Charts of the Week

Welcome to another Charts of the Week! We have a lot of ground to cover, so let’s get right to it.

Global Rates Roar Higher

Global rates have been surging, particularly over the last two years. This has been a historic increase, one where the cost of capital has surged and yet the global economy hasn’t ground to a halt. At least not yet.

Meanwhile the Federal Reserve, who was originally among the more aggressive central banks in their response to the COVID crash, seems intent to unwind its massive balance sheet, which could continue to exert upward pressure on the long-end of the yield curve.

Adding to that, household inflation expectations are rising and dragging the term premium on 10-year notes higher.

Expensive Risk vs Risk-Free Returns

Moving to the short end of the curve, and comparing it to the S&P 500’s earnings yield, shows an inverted equity risk premium. Which strongly suggests that 6-month Treasury bills are more attractive than the S&P 500 here.

Adding to that, valuations are quite lofty in the leadership of this market. The so-called “Magnificent 7” have a PE close to 45, largely without the growth to warrant such a high valuation.

The gap between QQQ and TLT remains wide, but it appears that QQQ is beginning to feel the gravity of falling sovereign duration price — and the pressure of rising rates. That said, earnings could certainly turn things around if the mega caps beat expectations. Microsoft certainly seems off to a promising start, but Google may have offset that to some degree with their lagging cloud growth.

Meanwhile, in a more speculative part of the market, rising rates are darkening the prospects for solar stocks.

Consumer Check-Up

There are signs that more households are struggling, as credit card delinquencies outside of the 100 largest banks have hit multi-decade highs.

Mortgage rates have also hit the highest level in 23 years, while applications have plummeted to lows not seen since 1995.

Which has created an enormous premium for home buying vs renting, with home buying over 50% more expensive.

Gen Z and millennials are also finding this economy rather challenging, with gig work not cutting it to make ends meet. About 50% of those 18-29 are living with family, the highest level since 1940.

Inflation Re-Acceleration?

We have been tracking signs that some components of inflation may be re-accelerating underneath the surface, including energy, components of agriculture and services. Speaking of which, health care costs are anticipated to rise at least 7% in 2024 for employers. That cost has to be passed on somehow…and it usually ends up being paid by the end consumer.

Live cattle prices have broken out to all-time highs, retracing somewhat of late. We’ve seen similar surges in cocoa, orange juice, olive oil, and sugar. This is driving the price of certain foods higher, and that’s another increased cost that consumers have to realize.

New Bull or Dead Cow Walking?

It doesn’t look a lot like a new bull, as we haven’t seen much of a de-risking. In fact, the opposite. The share of US households with stock holdings is at an all-time high, and the percentage of household net worth invested in stocks is also near-all time highs (which were made in 2021).

Additionally, from the bear market lows last year the market has been led by market cap weight rather than equal weight or small caps. A departure from every recent low that we’ve seen going back to 1982.

Of Hedge Funds and Money Markets

Hedge funds are aggressively shorting single stocks, and have been for much of 2023. Not so much index and ETF products, though. Is it a stock pickers market on the short side as well? These fund managers seem to think so.

They may be right, too, as outside of the sStarting Up and Ending Down

o-called “Magnificent 7” the rest of the S&P 493 are up about 2% YTD, meaning there were plenty of downside opportunities to capture alpha this year as well.

Meanwhile, there’s been the biggest exodus from money markets on record. Where is the money going? Some to stocks, some to settle tax and other bills, and a lot to fixed income, where the inflows continue as rising rates make returns from debt more attractive to investors.

Starting Up and Ending Down

2023 is proving to be an even more brutal year for fledgling firms than 2022, with companies dissolving at an increasing rate every quarter of this year.

China Remains in the Red

Record injections of cash, increasing promises of stimulus, and a reeling real estate market — the aspiring dynasty is attempting to shore up confidence amid a growing crisis.

This has led to record sales of US securities as the country attempts to defend its currency.

China seems to be leading world markets lower, as well, and the strong correlation between European (purple) and Chinese (black) stocks suggests that European stocks may be set to catch down. After all, China is a rather sizable trading partner.