The Week in Charts (7/29/24)
View the video of this post here.
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The most important charts and themes in markets and investing…
1) When Small Caps Ruled the World
If you were expecting a quiet summer in markets, you were in for a big surprise. What we’ve seen over the past few weeks is one of the most epic rotations in market history.
Small caps have come out of the doldrums to race 10% higher in just the last 12 trading days. At the same time, the large cap juggernaut known as the S&P 500 is down 3%. That 13% spread is the biggest 12-day outperformance by small caps ever.
The huge rotation has narrowed the S&P 500’s year-to-date lead over the Russell 2000 from over 16% to less than 4%.
Right alongside the historic small/large reversal has been the 180 degree shift in value/growth.
A few weeks ago, I noted growth’s outperformance over value had widened to its most extreme level since March 2000, the peak of the dot-com bubble.
Since then, we’ve seen value stocks outperform growth stocks by close to 11%, one of the biggest periods of outperformance ever.
Many regional banks are in that value category and they have surged over 19% in the past 12 trading days while the best performing industry group in the past decade (Semiconductors) has actually declined 13.5%. The hottest stock in the market, Nvidia, is down 14.5% and all of its Magnificent Seven peers have declined as well (Apple, Microsoft, Amazon, Google, etc.).
2) Volatility Returns
A few weeks ago, I was writing about one of the calmest years on record with the VIX averaging just 13.8 at that point (vs. 19.5 historical average).
But with the Great Rotation we’ve seen a notable uptick in volatility, and a 2.3% decline for the S&P 500 on July 24.
That marked the biggest one-day drop for the index since December 2022 and the end of a 356 trading day run without a 2% decline (the longest streak since 2007).
3) The Expansion Continues
US Real GDP for the 2nd quarter came in at 2.8%, handily beating estimates for a 2% growth rate.
Consumer Spending on Services was the biggest contributor to that growth at 100 bps, followed by 80 bps from Private Inventories and 70 bps from Nonresidential Investment.
The US economy has now been in an expansion for 51 months. With the exception of the two-month covid collapse in 2020, we haven’t seen an economic contraction since 2009.
4) The Curious Case of Consumer Sentiment
Given that backdrop and the strength in the stock market this year (38 all-time highs in the S&P 500), one would assume Consumer Confidence would be running hot.
But the University of Michigan sentiment survey is showing just the opposite, falling to its lowest level of the year this month. In the past, we’ve only seen such low readings in either bear markets or recessions.
Why are consumers feeling so grumpy?
High prices continue to be the number one complaint. Even though we’ve seen the rate of inflation moderate, that doesn’t mean prices overall have come down, and consumers are very unhappy with that fact.
This is likely having an impact on Retail Sales which continue to exhibit below average growth on a nominal basis (+1.9% YoY vs. +4.64% historical average) and negative growth after adjusting for inflation (-0.99% YoY vs. +2.02% historical average).
5) Market to Fed: You Will Cut Rates in September
It’s a done deal.
That’s what the market is now saying about a Fed rate cut in September, with a 100% probability priced in.
This is important because in every single FOMC meeting since 2009, the Fed has done exactly what the market was expecting it to do entering the meeting.
The Fed is likely to send a strong signal of that rate cut in their meeting this week, and market participants will be trying to decipher how quickly thereafter the Fed will cut again.
The current expectation: the Fed will cut rates again in November and December, bringing this year’s total to 3 cuts. As for 2025, the market is currently expecting 4 more rate cuts.
6) It’s All About Supply
US Existing Home Sales fell 5% over the last year, the 34th consecutive YoY decline. That’s the longest down streak in activity since 2006-2009.
Why are sales so low?
The number one factor continues to be a lack of affordability, which remains worse today than the peak of the 2000s housing bubble. The median American household would need to spend 43% of their income to afford the median priced home for sale.
That’s an untenable situation and the main reason why the housing market standstill continues.
What would help increase activity? More home for sale. On that front, we’re seeing two encouraging signs:
- The months’ supply of existing homes moved up to 4.1 in June, the highest since May 2020.
- The number of active listings of homes for sale in the US is up 19% year-over-year.
7) Higher Earnings, Much Higher Stock Prices
We’re about a third of the way through earnings season and S&P 500 EPS are on pace for a 4% YoY increase, the 6th consecutive quarter of positive growth.
But with the 500 up over 20% year-over-year heading into earnings, expectations were quite high and valuations were rich. The S&P 500’s price to peak earnings multiple hit 25.9, its highest level since 2000 and 50% above the historical median (17.2).
Thus far we’ve seen a minor pullback in the S&P 500 index (just under 5%) and declines in some of the major companies that have reported (Netflix, Tesla, Google).
Here’s a breakdown of 3 of the 8 members of the Enormous Eight that have reported thus far:
- Netflix ($NFLX) revenues hit a record $9.6 billion in Q2 2024, up 17% YoY. This was the highest growth rate since Q2 2021. Their net profit margin of 19.5% was a record high. Over 8 million paid subscribers were added during the quarter (bringing the total base up to 278 million), well above estimates of 5 million.
- Tesla ($TSLA) Q2 revenues increased 2% over the last year, turning positive again despite a 7% YoY decline in automotive revenues due to the 100% increase in energy generation & storage revenue. Net Income fell 45% YoY to $1.5 billion. Q2 gross margins came in at 18% vs. 25% two years ago.
- Google’s ($GOOGL) revenues increased 14% over the last year to a new 2nd quarter high of $84.7 billion. Net income increased 29% YoY to $23.6 billion. Operating margins moved up to 32% from 29% a year ago.
8) A Few Interesting Stats…
a) Google’s capital expenditures are on pace to hit $49 billion this year, a 52% increase over 2023’s total.
“The risk of underinvesting [in AI] is dramatically greater than the risk of overinvesting.” – Sundar Pichai (Google CEO)
b) Truflation’s real-time US inflation gauge has moved down to 1.6%, the lowest level in the past year.
c) The median sales price of a new home sold in the US is now $10k less than the median sales price of an existing home, a record discount due to the “lock-in effect” and continued shortage of existing homes for sale. The supply of new homes, by contrast, is now at 9.3 months, well above the historical average.
d) There are now about 3 times as many stock mutual funds and ETFs in the US as there are publicly traded equities (see video discussion here).
e) If you held a 60/40 US stock/bond portfolio 5 years ago that portfolio is now 75/25 due to the 100% gain in stocks while bonds have been flat (see video discussion here).
And that’s all for this edition. Have a great week everyone!
-Charlie
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