The Week in Charts (7/8/24)

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The most important charts and themes in markets and investing…

1) Betting on a Rate Cut

The market is now pricing in a 78% probability of a Fed rate cut in September, up from 64% a week ago and 50% a month ago.

Why have the odds of a cut been rising? 4 reasons…

a) Rising Unemployment Rate

The US Unemployment Rate moved up to 4.1% in June, the highest level since November 2021.

b) Slowing Jobs Growth

Total jobs in the US increased 1.7% over the last year, the lowest YoY growth rate since March 2021.

c) Slowing Wage Growth

US Average Hourly Earnings increased 3.9% over the last year, the slowest growth rate since May 2021.

d) Cooling Inflation

The Fed’s preferred measure of inflation (Core PCE) moved down to 2.6% in May, the lowest since March 2021.

2) The All-Time High Party Continues

Market participants are said to be excited about the prospect of a rate cut. One might assume that’s because the S&P 500 has been held back by the Fed’s restrictive monetary policy.

But as the chart below indicates, that’s far from the case, with the S&P 500 now 28% higher than when the Fed first started hiking rates in March 2022.

The S&P 500 hit three more all-time highs last week, bringing this year’s total up to 34. We’re currently on pace to hit the 3rd most all-time highs of any year in history, trailing only 1995 and 2021.

The S&P 500’s 16.7% gain thus far in 2024 is the 12th best start to a year and the best start to a presidential election year in history.

Is everything participating in this bull run?

Not exactly.

Small caps are still down 2% on the year, trailing large caps by the widest margin since 1998.

That’s pushed the ratio of large caps to small caps up to its highest level since October 1999.

The biggest growth companies in the US continue to get bigger, led by Nvidia’s 154% gain.

As a result, the outperformance of growth stocks over value stocks has widened to its highest level since March 2000. Yes, that March 2000 – the peak of the dot-com bubble.

3) Investors Are Getting Greedy

The market’s rapid advance this year has not gone unnoticed, and sentiment is getting frothy again.

The percentage of Bulls in the Investors Intelligence survey has moved up to 63%, the highest we’ve seen since April 2021. This is above 97% of historical readings.

Meanwhile, Active Managers (NAAIM survey) have gone all-in and then some, with their equity exposure moving north of 100% on average.

4) Apple’s Highest Valuation Ever

Bullish sentiment is pushing valuations higher and higher for many of the biggest names.

Apple’s Price to Sales ratio moved above 9 last week, the highest valuation level in company history. This is 3x higher than what investors were paying for Apple shares in early 2019.

Here’s a look at how Apple’s current valuation metrics compare with averages over the last decade. The one-word summary: rich.

But Apple is not alone in that regard, with elevated valuations across the large cap growth spectrum. Which means that heading into earnings season, expectations are very high.

5) What a Comeback

Tesla was down 43% on the year at its closing low on April 22, an outlier among the otherwise strong returns from the Magnificent Seven. But after a 77% rally, Tesla has turned positive and is now up 1%. One of the most incredible short-term comebacks you’ll ever see.

Last week’s 27% surge higher got a boost from Tesla’s latest delivery data, showing 443,956 vehicles in Q2. While this was down 5% from a year ago it exceeded the consensus estimate of 439k.

6) A Coordinated Contraction

While the stock market has been going gangbusters, the real economy is showing some signs of weakness.

The ISM Manufacturing PMI has been below 50 (in contraction) for 19 out of the last 20 months. With data going back to 1948, that’s only happened two other times:

• 1989-91 (Recession in 1990-91)
• 1981-83 (Recession in 1981-82)

Meanwhile, the ISM Services PMI is also below 50 and at its lowest level since May 2020.

The only periods in the past when both the Manufacturing and Services PMIs have been below 50 at the same time:

• Jul ’08 – Jul ’09 (Recession)
• Apr – May 2020 (Recession)
• Dec 2022
• Apr 2024, Today

The Atlanta Fed is now projecting 1.5% for real GDP in the 2nd quarter, down from 3% just a few weeks ago.

7) More Listings = More Price Drops

On average, 6.9% of homes for sale in the US had a price drop in recent weeks, a record high as far back as the data goes (beginning of 2015).

A big reason for the cuts: homes are taking longer to sell due to rising supply. Active listings of homes for sale have increased 18% in the past year to their highest levels since 2022.

8) More Available Apartments = Cheaper Rents

Only 47% of newly constructed apartments in the US were rented within 3 months, the 2nd lowest share in the last 12 years (only Q1 2020 was lower).

The reason? Rising supply, following the multifamily construction boom in recent years…

This has led to rising vacancy rates (highest since August 2020)…

…and lower asking returns, down 0.7% in the past year. This is the 13th consecutive month showing a YoY decline in rental prices.

9) A Few Interesting Stats…

a) The US Unemployment Rate is now 0.7% above the cycle low from April 2023 (3.4%). In the past, a 0.7% increase has occurred on average 2 months after the start of a recession.

b) The US labor force participation rate among 25-54 year olds (prime working age) moved up to 83.7% in June, the highest level since February 2002.

c) Manufacturing Construction Spending in the US continues to hit new record highs, more than tripling over the last 3 years.

d) Truflation’s real-time inflation gauge is now under 2%, which is well below the consensus estimate for the next CPI report (3.1%).

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

-Charlie

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