The Week in Charts (7/1/24)

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The most important charts and themes in markets and investing…

1) A Tale of Two Markets

The first half of 2024 was a tale of two markets.

It was the best of times for U.S. large cap stocks, with the S&P 500 hitting 31 all-time highs.

The 14.5% gain for the index was the 15th best start to a year going back to 1928.

At 5,460, the S&P 500 ended the first half above every single 2024 year-end price target from Wall Street strategists. The current level is 12% above their average target price of 4,861.

Led by large cap growth names, the Nasdaq Composite crossed above 18,000 for the first time, just a month after hitting 17,000. It took 17 years following dot-com bubble peak in 2000 for the Nasdaq to move from 5,000 to 6,000. In the past 7 years, we’ve seen the index triple, hitting 12 thousand-point milestones.

The US Tech sector has trounced everything else in the last decade, up 706% versus a 237% gain for the S&P 500 (note: total returns). Its relative strength versus the broad market hit a new record high in June, surpassing the prior high from March 2000.

But a rising tide has not lifted all boats this year.

Small cap stocks ($IJR ETF) are down 2% on the year while the S&P 500 is up 15% including dividends. That’s the biggest outperformance of large over small since 1998.

Also underperforming were Value stocks ($IWD), International stocks ($ACWX), and Regional Bank stocks ($KRE). Within the fixed income space, long duration ($ZROZ) underperformed cash equivalents ($BIL) as interest rates have moved higher on the year. Within the currency markets, the US Dollar ($UUP) remains king while the Japanese Yen ($FXE) has plummeted.

2) To the Moon

SpaceX’s private market value is reported to have hit a new high of $210 billion last week.

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 its current valuation it would be the 35th largest company in the S&P 500. But it still has no plan for an IPO, yet another example of a prominent company delaying the transition from private to public markets.

Which is a huge shift from a few decades ago when companies were much more likely to go public earlier in their lifetimes.

One prime example from back in the 1990s was Amazon, which was founded in July 1994 and went public less than three years later in June 1997. Its valuation on the first day of trading was just $442 million. Last week, its market cap crossed above $2 trillion for the first time, a 4,560x increase from its IPO.

Whenever SpaceX decides to go public, the story for investors will be much different than Amazon. It’s already been over 22 years since SpaceX was founded (March 2002) and while it certainly can continue to grow from here, the real exponential growth will have occurred when it was a private company.

3) Obesity Drug Boom

Speaking of exponential growth, Eli Lilly’s market cap has increased an astounding 1,120% over the last decade and it is now the 8th largest company in the S&P 500. Meanwhile, its revenues have grown just 69% and net income is 81% higher. Which means investors seem to be betting on huge increases in sales and profits in the years to come, driven by demand for their weight loss drug Zepbound.

Eli Lilly now trades at over 22x sales, a record high for the company.

4) Nvidia (2024) vs. Cisco (2000)

The #1 story stock of the 1990s dot-com boom was Cisco Systems ($CSCO). The #1 story stock of the AI boom today is Nvidia ($NVDA).

Here’s a look at how the last 5 years for Nvidia compares to Cisco’s incredible 5-year run that ended in March 2000:

• Nvidia’s 5-year return leading up June 2024 Peak: +3,440%.
• Cisco’s 5-year return leading up to March 2000 Peak: +3,590%.

The similarities don’t end there.

In the 5 years leading up to its peak in March 2000, Cisco’s Price to Sales ratio moved from 7x to 39x and it briefly became the world’s largest company. In the 5 years leading up to its June 2024 peak, Nvidia’s Price to Sales ratio moved from 9x to 42x and it briefly became the world’s largest company.

Who did Cisco pass in March 2000 to become the world’s largest company? Microsoft.

And who did Nvidia pass in June? You guessed it – Microsoft.

5) Getting Closer to a Rate Cut

The Fed’s preferred measure of inflation (Core PCE) moved down to 2.6% in May, the lowest since March 2021.

The Fed Funds Rate now stands at 2.7% above Core PCE, the most restrictive monetary policy we’ve seen since September 2007.

But if markets are correct, monetary policy will soon be moving in the other direction, with a 65% probability of a rate cut in September.

Whether that actually occurs, though, remains to be seen. The market has been very wrong thus far in its rate cut expectations, currently pricing in 1-2 cuts this year, down from 6-7 cuts at the start of the year.

6) Down Goes the Yen

The Japanese Yen is at its lowest level since 1986 against the US Dollar, losing 53% of its value from the 2011 peak.

What’s driving this decline?

Two main factors:

a) A huge divergence in central bank policy. The Bank of Japan is still manipulating interest rates to a large extent, with a real policy rate of -2.8%. Meanwhile, the Fed Funds Rate is over 2% higher than CPI.

b) A big differential in growth rates.

Adjusted for inflation, Japan’s economy contracted 0.2% over the last year while the U.S. economy expanded 2.9%.

7) Rising New Home Supply

There are now 481,000 new homes for sale in the US, the highest inventory since January 2008.

The supply of new homes in the US moved up to 9.3 months in May, the highest level since October 2022. In the past 50 years, when supply was this high the U.S. economy was facing job losses and recession. Today, however, high supply is due to the least affordable housing market in history.

Here’s how affordability has changed over the past four years:

• 4 years ago: 30-yr mortgage rate was 3% & average new home price in the US was $369k.
• Today: 30-yr mortgage rate is 7% & average new home price is $525k.
• Result: $31k increase in down payment (assuming 20% down) & 124% increase in monthly payment (from $1,245 to $2,794).

That lack of affordability is leading to a sharp decline in new home sales, down 16% in the past year.

8) Immune to Higher Rates?

The percentage of US homeowners without a mortgage has increased from under 33% in 2010 to over 39% today. The big driving force: an aging US population with baby boomers retiring and paying off their mortgages.

That means fewer households in the US with any debt at all, and an increasing number of households that are actually benefitting from higher rates via higher interest earned on their savings.

Of the household debt that remains, the following stat will likely come as a surprise: only 11% has an adjustable interest rate. The impact of this cannot be overstated: the vast majority of Americans with existing fixed rate mortgages/auto loans/student loans have not yet been negatively impacted by the Fed’s 11 rate hikes.

This is a big factor in explaining why US household debt service as a percentage of disposable income remains much lower than the historical average at 9.8%.

With many households still in good financial shape, a growing economy, and increasing corporate profits, the equity market has proven to be resilient to higher interest rates as well.

The S&P 500 is 26% above where it was when the Fed started hiking rates in March 2022.

9) Travel Boom Continues

US Inflation-Adjusted Personal Income (excluding transfer payments) hit a record high May, increasing 2.0% over the last year.

Higher incomes coupled with significant pent-up demand have propelled an unrivaled travel boom.

The top 7 US airline travel days in history have all taken place this year, with 4 of the 7 occurring in just the past week.

10) A Few Interesting Stats…

a) The S&P 500’s dividend yield has moved down to 1.32%, the lowest since Q4 2021. All-time low was 1.12% in Q1 2000.

b) The US Bond Market has now been in a drawdown for 47 months, by far the longest bond bear market in history.

c) Nike is now down 56% from its peak in November 2021, the largest drawdown since 2000.

d) The Fed’s balance sheet is now at its lowest level since December 2020, down $1.7 trillion from its peak in April 2022.

e) The top 5 holdings in the S&P 500 now make up 27% of the index, the highest concentration we’ve seen with data going back to 1980.

f) % Increase over the last 5 years…

• US Money Supply (M2): +42%
• Average US New Home Price: +44%

“Inflation is always and everywhere a monetary phenomenon.” – Milton Friedman

And that’s all for this week. Have a great week and Happy 4th!

-Charlie

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