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The most important charts and themes in markets and investing…
1) Here Come the Bulls
It’s been a while, but the bulls are back in town.
Individual investors (AAII poll) haven’t been this optimistic since November 2021, with Bulls outnumbering Bears by over 20%. The same is true for active managers, who reported net exposures of over 90%, up from 12% in late September (NAAIM survey).
Why the increased bullishness?
Stocks are going up, with the S&P 500 gaining nearly 24% from its October low, the biggest rally we’ve seen since the market peaked in January 2022.
It’s counterintuitive, but investors get more excited as prices rise, the opposite of how shoppers behave. People rush to stores on Black Friday to take advantage of discounts, but when stocks are on sale many investors run for the exits.
2) Tearing Down the Wall of Worry
All is calm again in the equity market. The $VIX has moved down to 13.83, its lowest weekly close since February 7, 2020.
With the debt ceiling suspended, bank failure fears subsiding, the Fed expected to pause, and recession forecasts pushed out, the wall of worry that has persisted for over a year has finally been torn down.
Has complacency as measured by the $VIX been a problem for stocks in the past?
It doesn’t appear to be. Looking out 1 to 5 years, average forward returns for the S&P 500 from the lowest 10% of $VIX levels (<12) were not only positive, but in many cases higher than the returns from all other $VIX levels (>12).
3) The Enormous Eight
Eight companies (Alphabet, Amazon, Apple, Meta, Microsoft, Netflix, Tesla and Nvidia) now make up 30% of the S&P 500’s market capitalization, up from 22% at the start of the year.
The reason for their growing influence: huge share price gains, with Enormous Eight members claiming the top 3 spots in the S&P 500 this year ($NVDA, $META, and $TSLA) and the remaining five all within the top 30, up at least 36%.
This is a remarkable comeback for big tech following the substantial declines in 2022. Leading the way is the bellwether Apple, back at an all-time high for the first time since January 2022, recovering from a 31% drawdown (total returns, including dividends).
Meanwhile, the average stock in the index is not faring nearly as well. This has led to the cap-weighted S&P 500 outperforming the equally-weighted S&P 500 by over 10%, the largest spread on record at this point in the year with data going back to 1990.
4) The Sky’s the Limit
With the debt ceiling suspended, the US government went back to doing what it does best: borrowing money. The National Debt immediately increased $358 billion, the largest one-day spike in history. We should soon see $32 trillion.
The cost of insuring US debt against default collapsed after the agreement, with 1-year CDS spreads moving from a peak of 157 bps down to 11 bps.
And the wild action in Treasury bills quickly normalized, with the 1-month Treasury bills moving from a yield of over 6% down to 5.25%.
5) June Pause, July Hike?
The Fed is set to meet again this week (June 14) and the market is currently expecting a pause (70% probability).
Surprisingly, though, the market is then expecting the Fed to hike again at the July meeting (70% probability).
While anything can happen, this scenario seems unlikely for the following reason: by the July meeting, the Fed will have in their hands the June CPI report, which is expected to show a significant decline (down to 3.3% according the Cleveland Fed’s latest estimate). If the Fed is going to pause in June with a 4.1% inflation rate (the CPI estimate for May which will be released a day before the Fed meeting), why would they hike with a much lower rate?
Additionally, many important trends on the inflation front continue to move in the right direction:
- Global Container Freight Rates (cost of 40′ Containers) are lower today than they were in February 2020, down 88% from their peak.
- Fertilizer prices are back to January 2021 levels, down 64% from their peak.
- Market-based inflation expectations have moved down to 2.07%, their lowest level since January 2021 (5-year breakevens).
- Asking rents in the US are down 0.6% over the last year, the largest decline since early 2020.
- The Case-Shiller 20 City Home Price Index is down 1.2% over the last year, the first YoY decline since 2012. 10 out of the 20 cities in the index are down over the last year.
6) IO Troubles
Interest-only loans as a % of new commercial mortgage-backed securities increased from 17% in 2010 to 88% in 2021.
Typically these IO loans are paid back through refinancing or the sale of the property. But today, both of those options are becoming increasingly difficult, particularly in the office market. As a result, CMBS spreads continue to widen, now over 1,100 bps for BBBs.
With an estimated $1.5 trillion in commercial mortgage loans coming due over the next 3 years, we’re still in the early innings of the default cycle.
7) Highest Stock Ownership since 2008
Stock ownership in the US is on the rise. 61% of people reported owning stocks in the latest Gallup poll, the highest % since 2008. After the global financial crisis and stock market crash, we saw a decline in ownership for a number of years, but that trend is now moving in the opposite direction.
The most predictive factor when it comes to owning stock? Incomes. The higher your household income, the more likely you are to own stocks.
8) The Jobs Comeback Continues
We now have 29 consecutive months of jobs growth in the US, with a big beat in the latest payroll report (339k jobs added in May vs. 190k consensus estimate).
The labor force participation rate among 25-54 year-olds (prime working age) moved up to 83.4%, the highest we’ve seen since January 2007.
The gap between actual payrolls and the pre-covid trend (+1.5%/yr) narrowed again in May, but is still at 3.9 million.
This likely explains the continued strength in the labor market, with a 4 million spread between the # of job openings (10.1 million) and the # of unemployed (6.1 million).
But the tightest labor market in US history is slowly loosening, with the Quits Rate moving down to 2.4%, its lowest level since February 2021.
And hourly earnings were up 4.3%, the smallest YoY increase since July 2021.
While wage growth is slowing, that 4.3% increase is likely to slightly outpace May’s inflation rate (4.1%). That would mark the first time YoY wage growth exceeds inflation in over two years. A welcome shift back on the path to prosperity that hopefully continues.
9) Some Interesting Stats
a) Brands with the highest reputation in the US…
b) The median and maximum range of EVs offered for sale in the US. Maximum range is up over 5x since 2011.
c) The companies that have generated the largest amounts of lifetime shareholder wealth in the US.
d) Auto brands with the highest inventory levels…
e) Breakdown in assets held by generation in the US…
And that’s it for this week. Have a great Sunday and week ahead!
-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.
