Earnings (and Guidance) Likely to Make or Break the Rally Once again today, DJIA, S&P 500 and NASDAQ closed at new all-time highs. With today’s modest gains, DJIA is up 17.3% year-to-date. S&P 500 is even better at 20.2% while NASDAQ is still best at 24.5%. Compared to historical average performance in pre-election years at this time of the year, DJIA and S&P 500 are comfortably above average. NASDAQ’s impressive 24.5% gain is just average (since 1971). NASDAQ’s Midyear Rally delivered again, but officially ended last Friday. The seasonal pattern charts, above and below, along with July’s typical performance over the last 21 years suggest further gains during the balance of July and the third quarter could be limited. For the market to make meaningful gains in the near-term earnings will need to decent and forward guidance will also need to be firm.
Philly Fed Special Thu, Jul 18, 2019 After just barely holding onto positive territory in June, sentiment in the manufacturing sector came booming back in the month of July. In Thursday's release of the July Philadelphia Fed Manufacturing report, overall sentiment surged from 0.3 up to 21.8. That's the highest reading for the index since July 2018, but more importantly, it was also the largest m/m gain for the index since June 2009. For some perspective, the last two times the headline index for the Philly Fed report showed a m/m increase of 20 points or more were in January 2012 (two months after the end of a recession) and in June 2009 (the month that recession ended). Surges like July's don't normally occur when the economy is on the cusp of a recession. Breadth among the various components of this month's report was also solid. Of the report's nine subcomponents, only two declined in July's report, and three saw double-digit increases. Two components that were especially strong were Average Workweek and Number of Employees. In the Philadelphia region, at least, employment appears to be very strong. Employment is so strong in fact that the index of Number of Employees has only been higher in one other month spanning the 50-year history of the index. The only other time it was higher was October 2017. This month's special question also suggests a solid backdrop for manufacturing firms in the Philadelphia region. When asked about the underlying demand trends for their products, more than half reported increased demand, while less than a third are experiencing weaker demand.
S&P 500 Hit Our Target—Time to Sell? The S&P 500 Index is within 1% of our year-end fair value S&P 500 target of 3,000 after rallying 20% this year and broaching that target several times in July. We set that target in November 2018 and have maintained it since then. Now that we’re close to reaching the target, is it time to sell? We don’t think so—primarily because the market is giddy about rate cuts. The adage “Don’t fight the Fed” applies here. The last five times the Federal Reserve (Fed) began cutting rates outside of recessions (1984, 1987, 1989, 1995, and 1998), the S&P 500 rose an average of 11.1% over the subsequent six months and 15.8% over the next year, as shown in the LPL Chart of the Day, Initial Rate Cuts Outside Of Recessions Have Helped Stocks. LPL Chief Investment Strategist John Lynch noted, “Even though fundamentals may not justify the market going much above our 3,000 forecast on the S&P 500, with the Fed tailwind behind us, we’ll ride the wave for now.” We also recognize stock market forecasting is an art, not a science. We use all available information to make forecasts and try to get as close as possible but stocks can remain over- or undervalued for extended periods of time. We’re maintaining our year-end fair value target range of 3,000 for the S&P 500 for now, but we certainly could raise our forecast if clarity on trade and monetary policy support result in an improved earnings outlook. At the same time, we would consider reducing equities allocations if the market’s giddiness about Fed rate cuts goes too far or fundamentals deteriorate. With the Fed at our backs, we recommend suitable investors maintain their targeted equities allocations. If we do get a bout of volatility, we’ll be looking to potentially add equity exposure on weakness.
Strong Cyclicals Breadth Bodes Well In our nightly global macro note The Closer last night, we noted strong breadth among the 27 GICS Level 3 Industries that we classify as cyclical. As-of yesterday's close, all 27 were up on the year, with performances ranging from +30% gains for Construction Materials, Consumer Finance, and Building Products to weaker sub-2% gains from Distributors and Diversified Financial Services. Below, we show price returns by industry. The strong cyclicals breadth bodes well for returns the rest of the year. Since 2004 (full data for all 27 industries starts in that year) there has never been stronger breadth at this part of the calendar. Generally speaking, strong cyclicals breadth is a positive sign for returns the rest of the year. There have been 8 previous years where at least two-thirds of cyclical industries were up through July 22nd. The market as a whole was up through the end of the year in seven of those eight instances, suggesting smooth sailing through the end of 2019.
Claims Keep Moving Lower Two weeks after seasonally adjusted initial jobless claims came in at the lowest level in 3 months (208K), this week's claims data continued to edge even lower dropping to 206K. This 206K number is now only 13K above the multi-decade low of 193K from the April 12th release. Expectations were actually calling for a small increase to 217K from last week's 216K. This week's drop also gave some headroom to the record streaks below 250K and 300K which grew to 94 and 229 weeks, respectively. Overall, this was a healthy print for claims as it held up near the lower end of the past year's range and helped to reaffirm a trend lower of the past several weeks. The four-week moving average, which helps to smooth out some of the week-to-week fluctuations, dropped to 213K from 218.75K last week. Similar to the seasonally adjusted weekly number, the moving average is also near the multi-decade lows from April (201.5K). Assuming next week sees another healthy print like we have over the past few weeks and with the recent high of 222K rolling off, the average could continue to grind lower. On a non-seasonally adjusted basis, claims came in at 194.9K. This was a sizeable drop of 48.7K from last week's number. This could be expected though as last week has typically been a seasonal peak for this time of the year. Regardless of seasonality, this drop to 194.9K is still a healthy print as this week's reading is well below the average for the current week since 2000 and the lowest for the current week of the year of this cycle.
Russell 2000 Gets in on the Act As the S&P 500 and Nasdaq have both been rallying and testing their record highs, small-caps had been lagging behind. In yesterday's trading, though, even the Russell 2000 got in on the act and rallied. As shown in the intraday chart for the index over the last three weeks, yesterday's 1.6% rally broke what had been a pretty consistent short-term funk for the sector. A fifteen-day high for the Russell 2000 is a start, but it still has a ways to go before getting anywhere close to catching up to the large-cap S&P 500 or Nasdaq. Not only is the index still well off its highs from earlier this year, but it's also still more than 9% from its all-time high made back in August 2018.
Checking On The Calendar “I’ve been on a calendar, but I’ve never been on time.” Marilyn Monroe We’ve pondered where the S&P 500 Index could go now that it’s near our fair-value target of 3,000. As we discussed in the latest Weekly Market Commentary: Riding the Wave…For Now, the path of least resistance very well could be higher, but the odds continue to increase that some type of pullback could take place. “On a total return basis, the S&P 500 hasn’t been lower during a presidential pre-election year going back to World War II,” explained LPL Senior Market Strategist Ryan Detrick. “Historically, stocks peak right around now and chop around until Santa comes to town.” As our LPL Chart of the Day, S&P 500 Index Tends to Get Choppy Here, illustrates, stocks show strength right out of the gate during a pre-election year, similar to what we’ve seen so far in 2019. What has our attention now, though, is that the S&P 500 typically peaks around mid-July and chops sideways for largely the rest of the year. Source: LPL Research, FactSet 07/22/19 We encourage suitable investors to prepare for possible market volatility and consider taking advantage of weakness to rebalance their portfolios to their long-term objectives.
Second-Half Pre-Election Year Blues Absent…So Far A little over one week ago, we posted updated charts of historical pre-election year performance with 2019 overlaid for comparison. Like then DJIA, S&P 500 and NASDAQ are still comfortably above average for this time of a pre-election year when compared to historical data. Thus far earnings have supported a continuation of the rally. A 100% probability (according to CME Group’s FedWatch Tool as of today) that the Fed will cut rates at least 0.25% is also aiding. And now it appears the debt ceiling is going to be raised eliminating another market headwind. It would seem the market has nearly everything going its way. Almost, sentiment is running on the frothy side. According to Investors Intelligence, bullish advisors have reached 58%, a new high for 2019, while bearish advisors are down to just 16.8%. Historically these levels have been an early warning. Combined with the historically meager gains in the second half of pre-election years (visible in the charts below), the rally appears to be increasingly prone to faltering. If the market does take a pause and consolidate some of its gains so far this year in August/September/early-October, it would likely improve the possibility of a respectable fourth quarter rally.
Rate Cut Inbound: A Tweak, A New Cut Cycle or Merely a Placebo? Tomorrow the FOMC will meet for the fifth time this year. Unlike previous meetings this year, it is widely anticipated that the Fed will cut its rate by at least 0.25% and possibly as much as 0.50%. Growth, measured by U.S. GDP has slowed, corporate earnings have also slowed, and inflation is running below target, but employment remains firm, risk of recession is not high, and stocks are trading near all-time highs. Ahead of this highly likely cut, historical data has been sliced and diced into numerous different variations. Below we present a straight forward look at the recent history of the S&P 500’s performance following any rate cut. Since October 1, 1982 there have been 80 interest rate cuts by the Fed (there also was 81 increases). On average, 1-month after the cut the S&P 500 was higher 57.5% of the time with an average gain of 0.77%. At 3-months, the frequency of gains improved to 60% and the average gain swelled to 2.21%. This trend of expanding gains and frequency of gains persisted at 6 months and 1-year after the cut. Of note is since 2001, (dot-com bubble bursting and financial crisis) the impact of rate cuts has not been as strong as it was in the prior two decades. In this next chart, we have plotted the average S&P 500 performance 30 trading days before and 60 trading days after a rate cut and a rate increase. Here the initial effects of both a cut and an increase are surprisingly not all that different. In either situation S&P 500 was higher 60 trading days later. A rate cut did have the edge when it came to average performance, but the difference is not all that large. A 0.25% cut would move Fed policy closer to market rates, a 0.50% cut even closer still. Nonetheless, how significant the impact will ultimately be is unknown. Historically speaking, rates are quite low already. Stock dividends and buybacks have been growing nicely and are likely to continue to do just that whether the Fed cuts 0.25% or 0.50% or not at all.
Consumer Confidence: What a Difference a Month Makes! In the span of just one month, the picture regarding Consumer Confidence has changed immensely. You may recall that in last month's report, the headline index came in at a 52-week low of 121.5 in what was just the fourth 52-week low for the headline reading since the expansion began. Well, this month the picture changed considerably. Not only was last month's headline reading revised higher (to 124.3), but the headline reading for July came in MUCH stronger than expected. While economists were forecasting a reading for July of 125.0, the actual reading came in at 135.7, or just slightly more than two points above the cycle high of 137.9 from October 2018. That beat in the actual reading relative to expectations was also the 9th strongest reading relative to expectations in more than 20 years! Our Economic Indicator Database allows users to look at historical economic releases and track how the market reacted to each report. Not only was this month's headline reading strong, but strength was also divided between Present Conditions and Expectations. What was especially encouraging was the fact that the expectations component saw a much larger gain than current conditions, and that helped to narrow the extremely wide spread between the two. As we have discussed frequently in the past, when the spread between Present Conditions and Expectations gets as wide as it is now and starts to narrow again, it usually means a recession isn't far behind. One caveat here, though, is that in the past the narrowing of the spread has been due to the Present Conditions index falling faster than the Expectations index. In the current period, the narrowing is occurring due to an increase in the Expectations Index. So why are consumers suddenly more confident in expectations? One fact behind the increase is that the jobs market has been strong. Jobless claims remain near cycle lows and as shown in the chart below, the Jobs Plentiful Index in the Consumer Confidence report rebounded to 46.2% this month. While that is not quite a new high for the cycle (46.8), it has rebounded nicely and erased nearly all of its losses from the November 2018 high of 46.8 to the March 2019 low of 42.5. As long as consumers feel that jobs are easy to get, confidence should remain high.
Claims Still Low But Not A New Low Seasonally adjusted jobless claims rose after dropping last week to the lowest level in three months (which was revised up to 207K). With a reading of 215K, claims came in slightly above estimates of 214K. While claims are currently at the lower end of the past year's range, other than a few spikes higher and lower, there has been no significant consistent trend higher or lower over the past 12 months (gray shaded chart below). That does not mean the data has not been healthy though as claims have remained at or below 250K and 300K for record streaks of 95 and 230 weeks, respectively. While it may not be evident in the weekly seasonally adjusted numbers, the four-week moving average has been continuing to trend lower. This week marked the fourth straight week with a decline in the moving average falling from 213.25K last week to 211.5K. This decline was largely a result of a recent high of 222K coming off of the average. This average is also now at its lowest level since mid-April's multi-decade low and would need to fall another 10K to take out this low to help confirm the trend lower is still alive and well. This time of year typically has favorable seasonality for jobless claims as a large drop is usually observed after a short term peak a few weeks prior. This year is following this pattern to a tee as NSA claims dropped to 177.9K from 196.4K last week and the recent peak of 243.6K the week before that. Seasonality aside, 177.9K is still the lowest print for non-seasonally adjusted claims for any week in ten months. At its current levels, NSA claims are also at the lowest level for the current week of the year for this cycle, but this year did see a much smaller degree of change year-over-year than previous years; a 2K decline versus declines of 20.9K and 18.9K for the comparable week in the past two years. While claims are still at healthy levels, the trend lower has not been as strong as it has been in prior years. Initial claims data has hinted at this but continuing claims are perhaps a more obvious example. Back in October of last year, continuing claims fell to a multi-decade low of 1649K. Since then though, there has not been a new low despite coming close in April and May. Since the spring, claims has been slowly grinding higher once again with another uptick to 1699K this week. So overall, while labor market data still is healthy and low by historical standards, the rate of improvement has subsided a bit.
JOLTS Stronger Than Expected Tue, Aug 6, 2019 This morning's release of the Job Openings and Labor Turnover Survey (JOLTS) for the month of June showed a stronger than expected picture in terms of the number of job openings, while last month's was revised higher. Economists were expecting the number of job openings to come in at 7.326 million but the actual level was 22K stronger at 7.348 million. Besides the fact that the June reading was higher than expected, the most notable aspect of the JOLTS report continues to be how there are more job openings than there are available workers. The shift in the jobs vs. available workers dynamic first shifted in February 2018 but has remained that way ever since and currently stands at 1.373 million more jobs than there are workers. While the 'shortage' of workers raised concerns that it would accelerate upward pressure on wages, at this point we have yet to see signs that wages are beginning to spiral out of control. While the above picture portrays a jobs market that is red hot, we would note that there has been some slowing in recent months. As shown in the chart below, the last time the JOLTS survey made a new high was seven months ago in November. Things are far from falling off a cliff when it comes to the employment picture, but for the time being, they aren't accelerating either.
Another Summer Storm U.S. stocks have hit another trade-induced summer storm. The S&P 500 Index fell 3% on Monday, its worst day since December 2018. The index is now about 6% from record highs in U.S. stocks’ worst bout of volatility since May. As shown in the LPL Chart of the Day, Storms Happen Often in U.S. Stocks, stock volatility this year has been relatively subdued compared to history. The S&P 500 has declined an average of 14% from peak to trough since 1990, and even in positive years, the index has dropped an average of 11% during the year. “Though the volatility has been uncomfortable, it’s normal for U.S. stocks to endure periodic pullbacks,” said LPL Research Chief Investment Strategist John Lynch. “These experiences typically provide opportunities for suitable investors to rebalance, diversify portfolios toward targeted allocations, or to add to equity positions based on what we see as a generally favorable macroeconomic environment.” Stocks’ recent sell-off has been especially brisk. Just 10 days ago on July 26, the S&P 500 reached a new all-time high, bolstered by Federal Reserve (Fed) rate cut hopes, improving economic data, and cooling trade tensions. Since then, the Fed’s rate cut and messaging wasn’t met with investor enthusiasm, the United States threatened tariffs on $300 billion in Chinese goods, and China pulled prior commitments to purchase U.S. agriculture goods. In addition, China’s central bank let its currency (the yuan) fall below the key 7 per dollar level that some view as a line in the sand relative to currency manipulation. The fundamental picture for stocks hasn’t really changed, though. Economic growth has exceeded expectations, inflation and interest rates are low, and second quarter earnings have been better than expected. Trade uncertainty continues to weigh on global markets, but tariffs haven’t significantly affected the domestic economy and the Fed has indicated willingness to loosen policy as needed. While there are still geopolitical risks, including trade, a review of all of the above fundamentals suggests to us that the odds of an imminent recession are quite low. We’ll continue to watch the trade and front monetary policy, along with their impacts to the U.S. dollar, economic output and corporate profit growth. For now, though, we see few reasons that suggest this market pullback will result in anything more than a typical correction, and we maintain our belief that the S&P 500 is fairly valued in the range of 3,000 by year-end.
Perfect "Shrug" Pattern Emerges for the S&P 500 Fri, Aug 9, 2019 The S&P 500 ripped higher by nearly 2% yesterday on no significant news, and when combined with gains seen over the prior two days, the index gained back all of its losses from Monday’s 3% drop. The technicals show a near perfect double bottom formed from the intraday lows on Monday and Wednesday. The 2,830 level proved to be very strong support that saw buyers step in just when things looked their bleakest this week. To throw some levity into the mix, the intraday chart of the S&P 500 over the last week has amazingly formed a perfect “shrug” pattern from the famous emoji that you’ve likely seen before in texts or on social media (especially if you have teenage kids)! A picture is certainly worth 1,000 words. Talk about the perfect description of this market!
Small Claims Change Thu, Aug 8, 2019 Today's initial jobless claims release was expected to come in unchanged from last week's reading of 215K. Instead, claims fell to 209K while last week's data was revised up to 217K. After reaching recent highs in June, initial jobless claims been in a tight range between 208K and 217K all summer with this week's print being at the low end of this range. Claims also held onto their record streaks below 250K and 300K at 96 and 213 weeks, respectively. Despite the lower reading this week in the seasonally adjusted number, the four-week moving average actually moved up ever so slightly to 212.25K compared to 212K last week. Even with the increase, though, the four-week moving average remains right near its lows for the cycle. On a non-seasonally adjusted basis, claims also saw a very small change only falling 0.2K to 178.7K. That is the smallest week-over-week change for any week since last October. For the current week of the year (31st week), this was the smallest absolute change week over week since 1986 when it rose by 0.2K. In the history of the data, the current week of the year has averaged a decline of 16.65K as the indicator is usually still working off of its seasonal peak from a few weeks prior. Despite the minor move lower, at the current level, unadjusted claims are now at the lowest levels since the post-recession cycle lows reached last September. Overall, although it continues to reaffirm labor market strength, this week's release also further epitomizes the slower pace of improvement that we have recently seen in the labor market.
Sticking to the Game Plan Okay, so the market has been volatile the past two weeks reacting to the Fed rate cut and more so the U.S.-China trade dispute. But in reality this is precisely the typical summer, especially early-August, seasonal weakness we have been warning about, so we are not panicking, but that does not mean the market is out of the woods yet. There is still some technical work to be done. At the risk of being repetitive, we remind you that the market continues to track the seasonal patterns closely, which suggests to us that it is likely to continue to do so. The chart below of the Pre-Election Year Seasonal Patterns clearly illustrates that despite somewhat greater amplitude DJIA, S&P 500 and NASDAQ have been following the seasonal trend this year. The late-July/early-August drop we just experienced came right on cue, which puts us on an upward trajectory through mid-September before another reversal into late-October. But things will need to continue to get constructive technically soon or else further declines become a higher probability. In the next chart we have updated the technical support and resistance levels for the S&P 500. The Down Friday/Down Monday (DF/DM) broke through initial support at S&P 2875 near the old January 2018 highs, but we held the next level of support at 2815 where the S&P failed intraday back on November 7, 2018, before the December selloff, which was rather constructive. Today’s rally was further improvement, but we have yet to reclaim the level before this past DF/DM. The sooner we clear this new overhead resistance around 2955 near the May 1 intraday high and the close of Thursday August 1 just prior to this latest DF/DM, the better the technical picture will be. If we cannot take out 2955 soon and then breach the next level of support the situation begins to look like the beginning of the selloff last October. Support at 2775 runs through several gaps and consolidations, but the next level of support around 2725 where we held in early June is important. 2650 is minor support below there, but critical support sits at the old February/April 2018 lows 2580. If we can retake 2955 in short order then we would expect the market to drift higher into mid-September, perhaps logging minor new highs.
As shown in the LPL Chart of the Day, the spread between the 2-year and 10-year Treasury yields fell as low as -2 basis points (-0.02%) in trading on August 14. Typically, yield curve inversion, when long-term yields fall below short-term yields, is viewed as a signal of oncoming recession, although often with a relatively long lead. In the past five economic expansions, the U.S. economy has peaked an average of 21 months after the spread between the 2-year and 10-year yields initially turned negative. U.S. Economy Remains on Solid Footing Even though we’re discouraged by the yield curve’s shape right now, we see few signs of danger ahead. Data shows the U.S. economy is on solid footing, and corporate debt spreads have remained contained in this latest bout of volatility. Financial conditions are still historically loose, yet there are few signs of excess in the financial system. U.S. stocks have also been resilient against yield curve inversions in the past: Historically, the S&P 500 Index has rallied an average of 22% from the first inversion to the eventual economic peak. “We’re not convinced that this yield curve inversion is a sign of imminent recession,” said LPL Research Chief Investment Strategist John Lynch. “The U.S. labor market is at full employment, healthy wage growth is fueling strong consumer activity, and corporate profits are at record levels.” Global Perspective Of course, recessions can be self-fulfilling prophecies of market sentiment, and we take that risk seriously. However, it’s a curious time for global fixed income right now, and Treasury yields have been weighed down by intense global buying pressure amid ultra-low sovereign debt yields elsewhere. Because of this, we think the yield curve’s shape has been driven more by technical factors than domestic economic weakness. Monetary Policy Remains Too Tight This yield curve inversion sends an important signal to Federal Reserve (Fed) policymakers. U.S. monetary policy is clearly still too tight, even after last month’s 25 basis point (0.25%) rate cut, given trade uncertainty and signs of slowing global growth. The Fed has promised flexibility, and we expect policymakers to enact one or two more cuts by the end of the year. Without an easier Fed, the U.S. dollar may stay elevated and global buying pressure will continue in Treasuries. What’s Next? We will continue to monitor the yield curve and incoming economic data. For now, we think the current U.S. economic expansion, now in its 11th year, has more room to run.
