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

China trade gap at new record

Amid rising trade tensions, the US trade deficit with China recently hit an all-time high. Tariff talk has been a primary driver of near-term market unease, and a rising deficit may serve to further fuel the effect.

Sources: Bloomberg, China Customs General Administration

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A map of exports

Amid rising global trade tensions, all countries involved in trade disputes would be effected by the implementation of tariffs. The map below shows each country's total value of exports. Unsurprisingly, the world’s 2 largest economies—the US and China—are also the 2 largest exporters of goods and services.

Sources:

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Confidence gap between generations widens

On its surface, consumer confidence appears to be strengthening. However, the generation gap is widening. Older Americans, who tend to be more established in their careers, are upbeat about the economy. At the same time, confidence among younger Americans is the lowest since September 2016. As the lower half of the chart shows, this has fueled a record-wide spread in confidence between those under 35 and those in the 35-to-54 age group, according to Conference Board data.

Source: Conference Board

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Convertibles in style

Issuance of convertible bonds—those that can be converted into stock at an agreed upon time and price—is on track to hit $50 billion this year, potentially the greatest volume since 2007. Tax code changes, namely the limitation of interest deductibility, and stock market volatility, have helped drive supply of these bonds (which are a cheaper source of funding to the borrower than traditional debt). Twitter’s recent $1 billion convertible bond offering propelled year-to-date issuance to more than $20 billion, according to Bloomberg.

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Building equity

One measure from the Federal Reserve reveals Americans have finally recouped the equity they lost during the housing collapse, thanks to a steady run-up in property values. Homeowners’ equity as a share of household real estate assets rose in the first quarter to 59.7%, matching the late-2005 peak (although it’s been in a long-term decline since 1945).

Source: Federal Reserve

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Coal continues decline

As a percentage of its contribution to US power generation, coal has slipped below where it was before the 2016 presidential election. As of early June 2018, coal produced just 24% of America’s power mix, according to the Energy Information Administration. That’s roughly 5% below coal’s market share in November 2016 (and about half its market share during the early 2000s). Cheaper natural gas and growth in renewables have been the primary reason for coal powering down.

Source: US Energy Information Administration

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Growth stocks outpacing value

Growth stocks have historically outperformed value, excluding the 15 years prior to 2003, during which value outperformed growth for much of the period. In recent years, investors have been buying more growth stocks than value stocks, despite increasingly higher valuations. Growth stock relative valuations are in the 70th percentile, whereas value stocks are in the bottom quartile.

Source: Bloomberg Finance, WSJ, as of May 31, 2018.

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Volatility has risen

In recent months, volatility hasn't been nearly what it was during the market downturn in late January and early February. However, volatility as measured by the S&P 500's percent of trading days with a greater than 1% move (up or down) suggests 2018 is on pace to be more volatile than the average annual volatility of the past 8 years. Moreover, US markets have been increasingly volatile at the open each day.

Source: Morningstar Direct, Paul R. Reid Financial Group. *2018 is year to date through 5/30/2018.

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Dominance of technology

If you are looking for a source of the US stock market's momentum during this multiyear bull market rally, look no further than FANG stocks—Facebook (FB), Amazon (AMZN), Netflix (NFLX), and Google (GOOG). The FANG group is often cited in financial media as a benchmark of new tech. If you add Microsoft and Apple to this group, you can see how significant they are to the global economy. The combined market value of just these 6 companies recently topped $4 trillion. That represents 5% of the value of all publicly traded companies worldwide. Of course, there is the possibility that these company values may be trading at valutions not justified by their underlying earnings.

Source: Bloomberg

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Rising financing costs impact housing market

Rising borrowing costs are slowing the rate at which US homeowners are refinancing their homes or turning to home equity for cash. According to a recent report by the Mortgage Bankers Association, mortgage refinancing volume fell to its lowest point since December 2000. Refinancings now represent just 36% of all mortgage applications, the lowest share since September 2008.

Source: Mortgage Bankers Association

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The US economy without debt

Debt can help fund productive increases in economic activity and output. Without debt, global economic activity would be substantially lower. However, many investors do not realize how significantly government debt contributes to the US economy. In the chart below, the black line represents the difference between US GDP growth and new US government debt. A noteworthy takeaway from this chart is that, if you subtract debt, US GDP has not seen positive growth since 2000, and the economy actually shrank every year since the financial crisis.

Source: FactSet, 720 Global, Mauldin Economics, as of May 1, 2018.

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Oil prices rise amid supply concerns on the Iran deal

For the first time since 2014, oil prices climbed above $70 per barrel recently. One driver of the price increase was the US decision to pull out of the Iran deal. In the wake of sanctions being removed in 2015, Iran became the 3rd biggest exporter of crude oil (nearly 4 million barrels per day) within the Organization of Petroleum Exporting Countries. Energy prices are a major cost for a wide range of industries, from airlines to shipping companies, and are a component cost of most other types of businesses.

Source: FactSet, Bloomberg, as of June 12, 2018.

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A reason stocks are moving sideways

Some investors compare the market's earnings yield (the inverse of the price-to-earnings ratio) to the yield on the 10-year Treasury note to assess the relative value of stocks. Despite the S&P 500 Index's earnings yield being up 50 basis points (0.5%) from its January 26 low, the gap between that and the 10-year yield has only increased 5 basis points (0.05%). This suggests that stocks have not improved in terms of relative value.

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Caution signs in Europe?

The Purchasing Managers' Index (PMI) for the eurozone declined for the fourth straight month in April. While still positive (a PMI over 50 indicates expanding manufacturing), it has declined substantially from the short-term high reached in late 2017. This follows a weaker-than-expected first quarter 2018 GDP report for the eurozone. Investors in European markets may want to keep a watchful eye on future manufacturing reports for the region.

Source: FactSet, Trading Economics, Mauldin Economics, as of May 17, 2018.

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How corporations are using their cash

Since the financial crisis, the percentage of corporate cash spending on dividends, buybacks, and acquisitions increased significantly. Meanwhile, investment by companies (Capex) has been trending down.

Source: Evercore, ISI, as of January 1, 2018.

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Are consumers overconfident?

Consumer confidence continues to set fresh highs, continuing a long-term trend since the financial crisis. Some contrarians worry that many are ignoring the bouts of volatility, the threat of rising inflation, and geopolitical uncertainty. Looking back over the past 40 years, consumer confidence has historically plummeted 1 year before a recession begins, on average.

Source: Strategas, as of 4/24/2018

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Manufacturing remains strong

Even though the US Purchasing Managers' Index (PMI) dropped slightly month-over-month in March to 59.3, it still remains in expansion territory (anything over 50 implies manufacturing growth). As the chart shows, PMI tends to track with S&P 500 earnings—the most important driver of the stock market.

Source: Strategas, as of 4/02/2018

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Inflation ticks higher

Some market indicators reveal inflationary pressures are on the rise. Indeed, inflation expectations have risen to the highest point since 2014, as measured by the US 10-year breakeven (a measure of expected inflation derived from 10-year Treasury Constant Maturity Securities and 10-year Treasury Inflation-Indexed Constant Maturity Securities). Meanwhile, the Bloomberg Barclays Global Aggregate Index yield rose above 1.9% recently, the highest point in 4 years.

Source: Bloomberg, as of April 26, 2018. The Bloomberg Barclays Global Aggregate Index is a multi-currency benchmark for global investment grade debt including treasury, government-related, corporate, and securitized fixed-rate bonds from developed and emerging markets issuers.

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US trade gap grows larger

The US trade deficit widened in February to a larger-than-forecast $57.6 billion, the highest since October 2008, according to the Commerce Department. Imports and exports both registered gains of 1.7%.

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Traders still think rates are going up

The Federal Open Market Committee's March meeting suggested the central bank is leaning toward a slightly faster pace of tightening. As of mid-April, traders are pricing in an 80% probability that the Fed will raise rates in June, according to federal funds futures.

Source: Bloomberg, as of April 17, 2018.

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Cracks in the housing foundation

The National Association of Realtors recently reported the median price of previously owned homes was 41% greater than it was just 5 years ago. That coincides with just a 12.6% rise in average hourly earnings by workers over the same period of time. With mortgage interest rates having been on the rise, having reached the highest rate since 2014, housing affordability may be a real issue entering the busiest season for home buying.

Source: National Association of Realtors, Bureau of Labor Statistics, as of February 22, 2018. AHE TOTL Index (US Average Hourly Earnings All Employees Total Private SA). Data is normalized as of January 1, 2013.

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US factory utilization has room to grow

Capacity utilization at American factories remains below the long-run average. According to the Federal Reserve, plant use rate rose to 76.9% in February, which is more than 1% below the average over the past 45 years. It has yet to recover fully to pre-recession levels.

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US consumers expecting higher wages

After years of stagnating wage growth, Americans are more optimistic than they have been in years. US consumers anticipate their earnings will rise 2.73% in the coming year, the most since data collection began in 2013, according to the results of a New York Fed survey. January was only the third month in the survey’s 56-month history in which expected wage growth topped expected consumer price inflation, which fell slightly, to 2.71%.

Source: Federal Reserve Bank of New York, US Department of Labor, as of March 7, 2018.

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