Treasury Yield Curves, S&P Valuation, Food Stamps

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Treasury Yield Curves, S&P Valuation, Food Stamps

Three “Data” items today:

Topic #1: 5-year US Treasuries now yield more than 10-year Treasuries (2.56 versus 2.47 percent, 9 basis points), which some market observers are calling out as a sign of an impending US economic contraction. The more common yield curve-related recession indicators are the spread between 3-month and 10-year Treasuries and the spread between 2-year and 10-year Treasuries. How does the 5-10 year Treasury spread stack up against those?

This chart shows the 10-5 year Treasury spread in solid red, 10s minus 2s in dotted black, and 10s minus 3-months in dotted blue, all back to 1990. Two points on the data presented:

  • First, this time series shows that the 10-year/3-month spread (blue line) is the clearest historical indicator of an upcoming recession. The line goes solidly negative in Q3 2000, Q1 2007, and even in Q3 2019 (before anyone knew there was a global recession coming due to the pandemic). 10-years minus 2-year yields (black line) largely track 10s/3-months, but do not go as negative before a recession.
  • Second, 10-years minus 5-years spreads can go to zero or even modestly negative without a recession appearing in 6-12 months’ time. Such was the case in 1994, the late 1990s, and 2006. If you expect, as we do, that 10-year yields will continue to climb then today’s slightly negative spreads should flip positive in the near future.

Takeaway: while we’d certainly like to see the 5-year/10-year Treasury spread revert to a more-normal positive differential, there’s less to this recession indicator than meets the eye. We continue to watch 3-month/10-years and 2-year/10-years spreads closely because decades of history say those are important signals. When those go negative, it means the market is concerned the Federal Reserve is set to overshoot on rate policy and cause an economic downturn. We are not there yet but understand why so many investors are following these data points closely.

#2: The S&P 500 at today’s close of 4,576 trades for 20.1x Wall Street’s $227/share estimate for forward 12-month index earnings per share – is that cheap, expensive, or just right?

This chart, courtesy of FactSet (link below) shows the last 10 years of S&P 500 forward multiples. Three points here:

  • US large caps have been growing into higher valuation multiples over the last decade, primarily for 2 reasons. First, Technology has become an ever-larger slice of the S&P 500 and this sector carries higher multiples due to its growth and high return on capital. Second, the first few years of this chart reflect (entirely understandable) post-Financial Crisis skepticism that US corporate earnings power would be as high and stable as it has ultimately been shown to be.
  • The S&P 500 has been getting “cheaper” over the last 18 months as analysts slowly started to incorporate higher US large cap earnings power into their forecasts. Their estimates now are likely quite close to what companies will report rather than being way too low, as they were a year ago.
  • The recent bounce for US stocks on March 8th/14th came as the S&P 500’s forward multiple hit 18.0x. This was the first time since the near-term aftermath of the pandemic crisis that the S&P 500 traded in the same range (18-19x) as its immediately pre-pandemic valuation.

Takeaway: with earnings season just 2 weeks away, S&P 500 valuations of 20x imply there is both upside to analysts Q1 estimates and room for Wall Street to raise numbers for the rest of the year. The chart above shows that is the only recipe that delivers such a high multiple of current earnings. We agree that the S&P can collectively beat expectations but wonder how much of that is already baked into stock prices.

#3: US Google search volumes for “food stamps”, the colloquial name for the Supplemental Nutrition Assistance Program. SNAP pays lower income individuals and families a monthly stipend to purchase food via an EBT (Electronic Benefits Transfer) card that looks and works like a credit or debit card. It is the primary anti-hunger program in the US. As of December 2021 (latest data available) there were 41.5 million SNAP recipients in the United States, or 13 percent of the population. Last year, monthly benefits averaged $218/month/person.

This is the Google Trends chart for “food stamps” back to 2004. Two points here:

  • Search interest rose before the Great Recession hit, with the uptick starting in early 2008. It peaked in late 2013 (as noted), but then declined during the last economic expansion. Adjusted for population growth, Google searches for “food stamp” returned to pre-Great Recession levels by 2019.
  • Search volumes for “food stamps” hit an all-time high in April 2020, as you’d expect. They are still, however, running 100 percent higher than pre-pandemic levels.

Takeaway: it is remarkable that “food stamp” Google search volumes remain so elevated in what other economic indicators say is a hot US economy, but we suspect food inflation and still-lower levels of labor force participation versus pre-pandemic are playing a role here. Even still, this is a large difference and speaks to continued societal interest in a basic anti-poverty program.

Sources:

FactSet Earnings Insight report: https://advantage.factset.com/hubfs/Website/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_032522B.pdf

US SNAP data: https://www.fns.usda.gov/pd/supplemental-nutrition-assistance-program-snap