Given the popularity of our weekly Market in Pictures, we thought it made sense to pick out a few and go into more detail with our PMs. In this edition, Dave and John Luke will spend a few minutes on each of the following:
- Typical Market Drawdowns
- Q1 Earnings Scorecard
- Consumers Still Strong
Hope you enjoy, and please send a note to [email protected] if there’s a particular chart/topic you’d like to see covered next month. Time to swing it around!
For those who prefer to read, the transcript:
Derek
Welcome May 1st. Fed just had their meeting and whipsawed the market a little bit, and I’ve got a couple of our experts here to talk through what happened in April and I guess after all of it, the Fed event was a non-event, but we’ll see where that plays out ultimately. But we’ve got our crew, our head of equities, Dave Wagner, CFA, out of Cincinnati, head of fixed income, John Luke Tyner, and our home base in Fairhope, Alabama. I got my disclosure to read. The opinions expressed during this call are those are the Aptus Capital Advisors Investment Committee and are subject to change without notice.
This material is not financial advice or an offer to sell any product. Forward-looking statements are not guaranteed. Aptus reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs or information about Aptus’s Investment Advisory Services can be found in its form ADV part two, which is available upon request. So I’ll kick it off to the two of you. April was a little bit different than the few months prior, so I’ll let you talk through what you’ve been seeing out there.
Dave
Yeah. I’d say still that April was a little bit different than the past five months. I mean, we just are coming off of five straight months where the mark was up 28% then. April showers hit and the market was down about 4.08%. And if y’all are regular listeners to this 3 Pointers, y’all know that I always have a random pop quiz for John Luke to try to keep them on his toes and I usually do it towards the end. I’m going to start off and do it early here. It’s usually more of a historical question, but I’m going to give you a layup here, Jonathan Lucas, looking at this chart right here, what signs in your eyes or what do you think catches my eye in this chart here?
John Luke
Yeah, no, I appreciate the softball today. But yeah, I mean looking back the end, just the monumental streak of equity performance, but you get some downfall in stocks in April and lo and behold, bonds were negative too. Almost 50% of the drawdown of stocks. And so you continue to see the positive correlations of stocks and bonds and the lack of a buoy from bonds in portfolios. And I think that continues to be a relevant theme for pretty much all of our conversations here the last 24 plus months.
Dave
The short answer was that there was positive correlation between stocks and bonds, John Luke, but it hit the wagon there, brought some commentary and I love it. It really seemed like there was getting some complacency in the market at the end of the quarter and that coincidentally was the linchpin that really saw the market do a peak to trough drawdown of 5.91%. And as you all have all heard me talk about for quite some time, and Derek, you can probably go to the next slide here. On average during a one-year basis, the market has three different distinct 5% pullbacks and one 10% pullback. So we just witnessed our potential first of three, 5% pullbacks in the market as a whole. So what I would say is that this is a very healthy market pullback and I think that people forget that pullbacks are healthy.
They always expect a hockey stick higher in the bottom left-hand corner of a performance starts at the top right-hand corner. But we know that the market just does not move in a linear fashion. It oscillates on its way up. So what really came out in the mid-part of the month that I’d really like to see was that the Bank of America, A2 study came out and showed, hey, what managers, what allocators, where’s your head at currently right now on your over allocation to stocks? Because what we saw over the last six months was that there was an over allocation of fixed income, but some people during that rally over the last five months, especially the allocators are getting more over allocated to risk on i.e. stocks. But what we saw come out on April 18 showed that obviously this is more of a soft data point than anything, but it really showed that people’s optimism for risk on assets actually came down back into its historical averages.
So basically that makes me think that this was a very healthy pullback because it brought expectations from market participants back into normalcy from where it was in the stratosphere just a month or a month and a half ago. But I think the surprising part for me on this pullback because the pullback from pictures drop was 5.91%. Volatility is somewhat nowhere to be found. I mean it’s been more than a year since we’ve seen a decline of over 2% on a one-day basis for the S&P 500. And that’s a current stretch of subdued volatility that’s nearing levels last observed back in 2017 where you had some type of bomb again and basically the 300 straight trading days that the S&P 500 not being down 2% more and that volume getting day back in 2017, you saw a reading of 352 straight days and that’s the second-longest on record.
And from 2003 to 2007, you saw about 950 trading days that occurred without some type of a one-day move of the S&P 500 by 2% or more. So yeah, we might’ve had a pullback. It seems really healthy. But I think one of the last, I’m going to say two more things, and if you’re looking at this chart here, even though you’ve had, this chart space is showing what your max peak to draw drawdown is. It’s showing the year, the peak to trough drawdown, the max peak draw down in that middle section. But on the right side it’s actually showing you your total return at the end of the year. So look at how many peak to trough drawdowns we had of over 10% and the market still ended up green. I mean that just shows you that pullbacks, a little bit of market volatility, it happens and it’s healthy.
I mean just on that far right chart, since 2008, the worst max drawdown obviously was a 2008 at 48%. I’d say eyeball it, the average drawdown is about 10%, but in all but three of those years of the year ended with a positive return. So you know what? Don’t let a market pullback like this scare you, but again, that’s why the genesis of Aptus credit, we are the drawdown patrol. We think we’re very level-headed when it comes to helping our partners maneuver the choppiness of volatile periods such as this one. But the last thing I’d say is that one of the more difficult jobs that myself, Brad, John Luke, Katie, Mark, and the rest of the CFA team is really trying to figure out and differentiating between what a modest correction phase is versus the start of something more sinister.
And I’d say that my base case is this near-term weakness that we witnessed of 5.9% on the drawdown should probably be viewed more of the former, more of a modest correction. But you know John Luke, everyone knows John Luke on this call and I’m probably in this camp too, but we’re always going to be incrementalist and always on guard for the challenges to our thinking. But I do think that this was more just of a washout of some, a little exuberance on the risk on space from some allocators and you saw that washed out. So it was just a healthy pullback in my mind.
John Luke
Yeah. And just market a little bit resetting to the move up in rate, right. I mean, you’ve seen a massive rally, the ten-year bonds the last five months I think is up or was up at the highs of about a hundred fifth. So just some general reprice in there. But biggest thing I think like we have talked about a lot is you look back to October of last year and everyone was in T-Bill and Chill mindset and boom, market rally 30%. So just part of the ride.
Derek
Part of the ride. Well, and one of the things that I know I’ve heard y’all talk about the focus has really been on what the Fed’s doing, but obviously we’ve seen the market go up during this pause and we’ve seen the market go down during this pause. What you had indicated was maybe that the only thing that could cause something a little more sinister would be is if we saw the economy fall off at the same time. So I see you guys included this chart here that shows the state of the consumer and what’s going on there. So maybe you can talk through this a little bit.
John Luke
Yeah, no, I think it’s a perfect setup there. One of our biggest comments of what would it take for the market and economy to falter a little bit would just be a cut to growth and general cut to growth expectations. You haven’t seen that yet. We’ve obviously been happy as everyone has to see inflation moved from 9% to 3%. It’s still sticky at 3%. The price level of things has gone up drastically since Covid. Probably not going to go back down to where it was. But I think one of the surprising things to most people has been the strength in the labor markets and the strength in real wage growth. And so what you’ve seen on top of the hot items that we’ve talked a lot about, whether it’s stock portfolios being at all time high, home values being at all time high, the ability and that the fact that most people have locked in interest rates at very low levels as their wages have grown, have given them more disposable income.
And you continue to see that be the case. Wages remain pretty robust. As inflation comes down, that just increases the spending power of people. And I think one of the things we talked a lot about was the shuffle of spending during Covid when you’re locked down, the spending went to goods and goods prices went up as they felt supply pressures and just demand for good. But what you’ve seen as a lot of that has shaken out is the money has just shifted to services. And so the biggest thing that I like to think about is really that as people remain employed, as they remain getting increases to their salaries and to their pay, as their asset values stay elevated, that the spend just shifts to other areas. And so you continue to see that work as the economy is driven by the consumer and the consumer continues to spend because they’ve got the money. And I would say that probably will continue looking forward barring some major hack to forward growth and we just don’t see that.
Dave
I’d agree. I keep getting that question because one thing I continue to say, what’s the rally killer here? And I think the wrench in the spokes, the tire, the flowing growth and everyone then responds like, “Hey Dave, you’ve continued to say that the consumers are strong. How long can this last?” And to say what John Luke said, in other words like well since over the last five and a half, six months, the S&P 500 is up 25%. So that’s a lot of money though unrealized probably in most cases still in people’s pockets. I mean, think of a lot of y’all on this call here, you might not be feeling a lot of the weakness on the consumer side because your financial assets accounts have just been boosted by 25% via your large cap exposure. That’s somewhat insulating, at least the mindset of the consumer right now. And they continue to spend and I don’t see it slowing down here in the near term.
Derek
Awesome. So the other piece that’s obviously critical is we’re in the midst of earnings season and I don’t know where we are, we’re halfway ish. I mean it looks here, based on this chart that you guys published this week, it’s 233 out of 500. So yeah, we’re pretty much halfway there. What’s been the tone so far?
Dave
Yeah, we’re actually a little bit farther down the road there. You can look at it from a nominal amount, 233 out of 500, poor reply, closer up to 325 of the names actually now reported encompassing this week. I mean outside of Apple tomorrow night, Thursday, May 2nd. I mean majority of the big players have already reported. And it’s a continuous theme that we saw that this market really started to deflect back higher after that peak to trough draw on a 5.9% rate win earning season began. And if anyone of y’all read my Q1 2024 earnings preview, I mean my big thesis here is that earnings have catapulted higher over the last three, four quarters coming off of a earnings recession, basically solely off of profit margin expansion. So the big thing that I was looking for this earnings season was, hey, can you get some top line to grow?
Can you increase crisis, but more importantly, can you increase margin? Because I think to get this next leg of earnings growth that the market’s expecting, the tune of 12% in 24 and almost another 12% in 2025, you legitimately just need to get volumes in top line back in order of a growth kicker right now. And what we’ve seen so far in this quarter is that we’ve seen top line basically this by volumes grown by 4% year over year. That’s relative to expectations too. So I’m saying that’s pretty strong, and if you get that volume expansion and growing that top line, that’s how you get even more operational leverage to actually increase profit margin of what we’ve seen over the last three, four quarters. You just get that more on a sustainable but more on operational leverage kick, which could drive the market much higher. Overall, I think it’s been a strong earnings season so far.
Obviously there’s been some winners, there’s been some losers cough meta, the winners Google. What I’m really focusing on because what we saw towards the latter half of last earning season for the consumer names, which basically just reported a month and a half ago, where there’s LVMH, Estee Lauder, [inaudible 00:14:24], surely seen some cracks in some of the higher-end consumer spending. That worries me just a little bit, but a lot of that data tends to be choppy and I think everyone’s always looking for cracks in their thesis of the consumer to really start to play out, oh, this time isn’t the head stake.
But again, as I mentioned before, trying to recognize whether market movements or consumer spending is a head fake or something more sinister is one of the toughest things we can do in this industry. But for right now, it seems to be more of a head stake in that consumer realm. And what we’re seeing from the rest of the part of the market tech’s still driving everything, the Meg-7 is still driving everything with earnings growth up 27% year-over-year. It’s been a pretty good earnings season and the market started to reflect that here recently.
John Luke
I think the thing that sticks out on this chart is the green, which is the improvements of today versus where we were a month ago. And it’s just showing that it’s not just confined to one or two sectors. You’re seeing it pretty broad-based where things are better than expectations work. And so I think that’s general positive to that theme of broadening out a little bit, which we like.
Dave
If you look at the earnings side on the right side, John Luke, look at healthcare, it’s down 27%, you’re like, “Wow, that’s terrible.” But if you’re actually look into the data and not just data might of what happened here, that’s all just BMY from an acquisition of write-off basically. Not a write-off, but just an acquisition that they had on a one-off basis cost really driving that earnings expectations down. It’s like it really should be every single sector has seen earnings growth, especially relative to expectations except for utility. Pretty good.
Derek
Yeah, the one that pops out to me, even though it’s boring, is financials, which have struggled through an inverted yield curve, but you see incremental improvement from a pretty low base from January to April, and then even on results both on the sales and earnings side. So I would guess there’s not too many markets where financials are doing okay, where you would run into a devastating market ahead probably. What was your take on financials coming out of the quarter?
Dave
Banks, it was very idiosyncratic. The crappier banks like Wells Fargo, Citi had great results. Bank of America and J.T. Morgan were a little bit more cautious. They have some more credit write-offs. They also had a few more allowances increased on the CRE side, but basically anything that the market was already looking for. So they had a little bit more of a draconian price movement for those larger, higher quality banks like JP Morgan and Bank of America. But we know that Brian Moynihan and Jamie Dimon are always the bellwether speaker heads for banks, but they still seem pretty positive if you looked at their commentary. A lot of these banks are still just somewhat benefiting, I think from some of the, John Luke will know this. Was it the BTFP or whatever the banking threat with that acronym? You love your acronyms, John Luke. So I know you know this, and this should be the pop test right here, but they’re still [inaudible 00:17:28] off of clipping the margin from what they were able to get from the Fed to really to stay afloat in case they needed to increase the half of their books.
Banks, yeah. Yeah. They’re still lending not at a grandiose amount, still a paltry amount, two, 3%, but it’s still much better than expectations. But the learning lesson here is that the market’s a forward-looking mechanism, and it’s all just based on expectations. And that’s what makes this market so hard. It’s not based on absolute expectations, it’s based on relative expectations that you don’t really know that you’re relatively benchmarking yourself off of because it’s the market expectations and you just don’t know what those are, if that makes sense.
John Luke
And I think just in the simple term, it takes away some of the sting that the market was so concerned about with the CRE exposure, probably not as bad as what most people expected. And I think you’ve seen that with a lot of the financials. That and their deposit costs haven’t gone up as much as maybe most people expected with rates up.
Derek
So I guess since today was Fed day, I don’t know if you’ve had to take out of it. Looked like there was a big spike and gave it all back. And a lot of times that reverses the next day anyway. But anything I’d probably go to you JL ’cause I know you dig into that stuff pretty closely. Anything out of the Fed today that was surprising?
John Luke
Yeah, so surprising, not really. I figured that Powell would really push back against any language on further rate hikes. And basically he said it was very unlikely. The bar to get further hikes would be very high. So in my mind, that pretty much puts the nail in the coffin that the hiking cycle’s likely over. Really the one change, I think, that was maybe a little bit was they actually are going to let QT roll off a little faster than what most people expected. So most people were thinking $30 billion of treasury coming down from $60 billion as what we’re seeing right now as far as balance sheet declining. And it’s actually going to be 25, so they’re going to let more bonds roll off, or sorry, less bonds roll off than what was expected previously. And you back that up with the commentary of Powell has taken a stance of being fairly dovish and not moving the inflation target, but letting it be moved in the sense of tolerating higher inflation for longer.
So it’s like his wording is not moving it, but its actions are accepting inflation. And so it’s just interesting that you’ve seen the inflation data at the start of the year be more elevated than what was expected, and you’ve got them accelerating the stoppage of QT. And so I thought that was fairly interesting of those two seem to go against each other as far as keeping things constrained with policy, but maybe they know more than we do just from a liquidity perspective with what the impacts of QT are on the market.
Derek
Got it. All right. Well, I appreciate y’all hopping on. Obviously you guys share dozens and dozens of charts every week, and these were a couple of the ones that the team had picked out that thought were most relevant to what advisor conversations were. So thanks for going through them and yeah, we’ll see how May present itself relative to April.
John Luke
We shall.
Dave
Thanks to everyone.
Derek
Thanks guys.
Disclosures
Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product. The information contained herein should not be considered a recommendation to purchase or sell any particular security.
The opinions expressed are those of the Aptus Capital Advisors Investment Team. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Forward-looking statements cannot be guaranteed.
Aptus Capital Advisors, LLC is a Registered Investment Advisor (RIA) registered with the Securities and Exchange Commission and is headquartered in Fairhope, Alabama. Registration does not imply a certain level of skill or training. For more information about our firm, or to receive a copy of our disclosure Form ADV and Privacy Policy call (251) 517-7198. ACA-2405-5.
