The Week in Charts (12/12/23)

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1) The Jobs Streak Continues

199,000 US jobs were added in November, the 35th consecutive month of jobs growth.

Healthcare (+93k) gained the most jobs, followed by Government (+49k) and Leisure/Hospitality (+40k). The resolution of the UAW strike also boosted Manufacturing employment (+28k).

Roughly a third of the jobs created this year have been in the healthcare sector, which is seeing an acceleration in jobs growth while the growth rate in other sectors has been on the decline. The aging US population is a secular tailwind for healthcare that should require many more workers in the years to come.

The US Employment to Population Ratio moved up to 60.5% in November, its highest level since February 2020.

The Unemployment Rate moved down to 3.7% in November from 3.9% in October. That’s the lowest rate since July. April’s 3.4% reading was the lowest reading since 1969.

The Unemployment Rate has now been below 4% for 22 straight months, the longest streak since the late 1960s.

2) A Looser Labor Market

A number of signs are pointing to a continued loosening in the labor market:

• The number of US Job Openings fell to 8.7 million in October, the fewest since March 2021.

• The number of job openings still exceeds the number of unemployed persons in the US, but the gap is narrowing. The 1.3 job openings per unemployment person is the lowest since August 2021.

• The 1.8% increase in total jobs over the last year was the lowest YoY growth rate since March 2021.

• US Average Hourly Earnings increased 4% over the last year, the slowest YoY growth rate since May 2021.

3) The Housing Market in 2024

Here’s what Redfin is predicting for the US Housing Market in 2024:

• Flat Home Prices.

• Listings rising from historic lows and a 5% increase in home sales.

• A decline in mortgage rates to 6.6% by year-end.

If these forecasts come true, this should help improve affordability from record lows. The median American household would have needed to spend over 41% of their income to afford the median-priced home in 2023, the highest share on record.

If wages continue to rise, even flat home prices will be more affordable. But a much faster path to affordability would come about with falling home prices or falling mortgage rates.

In terms of the latter, we’ve seen a sharp improvement of late. The 30-year mortgage rate in the US has declined for 6 consecutive weeks, moving from its highest level since 2000 (7.79%) down to 7.03%.

4) Lower Volatility, Higher Equity Prices

The Volatility Index ($VIX) ended last week at 12.35, its lowest level since January 2020.

The $VIX has fallen 43% over the last 7 weeks (from 21.71 to 12.35), the 16th largest 7-week decline in history.

Meanwhile, equity prices continue to rise with the Dow hitting another total-return high this week and the S&P 500 (-1% below)/Nasdaq 100 (-1.7% below) not far behind.

5) The Year of the Gap

While equities are now broadly positive on the year, there’s been a wide divergence in performance across various styles, market caps, and geographies…

• Large vs. Small: The S&P 500 is outperforming the Russell 2000 by 13.7% in 2023. In the last 30 years, large cap outperformance has only been higher two times: 1998 (31.1% spread) and 2021 (13.9% spread).

• Market Cap Weighted vs. Equal Weight: The S&P 500 is outperforming the equally weighted index by 14% this year, on pace for the 2nd biggest outperformance on record with data going back to 1971 (only 1998 was bigger @ 16%).

• US vs. International: The S&P 500 (+21.3%) is outperforming MSCI EAFE (+13.6%) by 7.7% this year. From 2010-23, the S&P 500 has outperformed in 11 out of 14 years w/ a cumulative total return of 440% vs. 112% for MSCI EAFE.

• Growth vs. Value: Growth stocks are outperforming Value stocks in 2023 by 30%, the 2nd biggest outperformance on record with data going back to 1979 (only 2020 was bigger). Driving this spread has been the huge advance this year in Technology shares which now have their highest relative performance versus the broad market since March 2000.

6) Submerging Markets

The ratio of Emerging Markets to US Equities hit a 22-year low last week, moving back to November 2001 levels.

China remains the largest single country within the EM indices (24% of MSCI Index, 31% of FTSE Index) and its had a very difficult year (MSCI China ETF $MCHI down 14%).

The divergence in performance between US and China tech shares continues to widen. While the Nasdaq 100 ETF ($QQQ) is not far from hitting a new all-time high, the China tech ETF ($CQQQ) is 67% below its peak.

7) Moving in Tandem

The correlation between US stocks and bonds over the last 2 years (0.74) is the highest we’ve seen since 1993-95.

Over the past 4 months, the relationship has been even tighter, with both asset classes moving up and down in tandem. Equities and bonds sold off as yields rose in August, September, and October and then rallied sharply higher in November and December as yields fell.

The recent move lower in yields has spanned all segments of the bond market, from Treasuries (10-year down 86 bps) to Investment Grade Bonds (down 96 bps) to Junk Bonds (down 139 bps).

8) Fed Still on Hold

The Fed is set to meet again this week and if the market is correct they will almost certainly hold rates steady at 5.25-5.50% (98% probability priced in).

All eyes will be on the Fed’s updated projections for inflation, unemployment, and the direction of interest rates. Currently, the market is saying the Fed will start cutting rates in May 2024, and if that’s the case they will likely start signaling a move lower well in advance. Thus far, chairman Powell has been reluctant to acknowledge any prospect of a rate cut, but we’ll see if that changes at all in the upcoming FOMC press conference.

9) More Affordable Used Cars and Gasoline

Wholesale used car prices are now at their lowest levels since March 2021, down 20% from the peak.

This should lead to lower retail prices in the coming months, which are already on the decline. Asking prices for used cars in the US are at their lowest levels in 29 months, down 10% from the peak in July 2022.

Traveling by car is getting less expensive too, with gas prices in the US moving down to $3.20/gallon (national average). That’s the lowest level we’ve seen this year.

10) A Few Interesting Stats…

a) Over the last 8 years, the S&P 500 ETF ($SPY) has gained 152% while Disney ($DIS) shares are down 14%.

b) According to Vanguard, Gen Z investors entered 2023 with a higher cash allocation (29%) than Baby-boomers (19%).

c) The best and worst performing stocks in S&P 500 this year…

d) The largest US companies by market cap, from 1960 to today…

e) ISM Manufacturing PMI has been below 50 (in contraction) for 13 straight months, the longest down streak since 2008-09.

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

-Charlie

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