With the surge in interest rates, the earnings yield for the Russell 3000 index is now below 10-year yields for the first time in 21 years. The same measurement for the S&P 500 is pretty much negative. To rationalize today's valuations yields need to fall and earnings can’t fall.
The bullish view; in a fiscal fueled world where, the economy is strong and inflation runs hot, you’d rather own real earnings that can grow with inflation.
From Torsten at Apollo, CEOs are increasingly becoming worried about their businesses.
The Business Roundtable CEO survey is designed to provide a picture of the future direction of the US economy by asking CEOs to report their company’s expectations for sales and plans for capital spending and hiring over the next six months.
Since the Fed started raising rates in March 2022, CEOs have gradually worried more and more about the economy slowing, see chart below.
This is how monetary policy works. Higher cost of capital slows down business spending. The decline in the employment sub-index to 2020 levels is particularly noteworthy.
The soft landing equity markets are pricing is not a unique occurrence ahead of problems. Not saying a recession is a certainty. Going into an election year the US Government will do everything possible to avoid a recession but there are certainly signs of stress across the global economy.
It is shocking to see how strong GDP can look going into a recession.
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Bond vol had fallen going into the FOMC meeting last week. It jumped up to 117 after the turbulence last week.
Another interesting one from Apollo.
The CCC spread in Europe is normally very highly correlated with the CCC spread in the US. But this relationship has changed after the Fed started raising rates, see the first chart below.
Spreads are currently pricing that Europe will have a recession with many defaults, but in the US, everything is fine.
The rally in the US relative to the EU has happened despite the consensus seeing a 60% probability of a recession in the US over the next 12 months and only a 50% probability in Europe, see the second chart.
The bottom line is that there is an inconsistency in pricing of lower-rated corporate credit in the US and Europe. We cannot both have that everything is fine and at the same time we are going into a recession.
The key question is why US credit has rallied so much despite the high recession probability. Given the relationship changed after the Fed started raising rates maybe the reason is what could be called a yield level illusion in US lower-rated credit, where investors focus more on the levels of yields than on the underlying fundamental credit risks of Fed hikes and permanently higher costs of capital.
In short, credit investors today should be asking themselves if spreads are focusing on yield levels or on credit fundamentals.
The US 10Y yield has just gotten back to its historical average.
If rates remain high, the majority of US corporates will need to refinance at higher rates.
Africa is the region worst hit by rising US interest rates. Since the Federal Reserve started tightening its monetary policy in March 2022, the regions bond market has closed.
Even with the fall in office REIT prices, they hardly are a screaming deal compared to risk free treasuries.
Google pays Apple over $50M a day to be their default search engine. The power of owning a platform.
Big Tech becoming utilities; Microsoft is exploring strategy to ensure cheap power.
There is a strong relationship between the extent to which someone is a zero-sum thinker, and the economic environment they grow up in.
The T Swift effect. Travis Kelce merchandise has seen a 400% spike on Fanatics since Sunday. His jersey has overtaken Patrick Mahomes’ on the Chiefs site and is currently the #2 overall seller in the NFL Shop.