Market Lows for S&P 500, Nasdaq, DJIA, Russell 2000
The fairness markets closed the quarter and the primary half of the yr on a excessive be aware with some main indexes at interim highs. The desk reveals final fall’s market lows for the S&P 500, Nasdaq, the DJIA, and the Russell 2000, their ranges at yr’s finish and for final Friday (June 30), and the proportion adjustments for these indexes from their lows to yr’s finish, to June 30 and yr to this point.
The DJIA, at 34,408 remains to be -5.5% under its January 5 ’22 all-time excessive (36,407). However, it has rallied almost 20% from its September 30 ’22 interim low. The S&P 500 closed on Friday at 4,450 and it has been on a tear for the previous two weeks. Nevertheless, it’s nonetheless -7.2% under its 4,797 all-time excessive (January 3 ’22). Just like the S&P, the Nasdaq, at 13,788, stays -10.3% under its 15,374 all time-high (September 7 ’21). However, it too has been streaking for almost all of June.
For some, that is proof {that a} new “bull market” has begun. However we’re skeptical. Just like the dot-com bubble on the flip of the century, Nasdaq has been propelled by the AI-craze (Synthetic Intelligence). And the S&P 500 is a capitalization weighted Index the place the highest seven shares are answerable for most of this yr’s positive factors. (The opposite 493+ shares? Not a lot value progress!)
Word within the desk that the DJIA recovered nicely in final yr’s This autumn after its precipitous fall final September, and whereas it’s up about 4% this yr, that pales compared to the S&P and Nasdaq. Then there’s the Russell 2000 which is an index of smaller capitalization shares. At 1888.73 (the shut on June 30), it’s primarily unchanged from the place it was on June 7th (1888.45) and remains to be -6.6% under its all-time 2021.35 peak (August 15, ’22).
So, it’s clear that just a few giant cap shares (tech oriented) are answerable for a lot of the outsized efficiency, as each the DJIA and Russell 2000 have lagged their tech laden S&P 500 and Nasdaq brethren.
We consider that the monetary markets are in the end tied to the economic system and its well being. Ultimately, fairness costs replicate what’s going on within the economic system. Sure, there are crazes; the present AI craze within the Nasdaq reminds us of the dot.com bubble 1 / 4 century in the past. Our current blogs have identified rising financial weak point. A lot of the previous yr’s financial efficiency got here from “free cash” applications and a moratorium on pupil mortgage debt funds. The previous (“free cash”) is within the rear-view mirror, whereas the latter (pupil debt moratorium) seems like it’s going to finish in September given the June 30 Supreme Court docket annulment of the Biden Administration’s pupil mortgage forgiveness program.
In Q1 stories, agency after agency both missed on revenues and/or earnings and key companies guided decrease. As an apart, we be aware that brief positions on Tesla
TSLA
MSFT
AMZN
It’s the Financial system (Silly)!
The chart reveals the Philly Fed’s Costs Obtained Diffusion Index. Word the 25-percentage level plummet over the previous couple of months! Clearly, that is demand pushed as provide chains have been therapeutic.
Present Costs Obtained: Diffusion
The subsequent chart reveals the yr over yr proportion adjustments within the costs of present and newly constructed properties. That is clearly a operate of decrease demand, as the provision of present properties has contracted.
Current House Gross sales Median Value & New Properties Median Gross sales Value
Word the current steep current value declines within the face of the present dwelling market’s low stock ranges. As we famous in previous blogs, mortgage charges at 7% have made householders with present mortgages at 3% or decrease “prisoners in their very own properties,” because the mortgage fee, even for a sideways transfer, would rise considerably. For instance, the fee on a $500,000 thirty-year fixed-rate 2.5% mortgage is about $1,975/month. That very same $500,000 mortgage with a 7% price jumps to $3,327/month, a 68% improve. $1,352/month ($16,224/yr) is the distinction, and it’s substantial for many household budgets.
What the Fed Watches
The Fed’s favourite inflation index, the PCE (Private Consumption Expenditure) Index confirmed a really delicate +0.1% month over month improve in Could (+1.2% annual price) vs. +0.4% in April. On a yr over yr foundation, the headline quantity right here fell to +3.8%, the bottom studying since April ’21! Core Companies Ex-Housing, a sub-index that Fed Chair Powell believes is sort of necessary, confirmed up at +0.2% on a month over month foundation in Could (that’s a +2.4% annual price). Nonetheless, from his current testimony earlier than the Home and Senate, markets consider (80% chance) that the Fed will elevate charges one other +25 foundation factors (+0.25 proportion factors) at its assembly in late July. Given the incoming inflation information and weak point now displaying up within the financial information, this seems to us like overkill.
US Used Automobile Worth Index & US Zillow Hire Index
The left-hand facet of the above chart reveals the yr over yr change in used automotive costs, the unique poster baby for the current spate of inflation. The best-hand facet of the chart reveals Zillow’s Hire Index (once more on a yr over yr foundation). On condition that condominium development is at a 40+ yr excessive, our view is that the downdraft in rents continues. Shelter represents a 30% weight within the calculation of the CPI, so it is a very highly effective deflationary power.
The subsequent chart reveals steep declines within the yr over yr price of inflation in Medical Care Prices (left-chart) and Airline Fares (right-chart). Once more, be aware the current steep declines.
Medical Care and Airline Fares
Good Information From the Fed – an Oxymoron?
On Friday (June 30), there was, for a change, some excellent news from the Fed. The 23 largest U.S. banks all handed the Fed’s recession stress check, that means their capital construction can face up to a major Recession. However, that’s not the tip of the story.
CRE Debt Excellent- by Lender sort
The Industrial Actual Property (CRE) market is a few $6 trillion in measurement. Word that the sunshine blue bars within the chart above present that the Regional and Group Banks personal 4 occasions the CRE debt that the big banks maintain. That’s about $2.4 trillion in comparison with $0.6 trillion on the giant banks. We suspect portion of these banks wouldn’t cross the Fed’s Recession stress check. As mentioned in previous blogs, we’ve simply seen giant resort homeowners in San Francisco stroll away from their loans (Hyatt at Union Sq. and Parc55), and we perceive that there are a number of extra to come back. Earlier within the yr, we famous that some workplace buildings in NYC and LA had the identical destiny. The CRE problem is in its infancy.
Over the subsequent two years, almost half of U.S. private and non-private debt is about to mature and must be refinanced. This seems like it’s going to happen with charges not less than 300 foundation factors (3 proportion factors) larger. Speak about a drain on cashflow for companies and a pressure on banks when their CRE portfolios flip to junk.
Different Incoming Knowledge
In Canada, industrial payrolls fell -140K in April together with a decline of -0.3% within the workweek. That’s a humongous quantity on condition that Canada’s inhabitants (40 million) is about one-eighth the dimensions of the U.S. That’s equal to the lack of -1.1 million industrial jobs in a month within the U.S. Think about what would occur to the monetary markets if such a quantity occurred. Additionally be aware that many economists consider that Canada is only a mini-version of its southern neighbor.
The remainder of the developed world can also be slowing. China’s manufacturing sector has been contracting for the previous three months with their Buying Managers’ Index (PMI) now < 50, the demarcation line between growth and contraction. Retail gross sales in Germany are -5.1% decrease on a yr over yr foundation whereas their Could unemployment price rose to five.7% (from 5.6%).
On Friday, the Division of Commerce launched its third (and remaining) Q1 GDP revision. In accordance with the discharge, Q1 Actual GDP rose at a +2.0% annual price, up from the +1.3% within the final GDP replace. Nearly all of the rise was on account of an “enchancment” in internet exports, as with out that “enchancment,” actual GDP progress would have been +1.4%. That “enchancment” occurred as a result of imports fell additional and sooner than exports. Ask your self how sturdy the U.S. economic system will be when imports are falling! It’s clear from the month-to-month information that the early months of the yr had been stronger, and there was a deterioration because the yr has progressed.
Ultimate Ideas
- The newest report for Actual U.S. Retail Gross sales reveals that they’re on the similar stage they had been in August, 2021.
- Regardless of a scarcity of stock within the present dwelling market driving patrons to the brand new dwelling market, housing begins have been flat for 2 years. And we be aware the autumn within the median costs of recent and present properties.
- Weekly earnings have barely stored up with inflation and workweek hours proceed to fall as enterprise homeowners cling to these hard-to-find staff; fewer hours as an alternative of layoffs.
- Industrial Manufacturing within the U.S. has been stagnant for nearly two years, and the Main Financial Indicators (LEI) have been damaging now for 14 months in a row. At this many damaging months in a row, this indicator has a 100% Recession predicting observe document.
Historical past proves that monetary markets finally mimic the state of the economic system. We shut by reminding our readers of a few legendary analyst Bob Farrell’s 10 Guidelines for Traders:
Rule 4: Exponential quickly rising or falling markets normally go farther than you suppose, however they don’t appropriate by going sideways.
Rule 7: Markets are strongest when they’re broad and weakest once they slim to a handful of blue-chip names.
(Joshua Barone and Eugene Hoover contributed to this weblog.)
