A few charts to remember before you jump to conclusions 📊
Plus a review of the macro crosscurrents 🔀
Stocks ticked lower last week, with the S&P 500 declining 0.7%. The index is now up 10.9% from its October 12 closing low of 3,577.03 and down 17.3% from its January 3 closing high of 4,796.56.
It’s been an exciting few weeks for TKer. Since the one-year anniversary a month ago, TKer has added nearly 2,000 net new subscribers!
On Thursday, I had the privilege of speaking to a class taught by Greg Harmon, one of the savviest minds in trading. Harmon teaches financial markets at Case Western Reserve University’s business school.
Below are some charts I shared with his class. They’re a reminder for investors to be cautious with news headlines that may belie a greater, more nuanced truth. TKer subscribers may recognize some of them.
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. Read more here.
Beating expectations is generally a good thing. But when it comes to earnings announcements, “better-than-expected” has lost its meaning. Read more here.
Stock buybacks can lead to lower share counts. But is it a major driver of EPS growth? No. Read more here.
While the stock market returns about 8-10% per year on average, you rarely ever see the market produce an average return in a given year. Read more here.
Analysts’ forecasts are not destiny. They’ll get revised up, and they’ll get revised down. Manage your expectations with analysts’ expectations. Read more here.
A high or low P/E ratio won’t tell you where prices are headed next year. Read more here.
Employers lay off lots of workers every month, even during boom times…
… BUT even 1.3 million layoffs in a single month represent just 0.9% of total employment. Read more here and here.
While we’re on the subject of layoffs, it’s important to understand that all of the tech layoffs we’re reading about are not a sign that widespread layoffs are coming. Among other things, tech represents a very small share of total employment in the U.S. Read more here.
More from TKer:
Your guide to 'good news is bad news' and 'bad news is good news' 🙃
A sneak preview of Wall Street's 2023 stock market forecasts 🔭
Reviewing the macro crosscurrents 🔀
There were a few notable data points from last week to consider:
🚨 Consumers are spending. Retail sales jumped 1.3% in October, the biggest gain in eight months. Excluding autos and gas, sales were up a strong 0.9%.
Most retail categories saw gains.
🛍 Retailer anecdotes were mixed. Here are some headlines from the past week:
Walmart raises outlook as groceries boost sales, inventory glut recedes - CNBC
Target posts huge earnings miss as consumers pull back - Yahoo Finance
Lowe's, Home Depot Beat Earnings Amid Housing Slump - Investor’s Business Daily
TJX posts mixed earnings with profit above estimates but sales slightly light - MarketWatch
Keep in mind that these are just anecdotes. While an individual company’s performance is certainly affected by macroeconomic trends, they also face company-specific issues that may cause them to underperform or outperform their categories.
💳 Credit card balances are up. According to New York Fed data released Tuesday, household credit card balances jumped 15% in Q3, the biggest increase in at least 18 years of data.
Younger borrowers are carrying higher balances than before the pandemic.
While delinquencies are ticking up, it’s important to note that they’re below pre-pandemic levels. In other words, delinquencies are normalizing.
💵 Consumers still have a lot of excess savings. From Goldman Sachs: “…we estimate that households have drawn down about 25% of their excess savings so far and will have spent around 60% by end-2023.“ For more on excess savings and consumer financial strength, read this.
👍 Wholesale price inflation cools. According to the BLS, the producer price index in October was up 8.0% from a year ago. Adjusted for food and energy prices, core PPI was up 6.7%.
😞 Expectations for inflation got worse. From the NY Fed’s Survey of Consumer Expectations: “Median inflation expectations increased at both the one- and three-year-ahead horizons in October, by 0.5 and 0.2 percentage point, respectively, to 5.9% and 3.1%. Both increases were broad-based across age, education, and income groups… Median five-year-ahead inflation expectations, which have been elicited in the monthly SCE core survey on an ad-hoc basis since the beginning of this year and were first published in July 2022, increased by 0.2 percentage point to 2.4%…“
🥪 Food prices are cooling. From Bloomberg’s Javier Blas: “Take the monthly food-cost index compiled by the United Nations’ Food and Agriculture Organisation. Over the last two years, it surged inexorably higher, posting year-on-year increases of as much as 40% by the middle of 2021, and 20% to 30% in early-to-mid 2022. Since then, however, the index has fallen back sharply, paring its annual gains in October to just 1.9%. Based on current trends, the FAO index is likely to post in November its first annual drop in more than two years.“
🌾 Food giant says prices are coming down. From Bloomberg: “Food prices will probably decline next year, even as global crop stockpiles stay very tight, especially for oilseeds, said David MacLennan, chief executive officer of Cargill Inc., America’s largest private company.“
🦃 No Thanksgiving inflation at Walmart. From Axios’ Hope King: “Prices for a ‘typical Thanksgiving meal’ will be the same as last year, Walmart CEO Doug McMillon said on a call with analysts Tuesday morning.“
This will be welcome news for Walmart shoppers. According to the American Farm Bureau Federation, the average cost of Thanksgiving dinner this year is $64.05, up 20% from a year ago.
⛓ Inventory levels are up. According to the Census Bureau, business inventories increased by 0.4% in September.
The inventory/sales ratio was 1.33 during the month, up from 1.26 a year ago.
🛠️ Business investment has been holding up. From The Wall Street Journal: “Big U.S. companies are stepping up their spending on capital projects, putting expenditures on pace to set a quarterly record even as worries about a potential recession loom. Capital spending among companies in the S&P 500 in the third quarter is set to top $200 billion, according to S&P Dow Jones Indices, which analyzed data through Monday from roughly 90% of index components. That is on pace for a jump of about 20% from a year earlier, roughly in line with the first and second quarter’s growth rates.“ For more on capex, read this.
🏚 Home sales continue to tumble. Sales of previously owned homes fell 5.9% in October to an annualized rate of 4.4 million units. From NAR chief economist Lawrence Yun: "More potential homebuyers were squeezed out from qualifying for a mortgage in October as mortgage rates climbed higher. The impact is greater in expensive areas of the country and in markets that witnessed significant home price gains in recent years."
💸 Home prices are cooling. From the NAR: “The median existing-home price for all housing types in October was $379,100, a gain of 6.6% from October 2021 ($355,700), as prices rose in all regions. This marks 128 consecutive months of year-over-year increases, the longest-running streak on record.“
📉 Mortgage rates comes down a bit. According to Freddie Mac data, the average rate for the 30-year fixed rate mortgage was 6.61% as of November 17, down from 7.08% the week prior. From Freddie Mac: “Mortgage rates tumbled this week due to incoming data that suggests inflation may have peaked. While the decline in mortgage rates is welcome news, there is still a long road ahead for the housing market. Inflation remains elevated, the Federal Reserve is likely to keep interest rates high and consumers will continue to feel the impact.“
Putting it all together 🤔
While inflation appears to be cooling, it continues to be very hot. So we should expect the Federal Reserve to continue to tighten monetary policy, which means tighter financial conditions (e.g. higher interest rates and tighter lending standards). All of this means the market beatings will continue and the risk the economy sinks into a recession will intensify.
On the matter of recession risks, consumers are increasingly stretching their finances to maintain their spending. They’re accumulating more debt and a growing number of these folks are going delinquent.
But it’s important to remember that while consumer finances may be deteriorating, they are coming from a very strong position. Many still have excess savings to tap into and the labor market continues to be very favorable for workers. Indeed, strong retail spending data confirms this financial resilience. So it’s too early to sound the alarm on the consumer.
Overall, any downturn won’t 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 had a terrible year so far, the long-run outlook for stocks remains positive.
For more, check out last week’s TKer macro crosscurrents »
Best of TKer 📈
Here’s a roundup of some of TKer’s most talked-about paid and free newsletters. All of the headlines are hyperlinked to the archived pieces.
Why the recession we may or may not be heading for won't be that bad 💪
While the economy may not be in a recession now, it’s certainly slowing and is at risk of going into a recession. However, not every recession has to be an outright economic debacle like the global financial crisis or the Great Depression. Yes, unemployment would likely rise during the next recession, which would be unquestionably painful for those affected. But the losses could be limited and the duration of the economic contraction could be relatively short.
You can make any piece of data look bad if you try 🔄
There’s more than one way to frame a piece of economic or financial market data. It might be better than expected relative to economists’ expectations, but it could also be worse than expected relative to traders’ expectations. That same stat could be down on a month over month basis and also up on a year over year basis. It may be high relative to the 10-year average but low relative to the 5-year average. It may look bad on an absolute basis but it may look good relative to what may be the normal course of business. With that in mind, below are nine unsettling — albeit accurate — market observations that miss the point when you take a look at the big picture.
700+ reasons why S&P 500 index investing isn't very 'passive'💡
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. From January 1995 through April 2022, 728 tickers have been added to the S&P 500, while 724 have been removed.
Your guide to 'good news is bad news' and 'bad news is good news' 🙃
The Fed is actively trying to slow the economy — even if it means “some pain” for businesses and consumers — because it believes that is the prescription for getting inflation under control. In this world, good news about the economy is potentially bad news if it’s exacerbating the dislocation between supply and demand. Let’s review a few hypothetical headlines and examine why good news might be bad news — and vice versa.
The complicated mess of the markets and economy, explained 🧩
Economic growth has since been awesome, powered by tons of job growth. GDP, personal consumption, and home prices roared to record levels as the unemployment rate tumbled. One problem: Inflation. Why? Supply hasn’t been able to keep up with booming demand, a dynamic that’s been fanning the flames of inflation.
The market beatings will continue until inflation improves 🥊
While the stock market is likely to generate healthy returns in the long run, there’s good reason for investors to manage expectations in the short run as the Federal Reserve gets increasingly aggressive with monetary policy.
Consumers have an extra $2 trillion. But in some ways, it's an economic curse.💰
Let’s talk about excess savings, the roughly $2.5 trillion financial war chest that represents a massive tailwind for the economy. This has generally been good news, especially for investors in companies that have successfully passed higher costs onto customers in the form of higher prices. However, these savings are also exacerbating two of the biggest challenges in the economy.
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. It’s all a reminder that in the stock market, the long game is undefeated and that time is a valuable edge.