Juggling Dynamite

In the second quarter of 2024, big tech companies drove the S&P 500 up 4.3%, while the Russell 2000 index of economically representative small and midsize stocks fell 3.6%.

The five most expensive S&P 500 companies now make up a record 29% of the US market capitalization–the narrowest concentration since 1965 and more extreme than in the 2000 tech top (chart below courtesy of Jim Bianco).
It’s worth remembering that 1965 was followed by a secular bear market (Dow Jones Index below from 1966 to 1982, courtesy of Crestmont Research) where stocks tumbled 25 to 45% four times and took 16 years to grow back losses as prices compressed from 21 times earnings in 1966 to 8 times by 1982.
By 1982, when return opportunities were finally the most attractive in decades with dividend yields above 8 percent, most who held stocks when prices were rich had exited with losses and a lasting disdain for the asset class.

Today, even more than in 1966 and 2000, households are holding the highest percentage of their financial assets in equities in at least 70 years (shown below courtesy of The Daily Shot).
Trying to track the gains of stock indices, the majority of professional asset manglers managers are also at record equity allocation, offering dismal risk management for their customers.
Meanwhile, most asset holders are over 50 years old with shrinking time horizons and a low loss tolerance, whether they realize it yet or not. Years of trying to grow back losses will have a negative life impact for most.

The 28-month (7-quarter) time lag since the start of the Fed hiking cycle in March 2022 has lulled many into unjustified complacency with financial risk. In reality, recessions have followed the first Fed rate hike by a range of 4 to 14 quarters (average of 10) since 1958.

From the Fed’s last rate hike—most recently 12 months ago in July 2023—the onset of recession has taken 1 to 18 months, as shown below since 1960 (courtesy of Apollo).
Longer-than-average lags in the last four cycles were also followed by larger-than-average bear markets. These are facts for thought.

For those of us who’ve benefited from driving an EV for years already, it is a relief to hear mainstream leaders finally drop the opposition and misinformation to embrace the obvious. Ford CEO Farley does an excellent job of articulating facts in this segment.

Ford CEO Jim Farley joins CNBC’s Julia Boorstin for a discussion on EVs, rapidly evolving vehicle technology, and how drivers’ shifting priorities are reshaping what we expect in cars and trucks. Here is a direct video link.

The US unemployment rate in June ticked up to 4.1% (from 4% in May, red line below since 2021, and 70 basis points above the 3.4% cycle low in 2022). Full-time job creation fell to a 39-month low and part-time job creation reached a 33-month high while April and May job estimates were revised lower.

Jobless claims have moved higher in recent weeks and survey data show rising financial uneasiness among consumers. The year-over-year growth in unemployed Americans is 11.9% and above the +10% that has signalled the onset of past recessions (hat tip Kantro).

Canada, meanwhile, lost 1400 jobs versus consensus expectations for a 25,000 gain and the unemployment rate rose to 6.4% from 6.2% in May (below since 2017). The unemployment rate for youth rose to 13.5%, the highest rate since September 2014 outside of the pandemic.  Nearly all of the employment gains were in the public sector (4.3%) rather than the private (.8%). See Canada sheds 1400 jobs, unemployment rate hits 6.4%. Canadian unemployment is now 160 basis points above the cycle low of 4.8% in July 2022. In past cycles, an 80 basis point increase in the unemployment rate coincided with the onset of recessions.

It’s noteworthy that the US Fed has forecast the US unemployment rate to peak at 4.2% in 2025 (from 4.1% now) and the Bank of Canada projected Canadian unemployment to peak at 6.6% (from 6.4% now) by the end of 2024, falling back to 6% in 2024.

Both forecasts look optimistic since in past cycles, it was typical for the jobless rate to accelerate through Fed rate-cutting cycles and well into subsequent economic recoveries.

Disproportionately negative economic surprises in the last couple of months have increased the odds of central bank rate cuts in 2024. But as with hikes, it will take multiple quarters for monetary easing to be felt through the economy.

Government bonds are taking the over on central bank unemployment estimates, with prices rallying sharply to end the week.

The equal-weight S&P 500 index has been flat since the start of March with the average stock negative since. But a handful of AI hopefuls have continued to boost equity benchmarks in the largest overshoot of the information technology sector market capitalization (green below) compared with earnings forecasts (yellow below since 1995) since the 2000 tech wreck top (red circles below courtesy of MRB Partners and The Daily Shot).
In the three incidents where stock prices entered recessions at valuations near present highs (1973, 2000 and 2007), broad indices like the  S&P 500 and TSX composite fell 30 to 55%, while central banks were slashing interest rates.

Today, households are up to their eyeballs in debt, while simultaneously doubling down on financial risk with a record 70% allocation of any savings they do have in the stock market. Meaningful diversification, capital preservation and finite human timelines have all been tossed aside in the latest hype around artificial intelligence.

All of this is set to make the give-back cycle more painful than historically average just as asset holders, 24 years older than in 2000, have less lifetime to grow back losses.