Stock Markets
S&P500 vs Nasdaq (May-2023)
31-May-2023. Dzisiaj ostatni dzień miesiąca: S&P500 +0,25% w maju, a Nasdaq Composite aż +5,80% w maju! Duża aberracja? Niekoniecznie… Od początku roku 2023 (YTD): S&P500 +8,86%, Nasdaq +23,59%. Ale z reguły Nasdaq podczas rynków byka rośnie mocniej niż S&P500. Jeżeli za dołek przyjmiemy 12.10.2022 – to S&P500 od tej daty wzrósł o +16,85%, a Nasdaq +24,17%. Nasdaq rósł mocniej niż S&P500 po dołkach rynku w 2020, 2009, 2002, 1990, 1987, 1982, 1970, oraz 1966. Natomiast Nasdaq rósł mniej więcej tak samo jak S&P500 po dołkach w latach 1974, 1962, oraz delikatnie słabiej niż S&P500 w roku 1957 (patrz załączone wykresy). Także praktycznie podczas wzrostów „zawsze” Nasdaq Composite >= S&P500 :)
S&P500 End-Cycle Scenarios
3-Sep-2023. What scenario does the stock market play if we assume that the FED has already finished the cycle of interest rate hikes? The S&P500 cannot decide, although a bit like the debt market, it plays more of an inflationary scenario (no further surge in the index after the last hike). Only the attack on the new ATH (all-time-high, above 4800 points) would mean a deflationary scenario, and a fall below the last lows (e.g. below 4300 points) would mean an inflationary scenario. But for a clear deflationary scenario and new ATHs, a further slowdown in the labor market and possible few small interest rate cuts by the FED are required to support the soft landing narrative. Why a few small cuts (e.g. 3x 25 bps)? Because large and quick cuts are more associated with a crash and the FED's lack of "control" over the stock market - then there is no longer room for a soft scenario narrative. Historically, we also have the case of the years 2000-2002, when, despite the deflationary environment, after the last rate hike by the Fed, the bursting of the Internet bubble turned out to be more important for the market.
S&P500 Bear or Bull ?
19-Nov-2023. Are we already in a bull market or are we still in a bear market? An update. The current cycle is completely different from the historical ones. But this does not prevent us from comparing the current decline from January 3, 2022 to the median of 20 bear markets (since 1920), and comparing the surge from October 12, 2022 to the median of 20 bull markets (since 1920) - see chart 1. After the recent S&P500 index increase ,we are closer to the median bull market (we are only 9.0% short of the bull market median (and that would be a new all-time high). Currently, we are only 5.9% below the peak on January 3, 2022. What is the gap to the bear market median? Very large... as much as a 27.7% drop from the current level. But here's a small caveat... as more than 22 months have passed since the peak in January 2022... historically, the bear market has only lasted longer three times (2000-02; 1937-42; 1929-32). The median at the current stage of the bear market is calculated only from these 3 examples. In turn, the median bull market is calculated from 18 cases. Chart 2 shows the full-time perspective.
17-Oct-2023. Bull or Bear Market? In the first chart on today's S&P500 I plotted the median bull market (starting on October 12, 2022) and the median bear market (we start on January 3, 2022). Interestingly, if we are still in a bear market - it is very advanced... it’s already over 22 months old. Of the 20 bear markets, only 3 lasted longer: 2000-2002; 1929-1932 and 1937-1942. This is clearly visible in the second chart - where we have a full (on the timeline) perspective of historical bear and bull markets. What appeals to me more is the interpretation that the stock market declines in 2022 were: - more of an “accident at work”, i.e. a bear market outside the "regular" historical cycle, - which is mainly due to the "shock" associated with the rapid increase in interest rates (see chart 3), which was also a shock for investors with a 40-year deflationary mindset... - nevertheless, it was not a shock for the real economy (easy to say in hindsight) - and the economy did not follow the stock market, - the debt market had to adapt to higher rates - but historically in the last 40 years this did not bother stocks - however the hiking cycles were slower and longer over time.
20 Bull Markets since 1920
15-Oct-2023. S&P500 bull markets since 1920. Referring to the previous post, if the low in the S&P500 on October 12, 2022 was a bear market low, then we have had a bull market since then... So how do we compare to the 20 bull markets since 1921? Poorly. Chart 1 and 2. At this stage of the bull market (exactly day 366), in as many as 19 out of 20 historical examples the S&P500 was higher than today, and only in one (the bull market starting on 27-Oct-1923) was the S&P500 lower. We are rather "in the middle" of historical examples: it is neither a pure bear market (yet) nor a pure bull market (hopefully soon). Attached is a table with bull market details + a chart with total returns for every bull market.
21 Bear Markets since 1920
14-Oct-2023. S&P500 bear markets since 1920. If we extend the analysis of bear markets from 1920, we get somewhat “uglier” results. Stocks fell 86% during the crash of 1929, and during the bear market of 1937-42 the maximum decline was 60%. Chart 1: S&P500 since 1920, Chart 2: all 20 drawdowns + today's bear market started on Jan 3rd, 2022, Table 1. Summary of all 16 examples of bear markets and 5 recession declines (drawdowns less than 20%).
16 Bear Markets since 1948
12-Oct-2023. Today, a year ago, the S&P500 marked the bottom of the current bear market and until yesterday we are up by +22.2%. Since 1948, we have had 12 bear markets (drawdowns above 20%, at closing prices) and 4 drawdowns of less than 20% but related to recessions (Figure 1). The current bear market is unlike any previous one, unless we assume that on October 12, 2022 we had a bear market bottom and now are reaching to new highs (Chart 2 and 3). Whether we will see new peaks depends on the "inflation" vs "strong economy" relationship/narrative. To see new peaks, in a nutshell, "inflation" should ease off and the "strong economy" should remain a strong economy.. The first test ... is later today when US CPI numbers will be published.. Chart 4 and 5: all bear market and recession related drawdowns since 1948.
Financial Sector (Nov-2023)
11-Nov-2023. Financial sector. Nothing to see here, maybe apart from Polish banks (+56% YTD) and American regional banks, which Bill Gross recently started buying (i.e. falling knife has hit bottom). Overall, US regional banks are -30% YTD. Let's take a look at the latest data on deposits in small and large American banks (next charts). Nothing special is happening here. After the crisis in March, deposits in small banks are slowly returning to higher levels. And in large banks, deposit declines slowed down somewhat after the banking crisis (looks like they are a bit better off). As a reminder, in March, during the run on SVB (Silicon Valley Bank), customers of this bank withdrew approximately USD 42 billion of deposits in one day (March 9, 2023).
S&P500 vs CNY, EUR & JPY
12-Nov-2023. S&P500 vs CNY, EUR & JPY. Traditionally, longer periods of increase in the S&P500 should correlate positively with a weaker dollar, a stronger Euro and the Chinese Renminbi, as well as a weaker yen. And this was generally the case with CNY and EUR during the 25% decline of the S&P500 in 2022 (Chart 1), and then during the S&P500 rebound from the bottom in October 2022 to the recent top in July 2023. However, the S&P500's relation to CNY broke in May 2023, when investors finally realized that the "opening up" of the Chinese economy after Covid was not happening as expected - and in fact, problems with the local real estate market may prevent the economy from growing on a historic pace that investors have become accustomed to. In the case of the yen, it appears that the traditional correlation is currently not working well... in general as a result of "extremely" loose monetary policy (relative to the rest of the world fighting hard with inflation). Chart 2 shows the same relationships during the genuine global boom/expansion period in 2020-2022 (from the 2020 Covid recession bottom to early 2022). Today, it's worth watching whether the dollar will continue to strengthen, as well as the weakness of the yen and a possible increase in CNY above USDCNY 7.35 (i.e. weakening of the Chinese currency). And such a combination/development would rather suggest further declines in the S&P500.
S&P500 after the Last Hike
2-Jan-2024. S&P500 after the last hike update. S&P500 after the last hike update – a selection of scenarios. Looking through history, we can distinguish several scenarios for the S&P500: 1) soft landing, 2) deflationary hard landing, 3) inflationary hard landing and 4) crash landing. If we compare the current cycle of rate hikes by the FED to the deflationary cycles of 1989, 2006, 2018 - since the last rate hike, the S&P500 has increased by some 20-30% (Figure 1). The tightening cycle that ended in 2000 is a scenario of the Internet bubble bursting (crash landing). We also have two examples of the soft landing scenario from the 1990s, and the inflationary cycles of 1969, 1974 and 1981 - see Figure 2. Figure 3 also shows these scenarios (color-coded). Currently, we are closest to the soft landing / deflationary hard landing scenarios. But unfortunately, the market (S&P500) may simultaneously price different scenarios (with different probabilities) depending on the incoming data and investor sentiment. For example, the declines of the S&P500 from the end of July to October 2023 were more of an inflationary hard landing scenario (the market was afraid of inflation and further FED’s hikes).
TSMC is Up +9.8% YTD
20-Jan-2024. US stock indexes are performing quite well in 2024, with Technology doing much of the heavy lifting. The pretext for technology melt-up was the world's largest chip manufacturer TSMC’s (Taiwan Semiconductor Manufacturing Company) announcement (January 18, 2024) of the quarterly results for Q4 2023. TSMC manufactures advanced processors for clients like Apple, Nvidia, Qualcomm, AMD. C.C. Wei, CEO of TSMC, expects revenue growth in 2024 “by low to mid 20% in U.S. "dollar terms". The news boosted other chipmakers and the Philadelphia semiconductor index (PHLX Index) is up YTD as much as +4.02%. YTD rate of returns: TSMC is up +9.8%. Mag7 is up +4.04% (market-cap weights), Nvidia is up by +20.1%. Nasdaq 100 is up +2.9%. Figure 1 shows the YTD results for Mag7 and Novo Nordisk, while Figure 2 shows the YTD results for the major US equity indices. Below are the most important fragments from the TSMC earnings conference call. C.C. Wei,’s CEO: „2023 was a challenging year for the global semiconductor industry, but we also witnessed the rising emergence of generative AI-related applications with TSMC as a key enabler. (…) Concluding 2023, the semiconductor industry, excluding memory industry, declined about 2%, while foundry industry declined about 13% year over year. TSMC's revenue declined 8.7% year over year in U.S. dollar terms. (…) Entering 2024, we forecast fab semiconductor inventory to have returned to a healthy level, exceeding 2023. (…) We expect 2024 to be a healthy growth year for TSMC, supported by continued strong ramp of our industry-leading 3-nanometer technologies, strong demand for the 5-nanometer technologies, and robust AI-related demand. (…) Coming up the steep inventory correction and low base of 2023, for the full year of 2024, we forecast the overall semiconductor market, excluding memory, to increase by more than 10% year over year, while foundry industry growth is forecasted to be approximately 20%. (…) We expect our business to grow quarter over quarter throughout 2024, and our full year revenue expect to increase by low to mid 20% in U.S. dollar terms”.
S&P500 Decoupling
22-Jan-2024. In recent days, we have been dealing not only with the great technology melt-up of 2024, but also with the divergence of US shares from other assets, such as the EURUSD, 10Y yield, or real 10Y yield. Additionally, we can add the USDJPY, USDCNY, or from another set of "indicators" even the Fed's balance sheet. Figure 1 shows 10Y yield compared to the S&P500. We have had a strong decoupling for a few days, but this is not the first time during the market rebound from the bottom of October 2022. We had the first "big" decoupling from May 11, 2023 to July 31, 2023, when the S&P500 increased by 11.1% - and 10Y yields increased by 58bps. Yet yields continued to rise by another 102bps... to the peak on October 19, 2023 - then the S&P500 could no longer defy gravity and fell by 10.3%. Figure 2 shows the EURUSD rate against the S&P500. Here, decoupling is less visible, but it has also occurred in recent days. Figure 3 shows the relationship between real rates and the Nasdaq 100. Here the situation is similar to that of nominal yields. We had the first "large" decoupling from April to July 2023. Figure 4 shows the relationship between USD/CNY and the S&P500. Figure 5 between USD/JPY and S&P500. In both cases the relationships with the S&P500 are more nuanced. The relationship between the S&P500 and the change in the Fed's balance sheet has completely broken down (the balance sheet is falling as a result of QT, but the shares are still rising). The same is true for broader measures of the Fed's liquidity (including other liquidity facilities - not just the change in FED’s balance sheet itself). In Q4 2018 (previous QT), shares could not withstand the FED's rhetoric about continuing QT and the S&P500 saw a 20% correction.
Dell up 30% in One Day
2-Mar-2024. An exciting end to the week on the markets. Part 1. The first part is about stock market (the second will be about rates/bonds). Stocks are easier to interpret (than bonds): the base-case scenario is a continuation of the bull market until: (i) hard-landing wake-up call (may occur within 1-4 quarters) – Figure 1, or (ii) resurging inflation wake-up call (e.g. US CPI Core > 4.5%, now it's 3.87% (SA series) - let us tentatively assume that there is little chance of this happening. What additionally supports such a scenario? This can be seen after yesterday's session... (1) each subsequent QE, like yesterday's Waller's remarks on the FED buying more short term US Treasury bills (Christopher J. Waller is a member of the Board of Governors of the Federal Reserve System), and (2) each subsequent AI story also supports the scenario of a further bull market - like Dell, which yesterday jumped by over 30% after the publication of its earnings (Figure 2), mainly as a result of such a comment about artificial intelligence: “Our strong AI-optimized server momentum continues, with orders increasing nearly 40% sequentially and backlog nearly doubling, exiting our fiscal year at $2.9 billion,” Jeff Clarke, COO. “We've just started to touch the AI opportunities ahead of us, and we believe Dell is uniquely positioned with our broad portfolio to help customers build GenAI solutions that meet performance, cost and security requirements.” On a side note, Dell reported an annual revenue decline of 11%. Go figure 😊. Analysts forecast revenue of $21.39 billion in the quarter ending April 30, 2024 (this means a year-on-year increase of only 2.2% - this cannot in any way be compared to Nvidia's revenue growth YoY ... over 230%) But the “Infrastructure Solutions Group” business segment (where AI-optimized servers are located) delivered fourth quarter revenue up 10% sequentially and only down 6% YoY. Servers and networking revenue was sequentially up driven primarily by AI-optimized servers. Storage revenue was up 16% sequentially with demand strength across the portfolio. In more traditional places of the economy (like the regional banking sector) some things are breaking now... however what is important for investors can be best summarized as follows: at yesterday's session Dell Technologies was up by 31.6% and New York Community Bancorp was down by 25.9%. YTD: Dell +62.9% and NYCB -65.3%. Figure 3 shows YTD performance of European Mag4 companies.
Stock Markets in 1H 2024
29-Jun-2024. Stock markets in H1 2024. Mag7, despite the weaker last session in June (-1.5%), is still the clear leader in H1 2024 with a rate of return of +34.6%. See Figure 1. Small US companies grew only 1.02% during this period. The S&P500 is roughly in the middle with a return of +14.48%. European companies had a very poor end to the first half of the year (snap elections in France). CAC40 has been down -0.85% since the beginning of the year. Euro Stoxx 50 only +8.24% - see Figure 2. From the S&P500’s local peak on July 31, 2023 (i.e. for the last 11 months): Mag7 +44.03%; S&P500 +18.99%; Russell 2000 only +2.22%. See Figure 3. Quarterly rates of return for Mag7 also look interesting (Figure 3, bottom panel): Q3 2023 -2.71%; Q4 2023 +14.46%; Q1 2024 +14.78%, and Q2 2024 +17.27% Japanese and Chinese stocks have been performing worse recently (Figure 4). Polish shares provided a similar rate of return to the S&P500 (Figure 5). H1 2024 is a successful period for companies producing anti-obesity drugs. Eli Lilly (+55.32%) and Novo Nordisk (+37.98%) – Figure 6. Nividia beats everyone: +149.48% in H1 2024 – see Figure 7. Detailed summary in Table 1 (there are two versions of the same table with different colors).
Russell 2000 Outperformance
18-Jul-2024. Small is magnificent, sometimes. Small American companies (Russell 2000) have their moments in the cycle when they outperform large companies (S&P500). Figure 1 shows returns since 2006, including the size of drawdowns (bottom panel). The S&P500 increased by 447% (yearly +8.41%) during this period; while the Russell 2000 increased by 333% (yearly +6.69%). Since 2019, the Russell 2000 has actually had one long period of beating the S&P500... right after the 2020 recession, as stock markets rebounded strongly after previously falling by more than 30%. See Figure 2 and 3. In 2024, however, the Russell 2000 was flat from the beginning of the year until July 9, when the combination of corrections in big tech and the development of the so-called "Trump trade" led to the Russell 2000 rising by more than 10% in a few days - see Figure 4. The next test of momentum for small companies is the currently published results for Q2 2024. And if the US economy continues to slow down in the following quarters, the results of small companies may be the first to suffer. Figure 5 shows the monthly and quarterly returns of the S&P500 and Mag7. July is still positive for both (after exceptional May and June).
Risk-off (21-Jul-2024)
21-Jul-2024. Third risk-off in the last 12 months. Looking through the prism of the S&P500, we currently have the third major correction since July 2023. The first one lasted from July 31 to October 27, 2023 - the S&P500 decreased by 10.35%. The second correction took place in April this year, the S&P500 fell 5.5%. The current decline (from the peak of July 16) is 2.9%. See Figure 1. During the correction in 2023 and April 2024, the largest decline occurred in small companies (Russell 2000). Currently, the Russell 2000 return in July 2024 is the best monthly result since December 2023 (month-to-date +6.67%, including a 3.5% decline from the top on July 16). See Figure 2. In the case of Nvidia, the current drawdown is already 13.02%. In April, the drawdown was 19.79%, and during the correction in 2023 it was 18.29% - see Figure 3. So far, the current risk-off is similar to the two previous such cases, only the performance of small companies is an exception.
Risk-off (26-Jul-2024)
26-Jul-2024. Risk-off This is the fifth major correction since the 2022 low. Interestingly, the nature of the current correction in US stocks is very mean-reverting. What was previously growing more strongly is now falling more strongly - which is best seen in Mag7 companies, which have fallen by about 11.7% since their recent peak. See Figure 1. In the case of the Nasdaq100, the current maximum drawdown was 8.9%, for the S&P500 it was 4.7%. Mean-reversion also affects small companies, and the Russell 2000 is trying to make up for lost time and performance with respect to other major indexes. During the correction in April 2024, the maximum drawdowns were for: Mag7 -6.5%; Nasdaq100 -7.1%; S&P500 -5.5%. If we look at all five S&P500 corrections since the October 2022 low, their range was from -5.5% to -10.3%. See Figure 2. The current correction is quite similar. In the base-case scenario, it is a correction similar to the previous ones, below are the main arguments. First of all, we are just ahead of interest rate cuts by the FED, which should have a positive impact on stocks, in particular long-duration stocks such as technology companies (ceteris paribus). The closest analogy is 2019, when the cycle of interest rate cuts began. In 2019, we had two corrections in the S&P500 (-6.8% and -6.1%). The FED cut rates three times in a row (which gave hope for a soft landing). From the bottom of the second correction, the S&P500 increased by more than 19% until the end of the bull market in February 2020. See Figure 3. The S&PP500 closed the entire year 2019 with a result of +28.9%. Meanwhile, the Nasdaq100 closed 2019 with a result of +38.0%. Second, it's an election year, and historically, stocks can perform better in such years. Thirdly, we are still facing interest rate cuts, which means a still strong economy and higher corporate profits. Paradoxically, the longer the Fed does not lower rates, the longer the expansion and bull market may last.
Risk-off (5-Aug-2024)
5-Aug-2024. Risk-off on risk assets. The correction in risk assets intensified over the weekend. The drawdown on the S&P500 (-7.7%) is still within the range of previous corrections starting from the 2022 low - see Figure 1. The Nasdaq100 is falling the most (drawdown) in this bull market, by as much as 14.4%. The rate of return after such a decline, counting from 12-Oct-2022, is currently above 64% for the Nasdaq100 and over 46% for the S&P500. Markets are changing quickly now, just a moment ago the market was pricing in a 100 bps cut in the fed funds rate at FOMC meeting on September 18 (as of writing this comment it is only 75 bps). All-in-all, the correction is sharp, but there is no sharp change of data at the macro level. Even the US labor market report for July cannot be classified as "extremely bad". Similarly, the decline in ISM Manufacturing will not result in a sudden recession. Financial markets are sometimes all about emotions, and we have such a situation today.
Risk-on (16-Aug-2024)
16-Aug-2024. Those who swam naked are no longer with us! Life after leverage unwind is slowly, or even quickly, returning to “old-normal”! How much have individual asset classes/stocks reversed the recent sell-off? Here is the list (as of Aug-15 closing): Meta: 97% Eli Lilly: 89% Gold:89% S&P500: 74% Nvidia: 67% Novo Nordisk:66% Apple:63% Nikkei 225: 62% (till Aug-16) Nasdaq100: 58% Amazon:43% USDJPY: 36% (till Aug-16) Microsoft:36% WIG30:35% (till Aug-14) Tesla:31% TLT: 23% Bitcoin: 22% Alphabet: 9% Tesla experienced the largest drawdown (-27%), and gold experienced the smallest one (-4%). However, the only thing that was important yesterday for the market was retail sales.. beat! Nonetheless, the beat did not change at all the Atlanta FED Q3 forecast: PCE’s contribution to Q3 GDP change did not move at all… see the Table 1. What spoiled the (macro) party was industrial production. As a result, change in inventories (plus Equipment) accounted for virtually all of the decline in the GDP forecast. Figure 1 shows the change in GDP forecast according to the Atlanta FED vs S&P500. We are by no means closer to a recession, at least when we look at the GDP forecast for Q3 2024. Today’s level of GDP growth is within a goldilocks scenario - see Figure 2. Finally, here is how Goldman's trading desk described the day's narrative (via Zerohedge): “EVERYTHING rally with all baskets on our screens green on the day”.
Risk-on (12-Oct-2024)
12-Oct-2024. Full throttle risk-on? That's how it looks, at least in the US, where the S&P500 closed yesterday's session at another all-time high. See Figure 1. After a strong correction in July/August (drawdown of as much as -13.6%), the Nasdaq 100 is still about 2% short of a new ATH. US stocks are not hindered in their further growth by rising bond yields (yet), which mean smaller interest rate cuts in the future (than on September 18th, after the first FED’s cut - see Figure 1). It is possible that stocks are already front-running the presidential election and the seasonality related to the end of the year to some extent. Let's look at two major Asian markets (Hang Seng and Nikkei 225 indices), which have recently been "behaving extremely" - which is well evident in their volatility and the size of drawdowns - see Figure 2. Both Asian economies are somewhat similar to each other... trying to change the economic status quo can be associated with too much "pain"... In Japan, an attempt to increase interest rates... ended with a 25% drop in the Nikkei 225. In China, attempts to "restructure" the real estate market or increase consumer spending may also be too difficult to achieve... to succeed, they may mean too many sacrifices (i.e. cost too much). Therefore, the scenario of the zombification of the Chinese economy (similar to what happened in Japan in the 1990s) cannot be ruled out. Investors were waiting for Saturday's press conference of the Chinese Minister of Finance. The market was expecting a fiscal stimulus announcement of 2-3 trillion yuan, but it looks like it didn't get it... and the press conference turned out to be more of a nothing-burger.. let's see how the markets react to it on Monday..
