The Week in Charts (4/1/24)
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The most important charts and themes in markets and investing…
1) Smooth Sailing
The first three months of the year were highly abnormal, but in a good way. Investors have rarely experienced such smooth sailing, with high returns and very low volatility.
The S&P 500 gained over 10% in the first 61 trading days, its 14th best start to a year in history.
All-time highs were a frequent occurrence, totaling 22 during the first quarter.
More remarkable, though, was the calmness in getting there. The Volatility Index ($VIX) averaged 13.7, on pace for the least volatile year since 2017.
If the year ended today, the S&P 500’s maximum drawdown of -1.7% would be the smallest of any year in history. 1995 currently holds the full-year record with a max drawdown of -2.5%. Such low downside volatility is highly unusual – the average intra-year drawdown since 1928 is -16%.
2) Enormous Eight Dispersion
Unlike 2023, the rising tide did not lift all boats in Q1.
Nvidia continued to lead the Enormous Eight with a gain of 82%, but Apple (-11%) and Tesla (-29%) moved in the opposite direction.
Tesla was actually the worst-performing stock in the S&P 500 in Q1. A number of other notable companies made list of biggest decliners, including Boeing (-26%), Lululemon (-24%), Adobe (-15%), and Nike (-13%).
Nvidia was #2 in terms of S&P 500 performers, but only because Super Micro ($SMCI) was added to the index in March.
What does Super Micro do?
They’ve quickly become the go-to provider of AI servers, which has seen significant growth over the past year and is expected to continue growing at a rapid pace in the years to come.
Analysts are forecasting Super Micro’s annual revenue will jump to $25 billion by 2026, more than triple the $7 billion recorded in the fiscal year that just ended.
Super Micro is trading at a Forward P/E ratio of 33x, which is even higher than Nvidia (30x) and up from 4x a year ago.
3) Signs of Froth?
Trump Media & Technology Group ($DJT), the parent company of Truth Social, went public last week via a SPAC merger and its market cap quickly surged above $10 billion.
Why is that notable?
The Truth Social app currently has only 1 million daily active users and $4 million in revenue, incurring a net loss of $58 million in 2023. Reddit ($RDDT) had a similar market cap with $804 million in revenue and 73 million daily active users.
Meanwhile, people are talking about Dogecoin again after the meme coin surged 144% so far this year.
Signs of froth? It certainly seems like it.
4) Multiple Expansion
The S&P 500’s P/E ratio has moved up to 24.4x from 22.3x at the start of the year. That’s 32% higher than the historical median P/E going back to 1988 (18.5x).
5) The Housing Affordability Gap
US Home Prices hit another all-time high in January while affordability remains near record lows.
A US homebuyer now needs to earn $114k to afford the median priced home for sale. The problem: that’s 35% more than the median household income.
6) Small, Cheaper New Homes
The median price of a new home sold in the US is now down 19% from its peak in October 2022 (from $496,800 to $400,500). After the last housing bubble peak the median new home price fell 22% nationally before bottoming.
Why are prices falling?
Homebuilders are adapting to the lowest affordability on record by building smaller homes and offering more incentives/price cuts. The median square footage of a new single-family home in the US has moved down to its lowest level since 2010.
7) The Power of Dollar-Cost Averaging
If you were the world’s worst market timer and bought the S&P 500 at the peak in March 2000 and held until today, you would be up 438%. That’s a 7.3% annualized return.
But most people don’t invest in a lump sum and instead add money over time. If you were in this group and added money to the S&P 500 each year, your annualized return since March 2000 moves up to 10.7%. That’s the power of dollar-cost averaging in a declining market (see video discussion here).
8) June in Jeopardy?
Gas prices in the US have moved up to $3.53 per gallon (national average), the highest level since last October and 10 cents above year-ago prices. This will likely be a factor in pushing up CPI for March (Cleveland Fed is currently forecasting 3.4%, up from 3.2% in February).
How the Fed reacts to this development remains to be seen, but we’ve already seen a huge shift in investor expectations. Entering the year the bond market was pricing in 3 rate cuts by the June FOMC meeting and 7 rate cuts throughout the entire year. Fast forward to today investors are expecting just 3 rate cuts in 2024 with the June start date now in jeopardy (<60% probability of a cut).
9) A Few Interesting Stats…
a) Cocoa prices have skyrocketed 245% over the past year to record highs, far outpacing the 2% increase in the S&P GSCI Commodity Index. The reason? Massive supply shortages due to crop diseases and unfavorable weather in West Africa where over 70% of global cocoa production takes place.
b) The Federal Reserve has $948 billion in unrealized losses on their Treasury/MBS holdings due to rising interest rates.
c) The US Bond Market has now been in a drawdown for 44 months, by far the longest bond bear market in history.
d) The correlation between US stocks and bonds over the last 3 years (0.69) is the highest on record.
e) The average American employee now ends their Friday workday at 4:03 p.m., an hour earlier than in 2021.
f) “The first rule of compounding is to never interrupt it unnecessarily.” – Charlie Munger
And that’s all for this edition. Have a great week!
-Charlie
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