiment outnumbered bullish sentiment. With the total reversal in sentiment, the bull-bear spread now heavily favors bulls. The spread reached 29.9% this week for the highest reading since April 2021. The gains to bullish sentiment have not entirely come from bears. Neutral sentiment is also reaching new lows, registering just 27.1% this week. Unlike bearish sentiment, that is only the lowest level since the last week of 2022. In tonight's Closer we will discuss the surge in other sentiment indicators and what that has historically meant for S&P 500 performance.
Seasonal Bump Absent in Claims Data Thu, Jul 20, 2023 Among the many economic indicators updated this morning, seasonally adjusted initial jobless claims came in stronger than expected, falling to 228K. That reversed the recent jump in claims observed throughout the late spring. Looking at the non-seasonally adjusted data helps to explain the recent decline in the adjusted number. As shown below, barring the pandemic years of 2020 and 2021, claims remain at one of the higher readings for the current week of the year in recent history. Typically, in late June and early July, seasonal headwinds cause a significant bump in claims. This year, that increase has been relatively modest. Pivoting to continuing claims, the indicator had been on the decline since early April, but the first two weeks of July have seen a modest turn higher. At those levels, continuing claims remain in the middle of the range from the few years leading up to the pandemic.
It’s a Bird. It’s A Plane! It’s … the US Economy! Posted on July 20, 2023 We just got a bunch of data to round out the economic picture in the second quarter (Q2). Long story short: Not only do we see no sign of recession, but it also doesn’t even look like the economy is looking for a “landing” at this point. I realize this could change, but so far the data doesn’t indicate much weakness. Now, the monthly data can be volatile, and subject to revisions. So it helps to look at the last three months. Let’s walk through some of the highlights. Consumption Was Strong Retail sales rose at a 4.7% annual pace in Q2. Core retail sales, excluding categories like vehicle and gas station sales, rose at a 6.3% annual pace. Even after adjusting for inflation, “real” retail sales rose at a 1.9% annual pace in Q2, and are currently running 6% above the pre-crisis trend! The Supply Side Is Coming Back Vehicle production rose 7.6% in Q2. Production within the aerospace industry rose 4.7% in Q2. High-tech industries are running hot, with production up 3.9%, and almost 17% above pre-pandemic levels. Production of business equipment outside of vehicles and high-tech also looks to have bottomed, which is a positive sign for capex. Construction is Booming Single-family housing permits and starts rose 11% in Q2. An index measuring homebuilder sentiment continues to move higher, indicating that builders are getting more positive about future demand. Meanwhile, total housing units under construction (single-family and multi-family) are near an all-time record. Combine that with a boom in manufacturing construction, and its not a surprise why construction payrolls have increased by 88,000 this year and are about 339,000 above pre-pandemic levels. All These Points to Strong Economic Growth The Atlanta Fed puts out a “nowcast” of quarterly real GDP growth that is updated with major economic data releases. Right now, it says the economy grew 2.4% in Q2, after adjusting for inflation. If that is close to actual GDP growth in Q2, it would mean the economy grew 2.6% over the past year. That is not only stronger than the average 2.3% pace of growth between 2010 and 2019, but it also matches the pace of growth over the three years prior to the pandemic (2017-2019), when economic growth picked up. What is amazing is that the economy accelerated after a poor first half of 2022 even as the Federal Reserve hiked rates aggressively, taking the federal funds rate from 0.25% to 5.25%. Meanwhile, the unemployment rate remained steady at 3.6% over the past year, and headline inflation fell from 9% to 3%. It really doesn’t get better than that. Perhaps more importantly, there is no reason to believe a major slowdown is in the cards at this point.
Emerging Markets (EEM) Attempts a Break Out Wed, Jul 26, 2023 Today we published our most recent Global Macro Dashboard which provides a high level summary of 22 major economies. Taking a look at those same countries' stock markets via US traded ETFs, 2023 has seen broad rebounds in equity prices across the globe. At the moment, the average country ETF is 4.55% away from a 52-week high after posting a double-digit YTD gain. Based on developed and emerging countries, there has been some divergence. Both last year and again this year, emerging market equities have seen modest outperformance relative to developed markets. That has also been the case in July with an average gain of 5.24% for EM countries versus a 2.85% rise for their developed market peers. South Africa (EZA) is up the most month-to-date with a 10.2% gain, while France (EWQ) is up the least with a gain of just 13 bps so far in July. From a technical perspective, the gains in emerging markets—proxied by the iShares MSCI Emerging Markets ETF (EEM)—have resulted in a move above resistance at some of the past year's highs. As shown below, earlier in the spring and again only a couple of weeks ago, EEM attempted to retest the levels from last summer unsuccessfully. Today, EEM is back above those levels with the next resistance to watch being the January high at $42.50.
Jobless Claims Back to Improving Thu, Jul 27, 2023 It was a solid morning for economic data with a number of indicators coming in better than expected. Weekly jobless claims were one of those with seasonally adjusted initial claims unexpectedly falling to 221K from 228K last week and the lowest level since the second half of February. Before seasonal adjustment, claims fell significantly week over week as could be expected for this point of the year. The 44.5K drop this week was in line with the average historical drop for the current week of the year as claims have fallen 80% of the time. Going forward, there will continue to be seasonal tailwinds through the end of summer before the typical fourth quarter turn higher. As for continuing claims, the seasonally adjusted reading likewise hit a new short-term low coming in at just 1.69 million. That is the lowest reading and first sub-1.7 million since the end of January. Combined with the initial claims reading, this recent data points to a return to strength in the labor market data following deterioration late last year through the early spring.
Sentiment Staying Bullish Thu, Jul 27, 2023 The S&P 500 has continued its rally but sentiment has not exactly reflected that. The latest reading on investor sentiment from the AAII survey showed bullish sentiment dropped back below 50% this week. 44.5% of respondents reported as bullish in the past week which is right in line with the average reading of the past two months. The 6.5-point decline in bulls was only partially picked up by bearish sentiment which rose from 21.5% (the lowest level in over two years) to 24.1%. Albeit higher sequentially, that remains a muted reading. Neutral sentiment took home a larger share of the drop to bulls with the reading rising to 31% from 27.1%. That is only the most elevated reading in two weeks as neutral sentiment is the closest of any response to its respective historical average. While the AAII survey showed some moderation in optimism this week, that was not the case for other surveys. In last Thursday's Closer, we discussed how alongside the AAII survey, multiple other sentiment readings have tipped in favor of bulls recently. One such indicator that has continued to become more bullish is the NAAIM Exposure index which tracks the average equity exposure of active investment managers. Readings range from -200 to +200. -200/+200 would imply on average money managers are leveraged short/long, readings of -100/+100 would be fully short/long, and a reading of zero would be market neutral. This week the index tipped above 100 for the first time since late November 2021. In other words, active money managers are now fully long for the first time in over a year and a half. That streak of readings below 100 also ends as the fourth longest in the survey's history at 86 weeks in a row.
Sentiment Swings Higher Despite Declines Thu, Aug 3, 2023 Equities have rolled over in the past week with selling hitting a pinnacle when the US government's credit rating was downgraded by Fitch on Wednesday. In spite of this, sentiment has not taken a hit. The latest survey from the AAII showed 49% of respondents reported bullish sentiment which compares to 44.9% the prior week. With nearly half of respondents reporting as optimists, bullish sentiment sits handily above its historical average of 37.5%. In fact, this week marked the ninth in a row with a bullish sentiment reading above the historical average for the longest such streak since one that ended at 13 weeks long in May 2021. The increase in bullish sentiment resulted in bearish sentiment to drop down to 21.3% which marks a 2.8 percentage point decline on the week and resulted in the lowest bearish reading since June 10, 2021 when it was 20.7%. Similar to bullish sentiment, that is the ninth week in a row with a reading below its historical average, and that is the longest streak since July 2021. As a result to the increased optimism, the bull-bear spread ticked up from 20.8 last week to 27.7. That is still below the recent high of 29.9 from two weeks ago, but reiterates how investors have an elevated degree of optimism. Not all of the gains to bulls came from bears. Neutral sentiment also declined this week falling from 31% to 29.7%. That is in the middle of the past few years' range.
Another Hot July. Another Late-Summer/Autumn Buy? DJIA was up 3.3% July 2023. Gains of this magnitude for July, however, have frequently been followed by late-summer or autumn selloffs and better buying opportunities in late-summer or autumn. In the past, full-month July gains in excess of 3.0% for DJIA have been followed historically by declines of 6.9% on average in the Dow with a low at some point in the last 5 months of the year. 2022 case in point. We’ve been hearing everyone’s now expecting a correction. Maybe the technicians and savvy traders are. But the rest of the world has become quite bullish recently. Investors Intelligence bullish % hit a new recovery high. Now the sell side that was bearish are getting bullish and the few that were on board with the bull early on like us – all great technicians who we respect – are doubling down. While many “in the know” are expecting a seasonal correction the bulk of the rest of the world the “real market” is starting to finally get bullish again. One little news item, the downgrade by Fitch of US debt has exposed the uncertainties, the overbought conditions and seasonal weakness is rearing its perennial head. Like Octobephobia, August-September seasonal weakness can easily become a self-fulfilling prophecy.
Small Business Sentiment Bounces Back Tue, Aug 8, 2023 Small business sentiment from the NFIB's monthly survey rebounded in July with the headline index reading 91.9 versus expectations of it rising only 0.3 points to 91.3. As shown below, small businesses are still reporting much weaker optimism than pre-pandemic or even in the first year of the pandemic, but sentiment has been making steady improvements in recent months. In the table below, we break down each category of the NFIB's survey. Again, the headline index remains historically low in the 14th percentile of readings. However, that is up from the 9th percentile last month. Most other categories that contribute to the optimism index also rose month over month, albeit there were multiple that went unchanged. As a result of those moves, most categories remain at the low end of their historical ranges with a couple of exceptions: Plans to Increase Employment and Job Openings Hard to Fill. Each of those readings are in the 76th and 94th percentiles, respectively. However, as we noted in today's Morning Lineup, overall this survey's employment metrics have pointed to softening of labor market activity. While several categories saw stronger readings in July, none rose more than Outlook for General Business conditions which jumped by 10 points month over month. That is the second 10 point increase in a row which makes for the largest two month increase since May 2020. Although that reading showed an increase in optimism which coincides with continued improvement in the number of firms reporting that inflation pressures have eased, readings on small businesses actual operations were less rosy. Even though sales expectations were up, actual sales changes hit a new low of -13, the weakest since the spring of 2020, resulting in earnings changes to also drop.
