The State of the Markets (June 2024)

By Charlie Bilello

06 Jun 2024


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This is a special of edition of the week in charts where I break down the current state of the markets…

1) Stocks

The 2022 bear market is fading away from memory.

Why?

We’re only in early June and the S&P 500 has already hit 25 all-time highs.

What’s propelling the market higher?

Two things:

a) Higher earnings: S&P 500 TTM operating EPS hit another new high in Q1, up 8% over the past year.

b) Higher multiples: enthusiasm over the AI revolution has led to significant multiple expansion over the last year with the S&P 500’s P/E ratio increasing 19% (from 20.5 to 24.3). This is the highest valuation we’ve seen since June 2021.

US equities are once again outpacing the rest of the world, a trend that has persisted for well over a decade.

Within the US the market, we’re seeing…

  • Large caps continue to outperform Small caps (highest relative strength since June 2000).
  • Increasing concentration with the top 3 holding in the S&P 500 (Microsoft, Nvidia, & Apple) now making up over 20% of the index, the highest % on record (note: data goes back to 1980).
  • Massive outperformance from Semis with the ratio of the Semiconductor ETF to the S&P 500 hitting a new record high, surpassing the previous high from back in 2000.
  • Growth stocks outpacing Value stocks with the ratio of Growth to Value nearing its highest level since 2000.
  • Continued weakness in Regional Banks ($KRE ETF) with relative strength against the S&P 500 nearing its record low from May 2023 (after SVB/First Republic failures).

2) Bonds/Fed

The US bond market is in a very different place than the stock market.

While the S&P 500 has been hitting 25 all-time highs this year, the Bloomberg Aggregate Bond Index remains 11% below its peak from the summer of 2020.

At 46 months and counting, this is by far the longest bond bear market in history.

The story behind the long drawdown is a simple one: interest rates rising from 2020’s historic lows.

While many feared this would lead to a spike in corporate defaults, that has yet to materialize. We’ve actually seen investors betting on the opposite of late, with both high yield and investment grade credit spreads hitting their tightest levels since 2021.

The sharp move higher in inflation expectations that we saw from the lows in 2020 to the peak in 2022 has subsided, with investors currently pricing in a more normal rate of inflation going forward (10-year breakeven rate @ 2.33%).

The path of these inflation expectations (higher or lower) will likely have a big impact on the direction of interest rates and Fed Policy.

With the Fed Funds Rate now 2.5% above their preferred measure of inflation (Core PCE), monetary policy is at its most restrictive level since September 2007, and many are expecting the Fed’s next move to be a rate cut.

But when that first cut occurs and how aggressive the Fed is in bringing down rates remains to be seen. Entering the year, the market was expecting the Fed to cut rates 6-7 times in 2024 with the first cut occurring in March. After stubbornly high inflation readings (overall CPI still at 3.4%), we’ve seen a dramatic shift, and the market is now pricing in only 1-2 cuts with the first cut not happening until September.

Which means the US yield curve (10-year yield minus 3-month yield) will remain inverted for the time being, extending what has already become the longest inversion in history (589 days and counting).

3) Real Estate/Housing

Bonds aren’t the only asset class feeling the pain of higher interest rates.

Real Estate Investment Trusts (REITs) remain over 20% below their peak from early 2022.

This matches the decline in US commercial real estate prices which are down 21% from their peak 2022 levels.

Meanwhile, US residential home prices have continued to march upward despite an increase in the 30-year mortgage rate from 2.65% to over 7%.

The Case-Shiller National Index hit another record high in March, up 6.5% over the past year. All 20 cities in the Case-Shiller 20-city index are showing higher prices than a year ago.

The combination of skyrocketing prices and skyrocketing mortgage rates have led to the least affordable housing market in history.

Naturally, this has led to a collapse in demand. So why are prices still going up? Supply has gone down even more, hitting a record low in 2022 as many would-be sellers could not afford to move. Only recently has the inventory of existing homes started to trend higher, but not enough yet to bring prices down.

Interestingly, while home prices continue to hit new highs, Asking Rents peaked back in 2022 and have now declined on a year-over-year basis for 12 straight months.

Rents have been helped by a multi-family construction boom that greatly increased supply and is leading to the highest vacancy rates (6.7%) since 2020.

The result: it’s never been more expensive to buy a home versus renting it than it is today.

4) Commodities

Commodities ($DBC ETF) have been the worst performing major asset class over the last 10 years, losing 5% versus an 81% gain for Gold ($GLD) and a 229% increase for the S&P 500 ($SPY). This weak relative performance hit its nadir in 2020 when Crude Oil briefly went negative. From there, Commodities would surge higher with rise in inflation until peaking in 2022.

Over the past 3 years, Commodities have fared much better than the last decade, gaining 28% versus a gain of 32% for the S&P 500.

Here’s a look at changes in the major commodity prices over the past year. Other than the parabolic move higher in Cocoa, what’s most notable is the surge in industrial metals (Copper recently hitting an all-time high) and gains in Silver (highest since 2012) and Gold (all-time high).

Gasoline futures are now 7% lower than a year ago, which is translating into lower prices at the pump (national average of $3.48/gallon vs. $3.54 a year ago).

5) Currencies

Predictions for the US Dollar’s demise have yet to materialize.

To the contrary, the Dollar remains among the strongest global currencies and has sharply increased in value relative to the Euro and the Yen over the past decade.

6) Crypto

Outside of Nvidia, the biggest story in markets this year has been the comeback in crypto.

With the approval of 11 spot Bitcoin ETFs in January, we saw another parabolic move higher in the space. By early March, Bitcoin was back at an all-time high, completely recovering from the 78% bear market that took place from November 2021 to November 2022.

The SEC recently approved 8 spot Ethereum ETFs as well, sending the coin sharply higher.

Both Bitcoin and Ethereum are up 69% year-to-date, widely outpacing equities, bonds, gold, and commodities.

7) Stocks vs. Bonds

Stocks have trounced Bonds over the last decade with the ratio between the two major assets continuing to hit new highs in 2024.

Over the past 3 years, stocks and bonds have been more highly correlated (0.71) than any other 3-year period in history.

But correlation does not equal returns, as evidenced by the chart below which shows the S&P 500 up 32% in the past 3 years versus an 8% loss for bonds.

Over the past 7 years, nearly all of the 7.5% annualized gains in the 60/40 US stock/bond portfolio have come from the stock side, with the S&P 500 gaining 11.6% per year versus just 0.8% per year for bonds.

8) Economy

The US economy continues to grow, albeit at a slower pace. The 1.3% annualized growth rate in Q1 of this year was a notable move lower from the 3.4% registered in Q4 2023.

Still, the expansion continues and is now 48 months long. Does that mean we’re overdue for a recession? Not necessarily. The last 4 expansions in the US lasted a minimum of 73 months with the 2009-2020 expansion running for 128 months (over 10 years).

Economic growth is expected to continue for at least another quarter, with both Wall Street and the Atlanta Fed forecasting between 2-3% for real GDP in Q2.

The biggest concern continues to be persistently high inflation, with CPI running above 3% for 37 consecutive months. That’s the longest stretch we’ve seen since the late 1980s/early 1990s.

The cumulative effect of these price increases appears to be starting the wear down the US consumer, with retail sales falling 0.7% over the past year after adjusting for inflation.

The good news is the labor market remains strong, with a 3.9% Unemployment Rate. At 27 months, this is the longest period with Unemployment below 4% since the late 1960s.

This streak may soon come to an end, though, with the labor market showing signs of loosening. Job openings have moved down by over 4 million from their peak to the lowest levels since February 2021.

The most important chart to watch in my view is wage growth relative to inflation. When wages are failing to keep pace with rising prices, we’re headed in the wrong direction, as your purchasing power is being eroded. This was the case throughout 2022 which caused Consumer Confidence to hit a record low. But over the past 12 months, we’ve seen the opposite, with wages rising at a faster pace than inflation. This is a great sign for the American worker that hopefully continues.


And that’s all for this week. Have a great rest of the week/weekend!

-Charlie

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