Charts of the Week
Tech, Rates, Earnings, and Econometrics: What We're Seeing
Hey friends! This Charts of the Week has something for everyone as we take a close look at what’s going on in the markets and big picture.
Tech: Tough or Troubled?
The NASDAQ has been the top performing equity index this year in the US, with tech — and particularly mega cap tech — pulling the index higher. The outperformance of tech vs the broader S&P 500 is now the most extreme that it’s ever been.
Underneath the surface of the NASDAQ, however, a different story is being told. One of more new lows than new highs for most of the last year. Not what most bull markets look like, and a sign of very limited risk appetite within the smaller companies outside of the magnificent 7.
Were There Any Bulls Left Last Week?
Managed money continued to maintain very limited exposure based on last week’s reading. The data is current as of Wednesday, which begs the question how much buying has happened since then. What’s interesting about this is that three weeks prior these same survey participants had bought the dip, but the dip kept dipping so they flushed all of their long exposure to 2023 lows.
Similarly, hedge funds were aggressively short going into November.
Rates Matter to Risk Again
The NASDAQ is becoming more sensitive to rates again, with the positive correlation to TLT prices rising to 0.75 over a 50 trading day rolling basis. It’s even higher against the 10-year note, at 0.82.
This helped the big drop in rates last week bring the number of NASDAQ stocks above their 20-day moving average from below 20% to nearly 60%. An incredible move. This was an impressive push higher and breadth showed wider participation, but we’ve yet to see any real continuation.
Buying Bonanza in Bonds and Stocks
Last Friday we saw the highest call volume in IWM on record, we saw similar in TLT as well. Rate sensitive instruments and longer duration debt all had powerful bids as concerns shifted from inflation and economic strength to the potential for slowing global growth to intensify into a potential recessionary environment. This helped to increase the amount of Fed cut expectations for 2024, and that also boosted the appetite for risk assets and debt.
The everything rally, as it’s been called, was the most powerful such rally in 2023, and we have to go back to November of 2022 to see anything quite like it. We saw a strong bid across stocks, corporate investment grade, high yield, and US Treasury bonds.
Rate Cuts Are All the Rage
Globally we’re seeing central banks cut rates at the fastest pace since August of 2020. This doesn’t necessarily mean that we’re starting a new credit cycle quite yet, but it does tell us that downside economic risks are growing.
2020 Sparked Powerful Energy Rally
Since February of 2020 energy, as a sector, has outperformed technology,. the NASDAQ and large cap growth. The worst performer in this list has been the 10-year Treasury followed by emerging markets.
Lower Your Earnings Expectations
Earnings revision breadth is rolling over back into negative territory as we see expectations become more conservative for the next quarter.
Economic Indicators Show Slowing
We can see evidence in the further weakening of manufacturing that some parts of the economy are continuing to slow. This was the 12th month of contraction in the manufacturing PMI, with 14 consecutive months of falling new orders.
The Leading Economic Index from the Conference Board continues to suggest that the economy is set to weaken rather meaningfully. It has been accurate in predicting prior contractions, but whether that holds up this time remains to be seen.
Market Thinks Fed is Done Hiking
The market expects that the Fed’s next move will be to cut by 100 bps in 2024, those expectations for a cut deepening as we saw softer employment data last week. This helped to drive rates lower and risk assets higher, but it’s not actually good news for earnings, the economy, or the market.
Recession Isn’t a Dirty Word
As we conclude on a playful note, the housing market has managed to price out many from being able to participate, which is in turn slowing family formation and reducing population growth at a time when it is already quite low.
This is especially problematic for Gen-Z, where about 50% of 18-29 year olds are living with family.
This is one reason that a recession is actually a welcome outcome, because it can reset prices, in goods and services as well as assets like real estate and stocks.
In doing so, it can create the opportunity for many to have a great chance to participate more meaningfully in the economy and reduce some of the pressure we have experienced as inflation ratcheted higher.
While recession seems like a dirty word, it’s actually a healthy cleansing process and it helps to build a healthier market and economy in the future.