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7 charts from the past week that tell an interesting story in markets and investing…
1) The Historic Rally
The S&P 500 was up more than 1% in each of the last 4 trading days…
This is only the 15th time in history that has happened (note: data going back to 1928). Interestingly, a number of prior instances occurred near bear market lows (1932, 1938, 1962, 1970, 1974, and 1982).
What’s different about today’s 4-day streak of large gains? The S&P 500 was not yet in a Bear Market, with a maximum drawdown of 14.6% from it high in early January.
2) Heightened Volatility
From February 28 through March 14, the Volatility Index ($VIX) closed above 30 for 11 consecutive days. That’s only happened a handful of times in history with data going back to 1990. With the markets moving higher, volatility has come back down, with the $VIX ending the week at 23.87.
3) A Hike at Last
As widely expected, the Fed hiked interest rates by 0.25% and projected 6 more 0.25% hikes by the end of the year. That means a 0.25% hike at every meeting which would bring the Fed Funds Rate up to a range of 1.75%-2.00%.
How does the Fed’s current policy stack up globally? It’s still remarkably easy. At -7.5%, the real Fed Funds Rate (Fed Feds Rate minus Inflation Rate) continues to be the lowest of any developed nation in the world.
As for the Fed’s balance sheet, it hit another record high at $8.95 trillion. Continued increases, however, are on borrowed time, with the Fed stating they will be announcing a plan to reduce the size of its balance sheet at a “coming meeting.”
4) What is the Yield Curve Signaling?
The flattening of the US yield curve continued after the rate hike announcement with the difference between the 10-Year Treasury yield (2.14%) and 2-Year Treasury yield (1.97%) falling to 0.17%. This is the narrowest spread we’ve seen since February 2020.
Part of the yield curve is inverted with the 3-Year Treasury Yield (2.15%) now 1 bps higher than the 10-Yield (2.14%). The last time we saw this particular inversion was February 2007 (note: it first inverted in that cycle in Feb ’06).
What is the flattening of the yield curve signaling? That market participants are expecting slower economic growth to come, with an increased risk of recession.
5) Rising Mortgage Rates, Falling Affordability
The 30-year mortgage rate in the US has moved up to 4.16%, its highest level since May 2019. In January of last year it hit an all-time low of 2.65%.
We now have the same mortgage rate as May 2019 but the median price of a new home in the US is up over 35% since then ($313k to $423k) with many areas of the country rising even more. The result is a substantial decline in affordability as incomes have failed to keep pace with home price inflation.
What would lead to a pause in further price increases? A decrease in demand and/or and increase in supply. On the demand side, we’re already seeing some signs of buyers pushing back, with the appreciation in home prices moderating in recent months. On the supply side, more houses are coming, with Housing Starts in the US now at their highest levels since 2006.
6) A Reverse Crash
After its peak in March 2000, the Nasdaq composite fell 78% to its low in October 2002. That took 31 months. From its high in February 2021 to its low last week, the China Internet ETF $KWEB fell 79% in just 13 months.
The rapid decline pushed valuation multiples down across the board, with Alibaba ($BABA) trading at the same price to sales ratio (1.6x) as Campbell Soup ($CPB).
But that wouldn’t last long as we saw a reverse crash on March 16, with 30-60% gains among China’s largest companies in a single trading day. What was the impetus? Chinese officials said they would introduce “market-friendly policies” and keep the capital markets “running smoothly.” It remains to be seen what that actually means but investors seems to be interpreting it as a bullish signal.
7) US Covid Declines Continue
Covid-19 cases in the US are now down 97% from their peak in January and at their lowest levels since last July.
Deaths lag cases but we’re already seeing a significant decline, down 74% from their peak in January and at the lowest levels since last August. We should see these numbers continue to fall in the coming weeks.
And that’s it for this week.
Have a great week everyone!
-Charlie
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