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10 charts and themes from the past week that tell an interesting story in markets and investing…
1) New Lows
The S&P 500 broke below its June low last week, extending the bear market that began in January.
At 269 days and counting, this is now the longest correction we’ve seen since the March 2009 low.
How does the 26% decline over the past 8 month compare to other bear markets? Here’s a table going back to 1929. What it shows is high variability from one bear market to the next, with an average/median decline of 36%/29% over an average/median duration of 14/12 months.
What you’ll notice from the stats at the bottom of the table is the tendency for recessionary bear markets to be longer and deeper than non-recessionary bears.
But are we in a recession? While the Federal Reserve and the Federal Government still seem to be in denial, most economic data continues to trend in that direction…
2) No Safety From the Safety Trade
What’s been markedly different about the current recession from those in the recent past has been the behavior of interest rates.
Typically, interest rates fall during recessions as the Fed is cutting rates and inflation is moving lower from a decline in demand. This year, we’ve seen the opposite, with the Fed hiking rates, Treasury yields across maturities spiking higher, and inflation hitting a 40-year high.
This has led to the longest (26 months) and deepest (-16%) drawdown we’ve ever seen in the US bond market.
The 10-Year treasury bond is on pace for its worst year ever (-16.7%), and a 60/40 portfolio of the S&P 500 and 10-Year bond (-21%) is on pace for the 2nd worst year ever, trailing only 1931.
Stocks and Bonds falling together, while rare, has happened before (1931, 1941, 1969, and 2018). But if the year ended today, it would be the first time in history that both stocks (S&P 500) and bonds (10-Year Treasury) were down over 10% in a calendar year.
3) Why Fear is Good
Given the losses outlined above, it should come as no surprise that investor sentiment has soured. Bears outnumbered Bulls by over 43% in a recent AAII Sentiment Survey.
With data going back to 1987, the only times we’ve seen sentiment more bearish than today was in October 1990 (-20% bear market that bottomed in Oct 1990 w/ a recession in 1990-1991) and March 2009 (week of the lows).
Historically, fear has been good to long-term investors who’ve embraced it as we’ve seen above-average forward returns following bearish sentiment extremes. We observe the opposite after periods of extreme greed (high percentage of bullish investors), where forward returns are well below average. This is not to say that stocks can’t go lower (they most certainly can), but that the risk/reward is much better today than it was at the start of the year.
4) What Happens After Large Declines?
Another sign of improving risk/reward is the historical record on what tends to follow large stock market declines.
The Wilshire 5000 (broadest US equity index) was down 25.9% in the last 9 months, one of the worst 9-month periods for stocks in the last 50 years.
Has selling AFTER large 9-month declines been a good strategy for long-term investors in the past?
It doesn’t appear to be. We’ve seen above-average returns going forward with positive returns every single time looking out 3, 5, and 10 years into the future (note: data goes back to 1971).
5) The Other Side of Mania
The downturn in stocks has led to a predictable downturn in the IPO market. During last year’s mania we saw a record $316 billion in U.S. IPO issuance, by far the biggest ever. Thus far in 2022, we’ve seen just $19 billion issuance, on pace for the slowest IPO year since 2016.
A huge driving force of the boom/bust in IPOs has been the 180-degree shift in the U.S. money supply. After a record increase in 2020/2021, money supply growth has stalled in 2022. And over the last 5 months, the money supply has actually declined, something we haven’t seen since 2004.
The year-over-year growth rate in the US money supply moved down in August for the 12th straight month. At 4.1%, it’s now below the historical average of 7.2% since 1959. There’s more work to be done but this is moving in the right direction if your goal is to break the back of inflation.
6) Inflation Expectations Plummeting
Speaking of inflation, the market-based expectations continue to fall. The 10-year breakeven inflation rate moved down to 2.15% at the end of September, an 18-month low.
You can be sure that the Fed is watching this number closely, and should it continue to move down, will likely have an impact on the path of the Fed Funds Rate.
7) Lower Home Prices and Lower Rents
Another market the Fed is most certainly watching is the housing market, with rising interest rates leading to a rapid slowdown.
The 30-year mortgage rate in the US has moved up to 6.70%, its highest level since July 2007. The 3.69% spike in rates over the last year is the largest YoY increase since 1980-81.
US Home prices fell in July for the first time since December 2011, ending a streak of 126 consecutive monthly increases (note: case-shiller national home price index, seasonally adjusted).
US Rents fell 0.2% in September, the first decline this year. The year-over-year increase moved down to 7.5%, the slowest growth rate since May 2021.
8) $31 Trillion and Counting
On thing that has not stopped going up is the US National Debt, which has crossed above $31 trillion for the first time. The record increase of over the last 3 years? $8 trillion, or 35%.
When the existing debt matures, new debt is issued at much higher interest rates. This is good news for investors buying these new bonds (1-year through 7-year Treasuries are all yielding 4% for the first time since October 2007) but a growing problem for the Federal Government as the interest expense rises.
Unless interest rates fall sharply in the coming months, the interest expense on Public Debt will soon surpass $1 trillion on an annual basis and become the largest line item in the budget.
9) Slow Normalization in the Jobs Market Continues
The number of US Job Openings hit a 14-month low in August, down 1.8 million from their record high in March. While still roughly 4 million above the number of unemployed persons (6 million), this is a sign that the labor market is finally moving back to a more normal state. That means a few things: 1) workers that have been on the sidelines are increasingly coming back to work (due to depletion of stimulus savings and rising inflation), 2) there are less jobs available (companies responding to recession) and 3) there is less pressure on companies to provide hiring incentives and raise wages (more of equilibrium in demand/supply).
10) Down Goes the Pound
The British Pound hit a new all-time low against the US Dollar on September 26, breaking below the prior low from 1985. The Pound has lost over 20% of its value against the Dollar this year and more than 50% from its peak in 2007.
With spiking interest rates (10-year Gilts rising from 2% on August 15 to 4.5% on September 27) and their currency plummeting, the Bank of England seems to have seen enough, announcing a “temporary” bond buying program. This is a sharp reversal from their stated plan to begin selling their holdings of government bonds (QT) in an effort to control record inflation (10% over the last year).
And that’s it for this week.
Have a great weekend everyone!
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