Charts of the Week

Happy Labor Day, friends! It’s Monday, and you know what that means, right? It’s time for another Charts of the Week!

Stocks: great in the long-run, extended here and now?

Over the last 222 years stocks outperformed every other asset class, with an average annualized return of 6.9%. Not pictured on this chart is real estate. Stocks also outperformed that asset class.

Of late, however, valuations seem rather stretched — or at least less sensitive to rates.

Even within technology, sensitivity to rates, which was once rather strong, has broken down.

Perhaps part of this has to do with the top 10% of the S&P 1500 having less sensitivity to rising interest rates, and with a similarly concentrated set of very large companies leading stock market performance this year.

Nevertheless, September is upon us and it tends to be a rather difficult month for stocks. 55% of the time since 1928 the stock market closed down in September.

Housing is too hot to handle

Would you look at that surge of prices within Canadian real estate? Absolutely stunning. Certainly makes the unaffordability situation in the US look tame by comparison.

Nevertheless, it is rather expensive to buy a home in America, with the cost to rent nearly $1,000 less per month.

These surging housing costs have brought down the Goldman Sachs Housing Affordability index to all-time lows.

While at the same time the level of Realtors in the US is near an all-time high.

If only real estate agents could conjure new homes into existence…

Paying too much

Inflation doesn’t just exist within the price of stocks or homes, though. It is widespread. We see it everywhere, every day. Hospital services, college tuition and textbooks, medical care, and childcare have surged. Food is rapidly moving higher in price as well.

Even the price of new vehicles have become, as one expert says, “the least affordable [..] in modern history”.

Meanwhile, that expensive tuition cost, underwritten by government-backed lending which seems cost insensitive, has led to a ballooning of student debt. That same debt cannot be discharged by way of bankruptcy protection either, unlike most other types of debt in the US.

Wealth disparities grow

With (asset as well as goods and services) inflation, the number of millionaires has risen in the US. That is to say, while the price of investments has appreciated, so too has the purchasing power of the dollar been reduced. There are more millionaires, but being a millionaire means a lot less in 2022 than it did in 2000.

Nevertheless, the distribution of wealth in the US is a matter that warrants some degree of scrutiny. Along the lines of generational wealth division, baby boomers are easily the most wealthy, which makes sense given their age, but millenials are not amassing wealth the same way that GenX had at the same age.

This is a concern that’s likely put many in a more difficult financial situation as they age. A big driver of this disparity is that many millenials have not been able to afford to buy a house in the US.

Wealth disparity isn’t just driven by age, however. The top 10% own 70% of US wealth, a level of concentration that has continued to rise over the last 23 years while at the same time the relative wealth of the bottom 90% has diminished comparatively.

In fact, the wealth disparity in the US is such that 40% of US adults have less than $1,000 in savings as the number of millionaires surges. A rather stark contrast, indeed.

Interesting, too, when considering that pay of CEOs (and potentially other leadership and managers) isn’t always correlated to performance. It does begin to create some rather interesting lines of inquiry for investors to consider when looking at overpaid executives.

Lower taxes? Higher desirability

Some states with lower taxes, like Texas, Florida, and Tennessee, are seeing inflows of both families and businesses. Meanwhile, California and New York are seeing a relative exodus of population.

Credit or debt it?

As consumer loans tighten, payrolls often drop. Tighter lending standards in a consumer-driven economy have powerful second order impacts.

As rates and debts rise, we’re also seeing delinquencies moving higher, particularly within consumer loans. This suggests that consumer lending is likely to become even tighter as conditions deteriorate.

If true, this points to a further build in unemployment claims. The percentage of US states with sharply rising year-over-year unemployment claims has been gradually moving higher all year long, which already sets us on a similar trajectory that has been experienced prior to other recessions.

This all begs the question, what will it cost to finance additional stimulus when rates are this high and the government has already spent generously on a number of stimulus measures over the last several years? Net interest paid on debt as a share of federal revenue is already set to rise, and may rise further should rates stay high and debt accumulation continue to outpace expectations.

Oil and gold set to firm further?

Oil production is slowing, the SPR is being rebuild, Saudi Arabia and Russia may further constrain supply, and demand may be set to further rise. Will price follow? We just hit the highest level in 2023, so it seems likely that it may.

Gold has been surprisingly resilient with rates and the dollar rising as much as they have. That suggests that we are likely in an environment where the metal is being accumulated ahead of a potential de-risking scenario in broader markets. Gold tends to perform quite well ahead of and even during recessions.

Positioning by CTAs according to Goldman Sachs is also extremely low, which suggests there may be an opportunity here. Something we wrote about for our premium readers recently.

China continues to look troubled

Finally, China, which once relied on construction to buoy its economy, is seeing anything but growth in that industry. Consumers aren’t participating. Exports are dropping. There’s a lot wrong with this picture. The government’s finally talking more seriously about stimulus, but will the measures that follow be enough?

Thanks for reading this Charts of the Week! Your questions and feedback are welcome in the comments below.