Published May 5, 2023
Markets continue to slog their way back and forth within a fairly tight range, bouncing between scenarios for a recession (or not), interest rate pauses from the Fed (or not), and just what is happening with the banks(!). Mixed signals abound. Despite corporate earnings coming in well above fears, the uncertainties noted keep investors from pursuing any consistent meaningful direction.
This week, we are turning to Blake Millard’s always-interesting roundup of data and charts to enlighten us. We hope you also find it interesting. Here’s Blake:
Loss aversion
No one likes losing. In fact, we’ll do almost anything to avoid it. Behavioral finance calls this loss aversion.
The logic? We’re so averse to losing that we feel the pain of loss more acutely than the pleasure of gain.
Something to consider when managing portfolio risk, especially when a trade or position starts working against you.
Source: Carl Richards, Management Study Guide
Micro caps on life support
The riskiest parts of the market are avoiding a major break down, at least for now. If micro caps lose this key level of polarity (blue horizontal bar below), it could be a harbinger of what’s to come next for risk assets.
The iShares Micro-Cap ETF (IWC) is down ~18% since the recent peak of $121.88 just two short months ago on February 2nd.
Source: Honeystocks
Global central bank update
Have we seen the peak in hawkishness from central banks?
The chart below tracks the proportion of central banks who left interest rates unchanged during the most recent month, meaning they neither cut nor hiked rates. This data series tracks 39 central banks across developed and emerging markets representing ~90% of world’s GDP.
In April, at just under 90%, it reached the highest level since mid-2021 – the period in time when macro policy pivoted and the global synchronization of rate hikes began.
This would suggest the bulk of tightening is most likely behind us as inflationary pressures begin to ease-off and recession risks come into focus. But a “pause” is the key operating word for now; “cuts” are premature at this point, unless market instability warrants an easing in policy conditions.
Source: Topdown Charts
ChatGPT’s growth rate is bonkers
OpenAI’s ChatGPT reached 100 million users in 2 months. Let me repeat that: 100 million people signed up for an AI chatbot just 2 months after launch. This is the fastest growth rate of any product to hit massive scale in history. Reviewing the chart below, it is running laps around other game-changing products and technologies that have redefined the landscape over the last 20 years.
Analysts believe the viral launch of ChatGPT will give OpenAI and its anchor investor, Microsoft, a first-mover advantage against all other Artificial Intelligence companies, including Google.
“In 20 years following the internet space, we cannot recall a faster ramp in a consumer internet app,” UBS analysts wrote in the note
Source: The Daily Shot
Wage growth for job-stayers vs. job-changers
Yesterday, the private payrolls firm ADP released their monthly employment report. The change in annual pay for job-stayers in April was +6.7% year-over-year, down from +6.9% in March and the lowest since December 2021.
The change in annual pay for job-changers in April was +13.2% YoY, down from +14.2% in March and the lowest since November 2021.
Wage inflation remains quite high but is starting to roll over, albeit slowly. The turnover rate in companies will remain elevated as long as the average job-changer is still commanding double digit wage gains.
Source: ZeroHedge
Which states have the lowest taxes?
Always interesting to see the latest update on total tax burden to individuals per state. Seeing tax burdens as a percentage of personal income cuts through the noise of analyzing tax rates.
Looking at this data from different angles provides key insights, including the fact that states without income tax don’t necessarily have the lowest tax burdens. They make up for it with high taxes on what people buy on or the property they own. Plus, states shift many taxes from residents to visitors and tourists via sales and other taxes.
Understanding how your state taxes people and corporations, compared to the services it provides residents, can give a sense of what a state prioritizes.
Source: USA Facts
Market Update
This week had it all for investors: another Fed meeting and interest rate comments; a hefty slate of corporate earnings reports; the monthly jobs report; and yet more bank drama. All to begin the somewhat notorious month of May (“sell in May and go away” is the long-term Wall Street adage). The week kicked off with beleaguered First Republic Bank being sold to JP Morgan. JPM’s stock popped +2% on the news. A report on factory activity contracted for the sixth straight month but came in better than expected and was improved from the March reading. Indexes stayed put Monday awaiting the Fed meeting output. But investor worries dominated Tuesday’s trade as regional banks sold off anew with shares in PacWest and Western Alliance Bank crushed as investors fled. The flight-to-safety mode pushed broad market stock indexes down -1.2%. Stocks gave up early gains Wednesday as investors failed to be soothed by Fed Chair Powell’s words. The Fed raised interest rates by the expected +0.25% Wednesday but left the door open to future increases while early readings on employment showed robust hiring. The mix of the two left investors nervous enough to push stocks lower by -0.7%. The selling continued Thursday with further steep declines in regional banks as PacWest Bank and Western Alliance Bank both were reported to be seeking a sale or other strategic move to stem the furious selling in their shares. A deal between another bank, First Horizon, and Canada’s TD Bank was called off as the Toronto-based TD Bank walked away. All the drama left stocks down once again this time off -0.7%. But all the angst was suddenly forgotten Friday as stocks ripped higher led by market behemoth Apple. The company reported earnings Thursday night that encouraged investors while also announcing another massive share buyback. Shares in Apple roared higher by +4.7% on the day to help propel market averages upward by around +2%. Adding to investor enthusiasm, the monthly jobs report substantially beat expectations to show a still-strong hiring and wage input to the economy. The report seemed to calm investor fears of a recession and allow them, for the day at least, to embrace a “soft landing” scenario.
Friday’s bullish action all but cancelled out four days of market weakness to leave the S&P 500 (SPY) down only -0.79% on the week after falling as much as -3%. The Nasdaq 100 (QQQ) managed a complete reversal of fortune to close +0.10%. Smallcaps (IWM) staved off the fierce selling in regional bank shares to close only down by -0.43%.
Warm wishes and until next week.