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The most important charts and themes in markets and investing…
1) Every Bull/Bear Market Is Different
Throughout 2022 there were many comparisons to the 2000-02 and 2007-09 bear markets, with the implication being that there was still more downside ahead.
While that was certainly one possibility, it wasn’t the only possibility, and what we’ve seen over the last eight months is a path very much unlike those other two bears.
The 27% rally from the October lows has brought the S&P 500 to within 10% of its prior high, and is now being called a “new bull market.”
The low level of volatility is said to be further confirmation of this fact, with the Volatility Index ($VIX) closing below 13 this week (lowest since January 2020). By comparison, the 2000-02 and 2007-09 bear markets never saw a $VIX below 16.
The truth, of course, is that these “bull” and “bear” market labels are anything but helpful, as they can only be identified in hindsight. Investing is about the future, and since every bull and bear market is different, that future is forever unknown.
2) The Housing Shortage Continues
The number of homes in the US for sale fell to 1.37 million in May, the lowest level on record with Redfin data going back to 2012.
62% of US mortgage holders have a rate below 4% and 92% have a rate below 6%. With current mortgage rates at close to 7%, many existing homeowners are staying put, which is the primary reason for the housing shortage.
And as inventories have declined, so has activity. US Existing Home Sales fell 20% over the last year, the 21st consecutive YoY decline. That’s the longest down streak since 2007-2009.
Prices are moving lower, but very slowly. The median price of an existing home sold in the US was down 3% over the last year, the largest YoY decline since 2011.
Given the rapid appreciation in home prices (40% in three years) and more than doubling of the mortgage rate, a 3% decline in prices is not helping affordability very much at all.
The median housing payment for an existing home is more than double what it was just a few years ago.
And the median American household would need to spend over 40% of their income to afford the median priced home for sale today, up from 28% in 2020.
This suggests that something will have to give in order for homes to become more affordable: either prices falling, mortgage rates coming back down, or incomes rising. Until that happens, the housing market will likely remain in a standstill.
Which begs the question: does the economy still need 1.5 million realtors, a number that exceeds the current number of homes for sale? The answer is mostly likely “no,” and with more than 60,000 former realtors leaving the profession over the last 6 months, that resizing has already begun.
3) If You Build It, They Will Come
The famous line from “Field of Dreams” rings true for the housing market today, which is in desperate need of more supply.
Homebuilders seem to be finally getting the message, with the US Housing Market Index rising for the 6th consecutive month, moving above 50 for the first time since last July.
Why is homebuilder confidence rising? Due to extremely low levels of existing inventory, with new homes representing a much larger share of the overall market than is typically the case.
And a more confident homebuilder generally means more building. US Housing Starts jumped 21% in May, the biggest month-over-month increase since 2016. On a year-over-year basis, starts grew 6%, the first positive YoY reading since April 2022.
The US Home Construction ETF is back at an all-time high, gaining 69% from its low last June. If the stock market is correct, we should see a continued increase in starts to come.
4) The Downtown Downturn
While homebuilder stocks may be booming, America’s downtowns are not.
A few examples…
-Public transit in major cities is still down over 30% from 2019 levels.
-Cell-phone remains down considerably, with San Francisco the lowest at 32% of pre-covid levels.
-Office occupancy in New York and Los Angeles remains at just 50% of pre-covid levels and San Francisco is even lower.
The stock market has definitely taken note of this, with Downtown Office REITs showing a 60+% decline since the start of 2020 versus a less than 10% decline for Retail/Residential REITs.
And regional banks ($KRE ETF), with considerable loan exposure to the office market, remain down over 30% on year.
5) A Long Way to Go?
Jerome Powell made headlines this week by saying “inflation pressures continue to run high, and the process of getting inflation back down to 2% has a long way to go.” He also hinted at the potential for more rate hikes in saying “it may make sense to move rates higher but do so at a more moderate pace.”
The market continues to price in a July rate hike (74% probability), but with real-time inflation metrics continuing to trend lower (Truflation now at 2.4%), the Fed should have a lot of leeway to pause again if they so choose.
We also have continued evidence of an improving supply chain, with Global Container Freight Rates (cost of 40′ Containers) at their lowest levels since 2019, down 88% from their peak.
Over a period of 18 months, the NY Fed’s Supply Chain Pressure Index has moved from its worst level ever (December 2021) to its best level ever (May 2023).
6) Rate Hikes & Returns
The Fed may not be done hiking rates, but here’s an interesting look at how various asset classes have performed during the last 4 rate-hiking cycles (see here for the full research study).
My conclusion: no two cycles are alike. There’s simply no way to predict in advance how an asset class is going to react to Fed rate hikes. Case in point: the S&P 500 rose during each of the last 3 rate hiking cycles but has declined thus far during the current one.
7) Less Miserable
The US Misery Index (Unemployment Rate + Inflation Rate) has now moved down for 11 consecutive months to its lowest level since January 2021 (7.7%). With CPI expected to decline sharply again in June (down to 3.2% or lower), we should see an even less miserable American public next month.
8) Q3 Recession?
What would change the Misery Index for the worse? A recession that brought with it a spike in the Unemployment Rate.
While we may not be in a recession today, there are some lingering signs that we may be headed in that direction.
The Conference Board’s Leading Economic Index declined in May for the 14th month in a row. They are now calling for a US recession from Q3 2023 to Q1 2014, driven by tight monetary policy and lower government spending.
The two components in the Leading Index that are not currently portending economic weakness: the stock market (S&P 500) and Building Permits (increase in residential homebuilding activity). The other areas (inverted yield curve, credit, consumer expectations, new orders, etc.) continue to suggest a downturn is coming.
9) Global Tightening, China Easing
Many central banks continued on their tightening path last week with Switzerland (25 bps hike), Norway (50 bps hike), and the UK (50 bps hike) all hiking rates again. Notably, Turkey did a 180-degree about-face in hiking rates 650 bps after ten straight rate cuts.
Meanwhile, China cut rates by 10 bps to 3.55%, its 4th rate cut since December 2021. China continues to move in the opposite direction to the worldwide trend of tighter monetary policy, and the expectation is that more easing lies ahead as their economic recovery is stalling.
10) Purchasing Power Cut In Half
Over the last 30 years, the purchasing power of the US consumer dollar has been cut in half due to inflation. At the same time, the S&P 500 has gained 681 (7% per year) after adjusting for inflation. Why you need to invest, in one chart.
11) Some Interesting Stats
a) Here are the largest companies in the S&P 500 by Market Cap, Net Income, Revenue, and # of Employees. Interest fact: Nvidia has the 5th highest market cap but is #132 in terms of Revenue and #86 in terms of Net Income.
b) Solar panel prices are 85% lower than they were a decade ago, adjusted for inflation.
c) There was an average of 2.6 million US airline travelers per day over the last week, the most since July 2019.
d) Car insurance rates in the US increased 17% over the last year, more than 4x higher than the overall rate of inflation (4% CPI).
e) China currently produces almost 20% of the world’s manufactured exports, up from less than 5% in 2000.
And that’s it for this week. Have a great Sunday and week ahead!
-Charlie
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