The Week in Charts (8/27/24)
View the video of this post here.
The rate cuts are finally coming, with market participants expecting the Fed Funds Rate to be 100 bps lower by year end.
What impact will this have on markets and the economy?
Don’t miss my big live show with YCharts on September 12 covering everything you need to know about the coming rate cuts. Register HERE to reserve your spot (if you can’t attend live, sign up to receive a replay).
The most important charts and themes in markets and investing…
1) From Panic to Euphoria
In the span of 3 weeks, market participants have moved from a state of panic to a state of euphoria.
Why the dramatic change in sentiment?
A vertical advance.
The S&P 500 has now rallied over 10% from the August 5 panic low and is less than 1% away from hitting a new all-time high.
It’s been a broad-based advance, with the equally-weighted S&P 500 ($RSP ETF) already hitting a new all-time high.
And the same is true for international stocks ($ACWX ETF), which have rallied 12% off their lows.
One of the primary sources of panic on August 5 was the crash in Japanese equities, with the Nikkei 225 closing down 12.4% that day.
But when it comes to investing, panic often creates opportunity.
We’re seeing that once again with the Nikkei already up 23% from its lows.
2) Frontrunning the Fed
Interestingly, the ferocious risk-on rally in equities has not hurt the bond market, with Treasury yields trending lower in anticipation of the upcoming Fed rate cuts.
Bond investors don’t seem to be waiting for those cuts, but instead are locking in longer-term yields today, driving prices higher.
The Aggregate Bond ETF ($AGG) is now at a 52-week high, up 8.8% in the past year. It’s also outpaced an investment in shorter-term Treasury Bills ($BIL ETF), which is up 5.4%.
Here’s a table of Bond ETF returns. Emerging Markets ($HYEM/$EMB) are the best performing segment this year, followed by US High Yield Bonds ($HYG).
Remember that spike in credit spreads a few weeks ago?
That’s already been undone. High Yield spreads ended last week at 3.19%, their tightest levels since July and well below the historical average of 5.32%.
3) The Fed’s Revisionist History
Imagine setting a house on fire, dousing it with lighter fluid, and when it burns down blaming it on the wind.
That’s tantamount to what the Federal Reserve is attempting to do in explaining why we’ve experienced the highest inflation since the early 1980s in recent years.
At the Fed’s annual Jackson Hole conference, Jerome Powell had this to say:
“High rates of inflation” were the result of “rapid increases in the demand for goods, strained supply chains, tight labor markets, and sharp hikes in commodity prices.”
And that’s it?
That’s it. Once again, no mention whatsoever of the two primary causes of high inflation: the record increase in the National Debt and the record increase in the Money Supply.
This has been a consistent theme from the Fed over the past few years, never acknowledging the true causes of inflation and their role in igniting it. Rather than holding them accountable, the media has been complicit, never asking about the national debt or the money supply in any of the FOMC press conferences.
Instead, we’re supposed to believe that inflation just magically spiked higher in 2022 and that the 40% increase in the money supply in 2020-2021 had nothing to do with it…
…and that borrowing $6.4 trillion in 2020-21 (a 28% increase in National Debt) had nothing to do with it.
Instead, higher prices were all due to external forces outside of the Federal Reserve and Federal Government’s control. That’s the revisionist history they want us to believe.
Milton Friedman said it best in this video, which should be required viewing for all voting members at the Federal Reserve…
4) Dollar Down, Gold Up
Fueled by the prospect of slower growth and lower interest rates, the US Dollar Index is now at its lowest level of year. Meanwhile, Gold ($GLD ETF) is at an all-time high, up 22% year-to-date.
In addition to the falling Dollar, the case for Gold relative to risk-free Treasuries has improved, with inflation-adjusted yields falling to their lowest levels of the year (1.67% on the 10-year).
5) Lower, But Not Low Enough
The 30-year mortgage rate in the US has moved down to 6.46%, its lowest level since May 2023.
This is helpful to prospective homebuyers, but not nearly low enough to solve the affordability crisis.
A direct result of that crisis has been the collapse in housing activity, which continues today.
Existing home sales fell 2% over the past year, the 35th consecutive YoY decline. That’s the longest down streak in activity since 2006-2009.
We’re likely getting closer to a turning point, however, as inventories have been rising. Active listings of homes for sale are up 18% in the past year and recently hit their highest levels since 2020.
6) It’s Good to Be a Homebuilder
At it’s core, the housing market is driven by supply and demand. And the biggest constraint on affordability is the lack of supply. Underbuilding after the Great Recession has led to a massive deficit of homes in the US, which Zillow estimates at 4.5 million.
That means we need 4.5 million additional homes just to get back to equilibrium, matching housing supply with household formation.
This is a secular trend that has been highly beneficial to the leading homebuilders who have all widely outpaced the S&P 500 in the past decade (S&P 500 +230%). Their profits are surging as well, ranging from a 353% increase for Toll Brothers ($TOL) to an 834% increase for D.R. Horton ($DHI).
7) The Inexorable Rise of E-Commerce
There are no certainties when it comes to the future, but if I had to pick one trend that has the highest probability of continuing in the next decade it would the rise of e-commerce.
In 1999, E-Commerce was less than 1% of total retail sales. Today that number stands at 16%. In 2034, that share of sales should be much, much higher.
Why?
In a free market economy, if something can be done better, faster, and cheaper, it will eventually be done better, faster and cheaper. As long as E-Commerce is providing additional value for the end consumer, the world will continue to move in that direction.
8) A Few Interesting Stats…
a) The S&P 500 is up 18.1% in the first 163 trading days of 2024, the 18th best start to a year going back to 1928 and 2nd best start to a presidential election year ever.
b) Argentina ($ARGT) is leading all global equity ETFs this year with a return of 22.3%.
c) The best and worst performing stocks in the S&P 500 are both in the Semiconductor industry. Nvidia ($NVDA) is up 155% while Intel ($INTC) is down 59%.
d) US tech stocks ($XLK ETF) are up 530% over the last decade while Chinese tech stocks ($CQQQ ETF) are down 13%.
e) The S&P 500 is now 29% higher than when the Fed started hiking rates back in March 2022.
And that’s all for this edition. Have a great week everyone!
-Charlie
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