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

Record Fed buying

The Federal Reserve has bought more than half of $1 trillion in mortgage-backed securities (MBS) since March. That is a record pace for just over 6 months, surpassing previous quantitative easing (QE) efforts by the US central bank. Before the coronavirus outbreak, the Fed had begun to unwind some of its holdings in 2018 and 2019. But the US central bank quickly reversed course as the magnitude of the pandemic unfolded, as this QE measure has been among the most substantial actions taken by the US to blunt the negative economic impact of COVID-19.

Source: Bloomberg

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Contrarian indicator

The total options put-call ratio has fallen alongside stocks rallying to new highs since the March COVID-19 US market low. Most chart users utilize the put/call ratio as a contrarian indicator: When investors appear broadly bullish or bearish when this ratio is at extremes, they take the opposite view. Basically, a contrarian is betting against the crowd. When this ratio is over 1, put volume exceeds call volume. Conversely, when this ratio is under 1, call volume exceeds put volume. Currently, it is around 0.5, which means that call volume exceeds put volume. A contrarian might interpret this ratio as the US market having risks to the downside.

Source: FactSet, as of September 6, 2020.

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US corporate profits fall

While stock markets are rallying to new heights, corporate profits have not reflected that reality. Coronavirus has dramatically slowed US corporate profits both before and after tax, with the pace of decline outstripping that of the drop seen during the financial crisis of 2008. Corporate income taxes had already been trending lower since 2015.

Source: FactSet

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Watching housing

Given how important housing is to the financial system, investors may want to monitor how COVID-19 is wreaking havoc on Americans' ability to afford their homes. The percentage of people who missed their July rent or mortgage payment (and do not believe they will be able to make the August payment by month end) varies by state, but is significantly higher across the country relative to pre-COVID levels.

Source: US Census Bureau, Household Pulse Survey.

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Oil prices stabilize

Demand for energy fell off a cliff earlier this year amid worldwide economic shutdown efforts aimed at combating the virus. While oil prices are still below price levels from just a few months before the COVID-19 outbreak, they have since recovered much of those losses. A multimonth chart shows that they appear to have stabilized near $40 per barrel. Recall that a contract of West Texas Intermediate (WTI) crude oil briefly fell below zero (buyers had to pay sellers to store the oil) for a short time back in April (this contract price not depicted below).

Source: FactSet, as of August 19, 2020.

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ESG wins

Over the past year, European stocks with the highest environmental, social, and governance (ESG) ratings have beaten the broad market, mostly thanks to their performance since the COVID-19 bottom set in March. This might suggest that investors broadly have thought companies with better ESG ratings have attributes that may help them better navigate current market conditions and/or a new normal, to some extent.

Source: Bloomberg, MSCI, as of August 6, 2020. Data is normalized as of 8/6/2019. MSCI Europe ESG Leaders Index is a capitalization weighted index that represents large- and mid-cap companies across 15 developed markets with high ESG performance compared with sector peers. MSCI Europe Index represents large- and mid-cap companies across 15 developed markets in Europe.

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Can earnings support stock prices?

While the initial shock of COVID-19 appears to have worn off from the perspective of many investors around the world, new confirmed cases remain near all-time highs as economies continue to try to reopen. Questions remain as to whether earnings can support the 4-month-long rally for global stock markets from their low point in March. Looking at the S&P 500, forward earnings per share (EPS) has lagged the stock rebound substantially.

Source: Bloomberg, as of August 2, 2020.

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COVID-19 crushes government revenues

As of July 26, there have been over 16 million confirmed COVID-19 cases worldwide, with over 642,000 deaths, according to data from Johns Hopkins University. With no vaccine or treatment available yet, these numbers will continue to rise sharply for the foreseeable future, given the growth in new confirmed cases in Brazil, the US, and many other parts of the world. The economic effect continues to remain unknown. In the US, 2021 revenue loss estimates for state and local governments—which employee millions of people—could be staggering.

Source: Strategas

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Home prices keep rising

One indicator says US home prices continue to rise. The S&P CoreLogic Case-Shiller Composite 20 City Index has shown no signs of weakness, even as the COVID-19 pandemic has unfolded. At the same time, 4.3 million Americans missed their housing payment in May, up from 2 million in March, according to mortgage data company Black Knight. The overall delinquency rate stood at 8% at the end of May.

Source: FactSet, S&P Indices. The S&P/Case-Shiller Composiite 20 Index is a composite of the home price index for 20 major US metropolitan areas, using a modified version of the weighted repeat sales methodology.

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30-year rate falls

While stocks have rocked back and forth thus far this year, interest rates have generally trended lower—including the 30-year mortgage rate. One reason why the 30-year may be falling is an increase in prepayments by agencies who buy out loans, which can result in cash being used to issue new loans at lower rates. Some speculate that unless 10-year yields increase significantly, 30-year rates might continue to fall.

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Stocks rock back and forth

Immediately after the worst quarter in over a decade for global stocks—as measured by the MSCI All-Country Index—the market had its best quarter in 11 years. While the Q2 rally recovered much of the coronavirus-induced losses, the risk of a downturn has accelerated in recent weeks with new confirmed cases at record levels in many places as testing ramps up and global economies reopen.

Source: Bloomberg, as of July 6, 2020.

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Summer stock doldrums

Q3 is typically the lowest-performing quarter for stocks, based on average quarterly price returns for the S&P 500 and Russell 2000. For example, the S&P 500 has averaged just 0.5% from July through September. That compares with greater than 2% gains for all other quarters. Of course, historical trends may be immaterial in this market, given the unique pressures of the global pandemic.

Source: CFRA, S&P Global, as of June 29, 2020. Past performance is no guarantee of future results.

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Chart Title	Date
Record Fed buying	09/18/2020
Contrarian indicator	09/11/2020
US corporate profits fall	09/04/2020
Watching housing	08/28/2020
Oil prices stabilize	08/21/2020
ESG wins	08/14/2020
Can earnings support stock prices?	08/07/2020
COVID-19 crushes government revenues	07/31/2020
Home prices keep rising	07/23/2020
30-year rate falls	07/17/2020
Stocks rock back and forth	07/10/2020

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