The Week in Charts (2/13/23)

By Charlie Bilello

13 Feb 2023


Note: view the video of this post here.

The charts and themes from the past week that tell an interesting story in markets and investing

1) A Screeching Halt

For years, the tech juggernauts consistently reported growth rates far in excess of the broad market, a persistent tailwind for share prices.

Across the “Big 4” (Apple/Microsoft/Google/Amazon) we saw tremendous gains, and today they have a combined annual revenues of $1.39 trillion (up from $345 billion 10 years ago). That’s larger than the GDP of all but 15 countries.

  • Apple: $388 billion
  • Microsoft: $204 billion
  • Google: $283 billion
  • Amazon: $514 billion

But that was the past.

The trend of seemingly unrelenting growth has come to a screeching halt, as evidenced by the latest revenue numbers…

  • Tesla: slowest growth rate since 2020
  • Amazon: 3rd slowest growth rate in company history
  • Microsoft: slowest growth rate since 2017
  • Netflix: slowest growth rate in company history
  • Google: 3rd slowest growth rate in company history
  • Facebook: 2nd slowest growth rate in company history
  • Apple: slowest growth rate since 2016

Profits have deteriorated even further, with declines across the board with the exception of Tesla.

The bellwether stock for a generation of investors, Apple, saw Q4 revenues fall 5.5% over the prior year. This was its largest YoY decline since 2016, and was driven in large part by an 8% decline in iPhone sales.

While Google’s Q4 revenues increased 1% over the prior year, it was the 3rd slowest growth rate in the company’s history (only Q4 2012 & Q2 2020 were lower).

And while Amazon fared better than most, its 8.6% growth rate was only the 4th sub-10% revenue growth rate in the company’s history (other 3 were in Q4 2021, Q1 2022, and Q2 2022).

Amazon’s $2.7 billion net loss in 2022 was its largest loss ever.

In nominal prices it was merely a growth slowdown, but after adjusting for inflation it looked more like a contraction. S&P 500 inflation-adjusted sales declined in the 4th quarter, the first negative YoY growth rate since Q4 2020.

Higher costs are eating into profits, as companies are finding it harder to pass on those costs to their customers. With 79% of companies reported, S&P 500 Q4 GAAP earnings are down 23% year-over-year, the 3rd straight quarter of negative YoY growth and the largest decline since Q2 2020. And profit margins moved down to 11.2% from 13.4% a year ago.

2) Lowest Unemployment Rate Since 1969

While the slowdown in Tech has led to widespread layoffs in the sector, that has not been true of jobs market as a whole. Growth in service industries (particularly leisure and hospitality) has more than offset the huge losses at the Tech giants.

As a result, the January employment report was an absolute blowout, with 517,000 new jobs far exceeding the Dow Jones estimate of 187,000. This was the 25th consecutive months of jobs growth in the US.

The Unemployment Rate moved down to 3.4% in January, the lowest level we’ve seen since 1969.

The gap between actual payrolls the pre-covid trend (+1.5%/yr) narrowed again in January, but is still above 4 million.

Which likely explains the continued strength in the labor market, as many companies still need more employees. This is evident in the massive spread between the number of job openings (>11 million) and the number of unemployed (5.7 million).

3) Does the Fed Really Want Unemployment to Rise?

If you listen to the media, they will tell you the Federal Reserve wants you to lose your job.

This is absurd. What the Fed wants is lower inflation, and they would be thrilled to achieve that objective without any job losses.

Thus far, we’ve seen just that. Since the inflation rate peaked last June at 9.1% we’ve added 2.7 million jobs which did not prevent the inflation rate from moving down to 6.5%.

But for inflation to go lower from here, do we need to see unemployment rise?

Absolutely not. The primary causes of the 40+-year high in inflation last year were a) record increases in the money supply (40% increase in 2 years) and b) record borrowing and spending ($6 trillion in 2 years). The result: too much money chasing too few goods, leading to a spike in prices.

And as we have stopped printing money (2022 saw the first decline in M2 going back to 1959) and stopped borrowing it and giving it away (no new stimulus bills), the inflation rate has come down.

Would it come down faster if unemployment was higher? Perhaps, but it all depends on what the fiscal and monetary response to an unemployment spike is. If we followed the 2020 template (print money and pay the majority of people on Unemployment more than they were paid when they were working), that’s not deflationary, that’s inflationary.

4) Not Done Yet

So why is the Fed still hiking rates?

It’s not because the jobs market is so strong, but because the inflation rate remains above their comfort zone. Specifically, the growth in Average Hourly Earnings (+4.4% YoY, slowest growth rate since August 2021) has lagged inflation for 22 consecutive months. That’s a decline in prosperity for the American worker and if you listen closely to Jerome Powell, is the primary reason why they are not done yet.

When will the next rate hike occur?

March 22, the next FOMC meeting.

The market is pricing in a high probability (90%) of another 25 bps hike. That would be the 9th rate hike in a row and bring the Fed Funds Rate up to a new range of 4.75-5.00%.

The last time the Fed Funds Rate was that high? September 2007.

How much higher will the Fed Funds Rate go?

Not much, if the results of a recent poll I conducted are correct. The vast majority (>70%) believe there’s only 1 or 2 more hikes left, with most of those in the 2 hike camp.

This is consistent with what the market is currently pricing in: a 25 bps rate hike in March (to 4.75%-5.00), another one in May (to 5.00-5.25%), and then a pause before the start of a cutting cycle.

These expectations for continued hikes are driving short-term Treasury yields higher.

The 1-Year US Treasury yield has moved up to 4.85%, its highest level since August 2007. A year ago it was at 0.88% and in mid-2021 it hit an all-time low of 0.04%.

The 3-Month Treasury Bill yield has moved up to 4.77%, its highest level since August 2007. A year ago it was at 0.26%.

5) Feeling Worse Off Than Last Year?

You’re not alone.

In the latest Gallup poll, 50% of Americans said they were worse off than a year ago. Since 1976, the only other times 50% or more said they were worse off occurred during 2008 and 2009 (financial crisis/recession).

The lower the your income, the more likely you were to say you were worse off than a year ago.

Why?

High inflation hits lower income groups the hardest as they spend a much higher % of their income on essentials (food/gas/shelter/etc).

But Americans are still optimistic about the future, as is typically the case. 60% believe they will be better off a year from now…

6) How Times Have Changed

Sales, 10 Years Ago…

  • GM: $152 billion
  • Ford: $134 billion
  • Tesla: $0.4 billion

Sales Today…

  • GM: $157 billion
  • Ford: $158 billion
  • Tesla: $81 billion

Net Income, 10 Years Ago…

  • $GM: $6.2 billion
  • $F: $5.6 billion
  • $TSLA: -$0.4 billion

Net Income Today…

  • $GM: $10 billion
  • $F: -$2 billion
  • $TSLA: $13 billion

As Elon wrote in response to this stunning shift: “how times have changed.”

7) The Buyback King

Apple has bought back $566 billion in stock over the past 10 years, which is greater than the market cap of 494 companies in the S&P 500.

The 1% buyback tax which was included in the “Inflation Reduction Act” seems to have had no impact on share repurchases. While President Biden proposed quadrupling the tax (to 4%) in his State of the Union address, that seems unlikely to pass given Republican control of the House.

8) The Bulls Are Back

Bulls finally outnumber Bears in the AAII Sentiment Poll, ending a record streak of 44 consecutive weeks of bearish sentiment. We haven’t seen more Bulls than Bears in this poll since March 2022.

Meanwhile, active managers have increased their average equity exposure to 85%, the highest we’ve seen since January 2022. When the market was plummeting in late September of 2022, their exposure had moved down to 12%, the lowest since the March 2020 crash.

Why are investors getting more bullish and increasing their exposure?

The 20% rally in the S&P 500 from the October lows, the biggest bounce we’ve seen since the market peaked in January 2022.

It may seem counterintuitive that investors would be more positive on stocks at higher prices, but this is a pattern we’ve seen throughout history. Basic human psychology (fear and greed) pushes many investors to sell low, and buy high, again and again.

9) Disney’s #1 Priority

Disney in 2009…

  • Revenues: $36 billion
  • Net Income: $3.3 billion
  • Net Profit Margin: 9%

Disney in 2022…

  • Revenues: $84 billion
  • Net Income: $3.3 billion
  • Net Profit Margin: 4%

In response to this deterioration in profitability, Disney CEO Bob Iger said cutting costs and returning value to shareholders was his “No. 1 priority.” Iger announced a massive corporate restructuring plan that will cut 7,000 jobs in an effort to achieve $5.5 billion in cost savings.

10) The Crop Report Was Bad

Florida’s orange crop is down more than 60% from last year (due to hurricane damage and the spread of citrus greening disease), driving Frozen Concentrated Orange Juice (FCOJ) futures to record highs.

This is the opposite of what occurred in the 1980s movie “Trading Places,” where the good crop report led to a collapse in the price of Orange Juice.

11) 3 Good Crashes

Crashes in markets aren’t often referred to a good thing, but here’s three that are very good indeed…

a) Fertilizer prices are down 58% from their peak last year, at their lowest levels since February 2021. Given their high correlation to food prices, we should see lower food inflation ahead.

b) Global container freight rates (cost of a 40′ container) moved down to their lowest levels since August 2020 this week, 82% below peak 2021 prices. This should continue to help ease inflationary pressures.

c) Natural Gas futures are down 77% from their peak last year. This will lead to a significant decline in household energy costs.


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

-Charlie

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Disclaimer: All information provided is for educational purposes only and does not constitute investment, legal or tax advice, or an offer to buy or sell any security. Read our full disclosures here.

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