Breadth undermines confidence in market's advance, plus no love for stocks, waiting on pullbacks, and a timely update on the consumer
Breadth undermines confidence in market's advance, plus no love for stocks, waiting on pullbacks, and a timely update on the consumer
The Sandbox Daily (6.18.2024)
Welcome, Sandbox friends.
Happy Fibonacci Day to all math nerds who celebrate 6/18!
Nvidia toppled Microsoft and Apple to become the largest company by market cap in the world, the U.S. Surgeon General called on Congress to require warning labels on social media platforms, a massive heatwave is sweeping across the United States, and the Boston Celtics raised banner 18 last night.
Quick programming note before we get started: U.S. markets will be closed on Wednesday in observance of Juneteenth, so The Sandbox Daily will be back with regularly scheduled programming on Thursday 6/20. As such, today’s report runs a little long to hold everyone over.
Today’s Daily discusses:
breadth undermining confidence in the market’s advance
no love for stocks
waiting for pullbacks
consumer concerns? retail sales weaker than expected…
Let’s dig in.
Markets in review
EQUITIES: S&P 500 +0.25% | Russell 2000 +0.16% | Dow +0.15% | Nasdaq 100 +0.03%
FIXED INCOME: Barclays Agg Bond +0.36% | High Yield +0.31% | 2yr UST 4.718% | 10yr UST 4.219%
COMMODITIES: Brent Crude +1.35% to $85.39/barrel. Gold +0.65% to $2,344.2/oz.
BITCOIN: -2.14% to $65,103
US DOLLAR INDEX: -0.05% to 105.267
CBOE EQUITY PUT/CALL RATIO: 0.62
VIX: -3.53 % to 12.30
Quote of the day
“If you put the federal government in charge of the Sahara Desert, in 5 years there’d be a shortage of sand.”
- Milton Friedman
Breadth undermining confidence in the market’s advance
With the Technology sector and semiconductor stocks (aka the modern-day “transports”) leading the way, narrow leadership seems to be the defining characteristic of this bull run following 2022’s nasty bear market.
The market just keeps grinding higher, and yet, not all stocks are seeing the same gains. Despite the S&P 500 returning +15% year-to-date and minting 31 new all-time highs this year (!!), some investors might not be achieving the same results, unless you own market-cap weighted index funds or the right basket of large tech stocks.
Michael Batnick shared a chart today that really jumped off the page; see below. Just 17% of stocks within the S&P 500 index are outpacing the benchmark itself over the last month, which is the worst reading over the past 10 years… by a landslide.
You own the winners? Great!
You own the other 83%? Probably not feeling so hot.
Bespoke Investment Group also shared some eye-opening stats highlighting this narrowness of leadership.
Over the last 4 weeks (20 trading days), there have been 7 days in which the S&P 500 closed green on the day, yet there were more stocks down than up on the trading day. Since 1990, we’ve only experienced 4-week stretches of weak breadth like this on 4 occasions, once during August 2020 but the other 3 times occurring over 20 years ago. So, this market behavior is truly unique for all investors.
This narrowness is not limited to just recent trading either, but key fundamentals that value investors, macro funds, and mechanical trading strategies care about as well.
Take the market multiple, for example. This chart from J.P. Morgan crystallizes how much the top 10 stocks by market cap are distorting the valuation of the market.
It’s popping up with earnings, too. After getting their butts kicked in 2022, the Magnificent 7 has roared back in 2023 and 2024, delivering the lion's share of EPS growth for the market.
It’s not all bad, to be clear.
9 of the 11 sectors are trading above their 50-day moving averages (DMA), earnings estimates are expected to broaden in its 2nd year of recovery, and the consumer remains in decent shape.
Much of this breadth discomfort simply arises from the type of strategies that investors use in their personal portfolio. What it does not mean is the market cannot rise higher from here or that it’s “unhealthy.”
Source: The Irrelevant Investor, Bespoke Investment Group, J.P. Morgan Guide to the Markets, Ned Davis Research
No love for stocks
This week, J.P. Morgan’s poll of its institutional clients showed that investors continue to express their forward view on stocks with weak hands, specifically light on equity allocations and risk-taking for new cash to put to work.
The current reading is nearly the lowest in the past 3 years.
This seemed to spark a lively debate on Twitter.
Source: J.P. Morgan Markets
Waiting for pullbacks
As with many things in life, knowing what we’re supposed to do and actually doing it are two separate things. This is true for our health, relationships, careers, and of course, our finances.
When it comes to investing, it’s well known that staying invested is a key tenet to achieving long-term financial goals. However, this is often easier said than done, especially when market and economic outlooks are uncertain, as they have been for many years.
Many investors often feel more comfortable putting on a trade or adding to an existing position after “waiting for the pullback,” however history often shows that getting into the market sooner than later often pays.
As the chart below shows, waiting for a better time to buy or trying to “buy the dip” has tended to backfire. Since the market tends to rise over time and can rebound unexpectedly, even the worst timing is often better than being out of the market.
For example, an investor waiting for a 5% pullback before investing would, on average, have waited 291 days. Even though 5% or worse pullbacks do occur 3-4x per year, the fact that the market rises over time means that there are often “higher lows” – i.e., the next dip is higher than before. Historically, markets have gained a whopping 13% during these periods, a figure which includes the pullback itself.
Source: Clearnomics, Ryan Detrick
Consumer concerns? Retail sales weaker than expected.
Retail Sales – an important and closely watched economic metric that tracks consumer demand for goods – came in weaker than expected for May, edging slightly higher by +0.1% on the month but below the consensus estimate of +0.2%.
On a smoothed YoY basis, Retail Sales is up +2.0%, about the same as in the prior month and range-bound over the past year.
The “Core Control” sales group, which strips out volatile categories such as motor vehicles & parts, building materials, and gasoline — and is included in the formula to determine GDP because it’s a more consistent and reliable reading of the economy — was up +0.4% in May and in line with expectations.
It’s important to remember that a key driver of overall spending is inflation.
While overall Retail Sales are up +2.0% in the last year and sit at record highs unadjusted for inflation, “real” (inflation-adjusted) Retail Sales are down -1.2% in the last year and have remained stagnant for nearly two years after peaking in April 2022.
It’s been 40 years since the U.S. had an inflation problem, so investors should be aware that it can distort the data.
So, what are the takeaways from today’s report?
The booming consumer may be behind us, as we’ve witnessed a decided deterioration in consumer spending over the past few months.
Josh Brown believes the consumer isn’t dying, just that they’re making more deliberate choices.
This is confirmed by what corporate America has been telling us. For instance, 1st-quarter sales from many large retailers showed little to no growth. The consumer is still buying, but they’re just not buying at the same pace as two years ago.
Economic data like Q1 GDP further confirms that personal consumption is slowing.
The recent University of Michigan Consumer Sentiment Survey followed suit as it was much weaker than expected.
Compared to earlier in this cycle, Retail Sales growth has moderated as the boost in pandemic-related excess savings has come down, compounding inflation remains an issue, credit usage is rising, and wage growth has eased.
Also, we should not discount that irregular post-pandemic consumption behaviors are finally normalizing and consumers no longer have the means or desire to overspend.
But, consumers are not down and out, as continued payrolls growth and low unemployment continue to support income and spending growth, even if it’s at a reduced pace.
Source: Piper Sandler, Axios, Barron’s, Advisor Perspectives, Charlie Bilello
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.