The Week in Charts (1/29/24)

View the video of this post here.

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The most important charts and themes in markets and investing…

1) What Tends to Follow All-Time Highs?

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.

The S&P 500 closed at an all-time high last Thursday for the 5th day in a row. The last time that happened was in November 2021.

It also crossed above 4,900 for the first time. It took 757 days to go from 4,800 to 4,900, the longest gap between 100-point milestones since March 2000-May 2013.

What tends to follow all-time highs?

More all-time highs, with an average S&P 500 total return of 10.5% over the next year (see video discussion here).

2) Will Small Caps Have Their Day in the Sun?

While the S&P 500 is at new highs, the Russell 2000 Small Cap Index is still in a 20% drawdown. That’s the largest Russell 2000 drawdown we’ve ever seen with the S&P 500 at an all-time high.

What happened following the 3 previous largest Russell 2000 drawdowns when the S&P 500 was at a record high?

Both indices would rally higher over the next year with the Russell 2000 outperforming and joining the S&P 500 at an all-time high…

• April 7, 1999 (-19.2% Russell 2000 Drawdown): S&P 500 gained 14.3% over the next year and Russell 2000 gained 36.5%.

• February 13, 1991 (-13.5% Russell 2000 Drawdown): S&P 500 gained 12.1% over the next year and Russell 2000 gained 35.5%.

• January 21, 1985 (-13.3% Russell 2000 Drawdown): S&P 500 gained 17.4% over the next year and Russell 2000 gained 18.2%.

But what about the notion that “weak breadth” is a bearish signal for markets, something we heard from pundits throughout 2023?

The data simply doesn’t support that thesis. Historically, stocks have experienced above-average returns following periods of small cap underperformance (“weak breadth”) and below-average returns following periods of small cap outperformance (“strong breadth”). (see video discussion here)

3) Trillion Dollar Club Adds a New Member

There are now 6 companies in the US with a market cap over $1 trillion. Meta joined the club last week, crossing above $1 trillion for the first time since September 2021. During the 2022 bear market, Meta’s market cap plummeted as low as $235 billion, and has since increased 326%.

With the exception of Tesla (-25%), the Magnificent 7 stocks are off to a big start in 2024 with Nvidia (+26%) once again leading the way.

Tech is once again outperforming, with the S&P 500 technology sector’s relative strength surging to its highest level since March 2000.

Within Technology, Semiconductors continue to lead the way, powered by Nvidia and AMD.

Semiconductor chips have become the new Oil, and over the last 10 years we’ve seen that play out in markets. The Semiconductor ETF ($SOXX) has gained 825% versus a 37% gain for the Energy Sector ETF ($XLE).

4) Tesla, Sentiment, and Mr. Market

Tesla reported Q4 earnings and revenues that missed expectations, and the stock fell over 13% on the week.

Its revenue increase of 3.5% over the past year was the slowest growth rate since Q2 2020.

Gross margins fell to 17.6% in Q4 2023 from 23.8% a year ago, largely a result of the deep price cuts on its vehicles.

Here are Tesla’s annual returns versus annual revenue growth going back to 2010. The visual is a textbook example of how sentiment drives everything in the short run (“voting machine”) and fundamentals in the long run (“weighing machine”).

In early 2021, three years ago, investor sentiment was so ebullient that it drove Tesla’s valuation up to 30x sales.

But as growth has slowed, so has investor enthusiasm, and the stock now trades at 6.7x sales. This valuation adjustment is the primary reason why the stock is down 37% over the last 3 years versus a gain of 33% for the S&P 500 ETF ($SPY). Tesla’s revenues have more than tripled over this period of time but the starting valuation was simply too high.

5) The Netflix Comeback

Netflix’s crackdown on password sharing has been a resounding success thus far.

The proof: Netflix revenues hit a record $8.8 billion in Q4 2023, up 12.5% YoY. This was the highest growth rate since Q4 2021.

13.1 million paid subscribers were added in Q4, well above estimates of 8.8 million. This brings its total subscribers up to 260 million a 13% increase over the last year.

In the last decade, Netflix shares have gained over 1,000% while its revenues have increased 7x.

6) It’s Good to Be The King

JPMorgan Chase ($JPM) led all big banks with a 12% increase in revenues over the last year and 34% increase in net interest income.

Its net income of over $49 billion in 2023 was the highest annual total for any bank in history.

JPMorgan Chase ($JPM) is at all-time high, up 28% over the last year. Meanwhile the regional bank ETF ($KRE) is down 10% over the last year and remains 30% below its prior high. No company benefitted more from the 2023 banking crisis than JPMorgan. It’s good to be the king.

7) Homebuilder Adaptation

The median price of a new home sold in the US is now 17% lower than its peak in October 2022 (from $496,800 to $413,200). After the last housing bubble peak the median new home price fell 22% nationally before bottoming.

Why are prices falling?

Homebuilders are adapting to the lowest affordability on record by building smaller homes and offering more incentives/price cuts. The median square footage of a new single-family home in the US has moved down to its lowest level since 2010.

8) The Expansion Continues

U.S. economic growth once again exceeded expectations in Q4, with real GDP rising at a 3.3% annualized rate versus consensus estimates of 2.0%.

The 3.1% increase in Real GDP over the last year is the highest growth rate since Q1 2022.

The US economy has now been in an expansion for 44 months with annualized real GDP growth of 4.9% over that time.

Meanwhile, the Leading Economic Index declined for the 21st month in a row, the longest down streak since 2007-08. The Conference Board is now forecasting US “GDP growth to turn negative in Q2 and Q3 of 2024,” pushed back from prior calls for a recession to start in Q1/Q2/Q3/Q4 2023.

One of the inputs to their model is the US Yield Curve (10-year minus 3-month), which has now been inverted for 457 consecutive days, the 2nd longest streak in history. If it remains inverted for two more weeks it will become the longest inversion in history, surpassing the period from November 1965 to March 1967. Interestingly, many view that inversion as the last failed yield curve signal because it took years for a recession to ensue (official recession did not start until January 1970).

9) China’s Plunge Protection Team

The S&P 500 ETF ($SPY) closed at an all-time high last week while the MSCI China ETF ($MCHI) closed at a 15-month low, down over 60% from its peak in February 2021.

It appears that Chinese authorities may have seen enough, with their plunge protection team ready to step in…

“Bloomberg reported Tuesday that Beijing is considering spending up to two trillion yuan, the equivalent of $282 billion, to support the stock market, possibly using cash stashed offshore by state-owned enterprises. That is a big sum: It is equal to around 8% of the free-floating capitalization of mainland Chinese stock markets, according to Morgan Stanley.” – WSJ

The PBOC also cut their required reserve ratio down 10%, its lowest level since 2007.

It remains to be seen if these measures will lead to a sustainable rally, but sentiment on Chinese equities certainly seems to be near a negative extreme. The Hang Seng Index is trading at a P/E ratio of 8, down from over 23x in early 2021.

10) Falling Money Supply, Falling Inflation

The US Money Supply fell 2.3% over the last year, a record 13th consecutive month with a YoY decline.

The 2% decline in M2 during 2023 was the largest annual decline on record with data going back to 1959. This was the second straight yearly decline which followed the record 40% expansion in the money supply in 2020-21.

This continues to be positive leading indicator for inflation, with the PCE Price Index moving down to 2.6% in December. This was its lowest level since February 2021.

The Fed’s preferred measure of inflation (Core PCE) moved down to 2.9% in December, the lowest since March 2021. The Fed Funds Rate is now 2.3% above Core PCE, the most restrictive monetary policy we’ve seen since September 2007.

What will the Fed do when it meets this week?

If markets are correct (and they have been ahead of every meeting since 2009), they will keep their restrictive policy in place and hold rates at 5.25-5.50% once again. The current probability of no change in the Fed Funds Rate: 97.4%.

11) A Few Interesting Stats…

a) The Best and Worst Airlines of 2023 according to the WSJ.

b) Global Currencies versus the US Dollar over the last 10 years…

c) The average ending balance of an investment in the US stock market for 30 years was over 6x higher than what you would have earned holding cash (3-month T-bills). (see video discussion here).

d) The Lithium and Battery Technology ETF ($LIT) closed at a 39-month low today, down 54% from its peak in November 2021.

e) Investors purchased 123k single-family US homes in the 4th quarter of 2023, down 24% from year-ago levels and 48% lower than Q2 2022 levels.

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

-Charlie

If we can help guide you on your road to wealth, reach out.

Disclaimer: All information provided is for educational purposes only and does not constitute investment, legal or tax advice, or an offer to buy or sell any security. Read our full disclosures here.

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