Trading Before Labor Day Weekend Generally Bullish Labor Day has become the unofficial end of summer and the three-day weekend has become prime vacation time for many. Business activity ahead of the holiday was more energetic in the old days. From 1950 through 1977 the three days before Labor Day pushed the DJIA higher in twenty-five of twenty-eight years. However, since then the days leading up to the long weekend have become somewhat mixed. In the last 21 years, Thursday has been weaker than Friday for DJIA and S&P 500 on average. NASDAQ and Russell 2000 however have been stronger on Thursdays and softer on Fridays. Frequency of gains has been modestly better on Friday. DJIA, S&P 500, NASDAQ and Russell 2000 have all advanced more often than declined on Friday. Also of note is volatility on Thursday and Friday appears throughout the table with numerous moves in excess of 1% scattered throughout.
3 Charts To Watch If You Are Bullish The S&P 500 Index just closed the door on its best August since 1986, making new all-time highs along the way, while also closing up five months in a row. First things first, make no mistake about it; this is a new bull market. That of course doesn’t mean it will last years like previous bull markets, but a nearly 57% gain in 5 months is what we’d classify as a bull market. Here are all the bull markets going back to the Great Depression and where this one ranks. Now let’s dig into the 5 month win streak. It is quite rare for stocks to gain from April through August, as the summer months tend to be somewhat tricky. Yet, we found there were six other years that saw these 5 months all close higher and the rest of the year was higher five times, with some solid returns in there. In fact, the only year that was lower the rest of the year was 2018, mainly due to the Fed policy mistake in December 2018. “What might surprise many investors is 5 month win streaks are actually incredibly bullish going forward,” explained LPL Financial Chief Market Strategist Ryan Detrick. “In fact, a year after a 5 month win streak has seen the S&P 500 higher 25 of the past 26 times.” As shown in the LPL Chart of the Day, the S&P 500 Index gained more than 35% during this 5 month win streak, the most ever. Yet, the future gains after 5 month win streaks is very impressive, higher 25 out of 26 times a year later. An object in motion tends to stay in motion and this sure seems to be the case here.
JOLTS Show Some Return To Normalcy Wed, Sep 9, 2020 Today's Job Openings and Labor Turnover Survey (JOLTS) report from the Bureau of Labor Statistics (BLS) on the flows in and out of jobs as well as the number of job openings was pretty encouraging. As shown in the first pair of charts below, the number of open jobs as a percentage of the labor force has surged back to pre-pandemic levels and is close to the very strong levels seen at the prior peak. This is a good sign that labor demand is holding up pretty well in aggregate. Also encouraging is that while not at extreme lows, layoff and discharge rates are back to the levels they sat at in 2019. Instead of settling at a new higher level, the 1.4% private sector layoff and discharge rate is at the same level it was at numerous times during 2019 and the first two months of 2020. Hiring, which crashed and then surged as businesses started to reopen, was 4.1% the labor force in July. That was a stronger pace than any month in the history of the last expansion. Finally, we think quit rates are about the best indicator of labor bargaining power available. As shown, they are bouncing and bouncing hard. They have not fully recovered from COVID's hit, but the size and speed of the bounce is consistent with a very strong trajectory for labor markets relative to what other indicators (for instance, permanent job losses in the Employment Situation Report, or the level of unemployment claims) are saying.
Housing Still Hot Headed Out of Summer Wed, Sep 9, 2020 This morning, the Mortgage Bankers Association (MBA) released this week's reading on mortgage applications. Seasonally adjusted purchases were up 2.6% from last week, rising to the highest level since the first week of July. In the past few months as housing activity has surged, other than that July reading, there was only one other time that purchases were stronger, and that was in the second week of June. In other words, purchase activity is once again on the rise after taking a bit of a breather in the summer months and is currently back to some of its strongest levels since early 2009. With rates staying low, refi activity similarly remains around some of its stronger levels of the past decade gaining nearly 3% this week. Granted, that is still in the range that the index for refinances has been in since the spring. As shown in the charts below, on a non-seasonally adjusted basis, purchase applications continue to run well above trend. Even with the big decline that went against seasonal norms in the spring (first chart below), the index of YTD purchase applications has averaged 290.1 each week compared to 272.4 last year (second chart below); these are by far the strongest readings of the past decade. For every week since the mid-June 2020 peak (which was later in the year than usual due to pent up demand; denoted by the blue dot in the first chart below), purchase applications have been consistent with seasonal trends, but each week's reading has been higher year over year by an average of over 24%. This week, thanks to the timing of the Labor Day holiday, the NSA purchase index rose by an even stronger 40% YoY which was by far the strongest reading of any week of this year. Another housing indicator showing similarly strong demand that we touched on in last night's Closer was the July version of Black Knight's monthly Mortgage Monitor. Although it is at a greater lag than MBA's readings, this was yet another data point pointing to strong housing demand as new originations in June (lagged an extra month to the rest of the report that covered the month of July) surged to over 1.3 million which was the highest reading since at least 2013; doubling year over year. The July Mortgage Monitor also indicated that delinquencies as a percentage of all loans have continued to improve, falling to 6.9% compared to its recent peak of 7.76% back in May. Albeit improved, the delinquency rate is still elevated at its highest levels since early 2013/late 2012.
Typical Early September Weakness Recovers Mid-Month Sells Off Month-End As of yesterday’s close the market was down more than the historical average performance in September. DJIA was down nearly -3.3%, S&P 500 was down -4.8%, NASDAQ was off 7.9%, Russell 1000 was down -5.2% and Russell 2000 lost 3.7%. Today’s rally looks like the beginning of a textbook mid-month recovery rally However, the second half of September has historically been weaker than the first half. The week after options expiration week can be treacherous with S&P 500 logging 23 weekly losses in 30 years since 1990. End-of-quarter portfolio restructuring, and window dressing can amplify the impacts of any negative headlines.
5 Lessons Learned About Rising Rates While the direction of the 10-year Treasury yield over the last cycle was decidedly lower, as shown in LPL’s Chart of the Day, there were still six extended periods where it rose at least 0.75%, and in two of those it rose almost 2%. Looking ahead, economic growth below potential, slack in the labor market, and an extremely supportive Federal Reserve (Fed) may limit rate pressure in the near term, but with interest rates already low and massive stimulus in place, we believe the overall direction is likely to be higher. “Even in a falling rate period there are lessons from the last cycle about rising rates,” said LPL Financial Chief Investment Officer Burt White. “Among them: Careful when the Fed stops buying and sometimes the best defense is a good offense.” While every economic cycle is unique, the last cycle highlighted these key takeaways about periods of rising rates: Careful when the Fed stops buying. The two drivers of rising rates last cycle were economic growth and Fed bond purchases, also known as quantitative easing (QE). The Fed buys bonds to keep rates down, but the start of Fed buying has actually been the time when rates rise—likely on expectations that the purchases would help strengthen the economy. These periods also often followed large rate declines either because markets anticipated the start of Fed buying or the economy was faltering. The takeaway: unless the economy is really taking off, any rising-rate period may pause for an extended period, or even reverse, when the Fed backs off bond purchases. Sometime the best defense is a good offense. Lower-quality, more economically sensitive bond sectors actually performed well during periods of rising rates during the last cycle. Rate gains were largely driven by economic improvement rather than a large pick-up in inflation, and that’s typically a good environment for sectors like high-yield bonds and bank loans. The downside is that these are much riskier bond sectors and don’t provide the potential diversification benefits of higher-quality bonds during periods of stock declines. Don’t expect TIPS to provide much resilience because of their inflation adjustment. Treasury Inflation-Protected Securities (TIPS) are high-quality bonds that have provided a little extra insulation against rising rates compared to similarly dated Treasuries when inflation expectations increased. TIPS prices are adjusted for inflation, but even with the adjustment, they are still very sensitive to rates. Investment-grade corporates can both hurt and help. If credit spreads narrow when rates are rising, investment-grade corporates can post some solid gains in a rising-rate environment, but if spreads are holding steady or even widening, they can be very sensitive to changes in Treasury yields, potentially (although not often) even more sensitive than Treasuries. Mortgage-backed securities (MBS) have not provided as much insulation as corporates, but they also have had less downside. While MBS have certainly outperformed Treasuries during periods of rising rates, they have not performed as well as investment-grade corporates. But they also have come with less downside, losing only 1.4% in their worst performing period compared to a 4% loss during the worst period for corporates. With the Fed still providing strong stimulus and economic growth potentially poised to accelerate, we currently see an increased risk of rates moving higher. We are playing some offense with our equity exposure, which allows us to emphasize a focus on higher-quality bonds. Among bond sectors, we are emphasizing MBS and still prefer investment-grade corporates over Treasuries. History may not repeat, but if it rhymes, this positioning may help add resilience to a fixed income portfolio if rates extend their move off recent lows.
Best and Worst Performing Stocks Since the 9/2 High Thu, Sep 10, 2020 Since the S&P 500 and Nasdaq peaked on September 2nd, we've seen rotation out of the post-COVID winners and rotation into laggards in the value space. Below we take a look at the best and worst performing stocks in the Russell 1,000 since the 9/2 high for the S&P. For each stock, we also include its YTD total return and its percentage change from the 3/23 COVID Crash low through 9/2. Capri Holdings (CPRI) is up more than any other stock in the Russell 1,000 since 9/2 with a gain of 17.43%. Even after the recent gains, however, Capri -- the holding company for brands like Michael Kors, Jimmy Choo, and Versace -- is still down 52.9% year-to-date. Only four other stocks are up more than 10% since 9/2 -- Beyond Meat (BYND), PVH, Virtu Financial (VIRT), and Reinsurance Group (RGA). Interestingly, BYND and VIRT are also up big (~80%) year-to-date, while PVH and RGA are both down more than 35% year-to-date. What stands out the most about the list of winners is that only one Technology stock made the cut -- Sabre (SABR). Most names come from the two consumer sectors including cruise-liners like Carnival (CCL), Royal Caribbean (RCL) and Norwegian Cruise (NCLH), Kohl's (KSS), Williams-Sonoma (WSM), Six Flags (SIX), Foot Locker (FL), and Ralph Lauren (RL). Both UBER and LYFT also made the cut with gains of 6% since 9/2. The 30 biggest winners since 9/2 are still down an average of 20% year-to-date, while the rest of the stocks in the Russell 1,000 are up an average of 1.46% YTD. While only one Technology stock made the list of biggest winners since 9/2, the sector accounts for two-thirds of the 30 biggest losers over the same time frame. As shown below, since 9/2, the six worst performing stocks in the Russell 1,000 and ten of the worst twelve all come from Tech. Notably, though, these 30 stocks that have all fallen more than 12% since 9/2 are still up an average of 5.6% YTD. Were it not for the horrid YTD performance of the Energy stocks that made the list, the average YTD gain would be even higher.
9/11 Bullish Since 2002 Tomorrow we honor the fallen and the heroes of 9/11. Up in Nyack, New York we will remember our hometown 9/11 fallen hero Welles Crowther, the man in the red bandanna. Before Welles was a trader at Sandler O’Neill at the Twin Towers and played lacrosse at Boston College where he graduated with honors and a degree in economics he was a Nyack High School graduate and lacrosse player, wearing his trademark red bandanna on the field. Hopefully we will be able to host our Red Bandanna Classic lacrosse tournament next year again. For the past 18 years the market has also seemed to remember and honor this day with a rather bullish record. 9/11 has been on the weekend 5 times since 2002 so we have used the next trading day in the table below and shaded those years in grey. DJIA was up 15 of the 18 years with an average gain of 0.56%; S&P 500 also up 15 of 18 with a 0.55% average; NASDAQ up 15 of 18, average 0.73%; Russell 1000 up 15 of 18, average 0.55% and Russell 2000 up 14 of 18, average 0.71%.
Election Charts You Need To See: Part 1 First off, our thoughts go out to everyone who was impacted by the tragic events of September 11, 2001—19 years ago today. It is a day to reflect and remember those who were lost. One of the top requests we’ve had here at LPL Research is for more charts on the election. Over the next week, we will share some of our favorite charts on this very important subject. Here’s how the S&P 500 Index performs under various presidents and congressional makeups. The best scenario has historically been a Democratic president and Republican Congress, while a Republican president and Democratic Congress has been the weakest. Building on this, a split Congress historically has been one of the best scenarios for investors. The best scenario under a Republican president is a split Congress, a potential positive for 2020 that has played out after the massive reversal in the stock market since March. Looking at the four-year presidential cycle shows that stocks haven’t been down during a year the president was up for a re-election since FDR in the 1940s, another bullish tailwind for 2020. Here’s another look at this, as stocks historically have done much better when there isn’t a lame duck president. Come back on Monday, as we’ll share some more election charts then.
Homebuilder Sentiment Soars Wed, Sep 16, 2020 Homebuilders had nothing to complain about in recent months, as the National Association of Homebuilders (NAHB) sentiment index was already tied for its best levels on record. Today's release of the September update surpassed all expectations. While economists were forecasting the headline index to come in at a level of 78, the actual reading was five points higher at 83. Never before has the homebuilder sentiment index topped 80, let alone moved as high as 83. If this sentiment survey was a stock chart, technicians would consider it a textbook breakout. The internals of this month's report were also very strong. Both Present and Future sales as well as Traffic all surged to record highs, and on a regional basis, every region except the West increased. The decline in the West likely stems from the fires in California, but even with that decline, all four regions are now comfortably back above their pre-COVID levels.
Election Charts You Need To See: Part 2 As we noted last week, the demand for election charts is off the charts (pun intended), so we are sharing some of our favorite election charts. Without further ado, here are some more election charts you need to know as November 3 inches closer. How stocks perform three months before the election has a stellar track record of predicting who will win in November. If stocks are higher, the incumbent party tends to win, while if stocks are lower, the incumbent party tends to lose. This indicator accurately predicted the winner 87% of the time (20 of 23) since the late 1920s. Building on this, if President Donald Trump is going to win, right about now is when the S&P 500 Index should start to outperform. Of course, if it weakens, it could mean we will be looking at a President Joe Biden soon. Speaking of presidents up for re-election, here’s what the S&P 500 historically has done during re-election years. Lastly, here are two final charts that may help forecast the outcome. If real per capita disposable income is higher, the incumbent president usually wins. Conversely, if wages are weak, that bodes well for someone new in the White House. Given real per capita disposable income is up more than 7% this year, it would suggest President Trump should take more than 70% of the votes. Of course, this is greatly skewed due to the CARES Act, so we’d put a major asterisk next to this one. To sum up, Gallup poll approval ratings have done a nice job of predicting how many votes a president up for re-election might get. With a 42% Gallup approval rating currently, this comes out to 49% of the total votes for President Trump, which points to a close race.
Retails Sales Shifting to Slower Growth Retail sales rose 0.6% month over month in August following July’s downwardly revised 0.9% advance, but sales fell short of Bloomberg’s consensus expectation for a 1% increase. The retail sales control group, which excludes building materials, autos, and gas, fell 0.1% month over month and also missed estimates (source: US Census Bureau). The speed of retail sales’ recovery to pre-pandemic levels—just five months—has been remarkable, although the July 31 expiration of supplemental jobless benefits provided a headwind during the important back-to-school shopping season. During the 2008–09 financial crisis, retail sales did not return to their prior peak for more than three years! As shown in the LPL Chart of the Day, sales in August 2020 were 2.6% higher than in August 2019, impressive given the impact of the pandemic and lockdown recession. Some restrictions have eased but many remain in place, making this rebound particularly impressive. August sales were 1.9% above the levels back in February, when the numbers were inflated by an 8.5% year-over-year increase in grocery store sales on some early shelf-stocking. “Retail sales’ ability to remain above pre-pandemic levels is remarkable considering the shrinking boost from supplemental jobless benefits while social distancing and business restrictions have continued,” said LPL Financial Equity Strategist Jeffrey Buchbinder. “We expect steady gains to continue as more restrictions are eased and consumer confidence is restored, though still-high unemployment and dwindling stimulus make the road ahead a bit tougher.” Looking at the various segments, sales gains were supported by the continued recovery in restaurants, up 4.7% (but still down 17% year over year), and housing-related spending. Weak spots included food sales, sporting goods (off elevated levels), and department stores. E-commerce sales continued to chug along, growing 20% year over year but were unchanged from July’s levels. The consumer recovery from the pandemic has been impressive despite the shortfall in August retail sales. Fading stimulus and still-high unemployment may slow the pace of consumer spending growth this fall, but the progress to date is encouraging.
Two Year High for the Richmond Fed Tue, Sep 22, 2020 This morning the Richmond Fed released its September reading on the manufacturing sector which showed continued improvement in the Fifth District. The headline index rose 3 points from 18 in August to 21 in September. Tha's the fifth consecutive monthly increase in the headline index and the third month in a row of expansionary readings. That leaves the index at its highest level in two years. The headline index as well as a number of its components is now in the top 5% of all readings. Components with historically high readings include New Orders, Order Backlogs, and Capacity Utilization. Breadth in this month's report was also strong with every index besides Services Expenditures, Availability of Skills, and Raw Materials Inventories sitting in expansion territory. Most indices also rose this month with the only outliers being the index for Shipments, Prices Received, Wages, and the indices for Finished Goods and Raw Material Inventories. Although the index for Shipments was lower, it remains at solid levels while other readings of demand like New Orders and Backlog of Orders continue to indicate strong order growth versus the prior month. Given this, inventories are dwindling. As shown below, the indices for Finished Good Inventories and Raw Material Inventories are both in the bottom 1% of historical readings with Raw Material Inventories showing a contractionary reading for only the second month ever. June of 2018 was the only time that Finished Good Inventories were lower and April of 2004 was the only lower reading for Raw Material Inventories. Meanwhile, Employment continues to improve with the index for Current Number of Employees rising to 23 from 17 this month. That is in the 98th percentile of all readings with the last time the index was this high being June through August of 2018. Not only are businesses bringing workers back, but they also appear to be raising expenditures elsewhere. Some of the indices that saw the largest month over month increases were those surrounding expenditures. For example, Service Expenditures rose from a contractionary -18 to 0 which was the biggest monthly gain on record. Meanwhile, the index for Capital Expenditure's 16 point increase was likewise one of the largest on record. That also leaves this index at its highest level since in nearly two years. In addition to the regional Fed's look at the manufacturing sector, the Richmond Fed also includes readings on the service sector. As shown below, while there is not an all-encompassing number like the manufacturing composite, September marked a broad pivot into expansion for most indices of the services economy after multiple months of contractionary readings. Some indices, like the one for Equipment and Software Expenditure, even experienced their largest one-month gains on record. The same is even applicable to the indices for future expectations in the services sector. Of those indices, Equipment and Software Expenditure and Services Expenditures, both saw their biggest one-month gains ever while several others were in the 90th percentile or better of monthly moves. Granted, those gains still only leave them at the low ends of their historical ranges. In other words, conditions improved, but not to the same extent as the manufacturing sector.
5 Real-Time Data Charts To Track the Recovery We check in again today on some of the real-time economic data that LPL Research is monitoring to provide timely and valuable insights into the state of the US economy. Traditional economic data is often reported too slowly to pick up the changes that are occurring in response to the COVID-19 pandemic. The latest data on US COVID-19 cases has shown steady progress since peaking at the end of July. COVID-19 hospitalizations are at the lowest levels since the end of June and are close to the lows of mid-June. The number of positive COVID cases rose over the last week, and while the number of tests performed increased, the positive test rate also increased to near 6% (source: COVID Tracking Project). Further, Labor Day get-togethers may have created the recent bump in transmission, a trend we saw following other holidays over the summer. “Even as much of the real-time data shows a slowing recovery as Americans adjust to the new normal, it’s encouraging that new COVID-19 cases and hospitalization rates have improved greatly since mid-summer,” explained LPL Financial Chief Market Strategist Ryan Detrick. “Progress on a COVID-19 vaccine and fiscal stimulus could help the economy and markets in the fourth quarter, but as investors struggle with election uncertainty and US-China tensions remain elevated, it’s likely to be a bumpy ride.” Out of all the indicators we monitor, US retail sales had been showing one of the most robust recoveries toward the end of the summer as it exceeded 2019 levels on a year-over-year basis, but the most recent weekly readings from retailers on same-store sales recently slipped back lower than last year (source: Bloomberg, Johnson Redbook). It’s not surprising that consumer confidence levels, as measured by the Bloomberg Weekly Consumer Comfort Index, also dipped on their last reading. Driving map routing requests by the Apple maps app exceeded pre-pandemic levels but have since leveled off and is now declining slightly. This real-time indicator steadily recovered from March and April lows as people returned to work or other economic activity, and it’s been continuing at a higher than normal rate as Americans travel by car when they previously may have used public transit or air travel. Public transit usage, as measured by Moovit, is still at only 50% of its baseline level, as working from home has a huge effect on usage numbers in major metropolitan areas. Electricity demand is also showing a bumpy recovery. It had recovered, dipped, and then recovered, only to dip again since the start of September. Demand for electricity dropping again potentially indicates a slowdown in the rate at which businesses are reopening or softening demand for their goods and services. During the midst of the March lockdowns, the number of diners in US restaurants hit extreme lows of -100% compared to the same time last year. The last reading on this indicator was -45%, coming off a recent peak of -30% on September 7 (source: Opentable). Restaurant bookings could be under pressure as cooler weather makes outdoor dining less comfortable in parts of the country. As the seasons change from summer to fall, consumer behavior often changes, too, and the potential for heightened rates of viral transmission grows. We will continue to monitor key high-frequency data and provide updates for clues about the path of the economic recovery as we continue to battle the outbreak of COVID-19 across the globe.
What Have Democratic Sweeps Meant for the S&P 500? Wed, Sep 30, 2020 Headed into the first presidential debate Tuesday night, betting markets (ElectionBettingOdds.com) placed Democratic candidate Joe Biden as the slight favorite to take the White House in November. The debate resulted in Biden gaining another 5 percentage point chance of winning the Presidency. As of this morning, Biden's odds to win are at 59.8% versus Trump's odds of 38.9%. Additionally, Democrats are slight favorites to win control of the Senate (58.4% to 41.5%) and big favorites to maintain the House (82.8% to 17.1%). Given these odds, in the chart below we show the average performance of the S&P 500 from the three months before Election Day through three months after Election Day for all election years post-WWII that resulted in a sweep of the executive and legislative branch by the Democrats. As shown, on average the S&P 500 has been on the decline in the weeks leading up to Election Day, though in the days just before the Election there has been a small rally that sharply reverses once the results come in. After the initial post-Election drop, the market has trended a bit higher, but by three months after the Election, it has only found itself around the same levels as Election Day; on average a 2.6% loss versus where the index stood three months prior. The composite shown above is comprised of six different years: 1948, 1960, 1964, 1976, 1992, and 2008. While on average the S&P 500 has traded lower, it is not necessarily a sure-fire thing. For example, 1948 and 2008 were the only years that saw the S&P 500 trade and stay significantly lower in the wake of the election. In 1976, there was similarly a sell-off in the immediate aftermath of the election, but the index did make its way back up to the highs of that six-month time frame later on albeit no new high was put in place. Meanwhile, 1960, 1964, and 1992 all saw the S&P 500 run higher after the election even despite some periods of consolidation after initial moves higher. In our B.I.G. Tips report from Tuesday, we show these same charts for all Presidential election years post WWII including a look at the average performance given every potential election outcome.
New Pandemic Low for Jobless Claims With A But Thu, Oct 1, 2020 Ahead of tomorrow's Nonfarm Payrolls number, seasonally adjusted initial jobless claims were all around improved this week. Claims fell 36K to 837K. With the caveat of there being different seasonal adjustment methodologies pre and post-September, that marks a new low for the pandemic, though, that is still much higher than any readings prior to 2020. Adding yet another caveat to this data, this week the state of California—the most populous and usually the biggest contributor to claims—also announced a two-week pause in the processing and reporting of claims so that the state can update some of its processes and catch up on a backlog. In other words, while this week's reading was strong, the most recent data for the state that has held one of the largest weights on the total number of claims was estimated. Non-seasonally adjusted claims were likewise lower this week, falling to 786.94K. That is the second time unadjusted claims have come in below 8,000K with an over 40K lower than the prior week. As with the adjusted number, that also marks a new low for the pandemic; just over 9K lower than the previous low of 796K from two weeks ago. After remaining unchanged last week, continuing claims have also continued to fall with the seasonally adjusted reading falling below 12 million for the first time since the first week of April. While regular state claims were lower, initial pandemic unemployment assistance claims rose by 34.5K. That increase offset the decline in regular state claims meaning the total between the two was unchanged from the previous week at 1.44 million. That is still around some of the lowest levels of the pandemic but is not quite at the same lows as regular claims alone. The same can be said for continuing claims. Total continuing claims (regular state claims plus PUA) rose to 24.3 million from 24 million in the most recent week. Again, in spite of the decline in regular state claims, that increase was thanks to a rise in PUA claims. In total, including all other programs like those for federal employees, veterans, extended benefits, and more, continuing claims for the week of September 12th stood at 26.53 million. That was an increase from 26.04 million the prior week which marked the lowest level of the pandemic.
How Current Returns Stack Up to History Thu, Oct 1, 2020 Even after September's weakness, the S&P 500's trailing 12-month total return stood at an impressive 14.9%. Given the events of the last 12 months, one could even say that performance is remarkable. What's even crazier is that the S&P 500's performance over the last 12 months is more than three times stronger than the 12 month period before that (+4.25%). The chart below compares the S&P 500's annualized total returns over the last one, two, five, ten, and twenty years and compares that performance to the historical average return of the index over those same time periods. The S&P 500's historical average 12-month return is 11.7%, so the current 14.9% gain exceeds that average by more than three full percentage points. Over a two-year window, though, the S&P 500's annualized return of 9.4% is more than a full percentage point below the historical average. Looking further out, the S&P 500's trailing five and ten-year annualized return has been much stronger than average, which makes sense given the long bull market we were in. Over a 20 year window, though, the S&P 500 is only just starting to work off some of the declines from the dot-com bust and as a result, the 6.4% annualized gain is a four and a half percentage points below the long-term average of 10.9%. Below we show how the current performance of the S&P 500 in each of the time frames shown compares to all other periods on a percentile basis. The S&P 500's performance over the last year, ranks just below 56th percentile of all other periods, while the two-year performance ranks just below the 42nd percentile. Even as the five and ten-year periods have seen well above average returns, they still rank in just the mid-60s on a percentile basis. The S&P 500's ranking over a 20-year time period is a completely different story ranking in single-digits on a percentile basis. Even with the equity market right near record highs, the last two decades have been forgettable for US equities.
ISM Disappoints But Manufacturing Still Improving Thu, Oct 1, 2020 The Institute for Supply Management's reading on the manufacturing sector released this morning disappointed coming in at 55.4 compared to last month's 56.0 level and expectations for a reading of 56.5. The decline marks the first time that the ISM reading on manufacturing was lower month over month since April and also runs contrary to strength in other recent manufacturing indices like the Chicago PMI or the five regional Fed readings. Granted, that is not to say it is a weak reading. At 55.4, the index still indicates manufacturing activity expanded in September for a fourth month in a row at a healthy rate similar to what was last seen in late 2018/January 2019. The commentary section anecdotally paints a mixed but interesting picture of the economy. There was plenty of mention of improving sales and orders with some seemingly at very strong clips, but that wasn't the case for everyone. One comment from the Transportation Equipment industry claimed that "Business is booming" while another comment from the Petroleum and Coal Products industry stated bluntly that they have yet to see any improvement. Others paint a more modest picture of the rate of improvement such as the comment from the Fabricated Metal Products and Paper Product industries. Those are perhaps more consistent with the headline index. While these comments paint a somewhat mixed picture as to whether or not and at what pace conditions are improving, one common theme appears to be supply chains trying to work out some kinks. There is mention of a range of topics concerning supply chains including longer lead times, price increases, shortages, and curbed production due to COVID quarantines. The hard numbers seem to back these claims up. Breadth was a bit mixed in this month's report with the indices for Production, New Orders, Customer Inventories, and Imports all falling month over month. Despite those changes, the same indices remain in expansion/contraction as last month. The only indices to remain in contraction are those for inventories (which is not necessarily a negative) and Employment (just barely). The 7.4 point decline in the index for New Orders was not as large at the 7.6 or 15.1 point declines in March and April, respectively, but it marked a substantial drop nonetheless which stands in the bottom 5% of all monthly moves. Granted one welcome difference between this most recent decline and the spring is at what level the decline came from. While those drops in March and April were indicative of sharp contractions in New Orders, the September reading still points to New Orders increasing at a healthy clip just at a slower rate than what was observed in August. Given that New Orders continue to rise, the Backlog of Orders has likewise continued to rise. With manfuacturing businesses continuing to have a full plate, the index for Backlog Orders rose to 55.2; the highest level since November of 2018. Given the growing list of to-do's, companies continued to increase production with that index continuing to sit in the upper quintile of all historical readings. At 61 versus 63.3 last month, though, the index does indicate that the improvements in production decelerated a bit from August. With the anecdotal evidence provided in the commentary section as well as the uptick to 59 in the Supplier Deliveries index (a reading well off the recent spike from earlier in the year but still at the high end of the historical range), there is at least some evidence that this slowed production improvement could be a factor of supply chain problems. While production is improving and supply chains continue to face pressures, there still has not been much help on the employment front. The Employment index rose for a fifth straight month with this month's reading of 49.6, but that also leaves it just shy of its first expansionary reading in 14 months. In other words, although the index is at multi-month highs, there continues to be more businesses reporting lower than higher levels of employment. The fact that it's improving, though, is a welcome trend and one that could continue given the strong demand and shrinking inventories.
ISM Services Shine Mon, Oct 5, 2020 As we discussed in our Monring Lineup, the resurgence of COVID in some global economies resulted in a number of weaker readings in Markit Service PMIs; namely those in Europe. Meanwhile, the reading for the US released this morning met expectations at 54.6, unchanged from the flash reading but slightly lower than last month's reading of 55.0. The ISM reading for the Non-Manufacturing sector, on the other hand, had a stronger showing in September with the headline index rising to 57.8 from 56.9 in August. That was also stronger than expected as forecasts were calling for the reading to decline to 56.2 which would have more closely resembled the Markit reading. At 57.8, this reading indicates that the service sector of the economy continued to expand sequentially for a fourth straight month in September and at a slightly accelerated rate from August. While not quite as strong as the reading from July, the services sector continues to bounce back at the strongest pace of the past couple of years. While the ISM's reading on services was stronger than expected, last Thursday's release of the manufacturing counterpart was more of a disappointment, although, it was still consistent with further improvements in that area of the economy. Despite that decline, the composite of the two readings rose to 57.5 from 56.8. Just like the services index, outside of the July high that is at one of the strongest levels since 2018. Breadth in the September report was mixed with a nearly an equal number of sub-indices rising and falling month over month. Despite this, there were only two indices, Inventories and Import Orders, that fell into or remained in contractionary territory. So overall, the report was consistent with continued improvement in the services sector across various metrics. For starters, overall demand seems to have held up well in September with the indices for Business Activity and New Orders both rising and coming in the strongest levels of any of the individual indices of this month's report. Similar to the headline number, these indices were higher in September after a drop in August from near-record levels in July. Currently, both are still off those highs but remain at the upper end of their historical ranges. The index for New Orders saw the largest improvements this month with a 4.7 point rise. While businesses receive more orders and general business activity continues to ramp up (both for a fourth consecutive month), the rate of Backlog Orders has slowed. As shown below, that index fell to a barely expansionary reading of 50.1 in September. Outside of the 7.3 point decline in April, the 6.5 point drop this month was the largest since June of 2011. In other words, businesses saw a significant deceleration in existing orders in the month of September. Given new orders rose, that was likely thanks to higher production rather than softening demand. With businesses working off their order backlogs, inventories have continued to decline. Although higher in September, the index for Inventories has now been in contractionary territory for back to back months. Those inventory declines are also consistent with what has been observed for the manufacturing sector. One major positive of the September report was that for the first time since February, the survey showed Employment expanded. The index rose to 51.8 after half of a year of contractionary readings. Comments from respondents regarding employment noted that this increase in employment was bringing back furloughed workers and increased hiring to meet increased demand.
Claims Inch Their Way To A New Low Thu, Oct 8, 2020 Last week's Nonfarm Payrolls report was a bit of a mixed bag for the health of the labor market as it showed signs of slowing in the pace of the rebound in employment as permanent job losses have mounted. Initial jobless claims—updated Thursday morning—have been showing a similar story of further improvements but at a slowing pace. Seasonally adjusted claims for the most recent week came in at the lowest level of the pandemic at 840K. But, as has been the case for two-thirds of releases since the peak in claims in late March, that missed forecasts of a drop to 820K. Additionally, that only was a 9K decline from last week; the only smaller improvement for any week since the peak in claims was a 2K decline in the second week of July. The undersized decline this week is an example of the general trend of slowing improvements in initial claims. Over the past two months, seasonally adjusted claims have averaged a decline of 1.54% week over week. That compares to mid to high single-digit readings throughout the summer and double-digit readings in the more immediate aftermath of the peak in claims back in the spring. Again, while those small improvements are still welcome as claims are at the lowest level of the pandemic, this week's reading was still 145K above the previous record from before the pandemic (695K in October of 1982) and the slower rate of improvement only further prolongs the recovery. On an unadjusted basis, claims actually rose 4.3K this week to 804K. Granted, that is not a particularly large increase. In fact, of all weeks that claims have risen WoW since the peak in the spring, this week's 5K rise was the smallest. Another silver lining of this increase is that it is also consistent with seasonal patterns given claims typically rise from the fall through the end of the year. At the current level, unadjusted claims are basically right in line with the four-week moving average of NSA claims at 806K. While initial claims have not been rapidly improving, continuing jobless claims (lagged an additional week to initial claims) have continued to fall at a healthier clip. Like seasonally adjusted initial claims, continuing claims are at the lowest level of the pandemic after falling by over 1 million this week. That is the largest WoW decline since August 21st. As previously mentioned, while initial claims have been improving at a slower rate, continuing claims look healthier (or less catastrophic!). The average WoW decline over the past two months now stands at over 4% which is the strongest rate since the first week of July. Including other measures of unemployment insurance like Pandemic Unemployment Assistance (PUA), NSA claims were lower for both initial and continuing claims for the most recent week. In the case of initial claims, total claims (headline plus PUA) fell to a pandemic low of 1.27 million from 1.31 million last month. That decline was mostly driven by a drop in PUA claims which fell by 44.3K to less than 500K; the only other week with initial PUA claims below 500K was the first week of August. Lagged another additional week, continuing claims also fell to a new low of 23 million thanks to sizeable drops in both regular NSA claims (-808.7K) and PUA claims (-433.5K).
