These are the charts Wall Street is watching: YF Chartbook

Twice a year, Yahoo Finance polls some of Wall Street’s top analysts, strategists, and advisers to find out which charts they are watching to gain insight into what’s driving the markets and what may be coming. The Chartbook gives investors an inside look at the markets so they can both protect their portfolios and find opportunities to invest.

Yahoo Finance’s Myles Udland, Seana Smith, and Josh Schafer share some of their favorite charts from the third volume of the Yahoo Finance Chartbook, taking a look at charts that shed light on the labor market, cash flow growth, and the impact the election may have on inflation.

For more expert insight and the latest market action, click here.

This post was written by Stephanie Mikulich.

Video Transcript

Welcome to the third volume of the Yahoo Finance Chart Book.

I’m Shawna Smith alongside Miles Lin and Josh Shafer.

Now we’ve compiled more than 30 charts from economists and strategists across Wall Street giving us some insight into what’s ahead here for both the economy and the markets.

And we got three of those charts here for you today.

Josh, you’re over at the big word.

I’m gonna kick it off with you here because you’ve been leading the charge on this for us today.

Yeah, Shana.

So we’re gonna start with a look at the labour market here.

And one thing that we got overall from economists in these charts was sort of the case for the Federal Reserve to cut interest rates.

And, yes, that has to do with inflation.

But it also has to do with dynamics in the labour market that have shifted a lot since the last chart book we did in January.

So what we’re looking at here is a chart from Goldman Sachs’ Jan Hanus and what he’s taking a look at is the unemployment rate versus the job openings rate.

This is known as the beverage curve you can see as uh, unemployed.

As the unemployment rate kicks out, when the job openings rate kicks out, that is not a good sign for the economy.

So this purple line here would be what?

Story continues

We’re not trying to have happen again.

You’ve been looking at this white blue line.

We’ve had job openings come down.

The unemployment rate has started to kick out, but the key concern would be normally as job openings come down, we move along the curve, and that is normally where we see recession so hot is sort of highlighting this chart in the labour market as a whole, saying that we’re at quote an inflexion point because we could stay here for a long time.

But if we were to keep coming down at some point, we likely kick out.

And that is where concerns would come for the economy.

Overall, I think this Miles was one chart that sort of spoke to me about the entire book as a whole.

Right now, with that term inflexion point, it seems like we’re also there with markets.

How much higher can markets really go via this a I driven rally?

Does the momentum have to move somewhere else?

It seems like from the last time we did the sharp book in January to now here in July, we’ve just moved a little bit closer to a moment where it feels like we’re at that quote inflexion point, I think, yes, but I also look at you know how far down into the economic literature we’re going with things like the beverage curve.

And if we’re having a discussion about the beverage curve, I just wonder, Are we reaching a little bit further Josh into that tool kit that economists on the street you have access to to make the argument that things are normalising?

And, you know, you mentioned how so little feels like it has changed between the last chart book and this one.

And I know a theme that you’ve written a lot about is there’s not really a feel for what’s normal yet what can do.

You know, Could we just persist in this state of play where we have, um, you know, job openings and the unemployment rate playing, staying fairly steady?

Um, and does that continue to, let’s say, confound the economics establishment, and that definitely feels like the moment specifically with the labour market right?

The labour market feels a little bit harder to define right now than maybe say the inflation story.

I think a lot of the inflation charts that we have in here are rather in two.

If inflation is starting to come down, people feel like it is on a trend where it is coming down.

And that sort of makes the case for the Fed to cut the employment.

Part of things has just been simply more confusing.

We have a chart in here talking about the so indicator, which is another recession indicator and sort of discounting that maybe this time is different with that indicator, like it has been with a lot of other recession indicators.

And so I think that is kind of an interesting piece of this book, as well as to think about the different parts where it’s easy to explain right now.

Like the inflation story where, perhaps the way market story, we still just need to see a little bit more and that looming question of how much of this is just different because of the pandemic.

Yes, we are several years still perhaps rebalancing from that, but we’re still seeing the effects from that, and it makes it a little bit harder to get a clear read on where we’re headed now.

Yeah, exactly.

And I think when when you point to at least some of the trends that we have seen, it is consistent with the calls of the soft landing, similar to what we’ve heard from Powell.

We’ve even heard from Waller specific here to the curve.

But I also think when you talk about this post Pande normal and maybe what the labour market looks like after it also just the behaviour here of even some employers.

Because, as you have seen, maybe a tick down here just in terms of job postings.

That’s obviously affecting vacancies and what we are seeing on that aspect.

But we’re not seeing that tick higher in unemployment, so I think also that question is whether or not people are just switching jobs.

Are they getting coached from current jobs?

That’s why we’re not seeing that move higher.

I think it will be interesting obviously, to see how this trend looks here a few months out and what exactly that points to as to whether or not we are seeing more material.

We is here within the labour, and there’s the part of that chart that we were just looking at where, like I said, You can stay there for a long time, right?

And you can stay in certain areas of charts like this for a long time.

And Miles has a stock chart for us that I also think perhaps maybe has that takeaway within it in some ways, too, that you can stay at extended periods of stock valuations for perhaps longer than we think.

So I’ll kick it over.

Yeah, So let’s take a look at this chart, which comes to us from Scott Kroner team over at Citi, and it shows what investors are pricing in in terms of cash flow growth.

Um, you know, over the next several years, so you’re looking at expected compound compounded annual growth rate for free cash flows of 14%.

These are at cycle highs.

You got to this level really in that 2021 period.

That was a very frenetic market.

So it makes sense.

A lot of things feel similar to that.

But I was interested in this chart because I think there are essentially two ways to read it, and how you read it as an investor speaks a lot to which way you think the market is going to break.

You could read this as we actually believe companies are going to be growing free cash flow at a higher rate and that everything the fundamentals are better.

And there’s a big A I component within the aggregates that would suggest that case is easy to make.

The other way.

I think you can interpret.

This is essentially that your cost of capital is going to be coming down.

Interest rates are going to go lower.

Therefore, if you you know, if what you have to pay to finance your business gets cheaper over time.

Your free cash flow in theory would then be, you know, would then grow or grow at a faster rate, whatever you want to say.

So I think that chart speaks to this moment where the Bulls, This is another theme sea In this book.

The Bulls kind of have two options here on why they can be bullish, which feels like why everyone we talked to is sort of so bullish.

Well, yeah, exactly.

And I think that also just points to no one really has.

I think it’s almost you can flip a salsa coin up in the air and try to figure out what exactly is going to lead this next leg higher, right?

You talked all about that.

There’s this huge focus on the Tech, so that has really been carrying the momentum here for the last 12 24 months.

And then you shift over maybe to some of that rotation that we have seen, especially what has played out in the market over the last week or two and whether or not we are going to see some of that take hold.

But I think it’s tough to argue that there is going to be anything that’s going to stop some of this bullish momentum, at least for now.

This is probably the only thing I needed to say in order for it to trigger some sort of bear market that’s going to happen.

But I do think when you take into account the charts that you have gathered here for this chart book really point to the fact as to why Wall Street for remains optimistic at this point.

Yeah, and staying on cities’ charts.

Sort of.

What they say in their commentary here from the team led by Scott Croner, is that earnings could be what continues to drive this higher right, And I think that is part of when we go back to our second volume of this chart book from the start of the year.

I think a lot of strategists how they’d reason that maybe their charts weren’t bullish enough is because they weren’t bullish enough about big tech earnings and sort of the mega cap exceptionalism that we’ve seen in earnings growth.

We’re talking about this chart at the start of big tech earnings.

Does that come through?

Do you get more surprises there somehow to continue to surprise you to the upside that keeps pushing this harder?

That’s definitely a case that exists, all right, So we did stocks.

Did the labour market.

Let’s do the election, which I think is hanging out here, Your pick for you to do that.

All right, let’s bring up the chart here that we got from Oxford Economics and their leading US economist sent this over to us and I thought that this was interesting one.

We got to talk about the election since we’re only a few months out and two, I think really, this also plays into the conversation clearly about what we’re having in terms of inflationary pressures.

Ultimately, what this could mean here for the Fed’s policy path forward.

So as we have seen, or as we see on your screen right now is laid out is a couple of different scenarios that we could see come November.

So that first line up in your screen that first graph is a full blown trump.

But what this essentially means this is viewed, at least in Oxford economic size, as the most inflationary will will add to the most inflationary pressure that we will see a lot of this having to do with the tax cuts, higher defence spending tariffs that we have heard talk about time and time again and also really is what what has played out on Wall Street here over the last couple of weeks in terms of the trump trade and kind of the behaviour that we have seen play out in the bond markets.

When you go down to the democratic scenario, we don’t have a nominee just yet, but at least in terms of the formula that they are using very confident in the fact that a Democratic, divided government or a full blown Democratic would be at least the least inflationary pressure that would be added here to the market.

So why do we care about this?

I think ultimately maybe what this could mean here for the Fed’s path here to attain inflation and maybe some of the policies that we could see coming out of Washington, how that could complicate things for the Fed going forward.

I think my takeaway when I look at that, is we are in a structurally higher inflation environment, because essentially the Democratic scenario contemplated there brings the Fed along that path to 2%.

And while the trump inflation or the Trump plan suggests there’s more inflation, neither are necessarily aggressively disinflationary.

Let’s say, Um, there’s certainly a view that any mix of fiscal policy tariffs, what have you going forward from?

Either future administration is going to have some upward pressure on inflation, and it really gets, you know, Josh back to that question of what’s the new normal?

Well, I think the new normal is a condition in which, or a market situation in which you have higher rates structurally because you have more inflation structurally.

And I think for me from the political side of this chart book, the numbers tell us about your politics.

The number one takeaway I had was, I ask, rather open question when I send this out to people just asking what the most important chart is right now.

And I only got back three political charts, and I think that sort of also gives a little bit of insight for investors right now in 2024.

Yes, we’re talking a lot about the election, and it is big news, and it’s going to matter a lot.

But there aren’t necessarily a lot of strategists on Wall Street economists having that be the number one thing that they think is going to impact stocks or impact the bottom line, impact earnings and be the biggest market driver.

That was not the top thing that came to mind for a lot of people, which I found rather interesting.

That is interesting.

But you know, a lot can happen over the next couple of weeks between now and Election Day, so maybe we’ll ultimately be a bigger driver than what strategists and economists are factoring in now.

All right, well, that does it for us right here.

But make sure you check out Yahoo Finance’s chart book.

Josh has been very hard at work over the last several months, putting this together more than 30 charts, really giving you insight into where top economists and top strategists see the market and the economy headed here.

Over the next several months, we’ll see you next time.