The Bear Thread

A Summer Swoon in Trendy Tech


Returns in the stock prices of technology companies have cooled as of late, marking a sharp change from the experience of the previous year. Performance to date in the third quarter of 2024 is listed below for the so called ‘Magnificent 7,’ and the data show a significant slowdown compared to recent history. An equal weight portfolio of the selected stocks would have returned -0.04% thus far in the third quarter, according to FactSet data, much lower than the year leading into this quarter which showed a gain of +54.72%.



Investors are tasked with forecasting the future earnings potential of each company and appropriately discounting to today’s value. With a clear slowdown in stock returns, investors may be anticipating a slowdown in fundamental growth. It may serve investors well to revisit some of the headlines that affected the sector during this quarter.

The emergence of Artificial Intelligence (AI) in late 2022 has catalyzed much of the positive returns in technology stocks. However, investors got their first glimpse that growth is potentially limited during this quarter. During Alphabet’s quarterly earnings call, CEO Sundar Pichai noted that “the risk of underinvesting [in AI technology] is dramatically greater than the risk of overinvesting for us.” For those skeptical of the AI-fueled gains, it gave a reason to suspect that some of the largest tech companies are at least cognizant of potentially overinvesting and that future growth may not be as high as currently anticipated. It’s noteworthy to highlight that Nvidia stock declined roughly 25% from the day those comments were made by Mr. Pichai on July 23rd to an intraday low on August 5th.

For the investor believing AI is indeed catalyzing a generational technology refresh, there are reasons for optimism. Data from Google Trends, pictured below, shows that search activity for “ChatGPT” reached an all-time high just this week. ChatGPT, one of the first and most well-known Large Language Models (LLMs) continues to dazzle users with new features and propel its popularity to new highs, with a new model released just this past week. It serves as a stark reminder that innovation and rapid product releases are one of the hallmarks of investing in technology companies.



Future usage of LLMs, such as ChatGPT, may get another boost to growth with the release of the iPhone 16 and the associated integration with LLMs. DemandSage estimates that ChatGPT saw 200 million weekly active users in July 2024, an impressive feat for such a young company.1 But it may be only Act 1, to borrow a phrase. ChatGPT’s integration into the Apple ecosystem, such as becoming the preferred LLM on iPhones, may open the application to a market of over 1 billion active devices. A connection to these cutting-edge applications with less friction may mean a surge of new users could be just over the horizon.

While the third quarter of 2024 has provided technology investors with lackluster returns compared to recent history, investors are tasked with assessing the current growth landscape. Executives have become cognizant of overspending and overinvesting in such pricey technology. Yet, usage continues to grow and hit new highs among ChatGPT, due both to advancing capabilities and a broader set of distribution lines for users to gain access with. Investors may be well served to look at growing usage among new technologies and assess if these trends continue.

 

September Quarterly Options Expiration Week Dodgy, Week After Dreadful



Since the S&P index futures began trading on April 21, 1982, stock options, index options as well as index futures all expire at the same time four times each year in March, June, September, and December. September’s quarterly option expiration week has been up 54.8% of the time for S&P 500 since 1982. DJIA and NASDAQ have slightly weaker track records with gains 52.4% of the time and 52.4% respectively.

However, the week has suffered several sizable losses. The worst loss followed the September 11 terrorist attacks in 2001. In the last twenty-one years, S&P 500 and NASDAQ are tied for best record during September’s quarterly option expiration week, up thirteen times, but NASDAQ has been down the last six straight. Friday had been firm with all three indices advancing every year 2004 to 2011, but S&P 500 has been down 11 of the last 12 and NASDAQ has been down 10 of the last 12 since.

S&P 500 Down 27 of 34 Week After September Quarterly Options Expiration, Average Loss 1.06%

The week after September options expiration week, has a dreadful history of declines most notably since 1990. The week after September quarterly options expiration week has been a nearly constant source of pain with only a few meaningful exceptions over the past 34 years. Substantial and across the board gains have occurred just four times: 1998, 2001, 2010 and 2016 while many more weeks were hit with sizable losses. In 2022 DJIA and S&P 500 declined over 4% while NASDAQ fell 5.07%.

Full stats are the sea-of-red in the tables here. Average losses since 1990 are even worse; DJIA –1.09%, S&P 500 –1.06%, NASDAQ –1.06%. End-of-Q3 portfolio restructuring is the most likely explanation for this trend as managers trim summer holdings and position for the fourth quarter.

 

Best and Worst Performers Since 8/5
Thu, Sep 19, 2024

The large-cap S&P 500 and Russell 1,000 are both now up more than 10% since the summer low made on August 5th. They're also trading back to new all-time highs today.

Within the Russell 1,000, the average stock in the index is up 10% as well, meaning breadth has been strong. This is different from what we saw in the first half of the year when the mega-caps pretty much drove all of the market's gains.

We've seen some pretty massive moves higher in individual stocks since August 5th. There are 137 stocks in the Russell 1,000 up more than 20% since then (just 32 trading days), and there are 21 stocks up more than 40%. Below is a list of those 40%+ gainers.

As shown, buy-now-pay-later stock Affirm (AFRM) is up the most since 8/5 with a gain of nearly 88%. App-maker AppLovin (APP) is up the second-most at +83.8%.

Language-learning app Duolingo (DUOL), online real estate search site Zillow (ZG), and fast-casual Mediterranean menu company Cava (CAVA) round out the top five with gains of more than 56%.

Other notables on the list of big winners recently include Palantir (PLTR) with a gain of 53%, Five Below (FIVE) at +45.4%, SharkNinja (SN) at 44.9%, and RH at 41.1%.



While more than 87% of stocks in the Russell 1,000 are up since 8/5, there are 123 stocks that are in the red, including the 26 listed below that are down more than 10%.

Trump Media (DJT) is the Russell 1,000 stock down the most since 8/5 with a drop of 44.7%. Wolfspeed (WOLF), elf Beauty (ELF), New Fortress (NFE), and Dollar General (DG) round out the list of the five biggest losers, and other notable names on the list include Dollar Tree (DLTR), Sirius (SIRI), Celsius (CELH), Moderna (MRNA), Walgreens Boots (WBA), Ally Financial (ALLY), and Birkenstock (BIRK).



Below is a look at the average performance of Russell 1,000 stocks since 8/5 broken out by sector. Four sectors have seen average gains in a tight range between 12.3-12.8%: Real Estate, Technology, Financials, and Consumer Discretionary. On the weaker side, the average Energy stock is up just 3.1% since 8/5.



Below is a look at the average year-over-year percentage change of Russell 1,000 stocks by sector. Over the last year (since 9/19/23), the average Russell 1,000 stock is up 23.8%, but stocks in the Financials sector have done by far the best with an average gain of 34.5%. Notably, the AI-heavy Technology sector ranks third behind Financials and Industrials. Energy stocks, on the other hand, are only up an average of 1.9% YoY.

 

Utilities Reacting to Reactor News
Fri, Sep 20, 2024

Although the S&P 500 finished in the red on the day, there is one sector reaching fresh 52-week highs: Utilities. The Utes are one of only two sectors higher today (the other being Communication Services), and its leadership is by a wide margin. Whereas Communication Services is only up 0.17%, the Utilities sector is flying with a 2.58% gain.



That big gain is thanks to news that Constellation Energy (CEG) will sell power to Microsoft (MSFT) in order to power its data centers. To generate that power, CEG will be restarting one of its nuclear reactors at Three Mile Island in Pennsylvania. As shown below, given the news, CEG is the top performer in the sector today with an impressive 21% gain. Vistra (VST) has also benefitted and is up 14.3%. Those two stocks are now top performers on the year with total returns of 79.35% for CEG and 142.2% for VST. Of course, the Utilities sector is often considered an income friendly area of the market, but the surges in the price of CEG and VST have dramatically lowered their yields below 1%. That compares to an average yield of over 3% for all members of the sector. The only other Utilities stock with a lower yield is PG&E (PCG) which recently reinstated its dividend after a few rough years dealing with the fallout of being to blame for wildfires in the back half of the 2010s.



As previously mentioned, Constellation Energy (CEG) is at the center of attention today. As shown below, the over 20% gain today erased all of the declines since the spring, leading to a fresh record high. Additionally, today's gain is the largest one on record since the stock's inception following a spinoff of Exelon (EXC) in 2021.



Vistra (VST) has likewise returned to new all time highs on today's surge, surpassing the previous record close from this past May. The 14.5% single day gain as of this writing is remarkable as there is only a single time that the stock rose by more, and that was on July 31st when it rose 14.8% as news of higher energy prices bolstered the Utilities sector.

 

October is Worst Month in Election Years



“Octoberphobia” has been used to describe the phenomenon of major market drops occurring during the month. Market calamities can become a self-fulfilling prophecy, so stay on the lookout. October can evoke fear on Wall Street as memories are stirred of crashes in 1929, 1987, the 554-point DJIA drop on October 27, 1997, back-to-back massacres in 1978 and 1979, Friday the 13th in 1989 and the 733-point DJIA drop on October 15, 2008. During the week ending October 10, 2008, DJIA lost 1,874.19 points (18.2%), the worst weekly decline, in percentage terms, in our database going back to 1901. March 2020 now holds the dubious honor of producing the largest and third largest DJIA weekly point declines.

However, October has been a turnaround month—a “bear killer” if you will, turning the tide in thirteen post-WWII bear markets: 1946, 1957, 1960, 1962, 1966, 1974, 1987, 1990, 1998, 2001, 2002, 2011 (S&P 500 declined 19.4%), and 2022. Only 1960 was an election year. While not in an official bear market this year, the market has recently endured bouts of seasonal weakness this year in early August and at the beginning of September. Despite the current Fed-rate-cut fueled rally, another round of weakness ahead of Election Day cannot be ruled out entirely.



Election-year Octobers rank dead last for DJIA, S&P 500 (since 1952), NASDAQ (since 1972) and Russell 1000. For Russell 2000 (since 1980) election year Octobers rank #11, March is worst. Eliminating gruesome 2008 from the calculation provides a little relief, as rankings improve at most two steps (DJIA). Should a meaningful decline materialize in October it may be an excellent buying opportunity, especially for any depressed technology and small-cap shares.

 

Octoberphobia Intensifies in Election Years



Election year Octobers rank dead last for DJIA, S&P (since 1950) and NASDAQ (Since 1971). Uncertainty ahead of Election Day can intensify Octoberphobia into a self-fulfilling prophecy, which can produce heightened volatility and market setbacks October is infamous for.

Over the last twenty-one years (2003-2023), the full month of October has been a fairly solid month for the market, ranking #4 for DJIA, S&P 500 and NASDAQ, #5 for Russell 1000 and # 6 for Russell 2000. All have logged average gains ranging from 0.8% by Russell 2000 to 1.5% by NASDAQ. But these gains have been accompanied by volatile trading, most notably during the early days of the month.

October has historically opened softly with modest average gains on its first trading day. On the second day, all but Russell 2000 have been weak followed by a rebound on the third trading day before additional weakness pulled the market lower through the seventh or eighth trading day. At which point, the market has historically found support and begun to rally through mid-month and beyond.

In election years since 1950, October has been weak from the start with some strength around mid-month followed by a second wave of weakness before rallying to the finish with a loss. Steep declines in October 2008 do influence the pattern, but weakness persists even when 2008 is excluded.

 

October Volatility After Big Gain First Three Quarters



Catalyzed by port strikes, escalating hostilities in the Mideast and uncertainty ahead of the election Octoberphobia strikes again. Cue “Spooky” by the Atlanta Rhythm Section. Perhaps it’s not a coincidence that these types of events also have history of transpiring in October. With the attention focused on Israel and Iran we are concerned the world may be exposed to some new mayhem from Putin, China or other bad actors.

The history of years with gains of this magnitude at this juncture in the year with solid Q3 and September upside performance for the most part have been followed by more bullish market behavior and a continuation of the rally. But as you can see in the table of S&P 500 Performance Following Big Q3 Year-to-Date Gains the bulk of any damage occurred in October.

Of the top 30 S&P 500 9-month gains since 1930 all 30 years ended higher with average gains of 25.9%. Q4s were up 24, down 6, average gain 4.6%. Octobers were up 15, down 15 with an average gain of 0.01%. Of the most recent 12 occurrences October is down 7, up 5 with an average loss of -1.1%, which includes the Crash of 1987 and a -21.8% loss for October 1987.

 

Time Sell Rosh Hashanah!



Time Sell Rosh Hashanah!

Happy New Year! Sell Rosh Hashanah, Buy Yom Kippur is set up again this year with the market coming under pressure on the heels of fresh highs and the best 9-month start since 1997. Uncertainty ahead of a tight presidential election race, heightened Mideast tensions and dockworkers striking are poised to exacerbate October’s scary history.

Rosh Hashanah is tomorrow 10/3 this year and Yom Kippur falls on Saturday 10/12. Our stats use the close the day before. This is right in the teeth of October volatility, especially in election years. S&P is down 31 of 53 years from Rosh Hashanah to Yom Kippur with an average loss of -0.4% since 1971. But it’s up 38 of 53 for an average gain of 6.7% from Yom Kippur to Passover.

The thesis is that folks sell positions on Rosh Hashanah the first of the Days of Awe to rid themselves of financial commitments and then return to the market after Yom Kippur, the Day of Atonement. It is no coincidence that this coincides with seasonal October weakness.

 

Insurance Cost Concerns Surging
Tue, Oct 8, 2024

Within the NFIB's Small Business Optimism report, the survey also provides a look into what firms are seeing as their biggest challenges each month. In September, inflation once again came in at top of mind with 23% of businesses reporting this as their biggest issue. Quality of labor and taxes were the two next most common concerns and the only others that single-handily accounted for double-digit shares. Of those, quality of labor saw a particularly large 4 percentage point drop last month.



As mentioned above, taxes were the third most common response in September at 14%. That was up slightly from 13% the month prior. Government requirements and red tape also rose a percentage point and combined the two problems made for 23% of responses. As the election closes in, that is actually a relatively small increase in these concerns as other indicators like the Economic Policy Uncertainty Index have surged.



At a combined 23%, government-related concerns on a combined basis equal the share of businesses reporting inflation as the biggest problem. As mentioned previously, inflation responses were lower month over month. Additionally, current levels are much lower than they were at the peak a couple of years ago. That said, current levels also remain very elevated historically, remaining in the upper decile of readings.



Factoring other categories that can be inflationary-adjacent, the picture changes slightly. One interesting area that has seen a surge recently is the cost or availability of insurance. That index is up to 8% of responses versus only 3% three months ago. That is the most elevated reading since the August 2021 spike to low double digits. Although that is the highest reading in a few years, this problem is not yet elevated from a longer-term historical perspective with September's reading actually matching the historical median. Furthermore, combining a range of expense-related categories (inflation, cost of labor, and cost/availability of insurance) shows that there has been an uptick in cost concerns over the past few months, but things aren't quite as bad as they were a couple of years ago.



Speaking of cost of labor, the combined share of businesses reporting cost or quality of labor as their biggest problem has continued to trend lower, consistent with a cooling labor market. With September's reading coming in at 26%, it was the lowest reading since the spring of 2020.

 

Small Businesses Fearing the Election
Tue, Oct 8, 2024

Early this morning, the NFIB published small business sentiment data for September. The Small Business Optimism Index ticked up from 91.2 to 91.5. While stronger, that wasn't as large of an uptick as was expected as the consensus forecast expected an increase to 92.0. Regardless, sentiment remains historically low in the bottom quintile of historical readings back to 1986.



In the table below, we show each category of the report including the previous month's reading, the month-over-month change in index points, and how those rank as a percentile of all periods of the survey's history. Breadth for components to the headline number was slightly positive with five categories rising, two going unchanged, and another three falling month over month. As for other categories, the results were much weaker. Of the non-inputs to the optimism index, only three components were higher versus five that declined. Across indicators, the vast majority are historically low—many ranking in the bottom decile of readings—save for some labor market-related points like Job Openings Hard to Fill, Compensation, and Compensation plans. With that said, those labor indices are also well off highs from recent years, and as we discussed in today's Morning Lineup, the past few months have seen stabilization in these indicators.



Of those indices that saw improvement in September, the largest MoM jump was in expectations for higher real sales. That index jumped from -18 in August to -9 in September. That ties July for the strongest reading of the year, albeit it is also the 33rd consecutive negative reading in this index, a record streak. While sales expectations improved materially, actual sales changes have continued to deteriorate falling 1 point to -17. That ties last November and October for the lowest readings since the pandemic. As actual top-line results have been reported as weaker, actual earnings changes improved from -37 to -34 even as the higher prices index rebounded a couple of points. Granted, even with that improvement, actual earnings changes continue to see some of the weakest readings in this index since the Great Recession.



One other key area of weakness we noted in today's Morning Lineup concerned capex. Both actual and expected capex dropped in September. For plans, the index is down to 19 which is the lowest reading since April 2023 whereas actual capex at 51 hit its lowest since July 2022.



Finally, we would note that an auxiliary index to the report, the Economic Policy Uncertainty Index, is surging. This index tracking small business trepidation concerning economic policy typically rises during presidential election years; at that, those increases are usually far larger than non-election years. However, the 24-point leap over the past year through September is the largest YoY jump for that month of any year in the index's history, Presidential election year or otherwise, and the index itself is now at a record high. As we noted last month (see here and here), the NFIB survey typically has political sensitivities and the increasingly tight presidential race would make sense with that rise in policy uncertainty.

 

October Isn't Just Volatile in the US
Tue, Oct 8, 2024

It was a brutal overnight session for stocks in Hong Kong where the Hang Seng plunged 9.4% after Chinese stocks rallied less than investors had hoped after re-opening from the six-trading session National Holiday. Last night’s decline was the largest one-day decline for the Hang Seng since the depths of the Financial Crisis in October 2008 and before that two days in October 1997. Although stocks in Hong Kong were down sharply during the session, the Hang Seng is still up over 23% from its September low.



As mentioned above, the last four times that the Hang Seng has declined more than 9% in a day occurred in October. Including these four days, eight of the eighteen days that the Hang Seng has declined by more than 9% occurred in October. So while October is the most volatile month of the year for US stocks, the same applies to Hong Kong as well!

To illustrate this another way, the chart below shows a distribution of 5% one-day drops in the Hang Seng since 1964. Of the 132 occurrences, 20 occurred in October, and the next closest month is March with just 14.



October has not only been the champion of 5%+ daily declines, but 5%+ gains as well. Throughout its history, the Hang Seng has gained 5% or more 138 times, and 23 of those occurred in October which is more than 50% greater than the next closest month (November). Overall, October has been home to 43 (15.9%) of the Hang Seng’s 270 daily moves of at least 5%.

 

Election-Year Octoberphobia Hangs Over Market



From one October day to the next, the market seems unable to decide which direction to go. Election-year Octobers going back to 1950 have been the worst month of the year, but in the last 21-years October has been fair ranking #4 for DJIA, S&P 500 and NASDAQ, #5 for Russell 1000 and # 6 for Russell 2000. And then there is October’s history of major market drops occurring during the month, hence Octoberphobia.

At today’s solid close, DJIA, S&P 500, NASDAQ, and Russell 2000 are all still in the red for October and appear to be tracking the typical election-year seasonal pattern. Russell 2000 is struggling the most, down 1.57% as of today. NASDAQ is least negative, down a small 0.03%. S&P 500 and DJIA are respectively off 0.20% and 0.59%. Should the market continue to track past election years, more sideways chop is likely heading into mid-month. A more decisive move lower in the second half of the month, ahead of Election Day, cannot be ruled out.

Geopolitical tensions are at or near the top of the list of market concerns as Israel’s response to Iran’s latest missile attack is still awaited. Last Friday’s much better than expected jobs report has sent the 10-year Treasury yield back above 4% rather effectively quashing expectations of another large Fed interest rate cut. Inflation readings later this week, CPI on Thursday and PPI on Friday, remain important, but barring a wild miss could fail to move the market considering how solid employment data has been.

 

Traders Much Less Enthusiastic Now Versus 2021
Thu, Oct 10, 2024

This week we got an update from the Schwab Trading Activity Index, also called the STAX. We initially covered this data in Tuesday's Closer for subscribers, but we also wanted to highlight it here on Think BIG.

Whereas most investor sentiment readings like the AAII survey directly ask investors how they feel about the market, indicators like the STAX are derived by measuring what retail investors are actually doing in their accounts. In September, Schwab's Trading Activity Index fell to 47.1, which is the lowest reading since January. That drop occurred even though the stock market continued to rally to new all-time highs.

The STAX data dates back to 2019, and as shown below, the index surged in late 2020 through late 2021 during the first post-COVID bull market when Americans were flush with stimulus cash and were actively bidding up pretty much everything that traded! At the time, the STAX index saw record highs with readings above 75 in June and November 2021. November 2021 was ultimately the peak for growth stocks before the bear market of 2022.

Notably, there's a big difference between the STAX reading now versus 2021. The stock market is currently up 60%+ off the late 2022 lows and has registered 44 all-time highs already this year. Similarly, the market was also making a new high after a new high back in 2021. During this year's rally, though, the STAX has remained quite subdued compared to going gangbusters in 2021. This tells us that there's less complacency, enthusiasm, and overall interest in the market right now versus 2021 levels, which is good if you're a long-term bull.



The Schwab STAX index was established in 2019, but before TD Ameritrade's acquisition by Schwab, it had a counterpart index called the Investor Movement Index that featured data dating back over a decade. Standardizing the two indices shows they've had comparable readings with only minor discrepancies. As mentioned earlier, current sentiment levels are much more depressed than at the time of past record S&P 500 highs like in 2020/2021 and 2017. During those periods, these trader activity indices were well over 2 standard deviations above the historical average. Right now, they're basically neutral, meaning retail investors are neither overly bullish or bearish.

 

Helene Spikes Claims
Thu, Oct 10, 2024

It was a busy morning for economic data, and there wasn't much to like at first glance. On top of a hotter-than-expected inflation print, weekly jobless claims came in above expectations on both an initial and continuing basis. The previous week's seasonally adjusted initial claims reading was unrevised at 225K, and this week's reading was expected to tick up to 230K. Instead, claims surged up to 258K matching the high from the week of 8/5/23 for the most elevated reading since 8/17/23. Outside of the extremely elevated readings observed through the pandemic, current levels are some of the highest since the fall of 2017.



On a non-seasonally adjusted basis, claims were up to 234.8K. As shown in the second chart below, claims have generally followed the usual seasonal track this year with declines throughout the first half followed by a brief bump in the summer that reversed until bottoming in the early fall. From September through year-end, claims have historically tended to rise, and that exact result appears to be playing out again.

While a week-over-week increase in the current week of the year is typical (such has been the case 86% of years historically), this week's jump of 53.6K was more than twice as large as the historical average. Furthermore, the last time the comparable week of the year saw as large of an increase was in 2013. In other words, the direction of claims could be expected, but the magnitude of the move was more of a surprise.



Fortunately, most of the big jump in claims this week can be explained. For starters, Michigan alone accounted for 30% of initial jobless claims as it saw an outsized increase with claims more than doubling to 16.27K versus 6.8K the prior week. The report indicated that these were due to layoffs in the manufacturing sector. The even larger contributors to claims were the states affected by Hurricane Helene. In the heatmap below, we show each state's week-over-week percentage change in non-seasonally adjusted initial jobless claims. As shown, those states in the direct path of Hurricane Helene and where the most severe damages occurred like South Carolina, Tennessee, Kentucky, and Florida all saw a massive increase in claims and accounted for more than half of all national claims on a combined basis.

The state with the single largest percentage jump was North Carolina where claims surged 290% WoW. Going back to 1986 when state data starts, the only other times (outside some seasonal blips around year-end) when claims rose as much were the onset of the pandemic, Hurricane Florence in September 2018, and during the recession in September 1990.



To summarize, national jobless claims have deteriorated with the caveat that a significant portion of that damage is weather-related. Below we show the national claims count (adjusted for seasonality) as well as claims excluding those storm-effected states (Florida, North Carolina, Tennessee, and Kentucky) with national seasonal factoring applied. As shown, with or without those storm-hit states, seasonally adjusted claims have risen in the past few weeks. Excluding those states, though, claims wouldn't even be at summer highs let alone some of the highest levels in recent years.

 

The Bull's Biggest Hits and Misses
Mon, Oct 14, 2024

The bull market turned two years old over the weekend, so we wanted to take a quick moment to highlight some of the S&P 500's biggest winners and losers over the last two years. Since the S&P 500's closing low two years ago, 73 stocks in the S&P 500 have rallied at least 100% while just 71 are down. The table below lists the 19 stocks that have rallied at least 200%, and below that we list the 24 stocks that have declined at least 25%.

AI has been a leading theme of the bull market, so most people already know that NVIDIA (NVDA) -- with its ten-bagger -- tops the list in terms of performance. Even the big gains in Super Micro (SMCI) and Vistra (VST) probably won't surprise many people, but looking through the list, some names will likely be eye-openers. Take General Electric (GE). Wasn't that an also-ran from the 1990s? After two decades in a 'penance' working off the financial engineering before 2000 and some questionable leadership and strategic decisions, GE has gotten a new lease after breaking up into three units. Its aerospace unit, which trades under the old ticker GE, has rallied more than 350% during this bull market, and even the two other spin-offs, GE Vernova (GEV), which consists of its electric power business, has doubled, while GE Healthcare (GEHC) is up 50%. Besides GE, other names that may come as a surprise to investors are Royal Caribbean (RCL), Axon Enterprises (AXON), Howmet Aerospace (HWM), and KKR. At the sector level, Technology leads the list with seven of the 19 names listed while Consumer Staples, Energy, Materials, Health Care, and Real Estate aren't represented at all.



Of the 24 stocks that have declined at least 25%, seven come from the Consumer Staples sector, including Walgreens Boots Alliance (WBA) and Dollar General (DG), which are both down over 60%. Health Care is the second most represented sector with six stocks, while Materials is the only other one with more than two stocks on the list. Overall, eight sectors are represented, with Consumer Discretionary, Financials, and Real Estate being the only ones missing.

Moderna (MRNA) and Pfizer (PFE) were two of the biggest winners during Covid as investors couldn't get enough of the stocks given their exposure to the vaccine. Now that Covid is well in the rearview mirror and jabs of the treatment have slowed to a trickle relative to the rates of 2021, investors want little to do with these former market darlings.

The lists of winners and losers during this bull market illustrate the importance of first-mover advantages. In the table above, streaming pioneer Netflix (NFLX) ranked 15th in performance with a gain of 227%. Contrast that to names like Paramount Global (PARA) and Warner Brothers Discovery (WBD) below. In 2021, these companies and others were convinced by NFLX's streaming success that launching their own services would be a breeze. However, as the years have passed, the competitive nature of the streaming market has become apparent. There's a limit to how many services consumers are willing or able to pay for.

 

Octoberphobia? – Not Out of the Woods Yet



Aside from weakness earlier in the month, this October has been rather sanguine. S&P 500 and DJIA have recorded new all-time highs and extended a weekly advancing streak to six in a row. But throughout the month the CBOE VIX index has remained stubbornly elevated around 20 and the 10-year Treasury bond yield has risen back above 4.10% while gold is also trading at new all-time highs.

Although the market did close mixed today, DJIA, S&P 500, Russell 1000 and 2000 were down while NASDAQ recorded a modest advance, today’s trading seems like a reminder that it is still October, and more volatility is not out of the question. At least until after the dust has settled on the presidential election.

Looking at October’s Election Year seasonal patterns compared to 2024 above, this October’s mid-month strength stands out as being well above average while today’s weakness aligns with the beginning of a typical, seasonal pullback in the second half of the month. Market weakness could last through the rest of this month before bouncing back during the final week of October.

 

Bullish November Has Weak Points

The first five or six trading days are bullish followed by weakness into the week before Thanksgiving. Stocks exhibit the greatest strength at the beginning and end of November. Recent weakness around Thanksgiving has shifted DJIA and S&P 500 strength to mirror that of NASDAQ and Russell 2000 with most bullish days at the beginning and end of the month.

 

Election Week Trading Stats. Meh.

Trading during presidential election week has been underwhelming over the years. Here are the data. My previous post of November market performance chart shows the bulls don’t usually take charge until the latter part of November.

 

Small Business: Poor Sales and Politics
Tue, Nov 12, 2024

Early this morning, the NFIB updated their latest gauge on small business sentiment. The headline number came in at 93.7 this month compared to a lower number of 91.5 last month. That was a larger than expected uptick as it was forecasted to only rise to 92. At current levels, the index remains in the bottom quartile of its historical range, but it's tied with this past July for the strongest reading since February 2022.



In the table below, we show each category of the report including non-inputs to the Optimism Index. We show this month's reading, last month's reading, and the month over month change in addition to how each of those rank as a percentile of all periods. As shown, improvements were broad in October with no inputs to the Optimism Index falling and many of those MoM gains ranking in the upper quintile of monthly changes or better. Breadth was a bit weaker for indices that are not inputs to the Optimism Index. For example, higher prices was lower, although that can be considered a good thing.



Even though the release showed most categories moving higher, overall it was somewhat of a mixed bag. As we discussed in today's Morning Lineup, labor readings are weak but showing some signs of stabilization. When it comes to many demand gauges, as shown below, outlook for general business conditions remains negative as has been the case for a record span of almost four years running (47 straight months). Granted, October saw the best reading since the 2020 election (this survey's political sensitives discussed in more detail below). Meanwhile, the share of firms reporting now as a good time to expand their business is still very low historically, albeit picking up to 6%. Elsewhere in outlook/expectations indices, sales expectations have rebounded significantly but remain negative.

Those weak but improving expectation indices contrast with much weaker readings for actual sales and earnings. Actual sales changes continue to plummet reaching a new low of -20 in October. The only periods in which this was lower was the depths of COVID and during the Financial Crisis years. Actual earnings changes moved higher for a second month in a row, but current levels are likewise some of the worst on record. As for inflation, the higher prices index is no longer falling at the same pace as yesteryear having stabilized around still historically elevated levels.



The NFIB has some auxiliary data within the report that surveys businesses reporting lower earnings on the reason for such a response. Weak actual sales are again reflected here. The share of businesses reporting sales volumes as the cause for lower earnings jumped to 16%. That matches last November for the highest reading since March 2021 and unseats increased costs for the number one reason. While increased costs are no longer the most common response, the reading is still well above pre-pandemic norms and has been mostly flat over the past few years.



More broadly in response to the question posed to all businesses of what is their most important problem, 9% of firms reported poor sales. That reading has been trending higher and is now the most elevated since March 2021. While poor sales is rising, other issues like inflation (23%), quality of labor (20%) and taxes (16%) all rank higher at the moment.



Circling back on expansion outlooks, again a historically low share of firms see now as a good time to grow. As shown below, economic conditions are far and away the most common reason given for this outlook. However, the next most common reason is political climate. As we often note including in today's Morning Lineup, one downside to the NFIB data is consistent sensitivity to politics.



In the chart below, we show the combined share of businesses reporting politics as their reason for a negative or uncertain expansion outlook. As shown, this reading has tended to rise sharply ahead of an election. After Trump won in 2016, this measure dropped sharply while the opposite played out in 2020 when Biden was elected. This go around, it has again risen into the election, but since Trump has won, it will likely head lower (maybe even dramatically so) in the next report. It also wouldn't be surprising to see this sort of positive turnaround in other categories of the report.