Markets Illuminated: The Curious State of the US Economy
As we round out the second quarter of 2023, the U.S. economy presents a very dubious backdrop with the data available to us thus far. The S&P 500 Index, one of the most commonly followed equity indices and general proxy for “the market”, is up over 10% year-to-date, a fact that would typically suggest broad-based growth and prosperity. However, upon closer examination, seven stocks account for more than 100% of the index's total performance, while the rest account for a cumulatively negative performance number.
Simply put, the S&P 500's gains are nowhere close to evenly spread. As of Friday, June 2nd market close: Apple (AAPL) +44%, Microsoft (MSFT) +40%, Amazon (AMZN) +44%, Nvidia (NVDA) +167%, Tesla (TSLA) +98%, Google (GOOGL) +40%, and Meta (META) +114%. If you take their relative index weightings you get a +12.75% performance attribution, which is greater than the entire index performance.
This kind of disparity might make you wonder about the health and stability of the market. It's important to note that such a concentration of returns isn't unprecedented, and it doesn't necessarily spell doom for the market. However, when we look at the EPS (Earnings Per Share) of the SP500 in June 2022 it was at 42.74. Today the SP500 EPS is at 39.61. This equates to a decline of over 7% in EPS and yet the SP500 index performance is up over 2% year-over-year.
What is driving this divergence?
Large companies have been feverishly attempting to protect profit margins by reducing expenditures and one of the main ways to do that is through staff reductions. In the most recent Challenger Report, published on June 1st, we see a few data points that should throw up some red flags about the health and persistence of the YTD market performance. Employers have continued to increase their month-over-month layoffs with May seeing a 20% increase over the prior month, which is a large increase, but when compared year-over-year that is nearly a 300% increase!!
So far this year, companies have announced plans to cut 417,500 jobs, a 315% increase from the 100,694 cuts announced in the same period last year. It is the highest January-May total since 2020, when 1,414,828 cuts were recorded. With the exception of 2020, it is the highest total in the first five months of the year since 2009, when 822,282 cuts were tracked through May.
To dig further into which areas of the economy are increasing workers vs. decreasing, there are only four sectors increasing: Government, Education, Industrials, and Utilities. Every other sector has been decreasing and particularly alarming is the sector leading the performance of the SP500, Technology.
The Technology sector announced the most cuts in May with 22,887, for a total of 136,831 this year, up 2,939% from the 4,503 cuts announced in the same period last year. The Tech sector has now announced the most cuts for the sector since 2001, when 168,395 cuts were announced for the entire year.
While it's never wise to make conclusions based on any single reason, it is worth noting that many companies have been implementing cost-cutting measures to shield profits. In the wake of the pandemic, a substantial number of businesses have shifted towards remote work, reducing the need for large office spaces, and with growth slowing tremendously and inflation and interest rates remaining sticky high the culmination of these forces may be sailing towards an economic cliff.
Turning our gaze to the national debt, we find that the contentious issue of the debt ceiling has been postponed until after the next presidential election in 2025. On the surface, this may seem like a positive outcome. It removes the immediate threat of a government shutdown and provides some short-term stability. However, as is often the case, the devil is in the details.
With the raising of the debt ceiling comes an increase in the issuance of U.S. Treasury bonds, which could withdraw liquidity from financial markets. These bonds are a way for the government to borrow money: they sell the bonds, and the buyers provide the government with the funds it needs. So, while avoiding a debt ceiling crisis may provide temporary relief, there is the long-term effect of reduced liquidity in the financial markets to consider.
There are many ominous factors pointing toward a less than favorable back half of 2023. One thing we can say with relative confidence is that there is still a great amount of uncertainty around the future economic picture and that of financial markets. This is the reason why it’s vitally important to have a number of diversified strategies that can work to protect capital and provide valuable sources of income when markets become challenging.