Tuesday, April 22, 2014:
- 10:00 AM ET NAR Existing Home Sales (March)
Wednesday, April 23, 2014:
- 10:00 AM ET New Home Sales (March)
Thursday April 24, 2014:
- 08:30 AM ET Durable Goods Orders (March)
Friday April 25, 2014:
- 09:55 AM ET Reuters/UMich Consumer Sentiment (April, final)
Over the course of the last eight trading days, the intraday range on the S&P 500 was greater than 1% on seven occasions; with the exception being a 0.95% range on April 8th. This volatile period started back on Friday, April 4th after the Employment Situation reports were published–this date also coincides with the all-time intraday high S&P 500 print of 1897.28. At one point, the index traded down by as much as 4.37% from that high. Currently, the S&P 500 index is 2.86% off its peak and lower by 0.29% on the year.
Previously on this blog, I’ve mentioned several price factors to consider during the month of April. To recap, April is the third best performing month for U.S. equities–specifically the S&P 500 index–since 1950; with an average return of 1.50%. At the time of its peak at 1897.28, the index was higher by 1.33% on the month.
I also suggested that lower prices were needed on equities in order to find a fresh round of buyers willing to step in. Perhaps the necessary lower prices were found in the 1814-1816 range during each of the last three days, but there is anything but certainty at this time. As equities continue to plateau, we added to our equity position in our tactical portfolios at an effective S&P 500 equivalent of 1824.
Today marks the third time this year that the S&P 500 declined by greater than two percent in one day; surpassing the two times that it occurred in 2013. If it wasn’t clear already, the investment framework that was used in 2013 is no longer applicable to portfolios in 2014.
To recap, the S&P 500 Index fell by 39.1 points to close at 1833.08; a level not seen since February 20th. The index is off by 0.83% on the year and -3.38% from its all time intra-day high achieved one week ago after the Employment Situation reports were released.
On the surface, this is nothing more than a mild pullback; the low seen in February 2014 is still five percent lower than where the S&P 500 closed today. However, the majority of the stocks that fueled equity markets in 2013–and even in 2014–are off by significantly greater percentages. Is this a rotation out of the momentum names and into more “value-oriented” equities or the beginning of a general pullback?
The chart above speaks for itself and the equity market continues to plateau. In the short-term, we should expect the continuation of this pattern. Our strategy will continue to focus on working within the range; adding equity exposure around 1800 on the S&P 500 and reducing exposure near the all-time highs. We will be mindful of any movement below 1785 as this may be an indication of something larger.
On a longer time frame, there are serious headwinds for equities (e.g. the Taper, economy, trend reversion). I’ve blogged about important inflection points on several economic indicators recently and in a future post, I’ll comment on the flattening of the Treasury curve.
The S&P 500 Index closed out the last day of Q1:2014 with a gain of 14.72 points, or 0.72%; finishing higher on the Month by 0.69% and higher on the Quarter by 1.30%. Obviously, those month-end and quarter-end statistics were heavily influenced by today’s gains. From a historical perspective, both March:2014 and Q1:2014 were sub-par performances for the index. Between 1950 and 2013, the S&P 500 averaged a 1.22% return in March and a 2.34% return in Q1. Below is a breakdown of average returns by month; April is highlighted.
The month of April, on average, returns 1.50% for the S&P 500 index; third only to November and December. However, it should be noted that April’s return is generally lower when the first quarter’s return is below average. That is, momentum in equities (or lack thereof) continues on from the first quarter into the month of April. The same can be said for Q2. When Q1 is below average, April’s average return drops to 1.33% (from 1.50%) and Q2’s average return drops to 0.81% (from 1.69%). The effects are more dramatic for Q2 as a whole.
To put this in perspective, these are still positive outcomes (on average) with a higher percentage of gains than losses. But how does this fit into your investment outlook? Does it confirm it or reject it? With the S&P 500 slightly higher (and below average) YTD, while spending more than half of its trading days below the December 31st close, we continue to observe a plateauing equity market.
U.S. equity markets initially rallied to start the day, only to fade around midday. The S&P 500 closed higher by 8.57 points, or 0.46%, to end the week at 1857.61. Month-to-date, the index is lower by 0.1% and year-to-date, the S&P 500 is higher by 9.25 points, or +0.60%. The 10-Year Treasury Note currently yields 2.71%.
The internals of equity markets are extremely weak and have been for the past six days, as all rallies have been met with selling pressure. The momentum leaders coming into the week have sold off significantly; to a point that it is surprising that the S&P 500 index is only 1.4% below its all-time intraday high.
The equity plateauing continues and I think the likely resolution is for equity prices to fall in order to find some natural buying interest.
The Census Bureau released their preliminary data for New Homes Sales today. February 2014 estimates came in at a seasonally-adjusted annual rate of 400k, compared with a revised 455k in January; a decline of 3.3% month-over-month and -1.1% year-over-year change. “Weather” may have affected these figures some, but a larger factor is likely rising home prices and interest rates. The first chart below is a 20 year view of year-over-year percent changes of total dollars spent on new homes.
The five highest growth rates over the last 20 years came between August 2012 and October 2013 and, in general, this period experienced strong growth overall. This is to be expected given Americans’ proclivity toward home ownership. Below is a closer view of the most recent two year period. February 2014 barely saw an increase (+0.46%) in total dollars spent when compared with February 2013.
This data is at an inflection point here and I’ll stop just short of calling it a no-win situation. That is, if house prices and interest rates continue to rise, or even stay the same on balance, demand is likely to stall. If house prices fall, demand may pick up, but then there is the issue of falling house prices.
I’ve discussed several indicators recently suggesting that the economy is plateauing. Financial markets are also experiencing a bit of churn with volatility picking up as momentum stocks fall out of favor.
Monday, March 24, 2014:
- PMI Manufacturing Index (Mar Prelim) (09:45 AM ET)
Tuesday, March 25, 2014:
- S&P Case-Shiller Home Price Index (Dec) (09:00 AM ET)
- New Home Sales (Feb) (10:00 AM ET)
- Consumer Confidence (Mar) (10:00 AM ET)
Wednesday, March 26, 2014:
- Durable Goods Orders (Feb) (08:30 AM ET)
Thursday, March 27, 2014:
- Gross Domestic Product (Q4 Final) (08:30 AM ET)
- Pending Home Sales (Feb) (10:00 AM ET)
Friday, March 28, 2014:
- Personal Income & Outlays (Feb) (08:30 AM ET)
- Consumer Sentiment (Mar Final) (09:55 AM ET)
The Federal Open Market Committee released their decision to allow the Federal Funds Rate to float between 0% and 0.25% while they once again reduced the amount of monthly asset purchases under QE3 by $10 billion. This was to be expected. Of larger note was the FOMC’s decision to remove a 6.5% Unemployment Rate threshold as guidance for when the Federal Reserve will begin to raise interest rates. There is some commentary suggesting that this leads to confusion. However, I think just the opposite is the case. Given that the Unemployment Rate currently sits at 6.7% and the FOMC is committed to leaving the Fed Funds rate unchanged through at least early 2015, the Unemployment Rate would need to remain where it is (or increase) over the next 12 months for that 6.5% threshold to align with their other guidance. See the chart below as it lays out the FOMC members’ expected year-end Fed Funds rate for the next three years and longer.
The bottom line is this: the ending of QE3 and the first rate hike are at least six months and one year away, respectively; and those time frames are data dependent. Equities and fixed income sold off today. Those selloffs can be directly attributed to the FOMC announcement and the Fed Chair’s subsequent press conference. But it was until the final hour of trading did U.S. equities really breakdown.
The SPX reached a low of 1850.35 (nearly 24 points below its intraday high) but modestly rallied into the close to finish at 1860.77. The SPX is now higher on the year by 0.67% but -1.21% from its all time high on March 7th. Domestic equities continue to plateau.
Equity markets declined today while Treasuries were bid. The S&P500 declined by 21.85 points, or -1.17%, to settle at 1846.35. The 10-year Treasury note currently yields 2.65%. Out this morning was the most important economic release of the week: Retail Sales. While U.S. equity markets initially rose early in the day based on slightly better-than-consensus economic data and yesterday’s intraday rally, they were consistently sold off throughout the day with a peak to trough decline of 1.74%.
Equities were likely a little overbought coming into the day and the Retail Sales report is unlikely to be the sole factor of the sell-off, but rather just the necessary catalyst. Below is a chart of the year-over-year change in Retail Sales:
Of the 254 data points on the chart above, only 22 are lower than the current 1.481% 12-month change (subject to revision); 18 of which came during the period between March 2008 and November 2009. It’s unfortunate that this data doesn’t go back any further for a more in-depth economic cycle analysis. Of note in this data is that the average year-over-year change for Retail Sales is 4.58%. Additionally, the chart is clearly trending lower from a recent peak in July 2011.
As it has in the past, markets tend to dislocate from economic data and it is yet to be seen whether or not an economic plateauing will translate into our thesis of an equity market plateauing. I would expect U.S. equity markets to trade flat-to-lower until Tuesday/Wednesday of next week, when they might receive the necessary support they need from several economic releases and the FOMC announcement. That is not to say they will trade higher at that point, rather, just that the short-term trend lower is in effect until that point.