📉The stock market fell last week with the S&P 500 shedding 1.9% to end at 5,827.04. The index is down 0.9% year to date and up 62.9% from its October 12, 2022 closing low of 3,577.03. For more on recent market moves, read: Investing in the stock market is an unpleasant process 📉
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In the early stages of the recovery, activity was bolstered by loose monetary policy and stimulative fiscal policy. It all helped fuel massive tailwinds that made it seem like the economy had nowhere to go but up.
But as time passed and policymakers turned hawkish in their efforts to contain inflation, the economy went from very hot to something a bit cooler.
To be clear, this is not to say we’re on the precipice of a recession. (In fact, there are some signs that he economy may be accelerating.)
Rather, it’s just acknowledgement and recognition that it has gotten harder to argue that growth is destiny.
In that vein, here are some once-hot metrics that have cooled off.
Orders for nondefense capital goods excluding aircraft — a.k.a. core capex or business investment — are a leading indicator, meaning they foretell economic activity down the road.
Orders surged from 2020 into 2022. With each monthly report on orders was the expectation that a lot of equipment would be shipped and put to work in the near future. In other words, today’s orders were a preview of tomorrow’s economic activity.
But growth in orders plateaued in 2022 and its been zig-zagging ever since.
The good news is this metric continues to trend at record levels. It’s just not really growing.
For more, read: The economy has gone from very hot to pretty good 😎 and ‘Check yourself’ as the data zig zags ↯
One of the clearest signs of booming economic demand was the number of job openings posted by U.S. companies. At the peak in March 2022, there were a whopping 12.2 million openings, which translated to 2 job openings per unemployed person.
Similar to core capex orders, the job openings number represents economic activity that has yet to be realized.
But this metric has been cooling for almost three years. As of November, there were 8.1 million job openings, or 1.1 openings per unemployed person.
The good news is there continues to be more openings than unemployed people, and this ratio continues to be elevated above the prepandemic trend. However, employers aren’t scrambling to fill jobs as they did for most of the past three years.
For more on job openings, read: Were there really twice as many job openings as unemployed people? 🤨 and A once massive economic tailwind has faded 💨
While the level of job openings remains elevated and the pace of job creation remains positive, key metrics of labor turnover have slumped.
Sure, there is much more hiring going on than there are layoffs.
But the hiring rate — the number of hires as a percentage of the employed workforce — has been trending lower. This could be a sign of trouble as companies looking to control costs will cut back on hiring before having to resort to more drastic measures like layoffs.
For investors in the stock market, this falling hiring rate is arguably a positive sign in a growing economy because it suggests companies are getting more productivity out of their workforces — which is bullish for profit margins.
The quits rate has followed a similar trajectory as the hiring rate.
Earlier in the recovery, the abundance of job opportunities encouraged many workers to quit their jobs and pursue new opportunities. The monthly quits rate peaked at an unprecedented 3% in April 2022.
As of November, the quits rate was 1.9%, which is below even prepandemic levels.
A low quits rate could mean more people are satisfied with their job. It could also mean workers have fewer outside job opportunities.
For investors, this could be a positive. The longer a worker stays in a job, the less time they spend on training and the more familiar they become with the work. This suggests they are becoming increasingly productive, which again is bullish for profit margins.
For more on labor market turnover, read: The hiring situation 🧩 and Promising signs for productivity ⚙️
Mortgage rates used to be very low. For much of 2020 and 2021, the average 30-year fixed mortgage rate was below 3%.
With tighter monetary policy and the improving outlook for economic growth came higher interest rates, including higher mortgage rates. In recent months, the average 30-year fixed mortgage rate has hovered around 7%.
To better understand what this means for homebuyers, Bloomberg’s Michael McDonough charted the trajectory of monthly mortgage payments based on reported mortgage rates. For a $500,000 home, a new homebuyer is paying about $2,100 a month today versus about $980 at the 2020 low.
Among other things, the U.S. housing market faces supply challenges. But affordability has certainly played a role in home sales activity cooling from once-hot levels.
There are countless ways to measure the health of household finances, which continue to be historically strong.
At the onset of the pandemic, consumers had limited opportunities to spend. Yet they continued to get paid. So during this period, many paid down their debts while accumulating mountains of excess cash savings.
But over the past three years, debt levels have increased and excess savings have largely been spent.
One metric that captures a lot of narratives is household debt service payments as a percent of disposable personal income. It was at record lows in 2021 but has mostly trended higher ever since.
In terms of indicators of financial distress, New York Fed data shows that about 3.5% of outstanding debt is in some stage of delinquency. This is up from 2022 lows.
Like most other metrics, these continue to reflect a consumer that’s in better financial shape than they were before the pandemic. However, the data suggests they don’t have the financial flexibility they once did.
For more on household finances, read: There’s more to the story than ‘excess savings are gone’ 🤔 and Americans have money, and they plan to spend it during the holidays 🎁
I can’t reiterate enough that the data we’ve reviewed hasn’t gone from good to bad.
Rather, it’s gone from very hot to something more — dare I say — normal.
And normal continues to be characterized by economic growth, which is fueling earnings growth, which in turn has supported stock prices and sent the net worth of households to record highs.
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Related from TKer:
There were several notable data points and macroeconomic developments since our last review:
👍 The labor market continues to add jobs. According to the BLS’s Employment Situation report released Friday, U.S. employers added 256,000 jobs in December. The report reflected the 48th straight month of gains, reaffirming an economy with growing demand for labor.
Total payroll employment is at a record 159.5 million jobs, up 7.2 million from the prepandemic high.
The unemployment rate — that is, the number of workers who identify as unemployed as a percentage of the civilian labor force — ticked down to 4.1% during the month. While it continues to hover near 50-year lows, the metric is near its highest level since October 2021.
While the major metrics continue to reflect job growth and low unemployment, the labor market isn’t as hot as it used to be.
For more on the labor market, read: The labor market is cooling 💼 and There are ‘rules’ and then there are ‘statistical regularities’ 🧮
💸 Wage growth ticks lower. Average hourly earnings rose by 0.28% month-over-month in December, down from the 0.36% pace in November. On a year-over-year basis, this metric is up 3.9%.
For more on why policymakers are watching wage growth, read: Revisiting the key chart to watch amid the Fed’s war on inflation 📈
💼 Job openings rise. According to the BLS’s Job Openings and Labor Turnover Survey, employers had 8.1 million job openings in November, up from 7.8 million in October.
During the period, there were 7.14 million unemployed people — meaning there were 1.13 job openings per unemployed person. This continues to be one of the more obvious signs of excess demand for labor. However, this metric has returned to prepandemic levels.
For more on job openings, read: Were there really twice as many job openings as unemployed people? 🤨 and A once massive economic tailwind has faded 💨
👍 Layoffs remain depressed, hiring remains firm. Employers laid off 1.77 million people in November. While challenging for all those affected, this figure represents just 1.1% of total employment. This metric remains just below pre-pandemic levels.
For more on layoffs, read: Every macro layoffs discussion should start with this key metric 📊
Hiring activity continues to be much higher than layoff activity. During the month, employers hired 5.27 million people.
That said, the hiring rate — the number of hires as a percentage of the employed workforce — has been trending lower, which could be a sign of trouble to come in the labor market.
For more on why this metric matters, read: The hiring situation 🧩
🤔 People are quitting less. In November, 3.06 million workers quit their jobs. This represents 1.9% of the workforce. The rate continues to trend below prepandemic levels.
A low quits rate could mean a number of things: more people are satisfied with their job; workers have fewer outside job opportunities; wage growth is cooling; productivity will improve as fewer people are entering new unfamiliar roles.
For more, read: Promising signs for productivity ⚙️
📈 Job switchers still get better pay. According to ADP, which tracks private payrolls and employs a different methodology than the BLS, annual pay growth in December for people who changed jobs was up 7.1% from a year ago. For those who stayed at their job, pay growth was 4.6%
For more on why policymakers are watching wage growth, read: Revisiting the key chart to watch amid the Fed’s war on inflation 📈
💼 Unemployment claims fall. Initial claims for unemployment benefits fell to 201,000 during the week ending January 4, down from 211,000 the week prior. This metric continues to be at levels historically associated with economic growth.
For more on the labor market, read: The labor market is cooling 💼
👎 Consumer vibes deteriorate. From the University of Michigan’s January Surveys of Consumers: “Consumer sentiment was essentially unchanged in January, inching down less than one index point from December, well within the margin of error. Assessments of personal finances improved about 5%, while the economic outlook fell back 7% for the short run and 5% for the long run. January’s divergence in views of the present and the future reflects easing concerns over the current cost of living this month, but surging worries over the future path of inflation.”
Consumer sentiment readings have lagged resilient consumer spending data. For more on this contradiction, read: What consumers do > what consumers say 🙊 and We’re taking that vacation whether we like it or not 🛫
Politics clearly plays a role in peoples’ perception of the economy:
Notably, expectations for inflation appears to be a partisan matter.
For more on how politics affects sentiment, read: Beware how your politics distort how you perceive economic realities 😵💫
💳 Card spending data is holding up. From JPMorgan: “As of 31 Dec 2024, our Chase Consumer Card spending data (unadjusted) was 0.1% above the same day last year. Based on the Chase Consumer Card data through 31 Dec 2024, our estimate of the US Census December control measure of retail sales m/m is 0.61%.”
From BofA: “2024 was a solid year for consumers and they finished the year strong, with December card spending per household up 2.2% year-over-year (YoY), according to Bank of America aggregated credit and debit card data. Seasonally-adjusted card spending per household rose 0.7% month-over-month (MoM).“
For more on the consumer, read: Americans have money, and they plan to spend it during the holidays 🎁
⛽️ Gas prices flat. From AAA: “The national average for a gallon of gas is stuck in neutral and has not budged since last week to stay at $3.06. …According to new data from the Energy Information Administration (EIA), gasoline demand rose from 8.16 million b/d last week to 8.48. Meanwhile, total domestic gasoline stocks soared from 231.4 million barrels to 237.7, while gasoline production decreased last week, averaging 8.9 million barrels daily.”
For more on energy prices, read: Higher oil prices meant something different in the past 🛢️
🏠 Mortgage rates tick higher. According to Freddie Mac, the average 30-year fixed-rate mortgage rose to 6.93%, up from 6.91% last week. From Freddie Mac: “In the first full week of the new year, the 30-year fixed-rate mortgage remained elevated at just under 7 percent. The continued strength of the economy has put upward pressure on mortgage rates, and along with high home prices, continues to impact housing affordability. The lack of entry-level supply also remains an issue, especially for those looking to become first-time homeowners.”
There are 147 million housing units in the U.S., of which 86.6 million are owner-occupied and 34 million (or 40%) of which are mortgage-free. Of those carrying mortgage debt, almost all have fixed-rate mortgages, and most of those mortgages have rates that were locked in before rates surged from 2021 lows. All of this is to say: Most homeowners are not particularly sensitive to movements in home prices or mortgage rates.
For more on mortgages and home prices, read: Why home prices and rents are creating all sorts of confusion about inflation 😖
🏭 Business investment activity trends at record levels. Orders for nondefense capital goods excluding aircraft — a.k.a. core capex or business investment — rose 0.4% to $74.1 billion in November.
Core capex orders are a leading indicator, meaning they foretell economic activity down the road. While the growth rate has leveled off a bit, they continue to signal economic strength in the months to come.
For more, read: The economy has gone from very hot to pretty good 😎 and ‘Check yourself’ as the data zig zags ↯
👍 Services survey improves. S&P Global’s U.S. Services PMI rose in December: “Business activity in the vast services economy surged higher in the closing month of 2024 on fuller order books and rising optimism about prospects for the year ahead. Expectations of faster growth in the new year are based the anticipation of more business-friendly policies from the incoming Trump administration, including favorable tax and regulatory environments alongside protectionism via tariffs. The improved performance of the service sector has more than offset a continued drag on the economy from the manufacturing sector, meaning the survey data point to another robust expansion of the economy in the fourth quarter after the 3.1% GDP growth seen in the third quarter.“
The ISM Services PMI also rose in December.
Keep in mind that during times of perceived stress, soft survey data tends to be more exaggerated than actual hard data.
For more on this, read: What businesses do > what businesses say 🙊
⛓️ Supply chain pressures remain loose. The New York Fed’s Global Supply Chain Pressure Index — a composite of various supply chain indicators — ticked higher in December and remains near historically normal levels. It’s way down from its December 2021 supply chain crisis high.
For more on the supply chain, read: We can stop calling it a supply chain crisis ⛓
🏢 Offices remain relatively empty. From Kastle Systems: “Most workers stayed away from the office during the holidays, as average daily occupancy was only 16.1% on the Thursday and Friday after Christmas Day. Peak day office occupancy was on Monday (12/30) at 24.9%, but then dropped again to 19.3% on Tuesday (12/31).”
For more on office occupancy, read: This stat about offices reminds us things are far from normal 🏢
🍾 The entrepreneurial spirit is alive. Small business applications are up and remain well above prepandemic levels. From the Census Bureau: “December 2024 Business Applications were 457,544, up 1.5% (seasonally adjusted) from November. Of those, 156,331 were High-Propensity Business Applications.“
For more on what the business formation boom means, read: Promising signs for productivity ⚙️
📈 Near-term GDP growth estimates remain positive. The Atlanta Fed’s GDPNow model sees real GDP growth climbing at a 2.7% rate in Q4.
For more on the economy, read: The US economy is now less ‘coiled’ 📈
The long-term outlook for the stock market remains favorable, bolstered by expectations for years of earnings growth. And earnings are the most important driver of stock prices.
Demand for goods and services is positive, and the economy continues to grow. At the same time, economic growth has normalized from much hotter levels earlier in the cycle. The economy is less “coiled” these days as major tailwinds like excess job openings have faded.
To be clear: The economy remains very healthy, supported by strong consumer and business balance sheets. Job creation remains positive. And the Federal Reserve — having resolved the inflation crisis — has shifted its focus toward supporting the labor market.
We are in an odd period given that the hard economic data has decoupled from the soft sentiment-oriented data. Consumer and business sentiment has been relatively poor, even as tangible consumer and business activity continue to grow and trend at record levels. From an investor’s perspective, what matters is that the hard economic data continues to hold up.
Analysts expect the U.S. stock market could outperform the U.S. economy, thanks largely due to positive operating leverage. Since the pandemic, companies have adjusted their cost structures aggressively. This has come with strategic layoffs and investment in new equipment, including hardware powered by AI. These moves are resulting in positive operating leverage, which means a modest amount of sales growth — in the cooling economy — is translating to robust earnings growth.
Of course, this does not mean we should get complacent. There will always be risks to worry about — such as U.S. political uncertainty, geopolitical turmoil, energy price volatility, cyber attacks, etc. There are also the dreaded unknowns. Any of these risks can flare up and spark short-term volatility in the markets.
There’s also the harsh reality that economic recessions and bear markets are developments that all long-term investors should expect to experience as they build wealth in the markets. Always keep your stock market seat belts fastened.
For now, there’s no reason to believe there’ll be a challenge that the economy and the markets won’t be able to overcome over time. The long game remains undefeated, and it’s a streak long-term investors can expect to continue.
For more on how the macro story is evolving, check out the the previous TKer macro crosscurrents »
Here’s a roundup of some of TKer’s most talked-about paid and free newsletters about the stock market. All of the headlines are hyperlinked to the archived pieces.
The stock market can be an intimidating place: It’s real money on the line, there’s an overwhelming amount of information, and people have lost fortunes in it very quickly. But it’s also a place where thoughtful investors have long accumulated a lot of wealth. The primary difference between those two outlooks is related to misconceptions about the stock market that can lead people to make poor investment decisions.
Passive investing is a concept usually associated with buying and holding a fund that tracks an index. And no passive investment strategy has attracted as much attention as buying an S&P 500 index fund. However, the S&P 500 — an index of 500 of the largest U.S. companies — is anything but a static set of 500 stocks.
For investors, anything you can ever learn about a company matters only if it also tells you something about earnings. That’s because long-term moves in a stock can ultimately be explained by the underlying company’s earnings, expectations for earnings, and uncertainty about those expectations for earnings. Over time, the relationship between stock prices and earnings have a very tight statistical relationship.
Investors should always be mentally prepared for some big sell-offs in the stock market. It’s part of the deal when you invest in an asset class that is sensitive to the constant flow of good and bad news. Since 1950, the S&P 500 has seen an average annual max drawdown (i.e., the biggest intra-year sell-off) of 14%.
Generally speaking, rising interest rates are not welcome news for the economy and the stock market. They represent higher financing costs for businesses and consumers. All other things being equal, rising rates represent a hindrance to growth. However, the world is complicated, and this narrative comes with a lot of nuance. One big counterintuitive piece to this narrative is that historically, stocks have actually performed well during periods of rising interest rates.
There’ve been lots of talk about the “yield curve inversion,” with media outlets playing up that this bond market phenomenon may be signaling a recession. Admittedly, yield curve inversions have a pretty good track record of being followed by recessions, and recessions usually come with significant market sell-offs. But experts also caution against concluding that inverted yield curves are bulletproof leading indicators.
Every recession in history was different. And the range of stock performance around them varied greatly. There are two things worth noting. First, recessions have always been accompanied by a significant drawdown in stock prices. Second, the stock market bottomed and inflected upward long before recessions ended.
Since 1928, the S&P 500 generated a positive total return more than 89% of the time over all five-year periods. Those are pretty good odds. When you extend the timeframe to 20 years, you’ll see that there’s never been a period where the S&P 500 didn’t generate a positive return.
While a strong dollar may be great news for Americans vacationing abroad and U.S. businesses importing goods from overseas, it’s a headwind for multinational U.S.-based corporations doing business in non-U.S. markets.
The stock market sorta reflects the economy. But also, not really. The S&P 500 is more about the manufacture and sale of goods. U.S. GDP is more about providing services.
…you don’t want to buy them when earnings are great, because what are they doing when their earnings are great? They go out and expand capacity. Three or four years later, there’s overcapacity and they’re losing money. What about when they’re losing money? Well, then they’ve stopped building capacity. So three or four years later, capacity will have shrunk and their profit margins will be way up. So, you always have to sort of imagine the world the way it’s going to be in 18 to 24 months as opposed to now. If you buy it now, you’re buying into every single fad every single moment. Whereas if you envision the future, you’re trying to imagine how that might be reflected differently in security prices.
Some event will come out of left field, and the market will go down, or the market will go up. Volatility will occur. Markets will continue to have these ups and downs. … Basic corporate profits have grown about 8% a year historically. So, corporate profits double about every nine years. The stock market ought to double about every nine years… The next 500 points, the next 600 points — I don’t know which way they’ll go… They’ll double again in eight or nine years after that. Because profits go up 8% a year, and stocks will follow. That’s all there is to it.
Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, “I can calculate the movement of the stars, but not the madness of men.” If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.
According to S&P Dow Jones Indices (SPDJI), 59.7% of U.S. large-cap equity fund managers underperformed the S&P 500 in 2023. As you stretch the time horizon, the numbers get even more dismal. Over a three-year period, 79.8% underperformed. Over a 10-year period, 87.4% underperformed. And over a 20-year period, 93% underperformed. This 2023 performance follows 13 consecutive years in which the majority of fund managers in this category have lagged the index.
S&P Dow Jones Indices found that funds beat their benchmark in a given year are rarely able to continue outperforming in subsequent years. For example, 334 large-cap equity funds were in the top half of performance in 2021. Of those funds, 58.7% came in the top half again in 2022. But just 6.9% were able to extend that streak through 2023. If you set the bar even higher and consider those in the top quartile of performance, just 20.1% of 164 large-cap funds remained in the top quartile in 2022. No large-cap funds were able to stay in the top quartile for the three consecutive years ending in 2023.
Picking stocks in an attempt to beat market averages is an incredibly challenging and sometimes money-losing effort. In fact, most professional stock pickers aren’t able to do this on a consistent basis. One of the reasons for this is that most stocks don’t deliver above-average returns. According to S&P Dow Jones Indices, only 24% of the stocks in the S&P 500 outperformed the average stock’s return from 2000 to 2022. Over this period, the average return on an S&P 500 stock was 390%, while the median stock rose by just 93%.
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