On June 30, 2023, Apple shares finished up 2.3%, surpassing $3 trillion in market value for the first time, but overall equities market growth has been fairly modest, with fewer than a dozen companies, including Apple, generating outsized gains.
Without them, the S&P and the Nasdaq would both have just slightly up thus far in 2018.
We are now entering the second half of a year that has been riddled with ambiguity. In light of this, it could be a good idea to evaluate some of the macro issues that could have an impact on the markets and the overall economy.
According to the most recent report from the Bureau of Labor Statistics, inflation in June decreased to its lowest level in more than two years, reaching barely 3% over the previous year and only 0.2% over May.
According to a different BLS study, earnings have climbed twice as quickly as inflation over the past four months, increasing by 0.4% from May to June.
Three of the largest bank failures in US history occurred earlier this year as a result of issues in the banking industry, which have not yet been fixed.
When the banking crisis first began at the beginning of the year, interest rates were far higher than they are right now, and many sizable banks still have millions in unrealized losses from loans that will never be repaid on their books.
And despite the optimistic BLS report, the Fed is still fighting to control inflation without wrecking the economy.
The same issues we have been dealing with for the past few years are still present, but since the stock markets are rising, everyone seems to be ignoring them or burying their heads in the sand.
However, if you pay closer attention, it becomes clear that the equities market has appreciated extremely slowly and that fewer than a dozen corporations, including Apple AAPL, which has a market worth of over $3 trillion, are mostly responsible for these astronomical gains.
Continued appreciation has primarily benefited the largest corporations, but without those executives, the prognosis isn’t as promising.
Without them, the S&P and the Nasdaq would both be up only slightly so far this year, and a market that is narrowing like that can be a sign of danger ahead.
Undoubtedly, the volume of bankruptcies filed so far this year indicates that something is off. In the first half of the year, there were 2,973 Chapter 11 petitions compared to 1,766 filings in the same period last year, according to Epiq Bankruptcy, a company that records US bankruptcies.
It also reported a 23% rise in Chapter 13 filings, which typically provide debt payback over a period of three to five years, and a 55% increase in Chapter 11 Subchapter V elections, which deal with small business bankruptcies.
Similar insight can be found in the most recent JP Morgan’s Default Monitor, which notes that among the corporations tracked by S&P Global Market Intelligence, US bankruptcies in the first half of 2023 were the largest since 2010.
Some of them, like Bed Bath & Beyond, Diebold DBD, Diamond Sports, and Party City, have already been addressed in this space. Additionally, the bankruptcy wave is not limited to the US.
JP Morgan says that similar situations are occurring in the UK, Sweden, Germany, Japan, and other countries, and that this is probably only the beginning of a wave of corporate defaults.
The high-yield bond and leverage loan default rates in June reached a two-year high, indicating that there was also increased default activity in the bond market.
With six of the 11 high-yield bond recoveries tracked by JP Morgan falling into the single digits, recovery rates have fallen to record lows. The recovery rates for leveraged loans are also lower than usual.
However, fixed income is beginning to appear more appealing than it has in a very long time. Today, investors can genuinely earn a 5% income without assuming any risk beyond that posed by the US government.
Speaking of risk to the US government, the total amount of USD money in circulation has completely increased over the past 60 years. Looking back in time, no other economy has ever successfully exited this type of money expansion.
The recent stock market surge, which is very strongly correlated with the quantity of cash outstanding in our economy, has been mostly driven by US money growth.
Although important, the Fed Funds benchmark interest rate is not the primary factor in this cycle’s inflation and market speculation.
It’s crucial to keep in mind that systemic changes like rising rates take roughly 18 months to propagate before their impacts are truly seen.
Nevertheless, it’s likely that the Fed will take action this year to increase benchmark interest rates one or two more times.
Even if it doesn’t truly address the issue of too much money “sloshing around,” symbolically, that sends a clear message that the Fed is taking steps to slow down our economy and that doing so will probably continue to have a negative impact on regional banks.
As a result, we might predict an increase in bank failures in the future due to rising unrealized losses on mortgages and long-term fixed income assets.
Since the price of gold and even Bitcoin BTC (a gold alternative) aren’t determined by the government way the CPI is, they are likely a more accurate indicator of inflation than the CPI.
Nevertheless, the high levels of historical money printing have led to and will lead to high CPI inflation rates.
We’ve also previously talked about how the US government’s deficit spending keeps our economy booming, which presents a new dilemma for the Fed, which is also tasked with trying to control inflation.
The overall effect of all this is that we might actually be “watching a slow-moving train wreck” as money becomes more expensive, banks continue to fail, consumer confidence declines, corporate earnings weaken due to rising inflation and sluggish demand, and stock market breadth remains very constrained.
Given the significant difficulties in effectively mending our overleveraged economy, it is hoped that the train disaster will remain “slow-moving” and won’t suddenly become a fast-moving systemic crisis. In addition, I hope that none of this historic money printing results in our turning into another “Weimar Republic.
Reduced total money supply, addressing the country’s underfunded liabilities, and finally reining in US government deficit spending would probably be the best real fixes for our country’s economy; however, these fixes are not popular politically and would probably require most people to endure some hardship.
In light of this, I still advise investors to exercise great caution, dedicate more time to looking for short-sale prospects, and start allocating money to distressed debt strategies.