The Week in Charts (11/6/23)
View the video of this post on YouTube here.
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The most important charts and themes in markets and investing…
1) Bouncing Back With a Vengeance
The S&P 500 bounced back with a vengeance last week, rising nearly 6%.
Two major catalysts:
a) Extremely Bearish Sentiment. The percentage of bears in the AAII Sentiment Poll had risen above 50%, the highest level of the year and above 96% of historical readings.
b) Falling Interest Rates. The 10-Year Treasury yield moved down sharply to 4.57% from a recent closing high of nearly 5%.
2) Volatility Is Crushed
While stocks surged higher, volatility was absolutely crushed.
The $VIX fell 30% last week, the 9th largest weekly decline in history.
We’ve seen an average $VIX of 17.5 thus far in 2023.
That’s right in the middle as compared to other years since 1990, meaning the volatility we’ve experienced is actually quite normal.
3) Investing in a Drawdown
Since 1928, the S&P 500 has been in a drawdown over 71% of the time (using monthly total return data).
Which means drawdowns are the norm rather than the exception; most of your time as an investor will be spent in a drawdown. Looking at the S&P 500, we’ve now been in a drawdown for nearly two years, which is the longest since the Global Financial Crisis.
When will it end?
No one can tell you that. But the stock market tends to be higher over the next year regardless of whether it’s in a drawdown or not. And both the odds of a positive return and the magnitude of that return tend to increase with time. The biggest drawdowns historically (>40%) have actually been followed by the highest long-term (20-year) returns. Which means that if you have a long time horizon and are still adding new money to stocks, drawdowns should be embraced, not feared.
4) The Improving Bottom Line
Earnings continue to pour in and for the most part exceed expectations.
With 64% of companies reported, S&P 500 Q3 GAAP earnings per share are 19% higher than a year ago, the 3rd straight quarter of positive YoY growth. Quarterly earnings are now just 2% below the record high from Q4 2021.
Here’s a look at revenue and EPS growth for the leading US companies…
5) Labor Market Loosening
150,000 US jobs were added in October, the 34th consecutive month of jobs growth.
The increase in total jobs of 1.9% over the last year, however, was the lowest YoY growth rate since March 2021.
This fact combined with slower wage growth (4.1% increase in hourly earnings, lowest since June 2021) are pointing to a continued loosening in the labor market.
6) Rising Unemployment Rate, Rising Risk of Recession
The US Unemployment Rate moved up to 3.9% in October, the highest since January 2022.
The Unemployment Rate is now 0.5% above the cycle low reached back in April (3.4%). Historically, that 0.5% move higher has occurred near the start of a recession.
7) Pause, Pause, Pause, Cut
The FOMC meeting went off exactly as expected, with the Fed holding interest rates at 5.25-5.50%.
If the market is correct, the Fed will continue to hold rates at that level when it meets again in December (only a 5% probability of a hike), a dovish shift from a week ago (19% probability of a hike) and a month ago (47% probability of a hike).
Here are current market expectations for the path of the Fed Funds Rate:
-Dec 13, 2023: Pause
-Jan 31, 2024: Pause
-Mar 20, 2024: Pause
-May 1, 2024: 25 bps Cut to 5.00-5.25%
-Additional cuts to 4.06% by Nov 2025
8) Nothing From the 40 in 60/40
The US Bond Market has now been in a drawdown for 39 months, by far the longest bond bear market in history.
US Bonds are down 16% over the last 3 years, the largest 3-year decline in history.
These losses have erased the gains of the previous four years, meaning bonds have contributed nothing to the 60/40 portfolio over the last 7 years:
-US Stocks: +8.8% annualized return
-US Bonds: -0.3% annualized return
-US 60/40 Portfolio (60% Stocks, 40% Bonds): +5.4% annualized return
9) Mortgage Industry Decline
The number of US employees in the mortgage industry has moved down to 337k from a peak of 420k in 2021, a 20% decline (note: includes mortgage bankers, brokers, & loan processors). After the last housing bubble peak, we saw a 49% reduction in the number of jobs from 2006 to 2012.
The average monthly pay for loan officers is less than half of what it was three years ago, with production down 58% (average loan officer closed 3.45 loans last month versus 8.15 in the same month in 2020).
10) More Affordable Rents
US Rents fell in October for the 3rd straight month and are down 1.2% over the last year.
With apartment vacancy rates rising and moving back to 2020 levels (6.4%), we should see continued YoY declines in rents over the next few months.
11) A Few Interesting Stats…
a) Amazon’s AWS revenue over the last 12 months ($88 billion) was higher than the revenue of 461 companies in the S&P 500. From $3 billion to $88 billion in less than 10 years (>40% annualized growth).
b) Apple has bought back $604 billion in stock over the past 10 years, which is greater than the market cap of 492 companies in the S&P 500.
c) Homebuyers need a household income of over $400k to afford the median-priced home in San Francisco, the the most expensive metro area in the US.
d) The combined revenue of the 4 largest US companies (Apple, Microsoft, Google & Amazon) hit a record $1.45 trillion over last 12 months. That’s larger than the GDP of all but 13 countries.
e) The inflation-adjusted median net worth in the US increased 37% from 2019 to 2022, the largest 3-year increase on record.
And that’s it for this week. Have a great week!
-Charlie
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