The Week in Charts (5/6/24)

View the video of this post here.

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The most important charts and themes in markets and investing…

1) Labor Market Cooling

There are a number of signs currently pointing to a cooling of the labor market…

• Exhibit A: 175,000 US jobs were added in April, well below the consensus estimate of 243k jobs.

• Exhibit B: Total jobs in the US increased 1.8% over the last year, the lowest YoY growth rate since March 2021.

• Exhibit C: The US Unemployment Rate moved up to 3.9% in April from 3.8% in March, the highest level since January 2022.

• Exhibit D: US Job Openings moved down to 8.49 million, the fewest since February 2021. At 2.1%, the percentage of workers quitting their jobs (quits rate) is at the lowest level since August 2020.

• Exhibit E: US Average Hourly Earnings increased 3.9% over the last year, the slowest growth rate since May 2021.

2) Bad News Is Good News?

Why did the S&P 500 rally 1.3% and the Nasdaq jump 2.0% after the weaker-than-expected payroll report on Friday?

Because sometimes bad economic news is interpreted as good news for stocks, one of the more interesting paradoxes in markets.

Why would a slower economy be a good thing?

Because of the perception that the Federal Reserve will take a more dovish stance, delivering interest rate cuts sooner and at a faster pace.

We saw a meaningful shift in Fed Funds Rate expectations after the jobs report, with market participants now pricing in two rate cuts in 2024 (September and December) and two more in the first half of 2025 (March and June).

Investors seemed to be excited about the prospect lower rates on Friday, but how long this excitement lasts is anyone’s guess. Two rate cuts this year are far from a done deal and if the Fed feels the need to cut rates despite stubborn inflation, that may not be a good thing as it could indicate a more significant slowdown has commenced.

Which is another way of saying there’s a limit to the “bad news is good news” phenomenon. When the news gets really bad, it’s no longer good.

3) Will the Unwind Ever Happen?

The Fed’s balance sheet is now at its lowest level since January 2021, down $1.6 trillion from its peak in April 2022.

How much more QT is needed to unwind the massive QE from March 2020 – April 2022?

$3.2 trillion.

Will that unwind ever happen? Probably not. The Fed announced last week that they will already begin slowing the pace of QT in June (from $95 billion/month to $60 billion/month).

This is a similar pattern from the Fed. During a crisis (2008/2020) an enormous amount of stimulus is added immediately. But once the crisis is over, they are extremely slow to reverse course. They seemingly cannot or will not remove all of the prior stimulus and return to a state of normalcy.

4) The Next Fed Move

“I think it’s unlikely that the next policy rate move will be a hike.” – Jerome Powell

That was the one-liner that got the most attention from last week’s FOMC meeting. If you believe those words, you’re assuming that inflation will not become a more pressing problem in the months to come.

Some recent data points, however, are calling that assumption into question:

• The broadest measure of US labor costs (includes wages AND benefits) rose 4.2% over the last year, which was above expectations for a 3.9% YoY increase.

• The Prices Paid component of ISM Manufacturing has moved up to its highest level since June 2022, potentially signaling higher inflation for longer. This was a leading indicator of the inflationary spike in 2021-22.

• The US Money Supply fell 0.3% over the last year, a record 16th consecutive month with a YoY decline. But this is the smallest YoY decline we’ve seen in the last 16 months and it looks likely to turn positive again next month.

5) Manufacturing & Services Slowdown

The ISM Manufacturing PMI has been below 50 for 17 out of the last 18 months.

The ISM Services PMI moved below 50 in April for the first time since December 2022.

Since 2008, the only periods when both PMIs have been below 50 at the same time:

• July 2008 – July 2009 (Recession)
• April – May 2020 (Recession)
• December 2022
• Today

6) The Undisputed King of Buybacks

Apple’s revenue fell 4% over the last year, the 5th negative YoY growth rate in the last 6 quarters. Net income declined 2% year-over-year to $23.6 billion. But Apple authorized a record $110 billion in share buybacks and the stock traded up 6% the next day.

Apple is the undisputed king of buybacks. Over the past decade, it has bought back $625 billion in stock. That’s greater than the market cap of 492 companies in the S&P 500.

7) The Amazon Economy

Amazon revenues increased 13% over the last year to a new 1st quarter record of $143 billion. Net Income increased 229% YoY to $10.4 billion, also a record high for the first quarter.

Amazon has never been more profitable, with Operating Margins moving above 10% for the first time in company history.

The biggest driver of that: tremendous growth in Amazon’s cloud business (AWS). Revenues there hit another record high of $94.4 billion in the first quarter, which was higher than the revenue of 466 companies in the S&P 500.

Twenty-five years ago Walmart’s revenues were 171x larger than Amazon. Today that gap has narrowed to 1.1x. At the current pace, Amazon will surpass Walmart as the top revenue company in the US sometime next year.

8) Higher Earnings + Much Higher Stock Prices = Higher Multiples

With 80% of companies reported, S&P 500 1st quarter operating earnings are up 5% over the past year, the 5th consecutive quarter of positive YoY growth.

S&P 500 Trailing Twelve-Month (TTM) operating earnings are on pace to hit another record high in Q1, up 8% YoY.

With earnings up 8% in the last year and the S&P 500 up 28%, multiples have expanded. The S&P 500’s P/E ratio at the end of the first quarter of 24.3 was the highest since Q2 2021, 31% above the historical median.

9) New Housing Highs

The Case-Shiller 20-City Home US Price Index hit another all-time high in February with all 20 cities showing an increase in prices over the last year.

On a national basis, home prices have risen 6% over the last year and have hit a record high 8 months in a row.

Meanwhile, mortgage rates continue to climb, rising to 7.22% last week. That’s the highest level since last November.

The mortgage payment needed to buy the median priced home for sale in the US has increased 95% over the last 4 years (from $1,480 to record $2,890), the consequence of skyrocketing prices and mortgage rates. Buying a home has never been more unaffordable than it is today.

10) A Renter’s Market

While buying a home has become increasingly unaffordable, renting an apartment is getting more affordable each passing month.

US Asking Rents were down 0.8% over the last year, the 11th consecutive YoY decline.

With apartment vacancy rates rising to their highest levels since August 2020 (6.7%), we should see continued YoY declines in asking rents over the next few months.

11) A Few Interesting Stats…

a) US Stock Market Capitalization as % of GDP…

• 1984: 42%
• 1994: 63%
• 2004: 93%
• 2014: 114%
• 2024: 187%

b) The combined revenue of the Big 4 US tech companies (Amazon, Apple, Google, and Microsoft) hit a record $1.53 trillion over last 12 months. That’s larger than the GDP of all but 15 countries.

c) The 10-Year Treasury Bond is down 3.6% in 2024, on pace for its 3rd decline in the last 4 years. That hasn’t happened since 1956-59.

d) The US Unemployment Rate has now been below 4% for 27 straight months, the longest streak since 1967-70.

e) The US Bond Market has now been in a drawdown for 45 months, by far the longest bond bear market in history.

f) The correlation between US stocks and bonds over the last 3 years (0.70) is the highest on record (see video discussion here).

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

-Charlie

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