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The most important charts and themes in markets and investing…
1) The Rising Tide Lifted All Boats
Through July, every major asset class had a positive return on the year, nearly the complete opposite of 2022.
Here’s a look at year-to-date equity performance by country. Raise your hand if you had Nigeria, Greece, and Argentina in the top 3.
The biggest story in the US equity market during the first 7 months: AI and incredible comeback in the shares of the Enormous Eight (Nvidia, Apple, Microsoft, Meta, Google, Amazon, Tesla, and Netflix).
2) Moving Slowly Back to Normal
A major driver of continued growth in the US economy has been the continued strength in the labor market. Payrolls grew in July for the 31st consecutive month, adding 187k new jobs.
The Unemployment Rate moved down to 3.5%, only 0.1% higher than the 54-year low reached in April.
The Unemployment Rate in half of the US states is now at or near their lowest levels ever with data going back to 1976.
The labor market continues on its path back to normal.
One data point on that front: total jobs in the US increased 2.2% over the last year, the lowest YoY growth rate since March 2021.
Another data point: the Quits Rate moved down to 2.4%, its lowest level since February 2021.
Does this mean the streak of job gains is coming to an end?
Not likely just yet, for there are still 1.6 job openings for every unemployed person in the US, well above the historical average. While the labor market has loosened considerably from a year ago, the demand for labor in most industries continues to exceed supply.
That imbalance helped to push hourly earnings up 4.36% over the last year, still well above the average in recent decades. And more importantly, wages are outpacing inflation again.
3) Why Inflation is Likely to Move Higher in July/August
For 12 consecutive months, we’ve seen the inflation rate in the US move lower, but that trend is likely coming to an end. The Cleveland Fed is projecting US CPI to rise from 3.0% in June to 3.4% in July and 3.9% in August (YoY % change).
Why is CPI likely to rise?
The low inflation readings from last July (0.0%) and August (0.2%) will drop off and could be replaced with higher numbers for this July/August.
One reason for that: commodity prices are moving up again, with both Unleaded Gasoline and Crude Oil surging higher. This is the opposite of what we saw last year after prices peaked in June 2022 and fell in the back half of the year.
Gas Prices in the US rose to their highest levels of the year last week at $3.82/gallon. If this trend continues, what was once a tailwind for lower CPI will become a headwind as the YoY rate of change will turn positive again.
4) The Longest Bond Bear Market in History
US Treasury yields continue to march higher, with 10-year and 30-year yields rising to their highest levels of the year.
While this is great news for bond investors going forward (the single best predictor of future bond returns is the starting yields), it’s been painful for anyone already invested in bonds over the past few years.
How painful? Two data points on that front…
-The US Bond Market has now been in a drawdown for 3 years, by far the longest in history.
-US Bonds are down 13% over the last 3 years, their worst 3-year return in history.
While bonds are struggling, some stock indices have fully recovered from 2022 bear market, with the Dow hitting a new all-time high on a total return basis.
This disparity has lead to a record spread between optimism in stocks and the optimism in bonds.
5) Cash is No Longer Trash
Investors are now earning their highest yields on cash since January 2001, with the 3-month Treasury bill moving up to 5.55%.
This yield is now 3% above market-based inflation expectations (10-year breakeven rate), the highest real yield on cash that we’ve seen in the last 20 years.
On the back of this trend, assets continue to flow into money market funds, hitting a record $5.5 trillion.
6) Losing Control
For much the last decade, the Bank of Japan has been pursuing ultra-easy monetary policy featuring negative interest rates and massive amounts of quantitative easing.
While its short-term policy rate remains in negative territory (the last negative yield holdout among central banks), they are now allowing longer-term yields to rise. And with free market forces at work, that’s exactly what’s been happening. The Japanese 10-Year yield has moved up to 0.65%, its highest level since January 2014.
7) The Latin American Easing Cycle
A divergence is central bank policy is starting to emerge with Chile and Brazil cutting rates last week. More Latin American countries expected to follow (Mexico could be next). Both Chile and Brazil started their hiking cycle well in advance if the US and Europe, and are now cutting first as their policy rates exceed a declining inflation rate.
Contrast this with the UK, where more hikes are expected as their policy rate of 5.25% remains below their inflation rate (7.9%). The same is true for the Eurozone.
8) Rising Auto Loan Rates
The average interest rate on 48-month new car loans in the US has moved up to 7.59%. That’s the highest we’ve seen since 2007.
At the same time, the cost of a new car has skyrocketed with an average transaction price of $46k, a 31% increase over the last year years.
The result: the average monthly payment for new cars hit a record $736 last month, a 28% increase over the last 3 years.
9) AAA No More
Fitch downgraded the US to AA+ last week citing an “expected fiscal deterioration over the next three years” and a “high and growing general government debt burden.”
That burden is becoming more and more problematic with the continued rise in interest rates. US Government Interest Payments spiked to 3.6% of GDP in Q2 2023, up from 2.4% in Q1 2022. That’s the biggest 5-quarter increase on record. This percentage is projected to continue to rise over the next decade with interest payments becoming a much larger share of the Federal budget.
Here are the 9 countries with AAA ratings across all three major rating agencies…
10) The Narrowing New/Existing Home Gap
The median sales price of a new home in the US is now $415k, only $5k higher than the median sales price of an existing home ($410k). This is the smallest price gap we’ve seen since 2005.
A few reasons why this is occurring:
a) Builders are offering more incentives to stimulate demand.
b) Smaller new homes are being built at lower price points due to the lack of affordability.
c) The supply of new homes as a % of the overall market is much higher than historical levels as existing home supply has plummeted (many locked into low mortgage rates are not selling).
11) Higher Growth, Higher Multiples
Here’s the breakdown in sales growth for some of the largest S&P 500 companies…
And here’s their earnings per share (EPS) growth…
Solid numbers overall, but share price gains this year have far outpaced the growth in revenues/earnings, leading to much higher multiples…
The median price to sales ratio in the Nasdaq 100 has moved up to 5.9x, its highest level since April 2022.
12) A Few Interesting Stats
a) How much money you need to earn to be in the top 1% in every U.S. state.
b) The average age in congress is increasing.
c) There are fewer public companies today (4,200) than there were in 1976 (4,800).
d) Criteria, a company that administers about 10 million assessments a year to evaluate prospective employees, has seen a sharp decline in young job candidates’ reading comprehension, verbal skills and numeracy as compared to 2019 levels.
e) The median home price in the Miami–Fort Lauderdale–West Palm Beach metro area is now 8.7x higher than the median income, up from 3.1x in 1990 and above the 2005 bubble peak (8.5x).
And that’s it for this week. Have a great week!
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