There was such a torrent of market intel to try to absorb last week that it was hard to keep up at times. It also meant that leads got buried all over the place as news and data points that would usually be the focus of market attention for a matter of days were eclipsed within hours or even minutes by yet another surprising earnings report, economic data release, geopolitical development, global interest rate change or piece of eye-popping housing market data.
Let’s try to quickly make sense of it all ..
The final outcome was sharply bifurcated market performance. In the very red corner were technology and communication services stocks, a few of whom had a rather catastrophic week, as we will discuss shortly. In the nicely green corner was pretty much everything else, which mostly moved agreeably higher over the course of the week.
There continues to be a fundamental re-pricing of the stocks of many technology-related firms, which seem to still be highly vulnerable to continued declines, while the more traditional parts of the economy, whose stocks trade at broadly lower valuations, are proving extremely resilient since the headline indexes started their latest bounce a couple of weeks ago.
The announcement on Wednesday of underwhelming earnings and forward guidance pushed Alphabet/Google (GOOGL) and Microsoft (MSFT) down intraday by 9.1% and 7.7%, respectively. Then Meta/Facebook (META) saw a quarter of its value disappear in a puff of smoke in after-hours trading following a truly hideous set of earnings and outlook, with the stock price falling to levels not seen since October 2015.
The company’s recent metaverse pivot and massive hiring spree is proving to be an absolute disaster and it is being openly said by smarter people than me that the firm appears to be basically imploding right now. It doesn’t even make the list of the top twenty most valuable US companies any more. A major investor last week wrote a scathing open letter to CEO Mark (net worth a year ago: over $140 billion, net worth last week: less than $38 billion) Zuckerberg, reflecting the concerns and suggestions of many embattled shareholders.
Amazon (AMZN) stock also crapped out, briefly falling back to below its pre-pandemic levels, despite online sales having doubled since then, after issuing some rather ugly forward guidance. Apple (AAPL)'s results stood apart from the pack by being just kind of OK. The company beat expectations on the top and bottom lines, but reported weaker-than-expected iPhone sales.
Earlier in the week, the first of three estimates of Q3 US Gross Domestic Product (GDP) indicated that the economy had expanded at a sizzling 2.6% annual rate, ending the streak of two back-to-back quarterly contractions. This was well ahead of estimates. The American consumer is just unstoppable. Personal consumption expenditures, which account for the biggest part of the economy, continue to power ahead, rising 1.4% in Q3. GDP was also lifted by exports, financial services and government spending (mainly as a result of defense spending and higher wages).
Markets also spent much of the week digesting the conclusion of the National People’s Congress in China which secured President Xi a third term as party leader and effectively made him a dictator for life. This dented emerging market returns.
A more powerful Xi likely means:
Continued tech theft from the West
Focus on domestic “shared prosperity,” which may be a noble social goal, but is not usually great for earnings
A continuation of the Zero-COVID policy that has crippled China’s economic growth and contributed to the continued snarling of supply chains
Continued geopolitical tensions with the West based on intellectual property and military movements, particularly in regards to Taiwan
Market anxiety around the recent UK fiscal debacle seemed to recede once it emerged that there were finally something resembling grown-ups in the room who are starting to clean up the mess now that the kids’ loud and crazy party is thankfully over. The markets also heaved a huge sigh of relief that Boris is now safely back in the bin. The whole bonkers episode was an unnecessary, short-term negative influence, but it didn’t change the core underlying drivers of this bear market.
While the UK may finally be putting the last few years of reckless populist nonsense into its rearview mirror, Italy appears to now be taking center stage. In one of her first pronouncements after taking office, the new Italian prime minister Giorgia Meloni openly questioned the European Central Bank (ECB)'s decision to raise interest rates to counter rampant European inflation (including Italy’s own 12% rate). The ECB declined to take any notice of her advice however, raising interest rates by 0.75% for the second time in a row on Thursday.
The situation in Ukraine continues to deteriorate. The recent decline in most commodity prices has been mistaken as being associated with some kind of easing of tensions in the war - it’s absolutely not.
Contrary to conventional wisdom or what you might hear from the clowns on FinTok, it’s perfectly possible for the situation in Ukraine to continue to worsen and commodity prices to keep falling. The reason that they are falling has nothing to do with the Ukraine conflict, it’s because of the prospect of a global demand slowdown due to a possible worldwide recession.
Last week, the Bank of Canada followed its Australian counterpart, unexpectedly slowing its pace of interest-rate hikes to “just” 0.50% compared with the consensus expectation of a 0.75% rise. It should be remembered though that central banks simply moving rates higher by a bit less than expected does not constitute the holy grail of the “pivot”, the definition of which is when the central bank clearly signals that interest rate increases will end at a specific date. We are not there yet by any means, so an over-optimistic reaction to these lighter-than-expected hikes would be ill-advised.
Housing prices make up nearly 40% of the calculation of the monthly retail Consumer Price Index (CPI) measure of inflation and while inflation pressures are well distributed throughout the economy, the biggest reason that CPI has not been meaningfully declining is because of recent buoyant home and rent prices.
On Tuesday, however, we learned that while housing prices are still up substantially on a year-over-year basis (13%), the rate of increase is falling (the previous month they were up by 15.6% annualized) at the fastest pace since the index was created in 1987.
National home prices fell almost 1% in the last thirty days alone, double the rate of the decline from the previous month. Then later in the week, we were told that new home sales fell nearly 11% from August to September and are down almost 18% year-on-year and that the average 30-year mortgage interest rate had moved above 7%, more than double where it was just a year ago. Indeed, this is the highest mortgage interest rate since Avril Lavigne asked us all why we had to go and make things so complicated in 2002.
This was all broadly viewed as positive for stocks over the longer term because these price declines and reduced demand will eventually begin to be reflected in CPI readings in the coming months and slowing inflation would signal to the Federal Reserve that its rate-hike policy is working. This could prompt the central bank to back down on additional aggressive rate hikes, thereby boosting investor sentiment and the outlook for the stock market.
OTHER NEWS
Grim retirement expectations .. Americans expect they would need $1.25 million to retire comfortably, according to new study from Northwest Mutual. The number is a 20% increase from the $1.05 million figure last year. At the same time, the study found Americans’ average existing retirement savings actually fell by 11% to less than $87k from $98k last year.
The average expected retirement age rose to 64.0 years old, up from 62.6 last year. This compares with the deemed Full Retirement Age (see EXPLAINER: FINANCIAL TERM OF THE WEEK below) of 67 years old as determined for those born after 1960 by the Social Security Administration. The survey of 2,300 adults found that about 40% don’t think they’ll be ready to retire, while around one-third think there is a more than 50-50 chance they might outlive their retirement money. At the same time, 36% report that they have not proactively taken any steps at all to address this concern.
We want our money back .. The Securities and Exchange Commission (SEC) finally approved a rule Wednesday that requires public companies whose financial statements contain errors or fraud to recoup their executives’ bonuses and other incentive pay.
The rule approved was required by the 2010 Dodd-Frank Act to discourage fraud and accounting mischief. The so-called clawback rule’s implementation has been delayed for years amid resistance from Republican lawmakers and (shocker!) corporate executives. Firms will have to start including check boxes on the front page of their annual reports to highlight whether an error correction or clawback analysis has been conducted.
Companies will also have to adopt policies to recover wrongfully awarded incentive pay from both current and former executives, going back as far as three years. The rule will take effect in roughly one year’s time.
Haters rejoice .. The self-anointed champion of worldwide freedom, Elon Musk, had a busy week. He completed his Twitter takeover, named himself Chief Twit, starred in a neither funny nor clever, but utterly cringeworthy “let that sink in” video of him arriving at Twitter HQ, wrote a bizarre, grotesquely self-important email to advertisers telling them that for some reason it’s really, really “important for the future of civilization” that it is he who owns, controls and sets the ground rules for society’s digital town square and then proceeded to immediately fire the company’s CEO, CFO, general counsel and top legal and policy executives, costing the company decades in industry-related professional expertise and experience and a reported $200 million in payoffs.
Hours later Musk tweeted “the bird is freed,” and, to the absolute delight of nutcase conspiracy theory peddlers, bullying sociopaths living in their parents’ basements and generally dim-witted, obnoxious people everywhere, pledged to limit Twitter’s moderation of toxic and dangerous content in favor of what he determines to be “free speech”. What could possibly go wrong?
UNDER THE HOOD:
The multiple big up-days closely clustered with big down-days that we have experienced over the last few months, with investor sentiment flip-flopping with alarming regularity, is not a sign of a market-bottoming process. Rather, it speaks to a lack of conviction by both bulls and bears, so much so that the news of the day (or even of the hour!) tends to create a short-lived stampede that lasts only until the next news item.
Bears can rightfully point to the fact that the pivotal Percent of Stocks 20% or More Below One Year Highs reading still remains stubbornly elevated at over 60%, maintaining the uptrend that has been in place since the March 2021 low. Head-fake failed bear market rallies have been known to push this figure temporarily back below 50%, including as recently as August this year but also in the midst of the Great Financial Crisis in May 2008, before it then resumed its course back to the upside as the indexes fell back again sharply.
The bottom line is that, despite some recent oversold conditions, the response from buyers has actually been pretty muted so far. The price gains of the last week or two seem strong - but beneath the surface the evidence for a sustainable uptrend is still not yet in place.
Anglia Advisors clients are welcome to reach out to me to discuss market conditions further.
THIS WEEK’S UPCOMING CALENDAR ..
This will be another busy week with a lot more Q3 earnings reports coming out and two massive economic releases; the latest interest rate increase from the Federal Reserve on Wednesday afternoon (consensus expectation: a hike of 0.75%) and the October jobs report before the market open on Friday (average expectation: payrolls 225k higher and the unemployment rate ticking up to 3.6%).
Among the 160 or so S&P 500 companies scheduled to report this week are Pfizer, Airbnb, Starbucks, Paypal, Moderna, Qualcomm, Illumina, CVS, eBay, Conoco Phillips, Uber, BP, Duke Energy, Paramount, Warner Bros, Newmont, Advanced Micro Devices, Cardinal Health and Marathon Petroleum.
Tuesday’s Job Openings and Labor Turnover Survey (JOLTS) will provide additional insight into the state of the U.S. labor market. Expecations are for 9.75 million job openings on the last business day of September, which would be down by 300,000 from a month earlier.
US INVESTOR SENTIMENT LAST WEEK (outlook for the upcoming 6 months):
↑Bullish: 27% (up from 23% the previous week)
→Neutral: 28% (up from 21% the previous week)
↓Bearish: 46% (down from 56% the previous week)
Net Bull-Bear spread .. ↓Bearish by 19 (Bearish by 33 the previous week)
Source: American Association of Individual Investors (AAII).
For context: Long term averages: Bullish: 38% — Neutral: 32% — Bearish: 30% — Net Bull-Bear spread: Bullish by 8
The highest recorded percentage of AAII bearish sentiment was 70% and occurred on March 5th 2009, right near the end of the financial crisis bear market. The lowest percentage of AAII bears was recorded at 6% on August 21st 1987, not long before the stock market crash of October 1987).
Weekly sentiment survey participants are usually polled on Tuesdays or Wednesdays.
LAST WEEK BY THE NUMBERS:
Last week’s market color from finviz.com:
- Last week’s best performing US sector: Industrials (two biggest holdings: Raytheon Technologies, Honeywell International) - up 7.1%
- Last week’s worst performing US sector: Communication Services (two biggest holdings: Meta/Facebook, Alphabet/Google) - down 2.3%
- The S&P 500 significantly outperformed the NASDAQ-100
- US Markets and International Developed Markets did much better than Emerging Markets
- Small Caps beat out Mid Caps which itself beat out Large Caps
- Value meaningfully outperformed Growth
- The proprietary Lowry's measure for US Market Buying Power is currently at 159 and rose by by 17 points last week and that of US Market Selling Pressure is now at 162 and fell by 15 points over the course of the week.
- SPY, the S&P 500 ETF, has now moved above its 50-day and 90-day moving averages but remains below its long term trend line. The 14-day Relative Strength Index (RSI) reading is 59**. SPY ended the week 18.6% below its all-time high (01/03/2022).
- QQQ, the NASDAQ-100 ETF, remains below its 50-day and 90-day moving averages and also below its long term trend line. The 14-day Relative Strength Index (RSI) reading is 53**. QQQ ended the week 30.4% below its all-time high (11/19/2021).
** RSI readings range from 0-100. Readings below 30 tend to indicate an over-sold condition, possibly primed for a technical rebound and above 70 are often considered over-bought, possibly primed for a technical decline.
- VIX, the commonly-accepted measure of anticipated upcoming stock market risk and volatility implied by S&P 500 index option trading (often referred to as the“fear index”) ended the week lower again at 25.8. It moved just below its 50-day and 90-day moving averages. It is now also below its long term trend line.
ARTICLE OF THE WEEK:
Save Like A Pessimist, Invest Like An Optimist. Morgan Housel’s latest dose of wonderful investing common sense. For more, read his book “The Psychology Of Money”, probably my favorite personal finance publication.
EXPLAINER: FINANCIAL TERM OF THE WEEK:
A weekly feature using information found on Investopedia to try to help explain Wall Street gobbledygook (may be edited at times for clarity) .
Full retirement age (FRA), also known as normal retirement age, is the age at which you can receive full retirement benefits from Social Security. Full retirement age varies depending on the year you were born. FRA is 66 years and two months for people born in 1955, and it gradually rises to 67 for those born in 1960 or later.
In the U.S., the FRA for Social Security benefits is 67 for people born in 1960 or afterward. It is 66 for people born from 1943 to 1954, and 66 and two, four, six, eight, or 10 months for people born from 1955 to 1959 (the retirement age increases by two months per birth year).
You can elect to receive Social Security benefits starting at age 62, but claiming benefits at an age below your FRA will reduce your benefit permanently. For example, if your FRA is 67 and you begin claiming benefits at age 62, the monthly benefit will be 70% of the benefit available at full retirement age. You will get 86.7% of the full retirement benefit if you start claiming benefits at 65.
If you were born in 1943 or later, your benefit will increase by 8% for each year you delay claiming it after your FRA. Waiting until you reach 70 will yield the maximum benefit. There’s no reason to wait beyond age 70 because your benefits won't increase further.
You can collect Social Security retirement benefits at your FRA while continuing to work. If you begin collecting Social Security before your full retirement age and earn over a certain amount, your benefits will be temporarily reduced. When you reach your FRA, there is no limit on how much you can earn while collecting full benefits.
FRA also applies to pension plans, such as employer-sponsored plans. Police officers, military service members, and other public servants typically receive full benefits after a certain number of service years, rather than at a specific age.
The average retirement age for Americans has increased by about three years over the past three decades, according to the Center for Retirement Research at Boston College. Even so, on average, Americans are retiring before they reach full retirement age. Men retire at an average age of 64.6 years. The average retirement age for women is 62.3 years.
The increase in the average retirement age has been fueled in large part by the later retirements of college graduates, research from Boston College shows. For example, men with college degrees retire three years later than men who are high school graduates.
One major reason workers (both men and women) who are high school graduates tend to retire earlier is that their health and life expectancy haven't improved as much as those of college graduates over the past century. Their jobs also tend to be more physically demanding, and they are not able to take as much time off as workers with college degrees.
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