The Week in Charts (12/19/24)
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The most important charts and themes in markets and investing…
All signs are pointing to warming inflation in the US…
- CPI moved up to 2.7% in November and is expected to increase again in December (Cleveland Fed’s current estimate: 2.86%).
- Core PCE, the Fed’s preferred measure of inflation, moved up to 2.8% in October (highest since April) and is expected to hit 3% by the end of the year (Cleveland Fed’s current estimate: 3.04%).
- Producer Prices increased 3% over the last year, the highest PPI reading since February 2023.
- Truflation’s real-time US inflation gauge has moved back above 3%, the highest level in over a year.
The Market Cap of a new crypto meme coin called “Fartcoin” (yes, you read that correctly) crossed above $1 billion yesterday.
At the same time, the Fed cut interest rates again with a 25 bps move down to 4.25-4.50%. This was the third rate cut in as many meetings with 100 bps in total rate cuts since September.
Why did the Fed cut rates again, particularly with extremely easy financial conditions (high yield credit spreads at lowest levels since 2007) and speculative manias building?
Because a) they were telegraphing a 25 bps rate cut and are unwilling to surprise markets anymore, and b) they seem to believe monetary policy is still too restrictive at current levels, ignoring all evidence to the contrary.
But with inflation rapidly warming, justifying another rate cut at the January FOMC meeting is going to be a tall task. The bond market is currently pricing in a January pause and only 50 bps of rate cuts in all of 2025.
The Fed’s updated December projections revealed they are now on the same page as the market, expecting higher inflation in 2025 (2.5% PCE) and fewer rate cuts (50 bps).
The Nasdaq Composite hit 20,000 for the first time last week, doubling over the past four and a half years.
This was a far shorter path to doubling than the journey from 5,000 to 10,000 which took over 20 years following the peak of the dot-com bubble in 2000.
The Nasdaq actually went 15 years without hitting an all-time high (from 2000 to 2015), a drought that would be unfathomable to new investors today.
4) Apple’s Highest Multiple Ever
Apple is now trading at nearly 10x sales, the highest valuation level in company history.
It also trades at over 41x earnings, the highest P/E ratio since 2007 which was when the first iPhone was released and Apple was growing at a much faster rate.
When Berkshire Hathaway first started buying Apple in 2016, it was actually trading at less than 10x earnings. Which likely explains why Berkshire has sold 67% of their Apple stake so far this year (as of the end of Q3).
Why are investors willing to pay over 40x earnings for Apple? The results of this recent poll I did on X may be one explanation…
5) America’s Exceptional Valuation
US stocks now make up 65% of the global equity market, their highest weighting in history. This is more than 11x bigger than the second largest country by market cap (Japan at 5.5%).
How did the US get to such a lofty position?
Massive US outperformance over the past decade, with a ratio of US stocks to international stocks now at over 3 standard deviations above the historical mean.
US Stocks are now trading at over 22x forward earnings versus 14x for International stocks, the widest valuation gap in history.
And fund managers are 36% overweight US stocks in the latest BofA survey, the highest level on record (note: survey began in 2001).
6) Optimistic Investors
Over 56% of American consumers expect stock prices to rise over the next year, the most positive outlook for the stock market in history.
At the same time, fund managers are 14% underweight Cash according to the latest BofA survey, the lowest percentage on record.
What could be the source of this surge in optimism? I can think of at least 57 reasons…
7) A Few Interesting Stats…
a) Since 1928, the S&P 500 has been positive in December 74% of the time, the highest of any month.
b) SpaceX’s valuation has hit a new record high of $350 billion. 3 years ago it was $100 billion, 5 years ago it was $32 billion and 10 years ago it was $10 billion. If SpaceX went public at this valuation it would be the 24th largest company in the S&P 500.
c) The S&P 500’s Dividend Yield has moved down to 1.2%, the lowest since 2000.
d) The P/E ratio on the S&P 500 has moved up to 26, with a multiple expansion of 17% in 2024. This is 32% higher than the average P/E ratio since 1989 (19.7).
e) The average home price in the US is up over 50% in the last 5 years, more than double the increase in wages. The widening gap between prices and incomes has led to the least affordable housing market in history.
f) Nvidia is the best performing stock in the S&P 500 over the last 5, 10, 15, and 20 years.
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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.
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