The Week in Charts (8/19/24)
View the video of this post here.
“Don’t put off until tomorrow what you can do today.” – Ben Franklin
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The most important charts and themes in markets and investing…
1) The Biggest Volatility Crash in History
“What goes up, must come down.”
When it comes to volatility, there’s no more appropriate saying. After it spikes higher and fear abounds, it’s only a matter of time before things calm down again.
Over the past 10 years, we’ve witnessed market participants move from a state of panic to a state of calm with increasing speed.
And over the last 9 trading days, we’ve experienced the biggest volatility crash in history, with the $VIX declining 62% (from 38.57 to 14.80 on a closing basis).
Are $VIX crashes a bad omen for equity markets?
They don’t appear to be. Following the biggest $VIX declines in the past the S&P 500 has been higher 1 year later 100% of the time with an average total return of +14.3%.
2) A V-Shaped Rebound
The rapid move lower in volatility has been a springboard for stocks.
The S&P 500 has rallied 8.5% from its low on August 5 and is now only 2% away from hitting a new all-time high.
With a 16.4% gain on the year, the S&P 500 is off to one of its best starts to a year and the 2nd best start to a presidential election year in history.
At 5,554, the S&P 500 is now above every 2024 year-end price target from Wall Street strategists and 14% above the average target (4,861). And there’s still four and half months to go.
A number of prominent names have snapped back from the August 5 panic lows in dramatic fashion, led by Nvidia’s ($NVDA) 37% gain. Japan’s Nikkei 225 Index, which had experienced a record 2-day crash (-17.5%), has already bounced 22% off its low.
But what about the unwinding of the “carry trade,” which was said to be the proximate cause of the sell-off?
Perhaps it has already been unwound. Speculators have moved from a record net short position in the Japanese Yen a month ago (-184k contracts) to a net long position today (+23k contracts).
3) Down Goes Inflation
The trend of lower inflation continued in July with headline CPI moving down to 2.9%, its lowest level since March 2021 and better than expectations for a 3.0% increase.
At 3.2%, Core CPI (ex-food/energy) fell to its lowest level since April 2021.
The biggest driver of the decline in headline/core CPI over the past year has been the continued move lower in housing inflation. Shelter CPI has now moved down on a YoY basis for 16 straight months, from a peak of 8.2% in March 2023 (highest since 1982) to 5.1% today.
While it is still lagging real-time data which shows rents falling 0.8% over the past year, the gap is narrowing. And if it continues to narrow as expected in the coming months, it will continue to push down the rate of inflation.
It’s now been two years and a month since CPI peaked at 9.1%. Since then, every major component with the exception of Transportation (which is unchanged at 8.8%) is showing a lower rate of inflation today.
Why is Transportation still elevated?
Surging auto insurance rates have been a huge factor, increasing by over 50% in the past 3 years. That’s the biggest 3-year spike since 1975-78. The average annual cost of auto insurance in the US has moved up to $2,329 from $1,550 three years ago.
4) Say Goodbye to the “Emergency” Rate Cut
As the panic in markets has quickly subsided so have the calls for an “emergency” rate cut.
Market participants are now once again expecting a 25 bps rate cut in September with a 78% probability priced in.
A 25 bps cut would be in line with the other major developed central banks that have already cut interest rates this year, starting with a 25 bps move (Switzerland, Denmark, Sweden, Eurozone, Canada and the UK).
After the September meeting, the Fed is expected to cut again in November and December, ending the year with a Fed Funds Rate about 100 bps lower than today. In 2025, another 100 bps in cuts is currently priced in but a lot can change between now and then.
5) Plunging Housing Starts
Interest rate cuts can’t come soon enough for Homebuilders, whose sentiment has moved down to its lowest level of the year.
This is translating into fewer homes being built, with housing starts down 16% in the past year, hitting a 50-month low in July.
A lack of affordability continues to plague the housing market, with a near record % of income (43.9%) needed to afford the median-priced home for sale.
While mortgage rates have declined in recent weeks (30-year down to 6.49%, lowest since May 2023), it hasn’t been enough to meaningfully change the equation.
The 90% spike in the monthly mortgage payment since the start of 2020 is simply too much.
6) Starbucks Surge
Starbucks rose 24.5% on August 13, its biggest 1-day gain in company history (IPO in June 1992). The previous record was an 18% advance in July 2009.
The reason for the spike? A change in leadership, with Chipotle’s CEO Brian Niccol taking the reins at Starbucks starting in September.
Investors seem to be betting that he can turnaround the struggling coffee giant like he did with Chipotle, boosting the market cap of Starbucks by over $21 billion in a single trading day.
7) The Decline of the Department Store
Few are betting on a turnaround for department stores, the biggest secular downtrend in retail over the past few decades.
Department-store sales peaked in 1999 at $96.65 billion, and have since declined 69% to $29.94 billion in 2023.
The largest department store operator still in existence, Macy’s ($M), has closed more than a third of its stores in the last 10 years. The downsizing is expected to continue, with Macy’s announcing plans to close 150 more stores by early 2027.
What does this mean for the malls at which Macy’s has been an anchor for decades?
A much different look, reflecting changes in consumer demand. The closures of department stores has cleared the way for “new apartment complexes and entertainment wings with restaurants, amusement parks or activities such as laser tag and rock climbing.”
And then, of course, there’s Amazon, whose retail footprint continues to grow.
“Amazon opened a huge fulfillment center on the former site of Randall Park Mall. The mall in Northeast Ohio struggled with dwindling occupancy rates and ultimately lost mall anchors, including Dillards, JCPenney and Macy’s. And earlier this summer, Amazon opened another fulfillment center in Baton Rouge, Louisiana — also on a former mall site.”
Investors have taken notice. Amazon’s stock price is up 963% over the past decade while Macy’s has declined 54%.
8) A Few Interesting Stats…
a) 8.5% of US Homes are now worth over $1 million, the highest % on record. Five years ago less than 4% of homes were above $1 million and ten years ago less than 2%.
b) Used Car prices in the US are now at their lowest levels since May 2021, down 14% from the peak in July 2022.
c) US Federal Government spending as a % of GDP has increased from 17% in the 1950’s to 27% thus far in the 2020’s (see video discussion here).
d) There are now 476,000 new homes for sale in the US, the highest new home inventory since February 2008.
e) The % of Bulls in the Investors Intelligence Sentiment Index has moved down nearly 20% in the past 3 weeks (from 64.2% to 44.6%). That’s the biggest 3-week % drop in Bulls since the October 1987 crash.
And that’s all for this edition. Have a great week everyone!
-Charlie
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The post The Week in Charts (8/19/24) appeared first on Charlie Bilello’s Blog.
