Good Friday evening to all of you here on r/stocks! I hope everyone on this sub made out pretty nicely in the market this past week, and are ready for the new trading week ahead. 🙂
Here is everything you need to know to get you ready for the trading week beginning November 14th, 2022.
The S&P 500 closed out its best week since June as a report on Thursday showing slowing inflation raised hopes that the Federal Reserve would soon slow its tightening campaign.
The broader market index added 0.9%, to close at 3,992.93. This brought its gain for the week to 5.9%, its best week since the one ended June 24 of this year. The Nasdaq Composite added about 1.9% to end at 11,323.33 as investors snapped up tech shares on hopes interest rates would ease. The Dow Jones Industrial Average gained 0.1%, closing at 33,747.86.
Tech stocks on Friday shook off a decline in cryptocurrencies. Virtual currencies tumbled sharply this week and once again came under pressure Friday after FTX filed for bankruptcy protection, and CEO Sam Bankman-Fried resigned. Bitcoin and ether both declined.
Still, tech stocks and related crypto stocks rebounded after opening lower Friday. The tech sector in the S&P 500 surged 10% through Friday, its best weekly performance since April 2020. Amazon was up more than 4% on Friday, while Google-parent Alphabet was 2.6% higher.
The Dow jumped more than 1,200 points on Thursday following a smaller-than-expected rise in consumer prices for the month of October, giving investors hope that inflation may be cooling. The S&P rose 5.5%, and the Nasdaq Composite surged about 7.4%. It was the best day since 2020 for all three indexes.
Treasury yields plunged Thursday on the back of the weaker-than-expected inflation print. The bond market was closed on Friday to observe Veterans Day.
“From an equity market perspective, as long as the threat of much higher rates is out the way, this should remove a major headwind,” Barclays’ head of European equity strategy Emmanuel Cau wrote in a Friday note.
All of the indexes posted a winning week. The Dow was up 4.1% on a weekly basis, while the Nasdaq Composite advanced 8.1%. The week marked a resumption of a comeback rally for the bear market, which began in mid-October.
This past week saw the following moves in the S&P:
S&P Sectors for this past week:
Major Indices for this past week:
Major Futures Markets as of Friday’s close:
Economic Calendar for the Week Ahead:
Percentage Changes for the Major Indices, WTD, MTD, QTD, YTD as of Friday’s close:
S&P Sectors for the Past Week:
Major Indices Pullback/Correction Levels as of Friday’s close:
Major Indices Rally Levels as of Friday’s close:
Most Anticipated Earnings Releases for this week:
(CLICK HERE FOR THE CHART!)
(T.B.A. THIS WEEKEND.)
Here are the upcoming IPO’s for this week:
Friday’s Stock Analyst Upgrades & Downgrades:
Banks and Brokers on Fire
The Financial sector ETF (XLF) has been on fire since its intraday low of $29.59 on October 13th, which was the day of the hotter than expected September CPI report. From that low point on 10/13, XLF is up 20.2%. As shown below, the ETF is currently at the very top end of a wide sideways range that has been in place over the last six months.
Below is a sampling of some of the most well-known banks and brokers that are part of the Financial sector. As shown, names like Goldman Sachs (GS), JP Morgan (JPM), Jefferies (JEF), Raymond James (RJF), and Stifel (SF) are all more than 10% above their 50-DMAs, and the only stock that’s not overbought (>2 standard deviations above 50-DMA) is LPL Financial (LPLA), which traded lower on earnings yesterday.
A quick look at the six-month price charts of the stocks listed in the table above gives you a glimpse into the huge rally that this area of the market has experienced since early October. Investors have seemingly been loading up on them with short-term Treasury yields now significantly higher than the interest rates these banks and brokers are paying customers on deposits.
Homebuilders Extended
Every day we browse through our Trend Analyzer tool (available with a Premium or Institutional membership) to monitor trends and overbought/oversold levels across financial markets. When we got to the homebuilder stocks this morning, we had to do a double-take after seeing some of the recent moves in this space. Have a look at the moves in the snapshot below. Most homebuilder stocks have rallied 12-15% over the last five trading days, leaving them in extreme overbought territory, which means they’re more than two standard deviations above their 50-day moving averages. DR Horton (DHI), Lennar (LEN), NVR (NVR), and PulteGroup (PHM) are the most extended. Even after the rally in these names over the last week, we’d note that they’re still all down sharply year-to-date as the spike in mortgage rates from 3% up to 7%+ has caused activity in the space to slow to a crawl. A drop in those mortgage rates over the last few days was the catalyst for the recent move higher in share prices. If you’re wondering which way the homebuilders are likely to trade going forward, keep an eye on interest rates — that’s the entire story these days.
A Very Encouraging Inflation Report, Including Goods Deflation (Finally)
One month does not make a trend, but today’s consumer price index (CPI) report was very positive. Dare I say, it’s probably the best inflation report we’ve seen in about 15 months, especially because there were so many encouraging signs in it. This is a huge relief, and markets appear to be responding in kind. S&P 500 futures were up more than 3% after the CPI report was released and as of lunchtime, the rally continued.
Let’s walk through it.
Headline inflation rose 0.4% in October, as expected. Core inflation, which strips out volatile food/energy prices, and is arguably more important for the Federal Reserve (Fed), surprised: rising 0.3% in October, below expectations for a 0.5% jump. This is the lowest monthly increase since September 2021.
Looking back over the past year, headline inflation is up 7.8%. That’s high but that’s come down from 9.1% in June. A big part of the deceleration was falling energy prices – you can see how the lighter red bars have been making up a smaller portion of inflation over the past few months.
In the chart above, you can see that Food prices continue to make a big piece of inflation (dark red bars). But we got a break here as well. “Food at Home”, i.e. groceries (which make up close to 9% of the inflation basket), rose just 0.4% in October – the lowest in more than a year and well below the average 0.7% monthly increase we’ve seen over the first 9 months of the year.
The Goods Deflation We’ve Been Waiting For
We’ve been talking about how private inflation data has been showing decelerating prices for goods outside energy and food. Just yesterday my colleague Ryan Detrick wrote about collapsing used car prices. Retailers have been telling us for a while that they’re discounting items as well. We’ve just been waiting for the official inflation data to catch up, and looks like it’s doing that, finally.
There’s a broad list of goods, including used cars, that saw prices fall in October, which is what makes it even more encouraging. The items below make up about 11% of the inflation basket (and 14% of the core basket). Falling household goods prices probably reflect the slowdown in residential activity, as home sales collapse amid higher mortgage rates.
Are Rents Breaking?
The best part about goods deflation is that it offsets high services inflation. As you can see below, the blue bars are now below the zero line for the second month in a row. We also got good news in the form of medical care services – which was a function of falling health insurance premiums.
The biggest part of the inflation basket is Shelter, including rents on primary residences and something called “Owners’ Equivalent Rent” (OER), which is the “implied rent” that owner-occupants would have to pay if they were renting their homes. The latter is also determined using rents of equivalent homes as I wrote about a month ago. In other words, OER is effectively a measure of rents, and altogether rents make up a whopping 40% of the core inflation basket.
And rents have been rising, putting a lot of upward pressure on core inflation. You can see the gray bars in the previous chart growing larger and larger over the past year.
However, market rents have been decelerating quite rapidly over the last few months – Ryan discussed this just yesterday. The problem is it hasn’t shown up in the official inflation data because of methodological reasons (we wrote about this quite extensively).
But the official rental data may be beginning to turn. Rent of primary residence rose 0.7% month-over-month and OER rose 0.6% in October, which is lower than what we’ve seen over the previous couple of months. Make no mistake, a 0.7% rise is still a lot – that translates to an annualized pace of 9%, which is why the Fed is really worried about it. But hopefully, the October data is a sign that the official data is beginning to turn and follow the private data, lower.
What does this mean for Fed policy
Perhaps the most important question.
As I said at the top, one month is not a trend. But this is not random. It jives with all the other leading indicators of prices, which have been showing a deceleration in prices. And now it looks like the official data is catching up.
With respect to policy, Fed officials are unlikely to change their minds based on one report. They’ll probably need to see at least three of these before starting to view it as “convincing evidence” that inflation is on its way down.
But what today’s CPI does is that it buys time. Yet another hot inflation print would have put more pressure on the Fed to raise rates even further. By coming out on the soft side, the report increases the odds for a “soft landing” scenario. In other words, inflation and wage growth can (hopefully) come down without the Fed having to ratchet rates higher and higher, which would eventually break the labor market.
Haves and Have Nots
As evident in our Sector Snapshots over the past several days and as we discussed yesterday on Twitter, sector performance has lately been a tale of the haves and have-nots. The areas of the market that possess some of the most heavily weighted stocks, namely Communication Services, Consumer Discretionary, and Technology, have drastically underperformed other cyclical sectors like Financials, Industrials, and Materials. As a result, relative strength lines have blown out. Shown another way, in the charts below, we show the ratios of each of these sectors relative to the S&P 500. A rising line would indicate the sector is outperforming the broader market and vice versa.
Communication Services has been in a brutal downtrend in relative strength terms for more than a year now and the recent drop has been steep. While the ratio of Consumer Discretionary to the S&P 500 has been more range bound in recent years, there have been a few wild swings in the past year. The most recent swing lower is leaving it close to the lowest levels since early 2015. Tech’s decline has not been nearly as sharp, but the ratio here has nonetheless rolled over to some of the lowest levels of the past few years. Conversely, Financials, Industrials, and Materials have all seen their ratios rip higher to the upper end of the past few years’ range.
In measuring just how sharp of moves these ratios have experienced, they have been outright historic. As for the most pronounced moves, the drops in the lines of Communication Services and Consumer Discretionary rank in the bottom percentile of all 10-day moves since 1990 when our sector data begins. The only periods in which the ratios fell by similar degrees, if not by more, were during the Dot Com bubble. While Tech’s ratio is at new multi-yea rlows, its decline was large (ranking in the 17th percentile) but not nearly as sharp, standing out much less than the aforementioned sectors.
Like Tech, the moves in Financials and Materials have also been quite large and rank in the top decile of all 10-day moves, but those are far from records. The outperformance of Industrials on the other hand, has been remarkable. As of yesterday’s close, the ratio versus the S&P 500 rose 7.24% over the past two weeks. Only three other days—May 19 through May 21, 2020—since 1990 have seen higher readings.
Small Business Labor and Inflation Slumping
The NFIB released its October data on small business optimism this morning. The headline index was expected to show further deterioration in optimism, and exactly that occurred as the index fell to 91.3 from last month’s reading of 92.1 versus expectations of 91.4. This month’s reading is off of the spring lows which had surpassed the worst levels from the early stages of the pandemic but remains one of the weakest readings of the past several years.
In the table below, we provide a breakdown of each category of the report. The headline index is now just off the bottom decile of readings as most components are likewise historically depressed. While the report was weak, there were some exceptions with strong showings in labor market metrics like Plans to Increase Employment, Job Openings Hard to Fill, and Compensation.
Even though these labor market metrics have remained at very high levels from a historical perspective, they have largely been rolling over for the better portion of the past year. Hiring plans as well as the percentage of firms reporting cost or quality of labor as their biggest issues are back to similar levels as the year prior to the pandemic. Meanwhile, actual employment changes are negative (as they have been throughout the pandemic) implying businesses are reporting a net decline in workers. That is in spite of still elevated compensation and a sharp spike higher in compensation plans. In fact, that index is just shy of the peak from the final months of 2021 after a record 9-point month-over-month jump. Companies are also reporting job openings remain hard to fill, although that index has also been on the decline alongside hiring plans. This month, the reading was unchanged at 46, the lowest level since June 2021.
Sales components have experienced far greater degrees of deterioration than employment metrics. The outlook for general business conditions has rallied back somewhat in the past few months, but it remains well below its historical range. Given the weakness in small businesses’ economic outlook, few report now as an opportune time to expand their businesses. Actual sales changes dropped to -8 in October which matched August for the weakest showing for sales since August 2020. Back in 2020 though, this index was far lower than it is now.
While the reading on the top line has held up relatively well, high inflation has meant the bottom line has taken a big hit. A net 30% of small businesses reported earnings have fallen. That reading did improve last month, though, as there have been fewer businesses reporting higher prices. In spite of those improvements, each of those indices has a long way to go until returning to what have historically been more normal levels.
As mentioned above, a historically low share of businesses are reporting positive sentiment on the economy and that has dampened their hopes of expansion. When questioned on the reason for not expanding, 44% reported economic conditions as the reason. Another 17% reported economic conditions as the reason for uncertainty on whether or not they would expand. Aptly coming out on Election Day, we have highlighted in the past the political nature of the NFIB survey. As such, it should come as little surprise that the next biggest reason for small business hesitancy in expanding has been the political climate. Assuming the survey results react to the current election in a similar way as in the past, a strong election showing for Republicans could provide a boost to small business sentiment and plans for expansion. Finally, given continued high inflation and rates rising to combat it, the next two most widely mentioned reasons to not expand were the cost of expansion and financial conditions and interest rates with a combined 9% of responses.
What’s Bothering Small Businesses?
As we noted in an earlier post, the pandemic trends of tight labor markets and high inflation continue to show up in the latest NFIB survey of small business optimism, albeit readings have begun to roll over. The survey also questions firms on what they perceive to be their most pressing problems. Perhaps even more than the other indices in the report, the results of these questions have shown how front and center labor and inflation concerns continue to be.
As shown below, most problems have seen record or near-record lows. Meanwhile, two-thirds of responses report either cost or quality of labor or inflation as their biggest problem.
At 33%, inflation as the single most important problem has well surpassed the previous record high set during what was a much less dramatic inflationary spell in 2008. Although this reading rose 3 percentage points versus September, it is in the middle of the past few months’ range. In other words, inflation is slightly less of a concern than it was a few months ago (which is confirmed by the decline in the higher prices index), but that is certainly not to say it is no longer the single most pressing problem.
Another third of responses reported either cost or quality of labor as their biggest issues. Quality is the bigger concern of the two—which is normal from a historical perspective—accounting for a 23% share.
As we frequently note, the NFIB survey has a tendency to be impacted by politics with a bias towards Republican administrations. For example, during the Bush and Trump years, there was a far lower share of respondents reporting government requirements and taxes as their biggest concerns. With the prominence of inflation, Biden’s tenure has resulted in a different scenario in which these issues have been placed on the back burner. Granted, these issues still account for the most pressing problem of a combined 17% of responses. We would also note, these readings have seen some dramatic moves around midterm election months, but those have not always been lasting.
Finally, we would note that very few businesses (only 3%) are worried about poor sales. That is a record-low share and unchanged for the third month in a row. As we noted in our discussion of the other areas of the report, that lack of concern for the top line contrasts with businesses’ hopes for expansion and the outlook for the economy. In fact, of the reasons given for firms reporting now as not a good time to expand, sales prospects were the least pressing reason given.
Beyond the Midterm Elections…Less Uncertainty and Historically Solid S&P 500 Performance
It is finally Election Day and hopefully soon the results will start rolling in. Once the outcome is known, it will likely alleviate some of the uncertainty that has been contributing to the market’s volatile trading which could help the market snap out of its Fed-induced funk. In the chart above the 30 trading days before and 60 trading days after the last 18 midterm-year elections appear (NASDAQ since 1974). Prior to 1969 the market was closed on Election Day so the close on the day before was used. By 60 trading days after the election (approximately three months), DJIA, S&P 500 and NASDAQ were higher on average from 6.4% to 9.2%.
Digging deeper into the data, the following table shows S&P 500 performance 1-, 3-, 6- and 12-months after the election. 1- and 3-months after the election S&P 500 was higher 77.8% and 88.9% of the time respectively. By 6-months and 1-year after, S&P 500 was always higher, although gains did slow after 6-months. Years when the President’s party lost its majority in Congress are shaded in gray.
The Sweet Spot of the 4-year cycle is now. The headwinds that abound this time around are not entirely unlike past midterm years that have historically been mired by bear markets and uncertain economic and political times. Many of the current concerns do appear to be accounted for by the market’s declines coming into Q4. Inflation does remain stubbornly high despite the Fed aggressively raising rates this year. The Fed’s most recent statement may not have been as dovish as some had hoped for, but it did contain language that suggested the time to slow the pace of increases and possibly even pause hikes is closer now than it was six months ago. The market is likely to remain volatile as it awaits more clarity from the Fed and more signs that inflation is easing. Any back and fill periods by the market are likely an opportunity to consider adding to existing long positions or establishing new longs.
Here are the most notable companies reporting earnings in this upcoming trading week ahead-
(CLICK HERE FOR NEXT WEEK’S MOST NOTABLE EARNINGS RELEASES!)
(T.B.A. THIS WEEKEND.)
(CLICK HERE FOR NEXT WEEK’S HIGHEST VOLATILITY EARNINGS RELEASES!)
(T.B.A. THIS WEEKEND.)
Below are some of the notable companies coming out with earnings releases this upcoming trading week ahead which includes the date/time of release & consensus estimates courtesy of Earnings Whispers:
Monday 11.14.22 Before Market Open:
Monday 11.14.22 After Market Close:
Tuesday 11.15.22 Before Market Open:
Tuesday 11.15.22 After Market Close:
(CLICK HERE FOR TUESDAY’S AFTER-MARKET EARNINGS TIME & ESTIMATES!)
Wednesday 11.16.22 Before Market Open:
Wednesday 11.16.22 After Market Close:
Thursday 11.17.22 Before Market Open:
Thursday 11.17.22 After Market Close:
Friday 11.18.22 Before Market Open:
Friday 11.18.22 After Market Close:
(CLICK HERE FOR FRIDAY’S AFTER-MARKET EARNINGS TIME & ESTIMATES!)
(NONE.)
(T.B.A. THIS WEEKEND.)
(T.B.A. THIS WEEKEND.) (T.B.A. THIS WEEKEND.).
DISCUSS!
What are you all watching for in this upcoming trading week?
I hope you all have a wonderful weekend and a great trading week ahead r/stocks. 🙂
