Chart Content: Differential in yield from the U.S. 10‐year treasury yield and the U.S 3‐Month treasury yield.
Chart significance: It provides an understanding of when economic recessions are most likely to occur. Based on the chart we can observe that recessions are most likely in the early stages of a rising spread, which is something we’re notably past at this point. In the event a recession does transpire, the likelihood of miniscule impact remains highly probable due to sustained fiscally healthy consumers.
Potential forward‐looking implications: Higher spreads remain possible, which implies a tighter Federal Reserve policy and higher interest rates. This may likely continue to be detrimental to investors allocated to traditional bond investments. Equity market participation may prove a better option over the next 12‐24 months, despite the potential for elevated short‐term volatility.
Chart Content: A measure of U.S. household debt for every dollar of income.
Chart significance: Overextension of debt can often spell trouble for U.S. consumers, which can impact banks and generate the potential for excess prudential risk in the economy. Understanding consumer fiscal health – by this measure – remains paramount.
Potential forward‐looking implications: The current state of consumer health, as measured by outstanding debt (relative to the income that is being generated), remains near the healthiest levels on record. In the event of a recession, which remains extremely unforeseen in our view, consumers remain in the driver’s seat.
Chart Content: A measure of available automobile inventory in the United States. As of 1/31/22, there are 0.17 cars available per desired sale.
Chart significance: The upbeat nature of consumers has resulted in excess demand for goods and services, which has been a direct factor to rising inflationary pressures. Geopolitical tensions have not helped in that matter (especially tied to oil prices), but consumers have also aided. Exuberant demand within the auto industry is a great example, a notion that has been further exacerbated by supply chain issues.
Potential forward‐looking implications: Consumer demand for goods and services is not likely to falter in the near‐term. Although we may see a normalization of retail sales and that of auto sales, the trend is likely to remain intact given the strong fiscal health of consumers. This may mean further inflationary pressures in the near‐term amidst such a demand‐pull backdrop. Equities likely stand to benefit.
Chart Content: A measure of profitability for the S&P 500 and the MSCI Europe equity indices.
Chart significance: The current state of global equity markets is one that feels worse than it is. In other words, the uncertainty from the Federal Reserve, coupled with geopolitical tensions, has built a false need for neutrality or even potential pessimism. The reality, however, is less grim. As corporations have raised prices, consumers have responded in an alarmingly positive way (due to their strong fiscal health) and have aided higher earnings per share. This is a tremendous positive and the chart depicts it well.
Potential forward‐looking implications: Equity market volatility is not likely over this year. We’re amidst a Federal Reserve tightening cycle,
we’re dealing with a midterm election year, and we’re now facing tremendous commodity price pressures due to Russian aggression in Ukraine. From a fundamental standpoint, however, equity market participation has historically provided the best insulation to inflationary pressures and long‐term wealth creation. We urge caution for those investors seeking refuge away from equities.
Chart Content: Performance differential between the equal‐weighted S&P 500 and the traditional capitalization weighted S&P 500.
Chart significance: Last year proved to be first time in five years where company size (by market capitalization) failed to correlate with strong index gains above and beyond other indices domestically. Stated differently, the growth biased allocation of the traditional S&P 500 failed to outpace its sister index that does not favor companies by size. This is significant because it may signify a shift away from concentrated mega‐cap names in the U.S. technology segment.
Potential forward‐looking implications: Except for 2016, all other instances of performance differential leadership on the part of the S&P 500 equal weighted index have resulted in a sustained trend. This may imply a continued performance stronghold on the part of value and dividend factors throughout 2022 and into 2023. The current data is confirming such a trend through the first quarter of 2022, and it may suggest further pain on the part of U.S. growth stocks. This is likely to be exacerbated by a tightening monetary policy cycle throughout the year.
Edison Byzyka, CFA – Chief Investment Officer – Credent Wealth Management
Investment advice offered through CX Institutional, a registered investment advisor.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. The economic forecasts set forth in the presentation may not develop as predicted.
All other data, including returns, soured from Bloomberg, through the release of monthly figures from the Department of Labor, Bureau of Economic/Labor Statistics, U.S. Census Bureau, or from the Federal Reserve and any of its affiliated regional locations.
Small Business Optimism sourced through NFIB. Small business hiring plans sourced through NFIB. Consumer sentiment sourced through the University of Michigan.
Earnings data sourced through Bloomberg Intelligence and through Bloomberg’ earnings analysis composites. Interest rate cut/rise probabilities are sourced from Bloomberg’s tracking of futures contracts tied to the Federal Funds interest rate.
Economic Policy Uncertainty data sourced from Bloomberg via The Baker, Bloom, and Davis Index.
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changed in the aggregate market value of 500 stocks representing all major industries.