Charts of the Week

Just 15 stocks accounted for 97% of the year-to-date gains in the S&P 500, illustrating once again that narrow breadth has been a driving theme of 2023. Often during cases of such narrow breadth we see a drawdown follow.

With this concept in mind, we can see that Microsoft and AAPL each account for about 7% of the S&P 500’s weighting, meaning just two enormous companies are 14% of the S&P 500 market-cap weighted index. That is the highest concentration of just two stocks in the index in about 60 years.

The AI bubble continues to be all the rage, with mentions on conference calls up 85% year-over-year, setting a new all-time high.

We believe we are within the “Peak of Inflated AI Expectations” based on the Gartner Hype Cycle. That is to say, AI does have great promise, but returns have been pulled forward and the technology isn’t quite at the point that is priced in as of yet.

Within the NASDAQ we continue to see that new lows outnumber new highs, although the amount of new lows vs new highs has dropped since the vicious 2022 bear market in tech and growth stocks.

Speaking of 2022, we saw a massive reduction in retail positioning that year, where investors sold twice as much as what they bought during the pandemic over the past 15 months. Suggesting that jitters are persisting even through 2023.

Major central banks total assets have a positive correlation with the performance of the S&P 500. That is to say, the level of liquidity available in the global financial system provided by the Fed, ECB, and BoJ has an impact on stock performance in the US (and beyond).

Apple has spent over a half trillion dollars on stock buybacks over the last 10 year period, which has the impact of shrinking the float (total number of shares available to the public), which in turn compresses multiples. There are less shares, so then P/E will fall as there appears to be more earnings per share.

Large banks exposure to commercial real estate by percentage of total assets. This is an area that is likely to be challenging for banks with high levels of exposure to navigate as challenges increase within the space. Particularly for those that have significant exposure to office space, where utilization rates are at a historic low.

We’re already seeing signs of credit standards tightening in the US, Europe, UK, and Japan. But it is likely that process is just getting started. Typically with this amount of tightening we do see a recession play out as major economies are driven by debt pulling forward future demand. As the cost of debt rises, that demand falls and the respective economy is likely to shrink.

Bank of America’s Michael Hartnett claims that the Fed broke regional banks as a part of their extremely aggressively hiking cycle. He’s likely not wrong, though there are other contributing factors adding to the mix, such as bank runs, periods of intense volatility and illiquidity in longer duration assets like Treasuries, and concerted efforts by hedge funds and others to engage in short selling and put buying raids.

The amount of bank failures during the Great Financial Crisis vs now is rather staggering, but what makes the recent bank failures rather noteworthy is that they are occurring before there is any sort of recession, and with large banks failing before a more significant credit crisis potentially plays out.

This may suggest that we could see more instability in the space as we navigate throughout 2023, with credit conditions further tightening and long duration assets facing more challenges with Treasury issuance increasing by as much as $1.2T after the debt ceiling kabuki theater is resolved.

The New York Fed’s probability of recession indicator has hit a level we haven’t seen in about four decades, at 57.77%. The indicator is based off of Treasury spreads, and tends to be rather accurate.

M2 money supply has been shrinking for the first time year-over-year since the Great Depression, but it isn’t necessarily a sign of imminent doom. We can see that M2’s trajectory seems to be reverting towards a longer-term trend.

Nevertheless, negative M2 growth is ominous because it suggests that there is less money to be lent into the economy and less money available to pay back debts. The net impact is likely further slowing economic growth.

Fed Funds are now higher than inflation as measured by the PCE Deflator, the Fed’s favorite flavor of inflation. This is one step that many economists consider necessary to subdue the demand pressure that is driving inflation higher.