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.
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…
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:
Reviewing the macro crosscurrents 🔀
There were a few notable data points from last week to consider:
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.
Sam Ro is the founder of TKer.co. Follow him on Twitter at @SamRo
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