Open with markets in motion page
Welcome to RBC’s Markets in Motion, recorded September 21st, 2021. I’m Lori Calvasina, Head of US Equity Strategy at RBC Capital Markets. Please listen to the end of this podcast for important disclaimers. This week in the podcast, we tackle three topics: investor sentiment, earnings sentiment, and supply chains.
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.
- 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
- 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
- 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.
- First, the rate of change on freight costs - which has decelerated from its peak in June.
- 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
- 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.