From the desk of Willie Delwiche.

Key Takeaway: With pessimism at levels that elicit comparisons to the financial crisis, conditions are set for a meaningful bounce in equities. But at this point, the similarities appear closer to what prevailed in the first half of 2008 than what was seen as stocks moved toward their final lows in March 2009. With the NYSE and NASDAQ still seeing more new lows than new highs (31 weeks and counting) and breadth thrusts conspicuously absent, the backdrop offers little about which to get excited. Recent leaders are experiencing newfound weakness and new leaders are more defensive in nature. Investors have endured a succession of failed rallies in recent months, but that patience may wear thin. The burden of proof is on the bulls. Rally attempts that increase hope but offer little strength would fit the pattern seen during the financial crisis

Sentiment Report Chart of the Week: Mixed Messages From Bonds 

It’s been a rough first half for bonds. For now at least, Treasury...

From the desk of Willie Delwiche.

Identifying recessions is an academic exercise for historians. It usually requires the passage of time to gain the necessary perspective. The December 2007 business cycle peak was not identified as such (by the NBER) until December 2008. While June 2009 would eventually be identified as the business cycle trough, NBER did not make this determination until September 2010.

For those allocating capital in real-time, this becomes more than just an academic discussion. Whether the economy is in recession or not can impact the length and severity of bear markets. Bear markets that occur independent of recession tend to last 7 months, with an average peak-to-trough drawdown of 23%. If there is a recession involved, bear markets tend to last for well over a year and the average pullback is 33%. The recession question was a hotly debated topic in early 2008 and there are certainly echoes of those conversations now. 

The Fed and other central banks are still aggressively raising rates even as growth slows dramatically. Manufacturing and New Orders indexes from the Richmond Fed (showing...

From the desk of Willie Delwiche.

Key Takeaway:

• Indicators suggest echoes of Financial Crisis.
• Looking for signs of strength, not just absence of weakness.
• Burden of proof is on the bulls to show that strength can persist.

At this point, we cannot know whether the current environment will ultimately end up bearing more than a passing resemblance to the 2008/09 financial crisis. There are, however, enough similarities between now and then that the comparison is worth considering.

Consider what we are seeing from a price perspective and across a handful of other indicators:

Price: Failed rallies have been followed by lower lows on the S&P 500 since the index peaked in January of this year. A similar pattern developed following the market peak in October 2007. The damage done to a 60-40 passive portfolio has been greater this year than at a similar post-peak point during the financial crisis, but it’s perhaps not a coincidence that prior to this year, the only time in the past quarter century that both stocks and bonds were underwater in back-to-back quarters was...

From the desk of Willie Delwiche.

This is a good time to think about what could happen after the midterms because the run-up to this fall’s elections could be almost unbearable. The Fed, the Supreme Court and lingering fights over the 2020 election will provide candidates of all stripes with plenty of political fodder. The public mood is already dour and an onslaught of negative ads is not likely to help. History and conventional wisdom suggest stocks could struggle for traction over the summer, find a low prior to the election and then rally as the outcome becomes evident. The S&P 500 has been higher 12 months after every single mid-term election since at least 1950. The problem with that information is that it is being widely discussed. The data is what it is and the past is all we have to go on. Nonetheless, the words of Bernard Baruch seem relevant right now: “Something that everyone knows isn’t worth anything.”

An alternative view is that the pattern of the S&P 500 since its early year peak is not dissimilar to what was seen...

This is the video recording of the June 23rd Weekly Town Hall w/ Willie Delwiche.

06/23/22 2:00 PM ET

 

From the desk of Willie Delwiche.

Monday was an unexpected break. Markets were closed for Juneteenth Day, which is now a Federal holiday. I didn't realize that would be the case until the middle of last week. It has made for a short week in the market after a long weekend for doing whatever it is you do to get refreshed after staring at computer screens all day. For me, it meant more time in the garden.

The garden has provided its own share of unexpected developments recently, and I’m not just talking about volunteer cantaloupes (though there are several of them around).

In the pond, a spike in ammonia levels necessitated an overdue and unexpectedly extensive cleaning. Not only is it now a healthier environment in which the fish can thrive, but in the process we discovered a baby fish that we hadn't known about.

From the desk of Willie Delwiche.

Key Takeaway: More and more distribution patterns are resolving lower as bearish price action runs rampant across all major assets classes. Even the leadership groups such as commodities experience selling pressure as pessimism grows. Yet, while investors have expressed concern, they have not done much about it. Equity funds continue to attract inflows ($200+ billion YTD, according to DB) and households are hardly flush with liquidity. Perhaps it will take a second quarter in a row of being told not to look at their retirement account statements to prompt some investor action.

Sentiment Report Chart of the Week: Copper Looks Tarnished 

Some call it Dr. Copper - the commodity with a PhD in economics. For me, it’s more like Mr. Copper, CMT - Emerging Market technical analyst. Either way, market participants express how they are feeling through the price of copper. Copper was an early leader off of the COVID lows but has moved sideways since early 2021. Now, our trend...

From the desk of Willie Delwiche.

Key Takeaway:

• Patient investors will let the bulls prove their case.
• Economic risks on the rise as data disappoints.
• Central bank action adding pressure to market and economy.

When we look at the data we have in hand, avoiding recession is looking more and more like a dubious proposition. Last week’s retail sales data showed that adjusted for inflation, retail sales in May were below year ago levels. While COVID-related distortions have added to the volatility in sales data, the last three recessions  have all been associated with year over year declines in retail sales. XRT (the Retail ETF)is currently more than 40% below its November peak and the two prior times it found itself in a 40% drawdown (2008 and 2020), the economy was already in recession. New orders data from the Philly Fed show an...

From the desk of Willie Delwiche.

Not sure where I first heard it, but I’ve always loved this saying: “Bull markets take you to levels you never thought you would see. Bear markets take you to levels you never thought you would see again.” Since the S&P 500 is now down more than 20% from its January peak, we are able to discuss bear market tendencies without getting the “yeah buts” from polite society. The S&P 500 is at levels not seen since late-2020, while the small-cap Russell 2000 is below its pre-COVID high back to where it was in early-2018. The Value Line Geometric index is also below its pre-COVID high and is at a level it first reached in early 2015. That is seven years of no progress for an index that serves as a proxy for the median stock.    

This is the video recording of the June 16th Weekly Town Hall w/ Willie Delwiche.

06/16/22 2:00 PM ET

 

From the desk of Willie Delwiche.

Last week, it was cool and rainy in Milwaukee. This week, it's been sunny and sweltering (with a few thunderstorms thrown in as well). Summer has definitely arrived as we approach the solstice and max daylight in the Northern Hemisphere.

With the heat we’ve had this week (several days in the 90s pushed our greenhouse temperatures to at least 120, which is as high as our thermometer measures), I've been sure to water the garden early and often.

From the desk of Willie Delwiche.

Key Takeaway: Lower prices have a way of souring investor moods. It’s a relationship that thrives on the feedback loop it creates. Increased selling pressure begets pessimism that fuels continued selling pressure. With the recent relief rally behind us, short-lived optimism has dissipated and bearish sentiment is on the rise  (II bull-bear spread challenges its lowest level since the GFC and Consensus bulls fall to their lowest reading since the Covid crash). It’s hard to claim sentiment is washed out as long as pessimism is still expanding. And based on the disparity between investor moods and positioning, there’s still plenty of gas in the tank for the bears.

Sentiment Report Chart of the Week: Household Liquidity Near Historic Lows

The Fed’s latest report on the Financial Accounts of the US (otherwise known as the Z.1) shows that household liquid assets increased by slightly more than 2% in the first quarter. Compared to total financial assets (which were down nearly 2% in the quarter), household liquidity improved slightly. Household non-equity liquid assets rose from 17.9% of...