The Week in Charts (9/25/24)
View the video of this post here.
The US Inflation rate has been moving down and the Fed is expecting it to remain near their target of 2% over the next few years.
Which asset classes have performed best when inflation is tame?
Get the latest research from YCharts on this topic HERE.
The most important charts and themes in markets and investing…
The Fed started off the easing cycle with a bang, cutting interest rates by 50 bps to a new range of 4.75-5.00%. This was the first rate cut in the US since 2020 and brings to an end the tightest monetary policy since September 2007.
What comes next?
More cuts.
The Fed is forecasting a year-end Fed Funds Rate of 4.25-4.50% while the market is pricing in a more dovish 4.00-4.25%. In 2025, the cuts are expected to continue, with Fed Funds Rate moving down to 2.8% by the end of the year.
Are rate cuts always bullish for equities?
No. There’s no such thing as always in markets. As we saw during the last two big bear markets, if the Fed is cutting rates aggressively because of an anticipated economic downturn, investors may hit the sell button on the expectation that earnings will decline.
Is that the case today?
The prevailing narrative from both the Fed and market participants seems to be a resounding no, with Jerome Powell saying he sees no sign of recession (“I don’t see anything in the economy right now that suggests the likelihood of a recession is elevated. You see growth at a solid rate, you see inflation coming down and you see a labor market that’s still at solid levels.”)
As for market participants, they continue to be exuberant buyers of stocks, with the S&P 500 quickly moving back to all-time highs after the outsized rate cut.
There have now been 41 all-time closing highs in 2024, on pace to be one of the strongest up years on record.
The 20% gain in the S&P 500 is the best start to a year since 1997 and 17th best in history.
Did anyone see this coming?
No. At 5,733, the S&P 500 is now more than 300 points above the highest year-end price target from Wall Street Strategists and 18% above the average price target (4,861).
From Bitcoin to Bonds, everything is up in 2024. We haven’t seen a year like this since 2019.
3) Is the Consumer Pulling Back?
The biggest driver of the US economy is the US consumer (68% of GDP). As long as the consumer is still spending, a significant economic downturn is unlikely to occur.
While spending continues, there are increasing signs of a consumer that may be pulling back, particularly at retailers.
Retail sales grew 2.1% over the last year, well below the historical average of 4.6%. And if we adjust for higher prices, they actually fell 0.5% versus the typical inflation-adjusted gain of 2%.
While the rate of inflation continues to move down, the cumulative impact of higher prices seems to be taking its toll. The Personal Savings Rate in the US has moved down to 2.9%, the lowest since June 2022 (when inflation peaked at 9.1%). The average savings rate over the last 30 years is 5.8%.
4) The Leading Economic Index Is Signaling Recession … Again
Are we in a recession today?
Not according to the Atlanta Fed, which is forecasting another strong quarter for the US economy in Q3 (2.9% real GDP estimate).
But what about the year ahead?
According to the Conference Board’s index of leading indicators, a slowdown is coming.
If that sounds familiar, it’s because they were calling for a recession to start way back in the first quarter of 2023, and continued to call for recession until earlier this year when they seemed to throw in the towel.
But now they’re back in the recession camp, pointing to weakness in new orders, consumer expectations, building permits and a negative interest rate spread. What’s missing? Confirmation from the financial markets, with equity and credit markets still booming.
5) Will Lower Mortgage Rates Unfreeze the Housing Market?
This is the big question confronting a housing market that’s been essentially frozen for the past few years.
Sales of existing homes fell 4% over the last year, the 36th consecutive YoY decline. That’s the longest down streak in activity since 2006-09.
The 3.86 million existing homes sold is near the lowest activity level since 2010.
What’s driving this? A lack of supply (low inventories due to the lock-in effect) and a lack of demand (due low affordability). Thus far, the lack of supply has been the more dominant factor, causing home prices to hit new highs in 2024 (+5% YoY), further constraining affordability.
But that picture may be on the verge of changing with mortgage rates falling to their lowest levels in 19 months (6.09%).
The question is how low do rates need to go for sellers to start listing again. That remains to be seen but we’re already seeing some progress. The months’ supply of Existing Homes has moved up to 4.2, the highest level since May 2020. While still below the historical average (5.2), it’s moving in the right direction.
6) A Few Interesting Stats…
a) “The easy money in this cycle has been made.” – Howard Marks, July 2017. The S&P 500 would gain 152% in the 7 years that followed, an annualized return of over 14%. (See video discussion here).
b) The US 60/40 portfolio (60% stocks, 40% bonds) is up over 29% since it was declared “dead” last October (See video discussion here).
c) Shares of Trump Media & Technology ($DJT) are now down 84% from their peak back in March. Incredibly, the company still trades at over 400x sales with a market cap of $2.5 billion.
d) Job postings for software developers are down more than 30% since February 2020.
e) Global automakers are struggling with falling sales in China as consumers there are increasingly embracing domestic EVs and hybrids. Non-Chinese brands fell to a 33% share of auto sales in July, down from over 50% two years ago.
And that’s all for this edition. Have a great rest of the week everyone!
-Charlie
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