Legacy’s Investment Team flips through hundreds of charts each quarter, handpicking those that we feel are relevant to the particular investment backdrop that you can walk through with us.
The Consumer Price Index (CPI) was unchanged in October, below the consensus expected +0.1%. The CPI is up 3.2% from a year ago - a huge improvement versus the 7.7% reading in the year ending October 2022. The actions taken by the Federal Reserve to fight inflation continue to gain traction.
How have markets historically reacted to geopolitical crisis events, including wars and terrorist attacks? We look back at two dozen or so such events going back to World War II in the table below:
While the total drawdown related to this tragic event and recovery timetable are unknown, based on prior geopolitical events, the average drawdown is -4.7%, while the average time to reach market bottom is 19 days, and the average time to fully recover losses is 42 days. In other words, equities have historically held up well during geopolitical shocks, including wars and other military conflicts going back decades, with the average recovery taking roughly two months. Even the market recovery from 9/11 took only 31 days.
What homebuyers need to know: It’s more expensive than ever to buy a home. The median monthly mortgage payment hit an all-time high of $2,632 during the four weeks ending September 10. Although the weekly average mortgage rate has declined slightly from August’s two-decade high, it’s still sitting above 7%. Prices are up, too, increasing 4% year over year.
What home sellers need to know: Prices continue to rise because inventory is so low, posting one of its biggest declines in 19 months this week. But keep in mind that high prices, elevated rates and the lack of inventory is sending some buyers to the sidelines; mortgage-purchase applications are hovering near a three-decade low and pending home sales are down 12% year over year.
While higher rates are a negative for borrowers, investors and savers have been raving this year about how much they can now earn on their cash. However, investors who deviated from a diversified portfolio have been left scratching their heads as the stock market continues to climb the wall of worry - the S&P is up 18.5% YTD and a diversified 60/40 portfolio is up double digits as well.
Owner's equivalent rent - the official measure of housing price inflation for CPI - is not a real time data point. As shown in the chart below from PGM Global, home prices typically lead the owner's equivalent rent CPI measurement by 18-24 months.
Why It Matters: With this measure just now starting to move lower, this should help inflation continue to tick lower in the coming months.
Abandoning strategic equity allocations may be most tempting at the end of central bank tightening cycles when cash yields reach their most attractive levels. Historically however, exiting the equity market to invest in cash at these inflection points has not provided durable capital appreciation in the longer term. Investors may need to exercise discipline in maintaining target equity weights to achieve long-term return targets.
US housing shortages may provide a cushion to home price declines in 2023. Refinancing activity will likely remain weak given many homeowners’ “golden handcuffs,” which describe existing attractive mortgage rates disincentivizing borrowers from moving homes. For example, less than 2% of conventional borrowers pay more than the current market rate on a 30-year fixed rate mortgage, potentially limiting motivation to refinance even if rates fall.
Based on forward Price/Earnings Ratios, International equity markets are trading at one of the largest valuation discounts relative to the US equity markets on record following their decade+ stretch of underperformance. This is paired with a nearly decade long rise in the value of the US dollar relative to foreign currencies. Cheap equity markets paired with cheap currencies bode well for forward looking returns.
The "excess savings" economists often refer to was driven by a combination of a significant drop in spending and increase in fiscal support during the pandemic. A degree of this "excess savings" has been spent down over the past 1.5 years but continues to be elevated.
Commercial real estate debt as a share of GDP is much smaller than residential mortgage debt thus reducing fears of another financial crisis akin to 2008.
Rental costs still remain below the cost of home ownership, even amid recent improvements in housing affordability. Elevated interest rates and still-lofty home values make ownership pricey. Meanwhile, rent prices on new leases have begun to roll over and will likely become a key driver for lower overall core inflation by year end.
Recent labor market strength has surprised to the upside for 12 consecutive months, revealing a resilient, though gradually softening jobs market. Labor market demand will need to continue normalizing relative to supply to slow wage growth and ultimately bring down core inflation.
March data shows easing energy prices helped pull U.S. headline inflation under 6% for the first time in over a year. However, "stickier" areas of CPI, like service, remain stubbornly elevated.
Over the past 18 months, the Fed has focused predominantly on one problem: inflation. However, recent financial system stress, may have altered policy priorities - or at least the market's perception of them. Over the past few weeks the market implied terminal rate has fallen as investors grapple with how much higher the Fed can hike without any further stress.
The year-over-year growth rate in Money Supply has decelerated to the slowest pace in at least 60 years as the Federal Reserve tightens monetary policy. As illustrated in the chart, rapidly declining money supply growth may help drive inflation lower.
Fourth quarter earnings season is beginning to conclude and many companies are seeing a critical tailwind of inflation showing signs of weakness. The share of management teams citing labor shortages, now at less than a third of the peak in 3Q 2021, indicates loosening in the jobs market, which the Federal Reserve has indicated will be necessary to slow wage growth and broader inflation.
After a string of monthly declines, the January CPI report showed a bounce in headline inflation of 0.5% month over month (m/m) and 0.4% m/m excluding food and energy. Markets had largely expected the uptick, but the underlying components showed a more mixed inflation picture compared to the broad-based declines seen in prior months. Still, disinflation is likely in its early innings across the major components of CPI, as shown below, and should gradually bring inflation back down to 2-3% over the course of 2023 and 2024.
Four Hundred portfolio managers attending Goldman Sachs' 2023 Global Strategy Conference were surveyed on their opinion of the best performing asset class in the year ahead. Relative to 2022, PM confidence in fixed income has risen the most, particularly for corporate bonds as higher yields, more attractive coupons, and an expectation for less interest rate volatility may continue to support portfolio asset rotations back into bonds in 2023. Predictions such as these should always be taken with a grain of salt, however the survey does provide meaningful insight into current sentiment and positioning.
Last year at this time, equity markets were near record highs after the economy and corporate earnings surged in 2021 and interest rates remained low. As it became clear that the Federal Reserve would need to aggressively hike interest rates to control inflation, investors reduced exposure to risk assets — sending equity valuations lower. Higher interest rates can put downward pressure on price-to-earnings (P/E) ratios, and we saw this play out in 2022. While earnings grew throughout the year, valuations declined — with the S&P 500 Index forward P/E falling from 21.7x to now 16.8x, close to the 15-year average (black diamond).
Inflation eased in December for the sixth straight month. The consumer-price index (CPI), a measurement of what consumers pay for goods and services, rose 6.5% last month from a year earlier, down from 7.1% in November and well below a 9.1% peak in June.
Goods prices, a key driver of inflation over the past year and a half, fell for the third straight month in December as improving supply chains and reduced demand have relieved price pressures on goods.
