Big Gains In November Steal From Santa What a month November was! Here are some of the highlights: Best month for Dow since January 1987 (11.9%) and best November since 1928 Best month ever for the STOXX 600 (16.7%) Best month ever for the Russell 2000 (18.3%) Best month for the S&P 500 (10.8%) and Nasdaq (11.8%) since April 2020 Best month for Dow Transports since October 2011 (12.1%) Best month from PHLX Semiconductor Index since March 2003 (18.4%) Best month for Industrials (16.0%) and Financials (16.8%) since April 2009 Second best month ever for energy (28.0%)* “A way better than expected earnings season, a likely split Congress, and major breakthroughs on the vaccine front all helped stocks soar last month,” explained LPL Financial Chief Market Strategist Ryan Detrick. “Add ongoing support from the Federal Reserve as the cherry on top and we are looking at a truly historic month on many levels.” Here’s all the Dow monthly returns since 1900. Last month was the best return since January 1987. Now before you go out and sell because you see 1987, remember the S&P 500 added another 20% the seven months after the huge gains in early 1987. It was the best November for the S&P 500 since November 1928. Small caps soared on the likelihood of taxes staying lower due to a divided Congress and vaccine progress, with the Russell 2000 adding more than 18% for the best month ever, topping the previous record from February 2000. What happens after a big month? Well, history says a 10% monthly gain is quite bullish. In fact, we had a 10% plus rally back in April 2020 and shared this same chart at that time. Sure enough, returns have been strong this time around as well. “The bottom line is the huge gains in November could actually be the start of something much stronger,” according to Ryan Detrick. “Also, this was the second month of 2020 with a 10% gain. The only other year to do that? 1982, which kicked off a historic bull market.” Turning to December, this month is widely known to be quite bullish, as Santa comes to town, people feel good, and stocks tend to do well. As shown in the LPL Chart of the Day, since 1950, December has been the second best month of the year, with only November better. December had been the best month of the year until the historic 9.2% drop in 2018. As a result, December hasn’t been quite as strong over the past 10 and 20 years. Breaking it down even more, a big rally in November can potentially steal some of December’s thunder. As after a 5% or 10% rally in November, the returns in December are more muted. The flipside to this though is if the S&P 500 is up more than 10% for the year (like 2020), then stocks have benefited from some performance chasing and have tended to do better. What does it all mean? After the historic move in November we wouldn’t be surprised to see below average returns in December. We do believe this is a new bull market and lasting economic cycle of growth, but overall sentiment is getting quite stretched and this increases the potential for some near-term weakness. Please read COVID-19 May Threaten The Economic Recovey for more of our near-term thoughts.
Not All Bad for Small Business Tue, Dec 8, 2020 This morning the NFIB released their monthly reading on the small business sector. With case counts rising throughout November, small business optimism took a hit. Compared to September and October's identical readings of 104, November's reading fell to 101.4. Although that is lower, it remains above the levels seen from March through the summer. Additionally, there were several silver linings in this month's report. Glancing across the various components and sub-indices of the report, breadth was pretty mixed. Of the ten components of the headline number, six fell and the remaining four were higher. Of the other indices that are not inputs to the headline number, half of the indices were higher while another two were unchanged, and the other two were lower. As for the most pressing problems reported by small businesses, there was little change overall. Quality of labor remains the most widely reported problem, stealing share from those reporting the cost of labor as the biggest issue. The second biggest issue and the only other one to see an uptick in November was taxes. Perhaps due to the results of the election and the prospects of higher taxes down the road, the percentage of respondents reporting taxes as the most pressing issue rose 3 percentage points to 20%. Taking a deeper dive into the individual components of the report, the various indices concerning employment metrics were pretty strong in November. While the index for actual employment changes remains negative meaning more businesses reported declines in employment rather than increases, that is not to say businesses are not looking to gain employees. For starters, a higher number of responding firms (34% vs 33% in October) reported that they had at least one unfilled job opening in November. That is in the top decile of all historical readings. Breaking that number down further, the NFIB highlighted that 29% of those were for skilled workers and 13% were for unskilled workers. Additionally, businesses do plan to fill open positions in the near future. The index for plans to increase employment rose from 18 in October to 21 last month. Overall, more than half of firms said that they either hired or are trying to hire as 30% reported that either cost or quality of labor have been the biggest roadblocks to their business. Given these apparently tight labor conditions, the indices for compensation and plans to increase compensation were both higher. We would also note that the divergence between businesses wanting/trying to fill positions and declines in the actual number of employees reported is consistent with what we saw in last week's data from the ISM report. Rising employment and compensation can be justified when looking at the indices concerning sales and earnings. While these broadly took turns lower this month, they remain at readings that are consistent with more companies than not seeing sales growth. The index for earnings changes turned a bit lower falling from -4 to -7. Despite that, it is still a level that is at the top of its historic range. Additionally, a net 5% of reporting firms saw higher sales over the past three months, down slightly from 6% last month. In turn, the net percentage of owners expecting sales to be higher also fell to a reading of 10% from 11% last month. Even though sales were a bit weaker, prices have continued to rise. The index for companies reporting higher prices rose from 15 to 18. That is the highest level of that index since a reading of 19 in May of 2018. NFIB highlighted further that the most common businesses to report higher prices were retail (28%) and wholesale (23%). Although the decline in expected sales was modest and businesses plan to increase hiring, the index that took the biggest hit in November was the reading for expectations for the economy to improve. That index for the general outlook of business conditions fell 19 points month over month to a low reading of 8. That is the lowest level since March when the index was 3 points lower at 5. Additionally, the only time the index has declined by more in just one month was in November of 2012 when it fell from 0 to -38 in just one month. Other indices like those for expenditures and whether or not it is a good time to expand similarly remain weak, but did not see the same sort of dramatic declines. Looking at other indices though, this decline appears to have been relatively extreme. A net 5% of owners report inventory levels are too low which is tied with September for a record high. While a greater share of firms plan to increase rather than reduce inventories, that index did fall from a 48-year high of 12 last month down to 5 in November. Despite that historically large single month decline, this monthly reading is still at a strong level.
Meet the Nasdaq 100's Post-Election Leaders Thu, Dec 10, 2020 The Nasdaq 100 finally made a new high on Tuesday before pulling back yesterday, but in the run-up to new highs in the post-election rally, it hasn't been the same old crew of stocks pushing the index higher. While the Nasdaq 100 is up about 12.5% since the election, thirteen stocks are up by more than twice the amount of the index itself. Leading the way higher, Moderna (MRNA) is up over 100% after positive news regarding its vaccine. After MRNA, shares of Pinduoduo (PDD), a Chinese e-commerce play, have rallied more the 50%, rising from $97.72 up to $154.00. Tesla (TSLA) rounds out the top three with a gain of 47% in just the last five weeks. The next two stocks on the list - Applied Materials (AMAT) and Micron (MU) - can hardly be considered emerging stocks. In addition to those two stocks from the semiconductor sector, three others from the sector made the cut (LRCX. MCHP, and QCOM) as chips have been red-hot. At the bottom of the table, we have also included the performance of the five mega-cap stocks of the Nasdaq 100. While all five stocks outperformed for much of 2020, not a single one of them is outperforming the Nasdaq 100 since Election Day, and only Apple (AAPL) is anywhere close to matching the performance of the index itself. The chart below shows the performance of an equally-weighted basket of the five mega-cap stocks over the last year. From 9/2 to 9/23, this basket of stocks pulled back more than 16%, and while it has been steadily grinding higher in the eleven weeks since that low, up until this point, the prior highs from September haven't even come into play.
Sentiment Still Overwhelmingly Bullish Thu, Dec 10, 2020 For the third week in a row, just under half of the respondents to the weekly AAII sentiment survey reported as bullish. This week's bullish sentiment reading came in at 48.06%, which was down just slightly from 49.07% last week. While lower in the past week, bullish sentiment remains elevated in the top decile of readings over the past decade. Granted, it is also still below the high of 55.84% from November 12th. Similarly, the Investor Intelligence survey of equity newsletter writers also saw bullish sentiment drop slightly, falling from 64.7% to 64.4%. But again just like the AAII survey, that is a historically elevated level in the top 3% of all readings since 1963. With bullish sentiment lower, a higher percentage of investors reported as bearish. Whereas last week saw bearish sentiment fall to 22.66%, the lowest level since the first week of 2020, this week bearish sentiment rose 4.2 percentage points to 26.86%. That is still below the reading of 27.47% from the last week of November and at the low end of the past few years' range. In terms of bearish sentiment, the Investors Intelligence survey is again echoing these results. This survey saw bearish sentiment rise 0.1 percentage points to 16.8%. Overall, sentiment remains heavily in favor of bulls. As shown below, for both the AAII and Investors Intelligence surveys, the bull-bear spreads are at historically high levels.
Rally To Resume Mid-Month - Typical December Seasonal Pattern For the most part, this December has unfolded in rather typical seasonal fashion. The market started the month off with solid gains and continued to rally through the fourth trading day before turning somewhat mixed. Russell 2000 and NASDAQ advanced an additional two trading days while DJIA, S&P 500 and Russell 1000 see-sawed essentially sideways until yesterday, the seventh trading day of December. Currently the major indexes are navigating the often-dull period that has historically begun around the fourth trading day of the month through the eighth. Afterwards, later this week into early next week, another patch of weakness is possible. Then right around mid-month, the rally that began in at the beginning of November, is likely to resume. The resumption could be bumpy but once quarterly options expiration passes our Santa Claus Rally will begin on the open of trading on December 24. Since 1969, S&P 500 has enjoyed an average gain of 1.3% during the Santa Claus Rally that spans the last five trading days of this year and the first two trading days of next year.
Outlook 2021: Focus on International 12/10/2020 This week we released Outlook 2021: Powering Forward, with our 2021 market and economic views. In the past several Outlook publications, we have favored the United States over developed international in equity allocations (international developed markets are composed primarily of Europe and, to a lesser amount, Japan). Each time we settled on those views, and as valuations for stocks outside the United States got relatively cheaper, we had thought we might be getting closer to an eventual sustainable rotation. But we didn’t get there. It’s been like taking a road trip with the kids and hearing, “Are we there yet?” too many times. Continue to Favor the United States This year is shaping up in a similar way. We continue to favor US equities over their developed international counterparts, as we noted in Outlook 2021, even though the valuation gap between the US and these international markets has widened further over the past year. But as we look ahead, we can envision a scenario at some point in 2021 when markets may respond to a coordinated global economic expansion after the developed world gets through the pandemic. A weaker US dollar may help. Japan may get a boost from the massive amount of fiscal and monetary stimulus the Japanese government and the Bank of Japan have implemented to boost its economy. A rising tide may lift all boats—including those that have not been the strongest in recent years. We simply think now is too early to make that shift in a meaningful way. Favorable Emerging Markets Outlook The outlook for emerging markets stocks looks better to us as 2021 approaches. This asset class is made up mostly of Chinese equities but includes several other Asian, European, and Latin American countries that index-provider MSCI classifies as emerging or developing. “We expect emerging market economies to lead the global economic rebound in 2021,” said LPL Financial Chief Market Strategist Ryan Detrick. “We believe growth in international developed economies may lag behind the United States, although a strong fiscal response may help Japan.” LPL Research forecasts global gross domestic product (GDP) growth in the 4.5–5% range in 2021, as shown in the LPL Chart of the Day.
Not All Bad for the Empire Fed Tue, Dec 15, 2020 The New York Fed kicked off the slate of December manufacturing data this morning with the release of the Empire State Manufacturing Survey. The release was expected to come in at the same level as last month (6.3), but instead, moved lower down to 4.9. The index remained positive meaning the survey's results were again consistent with growth, just at a slightly lower rate than expected. Even though current conditions have not been improving rapidly, respondents generally remain optimistic for the future. The index for expectations six months out was slightly higher at 36.3. While higher, it is off the highs from just a few months ago still at more optimistic levels than were observed over the last couple of years. Even though the headline index fell 1.4 points this month, breadth in the report was fairly strong. Most indices were higher relative to November with the only two indices declining being those of New Orders and Prices Received. Meanwhile, only two indices—those for Unfilled Orders and Inventories—showed contractionary readings in December which is no different from last month. Granted, both of these indices also showed less of a contractionary picture. Expectations readings for the same indices, on the other hand, were more mixed with around half lower month over month. One of the two indices to decline in December was New Orders. The decline was small though as the index dropped just 0.3 points to 3.4. Outside of August's contractionary reading, that is the lowest reading for New Orders in the past six months. Granted, the positive reading meant new orders have now risen for four straight months, albeit at a slower pace in November and December. As New Orders continue to grow, Unfilled Orders are getting worked off. The index for Unfilled Orders has remained in contraction for every month since April now. This month's reading of -3.6 was the second-highest reading of that period behind July's reading of -0.6. The expectations index, though, remains much more optimistic. 25.7% of respondents reported that they expect unfilled orders to be higher in six months compared to 11.4% reporting they expect orders to be lower. That resulted in the index rising to 14.3, the highest since February of 2018. The 9.7 point increase was also the largest one month move in expectations since November of last year. With businesses meeting demand, inventories have continued to decline. The index for Inventories has now been in contraction for nine consecutive months. Granted, this month saw the index move higher from -8.6 to -4.3. That means inventories have continued to decline but at a slower pace in December. Similar to unfilled orders, there is also quite a gap between current conditions and expectations. The index for future expectations rose to a reading of 15 in December. That is the second-highest reading on record behind January of 2018's high of 20.3. In other words, even though inventories have declined for nine straight months, firms are not anticipating that to continue. Nearly 30% of responding firms reported that they expect inventories to rise in six months' time. While there were more improvements in demand and inventories were lower, prices for inputs have been on the rise. The index for Prices Paid rose 8 points to 37.1 in December. Expectations for Prices Paid likewise moved higher reaching the highest level in two years. Prices Received are not experiencing the same degree of upward pressure though. The index for Prices Received fell in December from 11.3 to 10 which is a much more modest reading overall. That is not to say it will continue to be that way. Expectations for Prices Received rose to a reading of 30, the highest level since February of 2018. In spite of the rise in COVID cases, the report's readings on employment were pretty strong. The index for the Number of Employees rose to 14.2 which was a two-year high while the index for the Average Workweek was unchanged at 4.8. So New York area manufacturers are not only hiring at their fastest rate since the end of 2018, but they are also increasing working hours.
Homebuilder Sentiment Unfazed Wed, Dec 16, 2020 In every month from August through November, NAHB's reading on homebuilder sentiment came in at record highs. That streak was bound to come to an end eventually, and it happened this month. The December reading released today was expected to decline from a record of 90 down to 88. Instead, the drop was even larger as the index fell to 86. Although lower, that is still the second-highest reading on record dating back to 1985. Each of the sub-indices were also lower this month with the declines in the bottom decile of all monthly moves, though again, the indices remain at historically strong levels in the top 1% of all readings. For the sub-index that tracks present sales, just like the headline number, the four-point decline in December hasn't done much damage as it was also still the second-highest reading on record. The indices for future sales and traffic likewise fell an identical four points. For future sales, the decline only brings it back to where it stood in September and the index for Traffic is at the lowest level since August. Those are the third and fourth highest readings on record, respectively. The picture also remains strong based on regions in spite of broad declines. While every region experienced a decline, the West's was the smallest. Additionally, the index for the West is the highest of the four regions. The Northeast, on the other hand, has the lowest reading for sentiment, though, it too is in the top 2% of all readings. Elsewhere in housing data today, the MBA's weekly mortgage application data showed another uptick in purchase applications. Purchase apps rose 1.8% week over week, and while still off the highs from the last week of November, purchases are running at the strongest level in over a decade. Even though this data remains broadly strong, homebuilder stocks have not been reflecting it. As shown below, the S&P 1500 Homebuilders group has yet to take out its October 15th high, currently trading 11.51% below that level. Since that high, the index has also fallen below its 50-DMA with multiple failed attempts to move back above. In fact, of the 43 trading days since that high, the group has closed below its 50-DMA on all but 10 days. While that paints a somewhat negative technical picture, on the bright side, the group has yet to make a lower low.
December quarterly options expiration week historically bullish December’s quarterly option expiration has a solidly bullish history. In fact, the week of options expiration and the week after have the most bullish record of all quarterly option expirations (page 106, soon to be available Stock Trader’s Almanac 2021). Since 1982, DJIA has advanced 29 times during December’s options expiration week with an average gain of 0.57%. S&P 500 has a similar, although slightly softer record. However, the record is not pristine. In 2018, DJIA and S&P 500 suffered their worst weekly loss as the Fed remained hawkish and determined to raise interest rates even as economic growth was slowing and Treasury bond yields were falling. In 2011, Europe’s debt crisis derailed the market. In 2012, the threat of going over the fiscal cliff triggered a nearly 2% loss the week after.0
Chart of the Year Stocks continue to surprise to the upside, with the Russell 2000 Index (small caps) and the Nasdaq making new all-time highs on Tuesday. The S&P 500 Index, a chip shot from new highs, already has made 30 new highs so far this year. “One thing that surprises many investors is new highs happen in clusters that can last a decade or more,” explained LPL Financial Chief Market Strategist Ryan Detrick. “Given that this cluster of new highs is only seven years old, history would suggest that we don’t bet against several more years of new highs.” One of the more amazing charts (and our friend Sam Ro at Yahoo! Finance called this the chart of the year) is how this new bull market has tracked the 2009 bull market. We’ve been sharing this chart for months now, noting if things continued to track 2009, then significant gains could be in store and sure enough that has played out. Here’s the catch, continued strength could still be in store, as 2009 continued to gain the next few months from this point forward. Lastly, will Santa come in December? We discussed this in detail at the start of the month in Big Gains Steal From Santa, but the truth of the matter is the S&P 500 Index is flat on average half way through the month and nearly all of the impressive December gains take place the second half of the month. As shown in the LPL Chart of the Day, if Santa is going to come in 2020, now is the time for the reindeer to get ready and for stocks to potentially bounce.
Richmond Fed's Strong Finish to the Year Tue, Dec 22, 2020 Whereas other regional Fed manufacturing readings like the Empire and Philly Fed were weaker than expected for December, today's release from the Richmond Fed was a welcome surprise. Rather than the forecasted decline down to 11 from 15 in November, the headline number rose to a reading of 19. Although that is still off the record highs from earlier in the fall, the December print indicated that manufacturing activity in the region continued to grow at an accelerated and still historically strong rate. As shown in the table below, this month's reading moved back into the top decile of all readings since 1993. As for the individual components, New Orders, Backlog of Orders, Vendor Lead Times, Number of Employees, Wages, and Average Workweek also all came in the top decile of historical readings. On the other hand, current condition indices covering expenditures, inventories, and Local Business Conditions remain much weaker relative to their historical range. Breadth was broadly positive this month with only a small handful of indices falling month over month. Of those that fell, the most glaring decline was for Local Business Conditions. Its 17-point decline was the 8th largest on record. Granted, the index remained positive, but it was at a much slower pace than November. The indices for future expectations were generally weaker than November with a higher number of indices falling in December. Demand has appeared to continue to recover with New Orders and Backlog of Orders both coming in at another strong expansionary reading in December. In fact, the Backlog of Orders index rose to the highest level since June 2018 which is also in the top 2% of all readings. Despite this, Shipments were lower falling 8 points to 12. That means shipments continued to rise in December but at a slower pace. Given the uptick in New Orders and Order Backlogs, that slowdown in Shipments could be more of a supply rather than a demand problem. Some evidence of this is the index for Vendor Lead Times. Higher readings in this index indicate that suppliers are taking a longer time to get products to manufacturers. Vendor Lead Times are in the top 2% of all readings rising another 14 points to 31 in December. That 15-point increase was the largest since March when the index rose by 17 points. Before that, you would need to go all the way back to June of 1996—in the early days of the index when readings were all over the pace—to find another time that the index has risen by more in just one month. The indices covering employment painted a positive picture for the region's labor market with Number of Employees and Average Workweek both rising 7 points back up to their recent highs from a couple of months ago. While firms are taking on more people and lengthening the hours worked, they also report having trouble hiring the right people. The index for Availability of Skills remains around historically low levels even after rising 5 points in December. Given that tight labor market sign, the index for Wages also rose 7 points up to its highest level since May of last year. As with the indices for Number of Employees and Average Workweek, the increase this month in Wages leaves each of these indices in the upper percentiles of their historic ranges.
Claims Well Below Expectations Wed, Dec 23, 2020 Over the past few weeks, initial jobless claims have been fairly elevated in the 800K range and moving higher. Last week's reading came in at the highest level since the first week of September and was revised even higher this week to 892K (compared to 885K originally). While claims remain elevated, they improved in a big way this week. Claims were expected to drop to 880K, but instead, claims saw their largest one-week decline since the last week of August, falling to 803K. As we noted last week, on an unadjusted basis claims were lower thanks likely to seasonal effects. The current week of the year's seasonal effect was not quite as strong, but it marked another decline in the non-seasonally adjusted number nonetheless. Unadjusted claims came in at 869.4K from 941.9K last week. Again, although this was an improvement, claims are still coming in at some of the highest levels of the past few months. Including other programs, it is the same story. Regular state claims in combination with Pandemic Unemployment Assistance (PUA) claims were lower dropping to 1.267 million from 1.396 million. While lower, outside of the prior two weeks, that is still the highest level since the last week of September. The decline this week was broad with both regular state claims and PUA claims falling sequentially. Continuing claims are lagged an additional week to initial claims meaning the most recent reading is for the week of December 11th; the same week as initial claims recent high of 892K. In spite of that week's big inflow into the unemployment insurance system, continuing claims actually fell 170K to a pandemic low of 5.337 million. As we have frequently made note of recently, the continuing claims number does not tell the full story though. Including all programs adds another week's lag but gives a more complete picture. Total continuing claims across all programs for the week of December 4th totaled 20.4 million. While that was lower sequentially, it was also above the pandemic low of 19 million from the week of November 20th. Breaking this number down by program, while regular state claims are around their lows of the pandemic, PUA claims have risen for two straight weeks and are back up to where they stood in October. Meanwhile, extension programs remain elevated. Pandemic Emergency Unemployment Compensation (PEUC) did fall week over week, although at those levels, the reading was above all but one other week since the pandemic started. Conversely, the Extended Benefits program saw an uptick to a new pandemic high of 712.9K.
Do You Believe In The Santa Claus Rally? 12/23/20 “If Santa should fail to call, bears may come to Broad and Wall.” —Yale Hirsh December is widely known as one of the best months of the year for stocks, but most don’t realize that the majority of the gains happen in the second half of the month. Equity strength at this time of the year is widely known as the Santa Claus Rally, but the term is somewhat misunderstood. Discovered in 1972 by Yale Hirsch, creator of the Stock Trader’s Almanac (carried on now by his son Jeff Hirsch), the real Santa Claus Rally is the final five trading days of the year and first two trading days of the following year, not just December. In other words, the official Santa Claus Rally is set to begin Thursday, December 24. So how likely are these seven trading days to be higher? Well, there isn’t a single seven-day combo out of the full year that is more likely to be higher than the 77.9% of the time higher we’ve seen previously during the Santa Claus Rally. Additionally, these seven days are up an average of 1.33%, which is the second-best seven-day combo of the year. Do you believe yet? “Why are these seven days so strong?” asked LPL Financial Chief Market Strategist Ryan Detrick. “Whether optimism over a coming new year, holiday spending, traders on vacation, institutions squaring up their books before the holidays—or the holiday spirit—the bottom line is that bulls tend to believe in Santa.” The LPL Chart of the Day illustrates how the Santa Claus Rally has performed over the past 20 years. Usually these seven days are higher, which leads to strength in January. But what stands out to us is that the times Santa didn’t come, January was lower each time. Now do you believe? Let’s take a closer look at what happens when things don’t go according to plan. Remember, Yale Hirsch told us, “If Santa should fail to call, bears may come to Broad and Wall.” This is because the New York Stock Exchange is at the corner of Broad and Wall Streets. Going back to the mid-1990s, there have been only six times Santa failed to show in December. January was lower five of those six times, and the full year had a solid gain only once (in 2016, but a mini-bear market early in the year). “Considering the bear markets of 2000 and 2008 both took place after one of the rare instances that Santa failed to show makes believers out of us. Should this seasonally strong period miss the mark, it could be a warning sign,” explained Santa Claus believer Detrick.
Under the Hood Strength in Texas Mon, Dec 28, 2020 This morning the Dallas Fed released its monthly reading on the region's manufacturing sector. The headline number was expected to fall for the second month in a row from the October high of 19.8; the highest reading since October of 2018. While that decline came to fruition, it was an even bigger drop than what was expected as the index fell to 9.7 compared to the forecast of 11.6. Although the index was lower, December marked the fifth month in a row with expansionary conditions. Although the index for General Business Activity fell, the rest of the report saw much more strength. Other than Finished Good Inventories, every index continued to show expansionary readings with many moving higher month over month. A few indices have even risen into the top decile of historical readings. Demand appeared to have picked up in December with the index for New Orders and New Order Growth Rate both rising month over month. While the index for New Orders is still just below its post-pandemic peak of 19.9 from October, the New Order Growth Rate has risen to its highest level since August of 2018. Given demand has continued to rise, Dallas area manufacturers have also appeared to have increased production in a big way in December. The Production index rose back up to 25.5, matching the pandemic high from October. Before that, you would need to go back to August of 2018 to find as high of a reading. Additionally, the 18.3 point increase from last month was the largest move since May and June and is tied with December of 2017 for the sixth-largest monthly gain on record. Given production has increased so too has Capacity Utilization, though this index's moves were not as dramatic as it still sits below highs from a few months ago. While most indices of the report saw some type of pause in their moves higher in recent months, prices have been on a one-way trip higher. Prices Paid for Raw Materials accelerated for the fifth month in a row reaching the highest level in over two years. Expectations for prices of inputs have similarly been elevated relative to recent history as that index rose to a reading of 50 in December; the highest since May of 2018. Those price increases are flowing into the price of finished goods as the index for Prices Received rose another 12.7 points to 17.4. Again, this was the highest reading since the summer of 2018 and the index for future expectations also reached a new high. Wages were also on the rise in December as the index rose to 19.1. That is the highest level since right before the pandemic began in February. Expectations on the other hand are at the highest level since March of last year. Those increases in wages and benefits come as businesses, in general, raise employment levels. The index for employment gained another 7.9 points moving to a two-year high of 19.6. While more people are being taken on with better compensation, the index for hours worked fell slightly in December.
Golden Crosses Abound in Energy Tue, Dec 29, 2020 Since mid-November, the Energy sector (XLE) has consistently traded above its moving averages. While it has pulled back a bit recently, XLE's moving averages have continued to move higher. In fact, today XLE is setting up to experience a golden cross. A golden cross is when an upwards trending 50-DMA moves above an upwards trending 200-DMA. Not only is the sector ETF potentially about to experience a golden cross, but it will be the first time in a long time that the 50-DMA has even traded above the 200-DMA. As shown below, the last time that XLE's 50-DMA was above its 200-DMA on a closing basis was way back in November of 2018, 537 trading days ago. Since XLE began trading in the late 1990s, that is the longest stretch on record in which the shorter-term moving average has been below the longer-term 200-DMA. The next longest streak ended at 389 days in May of 2016. As for the individual stocks of the sector, there are many charts that are showing a similar trend. Each day in our Chart Scanner and Trend Analyzer tools, we highlight recent golden crosses. As recently as last Thursday, Chevron (CVX), EOG Resources (EOG), National Oilwell Varco (NOV), and Transocean (RIG)—not an S&P 500 member and as such not included below—all made their way onto the screen. Looking across other S&P 500 Energy names, there have been several other recent golden crosses like Apache (APA), Diamondback Energy (FANG), and ConocoPhillips (COP). As those stocks have completed the pattern, there are still others that are getting close to experiencing a golden cross. Perhaps the closest is Occidental Petroleum (OXY) whose 50-DMA was just 5 cents below its 200-DMA as of yesterday's close. As for other stocks in the sector, names like Kinder Morgan (KMI) and Exxon Mobil (XOM) have further to go but generally have their moving averages trending in the right directions.
January Almanac: Still a Solid Month in Post-Election Years January has quite a reputation on Wall Street as an influx of cash from yearend bonuses and annual allocations has historically propelled stocks higher. January ranks #1 for NASDAQ (since 1971), but fifth on the S&P 500 and sixth for DJIA since 1950. January is the last month of the best three-month span and holds a full docket of indicators and seasonalities. DJIA and S&P rankings did slip from 2000 to 2016 as both indices suffered losses in ten of those seventeen Januarys with three in a row, 2008, 2009 and 2010 and then again in 2014 to 2016. January 2009 has the dubious honor of being the worst January on record for DJIA (-8.8%) and S&P 500 (-8.6%) since 1901 and 1931 respectively. The early stages of the Covid-19 pandemic mostly spoiled January in 2020 as DJIA, S&P 500, Russell 1000 and Russell 2000 all suffered declines. Only NASDAQ was positive. In post-election years, Januarys have been modestly weaker. DJIA and S&P 500 slip to number #7 and #6 respectively but do maintain positive average performance. NASDAQ holds the outright best ranking of the five at 5th place, but the frequency of gains has historically been mixed. DJIA, S&P 500 and NASDAQ have all advanced in seven of the last nine post-election year Januarys. The two down post-election years since 1985 were 2005 and 2009.
ISM Prices and Production Packing a Punch Tue, Jan 5, 2021 This morning saw the release of an impressive reading on the manufacturing sector from ISM's Manufacturing PMI for the month of December. For the seventh month in a row, the index was consistent with growth in the manufacturing sector (readings above 50 generally indicate month over month growth). Not only did the ISM's reading show yet another month of growth but that growth accelerated as the index rose to 60.7 - the highest level since August of 2018. Prior to that, you would need to go all the way back to January and May of 2004 to find readings as high as this past month. Along with one of the highest readings in two decades for the headline index, breadth in the report was very strong. The only indices to fall were those for Exports and Imports, and even those declines were minor. Meanwhile, the indices for Production, New Orders, Order Backlogs, and Supplier Deliveries all came in the top decile of readings of their respective histories. To summarize, overall conditions continued to improve with strong demand and production on the rise to meet that demand. There are some supply issues like low inventories and longer lead times, though and that's contributing to sharply rising prices. The commentary section gives a bit more color into this. Comments frequently mention that there are supply chain issues due to recent COVID outbreaks. Such issues include logistics and supplier delays, as well as labor shortages. On the bright side, there are also several mentions that sales have not only gotten back on track but have actually passed levels from prior to COVID. The data from the report backs up that strength in sales noted in the commentary section. The New Orders Index rose 2.8 points to 67.9. That is back up to where the index stood in October which was/is also the highest level since late 2003/early 2004. As New Orders have come in at such a strong pace, order backlogs have continued to rise. The index for Backlog Orders rose to 59.1 in December, the highest level since June of 2018. To meet that surging demand, manufacturers continue to massively ramp up production. The Production Index rose to its highest level in nearly a decade in December. At 64.8, the index is only half a point below the January of 2011 high. Once again, prior to that the last time the index was at these levels was in 2004. Additionally, manufacturers are taking on more workers as the index for Employment rose back into expansionary territory, although it remains below its October high. Looking to the future, these two indices should continue to have the wind in their sails given new orders remain strong and inventories remain low. With regards to inventories, the index for Customer Inventories was higher this month but continues to indicate that a high share of respondents report that customer inventories are too low. As the commentary section made abundantly clear, that is not to say the supply side does not currently have issues. The index for Supplier Deliveries sharply rose in December rising to 67.6 from 61.7. Higher readings in this index indicate longer lead times. The index is now at its highest levels since the worst of the lockdowns back in the spring while the 5.9 point increase month over month is near the top 5% of all monthly moves in the index's history. In other words, there is evidence that supply chains are once again under strain due to a mix of strong demand and COVID related issues. Not only are products from suppliers taking longer to reach their destinations, but they are also costing more. The index for Prices Paid topped 77.6 in December indicating that price growth accelerated to the fastest pace since May of 2018. ISM also surveys on what products exactly manufacturers are observing to have moved up or down in price. As the index for prices paid surged, not a single commodity was noted as moving down in price. On the other hand, there was a long list of commodities up in price. Aluminum, copper, and various steel products were all noted as costing more and being in short supply. Similarly, shipping has seemed to have gotten more expensive. Freight, packaging supplies, corrugated boxes, and wood pallets all saw price increases with some also being observed as in short supply. As COVID cases continue to surge, personal protective equipment (PPE) has also seen price increases but only for gloves.
Massive Outperformance From Renewables and Banks Wed, Jan 6, 2021 With the Democratic party looking to pick up two more seats in the Senate, investors are flocking to names that would benefit from the party's agenda; namely renewable energy stocks. While valuations in the renewables space have already been stretched in the past year as we noted in last night's Closer, today the multiple expansion has only accelerated as these names are having a banner day. The Invesco Solar ETF (TAN) as well as the Invesco WilderHill Clean Energy ETF (PBW) are up around double-digit percentages or more in today's session and are on pace for the best day since March 24th of last year- the first day of the current bull run. Relative to the broader market, today's performance is even more spectacular. In the charts below, we show the ratio of TAN and PBW relative to the S&P 500. For TAN, the move higher in the ratio today surpasses any day of the past year. In fact, the 10.39% rise in the ratio today is on pace to be the largest single-day increase since April of 2013. For PBW, the increase in the ratio is second only to March 26th of 2009. Another area of huge outperformance today is the banks. The 10-year yield has topped 1% for the first time since March. With yields providing a more welcoming environment for the industry, the S&P Regional Banking ETF (KRE) is up 8.5%. That is the best day since November 9th when the ETF popped over 15%. While nearly half of that day's rally, KRE's performance today still stands in the top 1% of all days since it began trading in 2006. Again, just like the renewable energy ETFs, the strong performance of banks relative to the broader market is historic today. Prior to today, the ratio of KRE to SPY has only seen a larger daily increase five times since 2006. One of those days was the aforementioned rally in November with the other days occurring in July and September of 2008 and March of 2009.
Quality Dividends Showing Strength Wed, Jan 6, 2021 Dividend stocks are having a great day with the iShares Select Dividend ETF (DVY) up over 4% as of this writing. That is the best day for dividend stocks since early November and is nearly 3 percentage points of outperformance relative to the S&P 500 (SPY). Looking at Russell 3000 stocks based on the constituents' dividend yields, stocks that do not pay any dividends, which there are over 1600 of, are up by an average of 3.47% today compared to an average gain of 4.58% for all stocks in the index that do pay a dividend. Breaking up those stocks that pay dividends into equal-sized deciles, generally, those stocks with higher yields are performing better. Granted, the 10th decile which is comprised of stocks with the highest yields have actually underperformed other dividend payers with an average gain of just 3.71%. That compares to deciles six through nine which have all risen around 5% on average. Although worse than other stocks that pay dividends, the performance of the 10th decile is still better than those stocks without a payout. Taking a look at performance based on dividend growth over the past year, the stocks that have seen their payouts lowered from last year are actually up the most today. On the other hand, companies with higher dividends are underperforming with an average gain of just 4.36%. Again, while that is underperformance relative to other dividend payers, it is still stronger returns than those stocks with no payouts. Meanwhile, companies that have not changed their payout have seen more middling performance. Investors also do not appear to be chasing just any yield. When a stock has a high payout ratio, it is typically viewed as being less likely to be able to maintain its dividend. Today, those stocks with the highest payout ratios have seen weaker gains. For example, the ninth decile actually is averaging weaker performance than non-dividend paying stocks. Comparatively, deciles three through six which are comprised of those with healthy payout ratios ranging between the low teens to low 40's are all up over 5% on average. The bottom two deciles made up of the lowest payout ratios have seen slightly weaker returns, but those are also still stronger than those with the highest payout ratios.
PUA Plunge Thu, Jan 7, 2021 After falling back below 800K last week, initial jobless claims have taken a pause coming in at 787K for the week ending January 1st. That was unchanged from the previous week's original reading, though, that number was revised up to 790K this week. While claims were little changed and remain off the low of 711K from early November, this week's 3K decline was better than the forecasted uptick back up to 800K. It is a bit less positive of a picture for unadjusted claims. After three weeks of declines, claims rose by 77.4K this week up to 922.1K. While at least part of that increase was a result of seasonality, that was the highest reading since the week of December 11th when claims came in at 941.9K. Although regular state claims on an unadjusted basis were higher, total claims with the inclusion of the Pandemic Unemployment Assistance (PUA) program saw an improvement. Total claims between the two programs fell to 1.084 million from 1.155 million last week. That decline was driven by a big drop of about 48% WoW in PUA claims which came in at a new low of just 161.46K. The 149K decline in PUA claims was the largest since the first week of August when claims under this program dropped 166.36K. While that may sound like a positive, as detailed below, it should be taken with a grain of salt. While that large drop in PUA claims is possible, there were irregularities on a state-by-state basis meaning the big drop was more likely due to a combination of the timing of when the recent spending bill was signed and the holidays. For instance, some states like Ohio, Florida, and Indiana reported zero PUA claims in the most recent week despite counts in the tens of thousands the prior week. Other states like Illinois and Kentucky may not have reported zero claims, but they reported single to double-digit numbers despite counts that were materially higher in the prior week. As for continuing claims which are lagged one week to initial jobless claims, claims fell 126K for their fourth consecutive weekly decline. That leaves claims just above 5 million which is the lowest level since the week of March 20th. Including the most recent data for all other programs in addition to regular state claims adds another week's lag. That means the most recent print is for the week of December 18th. Total claims across all programs came in at 19.2 million, down from 19.6 million the week before. That is still above the pandemic low of 19.077 million from November 20th but marks a third consecutive improvement. The declines were broad across programs with the only uptick coming from the Extended Benefits program. Given this, the trend of a growing number of those on some sort of extension has continued with the Extended Benefits program accounting for a new high of 5% of all claims. Claims for all extension type programs accounted for roughly 29% of all continuing claims in the most recent week's data.
