There's a lot I've been thinking about lately. You'd think that as we approach the end of the year, the noise in financial markets would lessen. Alas, we are not there yet.
Here's what I've been reading and thinking about.
The Federal Reserve Bank of Philadelphia released their State Coincident Indexes report. It's basically a report that summarises the current economic conditions in a single number.
The Federal Reserve Bank of Philadelphia has released the coincident indexes for the 50 states for October 2023. Over the past three months, the indexes increased in 33 states, decreased in 16 states, and remained stable in one, for a three-month diffusion index of 34. Additionally, in the past month, the indexes increased in 16 states, decreased in 27 states, and remained stable in seven, for a one-month diffusion index of -22.
What does this all mean? The economy isn't bad, and it isn't great. About 2/3rd of states expanding and 1/3rd of states slowing. The economy has slowed down dramatically, notwithstanding the last GDP print.
There are more and more signs that the inflation crisis is over (at least in America). According to BLS data, the CPI in October was up 3.2% from a year ago. Adjusted for food and energy prices, core CPI was up 4.0%, the lowest since September 2021.
The US Fed have won the battle, but the war is far from over - no victory laps just yet guys.
On Tuesday, the percentage of stocks with a daily gain of 4% or more surged to 25%, reaching the highest level since the stock market low in October of 2022. Similar one-day surges tended to mark an inflection point with bullish implications for the S&P 500. Comparable upswings presaged a 100%-win rate for the S&P 500 over the subsequent three, six, and twelve months. One day does not make a trend, but this is compelling.
40% of Companies in Russell 2000 Have Negative Earnings. During recessions, the share of unprofitable firms rises. This is not surprising. But even before the economy has entered a recession, the share of companies in the Russell 2000 with no earnings is at 40%, see chart below. The bottom line is that if the economy enters a recession, a lot of middle-market companies will be vulnerable to the combination of high rates and slowing growth.
Credit conditions are tightening for consumers. I guess this is what the Fed wanted when it started raising rates.
The Fed has also triggered a default cycle. This is not surprising.
This is a very slow transition, but we're now seeing lower proportion of borrowers with lower rates, and a high proportion of borrowers on higher rates.
We'll probably see rates higher for longer as we transition. Having said this, I note that the median gap between the last hike and the first cut is only 4 months over the last 13 US hiking cycles. We are already 4 months from the last hike and given the first full cut is priced for June 2024, that would be an 11-month period on hold, which would be the third longest gap between the last hike and first cut.
The fact is that pauses after hiking cycles don’t tend to last that long, which means the popular “higher for longer” narrative is not usually one associated with the end of a hiking cycle.
The US just keeps building. That's the key takeaway from new US housing data as the US continue to grapple with a housing shortage.
Here are the least expected outcomes for 2024 according to BofA's Global Fund Manager Survey.
Who knows where this market is headed in the short term. If the trend is your friend, then this market probably has further to run. Santa Claus rally? Yeah, sure. Why not? The driver? The moderation of inflation without a recession.
What I'm far more certain about, is that stock prices usually go up over long periods of time. Here's a very long-term chart illustrating this fact.
So, will the Fed nurse the economy into a soft landing? Who knows. What we do know is that right now, notwithstanding the current landscape and some of the headwinds the economy is facing, the market appears to be doing ok. I think it deserves some respect.