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Tag: bond markets

  • Why 5% bond yields could wreak havoc on the market

    Why 5% bond yields could wreak havoc on the market

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    The yield on the 30-year Treasury bond briefly rose above 5% again on Friday, opening the door to the likelihood of a more sustainable rise above that mark and the risk that the benchmark 10-year yield follows — moves which could wreak havoc across financial markets.

    One big reason is that investors are likely to demand greater compensation for taking risk as yields hover around some of the highest levels of the past 16 years, asset managers said. Corporate credit spreads could keep widening in a sign of worsening economic conditions and higher overall risk. And with returns on government debt becoming a more favorable option for investments, the stock market may be vulnerable to repeated drubbings.

    Read: Treasury yields are climbing: ‘There’s never really been such an attractive opportunity for fixed-income investments’

    Stock investors nonetheless shook off Friday’s stunning official jobs report for September, which saw the U.S. add almost twice as many jobs as forecasters had expected. All three major stock indexes
    DJIA

    SPX

    COMP
    finished higher even though yields climbed on everything from the 1-month T-bill
    BX:TMUBMUSD01M
    to the 30-year bond
    BX:TMUBMUSD30Y.
    The yield on the long bond finished at 4.941% — the highest level since Sept. 20, 2007 — after rising past 5% during the New York morning. The rate on the 10-year note
    BX:TMUBMUSD10Y
    ended at 4.783%, the second-highest level of this year.

    Yields are returning to more normal-looking levels that prevailed before the 2007-2009 recession as the result of aggressive selloffs in government debt. More important than the absolute level of yields is the speed with which they have been heading to 5%. In the words of analyst Ajay Rajadhyaksha of Barclays earlier this week, there’s “no magic level” that will turn the current selloffs into a rally, and stocks have substantial room to reprice lower before bonds stabilize.

    “I think the market isn’t breaking yet, but a 5% 10-year yield is coming,” said Robert Daly, who manages $4.5 billion in assets as director of fixed income at Glenmede Investment Management in Philadelphia. “We’re already here on 30s and not that far away on 10s. Investors are trying to figure what level breaks the market, and I don’t think you can put your finger on the pulse as to what that level is.”

    Still, “a higher level of interest rates and yields is going to start having ramifications for broader markets at large,” leaving many investors hesitant to buy just about anything due to the volatility, Daly said via phone on Friday, after the release of September’s hot payrolls data.

    Friday’s data, which showed the U.S. creating 336,000 new jobs last month or almost double what economists had expected, is opening the door to a possible interest rate hike by the Federal Reserve on Nov. 1. The strong labor market means the Fed’s higher-for-longer mantra in rates is still in play and “the market is in a tenuous position to navigate all these things because of all the uncertainty,” Daly said.

    “Yields sustainably above 5% for a longer period of time will act as a weight on the market in terms of how you value risk compensation,” he said. “Investors are going to ask for more compensation to take risk and when you see liquidity evaporate more and more, that’s what’s going to turn the market over.”

    Friday’s price action was the second time this week that data related to the robust U.S. labor market has triggered a bonds selloff. On Tuesday, a snapback in U.S. job openings for August sent the 10- and 30-year yields to their highest closing levels since August-September of 2007.

    The next day, high-grade corporate-credit spreads widened for a seventh consecutive session. Daniel Krieter, a fixed-income strategist at BMO Capital Markets, wrote that “if rates continue to move higher or simply remain at these elevated levels for a significant period of time, it is going to have a pronounced effect on the creditworthiness of corporate borrowers, particularly in the high yield space.”

    In a note on Friday, Krieter’s colleagues, rates strategists Ian Lyngen and Ben Jeffery, wrote that “it’s not difficult to envision 10s maintain a range between 4.75% and 5.00%.”

    “The longer 10s hold this range, the more convinced the market will become that elevated yields are here to stay,” Lyngen and Jeffery said. “Admittedly, we’ve been surprised by the muted response in U.S. equities from the spike in yields and expect that’s due in part to the expectation for a swift reversal. In the event a correction fails to materialize, stocks will be overdue for a more meaningful reckoning.”

    The risk of “something breaking” will remain top of mind and “there is no shortage of risks facing equities and credit as rates continue to climb,” they added. “It’s not only the outright level of yields, but the length of time that borrowing costs stay elevated will also hold implications for risk asset valuations.”

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  • S&P 500 scores best day in 3 weeks as bond yields ease back

    S&P 500 scores best day in 3 weeks as bond yields ease back

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    U.S. stocks finished higher on Wednesday as yields on long government bonds retreated from 16-year highs, helping lift the S&P 500 to its best day in three weeks. The Dow Jones Industrial Index
    SPX,
    +0.81%
    gained about 125 points, or 0.4%, ending near 33,128, according to preliminary FactSet data. The boost, however, failed to push the blue-chip index back into the green for the year, a day after its gains for 2023 were erased. The S&P 500 index
    SPX,
    +0.81%
    rose 0.8%, marking its biggest daily climb since September 14, according to FactSet data. The Nasdaq Composite Index
    COMP,
    +1.35%
    shot up 1.4%. U.S. bond yields have surged since late September when the Federal Reserve indicated that rates likely will stay higher for longer than initially anticipated as it works to keep inflation in check. The sharp bond-market repricing has made buyers reluctant to step in, sending yields higher and creating ripples in financial markets. The 10-year Treasury
    TMUBMUSD10Y,
    4.739%
    fell 6.6 basis points Wednesday to 4.735%, while the 30-year Treasury yield
    TMUBMUSD30Y,
    4.868%
    shed 6 basis points to 4.876%, after briefly topping 5% late Tuesday. Investors remain focused on political upheaval in Washington and the prospect of a November government shutdown. Friday also brings the monthly jobs report for September, which is expected to show a cooling labor market, but still a low 3.7% unemployment rate.

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  • Why you should care about the global rout in government bonds | CNN Business

    Why you should care about the global rout in government bonds | CNN Business

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    London
    CNN
     — 

    A slump in government bonds around the world has pushed up the cost of some nations’ debt to levels not seen in more than a decade. That’s bad news for governments in the red but also for the wallets of millions of mortgage borrowers, stock investors and businesses.

    The sell-off has been fueled by expectations among investors that the world’s major central banks will keep interest rates “higher for longer” to bring inflation down to their targets.

    It works like this: Governments looking to raise cash for public services and investments issue bonds. A bond provides a way to borrow money from investors for a set length of time, with the obligation to make regular interest payments.

    When official interest rates rise, so do investors’ expectations for returns on bonds, known as yields. This creates an incentive for investors to sell the bonds they currently hold and buy newly issued ones that offer higher interest payments. Selling bonds reduces prices. So, in short, when yields rise, bond prices fall.

    And yields have most definitely been rising: The yield on 30-year US government bonds, also known as Treasuries, hit 5% on Tuesday for the first time since 2007. In the United Kingdom, the yield on 30-year bonds also reached 5% this week, the highest level in more than two decades.

    Yields on German long-dated bonds are back to levels last seen on the eve of the eurozone debt crisis in 2011. Yields on Italy’s 10-year bonds hit 5% on Wednesday, the highest level since 2012, when that crisis was in full swing.

    Here’s why you should care.

    The yields on local government bonds are usually used by banks to price mortgages.

    The disastrous “mini” budget unveiled by former UK Prime Minister Liz Truss in September last year provided a stark illustration of that relationship. Her plan to borrow tens of billions of pounds to fund tax cuts spooked bond investors who feared that the country’s finances were on an unsustainable path.

    The resulting sell-off in UK government bonds — called “gilts” — caused yields to shoot up, taking mortgage costs higher with them.

    The average interest on a two-year fixed-rate mortgage soared to 6.47% at the start of November 2022, according to data from product comparison website Moneyfacts, the highest level since the depths of the global financial crisis in August 2008.

    Early morning sun illuminates streets of residential terraced houses, on September 17, 2023 in Bath, England. Soaring interest rates and falling prices has meant the end of the UK's 13-year housing market boom potentially leading to a wider house price crash.

    That meant hundreds of pounds more a month in mortgage payments. Before higher mortgage rates kicked in, some panicked homeowners rushed to refinance their fixed-rate loans earlier than planned, accepting a financial penalty for doing so.

    Mortgage rates had been falling back since the drama last fall but are now back to 6.47%, this month’s data from Moneyfacts shows.

    In the United States, mortgage rates tend to track the yield on 10-year Treasuries, and that yield has risen 0.27 percentage points since late September.

    On Thursday, government-backed mortgage provider Freddie Mac announced that the average interest on a 30-year fixed-rate mortgage had hit 7.31% in the week ending September 28 — its highest level since 2000.

    “Higher mortgage rates create a standoff between potential buyers, who face some of the highest borrowing rates since 2000, and sellers, who may already enjoy a low fixed-rate mortgage and thus are less incentivized to sell,” Andrew Sheets, global head of corporate credit research at Morgan Stanley, told CNN.

    Surging government bond yields are probably coming for your stock portfolios too.

    Shares typically lose value when the yields on government debt rise, as investors can now get high returns — and a steady income — from less risky assets.

    Take the yield on 10-year Treasuries: at 4.78%, it is more than twice as high as the average yearly dividend paid out by the companies making up the S&P 500 index (SPX).

    “The higher the gilt yield goes, the less inclined, or obliged, investors will feel to take risk and pay up for other asset classes, such as shares,” Russ Mould, investment director at AJ Bell, told CNN.

    Stock indexes have tumbled on both sides of the Atlantic in recent weeks. The S&P 500 and the tech-heavy Nasdaq Composite (NDX) have shed 4% and 2.3% respectively since the Federal Reserve said late last month that it could hike rates once more this year and expected to make fewer rate cuts in 2024.

    The STOXX Europe 600 has sunk 4.5% and London’s FTSE 100 4.3% in that time.

    “Income is back,” analysts at BlackRock, the world’s biggest asset manager, wrote in a note Monday, recommending investments in short-dates US Treasuries.

    Stocks have also taken a hit in recent weeks as rising oil prices, an ailing Chinese economy and the prospect of another government shutdown in the United Stated have unnerved investors.

    High official interest rates in America and Europe have also raised the cost of borrowing for businesses.

    “Higher interest rates make borrowing less attractive, and we’ve already seen a sharp slowing of bank lending that we think is consistent with this idea,” said Sheets at Morgan Stanley.

    “It’s important to note that slower credit growth, which generally means a cooler economy, is precisely what the Federal Reserve is trying to achieve through its large recent rate hikes,” he added.

    Higher yields also mean that the government must pay more to service its debt — with less money available to spend elsewhere.

    The US government is currently sitting on a $33 trillion debt pile and is expected to incur more than $1 trillion in average annual interest costs over the next decade.

    In March, when gilt yields were much lower than now, the UK’s public spending watchdog said it expected the annual interest paid on the government’s pile of debt to peak at £115 billion ($140 billion) this year. That’s almost three times as much as the UK government plans to spend in 2023 on a key benefit for children and people with disabilities.

    Rising bond yields mean that “for any given level of borrowing, more must be spent on debt interest, leaving less scope to finance other priorities,” the Office for Budget Responsibility said in its March forecast.

    Higher gilt yields give politicians “less wiggle room to ease [the] cost-of-living pain through tax cuts or public sector pay offers,” Susannah Streeter, head of money and markets at Hargreaves Lansdown, wrote in a note Wednesday.

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  • These 20 stocks in the S&P 500 are expected to soar after rising interest rates have pushed down valuations

    These 20 stocks in the S&P 500 are expected to soar after rising interest rates have pushed down valuations

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    Two things investors can be sure about: Nothing lasts forever and the stock market always overreacts. The spiking of yields on long-term U.S. Treasury securities has been breathtaking, and it has led to remarkable declines for some sectors and possible bargains for contrarian investors who can commit for the long term.

    First we will show how the sectors of the S&P 500

    have performed. Then we will look at price-to-earnings valuations for the sectors and compare them to long-term averages. Then we will screen the entire index for companies trading below their long-term forward P/E valuation averages and narrow the list to companies most favored by analysts.

    Here are total returns, with dividends reinvested, for the 11 sectors of the S&P 500, with broad indexes below. The sectors are sorted by ascending total returns this year through Monday.

    Sector or index

    		 2023 return

    		 2022 return

    		 Return since end of 2021

    		 1 week return

    		 1 month return
    Utilities

    		 -18.4%

    		 1.6%

    		 -17.2%

    		 -11.1%

    		 -9.6%
    Real Estate

    		 -7.1%

    		 -26.1%

    		 -31.4%

    		 -3.0%

    		 -8.8%
    Consumer Staples

    		 -5.4%

    		 -0.6%

    		 -6.0%

    		 -2.2%

    		 -4.4%
    Healthcare

    		 -4.2%

    		 -2.0%

    		 -6.1%

    		 -1.7%

    		 -3.3%
    Financials

    		 -2.5%

    		 -10.5%

    		 -12.7%

    		 -2.5%

    		 -4.7%
    Materials

    		 1.3%

    		 -12.3%

    		 -11.2%

    		 -1.9%

    		 -7.0%
    Industrials

    		 3.5%

    		 -5.5%

    		 -2.1%

    		 -1.8%

    		 -7.3%
    Energy

    		 4.0%

    		 65.7%

    		 72.4%

    		 -1.9%

    		 -1.4%
    Consumer Discretionary

    		 27.0%

    		 -37.0%

    		 -20.0%

    		 -0.6%

    		 -5.2%
    Information Technology

    		 36.5%

    		 -28.2%

    		 -2.0%

    		 0.8%

    		 -5.9%
    Communication Services

    		 42.5%

    		 -39.9%

    		 -14.3%

    		 1.1%

    		 -1.3%
    S&P 500
    		 13.1%

    		 -18.1%

    		 -7.4%

    		 -1.1%

    		 -4.9%
    DJ Industrial Average
    		 2.5%

    		 -6.9%

    		 -4.5%

    		 -1.7%

    		 -4.0%
    Nasdaq Composite Index
    COMP     		28.0%

    		 -32.5%

    		 -13.7%

    		 0.3%

    		 -5.1%
    Nasdaq-100 Index
    		 36.5%

    		 -32.4%

    		 -7.7%

    		 0.5%

    		 -4.2%
    Source: FactSet

    Returns for 2022 are also included, along with those since the end of 2021. Last year’s weakest sector, communications services, has been this year’s strongest performer. This sector includes Alphabet Inc.
    GOOGL
    and Meta Platforms Inc.
    META,
    which have returned 52% and 155% this year, respectively, but are still down since the end of 2021. To the right are returns for the past week and month through Monday.

    On Monday, the S&P 500 Utilities sector had its worst one-day performance since 2020, with a 4.7% decline. Investors were reacting to the jump in long-term interest rates.

    Here is a link to the U.S. Treasury Department’s summary of the daily yield curve across maturities for Treasury securities.

    The yield on 10-year U.S. Treasury notes

    jumped 10 basis points in only one day to 4.69% on Monday. A month earlier the 10-year yield was only 4.27%. Also on Monday, the yield on 20-year Treasury bonds

    rose to 5.00% from 4.92% on Friday. It was up from 4.56% a month earlier.

    Market Extra: Bond investors feel the heat as popular fixed-income ETF suffers lowest close since 2007

    The Treasury yield curve is still inverted, with 3-month T-bills

    yielding 5.62% on Monday, but that was up only slightly from a month earlier. An inverted yield curve has traditionally signaled that bond investors expect a recession within a year and a lowering of interest rates by the Federal Reserve. Demand for bonds pushes their prices down. But the reverse has happened over recent days, with the selling of longer-term Treasury securities pushing yields up rapidly.

    Another way to illustrate the phenomenon is to look at how the Federal Reserve has shifted the U.S. money supply. Odeon Capital analyst Dick Bove wrote in a note to clients on Friday that “the Federal Reserve has not deviated from its policy to defeat inflation by tightening monetary policy,” as it has shrunk its balance sheet (mostly Treasury securities) to $8.1 trillion from $9 trillion in March 2022. He added: “The M2 money supply was $21.8 trillion in March 2022; today it is $20.8 trillion. You cannot get tighter than these numbers indicate.”

    Then on Tuesday, Bove illustrated the Fed’s tightening and the movement of the 10-year yield with two charts:


    Odeon Capital Group, Bloomberg

    Bove said he believes the bond market has gotten it wrong, with the inverted yield curve reflecting expectations of rate cuts next year. If he is correct, investors can expect longer-term yields to keep shooting up and a normalization of the yield curve.

    This has set up a brutal environment for utility stocks, which are typically desired by investors who are seeking dividend income. In a market in which you can receive a yield of 5.5% with little risk over the short term, and in which you can lock in a long-term yield of about 5%, why take a risk in the stock market? And if you believe that the core inflation rate of 3.7% makes a 5% yield seem paltry, keep in mind that not all investors think the same way. Many worry less about the inflation rate because large components of official inflation calculations, such as home prices and car prices, don’t affect everyone every year.

    We cannot know when this current selloff of longer-term bonds will end, or how much of an effect it will have on the stock market. But sharp declines in the stock market can set up attractive price points for investors looking to go in for the long haul.

    Screening for lower valuations and high ratings

    A combination of rising earnings estimates and price declines could shed light on potential buying opportunities, based on forward price-to-earnings ratios.

    Let’s look at the sectors again, in the same order, this time to show their forward P/E ratios, based on weighted rolling 12-month consensus estimates for earnings per share among analysts polled by FactSet:

    Sector or index

    		 Current P/E to 5-year average

    		 Current P/E to 10-year average

    		 Current P/E to 15-year average

    		 Forward P/E

    		 5-year average P/E

    		 10-year average P/E

    		 15-year average P/E
    Utilities

    		 82%

    		 86%

    		 95%

    		 14.99

    		 18.30

    		 17.40

    		 15.82
    Real Estate

    		 76%

    		 80%

    		 81%

    		 15.19

    		 19.86

    		 18.89

    		 18.72
    Consumer Staples

    		 93%

    		 96%

    		 105%

    		 18.61

    		 19.92

    		 19.30

    		 17.64
    Healthcare

    		 103%

    		 104%

    		 115%

    		 16.99

    		 16.46

    		 16.34

    		 14.72
    Financials

    		 88%

    		 92%

    		 97%

    		 12.90

    		 14.65

    		 14.08

    		 13.26
    Materials

    		 100%

    		 103%

    		 111%

    		 16.91

    		 16.98

    		 16.42

    		 15.27
    Industrials

    		 88%

    		 96%

    		 105%

    		 17.38

    		 19.84

    		 18.16

    		 16.56
    Energy

    		 106%

    		 63%

    		 73%

    		 11.78

    		 11.17

    		 18.80

    		 16.23
    Consumer Discretionary

    		 79%

    		 95%

    		 109%

    		 24.09

    		 30.41

    		 25.39

    		 22.10
    Information Technology

    		 109%

    		 130%

    		 146%

    		 24.20

    		 22.17

    		 18.55

    		 16.54
    Communication Services

    		 86%

    		 86%

    		 94%

    		 16.41

    		 19.09

    		 19.00

    		 17.43
    S&P 500
    		 94%

    		 101%

    		 112%

    		 17.94

    		 19.01

    		 17.76

    		 16.04
    DJ Industrial Average
    		 93%

    		 98%

    		 107%

    		 16.25

    		 17.49

    		 16.54

    		 15.17
    Nasdaq Composite Index
    		 92%

    		 102%

    		 102%

    		 24.62

    		 26.71

    		 24.18

    		 24.18
    Nasdaq-100 Index
    		 97%

    		 110%

    		 126%

    		 24.40

    		 25.23

    		 22.14

    		 19.43

    There is a limit to how many columns we can show in the table. The S&P 500’s forward P/E ratio is now 17.94, compared with 16.79 at the end of 2022 and 21.53 at the end of 2021. The benchmark index’s P/E is above its 10- and 15-year average levels but below the five-year average.

    If we compare the current sector P/E numbers to 5-, 10- and 15-year averages, we can see that the current levels are below all three averages for four sectors: utilities, real estate, financials and communications services. The first three face obvious difficulties as they adjust to the rising-rate environment, while the real-estate sector reels from continuing low usage rates for office buildings, from the change in behavior brought about by the COVID-19 pandemic.

    Your own opinions, along with the pricing for some sectors, might drive some investment choices.

    A broader screen of the S&P 500 might point to companies for you to research further.

    We narrowed the S&P 500 as follows:

    • Current forward P/E below 5-, 10- and 15-year average valuations. For stocks with negative earnings-per-share estimates for the next 12 months, there is no forward P/E ratio so they were excluded. For stocks listed for less than 15 years, we required at least a 5-year average P/E for comparison. This brought the list down to 138 companies.

    • “Buy” or equivalent ratings from at least two-thirds of analysts: 41 companies.

    Here are the 20 companies that passed the screen, for which analysts’ price targets imply the highest upside potential over the next 12 months.

    There is too much data for one table, so first we will show the P/E information:

    Company

    		 Ticker

    		 Current P/E to 5-year average

    		 Current P/E to 10-year average

    		 Current P/E to 15-year average
    SolarEdge Technologies Inc.

    		 SEDG 89%

    		 N/A

    		 N/A
    AES Corp.

    		 AES 66%

    		 75%

    		 90%
    Insulet Corp.

    		 PODD 18%

    		 N/A

    		 N/A
    United Airlines Holdings Inc.

    		 UAL 42%

    		 50%

    		 N/A
    Alaska Air Group Inc.

    		 ALK 51%

    		 57%

    		 N/A
    Tapestry Inc.

    		 TPR 39%

    		 49%

    		 70%
    Albemarle Corp.

    		 ALB 39%

    		 50%

    		 73%
    Delta Air Lines Inc.

    		 DAL 60%

    		 63%

    		 21%
    Alexandria Real Estate Equities Inc.

    		 ARE 59%

    		 68%

    		 N/A
    Las Vegas Sands Corp.

    		 LVS 96%

    		 78%

    		 53%
    Paycom Software Inc.

    		 PAYC 61%

    		 N/A

    		 N/A
    PayPal Holdings Inc.

    		 PYPL 33%

    		 N/A

    		 N/A
    SBA Communications Corp. Class A

    		 SBAC 27%

    		 N/A

    		 N/A
    Advanced Micro Devices Inc.

    		 AMD 58%

    		 39%

    		 N/A
    LKQ Corp.

    		 LKQ 92%

    		 44%

    		 78%
    Charles Schwab Corp.

    		 SCHW 75%

    		 54%

    		 73%
    PulteGroup Inc.

    		 PHM 94%

    		 47%

    		 N/A
    Lamb Weston Holdings Inc.

    		 LW 71%

    		 N/A

    		 N/A
    News Corp Class A

    		 NWSA 93%

    		 73%

    		 N/A
    CVS Health Corp.

    		 CVS 75%

    		 61%

    		 67%
    Source: FactSet

    Click on the tickers for more about each company or index.

    Click here for Tomi Kilgore’s detailed guide to the wealth of information available for free on the MarketWatch quote page.

    News Corp
    NWSA
    is on the list. The company owns Dow Jones, which in turn owns MarketWatch.

    Here’s the list again, with ratings and consensus price-target information:

    Company

    		 Ticker

    		 Share “buy” ratings

    		 Oct. 2 price

    		 Consensus price target

    		 Implied 12-month upside potential
    SolarEdge Technologies Inc.

    		 SEDG 74%

    		 $122.56

    		 $268.77

    		 119%
    AES Corp.

    		 AES 79%

    		 $14.16

    		 $25.60

    		 81%
    Insulet Corp.

    		 PODD 68%

    		 $165.04

    		 $279.00

    		 69%
    United Airlines Holdings Inc.

    		 UAL 71%

    		 $41.62

    		 $69.52

    		 67%
    Alaska Air Group Inc.

    		 ALK 87%

    		 $36.83

    		 $61.31

    		 66%
    Tapestry Inc.

    		 TPR 75%

    		 $28.58

    		 $46.21

    		 62%
    Albemarle Corp.

    		 ALB 81%

    		 $162.41

    		 $259.95

    		 60%
    Delta Air Lines Inc.

    		 DAL 95%

    		 $36.45

    		 $58.11

    		 59%
    Alexandria Real Estate Equities Inc.

    		 ARE 100%

    		 $98.18

    		 $149.45

    		 52%
    Las Vegas Sands Corp.

    		 LVS 72%

    		 $45.70

    		 $68.15

    		 49%
    Paycom Software Inc.

    		 PAYC 77%

    		 $260.04

    		 $384.89

    		 48%
    PayPal Holdings Inc.

    		 PYPL 69%

    		 $58.56

    		 $86.38

    		 48%
    SBA Communications Corp. Class A

    		 SBAC 68%

    		 $198.24

    		 $276.69

    		 40%
    Advanced Micro Devices Inc.

    		 AMD 74%

    		 $103.27

    		 $143.07

    		 39%
    LKQ Corp.

    		 LKQ 82%

    		 $49.13

    		 $67.13

    		 37%
    Charles Schwab Corp.

    		 SCHW 77%

    		 $53.55

    		 $72.67

    		 36%
    PulteGroup Inc.

    		 PHM 81%

    		 $73.22

    		 $98.60

    		 35%
    Lamb Weston Holdings Inc.

    		 LW 100%

    		 $92.23

    		 $123.50

    		 34%
    News Corp Class A

    		 NWSA 78%

    		 $20.00

    		 $26.42

    		 32%
    CVS Health Corp.

    		 CVS 77%

    		 $69.69

    		 $90.88

    		 30%
    Source: FactSet

    A year may actually be a short period for a long-term investor, but 12-month price targets are the norm for analysts working for brokerage companies.

    Don’t miss: This fund shows that industry expertise can help you make a lot of money in the stock market

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  • Japanese yen sees wild swing amid intervention fears after falling to nearly 1-year low versus dollar

    Japanese yen sees wild swing amid intervention fears after falling to nearly 1-year low versus dollar

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    The Japanese yen roared back violently against the dollar Tuesday amid fears of intervention by Tokyo after trading at its weakest in nearly a year after a round of strong U.S. employment data.

    The U.S. dollar fetched 148.92 Japanese yen
    USDJPY,
    -0.42%    ,
    down 0.6%, after trading as low as 147.415 yen in a sharp tumble from a session high of 150.18 yen. The dollar hadn’t traded above the 150-yen level since Oct. 21, 2022, according to FactSet data.

    Japanese authorities in the fall of 2022 intervened in the market, selling dollars and buying yen as the Japanese currency slumped. Currency traders had been on the lookout for renewed intervention as the yen extended its recent weakness. Japan’s Ministry of Finance has issued several verbal warnings over recent weeks, but they have failed to arrest the yen’s fall.

    Finance Minister Shunichi Suzuki earlier Tuesday had warned that “all measures are on the table with a high sense of urgency,” according to Nikkei.

    But FX analysts were skeptical the yen’s bounceback was due to intervention.

    “Talk of intervention but I am skeptical.  It seems like the market is doing it to itself with orders to sell dollar above JPY150.  BOJ intervened three times last year, none was during US time zone,” said Marc Chandler, managing director at Bannockburn Global Forex, in a note to clients.

    The dollar had initially extended its rally versus the yen and other major currencies after data showed U.S. job openings jumped unexpectedly to 9.6 million in September, up from a revised 8.9 million in August. Analysts surveyed by The Wall Street Journal had expected a reading of 8.8 million.

    Continued strength in the labor market added to a rise in Treasury yields
    BX:TMUBMUSD10Y,
    which in turn boosted the dollar. The ICE U.S. Dollar Index
    DXY,
    a measure of the currency against a basket of six major rivals, remained up 0.1% at 107.06, after trading at its highest since November.

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  • Stocks end mostly higher Monday despite resumed U.S. debt selloff

    Stocks end mostly higher Monday despite resumed U.S. debt selloff

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    Stocks closed mostly higher to kick off October as a sharp selloff in longer-dated U.S. government debt resumed. The Dow Jones Industrial Average
    DJIA,
    -0.22%
    fell about 74 points, or 0.2%, ending near 33,433, according to preliminary FactSet data. The S&P 500 index
    SPX,
    +0.01%
    ended flat at 4,288, while the Nasdaq Composite Index
    COMP,
    +0.67%
    gained 0.7%. Surging long-term borrowing costs remain a key focus in the final quarter of 2023, with the fear being they could derail the U.S. economy and spark more corporate defaults. The benchmark 10-year Treasury yield was punching higher to about 4.682% on Monday. Evidence of the debt rout could be found in the popular iShares 20+Year Treasury Bond ETF,
    TLT,
    -1.98%
    which cemented its lowest close since since August 2007 and in the iShares Core U.S. Aggregate Bond ETF,
    AGG,
    -0.70%
    which finished at its lowest since October 2008, according to Dow Jones Market Data. Investors in short U.S. government T-bills, however, have been mostly insulated from recent volatility, with yields steady in the 5.5% range, according to TradeWeb data.

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  • ‘Anxiety’ high as stock market falls, bond yields rise — what investors need to know after S&P 500’s worst month of 2023

    ‘Anxiety’ high as stock market falls, bond yields rise — what investors need to know after S&P 500’s worst month of 2023

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    U.S. stocks and bonds are both falling again, with the S&P 500 just wrapping up its worst quarterly performance in a year after another surge in Treasury yields. 

    “That creates a lot of anxiety,” as there’s still a fair amount of “investor PTSD” from last year, when markets were rocked by losses in both equities and bonds, said Phil Camporeale, a portfolio manager for J.P. Morgan Asset Management’s global allocation strategy, by phone.

    But it’s not the same environment.

    Last year was about the Federal Reserve rushing to tame runaway inflation with rapid interest-rate hikes after being “behind the curve,” he said. Now investors are grappling with a surge in Treasury yields after the Fed in September doubled its U.S. growth forecast this year to 2.1%, according to Camporeale, pointing to the central bank’s latest summary of economic projections.

    “This is your kiss-your-recession-goodbye trade,” he said, with sharp market moves in September reflecting the notion that “the Fed is not easing anytime soon.”

    The U.S. labor market has been strong despite the central bank’s aggressive tightening of monetary policy, with the unemployment rate at a historically low 3.8% in August. In September, the Fed projected the jobless rate could move up to 4.1% by the end of next year, below its previous forecast from June.

    “Inflation is falling,” Camporeale said. “The most important metric right now is the labor market.”

    As he sees it, investors are worried that the Fed will hold interest rates higher for longer should the unemployment rate remain low and the labor market “tight.” The Fed projected in September that it could raise rates once more this year before reaching the end of its hiking cycle, with fewer potential rate cuts penciled in for 2024 than previously forecast. 

    Investors expect to get a look at the U.S. employment report for September this coming week, with nonfarm payrolls data scheduled to be released on Oct. 6.

    See: Government shutdown averted for now as Congress approves 45-day funding bridge

    Meanwhile, the U.S. stock market ended mostly lower Friday, with the Dow Jones Industrial Average
    DJIA,
    S&P 500
    SPX
    and Nasdaq Composite
    COMP
    all closing out September with monthly losses as investors weighed fresh data on inflation. 

    A reading Friday of the Fed’s preferred inflation gauge showed that core prices, which exclude volatile food and energy categories, edged up 0.1% in August. That was slightly less than expected. Meanwhile, the core inflation rate slowed to 3.9% over the 12 months through August. 

    But headline inflation measured by the personal-consumption-expenditures price index rose more than the core reading on a month-over-month basis, as higher gas prices fueled its increase. 

    S&P 500’s worst month of 2023

    Investors have been anxious that the Fed may keep rates high for longer to bring inflation down to its 2% target. 

    Friday’s close left the S&P 500 logging its worst month since December, dropping 4.9% in September for back-to-back monthly losses. The S&P 500 sank 3.6% in the third quarter, suffering its biggest quarterly loss since the three months through September in 2022, according to Dow Jones Market Data. 

    The U.S. stock market has been startled by surging bond yields following the Fed’s policy meeting in September, after being jolted by the rise in Treasury rates in August.

    “The price to pay for a resilient economy is higher yields,” said Steven Wieting, chief economist and chief investment strategist at Citi Global Wealth, in an interview. “We’re probably near the peak in yields.”

    The yield on the 10-year Treasury note
    BX:TMUBMUSD10Y
    ended September at 4.572%, after rising just days earlier to its highest level since October 2007, according to Dow Jones Market Data. Yields and debt prices move opposite each other.

    But for Camporeale, it’s still too early to venture out to the back end of the U.S. Treasury market’s yield curve to add duration to bondholdings. That’s because the yield curve is not yet “re-steepened” and he views the U.S. economy as currently on course for a soft landing with rates staying higher for longer.

    “If you avoid recession, why should you have a lower yield as you go out in time?” said Camporeale. “You should be compensated for having more yield as you go out in time if you avoid recession, not less.”

    The 2-year Treasury rate
    BX:TMUBMUSD02Y
    finished September at 5.046%, continuing to yield more than 10-year Treasury notes.

    The yield curve has been inverted for a while, with short-term Treasurys offering higher rates than longer-term ones. The situation is being monitored by investors because historically such inversion has preceded a recession. 

    “If we were nervous about growth we would be buying the 10-year part of the curve or the 30-year part of the curve,” said Camporeale. “But we are not doing that right now.”

    As for asset allocation, he said he’s now neutral stocks and overweight U.S. high-yield credit, particularly bonds with shorter durations of one to three years. 

    Camporeale sees junk bonds as a “nice” trade as he is not expecting a recession in the next 12 months and they are providing “enticing” yields versus the U.S. equity market, which probably has most of its returns in “versus what we think you get through the rest of the year.”

    The S&P 500 index was up 11.7% this year through September, FactSet data show. 

    While watching for any signs of deterioration in the labor market, Camporeale said he now anticipates the earliest the Fed may cut rates is in the second half of next year. To his thinking, the recent move higher in 10-year Treasury yields was appropriate “in a world where maybe the yield curve has to re-steepen.” 

    ‘Pain trade’

    Bond prices in the U.S. broadly dropped in September along with the stocks. 

    The iShares Core U.S. Aggregate Bond ETF
    AGG
    was down 2.6% last month on a total return basis, bringing its total loss for the third quarter to 3.2%, according to FactSet data. That was the fund’s worst quarterly performance since the third quarter of 2022.

    The ETF, which tracks an index of investment-grade bonds in the U.S. such as Treasurys and corporate debt, has lost 1% on a total return basis so far this year through September, FactSet data show. Meanwhile, the iShares 20+ Year Treasury Bond ETF
    TLT
    has seen a total loss of 9% over the same period.

    “Few investors want to call the top for peak rates,” said George Catrambone, head of fixed income at DWS, in a phone interview. Some bond investors had started to extend into long-term Treasurys in July. “That’s been the pain trade, I think, ever since then,” said Catrambone.

    As for the equity market, the speed of the move up in 10-year Treasury yields hurt stocks, with the rate climbing “well beyond what many assumed would be the upper end,” according to Liz Ann Sonders, chief investment strategist at Charles Schwab. 

    With higher rates pressuring equity valuations, “clearly what’s going to matter is third-quarter-earnings season, once that kicks in” during October, she said by phone. Company “earnings are going to have to start to do some more heavy lifting.”

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  • Government shutdown looms: Here’s how to help preserve your investment portfolio.  

    Government shutdown looms: Here’s how to help preserve your investment portfolio.  

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    “ The economic impact of a shutdown and the potential implications on your portfolio depend largely on how long the shutdown lasts. ”

    The potential for a U.S. government shutdown can raise alarm for investors and send the phone of a financial adviser like me ringing off the hook. Headlines in front of them, my clients are increasingly asking about potential portfolio implications and how they should respond.

    There is certainly a measured response, which includes not overreacting to the headlines and sticking to your long-term investment plan, and I’ll show you how to draw it.

    Government shutdown explained

    First, it’s important to understand what is happening. During a shutdown, the federal government will suspend all services that are deemed nonessential until a funding agreement is reached. This is much different than a default — which can happen when the government can’t pay its debts or satisfy its obligations. A default can have significant ramifications on U.S. creditworthiness and in turn, the global financial system. You may recall lawmakers’ discussions earlier this year regarding raising the debt ceiling — a solution to avoid defaulting. 

    A U.S. default has never happened, but shutdowns have occurred more than 20 times since 1976. Unlike a default, a shutdown does not affect the government’s ability to pay its obligations, and many critical government services, like Social Security may continue. When weighing the two, one can presume that markets may react more negatively to a default.   

    Markets may experience heightened volatility in response to the shutdown uncertainty, but markets do not react consistently to the news. In the past we have seen U.S. stocks — as measured by the S&P 500
    SPX
    — finish positively after more than half of these shutdowns. Results are similar for fixed-income securities, as we’ve seen an even split between positive and negative returns in the bond markets in shutdowns since 1976. 

    Of course, all investing is subject to risk, past performance is not a guarantee for future returns, and the performance of an index is not an exact representation of any particular investment. 

    The economic impact of a shutdown — and the potential implications on your portfolio — depend largely on how long the shutdown lasts. The longer the shutdown, the more Americans experience dampened economic activity from things like loss of furloughed federal workers’ contribution to GDP, the delay in federal spending on goods and services, and the reduction in aggregate demand (which lowers private-sector activity). 

    Read: Government shutdown: Analysts warn of ‘perhaps a long one lasting into the winter’

    A measured response 

    A government shutdown is just one of many factors, both positive and negative, that can cause fluctuation in the market, so it’s important to treat it just as you would other fluctuations.

    With so many variables, it’s impossible to precisely predict the effects the shutdown will have or determine how long it will last. This can seem scary for many, so it’s important to remember your long-term financial plan and focus on the factors you can control.  

    First, do not try to time the market. Doing so based on short-term events is never a good idea, and volatility is unpredictable. Even if the markets fall, we don’t know when they might recover. If you make an emotionally charged decision, you run the risk of missing out on potentially substantial market gains. 

    Instead, focus on the following: align your asset allocation with your risk tolerance; control your costs; adopt realistic expectations; hold a broadly diversified portfolio and stay disciplined. Doing so can help you weather any form of market uncertainty, including a shutdown.

    Stick to healthy financial habits

    In addition to not making any sudden moves in your investment portfolio, now is a suitable time to make sure you are keeping up with healthy financial habits, especially if you are a federal employee facing a furlough. This can look like readjusting your budget based on your current needs, keeping high-interest debt to a minimum, paying the minimum on all debt to keep your credit score in good standing and continuing to save.

    Remember, using your emergency fund to navigate tight times is exactly what you have saved for and tapping it in this instance is considered a healthy financial habit. Just be sure to replenish it when you have the funds to do so. As a good practice, Vanguard recommends having three- to six months of expenses saved in readily accessible investments.

    With a level, long-term approach and a personalized financial plan, you can be prepared for this potential storm and the inevitable ones to come. 

    Lauren Wybar is a senior financial adviser with Vanguard Personal Advisor. 

    More: Bill Ackman says Treasury yields are going higher in a hurry, and that investors should shun U.S. government debt

    Plus: Social Security checks will still come if there’s a shutdown. But there are other immediate threats to America’s benefits.

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  • Dow falls 160 points Friday, S&P 500 posts worst monthly drop since December

    Dow falls 160 points Friday, S&P 500 posts worst monthly drop since December

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    Stocks closed mostly lower on Friday, with the S&P 500 cementing its biggest drop in a month since December, as a surge in bond yields knocked the wind out of this year’s rally in equities. The Dow Jones Industrial Average
    DJIA,
    -0.47%
    fell about 157 points, or 0.5%, ending near 33,508, according to preliminary FactSet data. The S&P 500 index
    SPX,
    -0.27%
    shed 0.3% and the Nasdaq Composite index
    COMP,
    +0.14%
    gained 0.1%. September was the worst month for the Dow since February, with its 3.5% loss, while the S&P 500 shed 4.9% and the Nasdaq lost 5.8%, marking their worst months since December 2022, according to Dow Jones Market Data. Yearly core inflation edged higher in August, according to Friday’s release of the latest PCE price index. The focus over the weekend will likely be a U.S. government shutdown. Given the negative backdrop for markets, the S&P 500, Dow and Nasdaq all booked declines in the third quarter.

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  • Why a surging U.S. dollar is about to become a problem for stock-market bulls

    Why a surging U.S. dollar is about to become a problem for stock-market bulls

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    Analysts are ringing alarm bells over a surge by the U.S. dollar, warning it may be set to serve as another “headwind” for U.S. stocks as they struggle through a losing September.

    “Since early August, the USD (U.S. dollar) has climbed above its average [second-quarter] level. That means that for corporates, the USD switched back from tailwind to headwind…and an increasing one” as investors close out the third quarter this week, said Andrew Greenebaum of Jefferies, in a Saturday note.

    A rapidly strengthening dollar is often seen as a problem for big, U.S. multinationals. A stronger dollar makes their goods more expensive to overseas buyers. And income earned overseas will be less valuable on their income statements.

    The U.S. dollar went on a tear in 2022 as Treasury yields surged in response to the Federal Reserve’s aggressive series of interest-rate hikes. The ICE U.S. Dollar Index
    DXY,
    a measure of the currency against a basket of six major rivals, hit a 20-year high last September, but then retreated sharply.

    The pullback, which saw the index drop from a high near 115 last fall to a low below 100 in July, was seen as a tailwind for stocks. The S&P 500
    SPX
    saw its bear-market bottom in October of last year, and built on its rally through the winter and spring. Since late July, stocks have suffered a pullback, with the large-cap benchmark down around 5.5% from its 2023 high set on July 31.

    “After creating a substantial headwind to profits for U.S. multinationals, it’s been a tailwind [year to date]. But that all changed roughly 10 weeks ago,” Greenebaum wrote.

    The DXY has ripped higher by around 4% in that short time frame, a move more than one standard deviation outside the norm, he noted. And that sort of move has tended have implications for both company fundamentals and asset allocation.


    Jefferies

    The chart above breaks out the average performance of key indexes, including the S&P 500, S&P 500 cyclicals, small-caps (RTY), the Nasdaq-100
    NDX
    and the MSCI All-World excluding U.S.

    Small-caps are typically expected to outperform during periods of dollar strength, since most of their revenues come from within the U.S. Cyclical stocks are expected to suffer.

    A rising dollar also tightens financial conditions, adding to other headwinds for stocks heading into the fourth quarter, said analysts at Morgan Stanley, in a Monday note (see chart below).


    Morgan Stanley Wealth Management

    “With the 10-year real rate at a 16-year high above 2.0%, the U.S. dollar is surging, producing meaningful headwinds for U.S. multinationals,” they wrote.

    “Oil is becoming a constraint as well, with West Texas Intermediate crude
    CL00,
    +0.01%
    up more than 30% from its spring trough. Together with indications that bank lending and credit availability are already shrinking, these factors suggest the liquidity backdrop may worsen,” they wrote.

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  • Treasury yields near highest levels in more than a decade after hawkish Fed projections

    Treasury yields near highest levels in more than a decade after hawkish Fed projections

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    Treasury yields tested their highest levels in more than a dozen years on Thursday as investors continued to absorb the Federal Reserve’s message of higher-for-longer interest rates.

    What’s happening

    What’s driving markets

    Treasury yields continued to climb on Thursday as investors continued to absorb the Federal Reserve’s projections, delivered Wednesday, that suggested another interest-rate increase this year and that borrowing costs were likely to be cut in 2024 by less than previously thought.

    Markets…

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  • This former Fed insider has 3 big takeaways from Powell’s press conference

    This former Fed insider has 3 big takeaways from Powell’s press conference

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    This former Fed insider has 3 big takeaways from Powell’s press conference

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  • Fed’s revised dot plot for interest rates makes wall of maturing debt a bigger worry

    Fed’s revised dot plot for interest rates makes wall of maturing debt a bigger worry

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    The Federal Reserve on Wednesday surprised markets with a fortification of its higher-for-longer stance on interest rates, penciling in only half as many rate cuts next year as had been expected.

    Fed officials kept the central bank’s policy rate at a 22-year high, but redrew their so-called “dot plot,” a chart of the potential path of short-term rates over time, in a less favorable way for borrowers.

    The…

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  • What the ‘mysterious shrinking’ of Wall Street’s fear gauge means for stocks, according to DataTrek

    What the ‘mysterious shrinking’ of Wall Street’s fear gauge means for stocks, according to DataTrek

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    Wall Street’s so-called fear gauge has been subdued this year, in a “mysterious shrinking” pattern, that’s a bullish signal for equities, according to DataTrek Research.

    Declines for the Cboe Volatility Index
    VIX
    fear gauge come despite continued worries over inflation and elevated interest rates.

    “We’ve been saying for several months that a low VIX is a sign that U.S. stocks are in a bull market rather than being excessively delusional about the obvious challenges ahead,” said Nicholas Colas, co-founder of DataTrek, in a note emailed Monday. “We still believe the next few weeks will be choppy, however.”

    The gauge, known by its ticker VIX, has dropped more than 35% so far this year and is trading below its long-term average, according to FactSet data. Its trading levels are derived from options contracts tied to the S&P 500, the U.S. stock benchmark that has rallied 16% in 2023 through Monday.

    Last week the VIX made “a new post-pandemic crisis low,” finishing below 13 on Sept. 14 in a “rare occurrence” for the index that was a positive sign for stocks over the next three months, Colas’s note shows. That’s even if it suggests near-term “choppiness” will continue, he said.

    On Monday the VIX closed at 14, well below its long-run average of around 20. The measure ended Sept. 14 at 12.8.

    “At first glance, this makes little sense,” Colas said. “The VIX is supposed to be Wall Street’s ‘Fear Index’ and it would appear “there’s plenty to be fearful of just now.”

    ‘Cloudy picture’

    Colas cited several areas of concern, including uncertainty surrounding inflation, the recent jump in oil prices
    CL00,
    +1.08%
    and “a cloudy picture” of how long the Fed Reserve will keep interest rates elevated, for his rationale as to why investor might feel fearful. 

    The Fed has been trying to slow the rise in the cost of living in the U.S. via its restrictive monetary policy, lifting its benchmark rate aggressively over the past 18 months.

    There also has been the recent climb in Treasury rates that has weighed on stocks lately, with 10-year Treasury yields looking “set on making new decade-plus highs,” said Colas. 

    The yield on the 10-year Treasury note
    BX:TMUBMUSD10Y
    finished Monday at 4.318%, according to Dow Jones Market Data. That’s around levels seen in late 2007, FactSet data show.

    ‘Seasonal peaks’ in volatility

    The VIX had kicked off 2023 trading below its long-run average, with Colas saying in January that it was looking a lot more like 2021, a year in which stocks rallied, rather than 2022, when equities tanked as the Fed rapidly hiked rates. 

    See: Wall Street’s ‘fear gauge’ VIX shaping up more like 2021 than 2022, as U.S. stocks rally this year, says DataTrek

    Meanwhile, September and October are known for “seasonal peaks in equity market volatility,” according to Colas.

    U.S. stocks have slumped so far this month, after falling in August. The S&P 500, which dropped 1.8% last month, is down 1.2% in September through Monday, FactSet data show.

    The S&P 500
    SPX
    closed 0.1% higher on Monday while the Nasdaq Composite
    COMP
    and Dow Jones Industrial Average
    DJIA
    each finished about flat, as investors digested fresh data showing a drop in confidence among homebuilders this month amid elevated mortgage rates. 

    Stock-market investors also have been monitoring the U.S. Treasury market’s inverted yield curve, or when shorter-term yields climb above long-term rates, as that historically has preceded a recession.

    There’s also some concern over the increased popularity of zero-day options in the stock market, as “you’d think their growing usage would push anticipated volatility higher, not lower,” Colas said.

    “We doubt options desks have just walked away from trading 30-day options” on S&P 500 futures, he said. “If there is money to be made in a financial asset, someone invariably trades it.”

    The Cboe Volatility Index measures 30-day expected volatility of the U.S. stock market. 

    “What the ultra-low VIX is telling us is that none of these concerns matter enough to offset a fundamentally strong picture for U.S. corporate earnings and the belief that the Federal Reserve is largely done hiking rates,” said Colas. “Equities are dismissing the possibility of a recession over the next 1-2 years, no matter what an inverted yield curve has historically said on that point.”

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  • Why the Fed’s next decisions on rates could lead to a wave of commercial-debt defaults

    Why the Fed’s next decisions on rates could lead to a wave of commercial-debt defaults

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    Getting staff back to the office is only part of the battle.

    Regional banks that went big lending on office properties also face a ticking time bomb of maturing debt that they helped create, particularly if the Federal Reserve holds its policy rate near the current 22-year high well into next year.

    “The area of greatest concerns for banks is office space,” says Tom Collins, senior partner focused on regional banks and credit unions at consulting firm firm West Monroe. Should rates stay high, “borrowers are going to face a tough decision of whether they refinance or default,” he said.

    The fight to bring more staff back to half-empty office buildings comes as an estimated $1 trillion wall of commercial real-estate loans is set to mature through 2024. While tenants haven’t shied away from signing up to pay top rents at trophy buildings, the same can’t be said for the rows of lower-rung properties lining financial districts in big cities.

    See: Labor Day is just a ‘milestone’ in the marathon to get workers back to the office

    The Fed embarks on a two-day policy meeting on Tuesday, with expectations running high for rates to stay steady, giving more time to study the impact of earlier rate increases.

    The central bank’s rate hikes have further complicated matters for landlords, and fresh debt for office buildings no longer looks cheap nor abundant. Regional banks also have been piling back on lending after Silicon Valley Bank and Signature Bank collapsed in March and as deposits fled for yield elsewhere.

    Related: FDIC kicks off $33 billion sale of seized assets from Signature Bank

    Loan volumes from Wall Street similarly have been anemic. This year it has produced slightly more than $10 billion in “conduit,” or multi-borrower, commercial mortgage-backed securities deals through the end of August, the least since 2008, according to Goldman Sachs. Coupons, a proxy for mortgage rates, have climbed above 7%, the highest since the early 2000s.

    “I don’t think this is a wash out here,” Collins said of the threat of more regional bank failures, but he does anticipate pain for lenders heavily exposed to lower quality class B and C office buildings in urban areas.

    Banks can help mitigate the wall of debt coming due by stepping up the pace of loan modifications to help borrowers keep properties, but Collins said he also anticipates lenders will need to increase loan sales, write downs and mergers or acquisitions.

    “There is no doubt there will be private equity and other investors that will be interested in buying some of these loans, taking them off the balance sheets of banks,” Collins said.

    “The obvious question there is at what discount?” he said, adding, “I think investors will wait until things get more dire to try to get a better deal.”

    Another offset to banks’ office exposure has been the relatively stable performance of hotels, industrial and other property types. But Collins said that if rates stay high and the economy falters, those sectors are likely to face challenges as well.

    The 10-year Treasury yield,
    BX:TMUBMUSD10Y
    a benchmark lending rate for the commercial real estate industry, was near 4.32% on Monday, hovering around a 16-year high ahead of the Fed meeting, while the policy-sensitive 2-year Treasury rate
    BX:TMUBMUSD02Y
    was near 5.06%. Stocks
    SPX

    DJIA
    were edging higher.

    Office distress intensified in August, with the special servicing rate of loans in bond deals hitting 7.72%, compared with a 6.67% rate for all property types, according to Trepp, which tracks the commercial mortgage-backed securities market. A year ago, the rate of problem office loans was 3.18%.

    “If I was an investor, I would be patient around this, because values are only going to come down, I would imagine,” Collins said.

    Check out: Powell could still hammer U.S. stocks on Wednesday even if the Fed doesn’t hike interest rates

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  • Rising health costs could make it harder for the Fed to get inflation down to 2%

    Rising health costs could make it harder for the Fed to get inflation down to 2%

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    The rate of U.S. inflation has slowed considerably from a 40-year peak of 9.1% in mid-2022 and it’s gotten an assist from a surprising source: falling medical costs.

    But that’s about to end — to a large degree because of the complex way the federal government tries to figure the rise of medical costs. And a re-acceleration in health-care costs could complicate the Federal Reserve’s job to get inflation back down to pre-pandemic levels of 2% or less.

    “Unfortunately, the bill is about to become due” said economist Omair Sharif, founder of research firm Inflation Insights. “It’s going to be more of a headache for the Fed.”

    Ever-rising medical costs

    Rising medical costs have long been one of the biggest sources of inflation, even in times when overall U.S. prices were growing slowly. Medical costs rose an average of 3% a year in the decade prior to the pandemic and even faster in the early 2000s.

    Expensive health care was one the chief drivers of former President Barack Obama’s attempt to create a national health care system more than a decade ago.

    Yet medical costs began to decelerate sharply about one year ago, and in July, they turned negative for the first time since Word War Two. At least according to the complicated formula by which the federal government measures these expenses.

    The consumer price index, the nation’s main inflation gauge, showed that the annual cost of medical care fell by 1% in the 12 months ended in August. Less than a year before, they were rising at a 6% pace.

    Now, no one really believes medical costs are falling. Historically prices rise every year. And just this week The Wall Street Journal reported that health insurance could post the biggest price increase in 2024 in more than a decade.

    So what’s going on?

    Well, the government’s method for determining health-care prices has always been flawed — and the pandemic only made the problem worse. Far worse.

    The cost of health care is almost impossible to measure accurately, economists say. It’s easy to determine the price of gas or a loaf of bread. Not so the cost of a trip to the emergency room or even a routine visit to one’s doctor.

    Prices charged by doctors and hospitals are opaque, for one thing, and differ sharply even in the same city. It’s also difficult to gauge patient outcomes. And payments for services rendered are split by businesses, consumers and government (Medicare and Medicaid).

    “How do you measure outcomes? Is it an hour in the hospital? Is it making a patient healthy,” said Stephen Stanley, chief economist at Santander Capital Markets. “How do you measure any of this?”

    Then came the pandemic

    The government had to come up with a workaround, and it did.

    Basically the CPI formula subtracts the cost of benefits paid by health insurers on behalf of customers from the amount of premiums they pay. Whatever profits are leftover each year — known as retained earnings — are used to determine how much health-care prices are rising.

    The formula works all right in normal times, but the coronavirus threw a huge curve ball.

    Americans stopped going to the hospital or doctor’s office during Covid for fear of catching the virus. Health insurers paid out far less in benefits and profits soared.

    As the pandemic faded and Americans went back to their doctors, health insurers had to pay much more in benefits and profits sank.

    The result: Health-care costs as measured by the CPI have shown unprecedented ups and downs since the pandemic, especially since the government only updates its math for the medical index once a year in October.

    Just how big are these swings?

    The annual cost of health insurance in the CPI soared by a reported 28% as of September 2022, only to sink by 33% as of August.

    Now here comes another swing. Health insurance costs are set to rise sharply starting in October after the government’s next update to its CPI formula.

    That could spell trouble for the Fed.

    The ‘core’ of the problem

    The goal of the central bank is to get inflation back down to 2%, especially the core rate that strips out volatile food and energy costs.

    The core rate of the CPI already slowed considerably in the past year, decelerating to a yearly pace of 4.3% last month from a four-decade peak of 6.6% in mid-2022.

    The supposed plunge in health-insurance costs helped pave the way.

    At Inflation Insights, Shariff estimates the core CPI would have slowed to only 5.1% — not 4.3% — if health-care costs had risen in the past 11 months as fast as they were rising in September 2022.

    What about in the year ahead, when health insurance costs accelerate in the CPI? Medical care is the third biggest category in the index after housing and groceries.

    Economists are split how much it could impede the Fed in its effort to get inflation down to 2%.

    Shariff, for his part, thinks rising medical costs could add three-tenths or more to core CPI by next spring.

    “It’s going to start adding back to core inflation,” he said.

    At Santander Capital Markets, Stanley was one of the first Wall Street
    DJIA
    economists to warn about high inflation a few years ago. He is less sure rising medical costs will undermine the Fed’s inflation fight. “It is a really important category, but it’s probably not getting worked up about.”

    Other economists believe inflation is likely to continue to slow toward 2% largely because of easing price pressures in many other major categories such as food and especially shelter.

    Rents have come off a boil, for example, and housing prices aren’t rising rapidly anymore. Shelter accounts for more than one-third of the CPI versus a little over 8% for medical costs.

    “CPI only barely starting to show the slowdown in shelter costs,” said Simona Mocuta, chief economist at State Street Global Advisors.

    An alternative approach

    Senior economist Aichi Amemiya at Nomura said it’s better to focus on a separate measure of health-care costs preferred by the Fed that shows more stability.

    The health-service gauge found in the so-called PCE index shows that costs are rising about about 2.5% a year.

    “The PCE is the best measure to look at,” Amemiya said. “It’s designed to capture the total cost of health care.”

    The PCE tries to take into account total health-care spending, including business contributions to employee health insurance as well as Medicaid and Medicare reimbursement rates.

    As of July, the core PCE was up at an annual rate of 4.2%, almost the same as core CPI.

    Whatever the case, the cost of health care and its impact on inflation still bear watching.

    The massive ups and downs in the CPI health-insurers index has even forced the Bureau of Labor Statistics to rejigger its once-a-year formula to try to be more timely and accurate.

    Whether it can truly capture the changes in medical costs is still an open question.

    “I don’t think there is an easy answer on this,” Stanley said.

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  • Powell could still hammer U.S. stocks on Wednesday even if the Fed doesn’t hike interest rates

    Powell could still hammer U.S. stocks on Wednesday even if the Fed doesn’t hike interest rates

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    The past six weeks have left investors with more questions than answers about the outlook for U.S. monetary policy and, by extension, financial markets.

    And although the Federal Reserve is expected to leave its policy interest rates on hold Wednesday, Chairman Jerome Powell could still rattle markets as he’s probed for clues about the central bank’s thinking.

    Powell’s statement is expected to hew to what he said at the Jackson Hole, Wyoming, symposium in August and before that, during the central bank’s July press conference, but market analysts say the question-and-answer session with reporters and the updated “dot plot” of policy makers projections for interest rates could potentially furnish market-moving news.

    See: U.S. economy is trending in the Fed’s direction, so expect Powell to tread carefully next week

    “Just because this meeting isn’t widely considered to be ‘in play’ doesn’t mean it is insignificant,” said Steve Sosnick, chief strategist at Interactive Brokers, during a phone interview with MarketWatch.

    “The fact is, the Vix is relatively low. That indicates a very sanguine, if not complacent market. And a complacent market can sometimes be more susceptible to a negative shock.”

    The Cboe Volatility Index
    VIX,
    better known as “the Vix” or Wall Street’s “fear gauge,” finished below 14 on Friday, even as the Nasdaq Composite
    COMP
    and S&P 500
    SPX
    logged back-to-back weekly losses. Markets have seesawed recently as inflation has reaccelerated while the U.S. labor market and broader economy have slowed.

    What will investors be looking for, exactly? Presently, investors expect the Fed could start cutting interest rates again by the middle of next year. Anything that could disabuse them of this notion could undercut U.S. stocks while boosting Treasury yields and the U.S. dollar, analysts said.

    Liz Ann Sonders, chief market strategist at Schwab, said clues could potentially surface during the Q&A at the post-meeting press conference, which often has more of an impact on markets than Powell’s statement.

    “It is that 45 minutes to an hour that tends to be more market moving,” Sonders said during a phone interview with MarketWatch. “It is what they say about higher for longer and expectations around rate cuts in 2024, and whether Powell pushes back against that.”

    Since the beginning of August, more data has emerged to suggest that the U.S. economy might finally be starting to respond to the pressure from the Federal Reserve’s most aggressive campaign of interest-rate hikes since the 1980s. Corporate and personal bankruptcies have climbed.

    See: Bankruptcies spiked in August — the post-COVID rebound ‘is becoming a reality’

    There have also been indications that the torrid postpandemic labor market might be starting to cool. The Labor Department’s monthly jobs report showed fewer than 200,000 jobs were created in August, while figures from the prior two months were also revised lower, and the unemployment rate ticked higher to 3.8%.

    At the same time, consumer-price inflation has accelerated for two months in a row. Some on Wall Street have started to worry about stagflation, and financial markets are now pricing in about even odds that the Fed will leave interest rates on hold.

    A report earlier this week showed consumer prices rose 3.7% over the 12 months through August, while the rise for the month was 0.6%, the biggest increase in 14 months.

    Adding to the complicated picture, the resumption of student loan payments in October has revived concerns about the consumer despite relatively robust retail-sales data released earlier this week, while an auto worker strike involving all of the “Big Three” U.S. carmakers and the threat of a government shutdown are also sowing fears about a hit to the economy.

    “The triple threat from the resumption of student loan payments, a government shutdown and a strike by auto union workers could significantly weigh on GDP growth in Q4,” said EY Chief Economist Gregory Daco in emailed commentary.

    Powell could be asked to weigh in on any or all of these. He also could be asked to directly address investors’ expectations for the timing of the Fed’s initial rate cut of the cycle. Expectations for a policy pivot already proved premature last summer, which caused a brief but powerful bear-market rally to fizzle.

    A repeat of this could again create problems for stocks, Sosnick said.

    “Let’s see if the Fed agrees with the market’s assumptions about rate cuts,” he added.

    Traders expect the central bank to keep interest rates on hold Wednesday, with market-based odds seeing a pause as a virtual certainty, according to the CME’s FedWatch tool, which measures expectations based on trading in Fed funds futures. Expectations for another hike later this year are roughly split.

    See also: 4 things to watch for at next week’s Fed policy meeting

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  • GM and Ford’s stocks are higher as UAW strike kicks off. Their bonds tell a different story.

    GM and Ford’s stocks are higher as UAW strike kicks off. Their bonds tell a different story.

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    Ford Motor Co.’s and General Motors Co.’s stocks were higher Friday as workers kicked off a strike, but their bonds have been under selling pressure for some time.

    Nearly 13,000 U.S. auto workers went on strike early Friday after the three automakers and the UAW failed to reach an agreement before their national contract expired just before midnight.

    The union has opted for targeted strikes, so workers at a Ford
    F,
    -0.04%
    plant in Michigan and a GM
    GM,
    +0.83%
    plant in Missouri were first to down tools, along with workers at a Stellantis N.V.
    STLA,
    +2.12%
    plant in Ohio.

     UAW President Shawn Fain has said others could join later and asked all 150,000 members to be ready if and when they’re called to strike.

    The strike at all three U.S. carmakers is a break with tradition, as the union for many years has elected to center strike efforts at one company to protect its strike fund and picket-line firepower.

    For more, read: UAW strike: 12,700 Ford, GM and Stellantis auto workers walk off the job

    Ford’s stock was last up 0.5%, while GM was up 1.4%.

    But as the following charts from data solutions company BondCliQ Media Services shows, the bonds have seen far more selling than buying over the last 10 days. Bondholders are often viewed as “smarter” than shareholders, because they tend to be laser-focused on a company’s financials and cash flows, to ensure they will be repaid their principal when bonds mature.


    Net customer flow of Ford and GM bonds (last 10 days). Source: BondCliQ Media Sources

    The next chart shows that Ford has seen more selling than GM.


    Ford and GM’s debt trading volumes (last 10 days). Source: BondCliQ Media Services


    Most-active Ford issues with net customer flow (last 10 days). Source: BondCliQ Media Services


    Most-active General Motors issue with net customer flow (last 10 days). Source: BondCliQ Media Services

    Stellantis, meanwhile, was seeing strong buying of its U.S. dollar-denominated bonds. The company, the former Fiat Chrysler, has far less debt than Ford and GM.

    Stellantis has about $26.5 billion of total debt, according to FactSet data, about $19.7 billion of which is in bonds.

    Ford has $143 billion of debt and $124 billion of bonds. GM has $118 billion of debt, with about $107 billion in bonds, according to FactSet.


    Most active Stellantis NV issues (USD) with net customer flow (last 10 days). Source: BondCliQ Media Services

    Fitch Ratings said earlier Friday the strike will have a limited financial impact on the auto makers, at least for now with just three plants striking.

    “It seems likely the UAW will try to ratchet up pressure on the automakers over time by shifting the strike to more impactful plants and adding more plants to the strike,” Stephen Brown, a senior director at Fitch, said in emailed comments. “The impact on the automakers of striking individual plants could be similar to the semiconductor-induced disruptions that we saw over the past few years.”

    See also: Big Three need to step up for the automotive workers who keep them profitable

    Fitch had already incorporated the potential impact of strikes in its recent decision to upgrade its ratings of Ford and GM, he said. The agency moved Ford to BBB- from BB+, moving it back into investment trade from speculative, or “junk,” status.

    “Ford, GM and Stellantis all have robust liquidity positions that will help them to withstand a potentially drawn-out period of production disruption. Based on June 30 figures, we estimate Ford has over $50 billion of cash and credit facility capacity, while GM has nearly $40 billion,” said Brown.

    Stellantis stock was up 2.2% Friday and has gained 36% in the year to date, outperforming GM’s 1.2% gain and Ford’s 9.0% gain. The S&P 500
    SPX
    has gained 17% in the same time frame.

    For live coverage of the UAW strikes, click here.

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  • Here’s the ‘triple power play’ that may rule stock-market returns, other assets for next 5 years

    Here’s the ‘triple power play’ that may rule stock-market returns, other assets for next 5 years

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    Three powerful dynamics in the global economy are expected to play a significant role in investors’ multi-asset allocations over the next five years, according to a 132-page report from Rotterdam-based asset manager Robeco.

    The first is labor’s likely increased bargaining power, with the outcome of any tussle between businesses and their workers probably being determined by wages in a sticky inflation environment, based on the report compiled by strategists Laurens Swinkels and Peter van der Welle on behalf of the multi-asset team at Robeco, which manages $194 billion in assets. The second is the end of monetary-policy leniency and the potential for central banks to lock “horns” with governments over the appropriate level of borrowing costs. The third is the dawn of “multipolarity” as the U.S. and China struggle for power.

    Taken together, this “triple power play” is already starting to unfold, shifting investors into a world of higher risk-free rates and lower expected equity risk premiums, according to the asset manager. Risk premium is a gauge of relative value for stocks, helping investors understand what their short-term gain might be when taking on the additional risk of buying equities or investing in stock funds.

    Robeco provided its forecasts for five-year annualized, projected returns on a range of assets held by euro- and dollar-based investors — including developed- and emerging-market equities, bonds, and cash.

    The firm’s base-case scenario, which Robeco’s team refers to as a “stalemate,” calls for a mild recession in 2024, consumer-price inflation in developed economies to remain around 2.5% on average heading toward 2029, and real GDP in the U.S. to average 2.3% or below what the S&P 500 index
    SPX
    currently implies.

    That benign growth outlook is expected to be accompanied by macroeconomic volatility, plus a “tug of war” between central bankers reluctant to lower interest rates and governments in need of low borrowing costs — which “means there is not enough monetary policy tightening to remove demand-pull inflation.” Under such a scenario, developed-market equities are likely to underperform their emerging market counterparts and domestic bonds should offer a higher return than cash for dollar-based investors, according to Robeco.


    Source: Robeco. Returns shown are annualized.

    “Looking ahead, a key question is: are we eyeing the start of a new bull market that will broaden and pave the way for another streak of above-historical excess equity return?” the Robeco team wrote in the report released on Tuesday. “In our base case, we expect developed markets’ earnings growth to end up below current 5Y forward consensus projections, which are high single-digit or even still low double-digit for the U.S. and eurozone.

    “The reason we foresee a decline in profitability is linked to our overarching macro theme, the triple power play. Equities will likely bear the brunt of the power play in geopolitics,” according to the report. In addition, efforts by global corporations to shift production toward geopolitically-friendly powers or closer regions “will prove more costly and lower efficiency.” Plus, “further pressure from margins will come from a lagged response from past policy rate hikes.”

    Under Robeco’s bull-case scenario, early and rapid adoption of artificial intelligence across sectors and industries would likely spawn above-trend growth and push inflation back to central banks’ targets. The result is “an almost Goldilocks scenario in which things are running neither too hot nor too cold,” central banks could take a break from tightening policy, and developed- and emerging-market equities may both be able to come out with double-digit annualized returns from 2024 to 2028.

    The firm’s bear-case scenario envisions a world in which mutual trust between the world’s superpowers hits rock bottom, governments are “in the crosshairs” of central banks, and labor loses bargaining power in the services sector. A “stagflationary environment emerges, intensifying the policy dilemma for central bankers” as inflation stays stubbornly high at 3.5% on average and growth comes in at just 0.5% annually for developed economies. In that situation, developed-market equities would eke out an annualized return of 2.25% for dollar-based investors over the four-year period, which would be below the expected return on cash.

    On Thursday, all three major U.S. stock indexes
    DJIA

    SPX

    COMP
    finished higher as investors digested a batch of better-than-expected U.S. data and continued to expect no action by the Federal Reserve next week. Officials are seen as likely to leave their main policy rate target at a 22-year high of 5.25%-5% on Wednesday.

    As investors continued to monitor the possibility of a strike by United Auto Workers, 2-
    BX:TMUBMUSD02Y
    and 10-year Treasury yields
    BX:TMUBMUSD10Y
    ended at one-week highs and the ICE U.S. Dollar Index
    DXY
    jumped 0.6%. In a separate development earlier this week, Air Force Secretary Frank Kendall warned that China is preparing for a potential war with the U.S.

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  • Why Ray Dalio says cash is ‘temporarily’ good: ‘I don’t want to own debt’

    Why Ray Dalio says cash is ‘temporarily’ good: ‘I don’t want to own debt’

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    ““I don’t want to own debt, you know bonds and those things.””


    — Ray Dalio, founder of Bridgewater Associates

    That was the response by the billionaire founder of one of the world’s biggest hedge funds when asked where he would put capital to work right now.

    “Temporarily right now, cash, I think is good…and the interest rates are fine. I don’t think they will be sustained that way,” Bridgewater Associates’ Ray Dalio said Thursday at the Milken Institute’s 10th annual Asian Summit in Singapore.

    The move into cash has been growing with the yield on the 30-day Treasury bills atop 5%, while investors can also get 4% on certificates of deposit and high-yield savings accounts, but there has also been pushback.

    Wells Fargo Investment Institute strategist Veronica Willis told clients last month that even if cash yields stay higher in the near term, history shows investors lose out in the long run as cash tends to underperform and act as a drag on their investments.

    Hence the word “temporarily” from Dalio. But his clear disdain for bonds might also run against the crowd, as the 10-year Treasury yield
    BX:TMUBMUSD10Y
    topped its highest since 2007 last month.

    Saira Malik, chief investment officer at Nuveen, recently advised investors to make the shift into longer-dated bonds sooner than later because she says the broader market tends to outperform after a Federal Reserve pause on interest rates and often continues to do well in the following year.

    Investors have become less concerned, as of late, that the Fed will keep hiking rates, with inflation data out Wednesday only showing a couple of surprises. Markets are pricing in slim chance of a Fed rate hike in borrowing costs after next week’s meeting, though a hike in November may still be up in the air.

    Dalio, who has a net worth of $16.5 billion, according to Bloomberg’s Billionaires Index, said when it comes to investing, he wants to “be in the right places, geographies,” and have diversification. “What I don’t know is going to be much more important than what I do know.”

    “Diversification can reduce your risk without reducing the return if you know how to do it well. And then I have to pay attention to the implications of the great disruptions that are going to take place because the world will be radically different tin five years…the next election, the debt situation, all of those things are going to change. And then with the new technologies…it’s going to be like a time warp. It’s a different world.”

    And that will “disrupt the disrupters,” so it will be important to know who will be using those technologies in the best way, said Dalio.

    Read: Investors need to be wary of ‘priced for perfection’ stock markets, warns Larry Summers

    And: Don’t bet against the economy yet, says Bill Ackman

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