Weekly S&P 500 #ChartStorm - 25 May 2020

Those that follow my personal account on Twitter will be familiar with my weekly S&P 500 #ChartStorm in which I pick out 10 charts on the S&P 500 to tweet. Typically I'll pick a couple of themes to explore with the charts, but sometimes it's just a selection of charts that will add to your perspective and help inform your own view - whether its bearish, bullish, or something else!

The purpose of this note is to add some extra context and color. It's worth noting that the aim of the #ChartStorm isn't necessarily to arrive at a certain view but to highlight charts and themes worth paying attention to. But inevitably if you keep an eye on the charts they tend to help tell the story, as you will see below.

So here's another S&P 500 #ChartStorm write-up!!

1. Earnings revisions. @TihoBrkan brings us this 25-year look at the S&P 500 and analyst earnings revisions. COVID-19 has led Wall Street analysts to drastically reduce EPS forecasts for the coming quarters as businesses scuffle to salvage the rest of 2020. Intuitively, one would think that a huge uptick in negative earnings outlooks would correspond to a declining stock market, but that has not been the case.

Keep in mind that price is often among the most leading indicators while analysts are known to suffer from conservativism bias – being slow to update their opinions (hence analyst forecasts are a lagging indicator). Market declines came before economic losses. In that sense, earnings revisions are more of a contrarian indicator.

Bottom line: When it comes to cycle data, often times it ends up that good is bad and bad is good. It’s typically during the upswing in the business cycle and in the later stages of the market cycle when the upgrades occur.

chart of earnings revisions

2. Your check is in the mail. Companies are taking longer to pay each other – as depicted in this chart from @athomasq. Abraham Thomas of Quandl shows that business-to-business payments are more than 2 standard deviations below the mean; companies are very slow to pay their debts right now. The index is actually far worse than it was in 2009.

We can also see this trend when looking at bank lending standards data – financial institutions are hesitant around issuing loans right now. Not everyone is able to take advantage of historically low interest rates. The cash conversion cycle (you remember this from business school, right?) is being extended to uncomfortably long periods for some firms.

Bottom line: This is a concerning chart and it highlights one of the key downside risks, i.e. that a liquidity crisis turns into a solvency crisis. Just in time cash flow management is incredibly vulnerable in this environment.

Chart of delayed payments by S&P500 companies

3. Don’t fight the Fed. The Federal Reserve of the United States has aggressively increased their balance sheet by purchasing Treasury securities. A refrain we as traders are used to hearing by now. Analyzing Fed open market operations is a necessary endeavor for macro analysts – you can hate it and disagree with it if you wish, but it’s the way of the economic world.

@meremortenlund provides this dual-axis chart of the S&P 500 year-over-year change (LHS) and the Fed’s Treasury holdings as a percent of outstanding marketable debt (RHS). You’ll notice a pattern of y/y Treasury holding increases to increases in stock performance. The Fed has been hard at work in 2020 as the y/y increase has been massive.

An interesting feature of this chart is while we think of Fed bond buying activity as propelling the stock market, it’s not always the case. Bernanke was in his helicopter in 2011, but that year was a dud for the equities.

Bottom line: Powell has seemingly outdone Bernanke with monetary stimulus. The S&P 500 has already increased more than 30% from the low just two months ago. Is the Fed done? Do they have bullets for a second wave?

fed balance sheet vs S&P500 chart

4. Buybacks ain’t what they used to be. Fidelity Investments’ Director of Global Macro Research Jurrien Timmer @TimmerFidelity brings us this look at announced share buybacks. 2020 is tracking among the weaker recent years for announced share repurchases – not surprising given the unexpected economic shutdown we have all experienced. Companies are looking to shore up their balance sheets, and among the activities that requires is often to increase liquidity positions.

A common tactic from the last several years in a world with cheap credit was to issue debt & buyback stock – this strategy can actually reduce a firm’s overall cost of capital since debt is typically much more inexpensive than equity.