WEEKLY WELL-TH NOTES

Data-driven insights on the markets and economy.

Third Week of July 2023

1. Cool Fuel

Cooling inflation helped drive stocks higher last week, with the consumer price index (CPI) showing that year-over-year (y/y) inflation fell to 3% in June ― the slowest in more than two years.[i] The S&P 500 gained 2.4% during the week and ended 18.4% higher year-to-date (ytd).[ii]

2. Fresh Breadth

After being driven almost entirely by seven big tech stocks, the S&P 500’s ytd gains are becoming more widely distributed. More than 140 stocks in the index have hit new 52-week highs since the end of May, and it would now require removing the top 50 stocks’ gains to erase the index’s positive return this year.[iii]

3. Federal Assistance

From 1989 to 2019, the S&P 500 grew at a real rate of 5.5% per year, excluding dividends, whereas U.S. GDP grew at a real rate of only 2.5%. Recent research proposes two main reasons for this outsize performance and points to potentially lower returns going forward. It estimates that reduced corporate taxes were responsible for 40% of real profit growth and that lower interest rates were entirely responsible for price-to-earnings multiple expansion.[iv]

4. Laying Low

It’s easy to understand why homeowners are staying put (existing home sales are roughly -20% lower y/y in 2023 and were -34% lower y/y in 2022).[v] Of all outstanding mortgages, 23% have an interest rate below 3%, 38% are between 3% and 4%, and only 9% were originated with an interest rate above 6%.[vi] As of last week, the average 30-year fixed rate mortgage was 6.96%.[vii]

5. Running Starts

Despite small business optimism being below its 49-year average for 17 consecutive months, applications for new businesses have soared to more than 400,000 per month on average, after rising to 300,000 per month in the 2010s. Likewise, high-propensity applications (for companies likely to produce a payroll) have been above 130,000 for the past two years after remaining below 100,000 per month in the 2010s.[viii]

6. Trading Places

Mexico surpassed China this year to become the top U.S. trading partner, with Mexico-U.S. trade representing 15.4% of all goods exported and imported by the U.S. Closely following are Canada (15.2%) and China (12%). The average U.S. tariff on Chinese imports is 19.3%, and China’s average tariff on U.S. imports is 21.2%, both significantly above the 9% tariff enjoyed by most-favored nations that are part of the World Trade Organization.[ix]

7. Marrying Into Money

Median U.S. household wealth ― the value of assets owned minus debts owed ― in 2021 was $166,900. At the 10th percentile it was zero dollars (i.e., 1 in 10 households had wealth of zero dollars or less), and at the 90th percentile it was $1.62 million. As one might expect, married households’ wealth was higher at all age levels — but by more than double. For example, married households under the age of 35 had a median wealth 9.2 and 3.1 times that of unmarried female and male households, respectively.[x]

8. Drilling Down

While the average price of gasoline has risen significantly, peaking in June 2022 at about $5 per gallon, it is about the same in real terms (adjusted for inflation) as it was in the early 2000s, with the June 2022 peak being more than -10% less than the June 2008 peak. Also, the average number of minutes of work it takes to earn the cost of a gallon of gasoline is about half the minutes it took during the June 2008 peak.[xi]

9. Top Dollar

Despite renewed attention, the U.S. dollar remains internationally dominant. For example, about 60% of international and foreign currency claims (primarily loans) and liabilities (primarily deposits), and 70% of foreign currency debt, are denominated in U.S. dollars. Likewise, it comprised 58% of disclosed global official foreign reserves in 2022, far surpassing all other currencies, including the euro (21%).[xii]

10. Running Late

The Los Angeles Angels became the first MLB team in more than 90 years to erase a deficit of more than six runs in the seventh inning or later, fall behind again by more than three runs, and still win the game.[xiii] Also, the 32 combined runs in the seventh inning or later in the overall series against the Houston Astros was the second most in any three-game series since 2000.[xiv]

[i] U.S. Bureau of Labor Statistics, “Consumer Price Index Summary,” July 12, 2023, https://www.bls.gov/news.release/cpi.nr0.htm. Accessed July 18, 2023.

[ii] FactSet total returns as of July 14, 2023.

[iii] Miao, Hannah and Hardika Singh, “What’s Behind the Stock Market Rally (It’s Not Just Big Tech),” The Wall Street Journal, July 14, 2023.

[iv] Smolyansky, Michael. “End of an era: The coming long-run slowdown in corporate profit growth and stock returns,” Finance and Economics Discussion Series 2023-041, Board of Governors of the Federal Reserve System, https://doi.org/10.17016/FEDS.2023.041. Accessed July 18, 2023.

[v] National Association of Realtors, “Summary of May 2023 Existing Home Sales Statistics,” https://www.nar.realtor/research-and-statistics/housing-statistics/existing-home-sales. Accessed July 18, 2023.

[vi] Sløk, Torsten, “The Distribution of Mortgage Interest Rates Outstanding,” Apollo (based on FHFA data), July 14, 2023, https://apolloacademy.com/the-distribution-of-mortgage-interest-rates-outstanding/. Accessed July 18, 2023.

[vii] Freddie Mac, 30-Year Fixed Rate Mortgage Average in the United States [MORTGAGE30US], retrieved from FRED, Federal Reserve Bank of St. Louis, https://fred.stlouisfed.org/series/MORTGAGE30US. Accessed July 18, 2023.

[viii] Federal Reserve Bank of St. Louis, “Business Formation is Booming,” July 13, 2023, https://fredblog.stlouisfed.org/2023/07/business-formation-is-booming/. Accessed July 18, 2023.

[ix] Torres, Luis, “Mexico Seeks to Solidify Rank as Top U.S. Trade Partner, Push Further Past China,” Federal Reserve Bank of Dallas, July 11, 2023, https://www.dallasfed.org/research/economics/2023/0711. Accessed July 18, 2023.

[x] Sullivan, B., D. Hays and N. Bennett, “The Wealth of Households: 2021,” Current Population Reports, P70BR-183, U.S. Census Bureau, Washington, DC, 2023.

[xi] The Federal Reserve Bank of St. Louis, “Are Real Gasoline Prices Really Higher?” July 17, 2023, https://fredblog.stlouisfed.org/2023/07/are-real-gasoline-prices-really-higher/. Accessed July 18, 2023.

[xii] Bertaut, Carol, Bastian von Beschwitz and Stephanie Curcuru. “The International Role of the U.S. Dollar Post-COVID Edition,” FEDS Notes, Board of Governors of the Federal Reserve System, June 23, 2023, https://doi.org/10.17016/2380-7172.3334. Accessed July 18, 2023.

[xiii]Farkas, Brady, “Los Angeles Angels Do Something Not Done in More Than 90 Years in Win vs. Astros,” Sports Illustrated, July 16, 2023, https://www.si.com/fannation/mlb/fastball/history/los-angeles-angels-do-something-not-done-in-more-than-90-years-of-baseball-history-in-win-vs-houston-astros. Accessed July 18, 2023.

[xiv] Farkas, Brady, “Wild Series Between Astros and Angels Joined Baseball History of the Last 20 Years,” Sports Illustrated, July 17, 2023, https://www.si.com/fannation/mlb/fastball/history/houston-astros-and-los-angeles-angels-make-baseball-history-of-the-last-20-years-with-wild-series. Accessed July 18, 2023.