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) Taking Its Toll
High inflation is taking its toll. With wages failing to keep pace with rising prices 22 months running, Americans are increasingly turning to credit to fill the gap.
Credit card balances in the US increased 15.2% over the last year, the biggest YoY jump since the 2001 recession.
This trend is becoming increasingly problematic given the skyrocketing cost of debt. At 19%, the average interest rate on credit cards is already at a record high. And with the Fed expected to continue hiking rates in the months to come, it will likely go even higher.
2) The Millennial Malady
Total debt balances for Millennials hit more than $3.8 trillion in the fourth quarter of 2022, a 27% increase from late 2019. That’s largest increase for any age group.
The average credit card balance for millennial borrowers increased to $6,750 in January, up 26% over the past 3 years. For comparison, balances were close to unchanged for Gen Xers and actually declined 11%-15% for older generations (Baby Boomers/Silent).
Millennials had the highest delinquency rates of any age group, moving above pre-pandemic levels. Meanwhile, older borrowers saw a decrease in delinquencies over the same time period.
3) The Mortgage Application Collapse
Mortgage purchase applications in the US fell to their lowest level since 1995 last week.
Why? The average American household simply cannot afford the average home price at current mortgage rates (6.5% for 30-year fixed).
According to Redfin, a US homebuyer with a $2,500 monthly budget can afford a $384,000 home today versus a $518,000 home that same buyer could have purchased back in 2021 at 3% interest rates.
Given this backdrop, sellers are faced with a choice: pull their home off the market or reduce the price. While many have chosen the former, not everyone is willing or able to wait.
New homes that are built have to be sold, and prices need to reflect the new reality.
On that front, the average price of a new home sold in the US is now down 16% from the peak last July. While that seems like a lot, after the last housing bubble peak the average new home price fell over 25% nationally. And affordability is a more pressing issue today than back then.
While the price declines have helped, a 16% drop is simply not enough.
Here’s the math supporting that statement:
- 3 years ago the 30-year mortgage rate was 3.45% and the average new home price in the US was $384k.
- Today you have a 6.5% 30-year mortgage rate with an average new home price of $474k.
- The result: an $18k increase in the required down payment (assuming 20% down) and a 75% increase in the monthly payment (from $1,370 to $2,396).
Importantly, this cost comparison does not include property taxes, insurance, utilities, repairs, and maintenance which have all seen significant increases as well. Which means the average US home is still very much unaffordable to the average American and unless mortgage rates plummet, the only solution is lower prices.
The same math is true for existing home prices, which have now declined 13% from their peak. This is the largest 7-month decline since July 2010 to February 2011.
After the last housing bubble top, prices fell 33% nationally. Incredibly, the same decline today would only bring prices back to February 2020 levels, a reflection of the absolute mania in the last phase of the current bubble: a 40% increase in just 2 years.
While prices have declined, activity has plummeted. US Existing Home Sales fell for the 12th consecutive month to their lowest level since October 2010 . The 37% year-over-year decline was the largest on record.
No segment of the market has been immune, with sales down sharply across all price ranges.
4) Rising Yields
Rising interest rates have been a scourge for the housing market, but they’ve been a welcome transition for many savers that have been yield-starved for over a decade. Take a look at the change in US Treasury Yields from the end of 2021 to today. Stunning increases over a 14-month period, from historic lows to 16-year highs…
The 2-Year US Treasury yield has moved up to 4.78%, its highest level since July 2007. A year ago this yield was at 1.54% and two years ago it was at 0.12%.
Here’s an updated look at Treasury yields since 1990…
5) How Long Will the Drawdown Last?
While rising yields will help future returns from bonds, the pain in getting there has been significant. A 60/40 portfolio of US stocks/bonds is currently in a 14-month drawdown, 14% below its all-time high. This is now the longest drawdown for a 60/40 portfolio since the financial crisis (37 months) and before that the aftermath of the dot-com bubble (43 months).
How long will the drawdown last this time around? No one knows, which is why investors need to have a long time horizon. The halcyon era of hitting new all-time highs on a weekly basis are over. In its place: the reality that risky investments have risk, and you can go months and years at times without hitting a new high. That is the price of admission, without which there would be no higher reward.
6) The First Pullback
After a booming start to 2023, the S&P 500 has come back to earth, suffering its first 5% pullback of the year. This is not at all unusual with an average intra-year drawdown of 16% since 1928.
But despite this fact, US equities have delivered an annualized total return of 9.7% over this time, proving risk is a feature of markets, not a bug.
7) A Sentiment Shift
It only took a 5% S&P 500 pullback to push the AAII poll back into bearish territory, with bears once again outnumbering bulls. At the same time, active managers have quickly reduced their exposures (from 85% down to 57%).
Average call option volume on the Volatility Index (VIX) is at its highest level since March 2020, a sign that there’s still much fear in the air.
8) Why the Angst?
Many of the same factors that caused investor anxiety throughout 2022 are present today.
a) Inflation
At 4.71%, Core PCE (the Fed’s preferred measure of inflation) remains above the Effective Fed Funds Rate (4.58%) and was above expectations in its latest reading.
b) Fed Tightening
The market is expecting 3 more 25 bps rate hikes (to 5.25-5.50%) and a continued reduction in the Fed’s balance sheet which still has a long way to go before normalizing.
c) Recession Fears
After adjusting for inflation, e-commerce retail sales fell 1% over the last year (down in 3 out of the last 4 quarters). With data going back to 2000, the only other time we’ve seen negative real e-commerce sales was during the 2008-09 recession.
d) Falling Earnings and Declining Profit Margins
S&P 500 net profit margins were down for the 6th consecutive quarter (to 11.3% from a peak of 13% in 2021). While sales are still rising, higher input costs (labor/materials/energy) are hurting the bottom line.
e) Russia/Ukraine War
We’re now a year into the Russia/Ukraine war with no end in sight. The risk of a broader conflict remains and the costs in terms of lives, property and dollars grow with each passing day.
9) WeWork for Losses?
WeWork has lost a total of $15.7 billion since the start of 2016…
- 2022: -$2.0 billion
- 2021: -$4.4 billion
- 2020: -$3.1 billion
- 2019: -$3.3 billion
- 2018: -$1.6 billion
- 2017: -$884 million
- 2016: -$430 million
Its current market cap: $878 million, down from a peak in the private markets of $47 billion in 2019. Here’s the valuation history…
- 2010: company founded
- Jul 2012: $97m
- May 2013: $440m
- Feb 2014: $1.5b
- Dec 2014: $5b
- Jun 2015: $10.2b
- Oct 2016: $16.9b
- Aug 2017: $20b
- Jan 2019: $47b
- Oct 2019: $8b
- Dec 2019: $7.3b
- May 2020: $2.9b
- Oct 2021 (IPO): $8.2b
- Today: $878m
According to the NY Times, back in September 2019 major investment banks were telling WeWork’s founder the company could IPO for $60, $90, or over $100 billion.
10) A Shift in Priorities
Carvana has a long history of losing money, but 2022 set new records for the company. Its annual net losses…
- 2022: -$1.59 billion
- 2021: -$135 million
- 2020: -$171 million
- 2019: -$115 million
- 2018: -$55 million
- 2017: -$18 million
- 2016: -$93 million
- 2015: -$4 million
- 2014: -$15 million
What went wrong? Just about everything. They were “positioned for growth” but instead got a spike in interest rates and a rapid slowdown.
And like many other companies, this had led to a “significant shift in [their] priorities away from growth and toward profitability.”
What a difference in 18 months. Back in August 2021, the company was valued at over $31 billion with investors caring only about top-line growth (YoY revenues at had grown 198%). Fast forward to today and it’s the bottom-line that matters, resulting in a 97% decline in Carvana’s market cap to $1 billion.
And that’s it for this week. Have a great week everyone!
-Charlie
To sign up for my free newsletter, click here.
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.
