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 7th, 2022.
Stocks rallied on Friday, but finished the week lower, as investors drew conflicting conclusions about what the latest payroll numbers mean for future Federal Reserve rate hikes.
The Dow Jones Industrial Average gained 401.97 points, or 1.26%, to close at 32,403.22. The S&P 500 advanced 1.36% to settle at 3,770.55, and the Nasdaq Composite rose 1.28% to finish at 10,475.25.
All the major averages capped off the week with losses. The Dow shed 1.4%, ending four weeks of gains. The S&P and Nasdaq fell 3.35% and 5.65%, respectively, to break two-week winning streaks.
October’s nonfarm payrolls report on Friday left investors divided, fueling some concern that the Fed will persist with its hiking campaign since the labor market added 261,000 jobs. Others interpreted the findings as a sign that the labor market is beginning to cool — albeit at a slow pace — since the unemployment rate rose to 3.7%.
“You see kind of a tale of two cities today,” said Anthony Saglimbene, chief market strategist at Ameriprise Financial. “I don’t think the market quite knows how to gauge this employment number versus what the Fed signaled on Wednesday.”
Investors in recent days have struggled to decipher comments from Fed Chair Jerome Powell regarding whether a tightening pivot may come as the central bank fights to tame rising inflation and a strong economy. Focus also shifted toward next week’s consumer price index report. A drop in inflation could signal rate hikes are doing their job and fuel a potential shift.
In other news, hopes of a reopening in China pushed shares of U.S.-listed China stocks higher Friday, although the government hasn’t formally announced a pivot. Pinduoduo, JD.com and Alibaba shares surged.
Corporate earnings season also continued, with mobile payment company Block surging 11% after beating expectations. Carvana shared dropped 38% as it posted a wider-than-expected loss, while Twilio and Atlassian both plummeted on disappointing guidance.
Along with Thursday’s CPI report, investors are looking ahead to next week’s midterm elections.
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:
Election Day and Day After Historically Bullish
Prior to 1969 the market was closed on Election Day. In the midterm elections since 1970, Election Day has been bullish with S&P 500, DJIA and NASDAQ (since 1974) all posting average gains. The day after Election Day, when results are in, is also bullish, but with even larger gains and a higher frequency of advancing days. Unlike the candidates on the ballots, the market generally only cares that the election is over as it has historically moved higher afterwards.
On the Other Hand
Harry Truman is famous (among other things) for saying, “Give me a one-handed Economist. All my economists say ‘on hand…’, then ‘but on the other…” And it’s true. You rarely will see an economic analysis that doesn’t couch one view with an alternative scenario, and you can’t fault them for hedging their bets. Predicting the future is impossible, especially when it involves the direction of the world’s largest economy.
This morning’s employment report also has a number of hands. At the surface, the report was better than expected coming in ahead of expectations (261K vs 193K). As shown in the chart below, this was the seventh straight better-than-expected print and the ninth in the last ten months.
To illustrate just how impressive this recent run has been, the chart below shows streaks of better-than-expected prints in non-farm payrolls (NFP). The current streak of seven is easily the longest such streak since at least 2000.
While job growth in the US economy has consistently surpassed expectations this year, it is important to point out that the pace of job growth isn’t accelerating. This month’s print of 261K was actually the smallest monthly increase since late 2020 and is well off the peak readings seen in 2021 when the FOMC was maintaining its zero interest rate policy. To put this trend in perspective, in 2021 the average monthly change in NFP was 562K. In 2022, that average has declined to 407K, and in just the last three months, the average has been 289K. On the one hand, the job market remains strong. On the other hand, momentum has clearly peaked and there has been a trend of deceleration.
The Silver Lining of Another Fed Rate Hike
The Federal Reserve (Fed) just raised rates by 0.75%, taking the federal funds rate to a target 3.75-4.0% range. This is the 4th consecutive 0.75% interest rate increase and comes as the Fed tries to get on top of inflation. The bond market has been anticipating this aggressive pace of tightening, and treasury yields have moved in sync. Short-term yields are a gauge of what investors believe is the path of monetary policy over the near future.
The bad news is that markets don’t think rate increases are done, and Fed Chair Jerome Powell more or less suggested this in his remarks. Investors now expect the target policy rate to peak at 5% six months from now.
So, what’s the positive news?
Well, interest rates are higher, and that means you can get a greater yield on bonds. And since the yield curve is inverted, with short-term yields higher than long-term yields, short-term bonds are potentially a very attractive option. They have less “duration” risk, in that they’re less sensitive to interest rate changes, especially if interest rates continue to move higher.
Extremely short-term bonds are more attractive now than they have been in more than a decade and a half. The 3-month treasury yield is currently at 4.2% and the 6-month treasury yield is at 4.6%, the highest yields in more than fifteen years. These “ultra-short” bonds could potentially be used as a potential cash-like solution, especially if that cash is not needed in the immediate future.
But Which Cash Solution?
I mentioned above that yields have moved up as the Fed raised interest rates. But yields haven’t moved up in tandem across all the different types of savings and short-term investment vehicles out there.
Savings accounts at some of the major banks are still paying interest rates well below the treasury yields I quoted above. And as the next chart illustrates, money market funds are also paying much lower yields, currently averaging about 2.9%. On top of that, they’ve started increasing fees. As Jason Zweig at the Wall Street Journal recently wrote, not a single U.S. money market fund was charging more than 0.18% in annual expenses at the end of 2021 – as of September 30th, the average expense is 0.39%.
CDs offer better yields and are gaining in popularity once again. However, the best rates (4% or more) tend to be offered by banks to their wealthiest customers, so-called brokered CDs which are purchased through brokerage firms.
The downside of CDs is that they are illiquid, locking up money for a longer period. Moreover, if yields continue to increase, you could be stuck with a CD that pays out a lower rate of interest. Also, CDs are subject to state and local income taxes, unlike treasuries (and funds that hold treasuries), and you also must pay taxes on accrued interest for each year, unless it’s in a tax-deferred retirement account.
This brings us to ultra-short-term bond ETFs. Now, you must be careful when picking one of these – being aware of the “duration” risk as well as the quality of bonds in the fund, i.e., “credit risk”.
I combed through the universe of ultra-short bond ETFs and selected 8 that hold treasuries. The table below shows the expense ratios, yields, and effective duration for these ETFs. (Please note that this is NOT a recommendation to buy or sell any of these securities, and you must do your own research before doing so, given your unique circumstances.)
If you notice, there are 3 different kinds of yields listed above. The first two are the 12-month yield and SEC yield, which are typically what’s shown if you pull up a site like Morningstar. These are both backward-looking yields. The 12-month yield is the sum of the ETF’s trailing 12-month interest payments divided by the last month’s ending share price (net asset value) – which is not helpful because interest rates were much lower over the past 12 months. The SEC yield is slightly better since it’s a little more recent – it divides the income received during the 30-day period that ended on the last day of the prior month by the share price on the last day of the period. The problem is the income received can vary from month to month, and it’s still backward-looking.
The yield you want to focus on is the “yield-to-maturity”, which can be found on the issuer websites, and is best reflective of the future expected return. The average effective duration can also be found on the issuer’s website, and as you can see, these ETFs all have extremely low duration. This means they have very little interest rate risk, even as they offer very attractive yields. And since these ETFs hold treasuries, there is no credit risk (unless the US government defaults). There are plenty of ultra-short ETFs that I didn’t list here which have much more attractive yields, but they do tend to stretch more out onto the credit risk spectrum.
A couple of interesting ETFs at the bottom of the table (tickers: TFLO and USFR) have practically zero duration risk. These hold “floating rate” treasury bonds that seek to take advantage of rising interest rates – they mature in two years, but the interest rate resets every week when the US Treasury auctions the 13-week treasury bill.
We believe all these ETFs are fairly attractive options that can be used as potential cash solutions. Ideally, you can tier your cash to maximize the yield – with money market funds used for immediate liquidity needs (say, a week or two) and ultra-short treasury bond ETFs like the ones listed above for longer-term needs.
The silver lining of an aggressive Fed is that now you can put your cash to work.
Typical November Trading Usually Bullish
After a big October for the record books the first two days of November have taken it on the chin as the market hoped for more dovish comments from Fed Chair Jerome Powell. Initial bullish reaction to new dovish remarks in the written statement were countered by tough talk from Powell in the presser. Looked like war of the algos today. Let’s wait for the dust to settle over the next few days to see if November begins to live up to it’s bullish reputation.
Being a bullish month November has seven bullish days based upon S&P 500, with four occurring on the first four trading days of the month. Although historically a bullish month, November does have weak points. NASDAQ and Russell 2000 exhibit the greatest strength at the beginning and end of November. Russell 2000 is notably bearish on the 12th trading day of the month; the small-cap benchmark has risen just ten times in the last 38 years (since 1984).
Best and Worst Performing Stocks Since Rate Hikes Began
The S&P 500 is down a little more than 12% since the close on March 16th after Fed Chair Powell hiked rates off the zero bound for the first time of this cycle. We’ve seen 300 basis points of hikes so far, and today we’re set for another hike of 75 bps.
Looking at the S&P 1500, which includes large-caps, mid-caps, and small-caps, the average stock in the index is down 7.1% since the close on March 16th after the first rate hike. As shown below, Real Estate stocks (REITs) have been hit the hardest by the rate hikes with the average stock in the sector down 20.6%. Communication Services stocks are down the second most with an average decline of 18.4%. Consumer Discretionary stocks have averaged a decline of 13.1% since 3/16, while Technology stocks are down 10.6%. On the upside, we’ve seen two sectors average gains since the Powell rate hike cycle began: Energy and Consumer Staples. Consumer Staples stocks are up an average of 5.6%, while Energy stocks have averaged a huge gain of 24.8%.
Below is a list of the stocks in the S&P 1500 with market caps above $2 billion that have done the best since rate hikes began back in March. PBF Energy (PBF) is up the most with a gain of 135.99%, while CONSOL Energy (CEIX) ranks second with a gain of 114.49%. Other notable stocks on the list of big winners include First Solar (FSLR), Constellation Energy (CEG), Shockwave Medical (SWAV), Enphase Energy (ENPH), Lamb Weston (LW), H&R Block (HRB), TreeHouse Foods (THS), Exxon Mobil (XOM), and Albemarle (ALB).
On the flip side, below is a list of the stocks with market caps still above $2 billion that have fallen the most since the rate hike cycle began. Leading the list is portable generator maker Generac (GNRC) with a decline of 62.45%, followed by two more stocks down more than 60%: Scotts Miracle-Gro (SMG) and Neogen (NEOG). Other notables on the list of rate-hike losers include Under Armour (UAA), Align Tech (ALGN), Meta Platforms (META), Carnival (CCL), Kohl’s (KSS), Expedia (EXPE), Cleveland-Cliffs (CLF), VF Corp (VFC), AMD, Paramount (PARA), and Yeti (YETI).
Stocks usually bottom before EPS, jobs, and GDP start to improve. Time after time we’ve seen it (but note it didn’t work during the Tech bubble). The bottom line, stocks sniff out better times and rally in the face of bad news.
Record Decline in Mortgage Apps
As mortgage rates continue to press higher with Bankrate.com’s 30 year national average for a fixed rate loan hovering well above 7%, high frequency housing data continues to show no signs of relief. The latest mortgage purchase reading from the Mortgage Bankers Association released this morning showed the lowest level of applications since the start of 2015. As we mentioned in today’s Morning Lineup, that would imply further significant declines in new and existing home sales data to come.
Refinance applications are even worse. Given homeowners would be refinancing at some of the highest rates of the past few decades, refinance applications were up modestly week over week, although that is far from enough to lift it off of the lowest levels since August 2000.
On a non-seasonally adjusted basis, purchases tend to peak in the late spring followed by a gradual decline through the end of the year. While mortgage activity has fallen off of a cliff this year, the drop has followed the usual seasonal pattern. What is amazing about this year is just how large of a drop that has been. Whereas 2022 started with purchase apps coming in at some of the strongest levels of the past decade for the comparable weeks of the year, the opposite is true today.
Although purchases have followed their seasonal pattern, the chart above does not do justice in showing how large of a decline it has been off of the annual peak. It has been nearly half a year (25 weeks) since applications hit their seasonal high, and in that time, purchases have been essentially cut in half. Relative to the 25 weeks after each other annual high since 1990, 2010 was the only other year in which there was a similar decline. However, that year comes with a caveat that the expiration of special homebuyer tax credits lent to a particularly strong home-buying season. Similarly, a change in mortgage disclosure rules in the fall of 2015 resulted in a seasonal peak occurring unusually late in the fall of that year, so 25 weeks later extended out to the following year. Given that, purchases were actually higher in the 25 weeks later; the only year in which that is the case. In other words, caveats aside, no other year in the history of this data has seen as sharp of a decline in homebuying/mortgage origination activity as this year.
Large Cap Growth Underperforms Everything
The past year has been a rough road for equities, but growth in particular has certainly seen its fair share of underperformance. The past month especially has been a notable microcosm of that underperformance. As we approach the one-year mark of the last all-time high in growth-oriented indices like the Nasdaq (discussed in today’s Chart of the Day) or S&P 500 Growth index, large-cap growth’s relative strength has broken down versus equities broadly, as well as growth and value across various market cap ranges.
As shown below, S&P 500 Growth relative to the S&P 500 steadily moved higher (upwards trending lines indicate S&P 500 growth outperformance) throughout the post-Global Financial Crisis era and absolutely took off in the early stages of the pandemic. After peaking in November of last year, the relative performance of growth has been on the downswing and erasing most of its earlier pandemic outperformance. In fact, following the historic weakness of mega caps on earnings (which we discussed in last week’s Bespoke report) that has continued into this week, and the relative strength is now at the lowest level since the end of February 2020.
Large-cap growth has not only underperformed other large caps, but it has also dramatically underperformed its mid and small-cap peers. From the post-Dot Com Bubble years through the Global Financial Crisis period, large-cap growth serially underperformed growth stocks of both the mid and small-cap varieties. The past decade, however, erased much of that underperformance. In fact, the 20-year relative strength line of S&P 500 growth versus S&P 400 growth actually turned positive briefly earlier this year in February. In other words, after almost two decades the performance of large-cap (S&P 500) and mid-cap (S&P 400) growth was finally near equal. Since then, the relative strength line has pivoted sharply lower and is now testing the uptrend line that has been in place since 2016.
Relative to small-cap growth, large-cap growth was much weaker in the first half of the 2010s and didn’t really begin to turn higher until the past five years. With that said, it also peaked far earlier (September 2020) than the relative strength versus mid-cap growth and is not quite testing its multiyear uptrend line yet.
Where the more dramatic underperformance of large-cap growth has been is relative to value stocks. As shown in the first chart below, relative to large-cap value, large-cap growth generally remains in its longer-term uptrend although most post-pandemic outperformance has been erased. Moving down the market cap chain increasingly worsens that picture through. The relative strength line of S&P 500 growth versus S&P 400 value recently hit a new low for the post-pandemic period, nearing the flatline in the process. In other words, large-cap growth has almost erased all of its outperformance versus mid-cap value, not only since the start of the pandemic but over the past 20 years. As for small caps, that outperformance is now gone entirely gone as the relative strength line now registers negative readings. Both versus mid and small-cap value, large-cap growth has definitively broken its multi-year uptrends that had been in place since late 2016.
Record Inflow into High Yield (JNK)
High yield bonds proxied by the third largest ETF tracking the space, the SPDR Bloomberg High Yield Bond ETF (JNK), went on a solid 3% run last week. That ranks as the fifth best performing fixed income ETF in our Trend Analyzer. That resulted in the ETF to close above its 50-DMA for the first time since late August. Today, the ETF has reversed those gains and is hovering slightly back below that moving average.
Although from a technical standpoint that could mean Friday’s breakout was a pump fake, the move was backed by near record volumes hence a record single day inflow. As shown below, roughly $980 million went into JNK on Friday, surpassing the previous record of $774 million set this past January. While total assets have been on the downswing for the past couple of years leaving plenty of room to go until the ETF is back up to its size from its peak in the summer of 2020, that single day inflow did put an impressive dent in those recent outflows.
Here are the most notable companies (tickers) 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 11.7.22 Before Market Open:
Monday 11.7.22 After Market Close:
Tuesday 11.8.22 Before Market Open:
Tuesday 11.8.22 After Market Close:
Wednesday 11.9.22 Before Market Open:
Wednesday 11.9.22 After Market Close:
Thursday 11.10.22 Before Market Open:
Thursday 11.10.22 After Market Close:
Friday 11.11.22 Before Market Open:
Friday 11.11.22 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. 🙂
