Apple is often a topic in these articles because it’s such a large company with outsized effects on the indices it’s in. Proof of that is Apple’s gains this year account for 102% of the Dow Jones Industrial Average’s gains. Large cap firms are outperforming small cap ones. Apple is exhibit A of this trend. The chart below is the latest update of S&P 600 margins. The S&P 600 is the small cap part of the S&P 1500. As you can see in the chart below, S&P 600 margins have fallen since 2013 and have not improved since the election. 2017 margin estimates have fallen at an astounding rate. In late 2015, 2017 S&P 600 margins were expected to be about 6.5% and now they’re expected to be about 4.5%. S&P 500 forward margins are now 10.8%. The trend in the margins diverging may simply be indicative of changes in market share opposed to the signal of a new recession or growth period.

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The chart below is further indicative of the divergence between the top companies and the rest of the bunch. As you can see, the labor productivity growth of the bottom 95% of manufacturing firms has been stable, while the top 5% have seen accelerated growth. There wasn’t even negative growth for the top firms during the financial crisis. The widening gap between the wealthy and the poor is not limited to personal income!

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I discuss the slack in the labor market a lot because the 4.4% unemployment rate and low jobless claims reports would be indicative of an overheating labor market which could crimp margins, but no margin crimping is occurring for large and midcap firms. The chart below is consistent with the unemployment rate. As you can see, the number of unemployed people per job is below the low seen in 2007 which means the labor market is very tight. Just a few years ago, there were media reports of hundreds of people lining up for jobs. Now it’s tough to find workers. It obviously depends on what type of job is being offered, but most industries in the economy act in tune. This metric didn’t see any spike during the economic weakness in late 2015/early 2016. This makes it important to study as there have been no false positives.

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Speaking of false positive, the chart below which shows the net percentage of banks reporting stronger demand for credit card loans has had a few since 2011. However, just because there have been false positive readings where more banks reported weaker demand for credit card loans doesn’t mean this chart should be ignored. Weaker demand for credit cards may reflect a distressed consumer. The idea that the consumer is distressed is reflected in elevated student loan default rates, near record high consumer debt, and weak real consumer spending growth. The counter point to this is the strong labor market reflected in the chart above.

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The chart below is the S&P/Experian consumer credit default composite index. Even though consumers are asking for less credit card loans, their default rate isn’t increasing in a meaningful way. The index bottomed at 0.81 in May 2016 and was at 0.94 in March 2017. As you can see from the chart below, there have been a few periods where the index has increased more than that, so it’s not a signal the index is about to move much higher. I think we need to see weakness in the labor market for default rates to increase. The consumer has taken out too much debt which is hurting its spending growth now, but it won’t default on those loans unless it loses its job.

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The chart below shows the growth in consumer credit card loan growth. As you can see credit card loan growth peaked in Q1 2016 at 7.9% and it’s now growing at a 3.8% rate. That’s almost the same time default rates bottomed in the chart above. The decelerating credit card loan growth rate could be a signal default rates will start moving higher. The credit card loan growth rate has been a lagging indicator. As you can see, growth only started falling in late 2008 at the end of the recession. I often discuss how 2008 wasn’t a proper deleveraging since the banks and auto firms were bailed out and the government debt as a percentage of GDP soared. The consumer did have a deleveraging event. Another one will likely occur in the next few quarters as the debt has become bloated again.

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The chart below shows the latest deceleration in demand for auto loans. Auto loan growth has fueled the bubble. There’s been four months of declines in seasonally adjusted monthly auto sales. It looks like the bubble could be unwinding this year. It’s important to recognize that auto loans, student loans, and credit card loans are all intertwined. Someone isn’t going to buy a new car when they have a delinquent student loan for over 90 days.

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Even though demand for auto loans is declining quicker than demand for credit card loans, the default rate for auto loans hasn’t risen meaningfully. The index bottomed at 0.85 in June 2015. The index was at 1.00 in March. It appears to be stumbling along the bottom like the jobless claims and the credit card default index. To be clear, these two indices reflect default rates, but aren’t the actual default percentages.

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Conclusion

The gap between large and small firms is widening. The cherry on top of the gap will be when Apple hits a market cap of $1 trillion. Its current market cap is $824.55 billion which means the stock needs to rise 21.2% for it to hit that milestone. When it happens in the next 12 months, it will be the number one story in finance and the general news.

Although loan demand is weakening, default rates aren’t. This means a recession brought about by the credit cycle unwinding is not imminent. It’s starting to look like there will be low GDP growth until Trump’s tax plan is passed. After it passes, there will be a last hoorah, before the cycle unwinds.