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10 charts and themes from the past week that tell an interesting story in markets and investing…
1) Retailers Go on Sale
Walmart ($WMT) fell over 11% in a single trading day last week, its largest decline since the Friday before the 1987 Black Monday crash. It finished the week down 19.5%, its largest weekly decline ever (previous record was -17.7% during the 1987 crash week).
A day after the Walmart rout, Target ($TGT) fell nearly 25%, its 2nd largest decline ever (#1 was the 33% decline during the 1987 Black Monday Crash).
What happened?
The negative effects of higher inflation are starting to hit the bottom line, with a decline in profits at both companies due to higher costs, rising inventories, and lower than expected sales of discretionary items. As food/gas prices continue to increase, consumers are shifting their spending from higher margin items (ex: electronics) to lower margin items (ex: groceries).
2) Every Bear Market is Different
It’s official: the Bear Market of 2022. The S&P 500 has now fallen 20.9% from its high in early January, the largest decline for the index since March 2020.
The question everyone’s asking: what happens next?
To answer that, we often look back at history, attempting to find parallels with the past.
But even a cursory glance at a table of prior bear markets reveals the difficulty in doing so, as the lack of any consistent pattern is evident. Bear markets have lasted as short as 1 month (2020) and as long as 36 months (1938-42), with a range of declines from -20% (2018/1990/1976-78) to -86% (Great Depression).
Every bear market is different, and the full story of the one we’re living through today has yet to be written (see here for my full post on bear markets).
3) Relentless Declines
The S&P 500 fell 3% last week, its 7th consecutive weekly decline. This is longest weekly down streak since 2001 which fell 8 straight weeks (and is tied with 1970 for the record). Here’s a look at what happened following the longest down streaks in history…
As a result of the declines, stocks are getting cheaper (a good thing), but don’t get too excited just yet. The Shiller PE Ratio has only moved back to 30, which is right around pre-1929 crash levels.
4) Rising Spreads
US High Yield credit spreads have increased to 492 bps, their widest levels since Nov 2020.
But compared to other major stock market corrections in recent history, this is the lowest spread we’ve seen, and still below the historical average of 543 bps.
You can interpret this in one of two ways:
1) Bullish interpretation: the credit market is the smart money and doesn’t believe we’re headed for a recession.
2) Bearish interpretation: credit market is not yet pricing in the rising risk of recession, and more pain needed before we reach a bottom.
5) The Last 2 Years in Tech
E-commerce sales in the US increased 6.6% over the last year, the slowest rate of growth since the 3rd quarter of 2009.
A brief summary of the last 2 years in tech:
a) pandemic/stimulus pulled forward years worth of demand,
b) growth rates surged,
c) investors bid up tech stocks to astronomical multiples assuming exponential growth would continue,
d) it did not continue and growth rates slowed,
e) tech stocks came crashing down.
6) Great Company = Great Stock?
One of the more common mistakes investors make is conflating a great company with a great stock. The two are not nearly the same thing. Another example…
Snap ($SNAP) is now down 85% from its high last year.
It’s also 48% below its first-day closing price from its IPO in 2017. Meanwhile, its revenues have increased 990% since its IPO ($404 million to $4.4 billion).
By any measure, Snap has been a great company, but it hasn’t been a great stock.
Why?
Because expectations were too high, with Snap trading at 64x sales at its IPO. Too many people thought it was a great company, driving up its valuation to extreme levels. The multiple contraction since then down to 4.6x sales (its lowest ever) has more than outweighed all of the company’s stellar fundamental growth.
7) Home Prices Skyrocket, Sales Plummet
The average price of a new home in the US rose to a record $570,000 in April, a 31% increase over the last year.
Here’s a look at the average sales price of a new home in the US over the last decade…
- 2012: 288k
- 2013: 337k
- 2104: 325k
- 2015: 340k
- 2016: 369k
- 2017: 366k
- 2018: 385k
- 2019: 385k
- 2020: 360k
- 2021: 435k (+21% YoY)
- 2022: 570k (+31% YoY)
What stands out? The last two years, and when you combine this with the recent spike in mortgage rates, housing is becoming less and less affordable.
In January 2021, the 30-year mortgage rate was 2.65% and average new home price in the US was $401,700. Today, the 30-year mortgage rate is 5.3% and average new home price is 570,300. Assuming a 20% down payment, that’s a 96% increase in the monthly payment (from $1,294 to $2,533).
The median price of a new home in the US is now 6.7x higher than the median household income which means that housing has never been more unaffordable relative to incomes.
This seems to finally be translating into lower demand, with new home sales plummeting 30% since the end of last year, moving down to their lowest levels since April 2020.
8) The Illusion of Stability
Investors in the TerraUSD ($UST) stablecoin were promised 20% yields with no volatility (pegged to $1.00). And then this happened: a 94% decline over a few short weeks. The lesson: if it seems to good to be true, it is.
9) The Only Path to Prosperity
After 144 consecutive monthly increases (12 years), the US Money Supply declined in April for the first time since March 2010. The year-over-year growth rate of 8% is the slowest since February 2020 and is likely to continue to decelerate in the coming months.
Initially, everyone loves borrowing/printing money as the results only seem positive (booming stocks/housing/economy). But invariably, the pernicious effects of inflation are revealed and a choice has to be made: borrow/print more or end the party before it’s too late.
Thankfully, we seem to have chosen the latter, with the Senate (Manchin) drawing a line in the sand on additional spending bills and the Fed ending QE/ZIRP with a move towards normalization. In the short run, this transition has been painful, but it’s something we all must endure. Sound money is the only path to long-term prosperity for a nation.
10) On the Road Again
There was an average of over 2.2 million US airline travelers per day over the last week, the highest level since the start of the pandemic. Despite higher prices everywhere you look (airfare/hotels/restaurants/rental cars/etc.), Americans are still spending, and the summer travel season is expected to be a good one.
And that’s it for this week.
Have a great rest of the week everyone!
-Charlie
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