The Week in Charts (10/23/23)
View the video of this post on YouTube here.
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Note: view my recent webinar with YCharts here…
10 Charts Every Investor Should Know (video)
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The most important charts and themes in markets and investing…
1) The 8% Mortgage Rate is Here
The 8% mortgage rate is back in the US for the first time since 2000.
This is dampening the spirits of homebuilders, with the Housing Market Index showing another sharp decline in October. 62% of builders are now offering sales incentives, the highest percentage in the current cycle.
Lower builder confidence has translated into fewer Housing Starts, which are down 7% year-over-year and 25% from the peak in 2022.
Less building means less sales and profits for companies tied to the construction industry. After a significant rally off of last year’s low, the Home Construction ETF ($ITB) is starting to reflect this new reality, down 20% from its peak in July.
The housing market is becoming increasingly frozen, with fewer existing homes selling today than at any point since 2010. The 3.96 million annual rate is even below the lowest level of sales during the 2020 covid shutdowns (4.01 million).
On a calendar year basis, existing home sales are on pace for their lowest annual total since 2008.
2) Priced Out of the American Dream
One would have thought the collapse in demand for housing would have caused home prices to fall, but we’ve actually seen the opposite over the last year with the median asking price up 5%.
Why are prices still elevated?
A lack of available supply. Many existing homeowners with low mortgage rates are simply not selling, both due to choice (they don’t want to give up their low mortgage rate) and necessity (they couldn’t afford to purchase the same home they are living in at current rates/prices).
The result: fewer existing homes are for sale today (1.13 million) than any other September on record (note: data goes back to 1999).
The combination of skyrocketing home prices and skyrocketing mortgage rates has led to the least affordable housing market on record. A US homebuyer now needs to earn a record $115k to afford the median priced home for sale, an increase of over 53% in the last 3 years.
This is $40k more than the median US household income of $75k. Which means that the average home for sale today is beyond unaffordable to the average American. They’ve been priced out of the American dream.
3) The Lost Decade in Long Bonds
It’s been a lost decade for holders of long-term bonds ($TLT ETF), with a decline of 1% over the last 10 years. Stocks have fared much better, with the S&P 500 ETF ($SPY) up 191% (11.3% annualized).
The 10-Year Treasury bond is down 5% this year, on pace for its 3rd consecutive annual decline. With data going back to 1928, that’s never happened before. The worst 3-year period for bonds prior to now was 1978-1980 with a 3% loss for the 10-Year. What’s the 2021-23 cumulative decline? -26%.
How did we get here? Rising interest rates from historic lows. At the end of 2020, the 10-year yield stood at just 0.93%. Last week it briefly crossed above 5% for the first time since 2007.
The good news for bond investors today? The future is likely to be much better than the past. The single best predictor of future returns for bonds (97% correlation) is the starting yield. And with yields close to 5%, prospective returns have not been this high since 2007.
4) The Bear Steepening
The US Yield Curve has been rapidly steepening, with the spread between the 10-year yield (4.98%) and 2-year yield (5.14%) now at -0.16%, up from -0.71% a month ago. That’s the least inverted curve we’ve seen since July 2022.
This has been a so-called “bear steepening,” with long-term yields (10-year) rising faster than short-term yields (2-year). Just prior to the last few recessions, we saw the opposite (a “bull steepening”), with short-term yields (2-year) falling faster than long-term yields (10-year) as a result of expected Fed cuts.
Which begs the question: when are the rate cuts coming?
If the market is correct, in June 2024, with a >60% probability of a rate cut that month. If these expectations hold, we could start to see 2-year yields fall in advance of this cut, and a “bull steepening” commencing.
5) Still Inverted
A year has now passed since the US Yield Curve (10-year minus 3-month) first inverted. And it remains inverted today with a 3-month Treasury yield (5.58%) that is 0.65% higher than the 10-year Treasury yield (4.93%).
With the economy still in an expansion, many are saying the indicator is now “broken,” and no longer predictive of a downturn to come. The Atlanta Fed is estimating 3rd quarter real GDP of over 5%, and Wall Street consensus has moved above 3%.
Does that mean the inverted yield curve is indeed a “broken” indicator? Not necessarily. It’s important to remember that this is a long leading indicator, with an average lead time of 24 months before the start of the last 8 recessions. Which means that if we saw a downturn begin in 2024, that would be well within the historical range.
6) The Difficult Business of Predicting Recessions
Predicting exactly when a recession will begin is a difficult business to be in.
The Conference Board’s Leading Economic Index has declined for 18 straight months, the longest down streak since 2007-09. But while this index has been predictive of recessions in the past, there’s certainly no built-in timing mechanism.
Case in point: the Conference Board first forecasted a recession would begin at the end of 2022. Since then, they’ve pushed that estimate back a number of times: to Q1 2023, then Q2 2023, then Q3 2023, and then Q4 2023. And in their latest update, they’ve pushed it back once again, this time calling for a “shallow recession … in the first half of 2024.”
7) The Netflix Turnaround
Earnings season has begun, and Netflix was the first big tech company to report.
By all accounts, they seem to have turned things around, with 8% revenue growth (new quarterly high of $8.5 billion), 20% net income growth (2nd highest quarter @ $1.67 billion), and an 8.8 million increase in paid subscribers (well above the 5.5 million estimate).
Netflix stock had been trading lower for a few months heading into the report, and expectations were quite low. It jumped over 16% on the better-than-expected news.
8) Margin Compression
Tesla reported earnings on the same day as Netflix, but the reaction from investors was very different. The stock fell 13% in the two days following the report, closing below its 200-day moving average for the first time since April.
The problems: slower top-line growth (9% YoY revenue increase, slowest since Q2 2020), margin compression (gross margins of 17.9% vs. 25.1% a year ago), and falling profits (44% YoY decline in net income).
Tesla has been aggressively cutting the prices of its vehicles over the past year, and while that has certainly boosted sales, it has also been a big hit to profitability.
On the earnings call, Elon Musk said he’s “worried about the high interest rate environment,” and that “if interest rates remain high or is they go even higher, it’s that much harder for people to buy the car.” He said Tesla has to “make [their] products more affordable so people can buy [them].”
With over 80% of new cars purchased with financing and loan rates at their highest levels since 2001 (8.30%), this is going to be a challenging environment for not just Tesla but all Automakers.
9) Is This What a New Bull Market Looks Like?
Back in June a “new bull market” was said to have begun, simply because the S&P 500 had rallied 20% off of its low.
A majority of professional investors at the time seemed to agree…
But had a new bull market actually started, or were we simply in the midst of one of the longest bear market rallies ever?
We’ll only know the answer to that in hindsight, but the average S&P 500 stock is now down 2% year-to-date while small cap stocks are down over 4%. Is this what a new bull market looks like?
10) Good Signs on the Inflation Front
Wholesale used car prices are at their lowest levels since March 2021, down 18% from their peak. This should translate into lower retail prices in the coming months.
Global Container freight rates are now down over 90% from their 2021 peak and are at their lowest levels in the last seven years (note: data only goes back to October 2016).
Truflation’s real-time inflation gauge is at 2.3%, well below the last CPI report (3.7%).
11) A Few Interesting Stats…
a) Chick-Fil-A is the top-rated fast-food chain in 34 states.
b) Moderna’s stock is now down 81% from its peak and below the price it was trading at when the FDA issued an EUA for its Covid-19 vaccine back in December 2020.
c) 66 million Social Security beneficiaries will see a 3.2% cost-of-living adjustment next year. That’s down from an 8.7% increase in 2023 and 5.9% increase in 2022, but still significantly higher than the average 1.4% cost-of-living adjustment from 2010-2020.
d) Country stock market returns are positively correlated with levels of honesty.
And that’s it for this week. Have a great week!
-Charlie
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