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7 charts from the past week that tell an interesting story in markets and investing…
1) First to $3 Trillion
The new year started off with a bang.
Apple, the first U.S. company to hit $1 trillion back in 2018 and then $2 trillion in 2020, became the world’s first to hit $3 trillion.
Apple’s market cap has now quadrupled over the last 3 years.
What’s driving this incredible increase in value?
a) Fundamental growth: Apple’s revenues have increased 42% and net income is up 62% over the last 3 years.
b) Multiple expansion: Apple currently trades at 8.4x sales and 32.4x earnings, up from 2.8x sales and 12.4x earnings just 3 years ago (note: using TTM sales/earnings).
Who will be the first to hit $4 trillion?
Here are the results of a poll I ran on twitter this week…
2) The Jobs Comeback Continues
The US Unemployment Rate moved down to 3.9% in December, the lowest level since the start of the pandemic. This is now well below the historical average of 5.8% (since 1948) and not far from the 49-year low we hit in February 2020 (3.5%).
Importantly, hourly earnings came in far above expectations, rising 4.7% over the last year (vs. expectations of a 4.1% increase).
3) The Rate Hikes Are Coming
The combination of very low unemployment and very high inflation is something we haven’t seen since 1970. But back then the Fed Funds Rate was close to 9%, while today it still stands at close to 0%. The outlier in the table below is glaringly obvious, and suggests the Fed is far behind the curve…
The FOMC minutes released last week confirmed that is indeed the case, and they seem to finally be ready to do something about it.
The market is now expecting the Fed to not only end their balance sheet expansion in March, but also hike rates at the same time (78% probability according to Fed Funds Futures). The Fed even discussed the potential for a balance sheet reduction soon after the first rate hike, something few were anticipating.
The market’s reaction was swift, with bonds falling every day last week (-1.5% in Barclays US Aggregate), with 1, 2, 3, 5, and 10-year Treasury yields rising to their highest level since the start of the pandemic.
4) Crypto Correction
The prospect of higher interest rates and a more hawkish Fed is putting some pressure on the asset class that had benefitted most from the narrative of low rates and ultra-easy money: Crypto.
These declines are serving as another helpful reminder for investors: drawdowns for any asset that has experienced exponential gains are the norm, not the exception.
Here’s an updated look at major corrections in Bitcoin since 2010…
5) Software Slump
Another area of the market that has been hit hard of late is Software ($IGV ETF) and Cloud Computing ($SKYY ETF).
Both are in the midst of a relative strength crash, with their ratios against the Nasdaq 100 in freefall over the last two months.
We saw this theme in 2021, with many former growth leaders becoming significant laggards.
The multiple contraction in these names has been severe, and many have suggested this is due to the prospect of higher interest rates to come.
The question for investors: when has the selling gone too far?
That’s impossible to say, just as it was impossible to call a top on the way up.
But it is interesting to me that a company like Teladoc has now given back all of its 2020 gains.
And during this same time period, Teladoc’s revenues have more than tripled, from $553 million to $1.86 billion (TTM). Its price to sale ratio started at 11x, jumped to 24x at its peak last February, and is now down to 6.5x. This is its lowest P/S ratio in 5 years. That’s still not “cheap” but its certainly a good deal cheaper than it was a year ago.
Another interesting development: both Coinbase (8.6x) and Robinhood (6.6x) are now trading at a lower Price to Sales ratio than Schwab (9.6x).
While the multiples on Coinbase and Robinhood have been contracting, Schwab’s have been expanding. Schwab’s price to sales ratio of 9.6x is now at its highest level since 2000.
6) Same Outcome, Different Paths
It’s no secret that Warren Buffett is not a fan of Gold, having denounced the metal as an investment on numerous occasions.
While there’s no denying Buffett’s huge long-term outperformance versus Gold, over the last 20 years they look exactly alike, with a return of +548%. Same end point, but very different paths getting there (first 10 years belonged to Gold, and the last 10 years to Buffett).
7) Nearing Peak Covid
Cases of covid-19 globally are surging to record highs, averaging over 2 million per day in the last week. This is nearly 3x higher than the peak levels from a year ago.
The good news: fatality rates are significantly lower (currently averaging 6k deaths per day vs. nearly 15k per day last year), a combination of vaccine/natural immunity and a milder Omicron strain.
If we follow the pattern from 2021, we should see a global peak in cases at some point in the next week, with a sharp move downward thereafter.
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Have a great week everyone!
-Charlie
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