The Week in Charts (1/22/24)

By Charlie Bilello

22 Jan 2024

View the video of this post here.


This week’s post is sponsored by YCharts. I’m doing a big live show with them this week on January 25 @ 2pm EST. We’re going to cover the 4 most important charts to watch in 2024 and what events would send shock waves across markets. Register here, open to all.


The most important charts and themes in markets and investing

1) Inflation Optimism

There’s a lot of optimism today surrounding inflation. And for good reason.

While overall CPI ticked up a bit to 3.35%, the core rate of inflation moved down to 3.9% in December, its lowest level since August 2021.

Here’s a breakdown of the major inflation categories today versus June 2022 when overall CPI peaked at 9.1%. Helping drive the rate down to 3.35% are a number of areas showing YoY declines, including Fuel Oil (-15%), Gas Utilities (-14%), Gasoline (-2%), and Used Cars (-1%). With the exception of Transportation and Shelter, all of the major CPI components have a lower rate today than back in June 2022.

As CPI’s largest component (>33% of the index), Shelter has the greatest impact on the direction of the headline index and is even more influential in terms of core prices. It’s been the primary reason why inflation has remained elevated in recent months.

Indeed, if we strip out Shelter, US consumer prices rose just 1.9% over the last year, the 7th consecutive month below 2%.

The good news: Shelter CPI has now moved down on a YoY basis for 9 consecutive months, from a peak of 8.2% in March (highest since 1982) to 6.2% today. Given its long lag vs. real-time data (asking rents are down 1% YoY), a continued move lower is expected which should lead to a continued decline in inflation in the coming months (assuming we don’t see a spike in the other components).

After understating true housing inflation in 2021 and the first half of 2022, Shelter has been playing catch up, slowly narrowing a gap that has finally been closed. Shelter CPI now shows a 21.0% increase since the start of 2020 vs. a 19.7% increase in asking Rents.

What was the best news in the CPI report? Lower food price inflation. The 1.3% increase over the past year was the smallest we’ve seen since June 2021, down from a peak of 13.5% in August 2022.

2) Signs of Cooling Inflation All Around

It’s not just CPI. There are signs of cooling inflation just about everywhere, including:

  • US Producer Prices, which declined 0.1% in December and increased just 1% over the last year.
  • US Import Prices, which fell 1.6% over the last year, the 11th consecutive YoY decline.
  • 1-Year ahead Consumer Inflation Expectations (NY Fed Survey), which moved down to 3.0%, the lowest since December 2020.
  • Year-ahead Business Inflation Expectations, which moved down to 2.2% in the latest Atlanta Fed survey. That’s the lowest we’ve seen since February 2021.
  • US gasoline prices, which moved down $3.07/gallon (national average), their lowest levels since June 2021.
  • Wholesale Used Car prices, which are at their lowest levels since March 2021, down 22% from their peak.
  • Retail Used Car prices, which are at their lowest levels in 31 months, down 12% from the peak in July 2022.

3) An Early Read on January CPI

What will the next CPI report show?

The Cleveland Fed is forecasting a drop in headline CPI to 2.96% for January, which would be the lowest US inflation rate since March 2021. Their core CPI (ex-food/energy) forecast of 3.81% would be the lowest core rate since May 2021.

Truflation, which attempts to calculate a real-time inflation rate in the US, is suggesting actual inflation is over a percentage point lower at 1.85%. A year ago this inflation gauge was above 6%.

4) Is the Fed About to Make a Policy Mistake?

At their meeting last December, the Federal Reserve projected three rate cuts in 2024 and the market is not only pricing in those three cuts but three more.

If these expectations prove correct, that would mean a Fed Funds Rate below 4% by the end of the year.

In calling for rate cuts (perhaps as soon as March), the Fed seems to be saying that the war against inflation is already over, and that we’ll smoothly move back to their 2% target and remain there.

But given their woeful track record, one has to wonder if the Fed is about to make yet another policy mistake.

Back in August 2020, not only was the Fed unconcerned about the coming spike in prices, but they were actually giving speeches about the “unwelcome fall” in inflation. Their strategy at the time: keep ultra-easy monetary policy in place with the goal of pushing inflation above 2% for a period of time in order to achieve a longer-term average of 2%.

When inflation spiked to 9.1% in 2022 (the highest since the early 1980s), there was no mention whatsoever of that speech or their role in driving inflation higher. All had been forgotten by the financial media and we were now to believe the Fed was a hardened “inflation fighter.”

Which is, of course, absurd on its face. If the Fed really cared about bringing prices down, they would apply their August 2020 logic but in reverse, keeping interest rates higher for longer so that inflation would run below 2% for a period of time. As it stands today, prices are 10% higher than where they would have been had inflation remained at 2% from 2020 through 2023.

Which begs the question: why not allow that gap to be closed before cutting interest rates? Especially when you have an Unemployment Rate at 3.7% and very loose financial conditions with a stock market back at all-time highs.

5) The Housing Market Deep Freeze Continues

Fewer US existing homes are selling today than at any point since 2010. The 3.78 million annual rate from December was even below the lowest level of sales during the 2020 covid shutdowns (4.01 million). The 4.09 million existing homes sold during 2023 was the lowest activity we’ve seen since 1995.

Why are home sales so low?

a) Lack of Affordability (Low Demand)

US housing affordability is worse today than the peak of the last housing bubble. The median American household would need to spend 45.3% of their income to afford the median priced home, a record high.

b) Lack of Inventory (Low Supply)

59% of US mortgage holders have a rate below 4% and 89% have a rate below 6%. With current mortgage rates at 6.6%, many existing homeowners are staying put, leading to a massive shortage of homes for sale.

And so, while demand has plummeted over the last year, supply has plummeted even more. The result: home prices in the U.S. actually increased 4% in 2023.

This has been a great environment for homebuilders as their share of the overall market has increased significantly given the low supply of existing homes. Over the past five years, the homebuilders ETF (XHB) has increased 184% vs. a 97% gain for the S&P 500 ETF ($SPY). Most estimates point to a deficit of single family homes in the millions, meaning a secular trend of more home building to come.

6) The Retail Sales Resurgence

The US Consumer is making a comeback.

After 13 consecutive YoY declines, inflation-adjusted Retail Sales rose 1.4% YoY in December, the first YoY increase since Oct 2022. Nominal Retail Sales grew 4.78% over the last year, rising just above the historical average of 4.71%.

What’s driving this increase in spending?

A huge boost in confidence.

The University of Michigan Consumer Sentiment Index has moved up to 78.8, ending the longest period of extreme negative sentiment on record. The 9.1 point increase in the index over the last month was the largest spike higher since December 2005.

And what’s driving the big boost in confidence?

Lower inflation and higher wages.

After a record 25 consecutive months of negative real wage growth, wages have now outpaced inflation on a YoY basis for 8 straight months. This is a great sign for the American worker that hopefully continues.

7) All-Time Highs Again

After a 38% rally off of the October 2022 low, the S&P 500 is back at an all-time high again. This is the first new high since January 4, 2022.

2023 was the first year since 2012 without an all-time high but the drought was short-lived this time as the recovery from the 2022 bear market was much quicker than the recoveries from the 2000-02 and 2007-09 bear markets.

The Dow, S&P 500 and Nasdaq 100 ETFs ended the week at all-time highs. Here are their returns over the last decade:

-Dow $DIA: +185% (11.0% annualized)

-S&P 500 $SPY: +215% (12.2% annualized)

-Nasdaq 100 $QQQ: +424% (18.0% annualized)

8) Capitalism vs. Communism

A decade ago many investors were completely enamored with China, looking past their Communist system of government and all the evils and restrictions of personal freedom that came along with it.

Growth was all that mattered, it was said, and with the largest population in the world, China was a market that you “needed” to be invested in.

Fast forward to today and that narrative has completely changed.

Chinese stocks ($FXI ETF) have declined 23% over the last 10 years while U.S. stocks ($SPY ETF) have more than tripled.

The gap between technology stocks in the two countries has been even wider, with US tech stocks ($XLK ETF) advancing over 6x while Chinese tech stocks ($CQQQ ETF) are down 11%.

One of those Chinese tech stocks is Alibaba ($BABA), which went public in September 2014 in one of the most hyped IPOs in history. The stock has since declined 27% while the Nasdaq 100 ETF ($QQQ) is up 349%.

When it went public Alibaba traded at over 20x sales. Today that price to sales ratio has moved all the way down to 1.36x, a lower valuation multiple than Campbell Soup (1.41x).

China has a host of issues, but foremost among those is its demographic crisis.

There were 9 million births in China during 2023, the lowest number on record with data going back to 1949. China’s population declined by 2 million in 2023 and further declines are likely with its fertility rate (# of children a woman has over her lifetime) falling to a record low of 1.0.

9) The Spot Bitcoin ETF: Will History Rhyme Again?

The spot Bitcoin ETF is finally here, with 11 different funds approved by the SEC.

They say history doesn’t repeat itself but it often rhymes…

  • Leading up to the approval of Bitcoin futures trading in December 2007, there was a parabolic move higher and sentiment was euphoric. An 84% correction would follow.
  • Leading up to the approval of the Bitcoin futures ETF in October 2021, there was a parabolic move higher and sentiment was euphoric. A 78% correction would follow.
  • Leading up to the approval of the first spot Bitcoin ETF this month, there was a parabolic advance and sentiment was – you guessed it – euphoric.

Is this time different or will history rhyme once more?

10) A Few Interesting Stats…

a) The average price of a used Tesla has declined 18 months in a row, moving from a record high of $67,900 in July 2022 to a record low of $35,844 today (-47%).

b) Gold bars continue to sell out in hours at Costco but buyers prepping for an apocalypse would have been much better off buying the stock. Costco has gained over 116,000% since its IPO in December 1985 versus a 413% gain for Gold and 228% increase in US inflation. (see video discussion here).

c) It’s a presidential election year, and you know what that means: headlines trying to scare long-term investors out of their positions. The latest from Barron’s: “Presidential Election Years Are Bad for Stocks.” What does the data actually suggest? That stocks have done slightly better during presidential election years (+10.0%) vs. non-election years (+9.7%). And going back to 1860, a 60/40 portfolio has gained 8.7% during presidential election years vs. 7.7% in non-election years. (see video discussion here).

d) The longer you sit in cash, the lower your chances of beating the stock market. Over the next year you have a 31% chance. Over a 10-year period, your odds move down to 15%. In every 25-year period an investment in the S&P 500 has beaten cash. (see video discussion here).

e) If China invaded Taiwan it would cost the global economy $10 trillion, or 10% of world GDP (Bloomberg Economics estimate).

f) According to economists surveyed by the Wall Street Journal, the probability of a U.S. recession in the next 12 months has moved down to 39% from 61% a year ago.

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


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