September 2023
Five in Five is a monthly publication where we share graphs around five topics that illustrate the current state of the markets, with brief commentary that can be absorbed in five minutes or less.
This month's topics include:
- Term Premium
- Forecasted Size and Style Earnings Growth and P/E
- Vehicle Sales and Retail Sales
- Average Mutual Fund Sector Positioning
- Home Affordability and Sales
TERM PREMIUM
- The term premium is the excess yield investors demand to hold longer maturities instead of a series of short-term bonds.
- The term premium theoretically should always be positive.
- It went negative amid a lower global growth trajectory after the Global Financial Crisis and little risk of inflation shocks.
- Higher inflation volatility and lower diversification characteristics should put upward pressure on the term premium.
- A return to a positive term premium would likely see higher longer-term Treasury yields.
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FORECASTED SIZE AND STYLE EARNINGS GROWTH AND P/E
- Analysts are forecasting positive earnings growth for the next 12 months for only a small number of style/size equity categories (Large Cap Core and Large Cap Growth).
- All other style/size categories are expected to see a continuation of earnings decline in the next 12 months as the equity markets have experienced since 2022.
- Price-to-Earnings valuations (P/E) for those two categories are above their 20-year long term averages as investors look to “pay up” for relatively higher earnings growth.
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VEHICLE SALES AND RETAIL SALES
- The U.S. consumer has played a critical part in delaying the forecasted recession with continued strong retail sales representing approximately two thirds of the overall economy.
- However, year-over-year growth in retail sales (green line, right axis) had begun to fall during 2022 when stripping out vehicle sales.
- Vehicle sales (blue line, left axis) have been increasing since early 2022 despite relatively higher interest rates. Vehicle sales have been range bound since the beginning of 2023.
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AVERAGE MUTUAL FUND SECTOR POSITIONING
- The Fed Model (top chart) compares the earnings yield (EY), the inverse of the S&P 500 price-to-earnings ratio (P/E), relative to the 10-year Treasury yield.
- The spread between the two indicates relative valuation of equities vs. Treasuries. (bottom chart)
- The spread between the two is currently at its lowest level since the third quarter of 2001 indicating the equity markets are compensating investors relatively less than previously for investing in equities compared to investing in Treasuries.
- The expansion in the P/E multiple as opposed to earnings growth in the equity markets has led to this multi-decade low in the spread.
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HOME AFFORDABILITY AND SALES
- National Association of Realtors Affordability Index continues to register record low levels.
- Housing affordability continues to struggle with high mortgage rates and high home prices.
- Despite the challenging environment new home sales have increased.
- There have been weak sales of existing homes due to homeowner reluctance to relinquish low-rate mortgages.
- Despite low affordability and weak existing home sales home prices have been rising steadily over the past several months.
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Investment products and services may lose value, are not a deposit, are not guaranteed by any financial institution, and are not FDIC insured or insured by any government agency.
Source: BTC Capital Management, U.S. Bureau of Labor Statistics, Bloomberg Finance L.P., Bureau of Economic Analysis, S&P Corelogic, National Association of Realtors. The information provided has been obtained from sources deemed reliable, but BTC Capital Management and its affiliates cannot guarantee accuracy. Past performance is not a guarantee of future returns. Performance over periods exceeding 12 months has been annualized. This document is intended for informational purposes only and is not an offer or solicitation with respect to the purchase or sale of any security. Statements in this report are based on the views of BTC Capital Management and on information available at the time this report was prepared. Rates are subject to change based on market and/or other conditions without notice. This commentary contains no investment recommendations and you should not interpret the statement in this report as investment, tax, legal, and/or financial planning advice. All investments involve risk, including the possible loss of principal. Investments are not FDIC insured and may lose value.
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