Category: Chart of the Week

No Longer Stuck in the Middle?

By now, readers likely know that large-cap equities propelled the U.S. equity market higher in 2023 and 2024, as the S&P 500 Index advanced over 20% in each of those years. Although positive performance continued for U.S. stocks to begin 2025, the often-overlooked mid-cap space ultimately led the way, with the Russell Midcap Index gaining 4.3% in January. This figure was higher than both the 3.2% and 2.6% returns notched by the Russell 1000 Index and Russell 2000 Index, respectively, during the month. Commonly underrepresented in investor portfolios, mid-cap indices provide exposure to more established business models than small-cap benchmarks but also offer potential exposure to companies growing at a faster rate than those within the large-cap universe.

As it relates to recent performance drivers, mid-cap equities were buoyed by the January CPI print, which led to a broadening out of markets. The space also benefited on a relative basis as mega-cap technology stalwarts sold off due to rhetoric surrounding trade restrictions and AI competition from China. While market concentration issues related to these mega-cap companies are a belabored topic, the theme of concentration is not isolated to the large-cap space. To that point, just two companies in the Russell Midcap Growth Index (Palantir and AppLovin) accounted for nearly 30% of the return of that benchmark last year. As of the end of last month, these two companies comprise more than 8% of the index and, with market capitalizations above $100 billion, are now outside of the typical range used to delineate the mid-cap space. Since these and similar dynamics have plagued indices across the equity spectrum, Russell will implement a second rebalance in November based on market capitalization beginning next year. This rebalance will help ensure the Russell indices provide an accurate representation of their respective asset classes and have the potential to combat historic levels of concentration. As index construction evolves, it is prudent for investors to construct diversified equity portfolios to balance the risks and rewards of each asset class.

Egg Prices Ruffle Consumer Feathers

While investors scrutinize rhetoric from the Trump administration for its potential to ignite another bout of inflation for U.S. consumers, one challenge is already ruffling feathers at the grocery store. Egg prices have surged amid a resurgence in avian flu cases as farmers have been forced to cull millions of egg-laying hens to protect healthy flocks. According to the Bureau of Labor Statistics, the average cost for Grade A large eggs reached $4.15 per dozen in December, which represents a more than 13% increase from November and a 65% year-over-year rise. In some states, costs have far exceeded the national average, with wholesale prices surpassing $7.24 and $8.35 per dozen in New York and California, respectively.

The latest outbreak has proven particularly severe, with more than 14.7 million egg-producing chickens infected in January alone (more than the total for all of 2023 following the initial outbreak of the flu). With the virus present in all 50 states, the CDC estimates that at least 150 million birds, including both commercial poultry and wild birds, have been affected since 2022. With no definitive end to the flu outbreak in sight, egg producers are lobbying the federal government to fund vaccine research as a potential long-term solution. As Easter approaches, rising demand for eggs could further exacerbate issues and potentially drive prices to record highs. The U.S. Department of Agriculture forecasts an additional 20% increase in egg prices through the end of this year due to shortages, with some grocery stores already struggling to maintain supplies and others instituting limits on purchases.

While the current price of eggs has been driven higher by the flu outbreak, trade restrictions could have a far greater impact on inflation for U.S. consumers. Consequently, investors must weigh the domestic supply shocks for eggs and other goods alongside ongoing trade uncertainties and accept that inflation and elevated interest rates may persist through 2025.

Assessing the Trade War “Battlefield”

The tariff plans announced by President Trump in recent days represent a significant escalation in trade policy and a shift away from targeted import taxes and toward broad-based economic measures. Specifically, the Trump administration imposed a blanket 10% levy on China and initially imposed a 25% duty on imports from Mexico and Canada, but has since paused those measures amid negotiations with the governments of those two nations as of this writing. The economic implications of these new policies are profound, potentially triggering inflationary pressures and reshaping global trade dynamics. This week’s chart highlights how U.S. export-dependent economies like Mexico and Canada are particularly vulnerable to Trump’s initiatives.

Trump’s tariffs have already prompted retaliatory responses from certain countries, raising concerns about the potential for an escalating trade conflict. Many economists note that these reciprocal measures could lead to a contraction in U.S. real GDP, an increase in consumer prices, and a disruption of established international trade networks. As the global community watches this ongoing situation closely, the ramifications of these unprecedented trade measures are yet to be fully understood.

Alternatives to Drive Growth in the Next Real Estate Cycle

As the real estate market evolves, alternative sectors are expected to drive significant growth in the coming years. Senior housing, cold storage, industrial assets, and data centers are expected to be particularly popular among investors, with each benefiting from unique factors like demographic changes and technological progress. Senior housing stands out as the sector with the highest projected NOI growth (9.7%) due to an aging U.S. population and the growing demand for retirement communities. Additionally, senior housing properties currently present value-add opportunities, as the average occupancy rate of 85% remains below historical norms due to regulatory challenges and restrictions implemented during the COVID-19 pandemic. As these regulatory pressures ease, there is significant potential for occupancy recovery and rent growth. Properties offering a mix of independent living, assisted living, and memory care units are especially attractive, as they cater to the diverse needs of an aging population and ensure steady revenues. These newer facilities, designed to meet the needs of both residents and their families, often achieve higher occupancy rates and command premium rents compared to older properties, enhancing their investment appeal. Regions with favorable climates, such as the Sunbelt and Mountain areas, are particularly attractive for these investments.

The single-family rental and affordable housing sectors are also gaining traction, as rising homeownership costs and a lack of affordable housing have increased demand for these types of properties. Affordable housing, particularly properties supported by government voucher programs, provides resilient income streams and often generates higher rental yields compared to traditional multifamily assets, making these segments essential in addressing housing shortages in high-growth regions. Data centers and digital infrastructure are becoming critical drivers of NOI growth as well, supported by the rising adoption of cloud services, e-commerce, and advanced computing. Meanwhile, smaller-scale industrial assets and cold storage are thriving due to increased demand for temperature-controlled supply chains and multi-tenant facilities that cater to small businesses. Together, these sectors offer durable demand, scalability, and opportunities to benefit from modern supply chain trends.

While the outlook for these alternative real estate sectors is strong, investment in these spaces does not come without risks. Regulatory challenges, energy consumption concerns for data centers, and liquidity issues in niche sectors like cold storage and affordable housing require careful consideration. That said, the structural trends detailed above should serve as tailwinds for alternative real estate in the years ahead.

The Economic Toll of the California Wildfires

Earlier this month, wildfires broke out across Los Angeles County, California, destroying more than 12,000 homes, businesses, schools, and other structures. Officials recently reported a total of 40,700 acres have burned across the area, with some of the blazes still only partially contained. According to Goldman Sachs estimates, the fires have resulted in roughly $40 billion in losses ($10–30 billion of which are insured) and could lead to a 0.2% drag on first quarter U.S. GDP growth. This potential impact, while significant, would be smaller than those of other natural disasters in U.S. history, including Hurricanes Katrina (2005) and Harvey (2017). These types of events typically result in short-term economic disruptions, but lost economic output is often gradually recovered as federal aid and insurance payouts allow communities to rebuild. As such, the cumulative economic impact of the wildfires may ultimately be lower than current estimates as eventual reconstruction efforts will likely provide a boost to GDP.

The wildfires in California are drawing attention to the availability and price of homeowners insurance, as the state faces frequent disasters, high real estate prices, and an uncertain insurance landscape. To that point, seven of the 12 largest insurance companies have either paused or restricted new policies in California due to the frequency and severity of natural disasters over the last decade. On January 10, the California Department of Insurance announced a one-year moratorium on the cancelation or non-renewal of homeowners insurance policies by carriers in specific areas affected by the wildfires. In coming years, California homeowners may see a shift in property insurance away from standard policies to provide higher risk coverage at higher rates.

A Cup of Joe Could Break the Bank

Over the last few years, a cup of coffee has become much more expensive as the costs of the two primary beans used to make the beverage, Arabica and Robusta, have moved significantly higher. Arabica beans are often imported to the U.S. from Brazil and are used to make higher quality coffee blends, while Robusta is a cheaper type of bean often exported from Vietnam and used to make instant coffee. A variety of factors can impact the prices of these beans, including weather irregularities, demand fluctuations, supply chain disruptions, regulatory changes, and currency movements.

This year, major drivers of prices include the high demand for coffee and concerns around supply given severe weather in Brazil and Vietnam. A late August frost in Brazil impacted the newly flowering trees and, thus, the next season’s beans, while severe droughts in both countries have impacted harvests. Droughts can cause coffee tree branches to die, leaves to fall (prohibiting photosynthesis), early flower shedding, and bean damage, all of which reduce a coffee tree’s expected harvest. Aggregate demand for coffee has gradually been increasing in tandem with these issues, primarily due to the growing coffee market in China. According to the U.S. Department of Agriculture, coffee consumption has risen by roughly 150% in China over the last decade, as the drink has become more affordable, accessible, and grown in popularity among young people. This growth is projected to continue into the next season of coffee consumption, up to 6.3 million bags (132lb each) from 5.8 million bags in the 2022/2023 season.

These challenged supply/demand dynamics have been felt by investors. To that point, coffee futures prices climbed 70% in 2024 and remain well above long-term averages as traders hedge against potential production delays and the anticipation of higher coffee prices. Additionally, name brands have also felt a squeeze, as Nestlé (the parent company of brands such as Nescafé and Nespresso) announced in November its plans to increase coffee prices and make smaller packages to absorb the higher costs of coffee beans. As consumers consider alternative morning beverages like orange juice or milk to cut costs, a word of advice: A cup of coffee is worth the price!

Deficit Dangers

Large-scale government programs aimed at stabilizing the nation’s economy in the wake of the pandemic, higher interest costs, and an increase in healthcare and retirement benefit spending have fueled higher deficit levels in recent time. To that point, the nearly $2 trillion U.S. federal budget deficit in the fiscal year that ended in September represented 6.4% of GDP, which was the largest such figure ever outside wartime periods or global crises (e.g., the Global Financial Crisis, COVID-19, etc.). Based on forecasts from the Congressional Budget Office, 2025 will be the third consecutive year that the United States will see a federal budget deficit in excess of 6% of GDP. The overall national debt has ballooned to more than $36 trillion as federal spending continues to outweigh tax revenues. This week’s chart outlines these dynamics above.

There are several risks posed by excessively high debt levels, including higher inflation, lower economic activity, and the potential that the nation will be equipped with fewer financial tools to handle geopolitical challenges as a large portion of U.S. debt held is by foreign investors. One risk that incoming Treasury Secretary Scott Bessent and other officials have highlighted is “rollover risk,” or the possibility that a drop in investor appetite at Treasury auctions would render the government unable to raise cash to pay for rapidly maturing debt. Bessent has made reducing the federal deficit a top priority via a combination of spending restraint, deregulation, and tax cuts aimed at fueling economic growth. While significantly reducing the federal budget deficit over the next four years may prove challenging for policymakers, it should be noted that the U.S. did manage to shrink its fiscal gap from 9.8% of GDP in 2009 to 4.1% in 2013 at the end of the Global Financial Crisis. That said, this moderation in the deficit came during a period of extreme economic recovery, which is a decidedly different environment than the current climate. Readers should note that efforts to return the federal deficit to historical levels will likely span years and different presidential administrations, though the structural advantages of the U.S. economy provide a buffer against the risks detailed above.

Back to Back!

This week’s chart details each calendar year return for the S&P 500 Index dating back to 1928, with consecutive 20%+ returns highlighted in orange. Despite a slight pullback over the last few weeks, the index posted a return of more than 20% in 2024, which represents only the fifth time in history that the benchmark has recorded such a figure in consecutive years (note that the five straight years of 20%+ returns in the 1990s are counted as one instance). As investors look ahead to 2025 and beyond, many are asking the following question: How have markets performed after such strong periods?

In the years following the first three of these instances (1937, 1956, and 1984), the S&P 500 Index notched a significantly lower return, with an average of -1.1%. Interestingly, each of these years was marked by either tighter monetary policy, inflation, decreased industrial production, higher unemployment, or some combination of these trends. As mentioned above, the late 1990s saw a staggering five consecutive years of 20%+ returns for the S&P 500 Index, fueled by a boom in investor interest in e-commerce, software, and telecommunications companies. The so-called “Dot-Com Bubble” led to widespread speculation related to unprofitable companies and a rapid expansion in market valuations, and the bursting of this bubble caused the S&P 500 Index to decline sharply in the first three years of the new millennium.

In the last two years, performance of the S&P 500 index has been largely driven by investor interest in artificial intelligence and the Information Technology sector. The Magnificent Seven stocks (Apple, Microsoft, Amazon, Alphabet, NVIDIA, Meta, and Tesla) have led the charge, accounting for over 50% of the total return for the benchmark since the beginning of 2023. As artificial intelligence becomes increasingly integrated into the global economy, these and other similar companies are expected to attract more investment and drive additional index returns. While there are some similarities between the current environment and the Dot-Com Bubble, the U.S. economy continues to show resilience and most of the winners from the last two years are well-established businesses with healthy profits. Still, history has shown us that periods of robust equity market performance do not continue forever. As the calendar changes to 2025, investors should keep this idea in mind as it relates to expectations for near-term stock returns.

A Damsel in Distress

An increase in defaults across below investment grade issuers, which are viewed as the weakest and riskiest, is often the “canary in the coal mine” that the economy is entering a downturn. Recently, below investment grade defaults have moved higher from record lows seen in 2021, fueled by defaults in the leveraged loan market. However, an increasingly greater share of defaults is coming in the form of distressed exchanges.

A distressed exchange is a type of out-of-court negotiation between a borrower and its creditors that occurs when the borrower is in danger of defaulting. The recent surge in the volume of distressed exchanges has come largely in the form of Liability Management Exchanges — or “LMEs” — which are voluntary proactive paths that primarily, but not always, distressed borrowers may take in lieu of a traditional default or restructuring. These types of transactions have grown in usage because of looser covenants and weaker protections on a company’s debt, particularly within the loan market, which can be seen in the above chart. On a year-to-date basis, distressed exchanges as a share of overall default volume are more than 60%, which is the highest percentage seen since at least 2000 when data became widely available. The year-over-year increase in distressed exchanges of nearly 30% is the result of the greater use of LMEs.

The proliferation of distressed exchanges may overstate the overall observed default rate. To that point, the 2024 rates (including distressed exchanges) for high yield and leveraged loans were 1.4% and 4.0%, respectively. Stripping out distressed exchanges, the 2024 default rate falls to 0.3% for high yield bonds and 1.5% for leveraged loans. While distressed exchanges are technical defaults since the terms of the debt agreement are altered, the recovery rates are more favorable for distressed exchange transactions relative to traditional defaults. Specifically, over the past 12 months, the recovery rates on distressed exchanges for high yield bonds and leveraged loans were 48.2% and 18.3% higher, respectively. Distressed exchanges, particularly LMEs, can grant a borrower the liquidity and flexibility needed to correct critical issues, and certain transactions are included in these default statistics even if there is no principal loss. At times, however, there are abusers of these transactions who are merely “kicking the can” on their debt as fundamental issues remain or increase.

Recent data points show that distressed exchanges can lead to better outcomes relative to outright defaults, but the long-term effect of their proliferation is not currently known. What is known is that, based on recent trends, the amount of distressed exchanges, and LMEs, are not going away any time soon.

Cryptocurrencies Surge Post-Election

The cryptocurrency space is making waves again after a robust post-election rally drove bitcoin over $100,000 earlier this month. While it is tempting to attribute recent performance to speculation or momentum, a deeper understanding of the dynamics that fueled this surge may help investors navigate markets in 2025 and beyond. To that point, this week’s chart outlines the year-to-date performance of Bitcoin, Ethereum, XRP, and the MarketVector Digital Assets 100 Index, a market-cap weighted benchmark comprised of the top 100 cryptocurrencies (excluding stablecoins). The vertical line represents the beginning of the post-election cryptocurrency rally.

During the months leading up to the election, broad cryptocurrency performance appears to have been largely tied to bitcoin. As bitcoin is the most established, recognized, and capitalized digital asset, it follows that its liquidity and capital base would generally define the market. However, recent divergences between bitcoin and other cryptocurrencies are less intuitive and can largely be attributed to bitcoin’s position in a space beset by regulatory ambiguity and incongruous guidance. Put simply, this year bitcoin appears to have benefited from increased regulatory clarity and investor confidence. By the end of the second quarter, aggregate assets in the top 12 bitcoin ETFs exceeded $50 billion, with the iShares Bitcoin Trust ETF accounting for nearly 40% of that figure. Additionally, the access and standards afforded by the ETFs increased investor confidence, led to modest institutional acceptance, and expanded bitcoin market dominance. Meanwhile, other cryptocurrencies like XRP have faced headwinds that have weighed on performance. Embroiled in litigation since 2020, XRP was delisted by most U.S. exchanges and, as a result, struggled to perform during most of this year despite increased cryptocurrency adoption. This dynamic is demonstrated by XRP’s losses prior to the U.S. election.

So how did these dynamics ultimately contribute to a broad post-election rally, and how could they be relevant in the future? Challenges faced by XRP and the broader cryptocurrency market have led to criticism from industry stakeholders, particularly following the collapse of FTX, which exacerbated regulatory scrutiny. Cryptocurrency advocates and industry leaders widely viewed the responses from regulators as heavy-handed, raising concerns over potential stifling of innovation. As the 2024 election cycle ramped up, stakeholders within the cryptocurrency space increasingly engaged with policymakers, pushing for clearer regulatory frameworks and a more balanced approach. This heightened engagement coincided with a surge in political spending, reflecting the industry’s efforts to influence the regulatory landscape and mitigate perceived risks. Estimates suggest that bipartisan political spending by the cryptocurrency industry during the 2024 election cycle totaled more than $320 million, outpacing the roughly $275 million spent by Elon Musk and $175 million spent by Charles Koch and affiliates.

While it is unclear how cryptocurrencies may benefit from the incoming administration, the nomination of Paul Atkins, a known digital assets advocate, for SEC Chair indicates a potential shift toward more favorable regulatory policies for the sector. Additionally, the appointment of venture capitalist and cryptocurrency proponent David Sacks as the new administration’s “crypto czar” seems to have renewed industry optimism. These and other developments suggest that the incoming administration could provide a more supportive environment for digital assets.