Three big things you need to know: (1) First, individual investor sentiment has fallen so hard recently, it may soon send a contrarian buy signal. (2) Second, earnings sentiment has started to deteriorate, led by Cyclicals, but Secular Growth has stayed resilient. (3) Third, we highlight what we’re watching on supply chains -- specifically, the rate of change in freight costs, global COVID trends, and regional Fed surveys -- where we are seeing some faint glimmers of hope.
If you’d like to hear more, here’s another five minutes. While you’re waiting, a quick reminder that you can subscribe to this podcast on Apple, Spotify and other major providers.
Flip to slide 2
Now, the details.
(1) Takeaway #1: Individual investor sentiment has fallen so hard recently, it may soon send a contrarian buy signal.
• Last week’s update from the American Association of Individual Investors revealed that bulls among so-called retail investors have fallen sharply. Those in the bullish camp fell to 22.4%, down from 38.9% the prior week and 43.4% two weeks ago. Meanwhile, bears surged to 39.3%, up from 27.2% the prior week. With those moves, net bullishness has fallen to -16.9% for the most recent week, bringing the four week average of net bullishness down to +2.9%.
Flip to slide 3
• While this data set can be noisy week to week, this is still an important development. Historically, when net bullishness has fallen below -10% on the four week average, the S&P 500 has been up 15% on average over the next 12 months, posting gains 86% of the time. We also tend to see gains on a 3 month forward basis – a 5% move on average, with gains 84% of the time.
Flip to slide 4
• While this adds to our conviction that any coming pullback in the stock market will be a buying opportunity, it is just one piece of the sentiment puzzle. A full sentiment unwind will probably take a little time to play out. Positioning by institutional investors – according to futures positioning by asset managers as tracked by CFTC – continues to hover near all-time highs despite some slippage last week.
Flip to slide 5
(2) Takeaway #2: Earnings sentiment has started to deteriorate, led by Cyclicals, but Secular Growth has stayed resilient.
• The rate of upward EPS estimate revisions on the sell-side has slipped to 70% in mid September from 78% in late August (in line with its pandemic and all time highs).
Flip to slide 6
• So far, the deterioration has been driven by Cyclicals, while Secular Growth has stayed strong at the high end of its historical range. Defensives have also stayed resilient.
Flip to slide 7
• This is an important underpinning of support for the stock market. As we’ve discussed in the past, Secular Growth far outweighs Cyclicals on market cap within the S&P 500, accounting for more than twice the market cap weight of the index that Cyclicals do.
Flip to slide 8
• The S&P 500 also has a heavy bias towards Secular Growth on operating income
Flip to slide 9
• and on operating margins as well.
• One key question for the market going forward is whether the resiliency of secular growth will endure.
Flip to slide 10
(3) Wrapping up w/takeaway #3: We highlight what we’re watching on supply chains, where we dare say there might be some faint glimmers of hope if you focus on the 2nd derivative or rate of change.
• We’re keeping an eye on 3 things for insight into when these pressures may abate.
o First, the rate of change on freight costs - which has decelerated from its peak in June.
o Second, global COVID trends - which are improving and have been a loose leading indicator for the rate of change in freight costs – late last year the rate of change in cases peaked about a month before the rate of change in freight costs, and this year in 2Q rate of change in cases peaked about 2 months before the rate of change in freight costs.
It’s a messy relationship, but global case trends do appear to be a relevant data point.
Flip to slide 11
o Third, regional Fed surveys - Empire and Philly Fed, the only two in for September, are sending conflicting signals on trends in delivery times & unfulfilled orders/backlogs.
Philly Fed expanded at a slower pace on both in September while Empire got worse.
That’s all for now, thanks for listening, and be sure to reach out to your RBC representative with any questions.