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The State of the Markets (October 2024)

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This is a special edition of the Week in Charts where I break down the state of the markets…

1) Stocks

2024 is currently on pace to be one of the strongest years for US equities in history.

The S&P 500 has already hit 47 all-time highs, averaging more than one per week.

The S&P 500’s total return of 24% is 4x higher than the average year at this point and the best start to a year since 1997.

What’s propelling the market higher?

Two things:

a) Higher earnings: S&P 500 TTM operating EPS are expected to hit another new high in Q3, up 8% over the past year.

b) Higher multiples: enthusiasm over the AI revolution has led to significant multiple expansion over the last year with the S&P 500’s price to peak earnings ratio increasing 27% (from 20.4 to 25.8). This is the highest valuation we’ve seen since June 2000, 50% above the historical median.

US equities continue to outpace the rest of the world, a trend that has persisted for over 16 years. This is by far the longest period of US outperformance in history.

Within the US the market, we’ve seen a factor rotation since July 10 with Small Caps ($VBR) outperforming Large Caps ($SPY) and Value ($IWD) outperforming Growth ($IWF).

This is a reversal from the prior secular trend which saw Large Cap outperformance hit its highest level since October 1999 and Growth stock outperformance hit its highest level since March 2000.

Back in July, the S&P 500 Tech Sector’s relative performance against the broad market surpassed the prior peak from March 2000. But since then, we’ve seen a reversal, with the Tech sector underperforming everything else. Tech is the only S&P 500 sector that is down since July 10.

2) Bonds/Fed

While the S&P 500 has been busy hitting 47 all-time highs this year, the Bloomberg Aggregate Bond Index remains 8% below its peak from the summer of 2020.

At 50 months and counting, this is by far the longest drawdown in bond market history.

The story behind the long drawdown is a simple one: interest rates rising from 2020’s historic lows…

While many feared this would lead to a spike in corporate defaults, that never materialized.

In fact, the exact opposite is occurring. High Yield Spreads are now at their tightest levels since June 2007 (2.89%) and Investment Grade Spreads at their tightest levels since March 2005 (0.83%). Bond investors are reaching for yield and behaving as if there will never be a default cycle again.

That has helped propel credit-sensitive areas of the bond market ($HYEM, $HYG, $BKLN) to the top of the performance rankings this year. Meanwhile, duration-sensitive areas ($TLT, $ZROZ) are lagging due to the rise in long-term interest rates (30-year yield of 4.49%, up from 4.03% at the start of the year).

The rise in long-term interest rates has been interesting to see with the Fed having already cut short-term rates 50 bps (down to 4.75%-5.00%) and expected to cut rates another 50 bps by year end (down to 4.25-4.50%).

Before the Fed cut interest rates by 0.50% on September 18, the 30-year mortgage rate in the US was at 6.11%. Today it’s at 6.82%, the highest since July.

Why are these longer-term rates rising?

Long-term inflation expectations have been moving up and there’s been flood of new supply in the bond market. US National Debt is exploding higher, increasing by over $600 billion in just the last 2 months. We’re fast approaching $36 trillion…

3) Real Estate/Housing

Real Estate Investment Trusts ($VNQ ETF) are having a solid year (+12% total return) but remain over 8% below their peak from early 2022.

This is in part a result of the decline in US commercial real estate prices which are still down 19% from their peak 2022 levels.

Meanwhile, US residential home prices have continued to march upward.

The Case-Shiller National Index hit another record high in July, up 5% over the past year.

Home prices in the US are up over 50% in the last 5 years, more than double the increase in wages. The widening gap between prices and incomes has created an affordability crisis.

The median household income necessary to purchase the median home for sale in the US ($120k) is over 40% higher than the current median household income ($85k). The most unaffordable housing market in history continues.

Naturally, this has led to a collapse in demand, with existing home sales near their lowest levels since 2010.

So why are prices still going up? Supply has gone down even more, hitting a record low in 2022 as many would-be sellers could not afford to move. Only recently has the inventory of existing homes started to trend higher, but not yet enough to bring prices down.

Interestingly, while home prices continue to hit new highs, Asking Rents peaked back in 2022 and have now declined on a year-over-year basis for 16 straight months.

Rents have been held down by a multi-family construction boom that significantly increased supply and is leading to the highest vacancy rates (6.7%) since 2020.

4) Commodities

Here’s a look at changes in the major commodity prices over the past year…

We’ve seen strong gains in Cocoa, Coffee, Precious Metals (Silver/Gold) and Industrial Metals (Zinc/Copper/Aluminum). If the year ended today, it would be the best year ever for the Gold ETF ($GLD) which is up over 31% in 2024.

On the other side, we’ve seen declines in Grains (Corn/Wheat/Soybeans) and Energy (Gasoline/Crude Oil, Heating Oil, Natural Gas).

Gas prices are down 11% over the past year and has been one of the key driving forces of the decline in CPI Inflation.

5) Currencies

Predictions for the US Dollar’s demise have yet to materialize.

To the contrary, the Dollar remains among the strongest global currencies and has sharply increased in value relative to the Euro and the Yen over the past decade.

Helping the Dollar retain its strength vs. the Euro and the Yen are two primary factors:

a) Tighter central bank policy in the US with a 2.5% real central bank rate versus 1.5% for the Eurozone and -2.3% for Japan.

b) Higher growth rate with 3.0% real GDP in the US over the past year versus +0.6% for the Eurozone and -1.0% for Japan.

6) Crypto

With the approval of 11 spot Bitcoin ETFs in January, we saw another parabolic move higher in the crypto space.

By early March, Bitcoin was back at an all-time high, completely recovering from the 78% bear market that took place from November 2021 to November 2022. From there, it spiked as high as 73,000 but has traded sideways to down over the past 7 months.

Bitcoin is up 63% year-to-date, outpacing the 2nd largest coin (Ethereum, +20% YTD) by a wide margin.

In outperforming many of its peers, Bitcoin’s share of the crypto market has moved up to 57% from 51% at the start of the year.

Bitcoin and Gold are the #1 and #2 performing major assets thus far in 2024, something we have yet to see in any calendar year going back to 2011.

7) Stocks vs. Bonds

Stocks have trounced Bonds over the last decade with the ratio of stocks to bonds continuing to hit new highs in 2024.

Over the past 3 years, stocks and bonds have been more highly correlated (0.71) than any other 3-year period in history.

But correlation does not equal returns, as evidenced by the chart below which shows the S&P 500 up 34% in the past 3 years versus an 5% loss for bonds.

Over the past 7 years, nearly all of the 9.3% annualized gains in the 60/40 US stock/bond portfolio have come from the stock side, with the S&P 500 gaining 14.5% per year versus just 1.5% per year for bonds.

8) Economy

The US economy continues to grow, with annualized real GDP coming in at 3% for the 2nd quarter.

The expansion is now 51 months long. Does that mean a recession is imminent? Not necessarily. The last 4 expansions in the US lasted a minimum of 73 months with the 2009-2020 expansion running for record 128 months (over 10 years).

Economic growth is expected to continue for at least another quarter, with the Atlanta Fed projecting 3.4% in Q3 and the Wall Street consensus above 2%.

The biggest concern continues to be persistently high inflation, with Core CPI running above 3% for 41 consecutive months. That’s the longest stretch we’ve seen since the early 1990s.

The cumulative effect of these price increases appears to be starting the wear down the US consumer, with retail sales falling 0.9% over the past year after adjusting for inflation.

The good news is the labor market remains in relatively good shape, with a 4.1% Unemployment Rate that is still well below the historical average (5.7%).

And wage growth of close to 4% over the past year was 1.5% higher than the increase in CPI inflation. That was the 17th straight month in which wages outpaced inflation over the prior year, a great trend for the American worker that hopefully continues.


Every week I do a video breaking down the most important charts and themes in markets and investing. Subscribe to our YouTube channel HERE for the latest content.

Disclaimer: All information provided is for educational purposes only and does not constitute investment, legal or tax advice, or an offer to buy or sell any security. Read our full disclosures here.

The post The State of the Markets (October 2024) appeared first on Charlie Bilello’s Blog.





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