Higher Priced Stocks Outperforming Tue, Jan 21, 2020 As the US equity market has rallied over the last decade, share prices have risen dramatically. When the S&P 500 hit is Financial Crisis low on March 9th, 2009, there were just six stocks in the S&P 500 trading above $100/share. At the same time, there were 119 stocks in the index (24%) trading with a single-digit share price of less than $10. Fast forward to today and there are now 235 stocks (47%) in the S&P 500 trading above $100/share, while there is just one -- ONE -- stock in the index trading below $10/share. The one stock trading with a single-digit share price is also a single-letter ticker -- Ford (F). We are constantly running our decile analysis on the S&P 500 to see which stock characteristics are driving performance within the index. To do this, we break the index into deciles (10 groups of 50 stocks each) based on things like P/E ratio, market cap, dividend yield, analyst ratings, etc., and then we calculate the average performance of the stocks in each decile over a given time period. Share price is a very basic stock characteristic that most people don't (nor should they) use as an investment factor. But when we ran our decile analysis recently, we still found it notable that the highest priced stocks in the S&P are outperforming the lowest priced stocks by quite a bit. As shown below, the 50 stocks in the S&P with the highest share prices at the start of the year are up an average of 3.67% year-to-date. The next 50 stocks with the highest share prices are up an average of 4.03% YTD. On the other end of the spectrum, the 50 stocks with the lowest share prices at the start of the year are up just 1.4% YTD, while the next 50 lowest-priced stocks are up just 0.77%. In case you're interested, below is a snapshot of our full decile matrix so you can see the other stock characteristics we like to analyze. This analysis is very helpful for finding underlying trends that are driving market performance.
Recession Watch Update As the economic expansion caps its first decade, we thought it’d be a good time to check on LPL Research’s leading indicators in our Recession Watch Dashboard. As you can see in our latest update and in the LPL Chart of the Day, the overall view hasn’t changed much. We believe we are in the later stages of this economic expansion, but we still see little threat of imminent recession. The current expansion is the longest on record, at 126 months, but the economy has grown at a slow and steady rate. We believe this measured pace, along with supportive fiscal policy, has contributed to this cycle’s continued durability. In the fourth quarter, the needle moved in different directions for two of our five forecasters: We removed the U.S. Treasury Yield Curve from On Watch status as the spread between the 3-month and 10-year yields moved back into positive territory. The spread between the 2-year and 10-year yields also climbed to an 18-month high following the Federal Reserve rate cuts. Going back to 1955, a yield curve inversion (long-term yields falling below short-term yields) has preceded each of the nine recessions. It’s important to note, however, that parts of the curve flickered between positive and inverted territory several times before the actual recession occurred. We added Market Valuations to On Watch status, as the S&P 500 Index trailing price-to-earnings (P/E) ratio rose near cycle highs. The P/E ratio is now comfortably above our 2020 target of 18.75. With the S&P 500 surpassing the upper end of our year-end fair value target of 3,300, we are watching closely to see if earnings growth is strong enough to justify these elevated valuations. The low interest-rate and inflation environment continue to be strong tailwinds for market valuations. “We remain optimistic of continued, albeit possibly slower, economic growth in the United States in the coming year, bolstered by recent progress on the U.S.-China trade deal,” said LPL Financial Chief Investment Strategist John Lynch. “While we continue to monitor the indicators closely, at the present time, we see only a modest chance of recession starting within the next year.”
Another Look At Election Years Last week in our LPL Research blog, we took a closer look at how stocks have performed during an election year. We found that since 1940, the S&P 500 Index hasn’t been lower during an election year when an incumbent president has been up for reelection. We’ve had many requests to look more into election years, so we thought we’d take another look at this impactful year. The S&P 500’s track record for reelection years has been impressive, but its average path during these years has been quite interesting, as shown in the LPL Chart of the Day. In ten reelection years since 1950, the S&P 500 on average has barely budged from February through June, before breaking out in the second half of the year. “Stocks actually have traded in a tight range from February through June during election years, with the big rally taking place during the second half of the year,” explained LPL Financial Senior Market Strategist Ryan Detrick. From a quarterly view, the S&P 500 has historically posted modest returns in the four quarters of an election year, but the benchmark has been higher an impressive 82% of the time in the fourth quarter of all election years. That’s one of the best track records of any quarter in the four-year presidential cycle.
Claims Higher As Expected Thu, Jan 23, 2020 Last week, initial jobless claims fell for a fifth consecutive week reaching 204K (revised up to 205K this week) which was the lowest level since November. As expected this week, claims rose off of these lows albeit by a less than expected amount. Initial jobless claims were expected to increase to 214K but instead only rose to 211K. All in all, the picture claims are sending about the labor market is a healthy one. Although seasonally adjusted claims were up this week, the four-week moving average has fallen further. The moving average has fallen each of the past three weeks as the much higher readings from around Thanksgiving have rolled off the average. This week's print brings the average to 213.25K which is the lowest since the end of September. Additionally, that is a drop of over 20K from the recent peak of 233.5K in the final week of 2019. Non-seasonally adjusted jobless claims experienced a substantial decline of 71K this week as the indicator works off of its seasonal and annual peak that seems to have been put in place last week. Now at 267.6K, the indicator is still well below its average for the current week of the year since 2000. Again, the 71K week-over-week drop in the non-seasonally adjusted number may sound like a significant move, but the large size of that move can mostly be boiled down to seasonality. In fact, since 2000 non-seasonally adjusted claims have averaged a decline of 147.9K in the third week of the year (current week). No other week of the year comes even close in seeing this sort of move. While initial jobless claims have improved in recent weeks, continuing claims have yet to fully share in the improvement. This week and last have changed that picture somewhat as continuing claims similarly were lower than forecasts, falling to 1,731K compared to the 1,750K expected reading. As shown in the charts below, just two weeks ago continuing claims totaled 1,804K which was the highest reading since April of 2018. Since then, though, they have started to fall back into last year's range. Despite the improvement over the last few weeks, continuing claims have still been rising on a y/y basis for the first time this cycle.
Sentiment Spikes Thu, Jan 23, 2020 In the span of just two weeks, the percentage of respondents in AAII's investor sentiment survey reporting as bullish has risen from the middle of the past few years' range of 33.07% to 45.6% (and from 41.83% last week), the highest reading since early October of 2018. Back then, bullish sentiment peaked out just slightly higher at 45.66% before turning lower as stocks sharply sold off. Bearish sentiment is another story. In spite of the strong bullish reading, bearish sentiment was actually lower in the final weeks of 2019 and the first week of this year. Now at 24.77%, bearish sentiment is low but still within a normal range of one standard deviation of the past year's average of 30.04%. Last week, we noted that AAII's weekly reading on neutral sentiment fell below its historical average for the first time in 22 weeks. Although the week-over-week decline was fairly small at just around one percentage point this week, that slide has continued as neutral sentiment has fallen further to 29.63%. This is the first time that the sentiment reading has fallen below 30 since the first week of last year. Neutral sentiment dropping so low indicates that investors have become increasingly polarized; mostly placing themselves in the bullish camp. In fact, in the past two weeks, both sentiment readings have reached fairly elevated levels relative to the past year. Bullish sentiment is now more than 1 standard deviation above the past year's average of 33.7% while neutral sentiment is 1 standard deviation below its average of 36.26% over the past year. This was the first time this has occurred while bearish sentiment remained within its normal range since early 2018. As shown below, of the 20 prior times in the history of the survey that bullish sentiment has been similarly elevated (over 1 standard deviation above the past year's average) while neutral sentiment is simultaneously extended below its average without having done so in the prior six months has resulted in near term underperformance compared to other periods. The S&P 500 has averaged declines in the next week and month following such readings. Fortunately, longer-term returns have been stronger and more consistently positive.
A Sentiment Check While this bull market continues its slow and steady pace, investor sentiment has climbed to concerning levels. We think this may mean stocks could be vulnerable to weakness if optimism fades. We look at market indicators for sentiment for direction. U.S. stocks have staged an impressive rally over the past few months. While we like seeing stocks rise, we’re starting to see signs of overbought conditions and stretched sentiment in market indicators we watch. We still believe in long-term fundamentals, but we think a modest pullback may be looking increasingly probable. CHARGING FORWARD Wall Street has often called this the most hated bull market in history, and for good reason. Even though this bull market is the longest on record, it has been the third-slowest expansion since 1950 based on annualized growth. While slow and steady price appreciation has been frustrating at times, stocks’ gradual ascent has helped sustain consistent gains for 129 months and kept sentiment in check. The S&P 500 Index’s latest rally has been anything but gradual, though, and the bull market has charged past our expectations for this year so far. The S&P 500 has climbed as high as 3,330 in January, breaking the upper end of our 2020 estimated fair value range of 3,250 to 3,300 [Figure 1]. SENTIMENT CHECK In turn, investor sentiment has climbed to concerning levels. We think excessive sentiment shows stocks could be especially vulnerable to weakness if the optimism fades. We’re watching these market indicators for sentiment: Stocks’ momentum has been unusually strong. The S&P 500 has climbed 15% since October 2, 2019, in what has felt like a straight line up. The biggest decline over that period has been a two-day drop of only 2% through October 8, 2019. As a result, the S&P 500 is sitting about 10% above its 200-day moving average, and the index’s stocks are the most overbought they’ve been in two years (according to the Relative Strength Index). Portfolio hedge purchases have dwindled. On January 17, 2020, the 10-day average of the Chicago Board Options Exchange’s (CBOE) put-volume-to-call-volume ratio fell to the lowest level since January 2011. This is important because fewer put options changing hands shows investors may be overly relaxed about the near-term market outlook, as puts typically have been bought to protect against market declines. Cash balances have fallen. Fund managers’ cash balances are at a six-year low, showing investors have bought into other assets instead of using cash as a safe haven (according to data from Bank of America-Merrill Lynch). A significant reduction in cash suggests investors may be overwhelmingly on one side of market positioning. Investors are historically optimistic. The number of individual investors who feel bullish about the next six months (relative to those who feel bearish or neutral) rose to a 15-month high, according to American Association of Individual Investors (AAII) survey data released January 22, 2020. We view the AAII survey as a contrarian indicator, so this historic optimism bolsters our case for stocks’ near-term vulnerability. NO ALARMS YET Sentiment is worth watching, as excessive optimism has doomed market rallies in the past. However, we’re still not seeing alarming excesses, leading us to believe a pullback at this time would most likely be a temporary pause in the bull market. Broad participation and cyclical stocks’ leadership in the latest climb may show that U.S. stocks have a good base from which to build. About 25% of S&P 500 stocks made new 52-week highs on January 17, the best participation on a record-high day since January 2018. Other financial markets have also appeared solid, as global stock indexes like the Japanese Nikkei, the European Stoxx 600 Index, and the German DAX Index have joined the S&P 500 in breaking out to new highs this month. U.S. corporate credit spreads have pushed down to multi-year lows, and economic data has improved globally. Historically, sentiment has become more of a worry when fundamentals haven’t supported market strength. If stocks sell off, we’d expect the solid backdrop for equities to entice buyers back into the market before too long. We’d encourage suitable investors to view volatility here as an opportunity to possibly rebalance positions or add to current positions at a discount. WHAT’S NEXT? We still see the potential for a rebound in earnings growth to send stocks higher in 2020, even if the path isn’t straight. We expect profits to recover as U.S. businesses welcome clarity from the U.S.-China phase-one trade deal. We could even envision modest upside to our earnings forecast in the event of further progress on trade and the possibility of additional tariff relief. There are risks on the horizon, including still present geopolitical issues, impeachment hearings, and the upcoming election. With the S&P 500 charging past our fair value estimate, we expect more volatility in the near-term as momentum fades. When, and not if, this occurs, we’ll look to the fundamentals supporting gross domestic product, inflation, employment, interest rates, and profits before making investment decisions. Considering these fundamentals, we’d likely position portfolios to benefit from any sentiment-related weakness and for leadership from large caps, value, international markets, and cyclical sector exposure.
Consumers Still Confident Tue, Jan 28, 2020 Today's report on Consumer Confidence for the month of January came in at 131.6 versus December's reading of 128.2 and was handily above forecasts for a reading of 128.0. At this level, confidence remains stuck in the narrowing range it has occupied for the last 18 months and well above its historical average of ~95. Breaking down this morning's report by Present Situation and Expectations, the wide gap between the two remains well intact and near its widest levels on record. While consumers' views toward the present are near twenty-year highs, sentiment towards the future has been stuck in a sideways range. For more than three years now, consumers have been expecting their optimistic views of current conditions to deteriorate in the future, but at this point those concerns have never materialized. One reason the less optimistic outlooks have yet to materialize is that the job market remains strong. Despite some mixed signals towards the end of last year, nearly half of all consumers say jobs are 'plentiful' which is near the highest levels on record. The strong job market is also fueling improved sentiment among the lowest paid US consumers. While sentiment levels have stalled out among consumers with incomes of $35K and above, confidence among consumers with incomes of $15K or less has surged in recent months. In fact, over the last seven months, confidence levels among this income cohort have seen two of their five largest m/m gains on record (January 2020 and July 2019).
Viral Outbreak Ends Period of Market Calm Fears that the deadly coronavirus would spread further around the globe intensified Monday and led to the biggest one-day drop in the S&P 500 Index since October 8, 2019. In fact, it was the first time the index moved 1% in either direction since early October—spanning 71 trading days. Not only that, but the index’s streak of 30 consecutive days without back-to-back declines, tying the longest such streak in over 60 years as shown in the LPL Chart of the Day, came to an end. Stocks had been eerily calm. We know from history these calm periods haven’t lasted very long. We were due for some volatility with stocks up about 15% in less than four months and valuations elevated. But a catalyst for a sell-off wasn’t obvious after the U.S.-China phase-one trade deal was signed on January 15. Economic data has been better globally, central banks remain supportive, and the major escalation in the U.S.-Iran conflict had minimal market impact. Then the coronavirus outbreak happened. “The coronavirus outbreak brings uncertainty to markets, and investors are understandably nervous,” said LPL Financial Chief Investment Strategist John Lynch. “While economic activity in China is being impacted, particularly travel-related businesses, we expect limited U.S. economic impact as with SARS in 2002–2003, bird flu in 2006, and Zika in 2016.” More than 100 deaths have been confirmed out of more than 4,500 cases of the coronavirus. Initial reports suggest this virus may be less deadly than SARS, which led to 774 deaths with more than four times the mortality rate as corona. Our hope at this point is that the current outbreak will be better contained and less deadly than SARS. We certainly don’t want to minimize human losses, however, our job is to provide you information on the potential impact to the markets. History tells us that the economic and market impact after potentially similar events tended to be modest and short-lived. The SARS outbreak started in November 2002, global equities bottomed in March 2003, and the outbreak was fully contained by July 2003—several months into the 2003–2007 bull market. The temporary loss of global output was quickly recovered in the third quarter of 2003. So while this situation is fluid and unnerving, we would advise suitable investors to stick with their long-term investing plans where appropriate and focus on generally supportive fundamentals of the economy, interest rates, and corporate profits.
DJIA Down Friday/Down Monday: Inflection Point in Rally Today’s retreat triggered the first DJIA Down Friday/Down Monday of 2020. The combination of a DJIA Down Friday* followed by a Down Monday** has been a rather consistently ominous warning, but they have also occurred at significant market inflection points (interim tops and bottoms). The last occurrence was in August of last year. That declined proved to be a good entry point for new long positions as the market enjoyed a solid rally through the end of the year. Since January 1, 2000 through today’s close there have been 212 DJIA Down Friday/Down Mondays (DF/DM). Declines following the DF/DM were greater in bear market years and milder in bull market years (see page 76 of Stock Trader’s Almanac 2020). Using DJIA’s close on Monday of the DF/DM as the starting point of the subsequent decline, DJIA has declined an average of 5.4% over the next 90 calendar days, but there were 37 times when no further decline occurred. In the chart above, the 30 trading days before and 60 trading days after a DJIA DF/DM have been plotted alongside the 37 times there was no lower low after Monday. Based upon this chart, if DJIA recovers its recent losses within about 4-7 trading days, then the DF/DM that just occurred was likely the majority of the decline. However, if DJIA is at about the same level or lower than now, additional losses are more likely sometime during the next 90 calendar days. *Friday or the last trading day of the week. **Monday or the first trading day of the next week.
Market May be Immune to Coronavirus Over the years the market has built up a rather string immunity to viruses, outbreak, epidemics and pandemics. While economies and communities around the world have suffered from these outbreaks and the horrific human toll they have taken, the market has proven to be resilient. We took a look back at 14 previous such contagions since 1950 and how the market performed right after the disease was confirmed publically by health officials and where the market was 3, 6 and 12 months later. HIV/AIDS continue to be an ongoing problem and are the longest running, widest spread and deadliest infectious human disease since the Spanish Flu that killed 50-100 million people worldwide from 1918-1920. HIV/AIDS is estimate to have taken the lives of some 30 million people. However, from the time these epidemics have become known the public at large they have had little negative impact on the S&P 500 since 1950. As you can see in the table here the market was weaker during the outbreaks of the first three on the list, but there were arguably other factors that had a great impact than these diseases. In 1957, during the Asian Flu pandemic the market was pushed into a bear market by and hawkish fed that had been raising interest rates culminating in a bear market bottom in October 1957. The downdraft surrounding the Hong Kong Flu in 1968 was likely cause more by heightened hostilities in the Vietnam War and the related protests and events in the USA that culminated in the bear market bottom on May 26, 1970. When the HIV/AIDS epidemic became known in 1981 the market was suffering from the nasty double-dip recession from 1980-1982. The Iraq War held the market down in early 2003 during the SARS outbreak. The sovereign debt crisis and the downgrade of US debt in 2011 likely hurt the market more than the horrendous Haitian Cholera outbreak. The Measles scare in the US in late 2014-early 2015 had little impact on the market, though we suffered a mini-bear in 2015-2016 due to the EU Sovereign Debt Crisis, Brexit fears and the Chinese bear market. So while the new Wuhan Coronavirus is major health and economic concern, especially to the affected areas, if history is any guide, the market is not likely to suffer from it.
Big Revision in Claims Thu, Jan 30, 2020 This week's initial jobless claims came in at 216K which was slightly above expectations of 215K. That leaves claims basically in the middle of the past year's range although it is an improvement from last week's revised number of 223K. Given they remain in a range, the revision to last week's print was one of the more notable aspects of this week's data. Originally, last week's seasonally adjusted number was much stronger at 211K, but that was revised 12K higher to 223K. While that does not leave claims significantly higher than any of the past year's readings—it was the highest since the last week of December's equivalent reading—the size of the revision was very large. The chart below shows the difference between the first revision and the first release of jobless claims over the past 20 years. Last week's 12K revision was the joint largest revision since the 12K upwards revisions in December and November of 2012. Before that, you would have to go back to March of 2012 to find a larger revision (16K). While those are big, there were multiple revisions that were ever larger like the 27K revision in January of 2012, 26K revision in September of 2005, 33K revision in March of 2002, and 26K revision in December of 2000. Despite that upward revision, the four-week moving average has fallen for a fourth consecutive week. Now at 214.5K, it is at its lowest level since early October when the moving average was 213.75K. In terms of the non-seasonally adjusted data, claims are continuing to work off of their seasonal peak, falling to 228.4K this week from 282.1K last week. Given that the data is non-seasonally adjusted those week to week comparisons do not mean much and a better look is through the year-over-year change. By this measure, claims fell 22.4K YoY.
ISM Manufacturing Soars Mon, Feb 3, 2020 One month ago, ISM released its monthly reading on the manufacturing sector which we noted was fortunately overshadowed by the headlines surrounding the geopolitical tensions in the Middle East. That December ISM Manufacturing report fell to 47.2 which was the lowest headline level since June 2009. One month later, the headline number has more than bounced, rising 3.7 points to 50.9. As shown in the second chart below, that 3.7 increase is one of the largest one month increases of the past 20 years. Ironically, while last month saw the weakest reading since June 2009, the 3.7 point bounce off of those lows was the largest month-over-month jump for the headline number since May 2009. The big jump in January far exceeded forecasts for a continued contractionary reading of 48.5. Now back above 50, this was not only the strongest but also the first expansionary reading for the headline index since July 2019. That five-month stretch from July to December was the longest run of consecutive contractionary readings since another five-month streak ending in February 2016; the longest such streaks of the current cycle. Glancing at the commentary section, the index's uptick certainly shows itself with Computer & Electronic Products mentioning suppliers are at or above capacity, though, there are also a fair share of negative comments. The headwinds that have been prominent for over a year now have by no means dissolved as multiple comments address adverse effects of tariffs and/or weakened demand. Computer and Electronic Products as well as Food, Beverage and Tobacco products make mention of hurt margins. In other words, although the data has improved dramatically, qualitatively there is still some weakness present. In the table below, we break down the changes over the past month and year of the individual sub-indices. Breadth was very strong in January with every sub-index rising with the exception of Supplier Deliveries. Not only did a vast majority rise month-over-month, but now seven of the eleven indices have expansionary (>50) readings compared to just two last month. By far the biggest winner has been Production which follows it being one of the biggest decliners last month. But even with the surge it is still lower than where it stood one year ago. But that is more broadly the norm as Customer Inventories, Prices Paid, and Export Orders were the only ones to have risen since last January. As previously mentioned, the 11.1 jump for production was a massive improvement. Now at 54.3, it is at its highest level since March 2019. As shown in the second chart below, these types of massive moves in one month have been pretty rare. Over the past two decades, there has only been one other time, May 2009, that this sub-index has risen by more than 10 points in a single month. Expanding the horizon and looking back to 1948 when data begins, there have been a total of just 11 (including this most recent occurrence) months in which the Production sub-index has risen by 10 points or more. New orders was another sub-index that experienced a notable improvement rising 5.2 points to 52.0. Although the month-over-month rise was not nearly as large as that of production, for the New Orders index it was the largest one month increase since January of last year and it is now at its highest level since May of last year. Employment for the manufacturing sector has been notably weak with last month's reading the lowest since January of 2016. Although it improved to 46.6 from 45.1, the improvement was much more modest when compared to the headline number. Given the recency of the issue, the full effects are unlikely to show in the January data, but the coronavirus has not yet put a damper on trade activity. Both export and import orders have been on the rise over the past few months and January was no exception as both sit at their strongest levels around a year or more.
Typical February Trading: Tepid Month with Solid Mid-Month Rally February has historically been a rather bland month. Since 1950, S&P 500 has averaged a measly 0.1%. Over the last 21-year period S&P 500 average performance has declined to a loss of 0.4% in February. February’s first trading day has historically been good, like today, and trading days eight, nine, ten and eleven have offered repeatable long opportunities. Outside of these five days, the balance of February has been rather lacking.
Services Sector Bouncing Back Wed, Feb 5, 2020 Just like we saw with the Manufacturing sector earlier in the week, the services sector of the US economy also continued to bounce back in January. According to the ISM Non-Manufacturing report for January, activity bounced more than expected rising from 54.9 up to 55.5 and compared to expectations for a level of 55.0. After falling to its lowest level in over three years last September, activity in the services sector has now rebounded to its highest level since August. On a combined basis and accounting for each sector's weight in the overall economy. the combined ISM for January bounced from 54.1 up to 55.0. Respondents also appeared to be a lot more optimistic about business in January. As shown in the commentary snapshot below, there were a number of positive statements. In fact, Energy was the only sector where there wasn't anything positive to say. No surprise there. The table below breaks down the ISM Manufacturing report by each of its sub-categories and shows their changes over the last month and year. Despite the positive reading this month, the majority of sectors were actually down on both a m/m and y/y basis. On the positive side, Business Activity (chart below) topped 60 for the first time since last May, and along with Import Orders is the only category that was higher on both a m/m and y/y basis. To the downside, Backlog Orders and Inventories (lower two charts) have both steadily declined in recent months and are now at their lowest levels since 2012.
Claims Come Down Thu, Feb 6, 2020 Initial jobless claims were forecast to drop slightly this week from 217K to 215K. Instead, this morning's release was much better than expected falling to 202K. That is the biggest one-week decline since mid-December's 17K decline as the indicator now sits at its lowest level since April's cycle and half-century low of 193K. With the seasonally adjusted number falling in seven of the last eight weeks, the four-week moving average has continued to grind lower. This week, it has fallen 3K down to 211.75K, which is only 10.25K above the cycle low that was put in place the week of April 12th of last year. Now, the moving average is at its lowest level since the week after that cycle low when the moving average totaled 206K. Additionally, the moving average has fallen for five consecutive weeks which is the longest such streak since September of 2018. As mentioned above, seasonally adjusted jobless claims are now just off of their cycle lows in terms of both the level of the data and the moving average. That is a welcome sign considering it has been quite some time, 42 weeks to be exact, since the data has last put in a cycle low. That is the joint longest streak—alongside another 42 week long streak in 2015—since the 44 week long streak that came to a close on July 11th of 2014. As for the 4-week moving average, the current 42-week run is tied with a streak that ended in December of 2012 for the longest streak of the current cycle without a new cycle low. The non-seasonal adjusted data has been similarly strong as it works through its seasonal downdraft. Non-adjusted claims fell to 224.4K this week, which is well below the average for the current week of the year since 2000 of 380.32K in addition to the comparable weeks of the past few years.
New Highs Tilt Scales to Bulls China is cutting tariffs; the impeachment process has come to an end and the market is at new all-time highs. The coronavirus is still a concern, but apparently not as much as it was less than one week ago. Progress has been made. Official emergency declarations have mobilized a stronger response. China has quickly built additional hospitals and work is underway on a treatment. Gilead (GILD) appears to be the first to offer a potential cure although its drug remdesivir has not been approved to cure any disease yet. These recent developments along with solid earnings, have been the fuel to reverse the market’s late January retreat in just a few trading sessions this month. In the above charts, the market’s strength since October can be seen along with second half of January weakness. DJIA, S&P 500 and NASDAQ have remained comfortably above their respective 200-day moving averages since October. In January only DJIA actually (and briefly) closed below its even higher 50-day moving average. The market’s rebound surge in February has also reversed negative readings from Stochastic, relative strength and MACD indicators. Momentum clearly favors the bulls and January’s negative finish remains unconfirmed as of today. As long as economic data and corporate earnings remain positive then the market is likely to continue the trend that has been in place since last October, higher. There are likely to be some dips along the way with the next possible soft patch arriving when earnings season nears its end later this month and/or in the first half of March.
Strong Jobs Report to Begin 2020 U.S. hiring came in stronger than expected in January, rebounding from a disappointing December print. Nonfarm payrolls rose by 225,000 in January, far surpassing Bloomberg’s consensus estimates for a 165,000 gain, according to the jobs report released today by the U.S. Bureau of Labor Statistics. This number may help alleviate some investor unease over December’s somewhat weak reading. We argued at the time that December’s reading likely was due in large part to calendar effects and the volatility of month-to-month changes. We prefer to base our views of the labor market’s vitality on the larger trend, which, has been undeniably strong, as shown in the LPL Chart of the Day. Some investors have questioned how long hiring can remain elevated before we experience a worker shortage or a sharp rise in wages. The answer, according to this report, is not yet. In addition to the strong hiring numbers, workers also have enjoyed healthy wage gains. January saw average hourly earnings rise 3.1% year over year, a slight pickup from December, while average hours worked remained unchanged. “Today’s wage number exceeds inflation, meaning workers are growing their purchasing power in real terms and should be able to continue increasing their consumption of goods and services,” said LPL Financial Chief Investment Strategist John Lynch. “But the number is also lower than the 4% threshold that has historically signaled an overheating job market and potential for subsequent economic and market volatility. This is a very encouraging report.” The one slight blip in today’s release showed the unemployment rate inching 0.1% higher to 3.6%. This was mainly due to changes to the size of the labor force, which affected revisions. Still, given the extremely low unemployment level, the volatility of month-to-month numbers, and the overwhelmingly positive tone of the other data points released today, we feel confident about the prospects for the U.S. consumer to continue powering this economic expansion through 2020 and beyond.
President's Day Seasonality Mon, Feb 10, 2020 As seen in the snapshot from our Seasonality Tool below, the current week of the year (February 10th through February 17th) has been one of the strongest of the past decade. The 1.85% median gain ranks in the 99th percentile of all seven-day periods throughout the calendar year. This year, that time frame (2/10 through 2/17) will bring us right into the President's Day holiday next Monday (2/17). Since the Federal Holiday's Act of 1971 set the holiday as the third Monday of February, the S&P 500 has experienced a median gain of 1.45% in the week leading up to President's Day. Prior to 1971, President's Day was observed on George Washington's birthday on February 22nd. Taking a look at each individual day the week before President's Day, Wednesday has experienced the strongest and most consistent positive performance. Tuesday is similarly strong with a median gain of 0.28% and a higher close 61.2% of the time. The second half of the week though is weaker with median declines on Thursday and Friday and a higher close less than half of the time. As for the week of President's Day itself, the shortened week sees more mixed performance for the S&P 500 with a median gain of 0.17% from the Friday before to the first Friday after. Of that week, Wednesday and Thursday have typically been the weakest days with median declines of 10 and 11 bps, respectively. Neither day has experienced a gain more than half of the time. Friday is by far the strongest day with a median gain of 0.15%.
Another Increase in Investor Sentiment Mon, Feb 10, 2020 While a number of investor sentiment surveys ask investors their views on the market, one less widely followed index from TD Ameritrade seeks to gauge sentiment by what investors are actually doing. According to TD Ameritrade, the Investor Movement Index (IMX): The Investor Movement Index, or the IMX, is a proprietary, behavior-based index created by TD Ameritrade designed to indicate the sentiment of individual investors’ portfolios. It measures what investors are actually doing, and how they are actually positioned in the markets. The IMX does this by using data including holdings/positions, trading activity, and other data from a sample of our 11 million funded client accounts. The latest update to the IMX index for January was released earlier and showed that investor sentiment improved as investors increased equity market exposure for the fourth straight month which is tied for the longest streak of monthly improvement since early 2014. The improved readings in the IMX index over the last four months have also taken the level of the index to its highest level since October 2018. In looking at longer-term trends for the IMX index, it's interesting to note that while sentiment has really ticked higher in the last four months, it is still nowhere near levels it was at in late 2017/early 2018 just before equities peaked and saw an 18-month consolidation period. This reinforces a broader trend we have seen in other sentiment readings recently. Namely, investor sentiment has clearly improved, and while this is hardly the most hated bull market ever, investors still have one eye warily looking over their shoulders.
Things Are Looking Up Stocks had their best week in 8 months last week, as the worst of the coronavirus fears subsided and the US economy showed some impressive resolve. Last, the LPL Strategists discuss why international stocks could finally be close to having their time in the sun after lagging the US for much of the past decade. DEVELOPED MARKETS ARE LOOKING BETTER Developed markets have lagged the US for more than 10 years now. Although we aren’t ready to fully invest in these areas, we are starting to see signs to warm up to international equites. As the LPL Strategists discuss, values are historically cheap relative to the US, global growth is stabilizing, growth leadership my start to weaken, and the US dollar should be pressured lower. Should any of those four reasons begin to take place, it could create a nice tailwind for international stocks. THE LATEST ON THE CORONAVIRUS Equity markets bounced nicely last week, as fears over the coronavirus appear to be calming. The loss of lives is devastating, but markets are focusing on this fast spreading, yet low death rate of this virus versus other dangerous outbreaks. The LPL Strategists noted that China could very well see flat GDP growth in Q1, a big pick up later in 2020 could be likely. Additionally, don’t forget that the US economy actually got stronger during the SARS outbreak in 2003. SOME MORE GOOD NEWS Further supporting stocks last week was a trio of solid economic data in the US. The jobs report in January showed a very solid 225,000 jobs created, well above expectations. Additionally, much better than expected manufacturing data and solid services data show an economy that continues to defy the naysayers. Last, productivity in Q4 bounced and for the year it was the highest nonfarm productivity since 2010.
