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The most important charts and themes in markets and investing…
1) Exuberance in the Air
The S&P 500 came within 2% of a new all-time high last week while the Nasdaq 100 pulled within 3% (note: on a total return basis including dividends). Meanwhile, the small-cap Russell 2000 Index (which has been lagging for most of this year) was still a good distance away at 17% below its prior high.
Driving the S&P 500 higher has been the outsized performance in the group of stocks I’ve called the “Enormous Eight” (Apple, Microsoft, Google, Amazon, Nvidia, Tesla, Facebook, and Netflix). As of July 18, all were up at least 40% on the year with Nvidia, Apple and Microsoft reaching new all-time highs.
The S&P 500 continues to experience one of its best starts to a year in history, something few had predicted.
As a result, sentiment has flipped and exuberance is once again in the air.
-Bulls now outnumber Bears by 30% in the AAII sentiment poll, the biggest positive spread since April 2021.
-Active managers reported equity exposures rising to over 99% last week, the highest since November 2021.
2) Higher Multiples and Higher Expectations
This surge in sentiment has led to a surge in multiples, as rising prices have widely outpaced rising earnings expectations. The S&P 500 now trades 19.5x forward earnings, up from under 17 at the end of last year.
That makes the setup for the current earnings season materially different than the last one, in that investor expectations are substantially higher.
We got a first glimpse of that in the market’s reaction to Netflix and Tesla, which were up 62% and 136% on the year heading into earnings.
Netflix beat on earnings ($3.29/share vs. $2.86 estimate) and added 5.9 million new subscribers and yet the stock declined 10% over the subsequent two trading days.
Tesla beat on revenues ($24.93 billion vs. $24.47 billion estimate) and Earnings ($0.91/share vs. $0.82/share estimate) and yet the stock declined 11% over the subsequent two trading days.
The reaction in Netflix/Tesla can be contrasted with the Banks, which had much lower expectations heading into earnings ($KBE ETF down 19% in the first half) and have since seen their shares rally ($KBE ETF up 12% in July).
Here’s a breakdown of the big bank earnings for the 2nd quarter…
3) A Done Deal
In every single FOMC meeting since 2009, the Fed has done exactly what the market was expecting it to do heading into the meeting.
And today, the market is most definitely expecting another rate hike this week with the implied probability at over 99%.
That would bring the Fed Funds Rate up to a new range of 5.25-5.50%, its highest level since September 2007.
The Fed is also expected to continue shrinking its balance sheet, which moved down to its lowest level since August 2021 last week but remains over $4 trillion higher than where it ended 2019.
Interestingly, the S&P 500 is now 2% higher than where it was when the Fed began its balance sheet reduction program in April 2022, dispelling the myth that stocks need QE to go higher.
4) Q3 Recession?
The stock market continues to buck the trend of leading indicators pointing to a future downturn in the economy.
The Leading Economic Index declined in June for the 15th month in a row, the longest down streak since 2007-08. The Conference Board is still forecasting a recession from Q3 2023 to Q1 2024 driven by “elevated prices, tighter monetary policy, harder-to-get credit, and reduced government spending.”
US Industrial Production is already seeing a slowdown, with growth turning negative on a YoY basis for the first time since February 2021.
Additionally, US Retail Sales have increased less than 1% over the last year and after adjusting for inflation have declined on a YoY basis for 8 consecutive months.
These negative data points, however, have been exceptions to the rule of late, with many other economic numbers surprising to the upside. In fact, the Citigroup Economic Surprise Index is at its highest level in some time, a much different place than where it stood a year ago.
This is translating into higher Wall Street expectations for 2nd quarter real GDP growth, and an Atlanta Fed estimate of 2.4%.
5) Don’t Try This at Home
US Federal Tax receipts fell 7% over the last year, the largest YoY decline since June 2020 and before that April 2010.
At the same time, US Government Spending has increased 14% over the last year.
The result: a budget deficit of $2.25 trillion. Don’t try this at home.
6) Fewer Homes to Choose From
Homes in the US are turning over at their slowest pace in over a decade. As a result, prospective homebuyers today have 28% fewer homes to choose from than back in 2019.
The biggest decline in turnover? Large suburban homes (4+ bedrooms), down 33% since 2019.
A stunning stat: the US Population is 19% higher than where it was in January 2000 while the inventory of Existing Homes for sale in the US is 37% lower.
While demand has collapsed over the past year due to lower affordability, the extreme lack of supply is supporting prices. The median price of an existing home sold in the US is up 14% from its low in January and is now less than 1% below its all-time high from June 2022.
Prices are clearing with very little activity, illustrated by the 19% decline in new home sales in the past year. That’s the 22nd consecutive YoY decline, the longest down streak since 2007-09.
What would help the housing market return to a more normal level of activity: more building, and more supply.
On that front, the US Housing Market Index rose for the 7th month in a row to its highest level since June 2022.
Homebuilder confidence has been steadily increasing due to the extremely low levels of existing inventory and the fact that new homes are representing a much larger share of overall supply.
7) US vs. Europe
After adjusting for inflation/purchasing power, the 17% increase in US wages since 2008 has far outpaced its European peers. Spain, Italy, and Greece have actually seen a decline in real wages over that time.
The same has been true in the stock market, where the S&P 500 ETF ($SPY) has gained 562% since 2008 vs. a gain of 176% for the FTSE Europe ETF ($VGK).
8) Remember the Debt Ceiling Crisis?
It now costs next to nothing to insure US against default. The debt ceiling crisis feels like a lifetime ago.
9) Some Interesting Stats
a) Americans are consuming much less ice cream (14 pounds per person, per year) than they were in the 1980s (18 pounds per person).
b) Americans are drinking a lot less juice/soda and a lot more water.
c) Car thefts in the US are skyrocketing.
d) Extra-virgin olive oil prices have increased 87% over the past year to a record high due to a severe shortage.
e) Dairy Queen is the most dominant ice cream chain in 74% of US counties.
And that’s it for this week. Have a great week!
-Charlie
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