Why Stocks Can Predict The Next President Although the fight against COVID-19 continues to dominate the headlines and our thoughts are with those affected, this is an election year and as we get closer to November it will begin to garner more attention. Next week in our Weekly Market Commentary, we will discuss the election in more detail, but today we wanted to share a very interesting connection between the stock market and election. Turns out, since 1928, the stock market has accurately predicted the winner of the election 87% of the time and every single year since 1984. It is quite simple. When the S&P 500 Index has been higher the three months before the election, the incumbent party usually won, while when stocks were lower, the incumbent party usually lost. “Think about it; no one expected Hillary Clinton to lose back in 2016, no one except the stock market that is,” explained LPL Financial Senior Market Strategist Ryan Detrick. “The Dow had a 9-day losing streak directly ahead of the election, while copper (more of a President Trump infrastructure play) was up a record 14 days in a row, setting the stage for the change in party leadership in the White House.” As shown in the LPL Chart of the Day, as we get closer to the election, how stocks are doing could signal who might win in November.
Labor Market Continues Its Momentum Following the massive beat in May nonfarm payrolls, many wondered if last month’s job gains pulled forward hiring ahead of the expiration of the Paycheck Protection Program to ensure small business loans were forgivable. Recall that the US labor market added 2.5 million jobs in May (revised up to 2.7 million in the June report) versus Bloomberg consensus expectations for a loss of 7.5 million jobs. The June report helped put those concerns to rest, as the US economy added 4.8 million jobs, surpassing Bloomberg’s median consensus estimate of 3.2 million. As shown in the LPL Chart of the Day, nonfarm payrolls have been on a wild ride in 2020: However, despite surpassing expectations in the headline numbers, the June report also revealed that permanent job losses continue to tick higher. “Job growth remains the key to the economic recovery,” added LPL Chief Investment Officer Burt White. “The pandemic has been a major shock to the labor market that will take time to heal, but the solid job gains over the past two months suggest the recovery is well on its way and the recession may already be over.” The unemployment rate dropped more than two points to 11.1% versus consensus of 12.5%, while misclassifications around the “absent from work but employed” issue would add only one point (compared with three points last month). Although the June report was a much smaller upside surprise than last month’s shocker, the job market is clearly coming back stronger than most economists expected.
Does a Weak First Six Months Mean Trouble? The wild ride of 2020 continues, with the S&P 500 Index down 20% in the first quarter and up 20% in the second quarter. Much like dropping a 20 dollar bill and picking it up, this doesn’t mean you are 20 dollars wealthier. Down 20% and then up 20% actually comes out to a 4% drop for the first half of the year. What does a negative first half of the year tell us? Turns out, gains could be hard to come by the second half of this year. “Although 2020 is like nothing we’ve seen before, the fact of the matter is a weak first half of the year could mean weaker than normal returns for the rest of the year,” according to LPL Financial Senior Market Strategist Ryan Detrick. In fact, the S&P 500 had been higher in the first six months of the year a record nine consecutive years before being lower in 2020. Since 1950, there were 48 times when the first six months were higher and the rest of the year gained 77% of the time and added 5.8% on average those final six months. Compare that with when the first six months of the year were lower 21 times, the final six months were higher only 52% of the time and up only 1.2% on average. As shown in the LPL Chart of the Day, a move higher is quite likely after strength in the first six months of the year, while very modest gains could be in the cards if those first six months underwhelm.
Bullish Sentiment Stops Sliding Thu, Jul 9, 2020 While the past week's gains are mostly being erased today, for the most part, the S&P 500 has been trading firmly higher which has lifted sentiment. AAII's weekly reading on bullish sentiment was lifted as a result, rising from 22.15% to 27.16%. That is the highest level of bullish sentiment since June 11th, and the 5 percentage point week over week increase was the biggest jump since the end of May. Not only was it the largest single-week increase in over a month, but this week snapped a four-week long streak in which bullish sentiment has declined. With the streak now over, it was the longest streak of consecutive declines in bullish sentiment since April of 2018 when sentiment also fell for four weeks. While higher this week, bullish sentiment is still below its historical average of 38% by at least one standard deviation as it has been for four straight weeks now. That is the first such streak since August of last year. Meanwhile, bearish sentiment has come back down reaching 42.67%. Mirroring bullish sentiment, that is the lowest reading for bearish sentiment since June 11th, but it remains above its historical average by at least one standard deviation as has been the case for the past four weeks. Bearish sentiment was not the only one to fall this week. Neutral sentiment also slightly pulled back falling to 30.17% from 31.96%. Although lower this week, neutral sentiment is still at a much more normal reading than the past few months' extreme lows. In fact, this week marked the first time that neutral sentiment was above 30% for back to back weeks since February.
US Citi Surprise Index Continues to Surge Tue, Jul 14, 2020 Just about a month ago, we noted how the Citi Economic Surprise Index for the United States reached a new record high as economic data broadly rebounded. In the time since then, the US surprise index has left that record in the dust. Since the first new record high on June 15th, the US index has not just continued to rise but has more than doubled with 19 of the past 22 days marking a fresh record high! Likely helped by the US strength at least in part, the index for the entire globe has also entirely recovered. The global index is at its highest level since March of 2017 and in the 98th percentile of all readings since the start of the index in 2003. Meanwhile, that strength has not been echoed in the indices for the Eurozone and Emerging Markets. The Eurozone index fell sharply in the first half of the year. Although it has staged a rapid recovery since mid-June, it is still negative meaning reports are generally missing forecasts. Although it never fell as sharply as other areas of the globe, the index for emerging markets likewise remains in negative territory and in the bottom 13% of all readings.
Big Winners Driving The Market In 2020 Tue, Jul 14, 2020 So far this year, the US equity market has been a story of big winners...and then the other 99% of the market. Seven S&P 500 stocks stand out in terms of contribution, with the “Big Five” tech or tech adjacent names (AAPL, AMZN, FB, GOOG, MSFT) and two others that get a bit less discussion (NFLX, NVDA) each accounting for at least a +0.3 percentage point impact on the overall index performance this year. On average, these top seven are up 45% YTD, versus an 11% decline for the rest of the index. That’s why the equal-weighted S&P 500 is underperforming so badly: the majority of stocks are way, way behind a furious rally in some of the biggest names. Currently, the top seven stocks by contribution have added 6.7% to the index in 2020, which itself is still down a bit over 1% on the year. That means that the rest of the stocks in the index have cost the S&P 500 over 8% in 2020. We went into further detail on contribution to total earnings as well as YTD gains in last night's Closer report, which is available to Bespoke Institutional members.
A Dow in Nasdaq's Clothing Tue, Jul 14, 2020 The last two trading days have certainly been out of the ordinary in terms of relative performance between the Nasdaq and the Dow. Since Friday's close, the Nasdaq is down 1.7% while the Dow is up 2%. That performance spread of 3.7 percentage points in the last two trading days is the widest gap between the two indices (in the Dow's favor) since right around the March lows. Three and a half months isn't a lot of time, but if you take a longer view, this type of short-term outperformance by the Dow has been uncommon. Before the occurrences (on back to back days) in March, you have to go all the way back to July 2002 to find the last occurrence. In other words, before March, a period of nearly 18 years elapsed since the last time the two indices saw a similar performance disparity over a two-day stretch. Before 2002 and going back to the late 1990s, there were a number of occurrences on both the way up and even more so on the way down. Given the market's performance following the last time we saw a high frequency of periods with similar performance gaps, let's hope the performance disparity of the last two days doesn't become a trend. Like what you see?
First Expansionary Empire Fed Since February Wed, Jul 15, 2020 The New York Federal Reserve released its July reading on the manufacturing sector this morning and for the first time since February, the headline index indicated that activity rose month-over-month in the region. Not only was it the first expansionary reading (those above 0), but at +17.2, it was also the highest level of the index since November 2018 when it stood at +21.1. This month also marked a third consecutive monthly increase. Although the index for present conditions is showing some of the strongest levels of the past couple of years with another uptick in July, optimism for the next six months pulled back. The index for general business conditions six months in the future fell to 38.4 from a multi-year high of 56.5 in June. That 18.1 point decline was the largest since March's 21.7 point decline and the ninth-largest decline of all months. While the pickup in activity was not as large as last month, for multiple individual categories the gains were still in the 90th percentile or better of all periods. Conversely, the declines in the indices for expectations for General Business Conditions, New Orders, and Shipments were all in the bottom decile of all readings. This month's report also marked a turn for a few components as they changed from contractionary to expansionary. This was the case for the indices for General Business Conditions, New Orders, and Number of Employees. Now more than half are expansionary. The two indices that rose the most this month were those for New Orders and Shipments. For the index for New Orders, it was the first non-contractionary reading since February, and for Shipments, it marked back to back readings above 0. One major positive of this month's report was the reading on employment. After four straight months of a greater share of manufacturers reporting decreases in employment, July marked an equal share of companies reporting an increase in employment as a decrease (21.9%). Additionally, the reading for future expectations rose to its highest level since August of last year indicating companies are at least expecting to increase hiring in the near future. Although employment was stabilized, average workweek did continue to fall, albeit, not by as much as previous months.
Why A Potential Democrat Sweep May Not Be A Market Worry Based on the latest polling data, there’s growing consensus that former Vice President Joe Biden potentially may win the election and Democrats possibly may sweep Congress. Some might think this could be a negative for stocks, as a higher corporate tax rate that reduces earnings could be part of the Democratic platform. Early writers of the US Constitution were worried about one party having too much power that could enable factions in Washington, DC, to enact more extreme policies and political ideals, upsetting the carefully balanced apple cart. As we noted in our recently released Midyear Outlook 2020, stocks historically have performed quite well when Congress has been split, although stocks actually have done better than most probably realized when the Democrats were in full control. “Higher corporate taxes are quite likely should we see a potential Democratic sweep,” said LPL Financial Chief Market Strategist Ryan Detrick. “But to blindly say stocks will do poorly is quite a stretch, as historically stocks have done rather well under this .” As shown in the LPL Chart of the Day, the S&P 500 Index has been higher 9 of the past 10 times and 15 of the past 18 times Democrats controlled both the White House and Congress. Although LPL Research anticipates a likely split Congress in November, with the list of overall worries growing, we don’t think a potential Democratic sweep should be at the top of investors’ list of worries.
B.I.G. Tips - Retail Revival Remains Thu, Jul 16, 2020 After months of being cooped up in their homes, Americans were once again out and spending in June. Retail Sales for the month of June were expected to rise by a strong 5%, but the actual reading came in much stronger at 7.5% on the headline reading and modestly less than that ex Autos and ex Autos and Gas. In addition to June’s strong headline number, May’s reading was also revised higher at the headline level but moved lower after taking out the impacts of Autos and Gas. It’s no doubt been a whirlwind four months for retail sales. After the two worst monthly reports in March and April, May and June have followed up with record m/m increases. As shown in the chart, even though June’s reading of 7.5% seems like a pretty big step down from May’s record reading, it was still the second strongest m/m change in the history of the report.
Philly Fed Continues to Rebound Thu, Jul 16, 2020 Following up on yesterday's New York Fed reading on the manufacturing sector, this morning we got the manufacturing numbers from the neighboring Philadelphia Federal Reserve bank region. Similar to the Empire Fed's reading for six months out, the Philly Fed's index for General Business Conditions pulled back a bit in July falling to 24.1 from 27.5 in June. In absolute terms, that was the least volatile one month swing in the index since November of last year. Additionally, although it indicates a slower rate of improvement in July than June, it still indicates that the region's manufacturing sector expanded for a second consecutive month after three months of contractionary activity. Although the headline number fell in July, the internals paint a much more positive picture. Almost every category is now showing an expansionary reading with the exception of Inventories and Delivery Times, though both of those in contraction is not necessarily negative. Granted negative readings of these two, as well as a sizeable drop in Shipments, did contribute to the weakness in the July headline number. This month's release indicated solid overall demand with New Orders surging to 23 from 16.7 last month. Unfilled Orders also rose; moving back into expansion territory after four months of contraction. Meanwhile, Shipments were down 10 points to 15.3, but that is still a firmly expansionary reading. In addition to the strong levels of those indices, respondents reaffirmed the strength in demand by reporting higher prices for the second month in a row in terms of both prices received and paid. As previously mentioned, both Delivery Times and Inventories showed contractionary readings this month, but that again is not necessarily a bad thing. The Philly Fed's index on delivery times has fluctuated between positive and negative readings in recent months while other Federal Reserve regions have seen their equivalent readings surge to extremely elevated readings (albeit lower more recently) pointing to supply chain disruptions and longer lead times. The tip into negative territory for the Philly Fed's index of Delivery Times indicates shorter delivery times and potentially some further normalization in supply chains. Additionally, the index for Inventories fell to its lowest level since September of 2016. That indicates large inventory drawdowns which reasonably can be evaluated as a result of a pick up in demand given the increase in other areas of the survey. As with yesterday's Empire Fed report, one of the major highlights of this month's Philly Fed report was the massive increase in readings on employment. The index for Number of Employees and Average Workweek were the categories to see the biggest increases in this month's survey returning to positive territory. For these two respective indices, this month's gains were also some of the largest of all reports since the beginning of the survey. In fact, for both indices, there have only been two months with higher monthly increases. For both indices, one of those months was this past May's report. As for the other month, the other larger monthly gain for the index for Number of Employees was May of 1975 and for Average Workweek it was June of 1970. These huge jumps also bring both indices into the upper 90th percentiles of all readings. In other words, Philly area manufacturers seem to have not only brought people back to work but also are returning to longer workweeks.
Hot Julys Often Bring Late-Summer/Autumn Buys Despite persistent pandemic setbacks, bleak economic and corporate numbers, geopolitical tensions, civic unrest and a knock-down, drag-out election battle, the U.S. stock market has proven rather resilient. After suffering the shortest bear market in history that lasted only 40 days the velocity and strength of the V-shaped rally off the March 23 bear market low has been impressive. Massive fiscal stimulus, the return of ZIRP (zero interest rate policy), vaccine promise and the boon of the “stay-at-home” economy have sent the market higher again here in July with NASDAQ tacking on new all-time highs, though the Dow and S&P 500 continue to struggle. As of yesterday’s close this put DJIA up 4.6%, S&P 500 up 5.7% and NASDAQ up 6.4% for the month of July at yesterday’s close, qualifying this as a “Hot July Market”. Gains of this magnitude for July, however, have frequently been followed by a late-summer or autumn selloffs and better buying opportunities than now. In the past, full-month July gains in excess of 3.5% for DJIA have been followed historically by declines of -7.2% on average (-4.7% median decline) in the Dow with a low at some point in the last 5 months of the year. The low in 2018 came a bit late, but it was just 2 days into winter. There were also prior lower prices in late October and November. Climbing COVID cases, hospitalizations and deaths have forced rollbacks and pauses of economic reopening plans and travel restrictions. Coupled with an uptick in jobless claims and other troublesome economic readings and forecasts as well as elevated valuations, exuberant sentiment, technical resistance and seasonal weakness, stocks are ripe for a pullback. Today’s selloff: case in point. This will likely set up a great buy as the $13+ trillion flows through the global economy into US stocks.
August: Top NASDAQ & Russell 2000 Month of Election Years August is amongst the worst months of the year. It is the worst DJIA, S&P 500, NASDAQ, Russell 1000 and Russell 2000 month over the last 32 years, 1988-2019 with average declines ranging from 0.1% by NASDAQ to 1.1% by DJIA. Contributing to this poor performance since 1987; the second shortest bear market in history (45 days) caused by turmoil in Russia, the Asian currency crisis and the Long-Term Capital Management hedge fund debacle ending August 31, 1998 with the DJIA shedding 6.4% that day. DJIA dropped a record 1344.22 points for the month, off 15.1%—which is the second worst monthly percentage DJIA loss since 1950. Saddam Hussein triggered a 10.0% slide in August 1990. The best DJIA gains occurred in 1982 (11.5%) and 1984 (9.8%) as bear markets ended. Sizeable losses in 2010, 2011, 2013 and 2015 of over 4% on DJIA have widened Augusts’ average decline. However, in election years since 1950, Augusts’ rankings improve: #6 DJIA, #5 S&P 500, #1 NASDAQ (since 1971), #1 Russell 1000 and #1 Russell 2000 (since 1979). This year, the market’s performance in August will likely depend heavily on how July closes and whether or not the rate of covid-19 infection continues to accelerate which could force some areas to roll back reopenings.
Richmond on the Rise Tue, Jul 28, 2020 The final regional Fed manufacturing index of the month came out today from the Richmond Fed. The headline index continued to improve rising 10 points in July indicating the first expansion in the region since March and the highest reading for the index since January. Along with the headline index, just about every sub-index posted expansionary readings. Shipments, Capacity Utilization, and Availability of Skills are in the upper decile of historical readings. When it comes to the indices for future expectations. even more categories are around some of their highest readings on record. For example, the indices for future conditions for Shipments, New Orders, Order Backlogs, Capacity Utilization, Vendor Lead Times, Local Business Conditions, and Number of Employees are all in the 90th percentile or better. The only areas that remain on the weak side for both present and future conditions are for expenditures. For current conditions, Capital Expenditures, Equipment & Software Expenditures, and Services Expenditure are all at the low end of historical readings with little improvement in July. Additionally, a greater share of companies continue to report decreases than increases in their workforce as the index for the Number of Employees remained below zero for a fifth consecutive month. Altogether, this points to a generally improved backdrop for mid-Atlantic manufacturing businesses, though they remain hesitant to invest back into and expand their businesses. Even though the manufacturing sector has staged a massive turnaround, the same cannot be said for the services sector. Service sector businesses did report Local Business Conditions improved in July, but Demand, Revenues, Expenditures, and employment all remain in contraction. Expectations are more optimistic, but there were some large declines this month, namely in the expectations indices for Revenues, Demands, and Local Business Conditions.
S&P 500 Stronger Underneath the Surface Thu, Jul 30, 2020 Earlier today we posted a chart showing S&P 500 sector performance since the Nasdaq's recent peak on 7/20 when Technology stocks began what has now been a 10-day period of consolidation. Below we have updated these performance numbers to include today's moves. While not as many sectors remain in positive territory, the majority of sectors continue to outperform the S&P 500, while Technology drags the market lower. Along with Technology, Communication Services, and Consumer Discretionary are the only other sectors that have lagged the S&P 500, and their performance has been dragged down by the mega-cap tech-like stocks of Alphabet (GOOGL), Facebook (FB), and Amazon (AMZN). Expanding on this theme of underlying strength in the index, the chart below shows the average performance of stocks in the S&P 500 grouped by sector. On an equal-weighted basis, the S&P 500 is actually up 1.3% since 7/20, and only two sectors (Technology and Materials) have seen negative average returns. On the upside, Real Estate (4.1%) has been the big winner followed by Consumer Discretionary (3.3%), and Consumer Staples (2.2%). The fact that Consumer Discretionary at the cap-weighted sector level is down over 1.4% while the average performance of stocks in the sector has been a gain of 3.3% illustrates what a mammoth impact AMZN has on that sector. Breadth among S&P 500 stocks has also been overwhelmingly positive. For the S&P 500 as a whole, 59% of stocks in the index have had positive returns since the close on 7/20. Only two sectors (Technology and Materials) have seen fewer than half of their components post positive returns over that time, while Real Estate, Consumer Staples, and Utilities have seen roughly three-quarters of their components rally since 7/20.
Production Popping Without People Mon, Aug 3, 2020 This morning's ISM report on the manufacturing sector indicated continued improvements in the month of July. July's rise in the headline number to 54.2 from 52.6 marked back to back months with expansionary readings for the first time since January and February of this year. It was also a third consecutive month in which the index has risen. That leaves it at its highest level since March of last year. Most of the sub-indices of the report are likewise now showing expansionary readings. As shown below, most indices have seen continued improvements with the increases in July being in the upper quartile of historic readings; many of these were actually in the upper decile. Nearly every index is now showing expansionary readings with Backlog Orders, Export Orders, and Import Orders all rising above 50 in July. At the moment, the only indices to remain in contraction are those for inventories and employment. These are also at the lower end of their historical ranges. For the indices for inventories, the contractionary readings are not necessarily a glaring negative though as they come off of expansionary readings (rising inventories) in recent months. Although the numbers are providing a fairly optimistic outlook for the country's manufacturing sector, more anecdotally, the comments in this month's survey had a decent amount of negativity. As shown below, several comments made mention that even if improved, demand is still down dramatically and uncertainty remains higher. On the other hand, some respondents like one from the Computer & Electronic Products industry and the Food, Beverage, & Tobacco Products industry are reporting that demand has either returned to normal or is better than a year ago. Increased demand, and as a result increased production, has been a major boost to the headline number. As shown below, the index for New Orders saw another huge increase in July rising 5.1 points to 61.5. Excluding last month's extreme rise of 24.6 points, which was the largest monthly gain on record, you would have to go all the way back to July of 2013 to find another time that the index for New Orders rose by more. That leaves the index at its highest level since September 2018 while the index for Production is at its highest level since August 2018. Those improved conditions also appear to be fairly broad with 13 of the 18 industries surveyed reporting growth in new orders and 16 of the 18 reporting growth in production; no industry reported a decrease in production in July. Stronger demand certainly seems to be the reason for that higher production. Over the past two months, inventories have been building as demand was bouncing back. This month's reading of 47 indicated that reversed as inventories began to be drawn upon. Meanwhile, as New Orders pickup, order backlogs are rising for the first time since February. That was the only other month since April of last year in which order backlogs were rising. The index for Backlog Orders is now at its highest level since April of 2019. Although production and demand has picked up, employment has been left behind. In other words, businesses appear to be ramping up output without the help of additional labor. Granted, that could change as production continues to pick up. Of the 18 manufacturing indices, ten reported a decrease in employment (again many of these also reported an increase in production) while only five reported growth: Apparel, Printing and Related Support Activities, Furniture, Plastic and Rubber, and Computer and Electronic Products. While improved from the past few months, the index for employment remains low at 44.3.
The Clock Starts Today on This Historically Accurate Election Winner Indicator 2020 has been historic and devastating in many ways, from the fastest bear market ever, to one of the greatest stock market recoveries ever. Not to mention a historic drop in the economy in the second quarter, with likely a record jump due in the third quarter. With so many things happening, it is easy to forget this is also an election year. As we inch closer to the highly anticipated vote, we expect more focus to move to November 3. Here’s the catch—stocks very well could be one of the best indicators to show who will win. “It is actually quite simple; when stocks gained the three months before the election, the incumbent party tended to win and vice versa when stocks were lower,” explained LPL Financial Chief Market Strategist Ryan Detrick. “Think about 2016 for instance; no one expected Hillary Clinton to lose, except the stock market that is, as stocks were quite weak before that upset.” Given the election is three months from today, the clock starts now. But why has this worked in the past and what could it be telling us? Maybe Wall Street can sense there is change in the air and this leads to uncertainty over what the new leadership might look like, so there is selling. Compare this when markets feel comfortable with the incumbent party winning, as they likely know what to expect based on the previous four years. As shown in the LPL Chart of the Day, how the S&P 500 Index has done the three months ahead of the election can predict who will win the election in November. In fact, stocks have accurately predicted the winning president every year since 1984 and been right 20 out of 23 of the last elections (87%).
Big Moves Off 52-Week Lows Wed, Aug 5, 2020 Within the US equity market, we've seen some major moves in individual stocks off their 52-week lows over the last few months. Look at the table below. Within the Rusell 1000, which tracks the performance of the largest companies in the US, stocks in the index are up an average of 87.6% from their respective 52-week lows. Looking at performance by individual sectors, stocks in the Energy sector are up an average of 136.8%, while the average Consumer Discretionary stock has rallied 131.4%. The Technology sector wasn't hit nearly as hard by the Covid-crash as other sectors, but stocks in the sector have doubled on an average basis relative to their 52-week lows. The only sector where stocks are up less than 50% on an average basis from their 52-week lows is Utilities at 46.33%. For many investors, the holy grail of stock picking is the proverbial ten-bagger. A ten-bagger is a stock that multiplies by ten times its original price. Usually, this happens over the span of years, but in the Covid-economy, we've actually seen a number of these ten-baggers play out in the span of months. While most of these examples are in the small-cap space, shares of Wayfair (W), which has a current market cap of $27.5 billion, have rallied from $21.70 on March 19th to its current price of $290.85 now. That's a gain of more than 1,200% in less than five months! Within the entire Russell 1,000, 257 stocks have at least doubled off their 52-week lows, and in the table below we highlight the 34 stocks that are at least a quarter of the way to the ten-bagger club and have rallied more than 250%. As mentioned above, W tops the list, but Fastly (FSLY), which has barely been public for a year, is just shy of the club with a gain of 992%. Behind FSLY, Livongo Health (LVGO) is up 855%. Given that LVGO just got a takeover offer from Teladoc (TDOC), the 11th best-performing stock on the list, it may only make the ten-bagger club under the banner of the TDOC ticker. In looking through the list of stocks shown, many of these names come from the Health Care, Technology, and Consumer Discretionary sectors and have been direct beneficiaries of the new Covid-economy. At the same time, six stocks from the Energy sector made the list as well as they recovered from their bombed-out levels after oil prices briefly traded in negative territory earlier this year.
Services Soaring Wed, Aug 5, 2020 Following Monday's release of the ISM's Manufacturing report for July, this morning the service counterpart was released. The report showed activity in the service sector continued to pick up with the headline number rising to 58.1 from 57.1 last month and expectations for a reading of 55.0. This month's reading was the highest since February 2019 (58.5) and represented the first back to back expansionary readings (above 50) since February and March. That is also the highest level of the index since February of 2019 when it was at 58.5. Much of the same applies to the combined reading of the service and manufacturing indices. With both the service and manufacturing readings rising in July, the composite of the two has now risen to 57.7; a second straight month of expansionary readings. That is also the strongest level of the composite since a reading of 58 in February 2019. For both the service and composite indices, the massive reversals higher since each ones' respective low in April has also marked the biggest 3-month upticks on record. In other words, the broad economy is no longer contracting and continued to improve month over month in both June and July. While the headline number was improved and most of the individual categories showed expansionary readings in July, not every index rose. There were only three sub-indices to swing higher in July: Business Activity, New Orders, and Backlog Orders. Every other one was lower with the indices for Employment and Export and Import orders even showing contractionary readings. Granted, with some nuance, not all of those declines are necessarily negatives for the economy. For example, the lower reading in Supplier Deliveries indicates that supply chains are normalizing as lead times become shorter. Additionally, the big drop in inventories indicates moderation in the massive inventory builds of the past few months. While some areas of the survey fell MoM with a few even dipping into contractionary territory, the index for Business Activity was far from one of them. The index rose to 67.2 which is the highest reading on record outside of January of 2004 when it was just 0.5 points higher. Part of that renewed outlook for business activity is thanks surging demand. In fact, the New Orders index surged 6.1 points (the ninth largest MoM increase on record) in July to a record high of 67.7. That means service sector businesses in July reported a record improvement in demand from the prior month. With an increase in New Orders, orders that were already in place are beginning to stack up. The index for Order Backlogs rose 4 points to 55.9. That is the highest reading since March of last year. Whereas the past few months saw huge inventory builds as a result of plummeting demand, improved demand has led to a reversal of this in July. The index for inventories fell 8.7 points in July to 52. That was the second-largest MoM decline on record behind a 12.4 point drop back in March. As previously mentioned, the decline in some areas of the survey like Inventories and Supplier Deliveries could actually be viewed as a positive. One area that does not apply is the index for employment which remains the weakest category of the service sector. After a substantial rebound last month (the biggest MoM increase on record), the Employment index reversed lower falling to 42.1 in July. While that is a small move relative to the past few months, it indicates further contractions in employment. July marked a fifth straight month in which Employment was in contraction. That's the longest such streak since one that lasted from May of 2008 to June of 2010. Similar to the manufacturing index, while it could mean a reversal in the month ahead, at the moment that weak reading for the labor market stands in stark contrast with the improved demand picture. As for the commentary section, it provided a bit more insight into employment as well as other areas. One comment noted the trend of remote work stating that roughly 95% of the company's workforce is working remotely while another noted virtual meetings and the likes remain the norm. Another made mention that they were beginning to bring employees back to the workplace. With regards to demand, one company in the Utilities industry reported conditions appear to be at levels from before COVID-19. Meanwhile, one comment from the Construction industry reported strength in homebuilding which not only backs up recent macroeconomic data but should also bode well for that industry's stocks. ©2
The Worst Years for Treasuries Don’t Look Like This…Except One The 10-year Treasury yield is historically low, so low that it could climb a full 1% before the end of the year and still be the lowest year-end yield on record, with room to spare. Historically low rates come with a genuine concern that they can reverse and climb higher, which could be painful for Treasury investors. The good news: As shown in LPL’s chart of the day, four out of five of the worst years for estimated 10-year Treasury returns have been mid- to late cycle, which is not the stage that we’re in now. “What pushes up Treasury yields? Growth, inflation, or the Fed,” said LPL Chief Market Strategist Ryan Detrick. “But what do we have? Growth, sure, but inflation looks tame and the Fed has signaled they may be on hold for a while.” Looking at the five worst years of estimated 10-year Treasury performance, there’s an interesting mix of drivers. There’s a period of high (and rising) inflation (1969) when the Fed was raising rates, hurting stock returns. There are two cases of the Fed pumping the breaks during a strong period of growth (1994, 1999). There’s the “taper tantrum” in 2013, when the Fed was just talking about winding down quantitative easing while remaining supportive, but it was still all about the Fed. And then there’s the outlier: 2009. If you looked at the economic data for every year since 1950, including what the Fed was up to, I don’t think you would pick out 2009 as a year when yields jumped, nevermind the worst period for Treasuries. The stock market rebounded, probably before many expected, as the economy starrted to recover from a difficult recession, although it wasn’t clear what kind of recovery we would have and there were still many who thought the market rebound was a head fake. The Fed continued to surprise markets by doing things it had just never done before. A massive stimulus bill was signed into law in February. The dollar started to fall. Gold prices started climbing steadily (and would continue to climb until 2011). TIPS yields were diverging from the 10-year Treasury. It’s all eerily similar to signals we’re seeing now—except the 10-year Treasury yield has just been flat. Despite the similarities, we think a rate surge now is much less likely. The Fed’s commitment to keeping rates low for an extended period of time is stronger; we know now that central bank asset purchases don’t necessarily lead to inflation, and low international yields continue to make Treasuries attractive, even if less so than a year ago. But despite not seeing a lot of room for rates to rise, we remain cautious on Treasuries. As interest rates fall, bond prices become even more sensitive to rate changes and aren’t generating as much income to offset losses. It’s not surprising to see only one year prior to 1990 make it into the five. Treasuries historically have been the best diversifiers for stock holdings during periods of market declines and that diversification still has value, but with yields low they have never come with more risk as right now.
