America's busted recession indicators, plus Mag 7 gets whacked, retail categories in deflation, and earnings season reactions
The Sandbox Daily (7.24.2024)
Welcome, Sandbox friends.
The S&P 500 suffered its first daily loss of >2% in 356 trading days (its worst rout since December 2022), the U.S. Department of Transportation has launched an investigation into Delta Air Lines' treatment of passengers following last week's CrowdStrike outage, and reports indicate Apple’s 1st foldable iPhone could arrive in 2026.
Today’s Daily discusses:
America’s busted recession indicators
Also busted? The Mag 7 today.
a handful of retail categories cheaper today than pre-pandemic
earnings season reactions have been tough
Let’s dig in.
Markets in review
EQUITIES: Dow -1.25% | Russell 2000 -2.13% | S&P 500 -2.31% | Nasdaq 100 -3.65%
FIXED INCOME: Barclays Agg Bond -0.31% | High Yield -0.32% | 2yr UST 4.431% | 10yr UST 4.285%
COMMODITIES: Brent Crude +0.60% to $81.50/barrel. Gold -0.38% to $2,445.9/oz.
BITCOIN: -0.21% to $65,771
US DOLLAR INDEX: -0.09% to 104.357
CBOE EQUITY PUT/CALL RATIO: 0.63
VIX: +22.55% to 18.04
Quote of the day
“Open your door to a good day and prepare yourself for a bad one.”
- Moroccan Proverb
America’s busted recession indicators
For roughly 2 years, we’ve been told the economy is headed towards recession because of the quick and significant rate hiking cycle undertaken by central banks around the world in synchronicity.
Only in the last 6-12 months have we seen implied recession odds collapse.
Classic economic indicators that often alert of impending recession – two consecutive quarters of contracting GDP, inverted yield curves, oil shocks, the Leading Economic Indicators, hiking interest rates by more than 5%, to name a few – have simply flashed phantom signals this cycle.
Perhaps the cleanest example of this concept is the inverted yield curve. In 2022 and 2023, nearly every economist warned of a looming recession due, in part, to an inverted yield curve. After all, an inverted yield curve preceded every recession since 1970. The median lead time using the 10-year Treasury and the bond equivalent yield of the 6-month Treasury bill is 11 months. The median inversion has lasted 12 months. Today, the current inversion is double that – a record!
So, what are we to make of these developments?
Here are a few takeaways:
We should always be on alert when the markets or economy don’t respond the way you expect them to.
We should understand that certain indicators will outlive their usefulness.
We should recognize when historical relationships (or correlations) break down and cease working.
It will always serve investors well to study market history to level set expectations, however we also must remain open-minded to the idea that sometimes things are different and outputs from econometric and statistical models should not be the end-all, be-all solution.
Instead, stay data-dependent and utilize a weight-of-the-evidence approach to stay humble and be nimble.
Source: Ned Davis Research
Mag 7 busted
Tough day for markets, but given the concentration of investors in the Magnificent 7, today was especially painful.
The Mag 7 just had their worst day since September 2022, down >5% in today’s trading.
Source: Bespoke Investment Group
A handful of retail categories cheaper today than pre-pandemic
The rise in prices in the post-pandemic period are well documented. Since inflation kicked down the tightly-sealed doors roughly 3 years ago, nearly everything has gone up in price.
However, we are finally seeing price declines in some areas, as inflationary pressures settle down. When prices fall, that’s deflation and that helps consumers regain lost ground after inflation eroded their purchasing power.
The chart below shows 6 notable spending categories – dominated by consumer electronics – where prices are cheaper today than pre-pandemic:
Consumer electronics seem to be one area in which prices keep falling as manufacturers routinely cut prices over time to stay competitive and defend market share.
Source: CNBC
Companies that announce an earnings miss are getting punished
While markets trade near all-time highs, positioning is stretched which leaves little room to absorb any disappointments.
There are several signs of complacency with respect to the economic and market outlook, most notably in the 23% of S&P 500 companies that have reported so far where stocks that missed earnings estimates (EPS) are being penalized more than usual. See chart below.
Given the rally leading up to the earnings season and the already stretched positioning, stock reactions to earnings season results continue to be underwhelming, with beats rewarded less (black bars below), and misses penalized by more than usual (blue bars).
Source: J.P. Morgan Markets
That’s all for today.
Blake
Welcome to The Sandbox Daily, a daily curation of relevant research at the intersection of markets, economics, and lifestyle. We are committed to delivering high-quality and timely content to help investors make sense of capital markets.
Blake Millard is the Director of Investments at Sandbox Financial Partners, a Registered Investment Advisor. All opinions expressed here are solely his opinion and do not express or reflect the opinion of Sandbox Financial Partners. This Substack channel is for informational purposes only and should not be construed as investment advice. The information and opinions provided within should not be taken as specific advice on the merits of any investment decision by the reader. Investors should conduct their own due diligence regarding the prospects of any security discussed herein based on such investors’ own review of publicly available information. Clients of Sandbox Financial Partners may maintain positions in the markets, indexes, corporations, and/or securities discussed within The Sandbox Daily. Any projections, market outlooks, or estimates stated here are forward looking statements and are inherently unreliable; they are based upon certain assumptions and should not be construed to be indicative of the actual events that will occur.