Hi there, welcome to my blog! Today I'm going to write about the economy and the Stock Market, and scratch the surface on how they are related. I'll focus on some key aspects I follow that affect both of them, such as hours worked, layoffs, credit card debt, housing cost and defaults, banking data, savings, and the performance of the S&P 500 index. Let's get started!
Hours Worked
One of the indicators of the health of the economy is how many hours people are working. More hours worked means more income, more spending, and more production. According to the Bureau of Labor Statistics, the average weekly hours for all employees on private nonfarm payrolls increased by 0.2 hour to 34.9 hours in January 2024. This is a positive sign for the economy, as it shows that employers are confident enough to increase their labor demand.
Layoffs
Another indicator of the economy is how many people are losing their jobs. Layoffs are bad for both workers and businesses, as they reduce income, spending, and production. According to the Department of Labor, the number of initial claims for unemployment insurance decreased by 14,000 to 220,000 in the week ending February 10, 2024. This is a low level that suggests that the labor market is tight and that employers are reluctant to let go of their workers. This is not focused on New Jersey which is one of the top regions for Unemployment.
Credit Card Debt
One of the factors that affects consumer spending and saving is how much debt they have. Credit Card Debt is a type of revolving debt that can be costly and risky if not managed well. According to the Federal Reserve, consumer credit outstanding increased by $16.6 billion in December 2023, with revolving credit (mostly credit cards) increasing by $5.7 billion. This means that consumers are borrowing more to finance their purchases, which can boost the economy in the short term but also increase their financial burden in the long term.
Housing Cost and Defaults
One of the sectors that has a big impact on the economy and the stock market is housing. There are three aspects I like to consider: Entry, Equity, and Defaults. Housing cost is what I call an entry indicator. It affects how much people can afford to buy or rent a home. On the polar opposite view, it outlines how much equity Owners' have in their property. Housing defaults, on the other hand, outlines how many people are unable to pay their mortgages, and how many homes are foreclosed and sold at a loss causing a trickle-back effect on the previous two considerations. According to Zillow, the median home value in the US was $317,300 in January 2024, up 5.4% from a year ago. According to CoreLogic, the national mortgage delinquency rate (the percentage of loans that are 30 days or more past due) was 2.1% in November 2023, down 0.4%, from 2.5% a year ago. These data suggest that the housing market is strong and stable, with rising home prices and low default rates. Entry is likely to remain competitive with few desperate sellers and Homeowners' have a growing asset to help their financial stability.
Banking Data, Savings
One of the sources of funding for the Economy, and the Stock Market, is Banking. Banking data shows how much money Banks have in Deposits, Loans, and (Importantly for growth) Reserves. The Data also gives insights on how Banks are using funds to facilitate transactions and investments. Savings shows how much money consumers have left after spending and paying taxes, and how they are allocating them between consumption and investment. According to the Federal Reserve, Total Deposits at all Commercial Banks increased by $113.9 billion to $18.9 trillion in January 2024. Total Loans and Leases increased by $76.4 billion to $11.3 trillion. The Excess Reserves of Depository Institutions (the amount of reserves above the required level) decreased by $19 billion to $1.8 trillion. I interpret that move, by the Fed, as an indicator that Banks have ample liquidity and are lending more to support economic activity. According to the Bureau of Economic Analysis, personal saving as a percentage of disposable personal income was 7.6% in December 2023, up 0.1%, from 7.4% in November 2023. This means that consumers are saving more of their income, which can be used for future consumption or investment.
On to the Stock Market, the big Auction
One of the benchmarks of the Stock Market performance is the S&P 500 index, which tracks the performance of 500 large-cap US companies across various Sectors and Industries. The S&P 500 Index reflects both the aggregate Earnings and Valuations of these companies, as well as the expectations and sentiments of Investors. According to Yahoo Finance, as of February 12, 2024, out of the 500 companies in the Index, 312 (62.4%) had a positive year-to-date return (appreciated in price), while 188 (37.6%) had a negative year-to-date return (depreciated in price). The average year-to-date return for all companies was 3.7%, while the median year-to-date return was 2.9%. The S&P 500 index closed at 5,012.34 on February 12, 2024, up 3.8% from the end of 2023.
One of the reasons why some companies in the S&P 500 Index may have declined in price is because of the uncertainty and volatility caused by Inflation and Interest Rates. Inflation is the general increase in the prices of goods and services over time, which reduces the purchasing power of money. Interest rates are the cost of Borrowing, which affects the profitability and valuation of Businesses. According to the Bureau of Labor Statistics, the consumer price index (CPI), a measure of inflation, increased by 0.2% in January 2024, after rising by 0.4% in December 2023. The CPI increased by 2.9% over the last 12 months, down 0.2%, from 3.1% in December 2023. This is the first time since November 2021 that the annual inflation rate dropped below 3%. According to the Federal Reserve, the Federal Funds Rate, a key Interest Rate that influences other Interest Rates, was unchanged at 0.25% in January 2024, after being raised by 0.25% in December 2023. This is the first time since March 2020 that the Fed raised its Policy Rate, signaling its intention to tighten its Monetary Policy to combat Inflation.
These data have a direct impact on the Stock Market, as they affect both the Earnings and Valuations of Companies. Higher inflation means higher costs and lower profits for businesses, as well as lower real returns for investors. Higher Interest Rates mean higher borrowing costs and lower Cash Flows for Businesses, as well as lower present values for future Earnings. Therefore, higher inflation and interest rates tend to depress stock prices, especially for companies that are more sensitive to these factors, such as those with high debt levels, low profit margins, or high growth expectations.
Conclusion
In summary, the Economy and the Stock Market are closely related, as they reflect and influence each other through various channels and factors. The recent Data shows that the economy is growing at a moderate pace, with low unemployment, high consumer spending, and a strong Housing Market. The Stock Market is also reaching new highs (Raising Caution), with most companies in the S&P 500 index having positive returns. However, there are also some challenges and risks ahead, such as inflation and interest rates, which could create uncertainty and volatility for both the economy and the Stock Market.
I hope you enjoyed this blog post and learned something new. If you have any questions or comments, please feel free to leave them below. Thanks for reading! Inflation data will be reported later today!