Overview:
Markets have been strong since the start of 2023 but a recession is on the horizon. Or is it already here? Some economic indicators suggest just that:
- Crowding: The top five stocks in US large caps have driven nearly 75% of market returns year to date.
- Consumer Behavior: Despite rising interest rates, non-household debt increased during Q1 2023, with debt delinquencies also trending upward.
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Business Confidence: Since October 2021, economic confidence among manufacturers has fallen steadily.
As I write this blog, markets are up strongly (Invesco QQQ up over 150 bps, the S&P 500 almost 100 bps YTD) on news there may be a deal to avoid the US defaulting on its debt. Let us, for now, ignore the frustration that such an event might even occur, and look at what is actually up this week in US large cap: Tech (Nvidia, Apple, Microsoft), the other tech – I mean Communication Services – (Netflix, Google, Meta), and the other, other tech – sorry, I mean Consumer Discretionary – (Amazon and Tesla). The rest of the index is…fine, with mixed results. What stands out is the narrowness of the market. This has been a hot topic among industry PMs, so I looked into the make-up of markets for the year, around the world, and noticed a few things.
- Five’s a Crowd? The top five names in the US Large Cap space are driving nearly 75% of the market returns YTD (Fig 1). These same names drive 40% of the total world equity markets (MSCI ACWI IMI)! It is not until we move down the cap space or away from the US that there is any sense of diversification within indices. Interestingly, Emerging Markets seems to be suffering a similar tech focus, driven by Taiwan Semi, Samsung, and Tencent.
- Trouble in (Profit) Paradise? Headlines have blared recently about the slowing down of consumer spending, highlighted by some startling data on household debt recently released by the NY Fed. Auto loan balances increased by $10 billion for the 1st quarter, student loans up $9 billion, and credit card debt didn’t decrease (fig 2). That last part is particularly interesting, as commentators have noted, because consumers typically pay off their holiday debt in the first quarter – this is the first time in decades consumers have not done so.
At the same time, debts moving to delinquency increased for credit cards and auto loans. Overall, delinquency rates are still low on an historical basis, but the trend is certainly upward. Consumers are also relying more and more on credit cards, with 35% of American’s carrying credit card debt month-to-month2, just as interest rates have spiked. As debts have risen, consumers have spent down their savings, which spiked during the pandemic (fig 3).
