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10 charts and themes from the past week that tell an interesting story in markets and investing…
1) No Place to Hide
The last 8 times the S&P 500 was down in a calendar year, Bonds finished the year up, cushioning the blow.
It’s been a very different story thus far in 2022 with Stocks and Bonds both down over 10%, something we’ve never seen in a calendar year.
The result: a 16% decline in the US 60/40 stock/bond portfolio, by far the worst start to a year in history.
2) Is Capitulation a Good Investment Strategy?
The Wilshire 5000 was down 20.9% over the last 6 months, one of the worst 6-month periods for stocks in the last 50 years.
Has capitulating after the largest 6-month declines been a good strategy for long-term investors in the past?
It doesn’t appear to be, as future returns over the subsequent 3, 5, and 10-year periods were all positive and on average significantly higher than other time periods.
As for the shorter run, anything can happen, but few investors seem to believe that the bottom is in…
Why do they feel that there’s more pain to come? Take your pick…
3) Are We Already in a Recession?
This is a question that’s increasingly being asked, and the latest ISM report has only added to concerns.
The last 5 times the spread between New Orders and Inventories in the ISM Manufacturing Index was this negative, the US was already in a recession.
Additionally, the US Yield curve is once again flashing a warning signal, with an inversion of the 10-year (3.09%) and 2-year (3.12%) treasury yield.
The first inversion occurred back in April, and as I wrote at the time, it has been a pretty good indicator of future economic weakness.
So are we in a recession? Ultimately, that’s up to NBER, the official arbiter in the US who has yet to make any announcement.
But if you ask the people on the street (or Twitter), a majority seem to believe that we are.
And that’s important because it’s led to a sharp move lower in consumer confidence, which in turn could lead to a decline in consumer spending (which is the largest part of the US economy at 70%).
And the expectation is that that things only get worse over the next six months, with the Expectations Index from the Conference Board at its lowest levels in over a decade.
4) The Jobs Comeback Continues
The best counter argument as to why we aren’t yet in a recession has been continued strength in the jobs market.
Another 372k jobs were gained in June, bringing the total number added back to 21.5 million. That’s only 500k short of the total before the start of the pandemic.
The US Unemployment Rate remains at 3.6%, the lowest level since the start of the pandemic and only 0.1% above the 50-year low we saw in February 2020 (3.5%).
The number of job openings still exceeds the number of unemployed persons in the US by over 5 million, an indication that the demand for labor remains much higher than supply.
This should put continued upward pressure on wages, which hit another record high in June, up 5.1% over the past year.
5) Inflation Abating
Gas prices have fallen over 30 cents per gallon from their peak in mid June.
Copper is down 33% from its all-time high in March, at its lowest levels since 2020.
Corn, Wheat, and Soybeans are all down over 25% from their highs and below the levels they were at before Russia invaded Ukraine.
Used Car prices are down 7% over the last 6 months. In 2020, this was one of the first areas to spike higher, in advance of broader inflationary measures. Hopefully, the current downturn is a leading indicator of lower inflation rates to come.
6) One Way Make Housing More Affordable
US Housing Affordability is now at its lowest level since July 2006, which was at the peak of the last housing bubble.
What happened back then?
Home prices subsequently fell 25% (national index), and housing became more affordable again.
7) From QE to QT
The Fed’s balance sheet is finally moving lower with the start of quantitative tightening, but it remains less than 1% below is all-time high. The transition from QE to QT has only just begun.
8) Working from Home
Less than half of workers in the largest US cities are back in the office on a daily basis (10-city average).
Why aren’t they going back? There are many reasons but the best explanation is that few workers want to be in the office every day, with many more preferring to work mostly from home or a hybrid model.
Some incredible stats on the impact this trend has had on NYC…
“From April 2020 to March 2021, 26,300 New York City small businesses closed permanently, according to a report the mayor released in the spring. Available office space in New York has grown to about 125 million square feet, up from 90 million in the first quarter of 2020, according to data firm CoStar Group Inc. Retail rents in Manhattan have declined for 18 consecutive quarters, starting well before the pandemic, according to commercial real estate services firm CBRE Group Inc.” – WSJ
9) High Growth Rally Attempt
From its peak in February 2021 to its low in May 2022, the ARK Innovation ETF ($ARKK) fell 78%, matching the 78% Nasdaq Composite decline from March 2000 through October 2002.
It’s hard to find anyone bullish on high growth stocks today, the complete opposite of the sentiment landscape back in early 2021.
On that front, it’s seems notable that ARK did not hit a new low with the broad market in June and is showing some relative strength for the first time in months.
At the lows in May, I asked whether a long or short position in $ARKK would be the better bet over the next year? So far, the majority has been right ($ARKK up 27% since vs. -30% for $SARK).
10) King Dollar
The US Dollar Index is at its highest level since 2002, up 49% from its low in 2008.
On the flipside, the Euro is at its lowest level since 2002, down 36% from its 2008 peak.
The differential in monetary policy appears to be part of the story here, with the ECB still maintaining negative interest rates despite record inflation of 8.6%.
Meanwhile, the Fed has already hiked rates 3 times with the expectation that they will push rates to above 3% by November.
And that’s it for this week.
Have a great weekend everyone!
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