In this town we call home
Everyone hail to the pumpkin song
In this town, don’t we love it now?
Everybody’s waiting for the next surprise
“This is Halloween,” Disney’s The Nightmare Before Christmas
In Orlando, there are two large Halloween events that happen every year at the town’s theme parks (fortunately for Weekly Edge readers, there is an Orlando expert on the investment team).
The first is Disney’s “Mickey’s Not-So-Scary Halloween Party”. It is a happy, sugar-high of a kids party, filled with smiling Jack-O-Lantern’s, fake fall foliage (it remains in the high 80s in the House of the Mouse), and only the smallest dose of spooky.
The second is Universal’s “Halloween Horror Nights”, and it will scare the socks off even the bravest of attendees. This terrifying event of nightmare-inducing haunted houses is filled with the most horrific “scare actors” jumping out behind corners and chasing you down the street with fake chainsaws (this is actually real).
After another tumultuous week in markets, we wonder which Halloween event the equity market is attending this year.
To answer this question, we will look at the underlying dynamics of the market and bucket them into these two Horror-Nights or Not-So-Scary dynamics.
1. Thursday’s Oversold Was Not Enough to Support a Bounce, While We Have Decisively Broken Below the 200-day Moving Average: After becoming slightly oversold on Thursday (moving too far, too fast to the downside), the S&P 500 tried to bounce Friday, only to face heavy selling late in the day.
This week has led to a decisive break below the 200-day moving average and important support ~4,200, meaning the next level of key support is ~4,000, which is also the 200-week moving average (or 999 day moving average below, with a good Disney’s Haunted Mansion reference there, “we have 999 happy haunts here, but there is always room for one more!”). Note, if the S&P 500 were to drop to 4,000, it would be trading at 16.3x current 2024 Bloomberg consensus earnings of $245/sh, a reasonably cheap valuation (though a debate about the accuracy of these earnings estimates is worthwhile).
The good news is that as of the close on Friday, markets are even more oversold than they were Thursday (using measures like the Relative Strength Index and breadth), which could support a near-term relief rally. The gusto of that bounce will be an important indicator even if we can recover further or are stuck in a short-term downtrend.
Here at NewEdge, we monitor these conditions closely by running our “Flush Check Deck” on days like Friday to take the inevitable emotion out of scary, weak market moments.
S&P 500 With Moving Averages, Including 200-Week (999 Day)
2. Bank Stocks Look Ugly: The S&P 500 Bank index broke down on Friday to a new absolute low for the year, meaning that many banks are trading below their March regional-bank-challenge lows, when fears of wide-spread banking contagion were at their peak. This is despite the Banks index trading at just 0.83x Price/Book, below the March lows and at levels of cheapness not seen since the March 2020 COVID meltdown. This weakness could be amplified by tax-loss selling into year end.
S&P 500 Bank Index Absolute (Top) and Relative to S&P 500 (Bottom)
Equal Weight Consumer Discretionary vs. Consumer Staples with Bloomberg Consensus Forecasts for 2023 and 2024 GDP Household Consumption
3. Despite Healthy Earnings, the Reaction to Earnings Having Been Negative: As can be seen in the table and corresponding chart below, despite some healthy beats to earnings estimates, the price reaction of S&P 500 sectors has been broadly negative. Stocks have been “spooked” by a small data point in results or guidance, responding with sharp sell-off’s for what might have been considered solid results in prior quarters. The percentage of beats on earnings is coming in below the 75% long run average (FactSet), at only 67% of companies beating estimates.
4. Cyclicals Breaking Down, Including the Important Discretionary vs. Staples Ratio: This week we saw cyclical sectors, like Industrials, trade poorly despite healthy earnings results. We also saw a breakdown in our must-watch Equal Weight Discretionary vs. Staples ratio. Both measures weakening could be signaling that either we are at peak growth (given this week’s 4.9% 3Q23 GDP growth!) or entering a period of heightened growth concerns (after growth estimates have been revised higher throughout 2023).
S&P 500 Industrials Index Absolute (Top) and Relative to S&P 500 (Bottom)
Not-So-Scary Dynamics (or at least mildly encouraging)
1. Despite Making New Lows, Fewer Names are Trading Below Their 50-Day, a Good Divergence: breadth, or the number of stocks in uptrends, has weakened materially in recent months. We will monitor closely the number of names trading below their 50-day as a sign that the index is getting “washed out” (the proverbial throwing the baby out with the bathwater). One interesting point to note is that, even though the S&P 500 is at new lows for this correction, the number of names below their own 50-day is not a new lows. A divergence to watch.
S&P 500 (Top) and % of Issues Trading Below Their 50-Day Moving Average (Bottom)
2. At Least the Average Stock is Now Cheap: The average stock, as measured by the equal weight index, has been weak enough that it now trades at just 14.3x forward earnings. This is just one multiple turn above the October 2022 lows, as well as the December 2018 lows. Of course, being cheap is not enough to drive better performance, and there are many companies within the S&P 500 that are facing mounting headwinds, from waning demand and/or swelling interest costs from higher-for-longer rates. This suggests a wide dispersion between winners and losers in this equity market, a characteristic that we typically experience in the later stages of the economic cycle (a dynamic we will explore in next week’s Weekly Edge!).
Overall, there is reason to believe that this equity market has been visiting both Orlando Halloween events this. We will continue to monitor these dynamics closely for signs about the next steps for the market into year-end and 2024.
Top Points of the Week
By Austin Capasso and Ben Lope
1. Global Equities Lower – Global equities moved down for a second week in a row. Within the US, the selloff saw most major indices down over 2% on the week. International stocks fared slightly better, with developed market equities decreasing by slightly less that emerging market equities.
2. Treasury Yields Move Lower – Following an increase in yields on longer dated Treasury bonds last week that saw the 2-10 year Treasury yield curve become significantly less inverted, this week yields on 2 and 10-year Treasury bonds each decreased by 10-15bps, leaving the degree of yield curve inversion relatively unchanged. The yield on 10-year Treasury bonds remains just above 5%, a level that prior to this year had not been seen since 2006.
3. Oil Prices Decrease Slightly – Despite the intensifying conflicts in the Middle East, oil prices ended the week slightly lower, with Brent crude dropping just below $90/bbl. Market participants remain jittery, as the widescale start of an Israeli ground invasion in Gaza could spark anger in some of the region’s largest oil producing countries. These countries are mostly Arab and could reduce their production or supply of oil as a sign of their displeasure with Israeli and US actions or policy.
4. US Q3 GDP Comes in Stronger Than Expected – The US GDP reading for the third quarter came in higher than expected at 4.9% versus the 4.7% forecast. The real uptick in the report was seen in personal consumption, which increased 4% for the quarter after rising just 0.8% last quarter. Despite this surprising result, markets stayed relatively muted in reaction.
5. US Core PCE Displays Resiliency of US Consumer – September’s US Core Personal Consumption Expenditures Price Index (PCE) reading, which is the Fed’s key measure of inflation, came in as expected at 0.3%. Although the reading came in slightly lower than last month, it seems inflation is having a tough time moderation. This underscores the strong underlying momentum of the economy and may require investors to put a Fed rate hike back into play.
6. US Consumer Sentiment Decreases in October – US Consumer Sentiment, as measured by the University of Michigan’s Survey of Consumers, fell to 63.8 in October from 67.9 in September. The survey director noted that the decline “was driven in large part by higher-income consumers and those with sizable stock holdings, consistent with recent weakness in equity markets.” Perhaps worryingly for the Fed, which seeks to keep inflation expectations anchored, one-year inflation expectations rose from 3.2% to 4.2% between September’s survey and October’s survey, and five-year inflation expectations increased from 2.8% to 3.0%.
7. Kevin McCarthy Out, Mike Johnson In – Republican Mike Johnson was sworn in as the 56th speaker of the House yesterday after former Speaker Kevin McCarthy was ousted from the position three weeks ago. We will continue to monitor any implications this may have for markets.
8. ECB Holds Rates Steady – The European Central Bank declined to enact a further increase to interest rates during their meeting on Thursday, holding rates in place for the first time in over one year. Despite the break from a hiking cycle that saw 10 consecutive rate increases, this announcement was not a surprise, as the ECB signaled last month that they were likely to keep rates constant as they assess the policy impacts of previous rate hikes. Eurozone inflation has moved down markedly over this hiking cycle, from above 10% at one point down to last month’s reading of 4.3%, but still remains above the central bank’s 2% target.
9. Earnings Recap: “Magnificent 7” Names – This week saw some members of the “Magnificent 7” report earnings: Microsoft (MSFT), Google (GOOGL), META (META), and Amazon (AMZN). Overall, it has been a tough week of performance for these stocks despite posting solid earnings results. The equal weighted basket of these seven companies is now off 12% over the past two weeks and off 13% since peaking in July. Valuations for the group have come down significantly, now at 29x FP/E vs 38x a few months ago. Seems the tougher earnings environment is starting to show.
10. The Week Ahead – We continue third quarter earnings with anticipated reports from McDonald’s (MCD), Advanced Micro Devices (AMD), and Apple (AAPL). With regards to economic news, it will be a huge week of data. We will get a look into consumer confidence, jobs data, and manufacturing and services data. The most watched day will be Wednesday, where the Fed will declare their decision on interest rates and Jerome Powell will speak about the current stance of the Fed.
Abbreviations/Definitions: Brent blend: a blend of crude oil extracted from oilfields in the North Sea between the United Kingdom and Norway. It is an industry standard because it is “light,” meaning not overly dense, and “sweet,” meaning it’s low in sulfur content; Core PCE: personal consumption expenditures prices excluding food and energy prices; Forward price-to-earnings (FP/E): a version of the ratio of price-to-earnings (P/E) that uses forecasted earnings for the P/E calculation; Relative Strength Index (RSI): a technical indicator intended to chart the current and historical strength or weakness of a stock or market based on the closing prices of a recent trading period; University of Michigan Consumer Sentiment Index: a survey of personal consumer confidence in economic activity, which is used to estimate future spending and saving.
Index Information: All returns represent total return for stated period. S&P 500 is a total return index that reflects both changes in the prices of stocks in the S&P 500 Index as well as the reinvestment of the dividend income from its underlying stocks. Dow Jones Industrial Average (DJ Industrial Average) is a price-weighted average of 30 actively traded blue-chip stocks trading New York Stock Exchange and Nasdaq. The NASDAQ Composite Index measures all NASDAQ domestic and international based common type stocks listed on the Nasdaq Stock Market. Russell 2000 is an index that measures the performance of the small-cap segment of the U.S. equity universe. MSCI International Developed measures equity market performance of large, developed markets not including the U.S. MSCI Emerging Markets (MSCI Emerging Mkts) measures equity market performance of emerging markets. Russell 1000 Growth Index measures the performance of the large- cap growth segment of the US equity universe. It includes those Russell 1000 companies with relatively higher price-to-book ratios, higher I/B/E/S forecast medium term (2 year) growth and higher sales per share historical growth (5 years). The Russell 1000 Value Index measures the performance of the large cap value segment of the US equity universe. It includes those Russell 1000 companies with relatively lower price-to-book ratios, lower I/B/E/S forecast medium term (2 year) growth and lower sales per share historical growth (5 years). The BBB IG Spread is the Bloomberg Baa Corporate Index that measures the spread of BBB/Baa U.S. corporate bond yields over Treasuries. The HY OAS is the High Yield Option Adjusted Spread index measuring the spread of high yield bonds over Treasuries.
Sector Returns: Sectors are based on the GICS methodology. Returns are cumulative total return for stated period, including reinvestment of dividends.
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