The Week in Charts (10/14/24)
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The most important charts and themes in markets and investing…
Not too hot. Not too cold. Just right.
It’s the “Goldilocks” moment for the US economy and equity markets are loving it…
- The S&P 500 crossed above 5,800 last week for the first time, its 10th 100-point milestone of the year.
- We’ve now seen 45 all-time closing highs in 2024. And there’s still two and a half months to go.
- The S&P 500’s 21.9% year-to-date gain is the best start to a year since 1997 and 13th best in history.
- Including dividends, the S&P 500 is up 23.3% in 2024, more than 4x higher than the average year at this point in time (+5.5%).
- At 5,815, the S&P 500 is now over 400 points above above the highest 2024 year-end price target from Wall Street strategists and 20% above the average target (4,861).
2) Just Right
The narrative propelling stocks higher is the Goldilocks scenario in which the Fed is easing monetary policy not by necessity but by choice. That is to say they are not cutting rates because the economy is showing signs of recession (the Atlanta Fed is estimating 3.2% real GDP in Q3) but because inflation and employment are “just right.”
On the inflation front, overall CPI has moved down to 2.4%, its lowest level since February 2021.
Every major component in CPI has a lower rate of inflation today than in June 2022 when CPI peaked at 9.1%.
On the employment front, we’ve now seen 45 consecutive months of jobs growth, with the latest report handily beating expectations (254k jobs added in September vs. 132k consensus).
The US Unemployment Rate, which had been trending higher, moved down for a second straight month in September to 4.1%. This is well below the historical average of 5.7%.
3) Market Expectations Meet Fed Expectations
While the Fed is still expected to ease, we’ve seen a big shift in those expectations over the past month.
A month ago, the market was pricing in a Fed Funds Rate of 2.8% by the end of 2025.
Today, the market is pricing in a Fed Funds Rate of 3.4% by the end of 2025.
Why the 0.6% shift higher?
A stronger-than-expected employment report and a hotter-than-expected inflation report.
The market seems to be saying this will make the Fed less inclined to aggressively ease policy over the next year. In terms of expectations, the market is now completely aligned with the Fed’s latest projections, pricing in another 50 bps in rate cuts by the end of this year (to 4.25-4.50%) and 100 bps in cuts next year (to 3.25-3.50%).
4) The 2% Inflation Farce Continues
The Fed is saying they are cutting interest rates because they are confident inflation has moved sustainably to their target of 2%.
But has it?
Only if you define inflation as what as occurred in just the last 12 months.
Because if you include what happened before then, we’re nowhere near 2%. Since the start of 2020, CPI has averaged 4.2%, more than double the Fed’s target.
Here are the cumulative increases in major CPI categories over the past 4 years…
- CPI Medical Care: +8.4%
- CPI Used Cars: +12.4%
- CPI Apparel: +13.8%
- CPI New Cars: +20.4%
- CPI Food at Home (Groceries): +22.4%
- CPI Shelter: +23.6%
- CPI Food Away from Home (Restaurants): +25.1%
- CPI Electricity: +29.5%
- CPI Gas Utilities: +32.3%
- CPI Transportation: +41.9%
- CPI Gasoline: +44.4%
- US Home Prices: +47.0%
- CPI Fuel Oil: +53.7%
- CPI Auto Insurance: +59.7%
All are above a 2% average inflation rate, and many are multiples above it.
What about core inflation (excluding food/energy)?
It came in at 3.3% in September, the 41st consecutive month above 3%. This is the longest period of elevated core inflation since the early 1990s.
5) What Are They Trying to Hide?
At 2pm EST on the 8th business day of every month the Federal Government is supposed to release their “Monthly Treasury Statement.”
This report details how much money the government is taking in via taxes and how much is going out via spending.
Last Thursday (October 10), the September report was supposed to be released, but there was no new report available when I clicked on the Treasury website.
No explanation. No apology. Nothing.
Which begs the questions: what are they trying to hide?
The answer to that may lie in what the previous 4 months showed…
- A budget deficit of -$347 billion in May.
- A budget deficit of -$660 billion in June.
- A budget deficit of -$244 billion in July.
- A budget deficit of -$380 billion in August.
That’s $1.6 trillion of deficit spending in just 4 months, a massive increase.
So what’s in the September statement? Likely nothing positive. The US National Debt has exploded higher in recent weeks and is fast approaching $36 trillion. Since the Debt Ceiling was suspended 16 months ago the National Debt has increased by over $4 trillion.
6) Why Are Mortgage Rates Rising?
Before the Fed cut interest rates by 0.50% on September 18, the average 30-year mortgage rate in the US was at 6.11%. Today it’s at 6.64%.
Many are wondering how that’s possible. Doesn’t the Fed control mortgage rates?
Not exactly. The Fed targets short-term interest rates which directly influence short-term bonds like 1-month and 3-month Treasury bills.
But mortgages are longer-term securities and are much more correlated with longer-term bonds like the 10-year and 30-year Treasury.
And those yields have actually been rising since the Fed cut rates, with the 10-year yield moving from 3.63% up to 4.09%.
What’s driving that move?
Rising inflation expectations, with 10-year breakevens moving up to 2.33% from a low of 2.02% before the Fed cut rates.
The market seems to be saying that the Fed rate cuts will stimulate the economy and lead to higher prices over the next 10 years. And long-term bond investors are demanding a higher yield in return.
What will happen to mortgage rates if the Fed cuts rates another 150 bps as currently expected?
That will depend on what happens with inflation expectations, longer-term Treasury yields, and the spread between mortgage rates and Treasury rates.
It will also depend on whether the Fed decides to start buying mortgage bonds again, something they haven’t been doing since April 2022.
China’s stock market recently went parabolic with a 40% increase over 13 trading days (note: using the large-cap $FXI ETF). This was the 3rd largest 13-day gain ever for Chinese equities, trailing only snapback rallies during the 2008 Global Financial Crisis.
In the span of a few weeks, China went from being one of the worst performing stock markets in 2024 to #1 on the list.
The vertical move higher was attributed to a barrage of stimulus coming out of China, including their central bank lowering interest rates (7-day reverse repo rate cut), the government making loans to boost stock prices ($71 billion for firms to buy shares and $43 billion to fund corporate buybacks), and relief for homebuyers (lower rates on existing mortgages and lower minimum deposits on 2nd homes).
Will that be enough to sustain the rally?
In the short run, that’s anyone’s guess as it’s entirely sentiment driven.
But in the long-run, a sustained advance will require real fundamental growth out Chinese corporations and a change in perception from investors. For that to happen, we would likely need to see a reversal in the recent trend of increasing control from the Chinese Government over their companies and increased meddling in their capital markets.
We’ve seen a number of fake-outs in the past where huge speculative surges in Chinese stocks were not followed by further gains (ex: September 2007, April 2015, April 2022, November 2022). It remains to be seen if this time will be different.
8) A Few Interesting Stats…
a) The S&P 500’s Dividend Yield has moved down to 1.27%, tied with Q4 2021 for the lowest yield since 2000.
b) The average interest rate on US credit card balances has moved up to 21.8%. With data going back to 1994, that’s the highest rate we’ve ever seen.
c) The Interest Expense on US Public Debt rose to a record $1.13 trillion over the last 12 months, more than doubling over the past two years. At the current pace it will soon be the largest line item in the Federal budget, surpassing Social Security.
d) US High Yield credit spreads have moved down to 2.89%, their tightest levels since June 2007.
e) After a record 25 consecutive months of negative real wage growth, wages have now outpaced reported inflation on a YoY basis for 17 straight months. This is a great sign for the American worker that hopefully continues.
f) The ISM Manufacturing PMI has been below 50 (in contraction) for 22 out of the last 23 months. With data going back to 1948, that’s only happened one other time: 1989-91 (Recession in 1990-91).
And that’s all for this edition. Have a great week everyone!
-Charlie
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