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The most important charts and themes in markets and investing…
1) Tis But a Scratch
The S&P 500 has suffered its first 5% pullback since March. Tis but a scratch, though, with the index still up over 13% on the year.
The median year since 1928 has experienced a 13% intra-year drawdown, making 2023 relatively mild by comparison. The 7.8% pullback in February-March is the largest thus far.
2) No Pain, No Gain
The 10-Year Treasury yield has moved up to 4.3%, its highest since December 2007. Real yields (adjusted for inflation expectations) of 1.97% are the highest since July 2009.
Rising yields since 2020 have caused considerable pain for bond investors. The 10-Year Treasury bond is down 1% this year, on pace for its 3rd consecutive annual decline. With data going back to 1928, that’s never happened before.
The gain for new bond investors: higher prospective returns. There’s a linear relationship between starting yields and future bond returns. And with bond yields at their highest levels since 2007, the future should be much brighter.
3) Q4 Recession?
The Leading Economic Index has now declined for 16 consecutive months, the longest down streak since 2007-08. The Conference Board is now forecasting a US recession to begin in Q4, pushed back from its previous forecast of Q3.
What are some signs pointing to economic weakness?
a) Industrial Production, which declined on a YoY basis for the 2nd straight month.
b) Retail Sales, which after adjusting for inflation have fallen for 9 straight months.
Both Target ($TGT) and Home Depot ($HD) reported lower revenue than a year ago, a sign that the US consumer may be pulling back.
4) The Real Policy Mistake
The 30-Year US Mortgage Rate has moved up to 7.09%, its highest level since 2002.
Some are suggesting this is evidence of a Fed policy mistake, as rising rates are crushing housing affordability. The median American household would need to spend 43% of their income to afford the median priced home, which is a higher % than the the peak of the last housing bubble.
With the Fed now letting its mortgage bond and Treasury bond holdings roll off each week (balance sheet at lowest level since July 2021), they are no longer in the business of manipulating interest rates.
Which begs the question: is this a mistake or was the real policy mistake in driving mortgage bond yields down to record lows (2.65% in 2021) while the housing market was already in bubble territory?
Regardless of your answer, the result of their policy actions was to throw fuel on a housing market that was already on fire. And withdrawing that fuel has had not only led to a collapse in demand but an equivalent collapse in supply. With nearly two-thirds of outstanding mortgages having rates below 4%, existing homeowners are largely unwilling or unable to move. For now, the housing market is in a stalemate.
5) Better Than Expected
With 91% of companies reported, S&P 500 Q2 GAAP earnings are up 15% over the prior year, the highest growth rate since Q4 2021. This is much better than most had expected.
S&P 500 sales per share are up 7% over the last year. That’s the slowest growth rate since Q4 2020 but still above the historical average (5.8%) and well above the expectations before earnings season began.
S&P 500 profit margins expanded to 11.9% in Q2, the highest since Q1 2022 and well above the historical average of 8.9% since 2000.
6) Streamflation
US Households are now spending nearly $30/month on an average of 4 streaming services, up from roughly $10/month on 1.5 services a decade ago.
With the average cost of a streaming service up 25% in the last year, that cost is rising fast.
What’s driving that? An increased focus on profitability, where previously the focus was only on creating great content and growing subscribers.
That model has certainly worked in terms of gaining eyeballs, with linear TV consumption falling below 50% for the first time.
7) A Secular Trend
US e-commerce sales now make up over 15% of total retail sales, up from less than 1% back in 1999. This is a secular trend that will be hard to break as consumers have benefitted enormously from the increased choice and convenience that online shopping provides.
And that’s it for this week. Have a great week!
-Charlie
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