The Bull Thread

Are Recessions Good For Stocks?

This isn’t like any recession we’ve ever seen, as it was sparked by a horrible pandemic and happened because people were told to stay inside. The impact was the worst contraction in gross domestic product (GDP) last quarter that anyone who is reading this has ever seen. But what is quite surprising is the fact the Nasdaq has made 30 all-time highs so far in 2020, while the S&P 500 Index has gained four consecutive months, all while the unemployment rate remains above 10%.

Why is this happening? There are two main schools of thought. One is that stocks are forecasting a better economy later this year and into 2021; remember, stocks tend to lead the economy and could be doing so once again. Another school of thought is that the massive fiscal and monetary policy are boosting equity prices, while not helping the overall economy quite as much.

Here’s the catch. It actually isn’t abnormal to see stocks gain during a recession. “This is one that might surprise many people, but stocks have actually gained during 7 of the past 12 recessions,” explained LPL Financial Chief Market Strategist Ryan Detrick. “There’s no question the difference between what is happening on Wall Street compared with Main Street is about as wide as we’ve ever seen, but maybe it shouldn’t be as big of a surprise that stocks have been strong.”

As shown in the LPL Chart of the Day, the S&P 500 actually gained 1.3% on average when looking at the 12 previous recessions going back to World War II, with a very impressive median advance of 5.7% (the average is skewed lower due to 2008). We continue to expect this recession to end soon, if it isn’t over already. In fact, when the end of the recession is officially declared at a later date, we could have yet another recession that saw stock market gains.

 

Individual Investors Still Don't Believe
Thu, Aug 6, 2020

As mentioned in a prior post, in the past week the S&P 500 has moved within 2% of its 2/19 high, but at the same time, less than a quarter of AAII respondents are optimistic for the future of stocks over the next six months. That begs the question- if there have been past times that sentiment and price action have been so detached from one another. Since the start of the AAII survey in 1987, there have been 10 periods (including the current one) in which the S&P 500 was within 2% of an all-time high but bullish sentiment was less than 25% without another occurrence in the prior three months. The most recent prior occurrence was not even a full year ago. Back in October, sentiment was only slightly higher as the S&P 500 was 1.84% from its all-time high. Prior to that, there were some scattered instances throughout 2013, 2015, and 2016 but before that, you would have to go back to 1993 to find another similar period. The one occurrence in 2013 stands out as it was both the lowest sentiment reading of these prior occurrences and the only one that occurred with the S&P 500 right at an all-time high.

As for where things stand after such instances, sentiment has tended to reverse higher in the following six months as the S&P 500 has tended to move higher. The S&P 500 has actually tended towards better than average returns over the next three months, although performance six months out has been modestly worse than average, even as it has been higher more often than not. Additionally, as shown in the second chart below, of the more recent occurrences of the past decade, they haven't marked any major top or bottom for the S&P 500 with occurrences clustered both coming off of lows and in the middle of longer-term uptrends.

 

July PMI Data Shows Recovery Chugging Along

We’ve written quite a bit lately about the deterioration in high-frequency data. Indicators of mobility (such as auto and air travel, commuting activity, restaurant diners, etc.) leveled off in July due to the latest wave of COVID-19 cases. The strong rebound in the job market reflected in May and June jobs data has faded, based on the increase in continuing claims reported last week by the US Bureau of Labor Statistics.

But this week’s data from the Institute for Supply Management (ISM) suggested that the economic recovery remained very much intact last month, even if more people chose to stay home.

The Institute for Supply Management’s Purchasing Manager’s Index (PMI) for manufacturing, reported on August 3, came in at 54.2, up from 52.6 in June, and solidly in expansionary territory. The more forward-looking orders component of the report jumped 5.2 months from the prior month, a sign that the positive momentum may continue for manufacturing.



The services ISM, reported yesterday (August 5), was even stronger. As shown in our LPL Chart of the Day, the ISM Services Index rose from 57.1 in June to 58.1 in July, including a 6.1 point increase in orders. This underrated economic data point deserves more attention than it gets given that services represent a much bigger piece of the US economy than manufacturing.



“This week’s ISM data suggests that the economic recovery remained on track last month despite signs of fading momentum from high-frequency data,” said LPL Financial Equity Strategist Jeffrey Buchbinder. “The manufacturing recovery bodes well for the near-term earnings outlook, while the services rebound is particularly impressive given social distancing constraints.”

This isn’t just a US story, as the JPMorgan global PMI indexes for manufacturing and services moved back above 50 in July for the first time since January 2020.

 

New Highs In Sight
Tue, Aug 11, 2020

Whether you want to look at it from the perspective of closing prices or intraday levels, the S&P 500 is doing what just about everybody thought would be impossible less than five months ago - approaching record highs. Relative to its closing high of 3,386.15, the S&P 500 is just 0.27% lower, while it's within half of a percent from its record intraday high of 3,393.52. Through today, the S&P 500 has gone 120 trading days without a record high, and as shown in the chart below, the current streak is barely even visible when viewed in the perspective of all streaks since 1928. Even if we zoom in on just the last five years, the current streak of 120 trading days only ranks as the fourth-longest streak without a new high.

While the S&P 500's 120-trading day streak without a new high isn't extreme by historical standards, the turnaround off the lows has been extraordinary. In the S&P 500's history, there have been ten prior declines of at least 20% from a record closing high. Of those ten prior periods, the shortest gap between the original record high and the next one was 309 trading days, and the shortest gap between highs that had a pullback of at least 30% was 484 tradings days (or more than four times the current gap of 120 trading days). For all ten streaks without a record high, the median drought was 680 trading days.



Whenever the S&P 500 does take out its 2/19 high, the question is whether the new high represents a breakout where the S&P 500 keeps rallying into evergreen territory, or does it run out of gas after finally reaching a new milestone? To shed some light on this question, we looked at the S&P 500's performance following each prior streak of similar duration without a new high.

 

4 Charts That Will Amaze You

The S&P 500 Index is a few points away from a new all-time high, completing one of the fastest recoveries from a bear market ever. But this will also seal the deal on the shortest bear market ever. Remember, the S&P 500 Index lost 20% from an all-time high in only 16 trading days back in February and March, so it makes sense that this recovery could be one of the fastest ever.

From the lows on March 23, the S&P 500 has now added more than 50%. Many have been calling this a bear market rally for months, while we have been in the camp this is something more. It’s easy to see why this rally is different based on where it stands versus other bear market rallies:



They say the stock market is the only place where things go on sale, yet everyone runs out of the store screaming. We absolutely saw that back in March and now with stocks near new highs, many have missed this record run. Here we show how stocks have been usually higher a year or two after corrections.



After a historic drop in March, the S&P 500 has closed higher in April, May, June, and July. This rare event has happened only 11 other times, with stocks gaining the final five months of the year a very impressive 10 times. Only 2018 and the nearly 20% collapse in December saw a loss those final five months.



As shown in the LPL Chart of the Day, this bear market will go down as the fastest ever, at just over one month. The recovery back to new highs will be five months if we get there by August 23, making this one of the fastest recoveries ever. Not surprisingly, it usually takes longer for bear markets in a recession to recover; only adding to the impressiveness of this rally.



“It normally takes 30 months for bear markets during a recession to recover their losses, which makes this recovery all the more amazing,” said LPL Financial Chief Market Strateigst Ryan Detrick.. “Then again, there has been nothing normal about this recession, so maybe we shouldn’t be shocked about yet another record going down in 2020.”

 

100 Days of Gains
Wed, Aug 12, 2020

Today marked 100 trading days since the Nasdaq 100's March 20th COVID Crash closing low. Below is a chart showing the rolling 100-trading day percentage change of the Nasdaq 100 since 1985. The 59.8% gain over the last 100 trading days ranks as the 3rd strongest run on record. The only two stronger 100-day rallies ended in January 1999 and March 2000.



While the Nasdaq 100 bottomed on Friday, March 20th, the S&P 500 bottomed the following Monday (3/23). This means tomorrow will mark 100 trading days since the S&P 500's COVID Crash closing low. Right now the rolling 100-day percentage change for the S&P 500 sits at +46.7%. But if the S&P manages to trade at current levels tomorrow, the 100-day gain will jump above 50%. It has been 87 years (1933) since we've seen a 100-day gain of more than 50%!

 

TGIW
Wed, Aug 12, 2020

Friday is just about everyone's favorite day of the week, but for both the entire year and since March 23rd, the best days for the S&P 500 have been Monday and Wednesday. On a YTD basis, the S&P 500's median gain on Mondays has been 0.70% while Wednesday's median gain has been 0.50%. Outside of those two days, Tuesdays and Thursdays have been modestly positive, while Friday is the only day of the week that has seen declines on a median basis.

Looking just at the period since 3/23, Mondays and Wednesdays have still been the strongest with median gains of 0.73% and 0.71%, respectively. Behind those two weekdays, Fridays have seen improved performance with a median gain of 0.34% followed by Tuesday (0.17%) and Thursday (0.00%). What's notable about the nearly five months since the 3/23 low is that every day of the week has seen gains on a median basis.

In terms of consistency, Mondays have been the most positive day of the week both on a YTD basis and since the March lows. Since the March low, Wednesday and Friday have both seen gains two-thirds of the time, and while Monday through Thursday have seen similar levels of consistency whether you look on a YTD basis or since the March lows, Friday has had a pretty wide disparity. In the period from late January through late March, investors did little in the way of buying on 'Corona Fridays' ahead of the weekend, but once the initial panic of the outbreak began to subside in April, that sentiment started to fade.

 

Homebuilders Head Higher and Higher
Mon, Aug 17, 2020

This morning's release on homebuilder sentiment provided more reinforcement as to just how strong the housing market has been despite - or even thanks - to the pandemic. The NAHB's Housing Market index rose another 6 points in August to 78, surpassing the pre-pandemic high of 76 from December, and now ties December of 1998's reading for the highest in the history of the index.



Not only is the index at its joint highest level ever, but the 6 point increase this month was no small move to get there, registering in the top 95% of all monthly changes. Excluding the past few months' readings, August's jump was the largest monthly gain since March of 2017. Breadth was also strong with every sub-index and all regions rising month over month; many of those are now at or close to fresh records.



While the headline index is right at its record high, the index for Traffic reached a new record this month surging 9 points to 65, surpassing its prior high of 62 from December of 1993.



Broken down by the four regions of the country, each one is strong, but the Northeast has seen some the biggest moves in the past few months and is now at a record high. People are fleeing city apartments and looking for homes. Similar to the headline index, the South is also tied for a record. That index rose 7 points to 79 in August to return to its February levels.



With several aspects of the pandemic boosting housing, the homebuilder stocks have continued to surge. Just like homebuilder sentiment, the S&P 500 Homebuilders group is also at an all-time high today. It actually first made a new high last week after taking out the prior high from July of 2005.

 

One Streak Ends, A Longer One Continues
Tue, Aug 18, 2020

It was a big, albeit brief, moment for the market today when the S&P 500 notched a new intraday record high, fully erasing all of the declines from the COVID-crash in February and early March.



Today's new high for the S&P 500 ended a streak of 125 trading days without a record intraday high. The chart below shows prior streaks of trading days without an intraday high since 1983 (when our intraday database begins). What's amazing about the current period is that despite losing roughly a third of its value, the 125 trading day gap between record highs is barely even a blip on the chart, and doesn't even rank in the top ten in terms of longest streaks without a new high. Even looking at more recent history, since the S&P 500 took out its pre-financial crisis high in early 2013, there have been three other streaks where the S&P 500 went longer without notching a new all-time high.



The S&P 500 may have notched a record high this morning, but it's a much different picture for the small-cap Russell 2000. At the same time that confetti was streaming for the S&P 500, the Russell not only remains well below its February high, but it's also nearly 10% below its record high from nearly two years ago at the end of August 2018.



While the S&P 500's just-ended streak of 125 trading days without a record high wasn't even one of the ten longest, the current streak of 493 trading days that the Russell 2000 has gone without a new high ranks as the 5th longest streak since 1983. Comparing the chart of Russell streaks below to the same chart for the S&P 500 shows that the Russell has been much more streaky. While the S&P 500 has only had three prior streaks of longer than 400 trading days without a new high, the current streak for the Russell ranks as its eighth such streak of more than 400 trading days.

 

B.I.G. Tips - Earnings Season and Top Triple Plays
Wed, Aug 19, 2020

Walmart (WMT) wrapped up the Q2 2020 earnings reporting period on Tuesday with a huge beat on both the top and bottom line. It was a fitting end to what turned out to be a record-setting earnings season.

As we highlighted in our Q2 Earnings Season preview in early July, analysts were rapidly increasing earnings estimates leading up to earnings season. Normally when that happens, stocks have trouble performing well during earnings season because the expectations bar has been set higher. This season, even with analyst estimates on the rise in the four weeks leading up to the start of the reporting period, companies managed to beat bottom-line EPS estimates at the highest rate in the history of our database going back to 1999.

As shown below, 76% of companies reported stronger-than-expected EPS numbers this season, which eclipsed the prior record high of 73% seen during the Q3 2006 reporting period.



Long-term Bespoke subscribers know how much we like earnings triple plays, but for those that haven’t heard of the term, we came up with it back in the mid-2000s. An earnings triple play is a company that beats EPS estimates, beats revenue estimates, and raises forward guidance all in the same quarterly earnings report. Investopedia.com is one of the best online resources for financial markets education, and they’ve actually given us credit for coining the “triple play” term on their website. We consider triple play stocks to be the cream of the crop of earnings season, and we are constantly finding new long-term buy opportunities from this basket of names each quarter.

This earnings season there were a massive number of earnings triple plays. We went through the list of this season's triple plays to find the ones that have the most attractive set-ups heading into the earnings off-season.

 

Industry Group Breadth Positive
Wed, Aug 19, 2020

While the S&P 500 moved to a new all-time high on a closing basis Tuesday, we wanted to check in on breadth with respect to S&P 500 industry groups and how they're trading relative to their 50 and 200-day moving averages. While we hear a lot about the largest five stocks in the S&P 500 accounting for the lion's share of the gains, it's not as if everything else in the market is falling apart.

Looking first at S&P 500 industry groups versus their 200-day moving averages (DMA), while not extraordinary by any means, more than two-thirds are currently above their 200-DMAs, and the level continues to trend higher. A more worrying sign would have been if this reading was much higher and showing signs of rolling over. The seven industry groups that are currently below their 200-DMAs are Banks, Consumer Services, Energy, Insurance, Real Estate, Telecom Services, and Utilities.



On a shorter-term basis, the percentage of industry groups currently above their 50-DMAs is considerably higher at over 95%. In other words, the only industry group not above its 50-DMA is Energy. What else is new? Now that the S&P 500 has taken out its February highs, these breadth readings will be key indicators to watch for signs of participation (or lack thereof) in any rally.

 

5 Charts To See With Stocks At New Highs

“Better late than never.”

It took a while, but the S&P 500 Index finally made a new all-time high, coming all the way back from the vicious 34% bear market in less than six months.



It might bring back some scary memories, but back in March it took the S&P 500 only 16 days to go from new highs to a bear market (down 20%), the fastest ever.



“This will go down as the fastest bear market ever, but also one of the fastest recoveries ever,” explained LPL Financial Chief Market Strategist Ryan Detrick. “Then again, we’ve never quite seen a recession and recovery like this, so maybe it isn’t a shock to see new highs this quickly.”

The bear officially lasted one month and took five months to recover the losses. Usually when there’s a bear market during a recession, it takes 30 months to recover those loses. This was the third-fastest ever, with only 3 months to recover from a bear market recession in the early ‘80s and 4 months to recover from a bear market in the early ‘90s.



It seems like earlier this year and new highs were a lifetime ago, but the S&P 500 finally moved off unlucky 13, notching the 14th new high of 2020.



As shown in the LPL Chart of the Day, returns after a long time without new highs actually get better. One, three, six, and 12 months after the first new high in more than five months show stronger performance than average or after any new highs. Yet another reason to think that this bull market from a long-term point of view could have some more tricks up its sleeve.



Last, we found there were four other times the S&P 500 made a new high during a recession: In February ’61, July ’80, November ’82, and March ’91. Incredibly, a new expansion started the following month every single time. Could stocks at new highs be signaling an end to this recession? We think that very well could be the case again this time.

 

Which Bull Will It Be?

The incredible rally off the March 23 bear market bottom continues, with the S&P 500 Index up more than 50% from those fateful lows. It feels like a lifetime since the longest bull market ever ended. Remember though, although the recent bull market was the longest, it wasn’t the greatest, as the 1990s bull gained more on a percentage basis.



We discussed in detail what the new highs in the S&P 500 meant here, so we won’t dive into that again. But this time we’ll show just how this rally ranks versus others that ended major bear markets. As shown in the LPL Chart of the Day, this new bull market, up to this point of about five months, is stronger than any other major bull market’s start going back to World War II.



“Yes, this new bull market is the strongest bull market we’ve ever seen after five months,” explained LPL Chief Market Strategist Ryan Detrick. “But that shouldn’t be a source of worry. The previous two strongest rallies up to this point were in 1982 and 2009, and both saw continued strength during the first year of the new bull market.”

Here is a chart showing just this bull market and the ’82 and ’09 bull markets.

 

New Orders Blowout
Tue, Sep 1, 2020

The Institute for Supply Management's August reading on the manufacturing sector showed a third straight month of accelerating expansionary activity. The headline index rose to 56 compared to expectations of 54.8 and 54.2 in July. That is now the highest level of the index since November of 2018 when it read 58.8.



Breadth across each of the individual components of the report continues to be solid with just about every index higher month over month. The only two indices to fall were both for inventories. The index for Employment along with these indices for Business Inventories and Customer Inventories are also the only ones that remain in contraction as has been the case for the past few months. Employment has been on the rise over the past few months, so it's not all bad though. Additionally, the declines in inventories may not necessarily be a bad thing as it coincides with strong demand and rising production, meaning strong demand is likely drawing on inventories rather than supply issues.



Demand is extraordinarily strong. Consistent with solid readings for New Orders across regional Federal Reserve manufacturing surveys, the ISM's reading on New Orders has consistently risen over the past few months and is now around the top 5% of all historical readings going back to 1948. The 6.1 point increase to 67.6 leaves the index at its highest level since the final months of 2003/January of 2004. Prior to that, you have to go all the way back to 1983 to find a time that New Orders were this strong. That is an enormous turnaround compared to where things stood as recently as April when the index was at its low of 27.1; in fact, it is the most the index has risen in four months on record (second chart below). The 40.5 point rise in New Orders in that time surpasses a 39.5 point increase that went from June to October of 1980.





Given the historically strong demand, manufacturers continue to ramp up production. That index rose to 63.3 from 62.1 last month. That is the strongest reading since January of 2018.



Additionally, US manufacturers also appear to be ramping up general trade activity as both indices for Imports and Exports have risen. Export Orders index are at the same levels as January of this year after rising 2.9 points this month while Imports are even stronger at their highest level since June of 2018. Assuming those imports are mostly inputs, that could be a positive sign for future production.



Even though production continues to rise, it still appears that demand is outpacing supply as Backlog Orders also expanded for a second straight month. Backlog orders rose 2.8 points to 54.6. That 2.8 point month over month increase is in the top decile of all monthly changes and leaves the index at the highest level since November of 2018.



Further evidence of demand outpacing output can be seen through inventories. As mentioned earlier, the only areas of the survey that remain in contraction concern inventories. Both Business Inventories and Customer Inventories remain deep in contraction at 44.4 and 38.1, respectively. For Business Inventories, that is the lowest since January of 2014.

For Customer Inventories, that was the largest decline in a single month since December of last year and that is now the lowest level in over a decade with the last time it was this low being June of 2010. With inventories dwindling and demand historically elevated, these should act as tailwinds for future improvements to employment and production (as well as prices)

 

Initial Jobless Claims Get Adjusted
Thu, Sep 3, 2020

The widely quoted seasonally adjusted initial jobless claims number for this week was 881K, which was well below estimates of 950K and last week's print of 1.011 million. While that is a decline, a like for like comparison of this week's data to past readings is not entirely accurate. This week was the first week that the Department of Labor changed the seasonal adjustment methodology. In a nutshell, previously the DOL had utilized a multiplicative seasonal effect which is dependent on the level of claims meaning at times of sudden large moves like the past several months, seasonal adjustments tend to over-correct. Instead, the DOL will now use an additive seasonal effect which is independent on the level of the series and should mitigate over or under adjustments. At this point, past weeks' readings were not revised with this new adjustment methodology and will not be revised until the usual annual revisions at the start of the calendar year.

As a result of the changes in seasonal adjustment methodology, looking at the non-seasonally adjusted numbers is a better look at the data for the time being. NSA initial claims rose slightly by 7.6K to 833.4K this week. That is the smallest weekly change since June 25th when they fell by 3.3K. That leaves claims up 659.8K versus the same week last year.



As for continuing jobless claims, on a non-seasonally adjusted basis claims were lower by 764.7K. Now at 13.1 million, continuing claims are at their lowest level since early April, albeit they remain up significantly compared to the same week last year.



While the regular number for claims has been headed lower for both initial and continuing claims, factoring in Pandemic Unemployment Assistance it is not as strong of a picture. Initial PUA claims have risen for a third consecutive week coming in at 0.76 million today. That is the highest amount since late July bringing total claims (PUA + regular claims) to 1.59 million; that is the highest since the last week of July. As for PUA continuing claims, which are lagged another additional week, this week saw a 2.598 million jump in claims. That was the largest one week increase since mid-May and brings total continuing claims to their highest level since July 17th despite a consistent move lower in normal continuing claims. While that is a weaker reading than the past few months, part of that week over week increase could be due to seasonality as claims tend to trend higher from September through the end of the year.