S&P 500 #ChartStorm - 22 Nov 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. Tis the season... @callieabost starts things off with a look at S&P 500 seasonality since 1950. The November through April period is known to be the time for the bulls to shine, and we have seen that play out in a major way so far this month with a 9% advance. It’s important to consider seasonality a secondary indicator at best. Traders should consider all of the fundamental and technical variables, come to a core thesis, then glance at seasonality. With that caveat in place, how has 2020 performed versus typical seasonal trends? It started very differently.

The January to mid-February timeframe played out as you might expect, but then came the COVID-crash – a rare Q1 bear market. Stocks rallied from April through August despite many pundits having called for a summertime dip due to bearish seasonal trends. The last several months, however, have unfolded as history suggested. September and October were rocky, and each month featured a mini-correction for the S&P 500. The elephant in the room of course was the election. Once that uncertainty faded, buyers poured back into stocks.

Bottom line: Sentiment is now very high, and many investors are feeling cheery heading into year-end. How will things resolve? Is the majority right? Will positive seasonal trends persist for the next 5+ months?

chart of S&P500 seasonality

2. Also on seasonality, a very interesting pattern for momentum - particularly given the violent rotations seen there in recent weeks... @MacroCharts digs deeper into the seasonal play. The momentum factor has been all over the place recently with volatility in large cap growth stocks. The latest 3 months have seen momentum underperform the S&P 500 with particular underperformance in the last two weeks. December tends to feature a surge in the best momentum stocks, however.

The relative gains don’t last long as January often sees beaten-down names perform well. If you are looking for a fundamental narrative that might drive this trend, perhaps you can look to tax-loss selling. Investors in taxable accounts sometimes dump the year’s losers in December for that ‘lucrative’ $3,000 tax deduction, then some of those left for dead stocks are bought back in January. Also, the famed “January Effect” suggests small cap names do well to start the year, perhaps at odds with what performed well over the prior year. It will be interesting to watch how year-end shapes up this time with a broad divergence in style and market cap performances this year.

Bottom line: Momentum has struggled mightily this month with the rally in value and small cap stocks. Since 1926, the momentum factor tends to attract buyers into year-end. Call it tax-loss selling and window-dressing, maybe, but December is the most wonderful time of the year for momentum stocks. Buyers-beware – January often reverses those year-end gains.

chart of momentum seasonality

3. Earnings have been handily beating expectations... Thanks to @PriapusIQ for this chart of earnings results relative to analyst expectations. FactSet tracks how earnings season progresses each quarter. The chart from Goldman Sachs highlights just how strong the past 2 quarters have been for S&P 500 earnings versus street estimates. Q2’s record-shattering figures were buttressed by a very strong Q3 reporting season. 84% of S&P 500 companies reported actual earnings per share amounts above estimates.

It ties for the strongest beat rate since FactSet has been tracking the data (2008). That’s the positive spin on the earnings picture. The not so rosy picture is the year-on-year comparison which shows Q3 2020 having the 4th largest decline in annual EPS at -6.3% since Q3 2009 according to FactSet. In terms of sectors, Energy and Industrials have led the declines while Health Care, Communication Services, Consumer Discretionary, and Technology have posted y/y jumps in profits. What’s unusual about this past reporting period is just how many companies beat on revenue & EPS, then guided higher, only to see their share price fall. Things turned around after the election with more positive stock price reactions.

Bottom line: Corporations have been resilient in the past quarters, easily topping analysts’ EPS expectations. Q4 is often the ‘show-me’ quarter for firms due to the holiday selling season. It will be a different shopping experience this year, but more of the same for 2020 with online retail doing well and brick & mortar businesses struggling.

chart of earnings beats through time

4. ...and earnings expectations are steadily being ratcheted back up --> V-shaped recovery in earnings? Often the case, as the earnings landscape turns brighter, analysts are ramping up expectations. The S&P 500 Earnings Revision Ratio has climbed to multi-year highs following the last two quarters’ stellar EPS beat rate. Much has been priced in with the S&P 500 up 9% already this month and up 20% over the last 6 months.

Analysts have also turned more positive on the coming 12-months of S&P 500 earnings. Expectations had hit a low back in the spring when massive losses were expected, but never under-estimate the power of the American consumer who will spend no matter what the consequences. While trailing earnings are in the dumps care of the record Q2 contraction, trailing 12-month losses were held in check due to the quick recovery in consumer spending. The dot-com bubble and GFC each had worse annual S&P EPS declines than the COVID crash.

Bottom line: Wall Street analysts have had to scramble to play catch up to the quickly improving earnings situation. The Earnings Revision Ratio has climbed to the second-highest level since 1990 – topped only by the fundamental reaction to the late 2017 Tax Cuts & Jobs Act changes that were quite beneficial to corporate profits.

chart of earnings revisions ratio, earnings growth and outlook

5. Capex Crunch. This chart from @topdowncharts demonstrates the relationship between S&P 500 forecast earnings and growth in capex. The two time series are related as firms will be more likely to invest in growth opportunities when the fundamental earnings backdrop is positive. History shows that capex aligns closely with S&P 500’s forward 12-month earnings expectation pushed forward one year. The presumption is that there will be a continued decline in capex for several months before a recovery.

Companies are likely to remain conservative with short-term assets on their balance sheets. Investing in long-term projects is just too risky right