The Week in Charts (11/28/23)

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The most important charts and themes in markets and investing…

1) The Volatility Crash

The Volatility Index ($VIX) ended last week at 12.46, its lowest close since January 2020.

The 41% decline in the $VIX over the past 4 weeks was the 9th largest 4-week decline on record (note: the VIX dates back to 1990).

While volatility was crashing, the major indices continued to move higher in a vertical fashion. The Nasdaq 100 ($QQQ) and S&P 500 ($SPY) ETFs finished positive for the 4th consecutive week and are now both less than 2% below their all-time highs (note: total returns). Meanwhile, small caps and high growth stocks still have a ways to go, with the Russell 2000 ETF ($IWM) 24% below its prior high and the ARK Innovation ETF ($ARKK) 71% below its high.

2) Higher Interest Rates, Higher Earnings, Higher Stock Prices, Higher Multiples

Talk about an unexpected combination of events this year…

• Higher interest rates: 10-Year yield moving from 3.88% to 4.47%
• Higher earnings: S&P 500 earnings rising 8.8% to a new record high.
• Higher stock prices: S&P 500 up 18.7% year-to-date (price return).
• Higher multiples: S&P 500 P/E ratio expanding 9.1% to 21.3x (historical average since 1989: 19.3x).

3) Exponential Growth

Nvidia reported another quarter of exponential growth, with revenues increasing 206% over the past year to a record $18.2 billion.

Their revenue projection for Q4: $20 billion, which would be a 231% YoY increase.

Net income for the quarter came in a $9.2 billion, a 13x increase over the last year and 77x increase over the last decade.

Net profit margins expanded once again to a record 51%.

4) Holiday Spending Spree?

The average American consumer is expected spend $1,652 on the holidays this year, a 13.5% increase from last year’s total (source: Deloitte survey).

What are some of the driving forces?

a) Strong labor market: 34 consecutive months of jobs growth.

b) Continued wage growth: average hourly earnings up 4.1% over the last year to $34/hour.

c) High job confidence: according to a recent survey by the NY Fed, workers said the average odds of losing their job in the next 12 months was 12.7%, still well below the pre-covid average of 14.3%.

d) Dry powder: US households still have an estimated $433 billion in excess savings remaining from the 2020-21 stimulus programs.

While most consumers will be spending more this holiday season, those with high credit card debt are increasingly under pressure as interest rates have surged to a record high (21%).

The share of US credit-card borrowers who were delinquent rose to 2.98% in the 3rd quarter, the highest since 2012.

5) Room to Spare

A record 34% of US households today have 2 or more spare bedrooms, up from 13% in 1970.

One factor: seniors aging in place, preferring to stay in their homes rather than downsize. Seniors make up 17% of the housing stock with 2 or more spare bedrooms, up from just 5% in 1970.

While the size of households has declined over the last 50 years, homes have gotten much bigger. 63% of homes today now have 3 or more bedrooms, up from 49% of homes in 1970.

6) Trying Something New

Plagued by a collapsing currency (Argentine Peso down 98% vs. the US dollar over the last decade), hyperinflation (estimate of 179% this year), and a series of deep economic contractions, Argentina is finally trying something new.

Libertarian economist Javier Milei was elected as their new president after promising to bring about significant change.

His ideas include dollarization (moving to the U.S. dollar as its main currency), slashing public spending by 15%, and abolishing the central bank.

The hope is that these measures will help bring down inflation and increase foreign investment which has been chronically low (currently only 1% of the economy).

Thus far, the financial markets have responded enthusiastically with the MSCI Argentina ETF ($ARGT) rallying over 20% since the election.

7) Lower-Priced New Homes

The median price of a new home sold in the US is now down 18% from its peak in October 2022. After the housing bubble in the 2000s the median new home price fell 22% nationally.

Two main factors are driving the price declines: a) discounts from builders due to low affordability and above-average inventories (7.8 months of supply vs. 6.1 months historical average), and b) builders increasingly constructing smaller, lower-priced homes.

8) The Housing Market Standstill Continues

Fewer US existing homes are selling today than at any point since 2010. The 3.79 million annual rate is even below the lowest level of sales during the 2020 covid shutdowns (4.01 million).

Existing home sales were 15% lower than last year’s total, the 26th consecutive YoY decline. That’s the longest down streak since 2007-09.

54,000 US home purchases were canceled in October, which equates to 17.2% of all homes under contract. That’s the highest cancellation percentage on record.

The good news for prospective buyers: the supply of existing homes for sale in the US is slowly rising, moving up to 3.6 months. This is the highest we’ve seen since June 2020.

9) “A Very Short Recession”

The Leading Economic Index has declined for 19 months in a row, the longest down streak since 2007-08. The Conference Board is now forecasting “a very short recession” for the US in 2024, pushed back from prior calls for a recession to start in Q4, Q3, Q2, and Q1 of this year.

10) A Few Interesting Stats…

a) In a recent survey of 2,000 Americans, respondents with a median income of $65k said they would need an income of $95k (a 46% increase) to “feel happy/less stressed.” Even the highest earners in the survey (those w/ a median income of $250k) reported needing a 40% increase in pay (to $350k).

b) Amazon is expected to ship 5.9 billion packages in 2023, surpassing UPS (5.3 billion estimate) as the largest delivery business in the US.

c) Battery-grade lithium prices are down over 70% from their peak in January as a result of weaker EV demand and the economic slowdown in China.

d) Total assets in money market funds have hit a record $5.73 trillion, increasing by $1 trillion since the start of the year.

e) The University of Michigan Consumer Sentiment Index has been below 75 for 28 consecutive months, tying February 2008 – May 2010 for the longest run of extreme negative sentiment on record.

f) Only 31% of securitized office mortgages that expired in the first 9 months of this year were paid off, the smallest % for any year since at least 2008. Of the loans that weren’t paid off, half ended up in default and the other half got extended or modified.

And that’s all for this week. Have a great week everyone!

-Charlie

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