19 charts that caught my eye 👀
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19 charts that caught my eye 👀
From recovering profit margins to poor economic news sentiment 📊
The stock market has had a rocky couple of weeks, which actually isn’t too unusual this time of year. The S&P 500 is down 3.4% in August so far. Still, the index is up an impressive 15.5% since the beginning of the year.
The past few weeks have come with some interesting updates in key market and economic data.
For the most part, these updates don’t really change the major narratives we’ve been covering here at TKer. But they do offer confirmation that we’ve got the narratives right.
Without further ado, here are 19 few charts that recently caught my eye.
Profit margins are holding up near record levels 🤑
Coming into Q2 earnings season, all eyes were on profit margins, which had come down a bit from record-high levels.
From Creative Planning’s Charlie Bilello: “S&P 500 profit margins expanded to 11.9% in Q2, the highest since Q1 2022 and well above the historical average of 8.9% since 2000.“
This matters because some strategists’ expectations for future earnings growth hinge on the earnings-amplifying operating leverage that comes with sales growth and resilient margins.
For more on this, read: All eyes on profit margins 👀
Earnings are expected to rise 📈
Earnings are the most important long-term driver of stock prices. And so, it’s a good thing that earnings are expected to grow after a brief period of weakness.
From Truist Advisory Services’ Keith Lerner: “From a fundamental perspective, as stocks have pulled back, forward earnings estimates have moved to an 11-month high. Consequently, the S&P 500 forward price-to-earnings ratio has reset from 19.6x, the highest level outside of the pandemic overshoot, to 18.5x. This is far from cheap by historical measures and relative to the rise in interest rates, but an improvement, nonetheless.“
For more on this, read: Stocks make more sense when you look forward, not backward 🚶♀️
Interest rates are up 📈
Interest rates have been moving higher. Last week, yields on long-term Treasuries reached their highest levels since the global financial crisis.
This will bear watching as higher rates are bad news for debt-laden companies who are due for some refinancing. Fortunately, many companies refinanced in recent years locking in low rates for years to come.
For more on this read: Why higher interest rates haven't crushed corporate profits 🤔and Why higher interest rates haven't crushed corporate profits [PART 2] 🤔
Rising interest rates seem bad for stocks in the short run 👎
All things being equal, rising interest rates aren’t great for stocks. So it’s not too surprising to see that the short-term, knee-jerk reaction to rising rates is lower stock prices.
From Ritholtz Wealth Management’s Michael Batnick: “This chart shows the 30-day change in the 10-year treasury rate and how stocks performed over the same time. From 2021-today, if the 10-year treasury rate was up, which it was 64% of the time, stocks fell 0.15% on average over the same time. If 10-year rates were down over a 30-day period, the S&P 500 gained 3.1% over the same time.“
For more on this, read: A bunch of ways higher interest rates are bad 👎
Rising interest rates seem not so bad for stocks in the longer run 🤷🏻♂️
Over longer periods of time, rising interest rates aren’t guaranteed to go hand in hand with lower stock prices.
From eToro’s Callie Cox: “Yields tend to increase this fast when the economy is getting stronger, and we know from recent data that this may be the case. History backs this up. Over the last 60 years, the 10-year yield’s biggest rallies happened at the beginning of economic cycles — and consequently, in the early stages of long stock market rallies. And here’s the kicker: Higher yields were more often a sign to lean into stocks, not run away from them.“
There’s no question that rising interest rates represent a challenge for companies. But the business environment is very complex, and history shows that the collective corporate world is adept at overcoming challenges.
For more on this, read: There's more to the story than 'high interest rates are bad for stocks' 🤨
Business investment inched up 🏭
Orders for nondefense capital goods ex-aircraft — aka core capex or business investment — climbed 0.1% in July to $73.6 billion.
The fact that these orders remain near record levels is a good sign for economic activity in the months to come.
For more on this, read: Three massive forces have fueled the economic expansion for the past two years 💪
Consumer finances remain strong 💰
While bank balances have come down from record highs, they remain much higher than prepandemic levels.
From Bank of America: “…households still appear to have significantly more cash in their checking and savings accounts than before the pandemic. Across all income cohorts in July 2023 the median checking and savings account was 54% higher than the average in 2019. Why don’t people feel like they are in a better place financially given these deposit ‘buffers’? One answer is that the levels of savings and deposits have come down from their peak in the first half of 2021. Lower and middle income groups saw the biggest percentage rise in their buffers relative to before the pandemic but have seen the largest decline in their balances since then, according to Bank of America deposit data.“
For more on consumer finances, read: The next massive consumer tailwind? 💨
Consumers are spending 🛍️
Even as consumer finances go from very strong to slightly less strong, data suggests consumer spending is holding up.
From SGH Macro’s Tim Duy: “Confounding the predictions that household spending would soon weaken, the BEA credit card data points to an ongoing strengthening trend over the past three months.“
For more on resilient spending, read: Don't underestimate the American consumer 🛍️
Many people are hearing a lot of negative economic news 📰
Despite economic data being unambiguously positive, many news consumers have a less rosy outlook on the economy.
From YouGov (via Catherine Rampell and Joe Weisenthal): “Many Americans say they are hearing mostly negative economic news, about four times as many as say the economic news has been positive (43% vs. 11%). What Democrats are hearing is roughly split between positive and negative stories; among Republicans, 6% are hearing mostly positive stories and 60% are hearing mostly negative ones.“
Even though most actual news about the economy is positive, the little bit of bad news tends to get outsized attention. Some of it has to do with readers’ tendency to gravitate toward bad news. Some of it has to do with social media platforms amplifying bad news. Some of it has to do with Google searches circulating data on what’s trending, which is often bad news. Some of it has to do with media companies prioritizing clicks — and bad news clicks. Combine all of that, and you get the perception that the economy is bad.
For more on this, read: Is good economic news really all that surprising? 📰
Gasoline prices are up ⛽️
While gasoline prices are down from last year’s levels, they have trended higher since the beginning of the year.
This bears watching as fluctuations in gasoline prices are known to have a significant impact on consumer sentiment. Though it’s also worth noting that weak consumer sentiment alone hasn’t caused consumers to curtail spending.
Yes, mortgage rates are up. But that’s only affecting new borrowers 🏡
While mortgage rates have risen sharply in recent periods, they are only affecting new homebuyers, which represent a minority of all home loan borrowers. As such, the effective average rate among all outstanding borrowers remains low.
From Bloomberg’s Bob Burgess: “The effective rate that borrowers are paying on their home loans is 3.60%.“
Fortune Magazine’s Lance Lambert shared a similar chart of the effective mortgage rate, but overlaid it with the market’s current mortgage rate, which is the blue line. From Lambert:
Blue line = average 30-year fixed mortgage rate
Purple line = effective mortgage rate of all outstanding mortgages
Green = when the "effective" rate is greater than the "market" rate
Red = when the "market" rate is greater than the "effective" rate
New monthly mortgage payments are surging 📈
High home prices and rising mortgage rates have made financing a home very expensive.
From Bloomberg’s Michael McDonough: “What a monthly mortgage payment would look like for a new home buyer in the U.S., based on the median existing home price and the average 30Y fixed-rate mortgage, assuming a 20% down payment:”
Many workers are on strike 🪧
From Axios’ Emily Peck: “About 205,500 workers were on strike in July, per a new tally from the Labor Action Tracker managed by Cornell's School of Industrial and Labor Relations. … The high number is largely due to the 160,000 actors and writers out on the picket lines now. And the number could get much larger in the coming months if 146,000 UAW members go out on strike.“
In the short-run, this is disruptive for the businesses and industries affected. In the long-run, this could end up being a win for everyone as those striking tend to be lower income workers, who tend to have a higher propensity to spend any additional money earned. And spending powers the gears of the U.S. economy.
Most people don’t keep the same job forever 💼
If you’ve changed jobs a couple of times during your adult life, you’re not alone.
From the Bureau of Labor Statistics: “Individuals born in the latter years of the baby boom (1957-64) held an average of 12.7 jobs from ages 18 to 56, according to the U.S. Bureau of Labor Statistics. Nearly half of these jobs were held from ages 18 to 24.“
I’m currently on my ninth job.
Demand for AI tech is hot 🤖
Businesses are very interested in incorporating artificial intelligence (AI) technology into their workflows in an effort to improve productivity and boost profitability. Chip giant Nvidia confirmed this sentiment in its earnings announcement last week.
From The Wall Street Journal: “Nvidia’s business has basically doubled in size compared with the same quarter last year, and that is almost entirely a result of booming demand for the company’s latest artificial-intelligence chips, which are being snapped up by tech giants building generative AI services. That demand drove Nvidia’s data center revenue to $10.3 billion in the recent quarter—a huge jump for a business that was running at less than $4 billion a quarter just six months ago.“
As I noted in a June 28 TKer Note, BlackRock CIO Tony Dispirito told me: “The demand is really real. ... The orders are there.“ We also talked about this at the 13-minute mark on The Compound & Friends podcast in July.
For more on this, read: Some thoughts on artificial intelligence... 🤖
The U.S. has limited exposure to China’s slowdown 🇨🇳
China, the world’s second largest economy, is seeing growth slow sharply. Wells Fargo economists used an Oxford Economics model to simulate what an economic “hard landing” in China could mean for the U.S., the Eurozone, and Japan. They found that U.S. GDP growth would be reduced by 0.1% in 2024 and 0.2% in 2025.
From Wells Fargo: “The relatively small effect on economic growth in these major economies reflects their limited export exposure to China. More broadly, total exports are equivalent to relatively small proportions of overall GDP in these large economies.“
In the stock market, time is an edge ⌛️
While it can be difficult to accurately predict the direction of the stock market in the short run, history shows the odds of positive returns improve when you extend your time horizon.
From Bespoke Investment Group: “Historically, the odds of the S&P 500 being up over any one-month time frame have been 62.6%. Over a year, the odds of being up jump to 74.6%, and over eight years, they jump to 97%. Since 1928, all 16+ year time frames have seen positive returns.“
For more on this, read: In the stock market, time pays ⏳
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19 charts that caught my eye 👀
Thanks Sam! I always find your posts really helpful and informative. They often make me consider questions like whether the shift from working from home will permanently mean more money in consumers' pockets. I no longer pay gas to drive to a train that cost a fortune. No daily picking up lunch or spur of the moment after work dinner or drinks. That's probably 1500/month saved in NYC. It's less social but less expensive. Just one of the many thoughts your posts spark.
Great article Sam. I got a kick out of the one about hearing negative economic news. That's not just a function of the actual facts, it's also a function of the source of the news.