The Week in Charts (4/23/24)

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The most important charts and themes in markets and investing…

1) The First Correction of the Year

The S&P 500 closed below its 50-day moving average last week for the first since last November.

That ended the 10th longest uptrend in the index since 1950 at 162 days.

The abnormally smooth ride higher over the past five months was reminiscent of 1995 and 2017, years in which the S&P 500 didn’t have a decline greater than 3% the entire year.

We now know this is not another 1995 or 2017, with the S&P 500 falling 5.5% from its March high.

Why are stocks going down? There’s always a reason you can come up with in hindsight. The current pullback is being attributed to fears over stubborn inflation, the Fed pushing back rate cuts, and an escalation from the Iran/Israel conflict.

These fears helped push the Volatility Index ($VIX) up to 19.2, its highest close since last October. Is this extreme? Not at all. The average $VIX level since 1990 is 19.5.

How did the leading story stock fare during the recent pullback?

Nvidia has declined 20% from its peak in March, its largest pullback in over a year. But this has only erased the last month’s worth of gains – the stock is still up 173% over the last year.

Other stocks in the semiconductor sector, however, have given back more of their gains. One example: AMD is now down on the year after being up over 43% YTD on March 7. That’s a 31% decline.

2) The Other Side of Mania

In the midst of a FOMO-driven mania, sentiment is all that matters. But manias don’t last forever, and when they end the weighing machine (fundamentals) rules the day. A few current examples…

• Peloton had a market cap of over $49 billion at the mania peak in January 2021. Today its market cap is down to $1.2 billion, an all-time low.

• Rivian ($RIVN) lost $4.7 billion in 2021 but investors looked past this during the EV mania, valuing the company at $153 billion. Today, investors seem to care about profits again with Rivian valued at $8.2 billion after posting a $6.8 billion loss in 2022 and $5.4 billion loss in 2023.

• Virgin Galactic’s ($SPCE) market cap hit nearly $15 billion in early 2021. Today its market cap is at $438 million, down 98%. Over the past 4 years, the company has lost $2 billion.

3) The Large/Small Divide

US Large Cap stocks ($SPY ETF) are up 28% over the past 3 years while Small Caps ($IWM ETF) are down 9%.

Why the huge divide?

The prevailing narrative of higher interest rates being much worst for smaller companies than larger companies.

Smaller companies generally spend a much higher percentage of their income on debt service, making them more sensitive to rising rates. The interest coverage ratio (operating income/interest expense) for the small cap S&P 600 is 2.3 times vs. 7.6 times for the large cap S&P 500.

The sharp drop in interest rates in November/December 2023 had propelled small caps higher in one of their best 2-month runs in history. But since then, we’ve seen the opposite impact, with the 10-year Treasury Yield moving up to 4.67% (entered the year at 3.88%), its highest level since last November.

4) Netflix Numbers

Netflix revenues hit a record $9.4 billion in Q1 2024, up 14.8% YoY. This was the highest growth rate since Q4 2021. Net Income surged to a record $2.33 billion, up 79% YoY.

Over 9 million paid subscribers were added during the quarter, well above estimates of 4 million. That brought Netflix total subs up to 270 million, a 16% increase from Q1 2023.

So why did the stock fall 9% after reporting? Expectations are everything and expectations were sky-high with the shares up over 80% in the past year before earnings. Netflix also announced that they will stop reporting subscriber numbers in Q1 2025, which some took as a signal that subscriber growth may begin to slow again.

5) When Valuation Matters

Zoom ($ZM) hit a new all-time low last week, down 90% from its peak in October 2020.

In October 2020, it was trading at a price to sales ratio of 124x, and it was said by many that valuations “didn’t matter.”

Fast forward to today its price to sales ratio has moved all the way down to 4x as growth has slowed.

An incredible stat: Zoom revenues have increased by more than 10x in the 5 years since its IPO in April 2019 but the stock price is lower today than back then.

Lesson: valuation eventually matters, but by the time it does it’s too late for investors who bought into a mania to do anything about it.

6) Tesla Trimming

Tesla said it plans to layoff 10% of its global workforce of 140k employees, which would bring it back to around 2022 year-end levels. If they go through with the cuts the number of employees would still be 163% higher than the end of 2019, tremendous growth.

Investors seem to interpret the cuts as another sign of slowing growth, with the shares hitting their lowest levels since early 2023. Tesla has now been in a drawdown for 896 days, the 2nd longest downturn since its IPO in 2010. It currently stands 64% below its November 2021 peak.

7) Housing Slump Continues

US Existing Home Sales fell 4% over the last year, the 31st consecutive YoY decline. That’s the longest down streak in activity since 2007-2009.

The biggest factor continues to be a lack of affordability, which is hitting both demand (buyers can’t afford the houses for sale) and supply (existing homeowners locked into low rates can’t afford to move).

Mortgage rates moved up to 7.1% last week, their highest levels since last December.

The monthly mortgage payment needed to afford the median priced home for sale in the US has increased 88% over the last 4 years (from $1,480 to $2780).

8) Still Earning a Low Yield on Cash? Get Moving…

The national average interest rate on US savings accounts is still only 0.47% even though the Fed Funds Rate has been above 5% for nearly a year.

Banks will only offer a higher rate if they have to, and so far many depositors seem to be falling prey to inertia.

If you’re still earning a low rate on your cash, get moving. It’s never been easier to move into money market/high yield savings/T-Bill ETFs/Treasuries with yields above 5%.

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

-Charlie

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