📈 Stocks rallied last week with the S&P 500 rising 1.9% to close at 5,222.68. The index is now up 9.5% year to date and up 46% from its October 12, 2022 closing low of 3,577.03.
It was one of the quieter weeks for economic data, earnings announcements, and other major market-moving events.
So, in lieu of riffing off a news event, here’s a bunch of charts that caught my eye in recent weeks:
The stock market likes the absence of news 📰
From BofA: “Historically, quiet weeks have been the best weeks for stocks. No news is good news.“
From Piper Sandler (HT Blake Millard): “S&P large caps have near-record exposure to a China that is wobbly economically, with an increasingly authoritarian Heavy Hand of regulation.“
From Apollo Global’s Torsten Slok: “Total global employment in the S&P 500 companies is 29 million, and total employment in the US economy is 158 million, see chart below. Put differently, more than 80% of total employment in the US economy is outside the S&P 500 companies.“
It’s worth noting that S&P 500 companies do a lot of business outside of the U.S., which means many of those 29 million employees aren’t based in the U.S.
From Ritholtz Wealth Management’s Ben Carlson: “The relationship between interest rates and stock market performance is murky at best… It’s certainly not a one-to-one correlation where higher rates lead to lower returns. The lowest returns have come in the 3-4% and 7-8% ranges. The best returns have come when rates are 2% or less, which makes sense when you consider rates were only that low during two of the biggest crises this century (the GFC and Covid). Look at the 4% to 6% range, which is where we are now. The returns have been pretty good. Maybe one of the reasons for this is because the average 10 year yield since 1950 is 5.4% (the median is 4.7%). Rates like this occur during normal times (if such a thing exists).“
Despite tight monetary policy and elevated interest rates, corporate net interest costs remain low. This is thanks to a combination of debt that’s largely locked in low rates and elevated cash balances earning more interest.
From Carson Group’s Ryan Detrick: “Yes, profit margins are improving due to cost-cutting, but this will likely create a leaner and more agile corporate America the second half of this year. We’ve been told for what feels like years now that profit margins have only one way to go and that is lower, but the opposite continues to happen. Improving profits and profit margins supported by continued economic growth next year would provide a strong tailwind for equities.“
From FactSet (emphasis added): “In a typical quarter, analysts usually reduce earnings estimates during the first month of a quarter. During the past five years (20 quarters), the average decline in the bottom-up EPS estimate during the first month of a quarter has been 1.9%. During the past ten years, (40 quarters), the average decline in the bottom-up EPS estimate during the first month of a quarter has been 1.8%. During the past fifteen years, (60 quarters), the average decline in the bottom-up EPS estimate during the first month of a quarter has been 1.5%. During the past 20 years (80 quarters), the average decline in the bottom-up EPS estimate during the first month of a quarter has been 1.8%. In fact, the second quarter marked the first time that the bottom-up EPS estimate increased during the first month of a quarter since Q4 2021 (+0.3%).”
The “Magnificent 7” stocks — Microsoft, Apple, Alphabet, NVIDIA, Amazon, Meta Platforms, and Tesla — have led the market higher thanks to outsized earnings growth. However, earnings growth is expected to cool for those names as they heat up for the other 493 stocks of the S&P 500.
Here’s Deutsche Bank on buyback announcements: “Buyback announcements booming, and not just from mega-cap tech companies. With earnings season in full swing, S&P 500 buybacks announcements also spiked to over $130bn just this week, taking the total so far in this earnings season to $262bn. While the high-profile announcements from Apple and Alphabet have garnered the most attention, we note that announcements from other companies this earnings season have also totaled a solid $82bn.“
(Source: Deutsche Bank)
From BofA on buyback activity: “Corp. client buybacks decelerated slightly vs. the prior week but are tracking above typical seasonal levels at this time for the ninth consecutive week. YTD, corp. client buybacks as a percentage of S&P 500 market cap (0.40%) are above '23 highs (0.33%) at this time.“
According to The Wall Street Journal’s Justin Lahart: “Among companies in the S&P 500, the term ‘recession’ showed up in just 100 transcripts of earnings calls, investor events and conferences recorded in the first quarter, according to FactSet. That was down from 302 in the first quarter of 2023, and the fewest in two years.“
JPMorgan analysts reviewed the performance of the S&P 500 under various U.S. Presidents since 1945. In most cases, the market trended higher. But also in most cases, the market experienced double digit max drawdowns.
From Oppenheimer’s Ari Wald: “The S&P 500 has closely followed its typical seasonal trajectory in recent years. Looking ahead, we believe seasonals indicate the potential for market consolidation should be used opportunistically to buy stocks ahead of seasonal tailwinds between June and August.“
From Fidelity’s Jurrien Timmer: “The cyclical bull market is 19 months old, with a gain of 46% (down from high of 50% in March). It’s modest, but in line with previous soft landings.“
From Truist’s Keith Lerner: “Since March 9, 2009, where stocks bottomed following the Global Financial Crisis, we count 28 previous pullbacks of at least 5% for the S&P 500. Impressively, despite these setbacks, stocks are up 644% on a price basis and 900% including dividends over that entire period.“
… or so the old Wall Street saying goes. The idea is that stocks underperform from May through August. But does it work as a trade?
The chart below from Deutsche bank…
…shows the strategy since 1973 in the U.S. based on selling at the end of April and reinvesting at the end of August whilst being fully invested at all other times. … our chart shows;
A simple sell equities strategy and retreat to cash (no interest) over the period
Staying with a buy-and-hold equity strategy all year round
Sell equities, buy US Treasuries for the 4-month summer period
Overall, the seasonal strategy wouldn’t have worked well, especially if you stayed out of all assets. Had you switched into Treasuries the trade would have slightly outperformed but with the buy and hold strategy having caught up in recent years.
At TKer, we’re not crazy about going all in on short-term trades.
On Wednesday, CFRA’s Sam Stovall raised his 12-month target for the S&P 500 to 5,610 from 5,250. He noted this implies a year-end level of 5,415. This is his second revision from his initial target.
“[H]istory offers guidance associated with traditionally encouraging election year returns and the benefits of a soon-to-be-initiated rate-easing cycle,” Stovall wrote.
There were a few notable data points and macroeconomic developments from last week to consider:
💵 Banks have gotten tighter. According to the Federal Reserve’s April Senior Loan Officer Opinion Survey, lenders tightened standards for commercial and industrial loans…
Tighter lending standards is a form of tighter financial conditions, which is what the Federal Reserve wants as it continues its fight to bring down inflation.
💳Consumers took on more debt. According to Federal Reserve data, total revolving consumer credit outstanding increased modestly to $1.33 trillion in March. Revolving credit consists mostly of credit card loans. Nonrevolving credit, which includes auto loans and student loans, increased to $3.72 trillion.
Of course, consumer debt should always be normalized against some form of assets or income.
Here’s Renaissance Macro’s Neil Dutta: “We keep hearing about consumers stretching themselves and taking on too much credit, but this really isn't the case. Below, I show the ratio of revolving credit to consumer spending and disposable income. We're still below pre-pandemic levels on both measures. Credit hasn't hurt, but it is not the main driver of consumption in the last few years. This is about income.“
💸 Pandemic excess savings may be depleted. From the San Francisco Fed: “Excess savings were built up over a period of 18 months, from the onset of the pandemic recession in March 2020 until August 2021. The rapid accumulation was largely due to pandemic-related financial support to U.S. households and a steep decline in consumer spending as a result of health-related social distancing and business closures. We estimate that excess savings at the aggregate level peaked at $2.1 trillion in August 2021 and were steadily depleted over the subsequent 2½ years.“
💳 Card data mixed on April spending. From JPMorgan: “As of 02 May 2024, our Chase Consumer Card spending data (unadjusted) was 0.1% above the same day last year. Based on the Chase Consumer Card data through 02 May 2024, our estimate of the U.S. Census April control measure of retail sales m/m is 0.06%.“
From Bank of America: “Total card spending per household rose 1.0% year-over-year (YoY) in April, following a rise of 0.3% YoY in March. Recent data has been noisy due to the early Easter, the leap year and other seasonal factors. Looking through these gyrations, spending momentum appears to continue to be relatively soft but stable.”
💼 Unemployment claims rise. Initial claims for unemployment benefits increased to 231,000 during the week ending May 4, up from 209,000 the week prior. While this is above the September 2022 low of 187,000, it continues to trend at levels historically associated with economic growth.
⛽️ Gas prices tick lower. From AAA: “Gas prices posted a quiet week, with the national average drifting lower by three cents to $3.64 since last Thursday. Tepid pre-Memorial Day domestic demand and oil costs below $80 a barrel are the likely culprits. … According to new data from the Energy Information Administration (EIA), gas demand rose modestly from 8.62 million b/d to 8.79 last week. Meanwhile, total domestic gasoline stocks increased by nearly 1 million bbl to 228 million bbl. Slack demand, rising supply, and falling oil prices could push pump prices lower.”
👎 Sentiment deteriorates. From the University of Michigan’s May Surveys of Consumers: “Consumer sentiment retreated about 13% this May following three consecutive months of very little change. This 10 index-point decline is statistically significant and brings sentiment to its lowest reading in about six months. This month’s trend in sentiment is characterized by a broad consensus across consumers, with decreases across age, income, and education groups. ... While consumers had been reserving judgment for the past few months, they now perceive negative developments on a number of dimensions. They expressed worries that inflation, unemployment and interest rates may all be moving in an unfavorable direction in the year ahead.“
🚗 Used car prices continue to come down. From Manheim: “Wholesale used-vehicle prices (on a mix, mileage, and seasonally adjusted basis) were down in April compared to March. The Manheim Used Vehicle Value Index (MUVVI) fell to 198.4, a decline of 14.0% from a year ago.”
🏚 Mortgage payments are high. According to Bloomberg’s Michael McDonough, “Monthly mortgage payments for existing homes, based on the average 30-year mortgage rate, have risen to $2,156 after a short reprieve — more than double the $977 seen in early 2020.“
🏠 Mortgage rates fall. According to Freddie Mac, the average 30-year fixed-rate mortgage declined to 7.09% from 7.22% the week prior. From Freddie Mac: “An environment where rates continue to hover above seven percent impacts both sellers and buyers. Many potential sellers remain hesitant to list their home and part with lower mortgage rates from years prior, adversely impacting supply and keeping house prices elevated. These elevated house prices add to the overall affordability challenges that potential buyers face in this high-rate environment.”
🍾 The entrepreneurial spirit is alive. Small business applications, while down slightly from the previous month, remain well above prepandemic levels. From the Census Bureau: “April 2024 Business Applications were 432,517, down 0.5% (seasonally adjusted) from March. Of those, 139,496 were High-Propensity Business Applications.“
This comes as the Federal Reserve continues to employ very tight monetary policy in its ongoing effort to get inflation under control. While it’s true that the Fed has taken a less hawkish tone in 2023 and 2024 than in 2022, and that most economists agree that the final interest rate hike of the cycle has either already happened, inflation still has to stay cool for a little while before the central bank is comfortable with price stability.
Here’s a roundup of some of TKer’s most talked-about paid and free newsletters about the stock market. All of the headlines are hyperlinked to the archived pieces.
The stock market can be an intimidating place: It’s real money on the line, there’s an overwhelming amount of information, and people have lost fortunes in it very quickly. But it’s also a place where thoughtful investors have long accumulated a lot of wealth. The primary difference between those two outlooks is related to misconceptions about the stock market that can lead people to make poor investment decisions.
Passive investing is a concept usually associated with buying and holding a fund that tracks an index. And no passive investment strategy has attracted as much attention as buying an S&P 500 index fund. However, the S&P 500 — an index of 500 of the largest U.S. companies — is anything but a static set of 500 stocks.
For investors, anything you can ever learn about a company matters only if it also tells you something about earnings. That’s because long-term moves in a stock can ultimately be explained by the underlying company’s earnings, expectations for earnings, and uncertainty about those expectations for earnings. Over time, the relationship between stock prices and earnings have a very tight statistical relationship.
Investors should always be mentally prepared for some big sell-offs in the stock market. It’s part of the deal when you invest in an asset class that is sensitive to the constant flow of good and bad news. Since 1950, the S&P 500 has seen an average annual max drawdown (i.e., the biggest intra-year sell-off) of 14%.
Generally speaking, rising interest rates are not welcome news for the economy and the stock market. They represent higher financing costs for businesses and consumers. All other things being equal, rising rates represent a hindrance to growth. However, the world is complicated, and this narrative comes with a lot of nuance. One big counterintuitive piece to this narrative is that historically, stocks have actually performed well during periods of rising interest rates.
There’ve been lots of talk about the “yield curve inversion,” with media outlets playing up that this bond market phenomenon may be signaling a recession. Admittedly, yield curve inversions have a pretty good track record of being followed by recessions, and recessions usually come with significant market sell-offs. But experts also caution against concluding that inverted yield curves are bulletproof leading indicators.
Every recession in history was different. And the range of stock performance around them varied greatly. There are two things worth noting. First, recessions have always been accompanied by a significant drawdown in stock prices. Second, the stock market bottomed and inflected upward long before recessions ended.
Since 1928, the S&P 500 generated a positive total return more than 89% of the time over all five-year periods. Those are pretty good odds. When you extend the timeframe to 20 years, you’ll see that there’s never been a period where the S&P 500 didn’t generate a positive return.
While a strong dollar may be great news for Americans vacationing abroad and U.S. businesses importing goods from overseas, it’s a headwind for multinational U.S.-based corporations doing business in non-U.S. markets.
The stock market sorta reflects the economy. But also, not really. The S&P 500 is more about the manufacture and sale of goods. U.S. GDP is more about providing services.
…you don't want to buy them when earnings are great, because what are they doing when their earnings are great? They go out and expand capacity. Three or four years later, there's overcapacity and they're losing money. What about when they're losing money? Well, then they’ve stopped building capacity. So three or four years later, capacity will have shrunk and their profit margins will be way up. So, you always have to sort of imagine the world the way it's going to be in 18 to 24 months as opposed to now. If you buy it now, you're buying into every single fad every single moment. Whereas if you envision the future, you're trying to imagine how that might be reflected differently in security prices.
Some event will come out of left field, and the market will go down, or the market will go up. Volatility will occur. Markets will continue to have these ups and downs. … Basic corporate profits have grown about 8% a year historically. So, corporate profits double about every nine years. The stock market ought to double about every nine years… The next 500 points, the next 600 points — I don’t know which way they’ll go… They’ll double again in eight or nine years after that. Because profits go up 8% a year, and stocks will follow. That's all there is to it.
Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, “I can calculate the movement of the stars, but not the madness of men.” If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.
According to S&P Dow Jones Indices (SPDJI), 59.7% of U.S. large-cap equity fund managers underperformed the S&P 500 in 2023. As you stretch the time horizon, the numbers get even more dismal. Over a three-year period, 79.8% underperformed. Over a 10-year period, 87.4% underperformed. And over a 20-year period, 93% underperformed. This 2023 performance follows 13 consecutive years in which the majority of fund managers in this category have lagged the index.
S&P Dow Jones Indices found that funds beat their benchmark in a given year are rarely able to continue outperforming in subsequent years. For example, 318 large-cap equity funds were in the top half of performance in 2020. Of those funds, 39% came in the top half again in 2021, and just 5% were able to extend that streak through 2022. If you set the bar even higher and consider those in the top quartile of performance, just 7% of 156 large-cap funds remained in the top quartile in 2021. No large-cap funds were able to stay in the top quartile for the three consecutive years ending in 2022.
Picking stocks in an attempt to beat market averages is an incredibly challenging and sometimes money-losing effort. In fact, most professional stock pickers aren’t able to do this on a consistent basis. One of the reasons for this is that most stocks don’t deliver above-average returns. According to S&P Dow Jones Indices, only 24% of the stocks in the S&P 500 outperformed the average stock’s return from 2000 to 2022. Over this period, the average return on an S&P 500 stock was 390%, while the median stock rose by just 93%.
Great charts!