05/29/2022. Catch up with all you need to know from the entire previous week in financial markets in less than ten minutes every Sunday by reading or listening to my weekly market review.
The historic seven-week losing streak for both the S&P 500 and the NASDAQ was finally broken. The NASDAQ took the lead last week, up a stellar 6.8% but all the major US indexes were up by more than 6%.
The week began with the market happy to hear that President Biden may consider easing or eliminating a number of the Trump-era trade tariffs on Chinese goods, while also announcing a new economic agreement with twelve Indo-Pacific nations, a pact between countries who represent a combined 40% of global GDP.
Back on the stock exchanges; in a move that would have sent chills up the spine of other firms dependent on such digital advertising-related revenue models, Snapchat parent SNAP became the latest stock to get destroyed in a matter of hours - crashing over 43% on Tuesday alone after missing earnings and giving miserable guidance. The implication was that digital advertising spending has likely peaked, partly because how quick and easy it is to simply cancel paying for digital ads with local TV and radio advertising usually following shortly after.
This dragged many other high growth, long-duration companies with low but volatile revenue and profitability down with it on Tuesday (Pinterest lost a quarter of its value in a day and Meta/Facebook tumbled as well).
The recent calamity of the Target (TGT) and Walmart (WMT) earnings the previous week had the market holding its collective breath ahead of a slew of other retailers’ earnings announcements early last week. Some of the numbers surprised to the upside but the ferocity of the rebound and rally in retail stocks and beyond that began on Wednesday surprised many observers.
It’s important to remember also that in this environment these relief rallies for retailers can be a double-edged sword, as they show a consumer that is still happy to spend heavily, casting some doubt on the rather trendy “inflation has peaked” narrative.
The sense was that this was a primarily a short-covering rally, which is not “real” buying, what it is is institutions booking profits on these stocks which they correctly believed were going to be slammed. Indeed, when you zoom out a bit and look at the charts for beyond a few days or weeks, many of these stocks actually still look in terrible shape.
Rebounds primarily led by the most beaten-down names like this one are always the most suspect kinds. Short-coverers, day traders and short-term dip-buyers will start by selecting these kind of names to buy and this is what I mean by “not real buying” as these participants are not playing the same game as the rest of us.
As is often the case, investors viewed subsequent data through the prism of the price action at the time and acted accordingly. A good example of this was the release of a report showing U.S. households boosted spending for a fourth straight month - rising by 0.9% in April. As discussed before, this can be good news (evidence of a still-strong economy) or bad news (higher consumer spending = higher inflation = higher interest rates) depending on the prevailing narrative at that moment, but last week the market decided it was a positive and stocks continued roaring upwards.
The release of the minutes from the last Fed meeting lacked a nasty surprise, which was also viewed as a net positive. Going into the minutes release, the futures market was showing a 60% chance of Fed funds interest rates ending the year at 2.50%–2.75% and a 33% chance of 2.75%–3.00%. These levels barely moved after the release of the minutes while the stock market marched on.
Each quarter’s Gross Domestic Product (GDP) measure of US national economic growth gets three “takes”, as a movie director might say. Each take is a more complete number than the prior one, with the third take being the official final number.
Take 2 of the Q1 2022 GDP came in last week at minus 1.5% compared with a Take 1 reading of down 1.0% and the new expectation for the final Take 3 is a fall of 1.4%, which - if confirmed - would be the worst quarterly growth since the second quarter of 2020, when output contracted 31.2%.
This is important because of course a formal recession is deemed to be two consecutive quarters of negative growth. This will be the first of those if Take 3 ends up negative.
The advice remains unchanged. Those with longer time horizons (say, anything twelve years plus) should continue to lean into all this, at a minimum maintaining their level of ongoing systematic purchases of either pure index funds or smart factor-based funds in an ETF wrapper (or index mutual funds in a retirement account). Avoid expensive actively managed funds and keep funds packed with high growth/low profit “2020 pandemic-type” holdings to an absolute minimum. And it hopefully goes without saying to stay away from any single-stock picking.
If cash flow permits, I believe you should actually be increasing your level of buying of these investments in your longer term accounts, loading up more heavily at currently lower prices.
Money with a time horizon of less than two years should not be in the stock market at all. High Yield Savings accounts at places like Marcus, Betterment, Ally etc are now paying around twice the interest that they were at the beginning of the year. It’s still very low (and a lot less than inflation) but there is essentially zero risk to the value of your principal as long as you keep within the FDIC insurance limit. Also, if you haven’t yet done so, look into US government I Bonds as a place to put money for over a year, currently paying a mouth-watering tax-advantaged 9.62% interest.
Cooling off, fast .. In a clear recession warning for the overall economy, new single-family home sales dropped 16.6% in April, massively worse than expected (average estimates were for less than a 2% decline). It was the fourth straight monthly decline and the biggest month-over-month slide since Robin Thicke blurred lines in 2013. New home sales have clearly been hurt by soaring prices and rapidly-rising mortgage rates, making homes much less affordable with most would-be first-time buyers being totally sidelined. The median sales price of a new home in April was $450,600, up 19.6% from a year ago.
Coupled with last week’s fall in existing home sales, there are clear signs that the residential real estate market is rapidly slowing down and no-one is seriously expecting anything other than further sales declines in the coming months.
Back to the office? Er, not really .. US office occupancy remains stuck in neutral, according to the latest data from Kastle Systems, the leading provider of office security systems and software. Its latest Ten Cities Workplace Occupancy Report shows only a 43.4% office occupancy rate nationwide and with COVID cases rising again in many locations, the next few weeks may well see fewer and fewer people working in offices.
Indeed, this is already happening in office markets like New York City, which was down last week to just a 38.2% occupancy rate and with summer now officially under way, these rates are unlikely to tick back up again until after Labor Day at the earliest. Kastle noted in its report that the trajectory of the data “suggests that these occupancy rates might be the new normal for businesses nationwide”.
“Take your job and stick it” .. The boom in the number of people changing jobs following the peak of the COVID-19 pandemic known as The Great Resignation (see FINANCIAL TERM OF THE WEEK below) is showing no sign of slowing down, according to research by PricewaterhouseCoopers (PwC). The consulting firm’s survey of 52,000 workers in 44 countries and territories found one in five indicated they would likely move to another job in the next 12 months.
The survey also indicated 35% of respondents said they are planning to ask for a salary increase over the next year, although finding fulfillment at work was just as important as compensation. PwC said workers are not just looking for decent pay, they want more control over how they work and want to derive greater meaning from what they do. Employees also care about where they work, with 47% noting that was a priority for them. It added that in order to avoid losing staff, businesses must do more to improve their workers’ skills, which will help provide more of the job control employees are seeking.
Under The Hood:
While it is undeniable that last week saw the emergence of some positive short term divergences to the still unhealthy longer term under-the-hood indicators (particularly Buying Power crossing into a dominant position over Selling Pressure), no real leadership emerged, it was the most damaged stocks that bounced the hardest which is exactly what you would expect in a rally with little more behind it than being simply a reaction to an oversold condition where things had fallen too far, too fast (remember, we are coming off seven straight weeks of falling markets, which is almost unheard of).
Following last week’s strong rally, we are now far above over-sold levels (see the RSI readings below in LAST WEEK BY THE NUMBERS), so that particular source of rocket fuel to stock prices has now been shut off. The evidence continues to point to the market process of decline still being in place with no compelling evidence of an imminent sustainable reversal apparent in any of the key intermediate- or long-term indicators.
Anglia Advisors clients are welcome to reach out to me to discuss market conditions further.
The upcoming week’s calendar ..
U.S. stock and bond markets will be closed on Monday for Memorial Day.
Just a handful of major companies report their earnings next week, including Hewlett Packard, Salesforce.com, Lululemon, CrowdStrike, Enterprise and, yes, GameStop.
There are also several annual shareholders’ meetings scheduled for next week, including Alphabet/Google, Comcast, Walmart, Nvidia, PayPal and what may be a spicy one at Netflix.
The big piece of economic data next week is the jobs report on Friday. Economists' average forecast is for a gain of 317k jobs and for an unemployment rate of 3.5%.
US INVESTOR SENTIMENT LAST WEEK (outlook for the upcoming 6 months):
↑Bullish: 20% (down from 24% the previous week)
→Neutral: 27% (down from 26% the previous week)
↓Bearish: 53% (up from 50% the previous week)
Net Bull/Bear spread .. ↓Bearish by 33 (Bearish by 26 the previous week)
Long term averages: Bullish: 38% — Neutral: 32% — Bearish: 30% — Bull-Bear spread: Bullish by 8
Source: American Association of Individual Investors (AAII). All numbers rounded.
LAST WEEK BY THE NUMBERS:
- Last week’s best performing US sector: Consumer Discretionary (two biggest holdings: Amazon, Tesla) - up 10.0%
- Last week’s worst performing US sector: Healthcare (two biggest holdings: Johnson & Johnson, UnitedHealth Group) - up 3.6%
- The NASDAQ-100 slightly outperformed the S&P 500
- US Markets comfortably outperformed all overseas markets
- There was virtually no difference between the performance of Large, Mid and Small Cap
- Growth outperformed Value
- The proprietary Lowry's measure for US Market Buying Power is currently at 192 and rose by 25 points last week while that of US Market Selling Pressure ended Friday at 178 and fell by 27 points over the course of the week
- SPY, the S&P 500 ETF is still below both its 50-day moving average and its 90-day and also remains below its long term trend line. The 14-day Relative Strength Index (RSI) reading is 48**. SPY ended the week 13.0% below its all-time high (01/03/2022)
- QQQ, the NASDAQ-100 ETF, is still below both its 50-day moving average and its 90-day and also remains below its long term trend line. The 14-day Relative Strength Index (RSI) reading is 45**. QQQ ended the week 23.5% below its all-time high (11/19/2021)
** RSI readings range from 0-100. Readings below 30 indicate an over-sold condition, possibly primed for a technical short term rebound and above 70 are considered over-bought, possibly primed for a technical short term decline.
- VIX, a measure of anticipated upcoming stock market risk and volatility based on S&P 500 index options (often referred to as the“fear index”) is right at its 50-day moving average and above its 90-day as well as above its long term trend line.
ARTICLE OF THE WEEK:
Each week I'll link to an interesting article I have come across recently.
This week: Estate planning is having real problems keeping up with societal trends and changes and a lot of people are at risk if they don’t plan.
Shameless plug: Anglia Advisors can help you put together a great estate plan, just get in touch.
FINANCIAL TERM OF THE WEEK:
A weekly feature using information found on Investopedia (may be edited at times for clarity).
The Great Resignation describes the elevated rate at which U.S. workers have quit their jobs starting in the spring of 2021, amid strong labor demand and low unemployment as vaccinations eased the severity of the COVID-19 pandemic. Anthony Klotz, a professor of business administration at Texas A&M University, coined the term in May 2021, attributing the phenomenon to pent up demand from workers who deferred decisions to quit earlier in the pandemic.
Though each individual’s reasons for changing jobs or leaving the workforce are tied to personal circumstances, there is no question that the arrival of COVID-19 and related job losses immediately curbed voluntary exits by employees. The quits rate tracking voluntary separations from employment for reasons other than retirement plunged from a typical 2.3% in February 2020 to 1.6% two months later in the Job Openings and Labor Turnover Survey (JOLTS) by the U.S. Bureau of Labor Statistics (BLS).
Employees often quit jobs after accepting a better one elsewhere, so to a large extent the drop reflected the decline in hiring for new positions. Others undoubtedly delayed a planned exit, whether to start their own business or for another reason, amid the economic turmoil at the outset of the pandemic.
With the arrival of COVID-19 vaccines and the accompanying economic rebound, hiring has picked up, even as those who delayed quitting for other reasons finally felt comfortable about proceeding.
Some have suggested the quits rate may also have risen for other reasons tied to the COVID-19 pandemic:
Pandemic experiences led some workers to re-evaluate life priorities and reduce working hours or leave the labor force entirely.
Employers demanded employees return to the office after allowing remote work in 2020.
Mistreatment by employers and customers during the pandemic pushed workers to leave as other options became available.
The labor force participation rate has been slow to recover from pandemic lows, fueling the competition for workers.
Some people left work because they could not obtain childcare as schools shifted to remote learning, while others did so because they wouldn't comply with workplace COVID-19 vaccination requirements.
Notably, though, the top reasons given by the workers who quit in a Pew Research Center survey conducted in February 2022 were low pay and a lack of advancement opportunities, suggesting many left for a better offer.
Harvard economist Jason Furman argued in June 2021 that the elevated rate of people leaving their jobs was in line with the rising number of job openings, suggesting competition among employers was driving resignations.
A record 4.5 million workers quit jobs for reasons other than retirement in March 2022, representing an increase of 152,000 from February 2022, according to JOLTS data. Job openings of 11.55 million at the end of March were also the highest on record.
This material represents an opinionated assessment of the market environment based on assumptions at a specific point in time and is always subject to change. No warranty of its accuracy is given. It is not intended to act as a forecast of future events, nor does it constitute any kind of a guarantee of any future results or outcomes. The material contained herein is insufficient to be exclusively relied upon as research or investment advice. The user assumes the entire risk of any actions taken based on the information provided in this or any other Anglia Advisors post or other communication.
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