Six Things to Know About All-Time Highs “Can you take me higher? To a place where blind men see. Can you take me higher? To a place with golden streets.” Higher by Scott Stapp of Creed After a wait of more than two years, the S&P 500 finally closed at an all-time high last Friday. That’s right, the last time it hit a new all-time high was clear back on January 3, 2022, more than two years ago. This was quite a long wait for new highs, but note it went nearly eight years without a new high in the ‘70s and early ‘80s and then more than seven years to made a new high after the tech bubble implosion in the early ‘00s. Still, this recent streak was the longest since more than five years without a new high after the Great Financial Crisis. The second thing to know about new highs is they tend to happen in clusters that can last many years. Since 1957 (when the S&P 500 moved to 500 stocks) there have now been 1,186 all-time highs. But the majority of those new highs took place during three major clusters. 1958 – ’68 281 new highs 1980 – ’00 513 new highs 2013 – current 348 new highs In other words, only 46 new highs took place outside of these three clusters (96.4% of all highs can be found in these three clusters). How much longer this new cluster could continue is hard to say, but we’d say be open to potentially many more years of new highs before it is all said and done. Or, to quote the great musical talent Scott Stapp as seen above, we could be going higher. Third, new all-time highs happen a lot. In fact, 7.0% of all days since 1957 closed at an all-time high, that is a new high every 14 trading days. That is a lot of new highs! Here’s a chart showing all 1,186 new all-time highs (good luck counting them all). If you picked any random day a new high was made, the future returns aren’t too far away from average returns. A year later up 7.4% on average and up about 71% of the time isn’t spectacular, but it sure isn’t bearish either. We’ve heard from many that they are worried that stocks have gone too far too fast, but history would say this bull market probably has plenty of life left. As we will show in number five below, sometimes the wait is worth it (probably like the 10 year wait we’ve had to wait to see Creed live). Fourth, yes, eventually there will be a new all-time high that marks the end of this bull market. But if you spend all your time worrying that each new high will be the final peak, like in ’87, ’00, or ’07, then you likely will miss out on historic gains along the way. Remember, these represent only three all-time highs out of 1,186 and even adding the previous bear markets going back to 1957 only gets you to 10 out of 1,186. Here’s a chart I made that indeed showed the peak before the past 10 bear markets. Again, there will be a time this bull market peaks as well, we just don’t think it is now. Fifth, time is your friend when it comes to investing and one of the strongest reasons to be bullish this year is the fact stocks just went so long with out a new all-time high. I found 13 previous times the S&P 500 went at least a full year without a new all-time high and then made one. The good news is stocks were higher a year later 12 times and up nearly 12% on average and even more looking at median returns. In our recently released Outlook ’24: Seeing Eye To Eye we noted we expected stocks to gain between 11-13% and this study fits right in that area. Here’s a table with all the exact dates and returns. The bottom line is better-than-average returns going out one year is perfectly normal. The sixth and final thing to know about new highs is once we finally made one after a bear market, the trend higher usually remained your friend. After the 25% bear market of 2022 bottomed in October ’22, it officially took more than 15 months to make a new all-time high. The really good news for the bulls here is looking at the past 10 bear markets showed that a year later stocks were higher nine times when new highs were eventually made. Yes, 2007/08 was the one time this didn’t work, but we don’t see many signs of a pending major financial crisis is on the horizon and expect to see higher prices a year from now. To sum it up, are we six feet from the edge (like Scott Stapp sang on One Last Breath)? We don’t think so, as this bull is alive and well, but I just had to make one final Creed reference.
Please Don’t Stress Yourself About “M2” If you’re wondering what I’m talking about, read on, but maybe grab a cup of coffee or your favorite beverage. M2 is a measure of money in the economy, and right now it’s falling, which has led to any number of overhyped worries, including a deflationary recession and/or a stock market crash, as people are perceived to have “less money” to spend or invest. BUT, the short answer to the question “should we be worried about falling M2” is no. The long answer should perhaps start with what exactly M2 is. Think of it like a Russian doll, with M2 consisting of something called M1 plus something additional, while M1 consists of something called M0 plus something additional. At the first level we have M0 (or monetary base): currency in circulation (cash) + reserves (“bank money”) Then we have M1: M0 + checkable deposits + savings deposits Above that is M2: M1 + time deposits (like CDs) + retail money market funds A key part of M2 is “deposits,” and it turns out deposits are falling. Deposits at commercial banks have fallen 2.1% over the year through December, while M2 has fallen 2.3%. Historically, the rate of change of M2 has closely tracked the rate of change of deposits, as you can see in the chart below. The correlation between the two lines is 0.89, and about 0.97 since 2009. More recently, deposits and M2 surged after the pandemic hit. From February 2020 through December 2020, M2 rose 39%, while deposits rose 34%. Since then, through December 2023, M2 and deposits have fallen 3%. We’ve never actually seen such a steep decline in M2, or deposits. To get to the question of why M2 is dropping, we need to understand why deposits are falling. But for that, let’s track back to why deposits surged in the first place after the pandemic hit. By May 2021, deposits were up 23% year over year, well above the historical average of about 6%. From February 2020 through December 2021, deposits surged from $13.4 trillion to $17.9 trillion, an increase of $4.5 trillion. Since then, deposits have fallen $0.6 trillion to $17.3 billion. There were three main reasons why deposits surged after the pandemic. And the reversal of these is what’s leading to a fall in deposits (and thereby, M2). 1) There was huge initial spike in commercial and industrial loans When the pandemic hit, a lot of businesses drew upon their commercial and industrial (C&I) credit lines in order to build cash buffers in the event of a brutal recession. When a business draws upon its credit line, an equivalent amount of money gets deposited in that business’s bank account. Voila! Money is “created out of thin air” by the bank. When a bank makes a loan, it deposits an equivalent amount of money in the borrowers’ bank account. This is a useful reminder that most of the money creation in the economy is done by banks when they make loans, and loans create deposits as opposed to deposits being “lent out.” C&I loans jumped about $0.7 trillion to just over $3 trillion between March and May 2020. These credit line draws then collapsed over the following year as the economy normalized, and businesses were able to pay back what they borrowed. As you can see below, commercial and industrial loans started to pick up again in late 2021 and early 2022 but plateaued after that as interest rates surged. 2: Deposits surged due to the Fed’s bond purchases, and that’s reversing now The Federal Reserve (Fed) re-upped their bond-buying program, i.e. Quantitative Easing (QE), in March 2020 after the pandemic hit, and that led to a surge in deposits as well. Here’s an example to understand why deposits increase when the Fed buys long-term government bonds (and mortgage-backed securities). Say, the Fed buys $1 million of Treasury bonds – but instead of buying them from the Treasury directly, they buy it from a pension fund. However, the Fed did not print $1 million worth of currency and swap it with the pension fund for Treasuries. What it did print was “reserves,” which are bank money that banks use amongst themselves to settle balances. The Fed used banks as an intermediary during QE. In our example, the Fed credited the pension fund’s bank account with a deposit of $1 million – which is a $1 million liability of the bank (as are all deposits), and a $1 million asset for the pension fund. It then credited $1 million reserves with the pension fund’s bank – which is a $1 million asset for the bank and equivalent liability for the Fed. The picture below highlights the process (via the Bank of England). You can see what happens to each entity’s balance sheet: For each entity, here’s what happened: Pension fund: It still has a $1 million asset on its books, albeit a short-term deposit instead of a long duration Treasury bond. Fed: It “financed” its purchases of the $1 million Treasury bond by creating bank money, i.e. reserves. Bank: It added $1 million of assets (reserves) and $1 million of liabilities (deposits). So, there was no overall change in net worth but the bank’s balance sheet expanded. As you can see, reserves weren’t “free money” for the bank, since an equivalent deposit was created at the same time. This is how QE increased deposits in the banking system. Reserve balances surged from $1.7 trillion in February 2020 to $4.2 trillion in December 2021. Since then, the Fed has reversed its bond buying program, and is now engaged in “Quantitative Tightening” – bringing reserves down to $3.2 trillion, driving deposits, and M2, lower in the process (a reversal of what I went through above). 3: Consumers increased liquid savings in 2020/2021 amid the pandemic, and that’s reversed (a bit) The pandemic saw household bank deposits surge, thanks to… Reduced consumption, which sent household savings rates surging Covid relief payments in the form of stimulus checks, the child tax credit, and PPP loans Covid relief measures such as deferred rental and student loan payments As a result, household deposits (checkable, time, and savings deposits) surged by over $4 trillion between Q4 2019 and Q4 2021. But this has pulled back by about $1.3 trillion since then (through Q3 2023). Now, a chunk of it has migrated to money market funds, which are paying a lot more interest than they did just a couple of years ago. Household assets in money markets have risen by $0.8 trillion since the end of 2021 (note that this is “counted” as part of M2). Taking all of this into account – checkable, time, savings deposits, and money market fund shares – the drop since 2021 Q4 is about $0.5 trillion. This also means households still have a chunk of liquid assets left, around $1.8 trillion more than you’d have expected based on the pre-pandemic trend (2017-2019). In summary, M2 is falling because deposits are falling because pandemic era (2020-2021) trends are reversing: The Fed has reversed Quantitative Easing, thereby draining deposits (and reserves) in the banking system. There is no more fiscal stimulus, or other measures, which is what ballooned household deposits. Households are no longer saving as much as they did during the pandemic. Instead of M2, Look at Bank Lending Rather than looking at M2 to understand how much money creation, or “destruction,” is happening, a much more straight-forward approach is to look at the entities that create most of the money in the system, i.e. the banks (in addition to fiscal deficits). As I pointed out above, banks create money “out of thin air” when they make a loan. And no, a bank loan officer doesn’t take yours (or my) deposit and lend out some fraction of it. Instead, the act of creating a loan results in a deposit being credited to the borrowers’ bank account. So, let’s look at bank lending. The good news is that bank lending grew in 2023 by about $250 billion, despite the crisis around the failure of Silicon Valley Bank last March, which created concerns about the banking system. The bad news is that loan growth eased from a 12% year-over-year pace at the end of 2022 to just over 2% at the end of 2023, well below the 1990-2019 average of around 5.5-6%. At the same time, keep in mind that GDP growth in 2023 is likely to clock in at 2.5-3%, above the prior decade trend. Because of that, the economy didn’t need credit to keep its engines moving. Instead, strong incomes, thanks to a strong labor market, and government spending (including defense and state and local government spending) boosted the economy. As we move into 2024, easing interest rates, and continued demand in the economy, is likely to boost loan growth, which would be a tailwind for economic growth. All this to say, there’s a lot going on an economy, especially one as dynamic as the US economy, and you have to look at the totality of data rather than just one seemingly simple indicator like M2.
Nonstop Nasdaq Wed, Jan 24, 2024 The mega-cap Tech-heavy Nasdaq 100 is up nearly 1% today as of this writing, which leaves it up 4.5% already in 2024. It's been about a month now since the Nasdaq 100 took out its prior all-time highs from late 2021, but as shown in the chart below, the index is already 5.9% above those prior highs as the breakout continues. Two more noteworthy stats: The Nasdaq 100 is now up 64% during its current bull market that began on 12/28/22. And, since the COVID Crash low that the Nasdaq 100 made on 3/20/20, the index is up a whopping 150%. Below is a table showing historical bull markets for the Nasdaq 100 since the index came to be in the mid-1980s. The current bull market is its 16th using the standard 20%+ rally definition, and this bull is now right at the median when it comes to gains and length. As shown, the current bull has seen a gain of 64.3% over 392 days. The median gain for all Nasdaq 100 bull markets is a gain of 64.5% over 407 days. When it comes to the average bull market, however, the current bull has a ways to go. Because of two very lengthy bulls that saw 600%+ gains in the 1990s and 2010s, the average bull market looks much different than the median bull market. As shown in the table, the average Nasdaq 100 bull market has seen a gain of 163.2% over 799 days -- which is basically double the length and 100 percentage points stronger than the median bull.
Taylor Swift Isn’t the Only One Feeling Good, More Americans Are Too Consumer confidence has been rising recently. Maybe it’s Taylor Swift, and her weekly Sunday appearances. Or maybe it’s rising stock prices, rising home prices, and falling gas prices. Ultimately, perhaps the best signal to draw from rising confidence is that the labor market is strong. Keep in mind that the close to 70% of the US economy is made up of consumer spending, and since consumption is driven by incomes, a strong labor market holds the cards when it comes to the economy. The Conference Board’s Consumer Confidence Index jumped by 6.8 points to 114.8 in January, taking it to the highest level since December 2021. Consumer confidence remains below levels we saw in 2018-2019, but the recent surge is welcome, after almost two years of depressed sentiment. The big driver of the jump was how consumers feel about present conditions, specifically job availability and business conditions. The Present Situation Index jumped 14.1 points to 161.30, the highest level since the pandemic hit in March 2020. In contrast, Americans are still relatively concerned about the future, with the Expectations Index – measuring expectations of future household income, job availability, and business conditions – still hovering well below levels we saw before the pandemic. It has risen over the last three months, which is positive, but we have quite a ways to go. The good news is that consumers’ perceived likelihood of a recession over the next 12 months continued to fall, hitting the lowest level since August 2022 at 66%. Consumers Are Telling Us the Labor Market Is Strong Later this week, we’ll get the December payroll report, which is the most comprehensive early look into the status of the labor market. However, the fact that consumer’s appraisal of the present situation surged in January suggests that the labor market is in a very healthy place. In fact, the number of survey respondents saying “jobs are plentiful” rose by 5.1%-points to 45.5%, the highest level since April 2023. At the same time, respondents saying “jobs are hard to get” fell 3.3%-points to 9.8%, the lowest since March 2022. The difference between the two is called the “Labor Differential Index,” and as you can probably guess, that jumped as a result. It surged 8.4 points to 35.7, which puts it above the 2019 average of 33.3. Outside of the pandemic recovery in 2020-2021, the increase in January is the largest we’ve seen in the history of this index (since the late 1970s). Historically, it correlates strongly with the unemployment rate, a large value corresponding to a low unemployment rate and vice versa. What consumers are telling us also corroborates with other “hard” data we got this week. Layoffs continue to run relatively low. In December, the level of layoffs was around 1.62 million, well below the 1.8 million we saw before the pandemic. Keep in mind that the workforce is also larger now. If we normalize for that, the “layoff rate,” or layoffs as a percent of the workforce, is running at a historically low 1.0%. For perspective, it was running around 1.2-1.3% in 2018-2019. (Note: I’ve truncated the y-axis in the chart below, to provide more clarity, since layoffs surged in March – April 2020 and overwhelms everything else.) Big picture, the economy is in a good place, especially the all-important labor market, and consumers are starting to perceive it as such. Strong incomes are what pushes consumption higher, and that’s good for economic growth, as well as company revenues and profits. Another huge benefit of a strong labor market and strong incomes, along with falling inflation, is that the economy is less dependent on credit as a driver of growth, for households, but also for businesses. It allows businesses to fund expansion with profits, as opposed to solely debt financing. This is a big reason why we saw economic growth run above trend in 2023, even as bank lending eased to 2% year over year, well below the historical run rate of around 5%. That’s another way in which we may be in a different sort of economic environment than what we’ve experienced since the 1980s – one that is fueled by incomes rather than credit. That’s a big reason to feel good.
Up 7 of Last 12 After Presidents’ Day but Still Weak Long Term DJIA, S&P 500 and NASDAQ are all up 7 of the last 12 years on the day after the Presidents’ Day market holiday with average changes ranging from -0.19% for DJIA to 0.01% for NASDAQ. Our February 2024 Strategy Calendar for members shows conflicting indications for this Tuesday, February 20, the day after Presidents’ Day. Over the most recent 21 years (2003-2023) the 13th trading of February has been down 61.9% of the time for S&P 500 with average loss of -0.28% earning the day our “Angry Bear” icon. Yesterday’s post noted the improving trend of market performance ahead of Presidents’ Day weekend. As you can see in the table here the days after has modestly improved the past 12 years but the Wednesday after has not enjoyed the same turnaround and both days still display a fair amount of red. Since 1990, Tuesday after Presidents’ Day has been strongest for the S&P 500 with 18 gains and 16 losses with a median gain of 0.08% but with an average loss of –0.30%. DJIA is 50/50 on the Tuesday after, but NASDAQ is a net loser down 21 of 34 years with an average loss of –0.56% and a median loss of –0.32%. Wednesday is all red for all three major averages. NASDAQ and S&P 500 have more losses, but DJIA is a loser as well. On the Wednesday after the Presidents’ Day holiday DJIA is down 18 of 34 with an average loss of –0.10% and a median decline of –0.16%. S&P 500 is down 21 of 34, average –0.08%, median –0.11% and NASDAQ is down 19 of 34, average –0.10%, median –0.14%. Today’s hotter than expected PPI (combined with a similar CPI report earlier this week) is a stark reminder that inflation and higher interest rates could be around longer than the market had hoped.
Why Stocks Up In Both January And February Is Quite Bullish “Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.” Winston Churchill First off, happy Leap Day! We get an extra day every four years and hopefully you have fun today. Well, so much for February being a historically weak month. The amazing bull market continued and the S&P 500 is about to close higher in both January and February. We noted in As Goes January, So Goes the Year? The Bulls Hope So that a higher January tended to suggest future strength, well, things get even better when the first two months are higher. Here’s what tends to happen after a positive January. How amazing is this? After the S&P 500 gained in both January and February (like 2024 is about to do) the next 12 months were higher an amazing 27 out of 28 times! The final 10 months were higher 26 out of 28 times, with the returns in both cases much better than the average returns. The S&P 500 was up 19.9% in years that saw both January and February higher, as the chart below shows. We aren’t expecting 20% gains this year, but we sure wouldn’t complain about them if they happened! Lastly, it isn’t just the first two months of 2024, as remember we saw a big rally the final two months of last year as well. We found 14 other times stocks were higher in November, December, January, and February and for the full calendar year (so 2023 returns) the bulls were smiling every single time, with an average return of 21.2%. We’ve been overweight equities since late 2022 and have remained there ever since. It wasn’t very popular this time a year ago saying stocks were going higher and a recession wasn’t happening, as it went against what the masses were saying. Well, right now we see very few reasons to change our bullish outlook and a higher January and February does little to change that.
S&P 500 Best on First trading Day of March Last 24 Years First trading days of months have a bullish reputation and March is not an exception. Reviewing the last 24 years of data reveals S&P 500 has the best record, advancing 66.7% of the time with an average gain of 0.35%. NASDAQ is second best based upon frequency of gains, up 62.5% of the time examined with an impressive 0.63% average gain. DJIA has been modestly softer, also up 62.5% of the time with an average advance of 0.27%. March’s first trading day strength has not been limited to just the last 24 years. Since 1950, DJIA has advanced 50 times in 74 years (67.6%) with an average gain of 0.23%. S&P 500 has been nearly as consistent, up 63.5% with an average gain of 0.24%. NASDAQ has also been a solid performer since 1971, up 33 times in 53 years (62.3%) with a respectable 0.35% average.
Here’s Why We Believe the Economy is Doing Fine Happy March 1st! Yesterday was Leap Day and we threw an extra special Facts vs Feelings event to celebrate: a 4 hour live stream with some of the top experts in the world of investing and finance, including Dan Ives (Managing Director and Senior Equity Research Analyst at Wedbush Securities), Cathie Wood (Chief Executive Officer and Chief Investment Officer at ARK Investment Management, Libby Cantrill (Head of US Public Policy, Managing Director at PIMCO), and Neil Dutta (Partner, Head of Economic Research at Renaissance Macro Research). Ryan and I had a lot of fun, and it took a village behind the scenes to put it on (thank you to all the folks at Carson Group). If you missed it, keep an eye out for individual Facts vs Feelings episodes with each of our guests, which will be released over the next few weeks. If I had to find a common thread across all our guests, it was a general sense of optimism around the economy and markets. Neil Dutta put it succinctly when we asked him what the story of the economy was right now. His response: “The economy is fine.” He went on to add that investors have been so focused on looking for risks over the last decade, that a big risk right now is that folks could potentially miss the upside. Historically, Neil’s been more right than anyone else on how the macroeconomic environment has transpired over the last 18 months, and most importantly, he’s been right for the right reasons. We’ve been in the same camp as Neil, which is a big reason why we continue to overweight equities in our House View portfolios. In fact, in our long-term oriented strategic portfolios – amongst the most popular models at Carson – we are at our maximum possible overweight to equities. I want to walk through some of the data Neil mentioned in our conversation. Yesterday, we also got the personal consumption index (PCE) inflation data, the Federal Reserve’s (Fed) preferred metric of inflation. There was a spike in inflation in January, mostly on the services side. But there’s good reason to believe this is a one-off “January seasonality effects,” which will ease over the next few months. The big picture is that inflation is easing. Core PCE inflation, which strips out volatile food and energy components, is running at a 2.5% annualized rate over the last three months, and 2.6% annual rate over the last six months. A year ago, these metrics were running around 5%, so the January spike in inflation data is likely just a bump in the downward trend. A big reason to be skeptical of another inflation surge is what we’re seeing in the labor market. For one, wage growth is not accelerating. The Employment Cost Index (ECI), which is considered the gold standard of wage growth measures, continues to decelerate. As of the fourth quarter of 2023, ECI for private sector workers was running at an annualized pace of 3.7%, well below peak levels in 2022 to early 2023. It’s only slightly elevated relative to the 2017-2019 average of 2.9%. Nevertheless, the downtrend in wage growth suggests the January inflation spike is not the beginning of an uptrend. Another sign that we’re not likely to see a burst of wage growth (and inflation) is that the rate at which workers are quitting their jobs has fallen significantly over the last ear. As a percent of the workforce, the number of workers quitting their jobs is now at 2.4%, well below where it was a year ago, and in fact, even lower than where we were pre-pandemic. Lower turnover implies that the labor market is not as hot as it was and validates what we’re seeing in the wage growth data. As I noted above, wage growth is still elevated relative to where we were pre-pandemic. That’s not necessarily a bad thing – inflation can still remain muted if productivity is running strong. And we’ve seen some evidence of that. Over the last three quarters, productivity growth has run at an annualized pace of 3.9%, the strongest pace outside of recessions since the late 1990s. (Labor productivity “artificially” goes up during recessions and their immediate aftermath, as the same level of output is generated by fewer workers.) In fact, Neil made a good point that the lower quit rate is likely boosting productivity. If a worker sits at the same seat for a longer period, they likely become better at their jobs. Ultimately, what matters for an economy that runs mostly on consumption is inflation-adjusted income growth. Relatively strong wage growth combined with decelerating inflation means real incomes are growing. Along with the latest PCE inflation data, the government also released personal income data, which perhaps got less attention than it deserved. Over the last three months, real incomes excluding transfers (like social security) are running at an annualized pace of 4.2%. For perspective, it was running at 2.6% across 2018-2019. Yeah, the general consensus is the economy is fine. Perhaps more than fine.
