S&P 500 Performance Breakdown: 2020 Sun, Jun 7, 2020 Amazingly, the average stock in the S&P 500 is now up 54.7% since the March 23rd COVID-Crash closing low for the index. From the high on February 19th through the low on March 23rd, the average stock in the S&P fell 39.13%. On a year-to-date basis, the average stock is down just 5.13%, while the average stock is down 9.06% since the February 19th all-time closing high in the index. Here are two other stats that are pretty mind-blowing. First, there is only one stock (COTY) in the entire S&P 500 that's down since March 23rd, and it's down less than 2%. Second, there are only eight stocks that aren't up more than 10% since March 23rd, and these include names like Walmart (WMT), Costco (COST), and Kroger (KR). Looking at the eleven S&P 500 sectors, the average Energy sector stock is up more than 107.05% since March 23rd. Note, however, that these Energy stocks are still down nearly 30% year-to-date because they fell 60% from February 19th through March 23rd. Consumer Discretionary, Financials, Industrials, and Materials all have average gains of more than 50% since March 23rd as well. The average Tech and Health Care stock is now up year-to-date, while most other sectors have average declines of 3-6% at this point. Below is a chart showing the average stock's gain since March 23rd by sector versus the average stock's decline from 2/19 through 3/23. In the second chart, we show a scatter plot of the same performance numbers. Basically the sectors that fell the most have rallied back the most, and the ones that fell the least have rallied back the least. The r-squared here is 0.85, which is very high. Below is a table showing the recent performance of the 30 largest stocks in the S&P 500. Apple (AAPL) is back on top with a market cap that's $10 billion more than Microsoft (MSFT), while Amazon (AMZN) ranks third at $1.227 trillion. Alphabet (GOOGL) is back up 7.15% on the year which leaves its market cap only $35.5 billion away from the "trillion-dollar club." The biggest winners YTD on this list are Amazon (AMZN), NVIDIA (NVDA), Netflix (NFLX), and PayPal (PYPL). PayPal is now the 29th largest stock in the S&P with a market cap of $181.5 billion. Below is a list of the 30 best performing S&P 500 stocks since the 3/23 closing low for the index. As shown, all 30 stocks are up more than 100%, with Apache (APA) up the most at 272.85%. Halliburton (HAL) is up the 2nd most at +177%, followed by Lincoln National (LNC) at +172.45%. APA is still down 36% YTD, while HAL is down 39.45% and LNC is down 17%. While there are many stocks on the list that are still down significantly year-to-date, there are others like Lennar (LEN), Align Tech (ALGN), and L Brands (LB) that are now up YTD after rallying more than 100% since 3/23. All 30 of these stocks were down more than 50% from 2/19 to 3/23 as well. Below are the 30 S&P 500 stocks that are now up the most on a year-to-date basis. These stocks are all up more than 23% YTD, with DexCom (DXCM) leading the way at +66.55%. Regeneron (REGN), NVIDIA (NVDA), ABIOMED (ABMD), and PayPal (PYPL) round out the top five with gains of more than 43%. Other notables on the list of 2020's biggest winners include ServiceNow (NOW), eBay (EBAY), Old Dominion Freight (ODFL), Amazon (AMZN), Netflix (NFLX), Clorox (CLX), and Domino's Pizza (DPZ).
Big Tech Breakout Wed, Jun 10, 2020 As we noted yesterday, the Consumer Discretionary sector (XLY) was the first and only sector above its 2/19 levels (date of the last all-time high for the S&P 500). But with further gains yesterday, Technology (XLK) is looking to join XLY in moving above its 2/19 levels. On a closing basis, XLK finished yesterday $0.15 above its last all-time high. While the ETF has broken out slightly, the same cannot be said just yet for the S&P 500 Technology index that the ETF tracks which finished yesterday still 0.2% below its highs; the closest to its 2/19 high of any sector excluding Consumer Discretionary. Communication Services, Materials, and Health Care are likewise within tangible reach of their prior highs. Within the Tech sector, there are several stocks that have begun to break out as well. As shown in the charts below from our Chart Scanner, there are some like Apple (AAPL), Adobe (ADBE), Microsoft (MSFT), OneSpan (OSPN), and Texas Instruments (TXN) that have broken out to or are very close to new 52-week highs after taking out their highs from earlier this year within the past several days. Though they are not at 52-week highs, there are others like Advanced Micro Devices (AMD) and Hewlett Packard (HPE) which are experiencing other types of breakouts. For AMD, the stock was quick to recover most of its 2/19 to 3/23 losses retesting those prior highs as early as mid-April, though, it had done so unsuccessfully. Ever since AMD has been in a short term downtrend as Tech shifted from a market leader to somewhat of a laggard in the past month. But surging 6.5% yesterday and another 2.87% today, the stock has broken that downtrend. HPE on the other hand had peaked last fall with losses accelerating during the bear market. Since March, the stock has not shared the massive recovery of other stocks as it has consolidated between roughly $9 and $10.5. In just the past week, though, HPE has managed to break out above this range. As previously mentioned, AAPL has experienced a significant breakout in the past week and the same can be said for other mega-cap stocks as well. Of the FAANG stocks, Amazon (AMZN) also broke out (again) yesterday to its own 52-week high. Facebook (FB) has nearly done the same after successfully retesting former resistance around $223 in the past couple of weeks. At the same time, Netflix (NFLX) has held up at its 50-DMA while Alphabet (GOOGL) has moved back into its range from earlier this year leading up to its 2/19 high.
Claims Finally Beat Estimates Thu, Jun 11, 2020 Weekly jobless claims have been a mixed bag over the past several weeks. Though they have been consistently declining to their lowest levels since the start of the pandemic, they still are well over a million and that is excluding other claims like Pandemic Unemployment Assistance (PUA). Additionally, continuing claims remain elevated at over 20 million this week. This week was more of the same for initial jobless claims as they fell to 1.542 million; a tenth consecutive decline WoW which is the longest such streak on record. This week's 355K decline was the largest WoW decline since 5/8 when they fell 489K. That brings the total number of initial jobless claims filed since the first over 1 million print in late March to over 44 million. On top of being the lowest reading since late March and one of the larger WoW declines of the past couple of months, another positive of this week's data was that it beat estimates. That was the first time this has happened in six weeks. As shown below, there have been several other streaks that initial jobless claims missed expectations for at least six straight weeks since the early 1990s. Only two of those streaks, one in 2009 and anther in 2010, came to an end at more than six weeks (seven and eight, respectively). This most recent streak was the first time claims missed that often since 2013. As for the non-seasonally adjusted number, this week's decline to 1.54 million was much more muted at only 82.9K. That still leaves claims at their lowest levels since the first print over 1 million and a ninth consecutive week with NSA claims lower. But this was also the smallest improvement for any week since claims began to work off their peak.
Bulls Coming Back in Favor Thu, Jun 11, 2020 Although the weekly sentiment survey would not have captured equities' sharp decline today, bullish sentiment through AAII's weekly survey was lower by 0.27 percentage points to 34.28% this week despite the S&P 500's general move higher in the past week. That was the smallest absolute weekly change for bullish sentiment since the final week of June of last year when it had risen by just 0.08 percentage points. Bearish sentiment likewise was headed lower this week falling by 0.82 percentage points. That left bearish sentiment at 38.05% which is the lowest reading since February 20th. That means most of the move this week went to neutral sentiment which was up from 26.58% last week to 27.67% this week. After being extremely muted for most of the COVID collapse, it is now at its highest level since the last week of February. The bull-bear spread rose again this week and is now at -3.77. The spread overall still favors bears as it has for nearly four months now but is the closest to favoring bulls since early March when it stood at -0.9. This week also marked a fifth consecutive week in which the spread has risen. That is one of the longer streaks on record as shown in the second chart below and the longest since July of last year. If that streak continues through next week, it would be tied with three other streaks from 2007, 2014, and 2019 for the second-longest such streak on record. The Investors Intelligence survey is echoing the increasing bullish tones. Both bullish and bearish sentiment in this survey experienced the largest increase and decline, respectively, since the middle of April. Bullish sentiment is now 56.9% which is the highest level since January 22nd and in the 85th percentile of all readings of the past decade. This week was also a fourth consecutive and tenth of the last eleven weeks that bullish sentiment was higher week over week. Bearish sentiment on the other hand is down to 20.6% which is the lowest level since the beginning of March. Although that only brings it to the middle of the past decade's range, this week was the eleventh straight week with a WoW decline. As shown in the second chart below, that is the longest streak since at least 1997.
Empire Strikes Back Mon, Jun 15, 2020 Only a couple of months after the lowest (April) and second-lowest (May) readings ever, the New York Fed's index on manufacturing activity was expected to improve with forecasts calling for a reading of -29.6. While that would have been a sizeable increase, it still would have resulted in the fifth-lowest reading on record. Instead, the headline number improved by much more coming in at -0.2 this morning. Of the survey's respondents, 36.1% reported better general business conditions while another 36.3% reported worse conditions. That near-zero reading in the index indicates that activity on net in the region was essentially unchanged compared to last month rather than experience large contractions like the prior two months. That massive rebound likely has reopenings to thank as the survey results were collected between June 2nd and June 9th which coincided with every region in the state including New York City entering at least Phase One of the reopening cycle (allowing manufacturers, construction, and supply chain businesses to resume business). By the collection period, many regions, but not NYC had actually entered Phase Two which allows for an even wider array of activity. As current conditions are no longer showing extremely weak activity and reopenings give hope of a return to normal, firms turned much more optimistic with the index for conditions six months out ripping higher to 56.5. As recently as March, the index was only at 1.2 which was the weakest reading since February of 2009. Just three months later, the 56.5 reading is the highest since October 2009 when the index was just 0.3 points higher. With future expectations now elevated and current conditions still somewhat muted, albeit improved, there remains a massive disconnect between how businesses view their present and future situations. As shown below, that spread was at a record high of 85.2 back in April as the index for current conditions was at a record low. It has since fallen down to 56.7 which is still higher than all but six other months in the history of the survey excluding April and May. Prior to the past few months, the last time the spread was at these levels was back in November of 2010. As shown in the table below, for the individual categories of the report, more than half for current conditions still remain in contraction though they are greatly improved from last month. On the other hand, of the indices for expectations, the only one in contraction in June was the one for inventories. For General Business Conditions, New Orders, and Shipments, the month over month increase in June was the largest on record. While not the biggest ever one-month increases, the indices for the expectations of those same categories, as well as Number of Employees, Capital Expenditure, and Technology spending in addition to current Prices Paid and Average Workweek all saw one-month gains in the 90th percentile or better. Broadly speaking, the readings for this month's survey seem to indicate that activity has begun to find a footing in June, even if that is at weaker levels, as firms hold a rosier outlook for the future. Again, one of the stronger aspects of this month's report was businesses' reporting optimism for the future. The indices for future plans for Cap-Ex and Technology spending embody this. Although they remain at the low end of their historic ranges even after historically large one-month gains, both indices showed more firms plan to invest rather than disinvest in their businesses. As previously mentioned, the indices (both current conditions and future expectations) for New Orders and Shipments saw massive moves this month. That indicates demand has firmed (though is perhaps not rising) and is no longer declining at the dramatic rate of the past few months. As with the headline number, the current new orders showed a very slight contraction in June while the index for expectations was at its highest level since August of 2005. Meanwhile, there was actually a slight pickup in Shipments as the index rose to a positive 3.3. Similar to New Orders, firms' optimism about the future was one of the bright spots with the index for Shipments six months out rising to 53.1. That is the highest reading since August of 2014. Employment indicators were actually a bit of a soft spot in this month's survey. The current indices for Number of Employees and Average Workweek were some of the weakest readings across the various categories albeit they too improved from May. 21.9% of respondents reported a lower level of workers compared to 18.4% that reported an increase in their workforce. Meanwhile, 24.1% reported a shorter workweek while about half of that (12.1%) reported a longer workweek.
Small Bounce For Small Business Mon, Jun 15, 2020 Last Tuesday, the NFIB provided an update on small business sentiment in the month of May. In April the headline number had fallen down to 90.9 which was the lowest level since March of 2013. In May, the index rebounded to 94.4. That 3.5 point increase was the largest one month gain for the index since a 3.7 point increase in November 2017. While an improvement, the index now only remains around similar levels to 2016. As shown in the table below, breadth in the May report was solid with all but two components of the headline number (Job Openings Hard to Fill and Actual Earnings Changes) rising month over month. Even with the nice bounce, though, there is still a negative net percentage of respondents reporting optimism for credit conditions, inventories, sales, and earnings. Similarly, poor sales have become one of the most pressing issues for businesses. While current optimism remains at the lowest level of the past several years, the index for expected conditions is more positive. A net percentage of 34% of respondents reported that they expect the economy to be better rather than worse. That is the highest reading since August and July of 2018. As shown in the charts below, activity indices have been some of the weakest areas of the report. A net of -19% reported sales were higher which was an 8 percentage point drop from the prior month. That is the weakest reading for that index in a decade. Bottom lines are also hurting with a net of 26% of respondents reporting lower earnings. That is a 6 percentage point drop MoM and the weakest level for this index since an equivalent reading in February 2014. NFIB highlighted that the bulk (46%) of owners reported weak sales as a source of the weak earnings while another 9% reported price changes as another reason. Meanwhile, a net 2% reported that they plan to accumulate inventories. Labor market indices are another weak area. Some of the only indices to experience sequential declines outside of sales and earnings were labor-related. For example, the indices for Compensation, Actual Employment Changes, and Job Openings Hard to Fill all were down from April. Those indices are now at their lowest levels since July 2013, September 2009, and September 2014, respectively. Meanwhile, the outlook is less pessimistic with Hiring Plans and Compensation Plans both ticking higher, though, they too remain at their lowest levels of the past several years. The weakening in labor activity is also showing through what businesses consider their biggest issue. Over the past couple of years, the quality of labor and the cost of labor had become some of the most pressing issues. But that is no longer the case as recent months have seen that trend reverse. Now 18% reported Poor Sales as the most pressing issue while Quality of and Cost of Labor as the most important issue are around similar levels to 2017. The amount reporting poor sales as the most important issue was actually down 1 percentage point in May but it is still elevated at its highest levels since 2013. Additionally, government red tape remains one of the most important issues though that is not at any multiyear high like Poor Sales. Leading up to the COVID Crash, "poor sales" was at the bottom of the list when it comes to the biggest problems reported for small businesses. You know an economy is firing on all cylinders when that is the case. Conversely, when "poor sales" are the leading issue for small businesses, it obviously represents a major problem. As shown in the lower right chart below, "poor sales" has indeed spiked as a major issue, but it's still only half of what was seen at the depths of the Financial Crisis. It's a good sign that this reading actually ticked slightly lower in May versus April, and we'll continue to watch it closely in the coming months as one of our key indicators for the recovery.
Green Shoots in Real-Time Economic Data Real-time data continues to provide valuable insight into the current state of the US economy even as traditional economic data is too slow to pick up changes that are occurring. Today we revisit some of the real-time data points that we are monitoring and find that while there is clearly a long way to go, there are green shoots indicating the US economy is on the road to recovery. Following the COVID-19 lockdowns and business closures in March and April, all 50 states have now reopened to some extent and we can already see the impact of the reopening in the real-time data. Map routing requests by the Apple maps app, shown in the LPL Chart of the Day, continued their steady increase from March/April lows and are now approaching pre-pandemic levels. More map searches means more driving, which means more people going to work or to stores and more economic activity. Another real-time indicator that has come back strongly from being down 100% in March and April is the number of diners in US restaurants. While social distancing clearly puts a cap on the opportunity for restaurants, in states that reopened earliest diners have returned to levels almost halfway back from a year ago. Even real-time data coming from the epicenter of the US COVID-19 outbreak is moving in the right direction. While not bouncing back quite as quickly as the prior data points, commuting in NY/NJ, as measured by public transit usage, is continuing to trend upward as people return to work and other economic activity. While the real time data is encouraging there are still many challenges to a full economic recovery as some states such as Arizona and Texas, among others, are emerging as potential new hotspots for COVID-19 outbreaks. Consumer confidence appears to be reflecting these concerns in that, having bottomed in mid May, it has recovered somewhat but is still at histrorically depressed levels. “The market drives without a rear view mirror and only focuses on what’s happening today and the road ahead,” said LPL Financial Chief Investment Officer Burt White. “The good news is we’re seeing green shoots on the road to recovery in the timeliest data we can find.”
B.I.G. Tips - Retail Sales Rise From the Ashes Tue, Jun 16, 2020 For the last several weeks, all we have heard is how Americans have been sitting at home and gambling away their stimulus checks in the stock market. Well, if that’s true, how did they ever find the time or the money to spend like they did in May? Relative to April, Retail Sales rose by a record 17.7%, which was more than double expectations and well more than double the next strongest month back in October 2001. Even after the largest monthly increase on record, Retail Sales remain well in the hole compared to where they were at their highs in January. In fact, through May the pace of sales on a seasonally adjusted basis was still nearly 40% off the highs.
Homebuilder Sentiment Surge Tue, Jun 16, 2020 Back in April, like many economic indicators, the NAHB's reading on the single-family housing market came crashing down. The index bottomed out at 30 which was its lowest level since June of 2012 when the headline number had been 29. May's reading saw a bit of a bounce as the index rose to 37, but even at those levels, it was still showing similar readings to the late summer of 2012. June, on the other hand, showed a massive improvement for both the overall market index and each of the components and other sub-indices. Now, while still well off the highs from only a few months ago, each index is greatly improved and sitting at the bottom of the past several years' range. This month's release also blew estimates out of the water. The headline number had been forecasted to come in at 45 which would have still been a contractionary reading. Instead, the actual number came in 13 points higher at 58. Only two months after the worst miss relative to expectations, today's 13 point beat was the biggest beat versus expectations since at least 2003. The headline number, as well as just about every sub-index, also observed their largest one-month increases on record. While those increases did not leave any sub-index at a new high, they are now back into the middle of their historical ranges. Additionally, all but two sub-indices (Traffic and the Northeast) are also now showing readings above 50 meaning homebuilders have a more favorable outlook on the market. Just last month every sub-index showed unfavorable conditions. In the charts below, we show the blowout of the month over month changes over the past few releases for the headline index as well as its three components. As previously mentioned, each one experienced its sharpest one month increase on record. Meanwhile, the same can be said for the indices covering each of the US regions. The only region to not experience a record month over month increase was the West, but even that was its second-largest MoM gain ever. As with the individual categories, most readings are showing more favorable housing markets although the Northeast, like the index for Traffic, remains below 50 (unfavorable market) despite its record uptick.
Citi's US Economic Surprise Index at an All-Time High Tue, Jun 16, 2020 Over the past few months, we've seen record drops and now record bounces for many of the most widely followed economic indicators. The Citi Economic Surprise indices, which track how economic data is coming in relative to forecasts, have been a prime example of the moves in economic data. Back at the end of April, the index for the US had fallen to a record low of -144.6, but that has since turned around. Even before the addition of today's blockbuster US retail sales report, the Citi Economic Surprise index had reached a new all-time high yesterday. With a further boost from today's releases, the all-time high is now even higher. That means that economic data in the United States has been coming in far stronger than economists have had penciled in. While the US has seen big beats for the country's economic data, the same cannot be said for the broader world. The global index (which would include the US) is at a much more modest level in just the 42nd percentile of all readings. Although it was briefly positive one week ago, the global index is not even positive. Negative readings indicate that more indicators from around the globe are still releasing at levels worse than forecast. Granted, that is still improved from April and May when the index was at some of its lowest levels since the Financial Crisis. The same can also be said for the G10 countries. Even though the US has likely provided a boost, the index for G10 countries remains negative and more or less in the middle of its historic range. Unlike the global index, though, the index for the G10 has not been in positive territory since April 1st. Taking another look at the developed world, more specifically the Eurozone, there has not been much of a rebound at all. The Citi Eurozone surprise index is currently around -200 compared to a low of -304.6 on May 11th. Despite the nearly 100-point increase over the past month, it is still in the bottom 1% of all readings since 2003. Switching over to Emerging Markets, there was never an outright collapse in the surprise index as was seen in other areas of the world. In fact, the index had been sitting in negative territory for much of the past couple of years, but the past several weeks have actually seen fairly consistent positive readings. But the emerging markets index has been falling back towards negative territory so far in June.
Phenomenal Philly Fed Thu, Jun 18, 2020 This morning, the Philadelphia Federal Reserve Bank updated its manufacturing index for the month of June. The past few months have seen some of the lowest readings in the index's history dating back to 1968. But this month the index rose from -43.1 in May to 27.5 in June. That 70.6 point increase in the index was the largest single-month gain on record. The turn into positive territory also indicates that overall manufacturing conditions for the region improved in June, although we're still far from fully recovered from the impacts of COVID-19. In the special questions section of this month's survey, 77.8% of businesses reported total production is down in Q2 versus Q1. Of the responding firms, 46% reported conditions improved in June compared to 19% reporting decreases. Last month over half of the respondents reported worse conditions. While the return to positive territory only leaves the headline index at its highest level since February, the index for conditions six months in the future is much higher as firms have an optimistic outlook. That index rose from 49.7 in May to 66.3 in June; its highest level since June of 1992. Like the gain in the headline number which was the largest since month over month increase on record, the same can also be said for Shipments while several other categories, especially those for future expectations, experienced increases in the 90th percentile or better of all prior periods. In addition to the headline index, several categories also showed expansionary readings (above 0) compared to only two last month. For the six month outlook, every index is now positive. Indicators of demand like new orders and shipments have both picked up substantially. As previously mentioned, the index for Shipments saw its largest monthly gain on record while New Orders saw its second-largest gain on record behind last month's even larger gain of 45.2 points. Broad activity for the region appeared to rebound in June, but employment remains weak. The indices for Number of Employees and Average Workweek both remain in negative territory (indicating a decrease in the level of employment) at -4.3 and -6.5, respectively, though they too have at least improved for two months in a row. Another reason for optimism regarding these indices is the six-month outlooks indices for these categories came in much stronger. In other words, while companies may not currently hiring, they expect to start doing so before year end.
3 Charts That Have Our Attention Stocks have shaken off the 5.9% S&P 500 Index drop last Thursday by gaining three days in a row before yesterday’s modest weakness. While researching and reading this week, three charts stood out that tell us quite a good deal about how investors have reacted during this volatile market and what could be next. “Incredibly, we saw nearly a third of all investors over 65 years old sell their full equity holdings,” explained LPL Financial Senior Market Strategist Ryan Detrick. “With stocks now back near highs, this is yet another reason to have a plan in place before trouble comes, as making decisions when under duress can lead to the exact wrong decision.” As shown in the LPL Chart of the Day, according to data from Fidelity Investments, nearly 18% of all investors sold their full equity holdings between February and May, while a much higher percentage that were closer to retirement (or in retirement) sold. Some might have bought back in, but odds are that many are feeling quite upset with the record bounce back in stocks here. Along these same lines, investors have recently moved to cash at a record pace. In fact, there is now nearly $5 trillion in money market funds, almost twice the levels we saw this time only five years ago. Also, the past three months saw the largest three-month change ever, as investors ran to the safety of cash. If you were looking for a reason stocks could continue to go higher over the longer term, there really is a lot of cash on the sidelines right now. Last, we noted last week that the extreme overbought nature of stocks here is actually consistent with the start of a new bull run, not a bear market bounce, or the end of a bull market. Adding to this, the spread between the number of stocks above their 50-day moving average and 200-day moving average was near the highest level ever. Think about it; with the 45% bounce in the S&P 500, many stocks were above their 50-day moving average, but not nearly as many were above their 200-day moving average. So from a longer-term perspective, there could still be gains to be had. Sure enough, looking at other times that had wide spreads, they took place near the start of major bull markets. Near-term the potential is there for a well-deserved pullback, but going out 6 to 12 months, stocks have consistently outperformed.
Nasdaq, Tech, Growth Keep Going Mon, Jun 22, 2020 With Technology rallying and once again outperforming to start the new trading week, we wanted to note that the sector's weighting in the S&P 500 has pushed above 27% recently up to 27.2%. That's nearly twice as big as the next biggest sector in the S&P -- Health Care -- at 14.5%. Just three other sectors have weightings above 10%, and they're all just only slightly above the 10% mark -- Communication Services, Consumer Discretionary, and Financials. We'd note that Amazon (AMZN) makes up about a quarter of the Consumer Discretionary sector's 10.8% weighting in the S&P, and while it is technically a retailer, between its web services division, and strong technology platform, you could argue that its just as much a Technology stock as it is Consumer Discretionary. Industrials and Consumer Staples have seen their weightings dip below 8%, and the four smallest sectors each have weightings of just 2-3%. At the moment, Tech's 27.2% weighting in the S&P is larger than the weightings of the six smallest sectors combined. The tech-oriented Nasdaq 100 continues to outperform as well. Below is a chart of the ratio between the index levels of the Nasdaq 100 vs. the S&P 500. The ratio has been on a non-stop march higher since the end of the Dot Com bust in late 2002. There have only been three trading days in history where the Nasdaq 100 to S&P 500 ratio was higher than the 3.25 level it's at right now. Those three days came on March 8th, March 9th, and March 10th of the year 2000 -- the very peak of the Dot Com Bubble. Finally, the Growth vs. Value trade remains lopsided towards growth. Below is a chart of the ratio between the S&P 500 Growth and S&P 500 Value index since 1995. This ratio actually took out its highs from the Dot Com Bubble in mid-2019, and it has exploded even higher over the last year. Value did outperform for a bit in May and early June, but over the last two weeks we've seen Growth soar and the ratio has once again made new highs.
Volatility in Economic Forecasts at an All-Time High The Citigroup Economic Surprise Index, or CESI, tracks how the economic data fare compared with expectations. The index rises when economic data exceeds Bloomberg consensus estimates and falls when data is below forecasts. The CESI has had a volatile year in 2020, as the effects of lockdowns in response to the outbreak of COVID-19 significantly impacted the global economy. As shown in the LPL Chart of the Day, following an all-time low in April, the index has skyrocketed to a new all-time high as the economy’s reopening process continues. While the data appears noisy, we think it’s indicative of the unprecedented current environment. Although the term “uncertainty” is often used with a negative connotation, the recent moves in the CESI show that uncertainty can exist to the upside and the downside. “Forecasting economic data in this environment can be been challenging,” added LPL Chief Investment Officer Burt White. “However, if data is improving relative to expectations, perhaps this equity rally isn’t entirely disconnected from fundamentals.” It is also important to note that positive and negative feedback loops feed on themselves—as expectations grow more positive or negative, they raise and lower the bar for economic releases. These feedback loops are what make the data in the CESI inherently choppy. As several headline indicators—such as the May nonfarm payrolls and retail sales numbers—have come in considerably better than consensus forecasts, future releases may have a tough time meeting loftier expectations.
Moving to the Next Phase on the Road to Recovery The US economy has made impressive progress in recent weeks. As the economy re-opens, the way we assess the recovery has changed. In March and April, we were looking for evidence that growth in COVID-19 cases was decelerating—which thankfully it did—along with evidence that a recession was priced into stocks and that stimulus measures were sufficient to get us through the crisis. We used our Road to Recovery Playbook, shown below, to help us determine how the market was progressing in its bottoming process. Using this framework, stocks are clearly no longer pricing in a recession (#3); in fact, the recession in the United States is probably already over, and stocks are trading at their highest next 12 month’s price-to-earnings ratios (PE) since the tech bubble 20 years ago. In addition, we no longer have widespread investor pessimism that could potentially translate into outsized gains (signal #4). But we do think we know what the COVID-19 peak looks like (signal #1), though we acknowledge the crisis isn’t over. We have also seen how deep the recession is (signal #2), while the policy response has been massive and sufficient to enable the recovery (signal #5). “We are encouraged by recent progress in reopening the economy, but it’s been low-hanging fruit,” according to LPL Equity Strategist Jeffrey Buchbinder. “As the pace of the economic comeback eventually slows in the second half, investors may stop celebrating strong growth rates and turn their focus to the shortfalls versus pre-pandemic activity, which could create a tougher path for stocks.” So what now? As we wait for stocks to digest these strong gains over the past three months, we need new tools to gauge the next phase of the recovery. We gave you a taste of those new tools here last week, which include some of the timeliest, high-frequency data to assess the economic reopening. For stocks to move much higher from here, we believe we will need continued steady improvement in economic activity in the daily and weekly data. In such a dynamic and uncertain economy, most monthly and quarterly economic reports are stale by the time they are released. Look for more updates on these timely data points in the weeks ahead.
Richmond Rebound Tue, Jun 23, 2020 This morning, the Richmond Federal Reserve Bank updated its monthly data on manufacturing activity in the region. The report showed manufacturing activity was unchanged in June as the index rose to 0 from -27 in May. That was the first non-contractionary reading since March. Additionally, the 27 point month over month increase was the largest one month gain on record. That follows a very strong reading in May when it rose by 26 points which at the time tied March of 2016 for the largest on record. As for the sub-indices of the report, there were five in addition to the headline index—Backlog, Capacity Utilization, Local Business Conditions, Capital Expenditures, and Average Workweek—that rose by the most in a single month. While a massive improvement, most of these readings sit at the lower end of their historical range and there are still roughly an equal amount of sub-indices for current conditions in contraction as expansion. Expectations, on the other hand, are much more optimistic with multiple categories now at the upper end of their historical ranges. For the indices for future expectations, those of Shipments, New Orders, Capacity Utilization, Local Business Conditions, Services Expenditures, Number of Employees, and Average Workweek also all rose by a record amount. Looking at the service side of the economy, the results were less rosy. Every service index is still deep in contraction and at the lower end of their historical range and that is even after some of, if not the largest monthly increases on record. As with the manufacturing indices, though, expectations for the future are more optimistic after huge improvements in June. The only areas for expectations that remain notably weak and at the low end of their historical ranges are those of capital expenditures (all of which are in the bottom 2% of all readings) and employment. While employment is still low, the 24-point gain in June brought it into expansionary territory.
Tech Historically Leads Market Higher Until Q3 of Election Years As of yesterday’s close DJIA was down 8.8% year-to-date. S&P 500 was down 3.5% and NASDAQ was up 12.1%. Compared to the typical election year, DJIA and S&P 500 are below historical average performance while NASDAQ is above average. However this year has not been a typical election year. Due to the covid-19, the market suffered the damage of the shortest bear market on record and a new bull market all before the first half of the year has come to an end. In the surrounding Seasonal Patten Charts of DJIA, S&P 500 and NASDAQ, we compare 2020 (as of yesterday’s close) to All Years and Election Years. This year’s performance has been plotted on the right vertical axis in each chart. This year certainly has been unlike any other however some notable observations can be made. For DJIA and S&P 500, January, February and approximately half of March have historically been weak, on average, in election years. This year the bear market ended on March 23. Following those past weak starts, DJIA and S&P 500 historically enjoyed strength lasting into September before experiencing any significant pullback followed by a nice yearend rally. NASDAQ’s election year pattern differs somewhat with six fewer years of data, but it does hint to a possible late Q3 peak.
Nasdaq 100 to S&P 500 Ratio Nears Record Wed, Jun 24, 2020 The ratio of the Nasdaq 100 to the S&P 500 rose to 3.26 as of yesterday's close. As shown below, this is as high as the ratio has been since the peak of the Dot Com Bubble back in early 2000. In fact, there have only been two trading days in the history of the Nasdaq that have seen a higher ratio -- March 9th and March 10th of the year 2000. March 10th, 2000 turned out to be the peak for the Nasdaq at the very top of the Dot Com Boom. The index would go on to fall 66% over the next two years. There has of course been a lot of discussion recently about the Nasdaq's huge run higher since late March. We are now exactly three months past the low point of the COVID Crash on March 23rd, and as shown below, the Nasdaq 100 is up 45.7% since then. This three-month period has been the strongest run the Nasdaq 100 has experienced since the Dot Com Boom of the late 1990s. While a 45.7% three-month gain is definitely huge, there were stronger three-month periods in 1999 and early 2000. On January 20th, 2000, the rolling 3-month return hit 62.63% for the Nasdaq 100, while on January 11th, 1999, the reading was +77.2%! One important difference between the recent three-month run for the Nasdaq 100 and the runs experienced in the late 1990s is the level of the index at the start of the rally. Prior to the current 45% rally, the Nasdaq had fallen 20% over the prior three months. This leaves the index up 17% over the past six months. That's still a strong six-month gain, but it doesn't even register as an outlier when looking at the six-month rolling performance chart below. During the late 1990s, there were two six-month periods that each saw gains of nearly 100%.
Continuing Claims Back Below 20 Million Thu, Jun 25, 2020 For a record 12th straight week, jobless claims declined this week. While they're moving in the right direction, over those same 12 weeks, claims have actually exceeded consensus forecasts nine times. Seasonally adjusted claims totaled 1.48 million which was down 60K from a revised 1.54 million last week (the original release was 1.508 million). While that 60K decline was larger than the 26K decline the previous week, the rate of improvement in jobless claims remains toned down from what was observed over the past few months. As previously mentioned, jobless claims have been consistently coming in above estimates. In the three months that jobless claims have declined, there have only been three weeks (April 10th, April 17th, and June 5th) that claims have come in better than expectations. In the chart below, we show the count of weeks in rolling a 12-week span that claims were above forecasts. The current reading of 9 weeks is actually just off the recent peak of 10 weeks thanks to the recent beat on June 5th. Prior to that, at the end of May, 10 of the 12 weeks had seen claims miss estimates. Before that, you would have to go all the way back to 2011 a stretch of weaker than expected reports that were this weak. The weakest 3-month span relative to estimates was back in the 12 weeks ending November 14th, 2008 when claims had missed estimates for 11 of 12 weeks. To put it briefly, while any drop in jobless claims is welcomed and that has been observed over the past three months, claims have seemed to have hit a bit of a plateau in terms of improvement. Non-seasonally adjusted claims embody that dynamic of shrinking improvements. Non-seasonally adjusted claims only fell by 6K to 1.457 million this week. That 6K decline was actually the smallest weekly move in absolute terms since a 5.1K decline back in early February- back before the surges of the COVID era. Unlike initial claims, continuing claims actually beat estimates this week falling below 20 million for the first time since mid-April. Continuing claims have now fallen for four of the past five weeks since the peak of 24.912 million claims on May 8th. Also unlike initial claims, this was actually a larger improvement than what has been observed in recent weeks. The first reading after the aforementioned peak in claims was the largest one week drop on record totaling 4.071 million claims. This week's 767K decline to 19.522 million continuing claims was the second-largest on record. It was also more than double the prior week's decline. Granted, even with those improvements more than a tenth of the US workforce is currently unemployed.
Christmas in July: NASDAQ’s Mid-Year Rally In the mid-1980s the market began to evolve into a tech-driven market and the market’s focus in early summer shifted to the outlook for second quarter earnings of technology companies. 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 27 of the past 35 years with an average historical gain of 2.5%. This year the rally may have begun a day early, today and could last until on or around 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 ten years, up nine times with a single mild 0.1% loss in 2015. Last year, NASDAQ advanced a solid 4.6% during the 12-day span.
