Through the year’s first seven months, 2023 has defied investor expectations.
The US economy continues to grow as economists abandon recession forecasts. The stock market has staged a rebound rally after enduring its most challenging year since the 2008 financial crisis in 2022.
Inflation is falling faster than expected. Home prices have stayed firm against mortgage rates that have topped 7% at times. Consumers are still spending down their pandemic savings.
In our first edition of the Yahoo Finance Chartbook, each of these themes plays a prominent role.
Across the 50 charts featured in this collection, however, emerges a sense that we’re waiting for something to happen — for that proverbial other shoe to drop. There is an unease churning below the year’s calm surface.
Credit spreads are eyed. Leading economic indicators flagged. The lagged effects of the Federal Reserve’s aggressive rate hikes are being monitored. And there are nascent signs of softening in the consumer.
The corporate flavor of the moment — artificial intelligence — only appears by inference. A lesson for the broader investor community, perhaps.
At a moment for investors in which consensus feels particularly elusive, our Chartbook is in keeping with the times. And we can’t wait to hear your thoughts.
This project would not be possible without the work of Yahoo Finance’s Jared Mitovich and his editor, Clara Colbert. Yahoo Finance’s graphics team, led by Adriana Belmonte, David Foster, and Brent Sanchez, helped turn screenshots and Wall Street shorthand into a visual presentation that feels light and modern. Most of all, thank you to all of the experts who contributed!
—Myles Udland, Head of News, Yahoo Finance
Julian Emanuel, macro research analyst, Evercore ISI:
“Because of all the tightening (interest rates, QT, reduced lending, higher mortgage rates), the actual near record contraction in Money Supply, M2, has caused the line to start hooking down. … It is so far above the extrapolated trendline due to the government stimulus in 2020, 2021, and part of 2022 (QE was still happening in 2022) that the economy has remained supported, the consumer strong, and employment robust.”
Rick Rieder, chief investment officer of fixed income, BlackRock:
“The media and market participants are highly attuned to inflation (for good reason), but what we think is overlooked, and often underestimated, is the long term trajectory of growth.
Productivity, which tends to ebb and flow in long cycles (think Industrial Revolution), is one way to both enhance growth and reduce inflation even in (or perhaps catalyzed by) an environment of slower demographics and deglobalization … but it does require investment.
The period between World War II and the end of the Cold War saw a remarkable rise in Research & Development investment by the government, resulting in many technological breakthroughs that have shaped modern life as we know it, such as the jet engine, GPS, and the internet.
We like the chart above because it shows an equally remarkable (and even larger) surge in private R&D investment today, led by many of the companies, particularly in tech, that have driven growth in corporate earnings and resilience in equity markets.
In addition, we may be on the precipice of a spike in government R&D spending too, on the back of the CHIPS Act and IRA, such that total investment in R&D (both public and private) could be approaching 4% of GDP, or a third greater than at the peak of the Cold War.
If there was ever the possibility for a structural inflection higher in productivity, perhaps as a result of a Technological Revolution, we think the best odds of that are in the decade we are living in now.
Long term asset allocation implications to us are that higher rates and higher stock prices are not incongruous in a world where inflation may be higher than before, but still suppressed by higher productivity-enhanced growth.”
Liz Ann Sonders, chief investment strategist, Charles Schwab & Co.:
“The plunge in the Leading Economic Index has taken it to territory only seen during recessions historically. In keeping with our theme of ‘rolling recessions,’ areas like housing, housing-related, manufacturing, and many consumer-oriented goods segments of the economy have had (or are still having) their own recessions. For now, offsetting resilience in services has helped keep the labor market afloat (given services employs more than manufacturing); but cracks are appearing, and deserve watching, in both services and the labor market.”
Torsten Sløk, chief economist, Apollo Global Management:
“Since the Fed started raising interest rates, the costs of capital have increased for consumers and firms, and not many people realize that a default cycle has already started. … This is the way monetary policy works. Higher interest rates have a negative impact on capex spending and hiring through corporate financings.”
Apollo is the parent company of Yahoo and Yahoo Finance.
Chris Harvey, head of equity strategy, Wells Fargo Securities:
“We are closely monitoring two key macro factors: (1) the spread between the 2yr US Treasury (UST) and Fed Funds (FF) rates; and (2) the investment-grade (IG) credit spread, the premium above Treasuries that investment-grade firms pay to borrow money.
If the US economy is heading for a ‘hard landing,’ these two factors will likely signal the slowdown. A material inversion between the 2Yr UST and FF [preceded] recessions in the early 2000s, 2007/2008, and quickly during the 2020 pandemic. This dynamic implies monetary policy is too restrictive for existing economic conditions, and signals a recession is likely. The relationship inverted materially post Silicon Valley Bank but has reverted in recent weeks.
A widening of credit spreads (or a significant increase in the cost of corporate credit) indicates investors are becoming more concerned with corporate prospects and are demanding a higher rate of compensation for the perceived risk. Widening spreads preceded economic slowdowns in the early 2000s, 2007/2008, and around the 2020 pandemic. Notably, IG credit spreads have been grinding tighter in recent weeks.”
Richard Bernstein, CEO, Richard Bernstein Advisors:
“Since ARKK’s (ARKK) inception in October 2014 (i.e., more than 8½ years ago), Mid-Cap and Small Cap Industrial stocks have outperformed ARKK.”
George Goncalves, head of US macro strategy, MUFG:
“In our opinion the ongoing BOJ [Bank of Japan] monetary policy changes along with global QT should drag up term premiums (TP) & 10s (TNX). There was a shift lower in US 10yr TPs a decade ago once BoJ & European Central Bank did QE (driving flows into USTs). BOJ was the last to start normalizing policy. As global rates stay high, higher Japanese Government Bonds should reinforce this.”
Veronica Willis, global investment strategist, Wells Fargo Investment Institute:
“This chart paints the picture that over the long term, the equity market has been able to move higher despite various economic and market shocks. As we face more uncertainty and potential volatility this year around a likely slowdown in economic growth and the timing of a potential recession, it’s important for investors to focus on more than just the short term. Short-term market shocks and volatility are normal parts of market behavior, and downturns can serve as attractive buying points for investors to purchase high-quality stocks at more reasonable valuations.”
Tom Lee, managing partner and head of research, Fundstrat:
“This is the % of CPI components (by basket weight) in outright deflation. This figure is well above the 10-year and 30-year average… looks a lot like October 1982.”
Michael McDonough, chief economist and global head of central banks & government financial agencies, Bloomberg LP:
“Supercore inflation has become critical to understanding the Fed’s response to price gains. The relatively new measure is a modified version of core services inflation that removes housing-related prices, which are expected to moderate ahead due to lagged effects. Core good prices are excluded from the picture as inflation here has moderated more quickly as pandemic-related supply-chain issues abated.
Supercore is believed to paint a clearer picture of the inflation landscape. While Fed officials have cited this measure, the Bureau of Labor Statistics doesn’t officially publish it with the CPI. This chart shows the annual change in supercore inflation — and highlights the underlying contributions. For example, medical care services subtracted 0.2 percentage point from the year-on-year change in supercore inflation in June. Transportation services added 1.9 percentage points, accounting for nearly half of the index’s 4% annual gain.”
Kathy Jones, managing director and chief fixed income strategist, Schwab Center for Financial Research:
“I am watching this chart since it provides a look into how tight monetary policy is. Note that yields in both nominal and real terms are at the highest level since 2007 — just prior to the financial crisis. It’s a level that has proven to be difficult for the economy and markets to handle in the past. Even if the Fed doesn’t hike rates from here — monetary policy is likely to get tighter as inflation falls because real rates will be rising. In my view, the Fed’s tightening is reaching a level that could trigger a hard landing scenario.”
Tom Simons, senior economist, Jefferies:
“Households have spent through a great deal of their excess savings from during the pandemic in order to offset the impact of inflation. The latest data from the National Income and Product Accounts (NIPA) shows the savings rate is back up to 4.3% as of June, up from a near record-low last June (2.7%). However, when looking at savings from the Flow of Funds (FoF) data, which calculates savings as net acquisition of assets less net acquisition of debt, the rebound is even more dramatic. This view gives a better sense of investment than the NIPA methodology, which simply shows the excess of income over expenses.
When we break down the FoF data, we can see a big move by consumers to take cash out of checking accounts and put it towards money market mutual funds, savings accounts, and US Treasuries (bills, etc). This cash that is being saved in higher-yielding accounts and investments is likely to be very sticky as households finally have an incentive to save for the first time in over 20 years. So although the economy looks like it is in fine shape right now, a less dynamic consumer is likely to cause things to slow in the second half of the year, especially with the added burden of student loan payments restarting.”
Gregory Daco, chief economist, EY-Parthenon:
“The ‘free disinflationary lunch’ from rapidly falling energy prices, cooling food price inflation and easing core goods inflation is now over and any additional disinflationary momentum will have to come from slower month-over-month gains in core services prices.
We believe easing demand for goods and services, the pass-through from softer housing price inflation, and cooling wage growth should lead to faster disinflation. Already, we have seen strong downward pressure on wholesale price inflation indicating profit margin compression and import price deflation. Inflation expectations and wages growth are also visibly cooling, and while small business owners are expressing pricing power nostalgia, fewer and fewer are raising prices.”
Andrew Hunter, deputy chief US economist, Capital Economics:
“Rent inflation has started to slow according to the Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE) measures, but remains exceptionally high. But a variety of third-party measures, including this one, indicate that inflation for newly-signed rental contracts specifically has already plunged back in line with or even below pre-pandemic levels. If that slowdown in new rent inflation feeds through in its entirety — as this chart suggests it will, with a lag of about 9 months — we could be looking at an all-out collapse in rent inflation over the coming quarters. With the housing components accounting for nearly 20% of the core PCE index and more than 40% of core CPI, that will make it increasingly difficult for Fed officials to push back against market expectations of looser policy to come.”
Nancy Vanden Houten, lead economist, Oxford Economics:
“Mortgage rates are often discussed in terms of their spread to Treasury securities, particularly, the 10-year Treasury note (TNX). Since the Federal Reserve began hiking the spread between mortgage rates and the 10-year note has ballooned by 125 basis points to 286 basis points as mortgage rates have increased by 370 basis points, compared to 245 basis points for the 10-year Treasury. This larger increase in mortgage rates has eroded home-buying affordability and weighed on housing activity.
Why has the difference between these two rates increased so much? Mortgage rates tend to move in the same direction as Treasury yields but the spread reflects among other things the uncertainty investors face about how quickly they will receive payments on their holdings of mortgage-backed securities. That spread is wider when bond market volatility is elevated and/or when the yield curve is inverted.
Bond market volatility has subsided some, but the yield curve remains quite inverted. We think spreads will remain wide until markets begin to price in eventual Fed rate cuts and the yield curve becomes less inverted and eventually positively sloped. When that occurs we think mortgage rates will fall more than Treasury yields, providing support to the housing market.”
Lakshman Achuthan, co-founder, Economic Cycle Research Institute:
“The Philly Fed’s GDPplus is based on information extracted from both GDP and GDI in a statistically optimal way. GDPplus is a smoother and better estimate of the underlying, but unobserved, U.S. economic activity that drives GDP and GDI. That’s why it’s worth paying closer attention to its movement.
As the chart shows, the quarter-over-quarter annualized growth rate of real GDPplus has never been this negative outside a recession (horizontal dashed red line).
Unless the GDI and GDPplus data are drastically revised, the implication is that the U.S. economy may have slipped into recession in late 2022 or early 2023.”
Joseph Quinlan, chief market strategist, Private Bank and Merrill, Bank of America:
“For U.S. investors, there is no place like home when it comes to generating equity returns. The outperformance of the United States relative to many other parts of the world reflects the simple fact that the American economy remains one of the largest, most competitive, and dynamic nations in the world. Never have so few people [produced so] much output, underscoring the productive capacity of the United States. And never has an economy exhibited such strength across various sectors. America is a hydra-headed economic superpower—a global leader in aerospace, agriculture, artificial intelligence, entertainment, education, energy, finance, life sciences, technology—among many other sectors. Stay long the U.S.”
Vincent Reinhart, chief economist and macro strategist, Mellon Investments Corporation:
“Federal Reserve officials haven’t apparently put much stock in its balance-sheet reduction program, Quantitative Tightening (QT), in tightening financial conditions since its start in June 2022. That may be because in its first year, QT didn’t dent the part of the Fed’s balance sheet that represents assets of the private sector supporting economic and financial activity—currency, reserves, and overnight reverse repurchase (RP) agreements.
In fact, their sum, plotted in the chart, returned close to its all-time high despite ongoing QT reductions in its asset portfolio.
While it may not seem that way, the Fed’s balance sheet did balance. As the Fed was running off $3/4 trillion of its Treasury securities, the Treasury Department was reducing its deposits at the Fed by a like amount because of the binding debt ceiling. The private sector wasn’t touched by QT because the Treasury was paying the Fed back with the Fed’s own money. In fact, the private sector soaked up an additional $1/2 trillion of currency, reserves, and reverse RPs to fund the Fed’s lending for bank resolutions.
Not anymore. With the debt ceiling suspended, the Treasury has rebuilt its Fed deposits and securities shrinkage is taking a toll on the private sector. With the Treasury out of the picture and the Fed paring $95 billion from its portfolio each month, QT will be a potent source of financial restriction that is off the Fed’s radar. Watch this space.”
Nela Richardson, chief economist, ADP:
“Even if you’re not a homeowner and have no interest in buying, summer home-buying season has consequences for you.
The $45 trillion housing market, one of the biggest contributors to the U.S. economy, has suffered from an undersupply of homes for sale for most of the past two decades, a chronic condition made worse by the Federal Reserve’s recent tightening.
Economists and real estate agents consider a six-months’ supply of existing homes to be healthy. The supply of new homes tends to be greater than the supply of existing homes on the market, but even that is starting to wane. For a while after the pandemic, inventory rose, reaching a 10-month supply in July 2022. But that run-up was short-lived, and the supply of houses and condominiums on the market was down to 7.4 months in June.
More inventory is like an escape valve – it helps release the pressure of high borrowing costs. With housing supply and demand out of whack, prices remain elevated even as mortgage rates rise. Its an insidious combination that is making housing one of the most important barometers of the overall health of the economy right now.”
Danielle Hale, chief economist, Realtor.com:
“The lack of home sellers has been an Achilles heel for the existing home sales market in 2023, and while the absence of sellers has been widely discussed, the size of the gap and its implications for listings and existing sales for the year as a whole have been less widely covered.
Looking at year-to-date trends (January through June) gives us a comparison over several years that is revealing. So far in 2023, new listings have totaled 2.1 million. This is 17.3% behind the previous worst year (2020) and 29.0% behind the pre-pandemic average (2017-2019).”
In addition to showing the total number of new listings at the halfway point of the year, we also explored what fraction of the year’s total new listings the first-half comprised, and in all cases except 2020, new listings in the first-half of the year were more than half of the annual total.
Applying these historical shares to this year’s data yields a range of between 3.8 to 4.3 million new listings that are likely in 2023. The lack of new listings is likely to be a damper on existing home sales in 2023, a reason our revised projection anticipates total sales of only 4.2 million this year. This is also likely to mean room for builders to grow this year, as new homes have an opportunity to fill the gap left open by existing homeowners choosing to stay put.”
“New home sales have surprised to the upside so far in 2023 and are currently down only -2.5% YoY, despite the 30-year fixed rate mortgage hovering around 7%. The resilience in new home sales has been supported in part by pent-up demand for housing, years of underbuilding in the US and a lack of competing product (existing homes on the market). In fact, as of June the supply of existing home inventory stood at only 3.1 months versus the long-run average of closer to 5.5 months.”
Jeffrey Kleintop, chief global investment strategist, Charles Schwab & Co.:
“Japan is home to the world’s second-largest stock market after the United States. Yet, Japan often gets little attention by investors. Ask a typical investor what they think of Japan and a common phrase you might hear is ‘lost decades,’ referring to the Japanese stock market failing to recover its peak of December 1989. But investors are taking another look as Japanese stocks show signs of finally closing in on a new high after more than 30 years.
There are several reasons why Japanese stocks may continue to surprise investors and help lift the performance of international markets: pro-market reforms are pushing companies to improve shareholder returns, Japan’s GDP growth is exceeding all other G7 nations this year and Japan is benefiting from the ‘de-risking’ of supply chains in Asia.”
Linda Yueh, adjunct professor of economics, London Business School and fellow in economics, Oxford University:
“Shadow banks account for nearly half of all financial assets globally, as measured by the Financial Stability Board (FSB). This sector includes investment funds, insurance companies, pension funds and other financial intermediaries. What’s formally known as the non-bank financial institutions (NBFI), they grew by 8.9% in 2021, which is faster than its five-year average growth of 6.6%, reaching $239.3 trillion worldwide.
Shadow banks have become an important source of financing for companies, notably private companies, as well as managing savings of households and firms. But, it’s a diverse sector that isn’t as closely regulated as the large banks, which is why the global body responsible for monitoring financial stability, the FSB, has highlighted that the debt or leverage in the shadow banking system could pose a systemic risk and lead to the next financial crisis.
This is a risk right now as seen in recent developments. This year has already seen three of the four biggest bank failures in US history where regional banks, triggered by Silicon Valley Bank, have been rescued in various ways. The commercial real estate sector is also under pressure in cities like New York, where declining prices could impact banks and shadow banks alike. And the valuations of private tech firms have fallen dramatically since 2021, which in turn exerts pressure on the balance sheets of their investors and creditors. There have already been some notable start-up collapses, e.g., payments start-up Plastiq declared bankruptcy after raising funds last year at a valuation close to $1bn. Zume, a robot pizza delivery start-up, closed in June after raising about $500 million from investors including SoftBank.
This is not unusual in this part of the business cycle since higher interest rates can make debt unaffordable. But what is unusual this time is the large amount of financial assets held by non-bank financial institutions which are less regulated, which adds to the risk of a crisis stemming from a sector where regulators are not as well equipped to quickly resolve it.”
Callie Cox, investment analyst, eToro:
“It’s a simple, but powerful chart. Paychecks are now growing faster than prices after a year and a half of inflation outpacing incomes. It’s caused a huge psychological shift for both consumers and investors, too. If you’ve been on the right side of pay raises – as many lower and middle-income Americans have – you may start to notice that your monthly budget stretches a lot further at the grocery store. On a larger scale, this could be a reason why consumer confidence is ticking up – something you don’t normally see right before recessions.
This is how nature starts to heal after an inflation crisis. Wages often catch up to prices instead of prices falling to pre-crisis levels. If companies can manage stabilizing costs and demand holds up, this optimism-fueled market rally we’ve seen lately could be for real.”
Mark Zandi, chief economist, Moody’s Analytics:
“The key question for investors remains whether the economy will suffer a recession in the coming year. Recessions are ultimately a loss of faith. Consumers lose faith that they will have a job and cut their spending. Businesses lose faith that they can sell whatever it is they produce and cut jobs. The economy unravels into a self-reinforcing cycle down. The Conference Board survey of consumer confidence is a good barometer of whether consumers still have faith in the economy. Whenever it falls sharply for a few months, consumers are packing it in, and the economy soon suffers a recession. There is no sign of that currently.”
“Despite record high prices, Europe will remain the #1 destination for American travelers taking international trips this summer. Despite continued inflation and economic uncertainty, American travelers continue to invest in travel at prices they’ve not paid for 6+ years. This shows a clear, continued prioritization of travel spending, especially among Millennials and GenZ.
Context: Europe is the #1 destination region for international US travelers, capturing more than ⅓ of all international searches from the US for summer 2023. Airfare to Europe this summer is averaging nearly $1,200 per ticket, the highest prices seen in the last 6 years. Airfare is averaging 12% higher than last summer, and 23% higher (+$220 per ticket) than in summer 2019. Despite higher prices, demand for travel to Europe remains high.
Since late April, demand to Europe has outpaced 2019 growth rates by as much as 20% as Americans have planned and booked their summer vacations. Prices peaked in late May / early June and have begun to come down in July.”
Danielle DiMartino Booth, CEO and chief strategist, QI Research:
“It’s difficult to conjure a recession when pandemic stimulus is running at record levels for privileged Americans. Like subprime mortgage lending towards the end of its run in 2007, it’s likely that the bulk of IRS Employee Retention Credit (ERC) claims are fraudulent today. That said, monthly taxpayer payments north of $30 billion, which will occur this July for the first time, will boost GDP growth by 1.5 percentage points in the next 12 months if the IRS cannot find a legal avenue to arrest the defrauding of the U.S. government.
As any business that legitimately claimed an ERC when first introduced with the CARES Act can attest, the small businesses whose sales were interrupted by COVID have long since filed their claims. What’s left is booming international luxury travel as ambulance-chasing outfits deliver claims’ proceeds to those bilking the system.”
Diana Choyleva, chief economist, Enodo Economics:
“Xi Jinping’s new economic team is at a loss as to how to revive the sputtering economy and prevent China from plunging into a Japan-style deflation. We expect to see a number of measures trialed — with limited results — as policymakers attempt to avoid deflating their way out of a debt hangover. The rest of the world cannot rely on China for growth.’’
Sam Ro, editor, TKer:
“This chart plots the one-year change in the S&P 500’s (S&P) price against the one-year change in the S&P 500’s earnings since 1955. The regression analysis comes back with an R-squared of 0.02, which means there’s effectively no linear relationship between the two measures. In other words, one year’s change in earnings regardless of magnitude won’t tell you what will happen with prices in a given year. It is worth noting that there are more instances of stocks rising than falling during years with negative earnings growth. The bottom line: It’s incredibly difficult to predict the direction of the stock market over short periods of time, even when you know where earnings are headed.”
“One of the positive surprises supporting the strong performance for stocks this year is the resilience in corporate profits.
After bottoming in early February, S&P 500 forward earnings estimates rose alongside stock prices for most of the first half. However, since mid-June, earning estimates have flatlined while stock prices have continued to rise. Given elevated market valuations, to sustain the rally it will be important to see earnings estimates resume the uptrend as we move deeper into the second half.”
Steve Sosnick, chief strategist, Interactive Brokers:
“The top two lines are the size of the Federal Reserve’s balance sheet and the amount of securities held on their balance sheet. The bottom is the S&P 500.
We can see that the top 2 lines move in almost perfect synch until March. They rose together during quantitative easing (QE) and sank together during quantitative tightening (QT). The bump in the balance sheet that occurred this spring was caused by the $300 billion in loans that the Fed offered to the banking system to stem the crisis. The loans show up on the balance sheet as assets, but not securities. Either way, they undid much of the past few months’ QT.
Now compare that to SPX. We saw the index rise as the balance sheet rose in 2020-2021, then shrank as QT began. Until March. SPX took off as the Fed’s balance sheet grew, but continues to do so even as the balance sheet shrinks back to prior levels.
The questions the chart raises are:
How much of the current rally be attributed to the unexpected monetary stimulus, regardless of intent?
Are equities now fighting the Fed? If so, how long can it continue?”
Charlie Bilello, chief market strategist, Creative Planning:
“Real wage growth in the US has finally moved back into positive territory after a record 25 consecutive months in which inflation was outpacing hourly earnings. The loss of purchasing power in 2022 was a major factor weighing on markets as it sent consumer sentiment (University of Michigan) to record lows and drove the Fed to pursue its most aggressive tightening cycle since the early 1980s. With wages now outpacing inflation again, consumer sentiment has rebounded (22-month high) and the Fed is expected to be at the end of its rate-hiking cycle. Hopefully, real wages remain positive, but should they turn down again it could signal further tightening from the Fed and a more challenging market environment.”
Claudia Sahm, founder, Sahm Consulting:
“The 70% labor force participation rate of Black men aged 20 or older is basically the same for White men, reflecting a remarkable four percentage-point jump in the rate the past three years. Wage gains have been largest at the bottom of the distribution — jobs where Blacks disproportionately work. As a result, these higher wages are likely a stronger incentive for Black men to be in the labor force than for White men.
Closing that gap that persisted for over fifty years is a major accomplishment. When I pulled the data and made the chart, I said, ‘Wow.’ out loud. Too often in policy circles, we hear that certain groups like Black men simply cannot be ‘saved.’ The argument is: some deficit of theirs, like a lack of education, will keep them always on the sidelines. Not so — it almost never is — Black men did come out in search of work. Even so, their unemployment rate still exceeds that of White men and Black women, albeit with a narrowing gap. Another important milestone: Black employment hit a record high of over 60% in March. Something to celebrate!”
“Since … 1914 the United States has experienced 8 inflationary episodes, defined as periods where CPI began at 2.5% or below, rose above 5%, and retreated back below 2.5%, which are depicted on the chart above. In 4 of the previous 7 episodes, these inflationary periods ultimately led to one or multiple recessions in the United States (depicted in reddish tones), whereas the other 3 (depicted in blueish tones) did not lead to a recession.
We are 29 months into the current inflationary cycle, and markets are optimistically pricing in that CPI will quickly return back below the Fed’s 2% target within the next 12 months, as indicated by the current 1yr breakeven inflation rate of 1.5%. With that in mind, the biggest risk we see to the market right now is that inflation persists longer than the market expects, which could ultimately lead to more protracted drawdowns across both stocks and bonds, and potentially drive the US economy into a recession.”
Lawrence Yun, chief economist, National Association of Realtors:
“America is facing a historically-low inventory of homes on the market. June 2023 registered the lowest inventory count for the month of June since NAR began tracking this data in 1982. Housing inventory in the winter months is generally low. So, in comparison with summer inventory data in previous years, 2023 could go down as the tightest inventory market conditions ever recorded. Homebuilder stocks look to benefit.”
“Beware the year-over-year house price comparisons. On a year-over-year basis, house price appreciation officially turned negative in April and into May, according to the S&P Case-Shiller. That is not surprising, as the year-ago comparisons increasingly reference the house price peak of last summer.
On a month-over-month basis, however, house prices have been re-accelerating for the past four months, increasing 0.2 percent and 0.4 percent in February and March, respectively, and 0.6 percent and 0.7 percent in April and May. The year-over-year comparison misleadingly suggests prices are falling, but that is all in the rear-view mirror. House prices may have bottomed out and the ongoing supply shortage along with continued demand for homeownership are driving prices higher again.”
Hessam Nadji, president and CEO, Marcus & Millichap:
“The rapid run-up in interest rates closed the yield premium investors had been achieving as the yield spread over the 10-year treasury collapsed from 540 bps in 2020 to about 200 bps late in 2022. Entering 2023, Commercial Real Estate Pricing began to fall, and the yield spread has once again begun to widen. Commercial Real Estate is in the process of recalibrating, with the pricing of each property type and each metro adjusting. Office property pricing has fallen the most, particularly in urban markets with a significant work-from-home employee base like San Francisco. Retail properties, particularly in the growing sunbelt market, have maintained the most stable pricing as these assets were generally trading at higher yields prior to the Fed rate increases.
The pricing recalibration is opening new opportunities for investors as abundant investment capital has been waiting on the sidelines for this pricing adjustment. Many private investors have become more active recently as the debt markets have begun to stabilize. We’re now in the transition zone where market pricing is recalibrating and active investors can find assets that normally do not trade, and the bid climate is not as competitive as it was in 2021 and early 2022 before the Federal Reserve started raising rates.”
Liz Young, head of investment strategy, SoFi:
“It’s important to look at valuations relative to history, relative to peer group assets, and relative to the rest of your portfolio. It’s also important to look at them relative to the environment, and this chart illustrates the rate environment of today.
In a period where the 10Y Treasury yield is at this level, and expected to stay here if the Fed holds rates high, these valuation levels on the S&P are at extremes compared to historically similar yield levels.
Charts like this illustrate the high price investors are paying for earnings and caution us to heed the warnings of the bond market.”
Larry Adam, chief investment officer, Raymond James:
“The saying goes – ‘as goes the consumer, so goes the economy.’ As consumer spending makes up ~70% of US GDP, it is essential to get a read on the health of the consumer. With the effects from COVID-related fiscal stimulus drying up as evidenced by excess savings likely to be fully depleted by 4Q23 (from as high as $2.3 trillion last year), the health of the labor market remains our key focus. Why? Because determining the spending capacity of the consumer via job growth and wage increases is essential.
As a result, one of our favorite readings on the labor market is withholding taxes – which reflects the amount of taxes that the government collects from employees’ paychecks daily. We prefer this indicator for a few reasons: it is [a] real-time figure (released daily), it is not revised (like the payroll numbers) and it has historically been a leading indicator for the strength of the labor market. It also captures job creation and wage increases as both lead to higher taxes needed to be paid.
While the pace of growth in withholding taxes has slowed relative to 2021/2022 levels, it has stabilized around the 3-5% YoY level over recent months. With cracks in the consumer starting to form (e.g. rising delinquencies, elevated debt levels, and spending hesitancy), weakness in the labor market will exacerbate building stresses on the consumer and likely lead to a recession.
A further deceleration in withholding taxes, should it continue to slow, will suggest weakness in the consumer before the other big headline employment figures. If this YoY pace were [to] decline and approach zero (range of 0%-3%), it would increase the probability of a recession and dampen the prospects of a soft-landing scenario.”
Ben Carlson, director of institutional asset management, Ritholtz:
“From the start of 2021 through June of 2022, year-over-year inflation in the United States went from 1.40% to 9.06%, the highest inflation rate since 1981.
The number of S&P 500 companies citing inflation in earnings calls hit a multi-decade high, with 416 companies mentioning inflation during their quarterly report.
The Federal Reserve didn’t begin hiking rates until March of 2022, and at that point there had been 8 straight months of year-over-year inflation greater than 5%. Jay Powell and the Federal Reserve vowed to bring inflation down and were willing to take the job market and economy down with it.
The resiliency of the labor market becomes apparent by comparing the inflation rate to the unemployment rate during the Fed’s hiking cycle. When they first began hiking the unemployment rate was 3.6%. It got as low as 3.4% earlier this year and currently stands at 3.6%, right where it was when this all started.
If the unemployment rate is able to remain steady while the Fed hikes so aggressively and inflation falls back to target, a soft landing might be on the table.”
Sean Dunlop, equity analyst, Morningstar:
“U.S. consumer spending has held up remarkably well against the backdrop of persistent inflation and rising borrowing costs. Restaurants have performed particularly notably, healthily exceeding nominal pre-pandemic sales benchmarks and capturing 7.4% of consumer disposable spending in the most recent month, about 10% higher than we’ve seen over the past five years (6.8%).
Nevertheless, we foresee some stout headwinds on the horizon—consumers have already shifted spending away from early-cycle goods like apparel and consumer electronics towards staples, and even within less cyclical categories like food service we’re starting to see signs of check management (fewer items per check or cheaper menu items) as the above chart illustrates.
More concretely, RMS data suggests that operators raised prices by 11.3% from a year ago in the most recent quarter, but only saw a net sales increase of 5.7%. We’d expect about a 7.9% sales increase during ‘normal times,’ so it looks clear to us that consumers are growing increasingly sensitive to sticker prices.
Moving forward, that likely means we’ll see a more competitive pricing environment, sluggish consumer traffic, as folks shift spending into cheaper channels like grocery and convenience stores, and commensurately slowing sales—and probably less margin recapture than the market seems to expect.
While we don’t forecast a recession in our base case Morningstar models, we expect slowing growth and an increasingly cautious consumer, with restaurants serving as an illustrative microcosm of consumer behavior elsewhere in the economy, in our view. We see the restaurant space as expensive, with our coverage trading at a 10% premium to our market-cap weighted fair value estimates, and suggest that investors turn elsewhere as they look for near-term investment opportunities.”
Ryan Detrick, chief market strategist, Carson Group:
“Inflation continues to fall more than expected, but we have seen some stubbornness from core inflation. This is mainly due to shelter, which makes up more than 40% of core CPI. One of the big reasons we expect core inflation to begin to move lower is shelter is showing signs that it could drop significantly in the second half of ’23.
Looking at private data from places like Apartment List and Zillow has shown rent prices already slowing significantly, but that hasn’t made it to the delayed government’s data. We expect shelter in the government’s data to roll over soon (and it has probably started), which will only add more pressure on lower core CPI.
All of this will help clear the path for the Fed to stop hiking rates in an economy that has surprised most economists, as the consumer has remained strong, with both housing and manufacturing now showing signs of bottoming.
Many have been looking for a hard or soft landing, but we’ve been in the lonely camp that no landing was ever necessary. The plane has always had plenty of fuel and lower inflation is another reason to expect the economy will avoid a recession.”
Aadil Zaman, partner, Wall Street Alliance Group:
“This chart exemplifies the divergence between the S&P 500 index and its equal-weighted counterpart as well as the outsized role that mega-cap technology has played in the S&P 500’s rally this year. As a result of this significant outperformance by large technology companies versus the rest of the market, it is a great time for investors to review their portfolio asset allocation, monitor sector exposures, and any concentrated positions.”
Sucharita Kodali, vice president and principal analyst, Forrester Research:
“The last 18 months have been an outlier in a good way—some of the lowest levels of unemployment ever (some will say that the unemployment denominator is smaller and a lot of people have stopped working; be that what it may, what it says is that if one wants to work, there are jobs). And now we have both low unemployment and low inflation.
We continue to see griping in surveys where consumers say they are unhappy with the direction of the US or politics or other concerns, but this data suggests that the pandemic stimulus was good for consumers overall (the ‘pandemic paradox’ which is well-known in economist circles) and the economy is quite robust. University of Michigan economist Justin Wolfers has been saying this is what would happen with inflation for months. Some sectors like commercial real estate are hurting but that’s not one sector.”
Chris Versace, chief investment officer, Tematica:
“We noted in last week’s Roundup that as we dig into quarterly results later this week from PepsiCo (PEP), we will be especially interested in comments about currency headwinds.
As we can see in the chart below, U.S.-based companies can feel dollar pain in the recently completed June-ending quarter vs. the June 2022 quarter. But that looks not to be the case in the current quarter. This could help companies with meaningful non-U.S. exposure bolster their outlook for the current quarter and perhaps the final one of this year if the dollar doesn’t rebound in a meaningful way.”
Jay Woods, chief global strategist, Freedom Capital Markets:
“There are two charts that have gotten my attention. Why two when the question was for one? Well… let me tell you.
This past month as we kicked off the second half of 2023, two charts of significance made new 52-week highs. Those would be the Dow Jones Industrial Average (DJI) and the Transportation Average (DJT).
This phenomenon known as Dow Theory goes back to the early 1900s, and it just gave price confirmation we are now in a new secular bull market. This doesn’t signal tops, but is a sign of economic strength that focuses on the Industrials — ‘the things that make’ — and the Transports — ‘the things that take.’
While the components of the index have changed over time and the primary index can be argued to be the S&P 500 or even the tech-heavy Nasdaq 100 (NDX), Dow Theory still rings true and as long as both indexes are trading above their breakouts to 52-week highs then the trend is bullish and all eyes will be on new all-time highs over the coming month.
For the Dow will need to cross 36,799 and the Transports need to eclipse 17,040 — both all-time closing highs. That would equate to rallies of 4.2% and 5.1% for the respective indexes.”
Will Tamplin, senior analyst, Fairlead Strategies:
“Apple (AAPL) has been an important chart to watch this year given its heavy weighting in the major indices (~7% in S&P 500 and ~12% in Nasdaq-100) and its strong year-to-date performance, up nearly 50%. Earlier this year, AAPL and other megacap growth stocks like Microsoft (MSFT) and NVIDIA (NVDA) were sources of upside leadership, helping shift sentiment meaningfully to the benefit of the broader market. This ultimately resulted in a major breakout for the S&P 500 in May.
In late June, AAPL confirmed a breakout to new all-time highs in a bullish long-term development for the stock. The breakout yielded a long-term measured move objective of about $254 looking out to late 2024. The measured move uses the Covid/2020 corrective low as a point of reference and assumes that the trajectory of the uptrend in 2020-2021 is intact, and that the uptrend has resumed from this year’s low.
The breakout in AAPL has lent confidence to market participants, which has resulted in more stocks participating in upside follow-through (i.e., expanding breadth) for the major indices. Given the long-term implications of the breakout, it is a positive development for the broader market over the next several months given AAPL’s large footprint and therefore ability to affect investor sentiment. Short-term, we would welcome a pullback for a compelling reentry in AAPL.”
“In my view, one of the most important charts to watch is the KRE ETF comprised of regional banks. Many of these banks hold significant amounts of commercial real estate loans, which are impacted by the current interest rate environment.
The key to a full-scale market rally is the participation of Financials, particularly these banks, to drive an all-Index rally.
We’ve seen surprisingly good news in early earnings reports, many reporting the return of depositors.
The yield curve has been inverted since last summer with short-term interest rates higher than longer-term rates. That’s usually a sign people are worried about a recession, so we need to see rates normalize with longer-term rates yielding more than shorter term.
There is still room to run with, in my view, KRE not running into price resistance until $49.40.
Support at $44 — this had been a resistance level, but I don’t expect the stock to fall below $44 and could move as high as $49.40 before it might run out of steam.”
Phil Mackintosh, chief economist and senior vice president, Nasdaq Global Markets:
“I realize this isn’t a ‘leading’ indicator. But why I like it is because so far many of the typical leading indicators that have forecast a recession have been wrong. And the reason they’ve been wrong is because they don’t factor in how consumer savings post Covid have supported spending, despite inflation, leading to surprisingly strong employment and a persistent gap in the workforce, that in turn has contributed to higher wages and household balance sheet strength.
In contrast, this chart will capture the point where the economy slows enough that worker confidence starts to melt. If (as the Sahm rule suggests) unemployment rises 0.5% or more above its low in the past 12 months, we will see that not only has hiring weakened considerably for businesses, but workers themselves will likely get nervous about their own job security. That could in turn reduce spending, putting an end to the consumer-driven soft landing we are all hoping for.
And if that doesn’t happen, this chart will also help show that the economy is slowing without causing joblessness. Showing us if the hoped-for ‘Soft Landing’ really is a possibility.”
Christine Short, vice president of research, Wall Street Horizon:
“There have been several academic studies using our data that [show] the timing of a firm’s earnings release is one indicator of its financial health. As such, [in] 2022 Wall Street Horizon introduced the LERI that allows investors to factor in the market intelligence derived from US companies releasing earnings later than their historical average, which typically signals negative news on the horizon.
The LERI tracks outlier earnings date changes among publicly traded companies with market capitalizations of $250M and higher. The LERI has a baseline reading of 100, anything above that indicates companies are feeling uncertain about their current and short-term prospects. A LERI reading under 100 suggests companies feel they have a pretty good crystal ball for the near term.
As you can see in the chart I’ve shared, for Q3 2023 (which takes into account Q2 2023 [earnings] dates which are mostly reported in Q3) we’re seeing the second-highest LERI reading since the pandemic. Note that we haven’t included 2020 in this instance, the numbers were off the chart and made other years difficult to read.”
OTTAWA – Statistics Canada says the country’s merchandise trade deficit narrowed to $1.3 billion in September as imports fell more than exports.
The result compared with a revised deficit of $1.5 billion for August. The initial estimate for August released last month had shown a deficit of $1.1 billion.
Statistics Canada says the results for September came as total exports edged down 0.1 per cent to $63.9 billion.
Exports of metal and non-metallic mineral products fell 5.4 per cent as exports of unwrought gold, silver, and platinum group metals, and their alloys, decreased 15.4 per cent. Exports of energy products dropped 2.6 per cent as lower prices weighed on crude oil exports.
Meanwhile, imports for September fell 0.4 per cent to $65.1 billion as imports of metal and non-metallic mineral products dropped 12.7 per cent.
In volume terms, total exports rose 1.4 per cent in September while total imports were essentially unchanged in September.
This report by The Canadian Press was first published Nov. 5, 2024.
