Charts of the Week

Did you know that only 59% of the companies in the Russell 2000 make money? The rest, largely small cap speculative growth companies, aren’t profitable. That’s one reason that we believe long IWN (Russell 2000 value) and short IWO (short Russell 2000 growth) could be a good pair trade for the first half of 2024.

The equity-bond return correlation breached 60% in 2023, marking the highest correlation in about a quarter century. The shorter-term 20-day rolling correlation has dropped recently, however, from 0.90 to 0.61 as equities push higher as bonds sell down.

Soft landing has become the consensus view now, which is a curious contradiction given that Fed Funds Futures are pricing in six rate cuts in 2024. The latter of which would suggest a hard landing. Who’s right, then? Time will tell, but what’s most curious about this is if the market really did expect a soft landing it should probably have a much lower outlook for cuts, perhaps 2-3.

We contrast the above image with the below, whereas each Fed rate tightening cycle has led to a major financial failure of one kind or another. While of course we did see Silicon Valley Bank and First Republic, was that all or is there more to come? If the latter, perhaps those six rate cuts being priced in makes more sense.

The United States has become the largest producer of crude oil in the world, and is maintaining that lead for now, accounting for 15% of all the world’s production. Increased efficiency, allowing less rigs to produce more oil, has also helped producers increase profit margins.

Which is one reason we remain bullish on the energy space despite the short-term pullback in prices. It is objectively the cheapest sector in the S&P 500 and we believe some of the better names, including ideas we’ve identified recently, could outperform.

Saudi Arabia’s breakeven oil price continues to rise, which is now estimated at $91 before considering the investments being made by their PIF, which brings the price to $108. This all illustrates the desire for the kingdom to increase the price of oil to at least the mid-80s so that their budget deficit is more manageable.

In the US, natural gas storage levels are above the 5-year maximum range, suggesting that there is ample supply. 2023 was the warmest year on record, and going with that same theme the winter had a slow start and natural gas usage for residential and commercial heating has remained lower than usual as a result.

January is also a seasonally poor time of year, with average downside of 5.7% and positive returns only 33% of the time from 2009-2023.

Shipping rates exploded higher to kick off 2024 as tensions in the Red Sea surged. Today Houthis staged their largest attacks on major freighters, with the US and other allies shooting down many attack attempts. The oil market and many of the impacted shippers seemed to ignore this news, at least for now. Though we suspect if tensions continue to escalate, we could see a boost in container prices, oil, and certain shipping stocks.

Leverage in China is at an all-time high, as is the intensity of credit necessary to stimulate economic growth. The country is struggling under the weight of increasing defaults within real estate development companies and local governments. So far the stimulus measures taken have been insufficient, needing to scale up at least 5-6 fold in size to ameliorate growing insolvency risks.

More couples in the US are meeting online over the last decade, to such an extent that it has become the most popular method that people are meeting to connect. It makes sense, too, as meeting online allows perspective partners to find others based on mutual interests and goals. This has helped online dating sites become a more attractive category for investment.

Some are even meeting on LinkedIn, which is quite interesting. LinkedIn has transformed into more of a social network, and away from strictly being a place to get jobs or recruit talent. Over the last decade it’s taken shape as a more professional version of Facebook.

Despite all of this online meeting, family formation has fallen as the rate at which Americans are getting married has slowed materially from one generation to the next. Of late, a part of this is more than likely driven by the lack of affordability to 1) buy a home; 2) raise a child (or children); 3) pay for school; 4) manage healthcare costs.

In the United States we see homelessness at elevated levels in New York, Vermont, Oregon and California. A surging cost of living helped to bring up a record level of homelessness among the age group that the Baby Boomer generation finds itself within, as well. The highest such level of homelessness for that age group since the Great Depression.

To add context to the above chart, we can see how a heightened cost of living is one leading driver of homelessness.

Office vacancy rates in the US are hitting multi-decade highs, particularly within metropolitan areas. Many businesses have embraced cost cutting initiatives to reduce office space, hybrid or remote work, and also reduced what are now being seen as overzealous expansion plans.

This vacancy rate isn’t just a US-centric phenomenon, however, as we’re seeing it all around the world. North America is simply leading the way vs the global average.

In another area of commercial real estate, more than $1 trillion of multifamily-linked debt will mature over the next four years, with the bulk of it in 2027. This year, however, will be a rather significant year as well. Which means it’s important to monitor this situation, and particularly any stress that may lead to negative impacts for lenders.

In Canada we saw the largest population growth within a single year ever, which was primarily driven by outsized immigration flows into the country.

Over the last 50 years we’ve seen incredible changes in video gaming. Arcades once led revenue, then consoles, handhelds had their day in the sun, as have PCs. But the growth within mobile is absolutely staggering over the last decade.

Tech was an extremely hot industry for jobs in 2021 and 2022. In fact, IT alone added 267K jobs in 2022. In 2023? Only 700. It does beg the question what this means for IT spend, as one would assume it means there may be some softening in discretionary areas in particular. We do remain bullish of high quality names in cybersecurity, though.

Apple is a juggernaut by any definition. While the company’s growth remains somewhat constrained, its profitability and overall business model is impressive to say the least.

That does it for this week’s Charts of the Week! We hope you enjoyed it. Our Charts of the Year for 2023 is coming out shortly and should be a fun read!