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Chart Title	Date
FTX crisis rattles cryptocurrency market	7/15/2022
Strongest 6 months for stocks coming up	11/11/2022
Midterm elections and stocks	11/04/2022
Have fertilizer prices peaked?	10/28/2022
Plunging tax rates propped up earnings	10/21/2022
King dollar	10/14/2022
Stock yields fall further behind bond yields	10/07/2022
Leading indicators turn negative	9/29/2022
Investors buying up intellectual property	9/22/2022
European stocks and the war in Ukraine	9/15/2022
Dividends to rise?	9/08/2022
Mid caps making a run at large caps?	9/02/2022
News spinning investor sentiment?	8/26/2022
Inflation report offers some hope	8/19/2022
Good and bad news on debt	8/11/2022
Home unaffordability grows	8/05/2022
Call-put ratio near rock bottom	7/22/2022

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FTX crisis rattles cryptocurrency market

Cryptocurrencies were already having a tough year before crypto exchange FTX collapsed earlier this month on news the company lent roughly $10 billion in customer assets to an affiliated trading firm to fund risky investments. Once valued at $32 billion, the FTX token has plummeted with FTX filing for bankruptcy last week. While the extent of the impact of FTX's collapse upon the broad market is unknown, many cryptocurrency industry watchers think that enhanced regulation of the industry is more likely to come now.

Source: CoinDesk, as of November 14, 2022.

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Strongest 6 months for stocks coming up

November kicks off what The Stock Trader's Almanac popularized as the "best 6 months." That's the period from November through April when US stocks have notably outperformed the May-through-October period. Since stock performance has historically been positive for both periods, rather than buy in November then “sell in May and go away” until November, rotating investments might be a better strategy for some. Since 1990, cyclical sectors including consumer discretionary, industrials, materials, and technology outperformed the broad market from November through April, while defensive sectors like consumer staples and health care outperformed from May through October. Interestingly, this trend has been even more pronounced during midterm election years.

Source: CFRA, as of November 6, 2022.

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Midterm elections and stocks

Q4 (October, November, and December) of midterm election years and Q1 (January, February, and March) after the election have historically been the 2 strongest quarters for stock performance of the 16-quarter presidential cycle. The S&P 500 has averaged 6.4% and 6.9% gains during these quarters, respectively. With that said, it’s worth noting that Q2 (April, May, and June) and Q3 (July, August, September) after midterm elections have been among the most volatile.

Source: CFRA, S&P Global. Data from 12/31/1944 to 09/30/2022.

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Have fertilizer prices peaked?

Fertilizer is a critical component of global agriculture production. A series of shocks—COVID, the war in Ukraine, China's 2021 decision to inspect exports of fertilizer inputs, a spike in natural gas prices, Hurricane Ida, and others—have wreaked havoc on both fertilizer prices and, consequently, agriculture products like wheat, corn, and others. The Producer Price Index for nitrogen fertilizer (the most comment type of industrial fertilizer, which is made by mixing natural gas and nitrogen) hit an all-time high in April 2022. But a combination of these factors easing as well as a stronger dollar have helped fertilizer prices decline over the past several months. This has broadly helped bring down grocery store and restaurant prices a bit, bringing some relief to consumers. Of course, additional shocks could reverse this trend at any time.

Source: US Bureau of Labor Statistics, as of 10/22/2022.

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Plunging tax rates propped up earnings

The effective corporate tax rate for S&P 500 nonfinancial companies has declined from about 30% in the early 2000s to about 17% in 2022. Research from the Fed finds that the real growth rate of corporate profits would have been almost 2% lower each year over this time period due to declining tax (and interest) expense. "In other words," the Fed notes, "the relative decline in interest and tax expense is responsible for a full one-third of all profit growth for S&P 500 nonfinancial firms over the past 2 decades … a very substantial contribution."

Source: Federal Reserve, Compustat, S&P Dow Jones Indices for S&P 500 nonfinancial firms, as of September 6, 2022. Values are aggregate for S&P nonfinancial firms.

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King dollar

For the first time ever, the US dollar is close to parity with the British pound. Indeed, the US Dollar Index, which measures the strength of the dollar against 6 major currencies, is near its highest level in 20 years. This trend has been underway, for the most part, since 2008, but has accelerated recently as US interest rates have increased. Among the winners: Americans traveling abroad and importers of foreign goods. Among the losers: US exporters and companies with relatively large foreign earnings.

Source: FactSet, as of October 10, 2022.

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Stock yields fall further behind bond yields

The Federal Reserve hiked rates another 0.75% in September, raising the target range to 3.0% – 3.25%, the highest level since 2008. That was the 5th straight Fed meeting this year the US central bank has increased rates, and it signaled intentions to raise rates another 1.25% before 2022 is over. In the years following the financial crisis, many investors searched for higher yields outside of bonds with the Fed slashing rates. Now, bond yields have dwarfed some of those alternatives. Consider the chart below, which shows the 10-year US yield more than double that of the S&P 500 dividend yield of 1.75%.

Source: FactSet, as of October 3, 2022.

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Leading indicators turn negative

The Index of Leading Indicators is a composite of multiple economic reports for things like employment, consumer spending, and manufacturing orders. The indicator went negative back in July—but just barely. The latest report for August fell further into negative territory, marking the first time there were multiple negative readings since right before the pandemic. Of course, this doesn’t necessarily indicate a recession is forthcoming. It did go negative well in advance of the financial crisis as well as before the COVID-induced recession, but a recession didn’t follow the brief dip into negative territory in 2016. With that said, many investors that watch this index think it's a cautionary signal.

Source: FactSet, as of September 26, 2022.

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Investors buying up intellectual property

Investors have been scooping up intellectual property (IP) at a greater, more consistent rate since the beginning of COVID. Intellectual property includes intangible assets like research and development; software; and entertainment, literary, and artistic originals. Investment in intellectual property increased 9% in Q4 2021, 11% in Q1 2022, and 10% in Q2 2022 on a real basis compared to the preceding quarters. The strong rate of growth in intellectual property investment over the past several years represents a shift from years prior to the pandemic, where IP investment growth was more uneven. This recent trend is an example of the growing interest in alternatives among investors.

Source: Bureau of Economic Analysis, as of September 18, 2022.

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European stocks and the war in Ukraine

Geographic proximity to Ukraine and Russia has been a strong factor in European stock market performance thus far this year. Since Russia invaded Ukraine on February 24, European stocks (measured by the Euro Stoxx 50 Index) are down roughly 9%, as of mid-September. Germany—Europe's largest economy—has performed worse compared with the European index. While France and Switzerland are also in the red year to date, they are not down as much as the European index, and UK stocks have recouped their losses from earlier in 2022. The chart below illustrates European stock market performance indexed to 100, and depicts the outperformance of western European stock markets relative to central European markets and the broader European region.

Source: FactSet, as of September 12, 2022.

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Dividends to rise?

The pandemic pushed the dividend yield for the S&P 500 to multidecade lows. While it has rebounded to 1.59% in early September 2022, up from a low of 1.22% in December 2021, it hasn't been this low since the early 2000s. With the passage of the Inflation Reduction Act (which implements a 1% tax on stock buybacks net of new issuances of stock, effective for repurchases after December 31, 2022), analysts broadly believe that many companies may boost dividend paybacks. If that occurs, dividend yields may continue to have the wind at their backs in the near future.

Source: FactSet, as of September 6, 2022.

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Mid caps making a run at large caps?

US mid-cap stocks have not declined as much as both large-cap and small-cap stocks thus far this year on a total return basis. That's notable because large caps have historically performed better than small- and medium-cap stocks during down markets (stocks are broadly in the red by double digits thus far this year). Zooming out 10 years shows large caps have been the top performing size category—by a wide margin—largely because large caps weathered the steep decline for stocks better during COVID.

Source: FactSet, as of August 31, 2022. Small-cap stocks measured by the Russell 2000 Index. Mid-cap stocks measured by the S&P Mid Cap 400 Index. Large cap stocks measured by the S&P 500 Index.

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News spinning investor sentiment?

Investor sentiment can sometimes be fickle, and may not always be a function of earnings and other fundamentals. One factor may be how economic news is spun. The San Francisco Federal Reserve tracks the Daily News Sentiment Index, which measures economic sentiment based on lexical analysis of economics-related news articles from 24 major US newspapers. Higher values indicate more positive sentiment, lower values more negative sentiment. Currently, this indicator suggests sentiment is relatively negative, though still well above the low points seen at the outset of the COVID pandemic, financial crisis, dot-com bust, and other recession periods.

Source: San Francisco Federal Reserve, Factiva, as of August 23, 2022. The Daily News Sentiment is a high frequency measure of economic sentiment based on the methodology developed by Shapiro, Sudhof, and Wilson (2020). News aggregator Factiva compiles the articles where they've identified US economics as the subject of the article. The daily-time series measure relies on statistical adjustments that account for changes over time in the composition of the sample across newspapers, and it is a trailing weighted-average of time series, with weights that decline geometrically with the length of time since article publication.

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Inflation report offers some hope

July's Consumer Price Index (CPI)—which measures the average change over time in prices paid by urban consumers for a market basket of consumer goods and services—was better than expected for both the headline and core number. Headline CPI fell to an 8.5% year-over-year increase this July, down from the 9.1% year-over-year surge in June 2022. Lower fuel prices were a primary driver helping soften prices somewhat. Core CPI, which excludes food and energy and is widely used by economists because of the oftentimes volatile nature of food and gas, was flat at 5.9%. While the better-than-expected inflation data may give some credence to the "peak inflation" narrative, relatively high food and shelter costs remain a cause for concern that could keep the Fed on pace for continued rate hikes.

Source: FactSet, as of August 18, 2022.

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Good and bad news on debt

US household debt—of which mortgages represent the largest component—is growing rapidly, according to data from the New York Federal Reserve. On the bright side, mortgage debt, and to a lesser extent non-mortgage debt, has been increasingly held by higher credit score borrowers. That might suggest rising debt levels pose relatively low risk to the economy. But researchers at the nation’s most influential regional Federal Reserve bank are beginning to worry that the current period of historically low delinquencies that has lasted for roughly 2 years could be coming to an end. "With supportive policies of the pandemic mostly in the past, there are pockets of borrowers who are beginning to show some distress on their debt," a recent report from the New York Fed notes. "The delinquency rates for credit cards and auto loans are creeping up … resuming a trend in rising delinquencies among subprime borrowers that we had begun to see in 2019 in auto loans."

Sources: New York Fed Consumer Credit Panel / Equifax, as of August 5, 2022. Charts show the percentage of total balances outstanding. Credit score is Equifax Risk Score 3.0.

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Home affordability drops

The Atlanta Federal Reserve's Home Ownership Affordability Monitor (HOAM), which measures the ability of median-income households to pay for estimated annual costs associated with owning a median-priced home, continues to tell a familiar story. The current HOAM Index dropped to 72 in May, well below the Affordability Threshold—where homes are generally considered affordable if the index value is greater than 100, or when all components of housing costs account for less than 30% of median household income. The major drivers of this decline in affordability have been rising prices, and more recently, rising rates. Given how significant a component housing costs are to consumers, a decline in affordability adds to economic concern.

Source: Atlanta Fed, as of August 1, 2022.

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US dollar near parity with euro

For the first time in nearly 2 decades, the value of the US dollar versus the euro is near parity (1 dollar can be exchanged for 1 euro). The dollar has appreciated rapidly against the euro (and other currencies, such as the yen) over the past year or so, largely as a result of the US central bank aggressively raising interest rates. The euro has also weakened against a range of currencies due in large part to the war in Ukraine. The implications for the USD/euro exchange rate are wide ranging—for example, purchases made by US tourists in Europe are about 20% cheaper compared to a year ago.

Source: FactSet, as of July 29, 2022.

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Call-put ratio near rock bottom

With stocks hovering near 2022 lows, many are wondering which way stocks may go from here. An indicator that some investors use to measure investor sentiment is the S&P 500's call-put ratio. A higher ratio implies more traders are buying calls (a bullish outlook) than buying puts (a bearish outlook). As stocks have declined this year, the call-put ratio has fallen to multiyear lows: The last time it was this low was at the outset of the COVID pandemic. Many investors who utilize the call-put ratio (which can also be shown as the put-call ratio) consider it a contrarian indicator by trading in the opposite direction of this ratio's trend (i.e., have a bullish outlook when the indicator is trending bearish, and have a bearish outlook when the indicator is trending bullish). From a contrarian’s perspective, the bearish trend in this ratio would be interpreted as a buy signal. Additionally, the call-put ratio does not have much lower to go, being near zero.

Source: FMRCo, Bloomberg, as of July 18, 2022.