Figure 1: 10yr-3mo Treasury spread (blue, left scale), 10yr-2yr Treasury spread (red, left scale), both in %; VIX at close (green, right scale). Source: Treasury, CBOE via FRED.
3 thoughts on “Reinversion Continues”
Fredrick Pauper
Business expansion has eroded creating a flight to safety, even if wrong headed.
Household spending is the largest demand category in GDP. Household demand doesn’t have to fall in order for GDP (employment, income, industrial output) to fall. A slowing in Household spending can be enough to induce recession.
It’s not new for the spending of the top income quintile to expand faster than overall spending – this is the U.S., after all – but we’re hearing more about it now. Here’s the picture of spending by income quintile through 2023:
The data for 2024 won’t be released until December (assuming the U.S. still releases data in December).
We’re also hearing that equity values are driving spending in the top quintile – the wealth effect, don’t you know. Historically, housing wealth seems to have a larger impact on spending than financial wealth, but with mortgage equity withdrawal limited right now, that may be less true these days.
Anyhow, spending by the top quintile is a big deal for the economy, and the stock market may be a big deal for top-quintile spending.
So what’s the outlook for stocks? I don’t know nothin’ ’bout no stocks, but here’s the S&P500 12-month trailing P/E history:
The Shiller ratio is a bit more extreme than the standard 12-month trailing P/E. The Shiller ratio, with its ten-year tail, still reflects the loss of earnings from the Covid recession. Y’all decide for yourselves whether that’s a problem.
Either way, equities are expensive relative to earnings. As the picture shows, extreme P/Es tend not to last long; they are followed by stock market declines.
The stock market is not the economy, and it is certainly not a forecast of the economy. However, there is some risk to household spending from an overvalued stock market.
Business expansion has eroded creating a flight to safety, even if wrong headed.
Household spending is the largest demand category in GDP. Household demand doesn’t have to fall in order for GDP (employment, income, industrial output) to fall. A slowing in Household spending can be enough to induce recession.
It’s not new for the spending of the top income quintile to expand faster than overall spending – this is the U.S., after all – but we’re hearing more about it now. Here’s the picture of spending by income quintile through 2023:
https://fred.stlouisfed.org/graph/?g=1E5FL
The data for 2024 won’t be released until December (assuming the U.S. still releases data in December).
We’re also hearing that equity values are driving spending in the top quintile – the wealth effect, don’t you know. Historically, housing wealth seems to have a larger impact on spending than financial wealth, but with mortgage equity withdrawal limited right now, that may be less true these days.
Anyhow, spending by the top quintile is a big deal for the economy, and the stock market may be a big deal for top-quintile spending.
So what’s the outlook for stocks? I don’t know nothin’ ’bout no stocks, but here’s the S&P500 12-month trailing P/E history:
https://www.macrotrends.net/2577/sp-500-pe-ratio-price-to-earnings-chart
Here’s the Shiller P/E ratio:
https://www.multpl.com/shiller-pe
The Shiller ratio is a bit more extreme than the standard 12-month trailing P/E. The Shiller ratio, with its ten-year tail, still reflects the loss of earnings from the Covid recession. Y’all decide for yourselves whether that’s a problem.
Either way, equities are expensive relative to earnings. As the picture shows, extreme P/Es tend not to last long; they are followed by stock market declines.
The stock market is not the economy, and it is certainly not a forecast of the economy. However, there is some risk to household spending from an overvalued stock market.
inversion is only of interest if it is caused by central bank tightening