Leading Economic Index Joins The "V-Shaped" Data Recovery

Last week the Conference Board released their report on the Leading Economic Index (LEI) along with data on the Coincident Economic Index (COI). The LEI rose 2.8% in May after falling 7.5% in March and down 6.1% in April. The report notes the improvement in unemployment insurance claims accounts for about two-thirds of the LEI improvement. With consumers representing a large part of the economy, an improvement in the job market is important. Three of the ten components that go into the LEI calculation are suggesting weaker economic conditions, one being the new orders component. The Coincident Indicator rose 1.1% after falling 2.2% in March and down 10.4% in April. In evaluating the ratio of the LEI to the COI, one can clearly see the "V-shaped" rebound occurring with this data metric. A trend reversal with this ratio tends to occur as the economy looks to be recovering.

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Individual Investors Expressing Equity Market Skepticism

Individual investors continue to express a low level of enthusiasm for stocks if the AAII sentiment survey is any indication. Today's AAII Sentiment Survey report noted individual investor bullish sentiment declined 9.9 percentage points to 24.4% with most of the decline showing up in the bearishness reading which increased 9.7 points to 47.8%. The bull/bear spread now stands at a wide -23.4 percentage points.

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Market Telegraphing A 'V-Shaped' Economic Recovery?

If one is only looking at the stock market, that is the S&P 500 Index, a 'V-shaped' recovery has unfolded off the March 23 low. Not too many expected this type of recovery as the virus/lockdown induced contraction was underway. However, on a price only basis, the S&P 500 Index is up 43.34% since the low on March 23.

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Individuals Save In April With Many Businesses Shutdown

Last Friday's April Personal Income and Outlays report from U.S. Bureau of Economic Analysis reported a significant month over month increase in personal income, up 12.9% and a dramatic increase in savings as a percentage of disposable income, up 33.0%. At the same time the income and outlays report showed a significant decline in personal consumption expenditures (PCE), down 13.2%.

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Negative Interest Rates And The Impact On Investor Investment Choices

One phenomenon investors face today is the fact central banks around the world have moved to a negative interest rate posture. Earlier this month Federal Reserve Chairman, Jerome Powell, stated the U.S. Federal Reserve is not considering moving the Fed Funds Rate to a negative level though. Yet, rates in the U.S. are near zero with the Fed Funds target rate at .25% or 25 basis points. A one month U.S. Treasury Bill yields just under 13 basis points. In other words, rates are near zero and going to a negative level is not out of the realm of possibility. One recent article notes if the Fed does push rates to a negative level it will do so in a meaningful way, maybe as low as minus 100 basis points or minus one full percentage point. What are the implications of negative rates if this were to be realized?

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JOLTS: How Quickly Things Can Change

Just a few short months ago I was writing about the tight job market and the fact the number of job openings continued to exceed the number of those unemployed. This had been the case since February 2018 and was a sign of a strong economy. How quickly the tide can go out.

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Weak Small Business Optimism, But Expectations Of A Short-Lived Recession

Not surprisingly, small business owners are anything but optimistic about the current environment. The NFIB Small Business Optimism Index fell 5.5 points to 90.9 in April. The NFIB report notes the index has declined 13.6 points in two months. The index is now at a level below the recession in 2001 that occurred after the bursting of the technology bubble.

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A Dreadful Employment Report

Much was written about the employment report on Friday, yet the the S&P 500 Index rose 1.69% and the Dow Jones Industrial Average rose 1.91% on the day. As much of the commentary notes, me included, the equity markets are forward looking. Not enough can be written about how bad this report is though. The equity market will eventually not look past this data if a V-shaped improvement is not seen in the economy and employment. Total civilian employment from the household survey fell be over 22 million individuals--a staggering decline.

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Approaching Maximum Investor Bearish Sentiment Level

Not to surprising that the individual investor sentiment as reported by the American Association of Individual Investors (AAII) this week continues to deteriorate. As seen in the below chart, this week's bullish sentiment is reported at 23.7% down 6.9 percentage points from the prior week. The economic reports over the last few weeks have been absolutely terrible and it does not seem the reported economic data can get much worse. However, as states are now in the process of reopening their economies, better economic data may not be on the too distant horizon.

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S&P 500 Dividend Aristocrats Lag In This Down Market

A favorable characteristic of the S&P 500 Dividend Aristocrats is this basket of stocks generally holds up better in broader market pullbacks as seen in the below table. Where the entire row is highlighted, it represents a significant market pullback and the Aristocrats outperformed the S&P 500 Index by double digits. The S&P 500 Aristocrats are companies in the S&P 500 Index that have increased their dividend each year for at least 25 consecutive years. The companies are then equally weighted in the Dividend Aristocrats Index. I have written about the Aristocrats several times in the past with a more comprehensive article at this link.

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Investor Cash Continues To Build

This past Friday our webinar looking at contrarian indicators included commentary on the level of cash in money market mutual funds. The below money market chart is an update from the one in the webinar and the chart shows cash levels continue to rise, now equaling $4.73 trillion. Clearly the current cash level is higher than the level reached at the peak of the financial crisis in early 2009.

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Retest The March Low Or Not

The economic and equity market environment investors find themselves operating in today are different and more challenging than any environment they have likely faced in their lifetime. The steep market contraction from the February high was swift, i.e., declining 33.9% over a short 22 trading days, the fastest on record. With a nearly global economic shutdown due to mandatory stay at home orders, the economic growth rate, or should I write, contraction, is turning out to be severe. The CBO's estimate of U.S. second quarter GDP is for a contraction of nearly 40% at an annual rate. Over 26 million jobs have been lost in five short weeks, wiping out the job gains that were generated following the financial crisis of 2008/2009. So in the face of this poor economic data, will the equity market retest the March 23 low?

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Investor Bullish Sentiment Weakening

Until today I had been surprised individual investor sentiment was holding up at an elevated level. However, with the AAII Sentiment Survey release this morning, for the week ending 4/22/2020, bullish sentiment fell 10 percentage points to 24.9%. This is the lowest bullishness reading since October 10, 2020 when bullish sentiment was reported at 20.3%. A majority of the formally bullish respondents flipped to the bearish category this week, where it rose 7.3 percentage points to 50%.%.

The sentiment readings are contrarian ones and looking at them on their own, a further weakening would be one positive metric for higher equity prices.

Downside Earnings Revisions Tend To Peak Near Market Bottoms

It is not surprising company earnings revisions have been mostly downside revisions with most of the country/consumers sitting at home. What is noteworthy though is the upside to downside earnings revision ratio tends to bottom near equity market bottoms. During the 2008/2009 financial crisis, the revision ratio bottomed in late February and the S&P 500 Index bottomed a little over two months later. As the below chart shows, the current upside/downside ratio is lower than the ratio reached at the bottom of the financial crisis in 2008/2009.

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The Current Market Like 1987 Or 2008/2009?

Investors and the market are entering peak earnings season and with futures down this morning, it seems investors may be facing a buy the rumor sell the news type of market. The crash in oil prices, with NYMEX crude down 35% to $11.77 per barrel, is adding to the negative market sentiment. Up until this peak earnings period for the first quarter, the S&P 500 Index rose over 28% off the March 23 low as of Friday's (4/17/2020) close. The speed of the market decline from February and the subsequent speed of the move higher seems at odds with the business environment facing companies. As is often said, the market is not the economy. Investors are now faced with answering the question of where the market is headed from here.

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Equity Markets Defy Emotions

From February 19 to March 23 the S&P 500 Index went from trading at a record high to being down 30.75% for the year, all in the span of 23 trading days. The speed of the decline caught most investors by surprise. In the fifteen trading days since the March 23 low though, the Index is up 27.2% and regained 608 of the 1,148 points lost in the contraction. In spite of the strong recovery, a majority of S&P 500 stocks still trade far below their 50 day and 150 day moving averages. Only 31% of S&P 500 stocks are trading above their 50 day moving average and 21% are trading above their 150 day moving average.

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Retest The Low Or Onto New Highs?

Of course March 23 is not even a month in the rear-view mirror, but the S&P 500 Index is up over 23% since the low on that date. Some have commented the market will retest that market low before achieving new highs while others say the Fed's intervention minimizes the likelihood of a retest. As time moves further past the March 23 day, it seems "the no retest" chorus is sounding more probable. Because I have a bit of a contrarian tilt in my viewpoints, maybe the no retest sound bite means just the opposite?

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Spring 2020 Investor Letter: The Bears Woke Up

The first quarter was an unprecedented one as the S&P 500 Index decline was the fastest 30%+ sell-off ever. The market ultimately fell 33.9% from February 19 to its low on March 23, just 23 trading days. This occurred on the back of a strong 2019 where the S&P 500 Index was up 31.5% for the year. A strong start was underway for 2020 with the S&P 500 Index up 5.1% through February 19. The COVID-19 virus pandemic puts individuals and investors in an environment that was unimaginable just a few weeks ago.

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NFIB Survey: Small Business Survival At Risk

Small businesses (less than 500 employees) account for around 50% of total private payrolls. The broad virus initiated and widely mandated "stay at home" orders across most states are having an extreme negative impact on small businesses, all business for that matter. In today's NFIB Small Business Optimism release, the Optimism Index fell 8.1 points to 96.4, the largest decline in the survey's history. It should be noted most of the survey responses were obtained in the first half of March.

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Individual Investor Bullish Sentiment Surprisingly Not So Low

One factor we track on a periodic basis falls into the investor sentiment category. There are a number of sentiment measures one can evaluate on the institutional and individual investor level. The one that is weighing on our minds currently is the fact the individual investor bullish sentiment level has not reached a level one would expect in a market like the recent one. When the S&P 500 Index is down 33.9% in 23 trading days, I would expect individual investors to become extremely bearish on equities, at least that has been the case historically.

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