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9 charts and themes from the past week that tell an interesting story in markets and investing…
1) Recession?
If it looks like recession, feels like a recession, and sounds like a recession, then it probably is a recession.
While the NBER (the official arbiter of expansions and contractions in the US) has yet to make a declaration, the evidence pointing to a downturn in the economy continues to build.
The latest example: real GDP growth, which has now contracted for two consecutive quarters.

The last 10 times the US had 2 or more consecutive quarters of negative Real GDP growth, the economy was in a recession. You have to go back to 1947 to find an exception to that rule of thumb.

However, many are saying we “can’t” be in a recession because jobs are still growing.

But while employment is an important part of the calculation, it’s not the only part, and it tends to be a coincident and at times lagging indicator. We saw this during the 1973-75 recession where jobs continued to grow for 8 months at the start of the recession before turning lower.

Will that happen again today? It remains to be seen, but the odds are increasing that it could. After hitting a record low in April, a 4-week average of initial jobless claims (unemployment filings) has increased by 79k (46%) to its highest level of the year. This is important as it tends to be a leading indicator of the jobs market with claims typically rising in advance of the unemployment rate moving higher.

2) Tightening Continues
As expected, the Fed hiked rates another 75 bps this week to a new range of 2.25%-2.50%. This is the 4th hike this year, bringing the key interest rate to its highest level since 2019.

A major difference between today and prior bear markets continues to be Fed policy. During the previous 8 bear markets, the Fed responded with easy money every time (rate cuts, QE, etc.). This year they’re doing the opposite, hiking rates and starting to shrink their balance sheet. The last time we saw a hawkish Fed during a bear market was in the early 1980s under Paul Volcker.

As for the path of the Fed Funds Rate going forward, the market is currently pricing in continued Fed rate hikes through year end (to 3.25%-3.50%) but then a sharp reversal in policy with rate cuts in 2023 and 2024. Why would the Fed reverse course and start easing again? A recession and the likely resulting decline in the inflation rate would be at the top of the list of potential reasons.

3) Why Workers are Switching Jobs
Historically, switching jobs in a recession has been a risky move, as you could be the first to be fired if the company undergoes layoffs. This year, however, many seem to be willing to take that risk with the “quits rate” remaining elevated.

Why are they switching jobs?
For higher pay, which is becoming increasingly important with inflation over 9%.
Workers who switched jobs received wage increases of 6.4% over the last year vs. 4.7% for those who stayed at their jobs. With data going back to 1997, this is the widest gap we’ve ever seen.

4) The Housing Slowdown Accelerates
The NAHB Housing Market Index, a survey which measures homebuilder confidence, fell to a 2-year low in July with its 2nd largest monthly decline on record. Key line from the report: “13% of builders in the survey reported reducing home prices to bolster sales and/or limit cancellations.”

This is translating into fewer homes being built, with Housing Starts hitting a 14-month low in June (down 6% year-over-year).

We’re also seeing a collapse in New Home Sales which hit 26-month low in June, down 43% from their 2020 high.

Lastly, sales of Existing Homes continue to plummet, down 14% over the last year and at their lowest levels since June 2020.

5) Housing Bubble Peak?
While housing activity is crashing, price continue to rise, at least according to data as of May. The Case-Shiller National Index showed US home prices hitting a record high for the 40th month in a row in May, up 20% over the last year and 40% over the last 2 years.

This rising tide has lifted all boats with every major metro area in the US showing a double-digit % increase in home prices over the last year, led by Tampa which is 36% higher. All 20 cities in the 20-city index hit record highs for the 7th month in a row.

But all of this data is lagging, and the more recent report on New Home prices tells a very different story. The median price of a new home sold in the US was down 12% over the last 2 months and at the lowest levels since June 2021.

What’s driving these price declines? The collapse in affordability and its impact on demand, as evidenced by the fact that mortgage applications have moved down to their lowest level since 2000.
In turn, the competition has subsided. Less than 50% of US homes for sale faced bidding wars in June, the lowest level we’ve seen since May 2020. A year ago the rate was 65% and in January it hit a high of 69.6%. (note: bidding war is defined as an offer with at least one competing bid).

Overall, we seem to be following a similar path to the last housing bubble: inventories bottom out, then sales decline, then inventories start to rise, then prices decline.

6) Rallying on Bad Earnings
The big banks all reported a sharp downturn in net income during the second quarter, but expectations were low enough where the stocks have all moved higher since.


7) Everything is Slowing
All of the major tech companies have reported earnings, and all showed the same thing: a sharp slowdown in the rate of revenue growth. Both Amazon and Facebook reported their slowest growth rates in company history, while Netflix reported its slowest growth since 2012, and Tesla/Google/Microsoft had their slowest growth rates since 2020.

The impact of the massive fiscal/monetary stimulus is clearly wearing off, and is likely to continue in that direction during coming months. More evidence on this front: the US Money Supply contracted 0.3% over the last 3 months, the largest 3-month decline in nearly two decades.

8) The Most Popular Vehicles in America
Tesla is clearly the fastest major growing auto company in the US, with revenues increasing 42% over the last year alone.

But is it the most popular? Not yet. The Ford F-150 continues to be the best selling vehicle in America and in no state is a Telsa (or any other EV) the number one selling vehicle.

Some interesting facts:
- The top 3 selling vehicles are all trucks (F-Series, Silverado, Ram).
- Toyota has 4 out of the top 10 best sellers (RAV4, Camry, Highlander, Tacoma).
- 8 out of top 10 are trucks or SUVs (only Toyota Camry & Honda Civic are not).
- The top-selling EV nationally is the Tesla Model Y.
- The top 5 selling vehicles in Alaska are all trucks.
8) Still Borrowing
Wealthy people are still borrowing in spite of the decline in stocks and rising interest rates. Morgan Stanley’s wealth management unit reported a 23% year-over-year increase in securities-based and other nonmortgage loans during the second quarter and a 30% increase in mortgage loans (source: WSJ).

9) Some Inflationary Relief
Gas prices in the US have moved down to $4.26/gallon (national average), a decline of 76 cents from their all-time high in mid-June.

Corn and Wheat prices are down 30-40% from their recent highs and below the levels they were at before Russia invaded Ukraine. Ukraine and Russia recently signed an agreement to free up Ukraine’s grain for export, and the first shipment is ready and waiting to leave the port. Great to see, hopefully will continue.

And that’s it for this week.
Have a great weekend everyone!
-Charlie
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