The charts and themes from the past week that tell an interesting story in markets and investing…
1) October to the Rescue?
The S&P 500 is rallying again, up nearly 12% from its intraday low on October 13. This is the 5th major bounce since the market peaked on January 4, with the previous four all ultimately failing to sustain momentum with lower lows to follow.
Is this time different? Students of market history may find some hope in the fact that October has frequently been a bear killer. Octobers in 2011, 2002, 1998, 1998, 1987, 1974, 1966, and 1957 all marked the lows of bear markets.
Will that be the case again this year? Based on a poll I conducted last week, the majority seem skeptical…
2) Another 75 bps on the Way
High on the list of concerns continues to be tightening Federal Reserve policy, with the market pricing in another 75 bps hike when the Fed meets on November 2. That would be the 4th 75 bps hike in a row and bring the Fed Funds Rate up to a new range of 3.75-4.00%. The last time the Fed Funds Rate was that high? January 2008.
With another hike expected at the December meeting (currently 50 bps to 4.25%-4.50%), the bond market continues to adjust at a rapid pace. The 3-Month Treasury Bill yield has moved up to 4.18%, its highest level since October 2007. It entered the year at just 0.06%.
3) Hello 7%
Speaking of rising rates, the 30-Year Mortgage Rate in the US has moved above 7% for the first time since 2002.
The impact this is having on affordability cannot be overstated.
Which in turn has translated into lower demand, plummeting transactions, and now lower prices.
Every city in the Case-Shiller 20-city index saw a decline in home prices in August. The last time all 20 cities were down in a single month was in March 2011. San Francisco is showing the largest decline thus far, -8.2% from its peak in May.
Nationally, US Home prices fell in August for the second straight month, with the 2-month decline of -1.3% being the largest we’ve seen since 2010. In July, the streak of 126 consecutive monthly increases in US home prices came to an end.
When the last housing bubble peaked in February 2007, prices fell 26% nationally. The same decline today would only bring home prices back to September 2020 levels. That’s a reflection of how much prices have gone up in the last phase of the current bubble, a 40% increase in just two years.
4) Just a Coincidence?
Over the last 3 years, both the US Money Supply (M2) and US Home Prices have increased 43%.
Just a coincidence? No, as the huge increase in the money supply has been one of the leading causes of inflation.
On that front, though, we’re seeing the opposite trend of late. The US Money Supply actually decreased 1.1% over the last 6 months, the largest decline over a 6-month period on record (note: M2 data goes back to 1959).
5) The Recession Debate
After 2 consecutive negative quarters, US Real GDP bounced back in Q3, hitting a new high. At the same time, the year-over-year growth rate moved down to 1.8%, the slowest since Q1 2021.
So the “are we in a recession” debate continues, with many now arguing that we can’t possibly be in one given that Real GDP at a new high?
Which begs the question: has the NBER ever called a period a recession even with Real GDP hitting a new high?
The answer: Yes.
-The 2008-09 recession was deemed to have started in January 2008 even though Q2 ’08 real GDP hit a new high (Q1 growth declined).
-The 2001 recession was deemed to have started in April 2001 even though Q2 ’01 real GDP hit a new high (Q1 growth declined).
Does that mean we could already be in a recession today? Yes, but regardless of whether we are currently in one or not, the evidence of future economic weakness continues to build.
The latest signal: an inversion of the 10-year and 3-month Treasury yields, which has preceded the last 8 recessions in the US. That spread (-17 bps) is now the most inverted since February 2020.
6) Watching the E in P/E
With 66% of companies reported, S&P 500 Q3 GAAP earnings are down 4.7% year-over-year, the 2nd quarter in row of negative YoY growth.
The market, of course, is well aware of this fact, with the S&P 500 having one of its most difficult years on record.
So where does that leave valuations today?
Cheaper, but still not meaningfully cheap. The average year-end P/E ratio for the S&P 500 since 1989 is 19.6. We entered the year 17% above that level and are currently 3% below it.
The big question, of course, is whether the E will contract in the coming quarters as it tends to during recessionary periods. Thus far we’ve only seen a minor decline in overall earnings, but should that decline worsen, stocks that currently appear to be “cheap” may be viewed in a different light.
That’s certainly been the case for Facebook, which saw its revenues fall 4.5% over the last year, the largest decline in company history.
Net income was down 52% year-over-year, a stunning reversal of the enormous increases in profits during 2020-21. Facebook’s P/E ratio is now under 10 for the first time and would be considered “cheap” but for the fact that many believe the E will continue to compress.
Investors in the stock have been running for the exists. Facebook’s market cap is down 75% from is peak last September, at its lowest level since January 2016.
8) Tech Slowdown Continues
The slowdown in the tech space is not limited to Facebook.
Netflix posted a 5.9% increase in revenue growth in Q3, the slowest in company history.
Google and Microsoft saw their slowest growth rates since 2020…
We’re seeing the opposite trend in the Energy sector (revenues/profits rising), leading to a sharp reversal in leadership.
8) News vs. Reaction to News
Tech is not the only sector hit by the economic slowdown. All of the big banks reported profits lower than the year-ago period.
It’s not the news but the reaction to the news that matters for investors, as the reaction reveals the expectations/sentiment before the event and the repositioning thereafter. And judging by the advances we’ve seen post-earnings, expectations were very low and sentiment was extremely bearish heading into the reports.
9) The Coming Stalemate
The US Budget deficit is widening again, hitting a 6-month high of $1.375 trillion in September (YoY change).
If the results of a recent poll I conducted are correct, however, we’re not likely to see a large increase in the deficit due to new spending packages. That’s because many are expecting control of the House and/or Senate to change hands after the November election, leading to a political stalemate.
10) Free Bird
Twitter is now a private company again. Elon Musk completed his acquisition last week for $44 billion, or $54.20 per share in cash. This is nearly 3x the current value of Snapchat, a social media platform with similar revenues and significantly more active users than Twitter. Given deteriorating market conditions, had Musk delayed his purchase by a few months, he would have likely been able to pay a substantially lower price.
11) The Hardest Game
Total Returns over the last 20 Years…
- S&P 500: +523%
- Berkshire Hathaway: +489%
Lesson: picking stocks and outperforming the index is extremely hard, even for the best investors.
And that’s it for this week.
Have a great week everyone!
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