10 charts to consider with stocks at all-time highs 📊📈
10 charts to consider with stocks at all-time highs 📊📈
Plus a charted review of the macro crosscurrents 🔀
📈 Stocks rallied to all-time highs, with the S&P 500 setting an intraday high of 5,733.57 and a closing high of 5,713.64 on Thursday. For the week, the S&P rose 1.4% to end at 5,702.55. The index is now up 19.6% year to date and up 59.4% from its October 12, 2022 closing low of 3,577.03.
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I spent the past week at Future Proof Festival, the premier conference for the wealth management industry. I participated on a panel, recorded a podcast, caught up with some old friends, and made many new ones!
My favorite part was seeing many existing subscribers and getting to know new subscribers who let me know what was and wasn’t working for them with TKer and the other newsletters out there. It was extremely helpful, and I expect to incorporate some tweaks in the coming weeks and months.
One thing most subscribers seem to value are the charts and stats I curate from all the research that hits my inbox.
So without further ado, here are some charts and stats!
When the Fed cuts rates while stocks are at record highs ✂️
People often assume the Federal Reserve will cut interest rates only when the economy is in trouble. That’s sort of true, but there’s a lot of nuance.
One observation that many folks have been making is that the Fed’s recent rate cut is coinciding with a stock market near record highs. How can that make sense?
It actually happens to be the case that it’s not unusual for the Fed to cut rates with stocks near record highs. From Carson Group’s Ryan Detrick: “Here are the 20 times the Fed cut rates when the S&P 500 was within 2% of an [all-time high] (based on the day before the cut). Higher a yr later all 20 times and up 13.9% on avg. [Wednesday] was the 21st time.“
Here’s a more detailed look at those historical instances.
There’s a lot to be said about monetary policy. For our purposes, one thing we can say is that a rate cut when stocks are at record highs historically hasn’t been a bad sign for long-term investors.
For more, read: Why the Fed's first rate cut wouldn't be that big of a deal ✂️ and There's a more important force than the Fed driving the stock market 💪
Tariffs are bad for exposed industries 🌏
That outlook for policy is a hot topic these days as the presidential nominees make their pitches ahead of the U.S. presidential election.
One controversial proposal involves tariffs on goods imported into the U.S.
Generally speaking, tariffs are considered bad news for the industries exposed. From Morgan Stanley Wealth Management: “In January 2018, Trump imposed tariffs on solar panels and washing machines of 30% to 50%. In March 2018, he imposed tariffs of 25% on steel and 10% on aluminum from most countries, which, according to Morgan Stanley & Co. Research, covered an estimated 4.1% percent of US imports. Following these measures, industries impacted by the tariffs underperformed. For example, both the Invesco Solar ETF and the VanEck Steel ETF declined by more than 11% in the first six months following enactment (see Exhibit 8). Tariff related pressures and trade uncertainty at the time caused both solar and steel to underperform the S&P 500 until mid-2019.“
For more on the effect of policy, read: The truth about corporate tax reform and earnings, charted 📈 and On presidents, the stock market, and the big picture for investors 🖼
Reshoring remains a hot topic ☎️
The COVID-19 pandemic exposed a lot of vulnerabilities in the global supply chain. Many big companies have responded by moving links of their supply chain to the U.S. or closer to the U.S.
And they continue to talk about these plans. BofA’s Savita Subramanian addressed it in a note to clients on Thursday: “Reshoring and near-shoring commentary is evident across a broad array of corporates. Reshoring mentions on earnings calls continue to climb…“
This is could be bullish for capex spending, which is bullish for economic activity.
For more on capex spending, read: Companies are investing in their business and 'Check yourself' as the data zig zags ↯
AI is a tailwind for profit margins 🤖
Stubbornly high profit margins continue to surprise many. Are they sustainable?
In the near-term, the answer seems to be yes. Analysts expect companies to benefit from operating leverage as modest revenue growth leads to strong earnings growth.
Longer term, companies are expected to benefit from improved efficiencies thanks to the deployment of AI-technologies.
BofA recently surveyed its analysts about the impact of AI: “BofA Global Research analysts found that enterprise AI implementations are moving from pilots to production, which could boost S&P operating margins by 200 basis points (bps) over the next five years, equivalent to approximately $55 billion in cost savings, annually. Surveyed analysts expect AI to drive margin expansion for 23 of the 25 industry groups globally, with implementations potentially boosting both semis and software margins by around five percent. They also note that companies within semis and software may also see AI-driven revenue increase by 34% and 25%, respectively, over the next five years.“
For more, read: Profit margins are rising again as macro narratives shift 🤯, A sneak preview of Wall Street's outlook for 2025 🔭, and Companies everywhere confirm AI is happening 🤖
Earnings growth is broadening out 👍
For a little while, earnings growth had been largely driven by the big tech and communication services companies, particularly the so-called “Magnificent Seven.”
Those concerned about market concentration can find solace in the fact that more companies across industries are expected to contribute to the stock market’s earnings prospects. From BlackRock’s Sept. 9 note to clients: “We see a narrowing gap in earnings growth between U.S. tech companies and the rest of the market – even if tech still leads the way – suggesting U.S. equity returns can broaden.“
For more, read: Narratives will change, and yet the stock market will go up 🆙 and The other 493 could be heating up 🔥
More stocks are outperforming in Q3 🙏
As we always say, earnings are the most important long-term driver of stock prices (see TKer Stock Market Truth No. 5). And so if earnings growth prospects are broadening out, then it shouldn’t be too surprising to learn that stock price growth is broadening out.
BMO’s Brian Belski flagged an interesting stat about this topic in his note to clients on Thursday (emphasis added): “It is no secret that a handful of mega-cap tech stocks have been the driving force behind market gains for much of the past two years and this has led to concentration worries amongst investors given the bloated valuations of some of these stocks. However, an interesting development has occurred alongside the most recent market rebound during 3Q – these stocks have underperformed the rest of the index for the first time in nearly two years and is something we find reassuring since the S&P 500 is nearing records again without this segment of the market leading the way. In addition, participation levels have also improved dramatically since 3Q started as 339 S&P 500 stocks have outperformed the broader index – the highest level in about 22 years.“
For more, read: All stocks are not created equal ⚖️ and The other 493 could be heating up 🔥
Earnings usually go up 📈
The U.S. stock market has been going up for a very long time. Why?
Because earnings have been going up for a very long time. Just take a look at this very long-term chart of S&P 500 earnings per share from Deutsche Bank:
For more, read: A very long-term chart of U.S. stock prices usually going up 📈 and Earnings are the most important driver of stock prices💰
This bull market is young 👶
We’re almost two years into this bull market. Does that mean we’re nearing the end of this rally?
On Friday, All Star Charts’ Grant Hawkridge charted the path of history’s bull markets. “So far, it is below-average,“ he said.
Grant shared a more detailed look at the historical numbers. The median bull market lasted 978 trading days. The average was 1,131 days.
For more, read: Bull markets are usually longer and stronger than this 🐂
When the yield curve disinverts ⚠️
As TKer subscribers know, I’m not crazy about reading too much into single metric market indicators like the yield curve. More here and here.
That said, the yield curve gets a lot of attention and it recently disinverted.
Here’s what Goldman Sachs recently observed about yield curve disinversions and the stock market: “On average, US equities delivered the strongest forward returns if the US economy was already in a recession at the time of the US 2s10s dis-inversion – the market usually would have already sold off at the start of the recession and rebounded not long after the yield curve dis-inverted. Unsurprisingly, equity prices tended to consolidate if the yield curve dis-inversion was followed by a recession within the following year. On the other hand, equities typically delivered positive albeit low returns if the US economy avoided a recession.”
Long story short, the real signal comes from whether or not the economy goes into recession, which the yield curve hasn’t been particularly helpful in predicting lately.
For more, read: When two popular recession indicators failed 👎 and Rule No. 1 of analyzing the economy 📋
Much of the stock market’s gains have come when the market is closed 🤯
Bespoke Investment Group makes some of the most fascinating observations in their killer research.
In their Sept. 13 note to clients, they observed: “…this year, nearly all of the market’s gains have come from moves outside of regular trading hours. As shown, had you hypothetically bought SPY at the close every day and sold it as the next open, you’d be up 13.8% this year. Had you done the opposite and bought SPY at the open every trading day and sold it at that day’s close, you’d be up just 3.3%.“
Who knows what explains this phenomenon? And who knows if it’ll continue?
All I know is I’m not crazy about trading in and out of the market at such a high frequency.
In fact, one of my favorite quotes about investing comes from Bespoke’s Paul Hickey: “A one-day holding period, it’s a coin flip. The longer you’re willing to stick to it, the better. … Markets have never been down over a 16 year stretch or longer. Time heals in the markets.”
For more on trading and investing, read: Smart people agree that the best investing wisdom shares a common theme 🧐
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🔊 I was on Odd Lots’ Lots More podcast with Bloomberg’s Joe Weisenthal and Tracy Alloway! We talked about the RIA business, wealth in America, newsletters, market volatility, monetary policy, how our favorite bands from back in the day are still doing shows, and more! Listen to it on Apple Podcasts, YouTube, or Bloomberg!
Reviewing the macro crosscurrents 🔀
There were a few notable data points and macroeconomic developments from last week to consider:
✂️ Fed cuts rates. The Federal Reserve announced its first interest rate cut since March 2020. On Wednesday, the Fed lowered its benchmark interest rate target range to 4.75% to 5%, down from 5.25% to 5.5%.
“Recent indicators suggest that economic activity has continued to expand at a solid pace,” the central bank said on Wednesday in its monetary policy statement. “Job gains have slowed, and the unemployment rate has moved up but remains low. Inflation has made further progress toward the Committee's 2% objective but remains somewhat elevated.“
As we’ve been discussing for most of this year, I think this whole matter of rate cuts is not that big of a deal. Yes, monetary policy matters, and it can move the needle on the economy. But monetary policy decisions are much more consequential, market-moving events during times of stress or crisis in the markets or the economy. Read more about my argument here, here, here, here, and here.
For more on how we got here and what’s next, read: The Fed closes a chapter with a rate cut ✂️
🛍️ Shopping rises to new record level. Retail sales rose 0.1% in August to a record $710.8 billion.
Strength was led by online shopping, health and personal care. Weakness was led by gas stations, which 1.2% amid falling gas prices.
For more on the consumer, read: There's more to the story than 'excess savings are gone' 🤔 and The US economy is now less ‘coiled’ 📈
💳 Card spending data is stable. From Bank of America: “Total card spending per HH was up 1.4% y/y in the week ending Sep 14, according to BAC aggregated credit & debit card data. Within sectors, we report, entertainment saw the biggest increase since last week followed by department stores & furniture. And, transit and gas (on the back of lower gas prices) saw a decline.”
For more on personal consumption, read: The state of the American consumer in a single quote 🔊
💼 Unemployment claims fall. Initial claims for unemployment benefits declined to 219,000 during the week ending September 14, down from 230,000 the week prior. This metric continues to be at levels historically associated with economic growth.
For more on the labor market, read: The labor market is cooling 💼
🏚 Home sales fall. Sales of previously owned homes fell by 2.5% in August to an annualized rate of 3.86 million units. From NAR chief economist Lawrence Yun: "Home sales were disappointing again in August, but the recent development of lower mortgage rates coupled with increasing inventory is a powerful combination that will provide the environment for sales to move higher in future months. The home-buying process, from the initial search to getting the house keys, typically takes several months.”
For more on housing, read: The U.S. housing market has gone cold 🥶
💸 Home prices cooled. Prices for previously owned homes declined from last month’s levels, but they remain elevated. From the NAR: “The median existing-home price for all housing types in August was $416,700, up 3.1% from one year ago ($404,200). All four U.S. regions posted price increases.”
🏠 Homebuilder sentiment improves. From the NAHB’s Carl Harris: “Thanks to lower interest rates, builders now have a positive view for future new home sales for the first time since May 2024. However, the cost of construction remains elevated relative to household budgets, holding back some enthusiasm for current housing market conditions. Moreover, builders will face competition from rising existing home inventory in many markets as the mortgage rate lock-in effect softens with lower mortgage rates.”
🔨 New home construction rises. Housing starts rose 9.6% in August to an annualized rate of 1.36 million units, according to the Census Bureau. Building permits grew 4.9% to an annualized rate of 1.48 million units.
🏠 Mortgage rates fall. According to Freddie Mac, the average 30-year fixed-rate mortgage fell to 6.09%, down from 6.2% last week. From Freddie Mac: “Mortgage rates continued declining towards the six percent mark, reviving purchase and refinance demand for many consumers. While mortgage rates do not directly follow moves by the Federal Reserve, this first cut in over four years will have an impact on the housing market. Declining mortgage rates over the last several weeks indicate this cut was mostly baked in, but rates will likely fall further, sparking more housing activity.”
There are 146 million housing units in the U.S., of which 86 million are owner-occupied and 39% of which are mortgage-free. Of those carrying mortgage debt, almost all have fixed-rate mortgages, and most of those mortgages have rates that were locked in before rates surged from 2021 lows. All of this is to say: Most homeowners are not particularly sensitive to movements in home prices or mortgage rates.
For more on mortgages and home prices, read: Why home prices and rents are creating all sorts of confusion about inflation 😖
⛽️ Gas prices tick lower. From AAA: “The national average for a gallon of gas dipped a mere two cents since last week to $3.22. Gas prices had been falling by more than twice as much recently, but the arrival of Hurricane Francine to the Gulf Coast created some temporary issues for nearby oil production and refining.”
For more on energy prices, read: Higher oil prices meant something different in the past 🛢️
😬 This is the stuff pros are worried about. According to BofA’s July Global Fund Manager Survey, "40% of FMS investors view US recession as the biggest 'tail risk'."
The truth is we’re always worried about something. That’s just the nature of investing.
For more on risks, read: Sorry, but uncertainty will always be high 😰, Two times when uncertainty seemed low and confidence was high 🌈, and What keeps me up at night 😵💫
🛠️ Industrial activity rises. Industrial production activity in August rose 0.8% from the prior month with manufacturing output increasing 0.9%.
For more on activity stabilizing as inflation cools, read: The bullish 'goldilocks' soft landing scenario that everyone wants 😀
📈 Near-term GDP growth estimates remain positive. The Atlanta Fed’s GDPNow model sees real GDP growth climbing at a 2.9% rate in Q3.
For more on economic growth, read: Economic growth: Slowdown, recession, or something else? 🇺🇸
Putting it all together 🤔
We continue to get evidence that we are experiencing a bullish “Goldilocks” soft landing scenario where inflation cools to manageable levels without the economy having to sink into recession.
This comes as the Federal Reserve continues to employ very tight monetary policy in its ongoing effort to get inflation under control. Though, with inflation rates having come down significantly from their 2022 highs, the Fed has taken a less hawkish stance in recent months — even cutting interest rates.
It would take more rate cuts before we’d characterize monetary policy as being loose or even neutral, which means we should be prepared for relatively tight financial conditions (e.g., higher interest rates, tighter lending standards, and lower stock valuations) to linger. All this means monetary policy will be relatively unfriendly to markets for the time being, and the risk the economy slips into a recession will be relatively elevated.
At the same time, we also know that stocks are discounting mechanisms — meaning that prices will have bottomed before the Fed signals a major dovish turn in monetary policy.
Also, it’s important to remember that while recession risks may be elevated, consumers are coming from a very strong financial position. Unemployed people are getting jobs, and those with jobs are getting raises.
Similarly, business finances are healthy as many corporations locked in low interest rates on their debt in recent years. Even as the threat of higher debt servicing costs looms, elevated profit margins give corporations room to absorb higher costs.
At this point, any downturn is unlikely to turn into economic calamity given that the financial health of consumers and businesses remains very strong.
And as always, long-term investors should remember that recessions and bear markets are just part of the deal when you enter the stock market with the aim of generating long-term returns. While markets have recently had some bumpy years, the long-run outlook for stocks remains positive.
For more on how the macro story is evolving, check out the the previous TKer macro crosscurrents »
Key insights about the stock market 📈
Here’s a roundup of some of TKer’s most talked-about paid and free newsletters about the stock market. All of the headlines are hyperlinked to the archived pieces.
10 truths about the stock market 📈
The stock market can be an intimidating place: It’s real money on the line, there’s an overwhelming amount of information, and people have lost fortunes in it very quickly. But it’s also a place where thoughtful investors have long accumulated a lot of wealth. The primary difference between those two outlooks is related to misconceptions about the stock market that can lead people to make poor investment decisions.
The makeup of the S&P 500 is constantly changing 🔀
Passive investing is a concept usually associated with buying and holding a fund that tracks an index. And no passive investment strategy has attracted as much attention as buying an S&P 500 index fund. However, the S&P 500 — an index of 500 of the largest U.S. companies — is anything but a static set of 500 stocks.
The key driver of stock prices: Earnings💰
For investors, anything you can ever learn about a company matters only if it also tells you something about earnings. That’s because long-term moves in a stock can ultimately be explained by the underlying company’s earnings, expectations for earnings, and uncertainty about those expectations for earnings. Over time, the relationship between stock prices and earnings have a very tight statistical relationship.
Stomach-churning stock market sell-offs are normal🎢
Investors should always be mentally prepared for some big sell-offs in the stock market. It’s part of the deal when you invest in an asset class that is sensitive to the constant flow of good and bad news. Since 1950, the S&P 500 has seen an average annual max drawdown (i.e., the biggest intra-year sell-off) of 14%.
High and rising interest rates don't spell doom for stocks👍
Generally speaking, rising interest rates are not welcome news for the economy and the stock market. They represent higher financing costs for businesses and consumers. All other things being equal, rising rates represent a hindrance to growth. However, the world is complicated, and this narrative comes with a lot of nuance. One big counterintuitive piece to this narrative is that historically, stocks have actually performed well during periods of rising interest rates.
How stocks performed when the yield curve inverted ⚠️
There’ve been lots of talk about the “yield curve inversion,” with media outlets playing up that this bond market phenomenon may be signaling a recession. Admittedly, yield curve inversions have a pretty good track record of being followed by recessions, and recessions usually come with significant market sell-offs. But experts also caution against concluding that inverted yield curves are bulletproof leading indicators.
How the stock market performed around recessions 📉📈
Every recession in history was different. And the range of stock performance around them varied greatly. There are two things worth noting. First, recessions have always been accompanied by a significant drawdown in stock prices. Second, the stock market bottomed and inflected upward long before recessions ended.
In the stock market, time pays ⏳
Since 1928, the S&P 500 generated a positive total return more than 89% of the time over all five-year periods. Those are pretty good odds. When you extend the timeframe to 20 years, you’ll see that there’s never been a period where the S&P 500 didn’t generate a positive return.
What a strong dollar means for stocks 👑
While a strong dollar may be great news for Americans vacationing abroad and U.S. businesses importing goods from overseas, it’s a headwind for multinational U.S.-based corporations doing business in non-U.S. markets.
Economy ≠ Stock Market 🤷♂️
The stock market sorta reflects the economy. But also, not really. The S&P 500 is more about the manufacture and sale of goods. U.S. GDP is more about providing services.
Stanley Druckenmiller's No. 1 piece of advice for novice investors 🧐
…you don't want to buy them when earnings are great, because what are they doing when their earnings are great? They go out and expand capacity. Three or four years later, there's overcapacity and they're losing money. What about when they're losing money? Well, then they’ve stopped building capacity. So three or four years later, capacity will have shrunk and their profit margins will be way up. So, you always have to sort of imagine the world the way it's going to be in 18 to 24 months as opposed to now. If you buy it now, you're buying into every single fad every single moment. Whereas if you envision the future, you're trying to imagine how that might be reflected differently in security prices.
Peter Lynch made a remarkably prescient market observation in 1994 🎯
Some event will come out of left field, and the market will go down, or the market will go up. Volatility will occur. Markets will continue to have these ups and downs. … Basic corporate profits have grown about 8% a year historically. So, corporate profits double about every nine years. The stock market ought to double about every nine years… The next 500 points, the next 600 points — I don’t know which way they’ll go… They’ll double again in eight or nine years after that. Because profits go up 8% a year, and stocks will follow. That's all there is to it.
Warren Buffett's 'fourth law of motion' 📉
Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, “I can calculate the movement of the stars, but not the madness of men.” If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.
Most pros can’t beat the market 🥊
According to S&P Dow Jones Indices (SPDJI), 59.7% of U.S. large-cap equity fund managers underperformed the S&P 500 in 2023. As you stretch the time horizon, the numbers get even more dismal. Over a three-year period, 79.8% underperformed. Over a 10-year period, 87.4% underperformed. And over a 20-year period, 93% underperformed. This 2023 performance follows 13 consecutive years in which the majority of fund managers in this category have lagged the index.
Proof that 'past performance is no guarantee of future results' 📊
S&P Dow Jones Indices found that funds beat their benchmark in a given year are rarely able to continue outperforming in subsequent years. For example, 334 large-cap equity funds were in the top half of performance in 2021. Of those funds, 58.7% came in the top half again in 2022. But just 6.9% were able to extend that streak through 2023. If you set the bar even higher and consider those in the top quartile of performance, just 20.1% of 164 large-cap funds remained in the top quartile in 2022. No large-cap funds were able to stay in the top quartile for the three consecutive years ending in 2023.
The odds are stacked against stock pickers 🎲
Picking stocks in an attempt to beat market averages is an incredibly challenging and sometimes money-losing effort. In fact, most professional stock pickers aren’t able to do this on a consistent basis. One of the reasons for this is that most stocks don’t deliver above-average returns. According to S&P Dow Jones Indices, only 24% of the stocks in the S&P 500 outperformed the average stock’s return from 2000 to 2022. Over this period, the average return on an S&P 500 stock was 390%, while the median stock rose by just 93%.
