The Week in Charts (7/31/23)

By Charlie Bilello

31 Jul 2023


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The most important charts and themes in markets and investing…

1) The 11th and Final Step?

As widely expected, the Fed hiked rates for the 11th time last week, moving up to 5.25-5.50%. This is now the highest Fed Funds Rate since January 2001.

Monetary policy is now the tightest we’ve seen since August 2007, with a Fed Funds Rate 2.4% higher than the US inflation rate.

Is this the last step higher? The market is currently saying yes, pricing in a pause at the next five FOMC meetings. Fed Funds Futures now indicate that rate cuts won’t start until May 2024.

But these expectations are not set in stone, and will continue to shift with each and every new data point. The market has been wrong many times in the past year, consistently underestimating how far the Fed would go in its fight to curb inflation.

And at the FOMC press conference, Powell certainly left the door open for additional tightening, saying “core inflation is still pretty elevated” and “we need to be prepared to raise further if we think that’s appropriate.”

2) Locked into Low Rates

The big question for the US economy: how much of a negative impact will these rate hikes have on American households?

The surprising answer thus far: not as much as widely predicted.

The reason: only 11% of US household debt has an adjustable interest rate. That means many Americans locked into existing fixed rate mortgages/auto loans/student loans have not been impacted by the Fed’s 11 rate hikes.

This is a big factor in explaining why household debt service as a percent of disposable income remains much lower than the historical average at 9.6%.

Who’s been impacted the most by the Fed’s hikes?

Those with adjustable-rate debt. One example: credit cards. The average interest rate on credit card debt continues to rise, hitting a record high of 20.7%.

Those in the market for new asset purchases that often require financing, like homes and cars, are being impacted as well. Not only has the price of houses and cars skyrocketed over the past few years, but the borrowing costs have as well.

Example: the median price of a starter home in the US is 46% higher than 2019 levels. The monthly mortgage payment needed to purchase one of these homes has more than doubled over that time period.

3) The Show Goes On

The first report on US economic growth during the 2nd quarter was a good one with Real GDP rising 2.6% YoY, well above expectations.

The Atlanta Fed’s 2.4% estimate for annualized real growth during Q2 (2.4%) was right on the money while Wall Street estimates (Blue Chip consensus) were much too bearish.

4) An Epic Run

We saw an Epic run in the Dow in July where it closed higher for 13 consecutive trading days, tying 1987 for the 2nd longest win streak in history.

The top 4 stocks in the Dow this year are all in the Technology sector, a 180 degree reversal from the Tech downturn in 2022.

5) Leveraged Long

The S&P 500 is now up over 19% year-to-date, one of the best starts to a year that we’ve seen.

It is also 5% higher than where it was when the Fed started hiking rates in March 2022.

Volatility has been crushed, with the $VIX down to 13.33, its lowest weekly close since January 2020.

As stocks continue to rise, active managers continue to get more bullish, and are now leveraged long (102% exposure) on average. Last October when the S&P 500 was over 1,000 points lower, they had less than 20% exposure to equities.

6) Many Signs Pointing to Lower Inflation

Data pointing to lower inflation continues to pour in…

  • The PCE Price Index moved down to 3.0%, its lowest level since March 2021.
  • Wholesale used car prices continue to decline in July and are now 17% lower than their peak in January 2022. This should translate into lower retail prices in the coming months.
  • US home prices fell 0.5% over the last year, the largest YoY decline since 2012. The 20-city index is down 2.3% over the last year.
  • US Rents are 0.7% lower than a year ago, the biggest YoY decline since January 2021. With apartment vacancy rates rising above peak 2020 levels (7.3%), we should see continued YoY declines in rents over the next few months.

7) Joining the Party

Big tech US large caps are still widely outperforming in 2023 (Nasdaq 100 up over 44%), but the rally has been quietly broadening over the past two months with US small caps ($IWM ETF), Emerging Markets ($EEM ETF), and value stocks ($IWD ETF) joining the party.

8) Earnings Update

With 46% of companies reported, S&P 500 Q2 GAAP earnings per share are up 7% over the last year, the highest YoY growth rate since Q4 2021.

S&P 500 Operating EPS are 10% below their Q4 2021 peak while GAAP EPS are 15% below. Estimate from S&P Dow Jones: we’ll see a new Trailing 12 Month (TTM) Operating EPS high by the end of 2023 and a new quarterly high by Q2 2024. For comparison, the S&P 500 Index is currently 4% below its peak from early January 2022.

Most companies are beating estimates once again, with big tech leading the way…

-Google revenues increased 7% over the last year with Net Income up 15% YoY.

-Microsoft revenues increased 8% over the last year to a new quarterly record of $56 billion. Net Income grew 20% over the last year to $20 billion.

9) Some Interesting Stats

a) Brewery Boom: at the end of 2022, there were a record 9,709 breweries in the US.

b) 6 goods/services with a lower price today than a year ago…

c) The states with the highest and lowest average salaries needed to “be happy.”

d) What people do on their breaks: working from home vs. in the office.

e) American workers are vacationing more this year than any other year over the last decade.


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

-Charlie

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