US economy and stock market analysis: Chart of the week archives

Bond and stock yields

The Fed has hiked rates multiple times this year, pushing the 10-year US Treasury yield near 3.5%. The 10-year yield is nearly 2% higher than the yield on the S&P 500 and the percentage of S&P 500 stocks with dividend yields above the 10-year has dropped to 11%, as of mid-June. That’s the lowest level since the financial crisis, highlighting an investing environment where there appear to be alternatives to stocks for income-seeking investors.

Source: Strategas, as of June 21, 2022.

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A bear market

For the first time since the early days of the COVID-19 pandemic, US stocks closed in a bear market (a decline of 20% or more) on June 13, 2022. Expectations for more interest rate increases by the US central bank and surging gas prices (the headline US consumer price index registered an 8.6% increase in May compared to the same month last year—the highest increase since 1982) are taking a toll on investor and consumer confidence. Stocks actually accumulated a 20% decline back in May, but an intraday rally when that happened prevented the market from finishing in a bear market. Consumer discretionary, comm services, and technology stocks have pushed stocks into bear market territory thus far this year, while energy is the lone sector to post gains year to date.

Source: FactSet, as of June 14, 2022.

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Home sales drop again

Skyrocketing home prices in most major cities across the US, booming construction costs, and rising rates continue to hurt home sales. Since new and existing home sales hit multiyear highs at the end of 2020, they have been trending lower. The latest data, for example, revealed a 17% drop in April for new home sales—far more than the roughly 2% decline that analysts expected. New home sales and existing home sales had been steadily rising since July 2010 up until the onset of the COVID-19 pandemic, and then bounced back amid the economic reopening at the end of 2020. Trends in new home sales are often seen as a critically important indicator, given how significant the housing market is to the overall economy.

Source: FactSet, as of June 6, 2022

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Large caps in focus

Large-cap stocks (as represented by the S&P 500 index) have outperformed both mid-cap stocks (as represented by the S&P Mid Cap 400) and small-cap stocks (as represented by the Russell 2000 Index) since the economic effects of the COVID-19 pandemic began. Stock performance sorted by market cap has described several of the periods since then, with large-cap stocks bouncing back the quickest during the economic reopening and small-cap stocks suffering the most in 2022 from rising rates, surging inflation, supply chain problems, the war in Ukraine, and other risks that have caused stocks globally to be in the red thus far this year.

Source: FactSet, as of 5/31/2022.

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A warning sign?

High-yield default rates surged at the outset of the COVID-19 pandemic to multiyear highs not seen since the financial crisis. As economic conditions generally improved during 2021, the pace of default rates slowed quickly. In fact, they declined at a faster pace than during the last 2 recessions. But defaults have begun to pick up lately, adding to concerns that deeper economic troubles could be on the horizon.

Source: Strategas, as of 5/22/2022.

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Fed rate hike and stocks

After a 0.25% rate hike in March, the Federal Reserve upped the federal funds rate another 0.50% in May—the largest percentage increase enacted at a meeting by the US central bank since 2000, as well as being the first time the Fed increased rates at consecutive meetings since 2006. The fed funds rate is the lending rate that banks charge each other, and it is critically important because it influences other interest rates—like mortgage and savings rates. The Fed has clearly signaled its intention to act aggressively to fight inflation by quickly raising rates (and by reducing its bond holdings). While the 0.50% increase brings the rate to a target range of 0.75% to 1.0%, with many analysts expecting it to reach as high as 3% by year-end, rates are still low by historical averages. Nevertheless, rate hikes have contributed to stocks being in the red thus far this year, as higher rates can be a headwind for consumer spending and corporate earnings.

Source: FactSet, as of 5/17/2022.

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Bread prices

As the war in Ukraine drags on, the human toll continues to cast a pall over markets and geopolitics—with wide-ranging effects, including high food prices, being felt across the globe. Wheat in particular is already at record highs and some food suppliers have recently begun warning that bread, pasta, and other wheat-related products could see huge price increases this summer. Russia and Ukraine produce roughly 25% of the world’s global wheat supply, and the war—along with other factors, including supply chain disruptions and COVID-19—is threatening to put companies that utilize wheat as well as consumers of wheat products under even more pressure.

Source: FactSet, as of 5/10/2022.

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A signal recession may not be coming yet

Investors got a shock on April 28 when news broke that the US economy shrank during the first quarter of 2022. More important for investors than this being the first time that happened since the early days of the pandemic: It was not expected. The bad GDP report, coupled with other risks that have helped pushed stocks into the red thus far this year, has led many investors to worry that a recession may be coming. But there are reasons to think that may not happen. The US Index of Leading Indicators, a composite of 10 indicators ranging from measuring unemployment to stock market performance that proponents believe can help forecast economic shifts, is currently not signaling it's time to panic. Of course, inflationary pressures, the war in Ukraine, rates hikes, and a potential resurgence in COVID-19 hospitalizations, among other headwinds, remain key risks to watch.

Source: FactSet, as of 5/1/2022.

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Prices on our minds

Rising prices have most businesses, consumers, and investors worried to varying degrees. But the level that worry has reached appears to have sped up lately. High prices are now the top issue for small businesses (overtaking labor quality), according to the NFIB Research Foundation. Indeed, inflation expectations have surged over the past year, and a big part of that is shelter costs (i.e., rising home and rent prices). As a result, a shrinking number of Americans believe this is a good time to buy a home, according to a recent consumer sentiment survey from the University of Michigan.

Source: Small-business sentiment measured by the NFIB Research Institute, inflation expectations measured by the Federal Reserve, and homebuyer sentiment measured by the University of Michigan, as of April 15, 2022.

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Strange investing days

Stocks and bonds just did something they rarely do, providing yet another example of how unusual today's investing climate is. In addition to bond yields inverting for the first time since 2019, both stocks and bonds finished the quarter in the red for just the 20th time. During the first quarter of 2022, US stocks (as measured by the S&P 500) lost 5% and bonds (as measured by the Barclays Aggregate Index) lost 6%, on a price return basis. Investors across asset classes continue to grapple with a lot, including a Fed that appears poised to combat inflation via several more rate hikes.

Source: FactSet, as of April 9, 2022.

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Despite war and inflation, volatility shrinks

The war in Ukraine and rising inflation—in addition to the potential for additional Fed rate hikes this year and the lingering threat of COVID-19—continue to loom over the market. Yet strong corporate profits, a relatively healthy employment situation, and other resilient economic forces have US stocks trading within sight of the all-time highs set in early January 2022. Meanwhile, the surge in volatility—as measured by the CBOE Volatility Index (VIX)—that occurred earlier this year, due in large part to the outbreak of war in Europe, has been erased almost entirely. In fact, volatility is back within the low range witnessed for most of 2021.

Source: FactSet, as of March 29, 2022.

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US construction activity builds new record

Despite the global supply chain crisis and some key construction commodity prices rising to multiyear highs, construction activity remains robust. US construction activity, for example, surpassed the 2006 all-time high in 2016 and has continued to grow. While public construction efforts may increase in the near future due to the US infrastructure legislation passed in 2021, private construction put in place outnumbers public construction by 4 times as much.

Source: FactSet, as of March 29, 2022.

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Inflation rises again

US inflation hit a 40-year high in February, as prices continue to rise for energy, food, and rents—among others. Prices had already been on the rise since early 2020. More recently, the war in Ukraine has sped up the pace of inflation globally, as commodity prices have broadly surged. Indeed, US prices rose at the fastest rate since the early 1980s, up 7.9% in February. Many economists believe that inflation may stay high in March and beyond, due in large part to surging gas prices. Persistently high inflation can hurt economic growth, and typically has a particularly negative impact on lower-income households who must apportion a larger percentage of their budgets to necessities.

Source: FactSet, as of March 21, 2022.

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Stock values improve, but the war looms

As the devastating human toll in Ukraine grows, investors have struggled with how the war might unfold and what the full economic impact may be. Meanwhile, US stock valuations have continued to broadly improve. The S&P 500’s next 12 months (NTM) price-to-earnings (P/E) ratio—which divides the current price by per-share earnings—is currently 18.9x. While that is expensive relative to its 15-year average of 15.7x, the S&P 500’s current P/E is the most attractive it has been since the spring of 2020. (When used as a relative value metric, a lower P/E can imply a more attractive valuation). Among sectors, only energy and materials are trading at a discount to their 15-year average NTM P/E. Of course, if economic conditions worsen due to the war’s impact, along with other risks, valuations could become less attractive.

S&P 500 current and historical valuations
Sector	NTM P/E	15-Year Average	Ratio (sorted)	Relative P\E	15-Year Average	Ratio
Technology	22.9x	17.0x	1.35	1.215	1.071	1.135
Discretionary	25.1x	19.5x	1.28	1.329	1.229	1.081
Utilities	20.2x	15.8x	1.28	1.072	1.015	1.056
Industrials	19.4x	16.0x	1.21	1.028	1.019	1.009
S&P 500	18.9x	15.7x	1.2	1.000	1.000	1.000
Staples	20.5x	17.4x	1.18	1.088	1.114	0.977
Communication	17.4x	15.4x	1.12	0.921	0.998	0.922
Financials	13.7x	12.8x	1.08	0.728	0.825	0.882
Health care	15.5x	14.5x	1.07	0.821	0.93	0.883
Materials	15.3x	15.8x	0.97	0.811	1.015	0.799
Energy	13.7x	19.4x	0.71	0.726	1.179	0.616

Source: FactSet, as of March 15, 2022.

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Oil prices surge on Ukraine conflict

The war in Ukraine has sent oil prices surging to multiyear highs. West Texas Intermediate (WTI) crude—the benchmark oil price for North America—broke above $119 per barrel for the first time since August 2008, and Brent crude—the benchmark oil price internationally—jumped above $123 for the first time since March 2012. Multiple analysts have forecasted that, unless the conflict in Europe abates, prices could continue to go up due to supply problems before even higher prices weaken demand and potentially prevent them from rising even further.

Source: FactSet, as of March 7, 2022.

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Russia's rising inflation

Like much of the world, increasing inflation may become a growing concern for Russia. And much like the 2014 Crimea crisis, it appears that the Ukraine situation may be exacerbating inflationary pressures. The chart below shows Russia's 1-year consumer price index (CPI) and 1-week repo rate—both of which have been rising.

Source: FactSet, as of March 1, 2022.

Chart Title	Date
Bond and stock yields	6/24/2022
A bear market	6/17/2022
Home sales drop again	6/10/2022
Large caps in focus	6/3/2022
A warning sign?	5/27/2022
Fed rate hike and stocks	5/20/2022
Bread prices	5/13/2022
A signal recession may not be coming yet	5/6/2022
Retail sales keep chugging	4/29/2022
Prices on our minds	4/22/2022
Strange investing days	4/15/2022
Despite war and inflation, volatility shrinks	4/8/2022
US construction activity builds new record	4/1/2022
Inflation rises again	3/25/2022
Stock values improve, but the war looms	3/18/2022
Oil prices surge on Ukraine conflict	3/11/2022
Russia's rising inflation	3/4/2022

Chart of the week Archives

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