The Bull Thread

Jobless Claims Continue to Fall
Aug 30, 2018

Breaking last week’s third straight week of declines, today’s initial jobless claims number came in slightly higher than expected at 213,000. Claims were estimated to rise to 212K off last week’s low reading of 210K. As we have been mentioning the past few weeks, even with this week’s increase in claims, we are still in the midst of multiple impressive streaks. Claims have now been at or below 300K for 182 weeks, at or below 250K for 47 weeks (longest streak since January 1970), and at or below 225K for 8 straight weeks (longest since 1969).


Despite the very small uptick in claims, we saw a decrease in the seasonally adjusted 4-week moving average to 212.25K. This 1.5K decline from last week’s 213.75K brought the average to its lowest level since December 13, 1969 when the report had a reading of 210.75K. Additionally, this is the lowest level of this indicator for the current cycle, surpassing May’s low.



On a non-seasonally adjusted (NSA) basis, jobless claims rose to 175.4K. While up from last week, they are still more than 100K below the average for the current week since 2000.

 

The Surprise Bull Move Continues

The incredible summer rally continues, as the S&P 500 Index is only two days away from possibly notching a fifth consecutive monthly gain. Not to be outdone, the usually tricky month of August is looking to potentially post one of its best returns going back to 2000.

But wait, there’s more: Since 1950, no month has had fewer all-time highs than the month of August, but with two days to go, it has reached new all-time highs for four consecutive days. That hasn’t happened in August since 1987.


“This summer rally has caught many investors flat footed, but they may want to consider that more strength could be coming, if history is any guide. Here’s why, as only five times since 1950 has the S&P 500 been higher each month from April until August. In those years, the final four months were higher every single time with some really strong returns,” explains LPL Senior Market Strategist Ryan Detrick.

As our LPL Chart of the Day shows, when the S&P 500 is up each month from April until August, September—which is historically weak—is much stronger, and the final four months of the year have done much better than average as well.

 

September Seasonals

Historically, September has been the worst month of the year for the US equity market. But further research into the historical numbers shows that investors may not need to be as concerned about this September.

In the chart below, we show the S&P 500’s average percentage change in the month of September and from September through year end based on a number of performance-related scenarios.

For all years since 1928, the S&P has averaged a decline of 1.05% in September, and the index has averaged a gain of 1.81% from September through year end.

In years when the S&P 500 is up YTD through August (it’s up ~8% this year), however, the S&P has actually averaged a gain of 0.20% in September, and a gain of 3.38% from September through year end. When the index has been up more than 5% YTD through August (as it is this year), the average change in September has been positive again at +0.36%, and the rest-of-year gain is +4.51%.

It’s the years in which the S&P has been down YTD through August that September has been ugly. When the S&P has been in the red through August, September has seen an average decline of 3.43%. When the index has been down 5%+ YTD through August, September has averaged a decline of 3.78%.

Finally, when the S&P has been up during the summer months (May through August), September has been positive as well, averaging a gain of 0.29%. The May through August period this year saw the S&P gain more than 9% for its best summer since 2009. When the S&P has been down during the summer months, the S&P has averaged a decline of 3.23% in September.

While September has indeed been the worst month of the year for stocks, the negativity usually comes during years when the market is already struggling entering the month. That’s simply not the set-up in place this year.

 

Why the S&P 500 Monthly Win Streak Could Have Bulls Smiling

After gaining 19.4% last year, the S&P 500 is once again surging in 2018—up nearly 8.0%, with the Nasdaq 14.8% and Russell 2000 11.7% up even more as of 09/06/18. Could there be even more gains in store over the coming year? We think so.

With a 14-year high in manufacturing, consumer spending at its best pace in four years, contained inflation, and 20% earnings expected in 2018 and another 10% next year, the economy continues to be in very solid shape. Not to mention the S&P 500 recently broke out to new all-time highs for the first time in nearly seven months, which historically has been followed by stronger than average returns in the coming year.

One more thing: A little-followed event just took place that has a solid track record for indicating potentially continued equity strength.

“The S&P 500 just closed higher for the fifth consecutive month in August. Well, would you believe that the past 25 times that has happened, it was higher a year later 24 of those times?” explained Senior Market Strategist Ryan Detrick.

As our LPL Chart of the Day shows, a five-month win streak may be a great signal for continued strength. Take note that this time last year, the S&P 500 was up five months in a row and many were concerned it had gone “too far too fast.” Twelve months later, it had added another 17.4%.

 

Monster JOLTS

Today’s Job Openings and Labor Turnover Survey from the BLS came in significantly stronger than expected as the number of job openings came in at 6.939 million versus estimates for a level of 6.675 million. Based on this report and reports over the last few months, 2018 is shaping up as a year where economists have underestimated the strength of the US job market. To illustrate, in the each of the JOLTS reports covering 2018 so far, all seven of them have come in better than expected, beating expectations by an average of 219K!

In the chart below, we update the spread between the number of Job openings in the US to the number of unemployed. You may recall that back in March the number of job openings exceeded the number of unemployed for the first time since the data for the JOLTS survey begins in 2001. Since then, the gap between job openings and available workers has continued to widen. Through July, which is the most recent available data for the JOLTS survey, the gap stood at a record 659K.

Earlier on Tuesday, the NFIB Small Business Optimism Index showed that small businesses are increasingly having trouble finding available workers and the latest data from the JOLTS survey confirm the tightness of the US labor market. These days, available jobs are like shooting fish in a barrel.



“Business is Booming”

“Business is booming.” That statement was taken from the commentary section of the August NFIB report on small business optimism. In fact, business appears to be so strong for US small businesses that the index of Small Business Optimism rose to a record high of 108.8 in August. That surpassed the old record of 108.0 back in September 1983. While the record high in 1983 came just three years after small business sentiment in the US hit a record low, the current record high comes ten years after sentiment hit a generational low.



One of the trends that stood out in this morning’s release was that 89% of small business owners looking to hire have found either no or few qualified applicants, indicating a pretty significant skills gap in the US economy. Given the lack of available qualified labor, a record 25% of small businesses cited Quality of Labor as the number one problem they face.



Of all the various ‘problems’ small businesses face, Quality of Labor is the biggest. It wasn’t that long ago that issues like Taxes and Red Tape were the biggest issues, but they have now taken a backseat, and even after combining the two issues, they are only a slightly bigger (28%) problem than labor quality. Finally, while investors have been very concerned with upward price pressures this year, small businesses owners seem complacent with just two percent citing inflation as their number one problem.

 

ISM’s 14-Year High Forecasts Economic Health

The Institute for Supply Management’s (ISM) primary manufacturing gauge just posted its strongest reading in 14 years. Is that a clear signal the economic cycle still has fuel left in its tank, or could it mean the good times are coming to an end?

As shown in LPL’s Chart of the Day, strong manufacturing growth has been a bellwether for overall economic health. Over its past five cycles, the U.S. economy has fallen into a recession an average of 46 months—nearly 4 years—after ISM’s U.S. Purchasing Managers’ Index (PMI) peaked. The fact that we may have hit a peak is not necessarily a cause for investor concern, and the potential for future economic and market growth remains strong in our view.



Growth in manufacturing output last month was primarily driven by domestic demand. ISM’s gauge of new orders jumped the most since August 2014, while export orders fell to a 10-month low and import orders dropped to an 11-month low.

“The jump in new orders is a strong sign that the impact of fiscal stimulus continues to outweigh trade concerns, a theme we’ve emphasized in multiple reports this year,” stated LPL Research Chief Investment Strategist John Lynch. “Favorable tax policy has boosted business investment and consumer spending, and we expect this combination to continue to benefit the manufacturing sector.”

Some data do hint to potential weakness and pricing pressures. Details in the ISM report point to continuing supply chain disruptions, or difficulties for manufacturers in getting the supplies necessary to produce goods. Manufacturing may be especially susceptible to future weakness from trade tensions, and cooling in trade activity is already evident in the divergence between domestic and international orders.

However, we believe the tailwind of fiscal stimulus will continue to overwhelm any negative impact from trade tensions and supply chain disruptions, buoying manufacturing and strong economic output through the end of this year.

 

Midterm Elections and Stocks: Friends or Foes?

2018 continues to be a solid year for U.S. equities, even in the face of many well-documented concerns (we’re looking at trade worries and the flattening yield curve here). Want some good news? The calendar may quickly become a bull’s best friend.

“How do you make a bull smile? Tell him that the next three quarters are historically some of the strongest out of the entire four-year presidential cycle,“ said Senior Market Strategist Ryan Detrick.

As our LPL Chart of the Day shows, going all the way back to when the Dow started trading in 1896, each of the next two quarters have closed higher 73.3% of the time—no other quarter is up more often. In addition, the average returns over the next three quarters have been 4.0%, 5.2%, and 3.6%—again some of the strongest in the four-year cycle.

 

Leading Indicators Shows No Signs of Slowing
Sep 24, 2018

The Leading Indicators report released this past Thursday reinforced signals of a strong US economy. From this release, there do not appear to be signs of a looming recession. Below we show the ratio of Leading Indicators to Coincident Indicators over the past 60 years. Historically, this ratio has been a very good leading indicator of recessions. Typically, but not always, when the ratio peaks then begins to fall, a recession is around the corner. This does not mean that a recession is necessarily in the near future. In fact, the ratio usually peaks in excess of a year before a recession and typically rolls over by the time the recession starts. Last Thursday’s reading showed no signs of a reversal; rising to a cycle high of 1.0662.



Another way of looking at this indicator is on a year-over-year basis. This tells much of the same story. Months or even years before a recession begins, the reading peaks then begins to decline. Right before a recession, it has never been on the rise.

August’s report came in at 6.41%, which is the second-highest level since July 2014. Since 1980, the earliest a recession came following a period where the y/y change in leading indicators was above 5% was 24 months. The average amount of time that elapsed from the last 5% or more reading to the earliest stages of a recession was 35 months. No matter which way you cut it, the Leading Indicators do not show signs of a slowing economy.

 

What Does The Dow New High Really Mean?

It took nearly eight months, but the Dow finally closed at a new all-time high for the first time since late January. Various other indexes have been making new highs for a while now, which begs the question: What does it mean for investors that the granddaddy of all stock indexes came late to the party?

“The Dow joining the ‘new high’ party is a nice sign, as historically when it goes seven months or more without a new high, the returns going out a full year after that initial new high have been much better than your average Dow returns,” explained Senior Market Strategist Ryan Detrick.

As our LPL Chart of the Day shows, since 1950, there have been 15 other times that the Dow went at least seven months without a new high. Sure enough, a year later it was higher 12 times, with an impressive average return of 13.7%—more than a full 5% above the average 12-month return. Additionally, the returns three, six, and 12 months later were all better than the average returns as well.



If this sounds familiar, that’s because we did a similar study a month ago when the S&P 500 Index made new highs for the first time since late January. The future average returns were quite similar, in that you saw stronger than average returns going out the next 12 months.

So, does a new high in stocks tell us anything about the economy? Remember, we usually see stocks break down ahead of a recession, while they turn higher ahead of a recovery. Here’s the good news: New highs in the Dow have historically signaled a significantly lower chance of recession over the coming year. We looked at all the months that saw a new all-time high for the Dow going back to 1950. Sure enough, the U.S. economy fell into a recession only 0.8% of the time within the subsequent six months and only 2.2% of the time 12 months after a new high. Considering that 13.5% of all months have been in a recession over this same timeframe, one could say new highs for the index Charlie Dow created back in 1896 could be another great sign that the economy could still be humming a year from now.

 

Should We Fear October?

Here it comes, the scary month of October. Many investors have bad memories of this month, mainly because it has had some spectacular crashes. In particular, 1929, 1987, and 2008 are a few of the years that saw October scar investors for a long, long time.

Here’s some good news: Over the past 20 years, the S&P 500 Index has shown a higher average return in October than in any other month. And the good news continues. This is a midterm year and, sure enough, midterm years have actually been quite strong for stocks. “Incredibly, since 1982, the scary month of October has seen stocks fall only once during a midterm year. Not to mention it has been the best month overall going clear back to 1950 for all midterm years,” explained Senior Market Strategist Ryan Detrick.

As our LPL Chart of the Day shows, October has been up 3.3% on average during a midterm year, ranking it as the best-performing month–ahead of the usually bullish months of November and December.

 

October is the Best Month of Midterm Year

October often evokes fear on Wall Street as memories are stirred of crashes in 1929, 1987, the 554-point drop on October 27, 1997, back-to-back massacres in 1978 and 1979, Friday the 13th in 1989 and the 733-point drop on October 15, 2008. During the week ending October 10, 2008, Dow lost 1,874.19 points (18.2%), the worst weekly decline in our database going back to 1901, in point and percentage terms. The term “Octoberphobia” has been used to describe the phenomenon of major market drops occurring during the month. Market calamities can become a self-fulfilling prophecy, so stay on the lookout and don’t get whipsawed if it happens.

But October has become a turnaround month—a “bear killer” if you will. Twelve post-WWII bear markets have ended in October: 1946, 1957, 1960, 1962, 1966, 1974, 1987, 1990, 1998, 2001, 2002 and 2011 (S&P 500 declined 19.4%). However, eight were midterm bottoms. This year is a midterm year, but the market has been resilient thus far during the Worst Months which may temper full-month October results.

Midterm election year Octobers are downright stellar thanks to the major turnarounds mentioned above; ranking number one on the Dow, S&P 500, NASDAQ, Russell 1000 and Russell 2000. This is also the beginning of the sweet spot of the four-year-presidential-election-cycle. The fourth quarter of the midterm years combines with the first and second quarters of the pre-election years for the best three consecutive quarter span for the market, averaging 20.4% for the Dow and 21.1% for the S&P 500 (since 1949), and an amazing 32.0% for NASDAQ (since 1971).

 

What Can The Strong Third Quarter Tell Us About The Fourth Quarter?

The surprise summer rally continued in September, as the S&P 500 Index gained for the sixth consecutive month. The third quarter is usually volatile, but this year it was one of the calmest ever, with the S&P 500 not closing up or down 1% on a single day. It last did that in 1963!

“The S&P 500 is up six months in a row, but the bulls might be interested in knowing that the fourth quarter of a midterm year has historically been the best quarter out of the entire four-year presidential cycle,” explained Senior Market Strategist Ryan Detrick.

It doesn’t end there though, as the first and second quarters of a pre-election year have posted the second and third strongest returns on average, respectively. In other words, the next three quarters have been the strongest out of the entire presidential cycle.



What about the big gain stocks sported in the third quarter? Historically, the third quarter is the worst quarter — but that sure wasn’t the case this year with an impressive 7.2% run-up for the S&P 500. Well, this could be another great sign for bulls, as the fourth quarter has often been stronger after big third-quarter gains.

As our LPL Chart of the Day shows, after the third quarter gains more than 7% (like it did in 2018), the fourth quarter has finished green 13 out of the past 14 times. Adding to that momentum, the returns going out both two quarters and four quarters historically have seen stronger than average returns.

 

Typical October Trading: Forget about “Octoberphobia”

October has a questionable reputation due to its history of hosting major market selloffs and crashes. However, October, especially in midterm years, has been a stellar performer on average and is the top month of midterm years since 1950. October is also the only month in which DJIA has gained more than 1000 points, twice. In 2011 DJIA soared 1041.63 points (9.5%) and in 2015 DJIA rocketed 1379.54 points (8.5%). Looking at the full month of October (chart above) one day at time the only area of weakness over the recent 21-year period has been on trading days five through seven. The rest of the month has been solid. Small-caps, measured by Russell 2000, do tend to under-perform, but still end October with an average gain of nearly 1%.

 

LEI-ding the Way to No Recession

The Conference Board’s Leading Economic Index (LEI) is one of our favorite economic indicators. It is designed to predict future movements in the economy based on a composite of 10 economic indicators (like manufacturers’ new orders, stock prices, and weekly unemployment claims) whose changes tend to precede shifts in the overall economy. Last week, it painted a continued strong backdrop for future economic growth, as it rose 0.4% month-over-month and 6.4% year-over-year (YoY).

Looking under the hood, the LEI has risen or been flat for 27 consecutive months, just topping the streak of 26 months that ended in 2011. This is now the longest streak without a drop in the LEI since the mid-1980s. While the yield curve has been getting all the attention recently, all recessions going back to the early 1970s first saw the LEI turn negative YoY; and because of its solid track record of predicting recessions, the LEI is a component of LPL Research’s Five Forecasters.

As our LPL Chart of the Day shows, the LEI is nowhere near turning negative currently.



“The fact that the LEI has been very successful at forecasting recessions, and is one of the few forward-looking economic indicators, makes it one of our favorites. The strong recent data suggests a recession is nowhere in sight and signals solid underlying fundamentals in the U.S. economy,” said Ryan Detrick, LPL senior market strategist.

Lastly, here are all seven recessions going back to early 1970. As you can see, the LEI turned negative year-over-year on average eight months (with a median of six months) before a recession officially took place. That is what we call a nice track record. Again, with the LEI up 6.4% year-over-year, we are a long way from this economic indicator flashing any major recession warning.

 

Why Bulls Smile After Midterm Elections

Volatility is heating up in October, with some big drops for stocks late last week. Now let’s put things in perspective. The S&P 500 Index just had its least volatile third quarter since 1963, and it hasn’t closed up or down more than 1% for more than three months in a row—one of the longest streaks ever. Not to mention the S&P 500 has been up six months in a row, and some type of volatility or correction is perfectly typical. It might feel bad when it happens, but pullbacks are a normal part of bull markets.

“Some pre-midterm volatility could be in the cards, but the good news is that looking at the past 18 midterms (back to 1946), the S&P 500 was higher a year later every single time,” said Senior Market Strategist Ryan Detrick. This helps put in perspective just how much of a tailwind the calendar could be for investors here.

As our LPL Chart of the Day shows, the S&P 500 has been up 14.5% on average a year after all midterm elections going back to 1946. In addition, all 18 midterms saw higher returns 12 months later.