Halloween comes to the markets: six charts to scare investors
With the arrival of Halloween, asset manager M&G has put together its traditional selection of spooky charts that should scare investors. Read
Halloween has arrived in the markets, and asset manager M&G has released their annual selection of spooky charts to scare investors. Investment strategist Joe Sullivan-Bissett highlights six key issues that warrant close attention: consumer spending, diesel prices, the housing market, credit differentials, the capital expenditure boom, and a recent re-pricing of bond yields in France.
Sullivan-Bissett notes a growing disconnect between income and expenses, forcing consumption to be sustained by savings. Real spending has risen by 2.6% year-over-year, while disposable income (excluding transfers) has only increased by 0.8%. Since mid-2024, expenditure has surpassed income on a month-to-month basis, and this gap is being covered by savings. As savings are finite, the longer this situation persists, the less protection there will be should any problems arise.
Historically, negative disposable income (excluding transfers) has coincided with recessionary periods, though Sullivan-Bissett warns that this is not a definitive signal. Diesel prices are a concern, as they consist of crude oil costs and refinery margins. The refining capacity bottleneck could pose a deeper problem in addressing the current market tension. In the U.S., this overcost has already translated into diesel prices exceeding $6 per gallon, impacting transportation, agriculture, and machinery.
The U.S. housing market is in a state of stagnation, with existing home sales as a percentage of total occupied homes sitting at 4.75%, below the 5.1% post-2010 crisis and roughly half the 9.6% seen in 2005. Homeowners are reluctant to move due to long-term, low-interest mortgages, limiting mobility and housing market turnover.
Credit spreads are tight, and Sullivan-Bissett suggests it's worth examining the excess return on credit segments versus public debt in prior periods when credit differentials contributed little to overall bond returns. Historically, such scenarios have been followed by weak or negative excess returns, but it's unclear if that will hold true this time around.
Hyper-growth companies, like hyper-scalers in the data center industry, are allocating 82% of their free cash flow to capex, a significant increase from 27% a decade ago and 40% at the start of 2024. This trend suggests that a larger portion of future investments may need to be financed through the bond market, potentially increasing reliance on credit.
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