A bit of a smorgasbord of Data topics today, but each with a direct read-through to US equity markets, economy, and Fed policy.
#1: This is the one time of the year where you have to look at the entire CBOE VIX term structure (all expirations) rather than just the front month prices quoted in the financial press. The implied volatility imbedded in options prices – what the VIX actually measures – is seasonal and typically declines in the back half of December. Part of this is due to the oft-mentioned light volume “Santa Claus” rally which often occurs then. The rest is options traders squaring up their books into year end, reducing liquidity and therefore price discovery.
The current VIX term structure looks like this:
Two points about this data:
- First, the January – July 2021 VIXs are all noticeably higher (25 – 26) than the spot price (that green line at 22.66) and December’s expiration of 24.05.
This is notable, because the VIX’s long run average back to 1990 is 19.3, and the 2021 prices are above that level. This indicates that options markets believe US equity volatility will remain elevated through the first half of next year rather than revert to their long-run average.
- Second, that’s a pretty flat “curve” we’re looking at here, which means options markets don’t see volatility declining through July 2021.
That’s a problem, at least in theory, for the S&P 500 because typically VIX levels drop when stock prices rise. For example, the index is up 15 percent since June 30th and over that time the 30-day VIX average is down from 30.4 to 28.2.
Takeaway: the VIX term structure is signaling that US stocks may be in for a choppy, largely directionless ride for the next 6 months. We assume that’s because a lot of good news is already baked into stock prices and Tech + AMZN, FB and GOOG is still 37 percent of the index. Even if groups like Industrials, Financials and other cyclicals continue to rally, the index overall may churn more than it rallies.
#2: A refresh on one of our favorite off-the-grid economic indicators: used car/truck prices from Manheim, the US leader in dealer-to-dealer auctions. Used vehicle prices are important to new car and light truck demand because they determine trade-in values. Aside from that industry-specific utility, used car prices are also a reliable indicator about the real state of the US economy.
Here’s the latest Manheim Used Vehicle Index, where you can see both the cyclicality (early 2000s and Great Recession) and the recent unprecedented increase in the auction value of used cars and trucks due to market dislocations caused by the pandemic:
Two points here:
- As impressive as November 2020’s 17 percent annual gain looks on that chart, Manheim notes that prices appear to be rolling over. On a non-seasonally adjusted basis November’s aggregate prices are down 0.9 percent from October and 3-year old vehicles (the largest model-year cohort at auction, according to Manheim) are down 1.2 percent over the last 2 weeks.
- Manheim also includes some useful vehicle loan analysis in its biweekly report (link below) about the state of US vehicle loans. According to credit reporting agency Equifax:
“Auto loan performance deteriorated again modestly in October, but performance remains better than last year or a typical year and much better than the typical recession.”
But… “Loan delinquencies and defaults have been low because of stimulus support and loan accommodations.” And …. “more than 1.9 million car loans … likely would have fallen into delinquency or completed default by now” without lender accommodations.
Takeaway: used car prices have certainly been strong this year, but Manheim points out that these are starting to weaken, portending lower new vehicle demand/economic output as trade-in values decline.
#3: That used car price index is a good reminder that measuring inflation is as much art as science; using a “trimmed mean” metric allows us to exclude oddball components that can skew accurate assessments of price change.
The Dallas Fed is one such metric, the Trimmed Mean PCE Inflation Rate. This takes the Personal Consumption Expenditures basket of goods inflation and excludes outliers (more info in the link below).
Here is the Dallas Fed’s measure back to 1978:
Two points here:
- The Trimmed Mean PCE clearly shows that the Pandemic Recession (yellow bar, far right) has not caused a significant decline in “core” inflation. September’s reading of 1.9 percent is right in line with the last 2 years.
- At least by this measure, the Fed did actually achieve its 2 percent inflation target from mid 2018 to the start of 2020.
Takeaway: we’re starting from a higher “core” inflation base than is commonly understood if the Trimmed Mean PCE is a better measure of systemic inflation than the more commonly used data points like CPI, PPI or traditional PCE. Over the short term that is a positive for corporate earnings leverage (a core theme of ours for 2021), even if it means the Fed may have to raise rates before 2022.
Manheim Used Vehicle Value Index: https://publish.manheim.com/en/services/consulting/used-vehicle-value-index.html
Dallas Fed Trimmed Mean: https://www.dallasfed.org/research/pce