The Daily Spark

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  • The Missing Slowdown

    Torsten Sløk

    Apollo Chief Economist

    Since the Fed began to raise interest rates in March 2022, the FOMC has constantly expected the economy to slow down, see chart below. But it still hasn’t happened. In this Daily Spark, we discuss why.

    The FOMC has constantly expected the economy to slow down. But it still hasn’t happened.
    Source: Federal Reserve Board, Bureau of Economic Analysis, Haver Analytics, Apollo Chief Economist

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  • The average P/E ratio of the top 10 biggest companies in the S&P 500 is almost 50, see chart below. Let’s hope we don’t have a recession anytime soon.

    The average P/E ratio of the top 10 companies in the S&P 500 is almost 50
    Note: Data as of November 4, 2024. Source: Bloomberg, Apollo Chief Economist

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  • Home Prices Declining in China

    Torsten Sløk

    Apollo Chief Economist

    The decline in house prices in China continues, with used home prices falling 9% and new home prices falling 6%, see chart below.

    China: Home prices falling
    Source: Bloomberg, Apollo Chief Economist

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  • A new study from S&P shows that roughly 90% of active public equity fund managers underperform their index, and 81% of active public fixed income managers underperform their index on a 10-year horizon, see chart below. For more see here.

    Roughly 90% of active equity fund managers underperform their index and 81% of active fixed income managers underperform their index on a 10-year horizon
    Note: Data as of June 30, 2024. Calculated as average of underperformance for each category for regions/countries: US, Europe, Canada, Australia, MENA, Brazil, Chile, South Africa, India, and Japan. Source: SPIVA Global Scorecard, Apollo Chief Economist

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  • What Happened to Long and Variable Lags?

    Torsten Sløk

    Apollo Chief Economist

    When the Fed started raising interest rates in March 2022, a lot of Fed speeches and market conversations focused on the long and variable lags of monetary policy, i.e., the time it takes before Fed hikes begin to slow down the economy.

    Traditional impulse-response functions in VAR models and the Fed’s own model of the US economy, FRBUS, suggest that it should take 12 to 18 months before tighter monetary policy begins to slow the economy down.

    However, it has been 30 months since the Fed started raising interest rates, and we have still not seen any sign of a slowdown. This week, we got GDP growth for the third quarter, and it came in at 2.8%. And the Atlanta Fed’s GDP estimate for fourth quarter GDP is 2.3%, above the CBO’s 2% estimate for long-run growth.

    This is the key issue across the S&P 500, credit, FX, and private markets: What happened to long and variable lags? Why is GDP growth still above potential, and why did Fed hikes not slow down consumer spending and capex spending the way the textbook would have predicted?

    There are three reasons:

    First, the US economy has been less sensitive to interest rate increases because consumers and firms locked in low interest rates during the pandemic.

    Second, the US economy continues to experience a big structural boom in AI and data centers.

    Third, fiscal policy is easy with a 6% budget deficit, driven by the CHIPS Act, the IRA, the Infrastructure Act, and defense spending.

    These tailwinds combined have offset the mildly negative impact of Fed hikes on highly leveraged consumers and firms.

    In addition, these three tailwinds are unique to the US, which is why the business cycle is strong in the US and weak in the rest of the world.

    With the Fed now cutting rates and these three tailwinds still in place, the outlook for the US economy continues to be positive.

    Our latest chart book with daily and weekly indicators for the US economy is available here.

    The Fed started raising interest rates in March 2022: What happened to long and variable lags?
    Source: BEA, Haver Analytics, Apollo Chief Economist
    Fed hikes have not slowed down the US consumer
    Source: BEA, Haver Analytics, Apollo Chief Economist

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  • The financial system is changing, and our chart book shows that:

    1) Public and private markets are converging,

    2) Public markets can be safe and risky, and private markets can be safe and risky, and

    3) Roughly 90% of active managers of public equity and public fixed income underperform their benchmark indexes.

    Conclusions
    Source: Apollo Chief Economist
    US: 86% of firms with revenues greater than $100 million are private
    Note: For companies with last 12-month revenue greater than $100mn by count. Source: S&P Capital IQ, Apollo Chief Economist
    Share of US companies with revenue greater than $100 million
    Source: S&P Capital IQ, Apollo Chief Economist
    Small cap, mid cap, and large cap: Percentage of companies with negative earnings
    Source: Bloomberg, Apollo Chief Economist
    Active funds lagging benchmark
    Source: Bloomberg, S&P SPIVA, Apollo Chief Economist

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  • Many commercial real estate (CRE) loans are five-year maturities, which means that CRE loans that were underwritten when the Fed funds rate was zero in 2020 and 2021 have to be refinanced in 2025 and 2026. This gives the maturity wall a downward sloping shape for CRE, with a lot of refinancings over the next few years. This is different from investment grade (IG), high yield (HY), and leveraged loans, where the maturity walls are spread over time; most companies that refinanced in 2020 and 2021 at very low interest rates do not have to refinance in the near future.

    The bottom line is that the maturity wall is front-loaded for CRE, back-loaded for HY and loans, and flat for IG, see chart below. The IG bars are taller in the chart because IG is a much bigger asset class.

    With rates higher for longer, what matters for markets is the profile of the maturity wall, i.e., is it downward sloping, upward sloping, or flat.

    The maturity wall is front-loaded for CRE, back-loaded for HY and loans, and flat for IG
    Source: ICE BofA, Bloomberg, PitchBook LCD, MBA, Apollo Chief Economist

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  • The two charts below show that US long rates are disconnecting from Fed expectations and oil prices. Despite the market still expecting five Fed cuts over the coming 12 months, long rates are moving higher. And despite oil prices falling, long rates are moving higher. This suggests that long rates are rising because of emerging worries about fiscal sustainability. 

    10-year Treasury term premium rising
    Note: New York Fed economists Tobias Adrian, Richard Crump, and Emanuel Moench (or “ACM”) present Treasury term premia estimates for maturities from one to 10 years from 1961 to the present. ACM further estimate fitted yields and the expected average short-term rates for the same set of maturities. The analysis is based on a five-factor, no-arbitrage term structure model. Source: Bloomberg, Apollo Chief Economist

    10-year Treasury yield decoupling from oil prices
    Source: Bloomberg, Apollo Chief Economist

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  • Long-Term Outlook for US and Europe

    Torsten Sløk

    Apollo Chief Economist

    The long-term growth outlook for Europe has deteriorated steadily over the past 20 years, see chart below.

    The long-term growth outlook for the US has also softened. But since 2016, it has been stable at just below 2%.

    The long-term growth outlook has deteriorated both in Europe and the US
    Source: ECB, FRB, Haver Analytics, Bloomberg, Apollo Chief Economist

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  • Nuclear Power Coming Back?

    Torsten Sløk

    Apollo Chief Economist

    Data centers need a lot of energy, and there is more talk about nuclear power playing a bigger role. There are currently 54 nuclear power plants in 28 states, see map below.

    54 nuclear power plants in 28 states
    Source: EIA, Apollo Chief Economist

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