[ad_1]
U.S. stocks are poised to rise on Monday ahead of a week of earnings and economic data releases, including quarterly reports from Tesla, Netflix, and .
Source link
-
Order Reprints
-
Print Article
Tag: Financial Investment Services
-
Long U.S. dollar now seen as the most crowded trade, but bodes ill for the greenback
[ad_1]
Long positions in the U.S. dollar is now considered the most crowded trade, according to a survey conducted by the Bank of America with global fund managers, but the greenback is likely near a peak, the bank said.
The bank surveyed 67 fund managers managing $997 billion assets under management from the United States, United Kingdom, Continental Europe and Asia from October 6 to 11.
The response represents a shift from early August as fund managers surveyed became more concerned about interest rates in September, according to the Bank of America note.
The latest survey bodes ill for the U.S. dollar
DXY,
as the equity rally this year has partially corrected and bond yields risen, after earlier making it to the most crowded trade, according to the bank’s strategists.“We believe USD is near the peak, further strength requires a change in narrative,” the strategists wrote.
The ICE U.S. Dollar Index
DXY,
which measures the greenback’s strength against a basket of rivals, has slightly pulled back from its highest close in 11 months at 107 reached on Oct. 3, according to FactSet data. The index is mostly flat on Friday at around 106.6.Strong economic data in the U.S. coupled with a relatively more hawkish Federal Reserve than other major central banks, could be the most likely reason to support further strength in the dollar, according to the fund managers surveyed.
BofA Global Research
Meanwhile, the biggest downside risk to the greenback is if the U.S. economy sees a hard landing which will prompt the Federal Reserve to cut its policy interest rates.
BofA Global Research
Respondents of the survey think that rate cuts are currently underpriced, and they think the Fed is likely to cut rates the most among major central banks.
“This should erode faith in USD strength, and suggests that USD longs may indeed be vulnerable,” the strategists noted.
[ad_2]
-
Dividend stocks are dirt cheap. It may be time to back up the truck.
[ad_1]
The stock market always overreacts, and this year it seems as if investors believe dividend stocks have become toxic. But a look at yields on quality dividend stocks relative to the market underlines what may be an excellent opportunity for long-term investors to pursue growth with an income stream that builds up over the years.
The current environment, in which you can get a yield of more than 5% yield on your cash at a bank or lock in a yield of 4.57% on a10-year U.S. Treasury note
BX:TMUBMUSD10Y
or close to 5% on a 20-year Treasury bond
BX:TMUBMUSD20Y
seems to have made some investors forget two things: A stock’s dividend payout can rise over the long term, and so can it is price.It is never fun to see your portfolio underperform during a broad market swing. And people have a tendency to prefer jumping on a trend hoping to keep riding it, rather than taking advantage of opportunities brought about by price declines. We may be at such a moment for quality dividend stocks, based on their yields relative to that of the benchmark S&P 500
SPX.Drew Justman of Madison Funds explained during an interview with MarketWatch how he and John Brown, who co-manage the Madison Dividend Income Fund, BHBFX MDMIX and the new Madison Dividend Value ETF
DIVL,
use relative dividend yields as part of their screening process for stocks. He said he has never seen such yields, when compared with that of the broad market, during 20 years of work as a securities analyst and portfolio manager.Dividend stocks are down
Before diving in, we can illustrate the market’s current loathing of dividend stocks by comparing the performance of the Schwab U.S. Equity ETF
SCHD,
which tracks the Dow Jones U.S. Dividend 100 Index, with that of the SPDR S&P 500 ETF Trust
SPY.
Let’s look at a total return chart (with dividends reinvested) starting at the end of 2021, since the Federal Reserve started its cycle of interest rate increases in March 2022:
FactSet
The Dow Jones U.S. Dividend 100 Index is made up of “high-dividend-yielding stocks in the U.S. with a record of consistently paying dividends, selected for fundamental strength relative to their peers, based on financial ratios,” according to S&P Dow Jones Indices.
The end results for the two ETFs from the end of 2021 through Tuesday are similar. But you can see how the performance pattern has been different, with the dividend stocks holding up well during the stock market’s reaction to the Fed’s move last year, but trailing the market’s recovery as yields on CDs and bonds have become so much more attractive this year. Let’s break down the performance since the end of 2021, this time bringing in the Madison Dividend Income Fund’s Class Y and Class I shares:
Fund 2023 return 2022 return Return since the end of 2021 SPDR S&P 500 ETF Trust 14.9% -18.2% -6.0% Schwab U.S. Dividend Equity ETF -3.8% -3.2% -6.9% Madison Dividend Income Fund – Class Y -4.7% -5.4% -9.9% Madison Dividend Income Fund – Class I -4.7% -5.3% -9.7% Source: FactSet Dividend stocks held up well during 2022, as the S&P 500 fell more than 18%. But they have been left behind during this year’s rally.
The Madison Dividend Income Fund was established in 1986. The Class Y shares have annual expenses of 0.91% of assets under management and are rated three stars (out of five) within Morningstar’s “Large Value” fund category. The Class I shares have only been available since 2020. They have a lower expense ratio of 0.81% and are distributed through investment advisers or through platforms such as Schwab, which charges a $50 fee to buy Class I shares.
The opportunity — high relative yields
The Madison Dividend Income Fund holds 40 stocks. Justman explained that when he and Brown select stocks for the fund their investible universe begins with the components of the Russell 1000 Index
RUT,
which is made up of the largest 1,000 companies by market capitalization listed on U.S. exchanges. Their first cut narrows the list to about 225 stocks with dividend yields of at least 1.1 times that of the index.The Madison team calculates a stock’s relative dividend yield by dividing its yield by that of the S&P 500. Let’s do that for the Schwab U.S. Equity ETF
SCHD
(because it tracks the Dow Jones U.S. Dividend 100 Index) to illustrate the opportunity that Justman highlighted:Index or ETF Dividend yield 5-year Avg. yield 10-year Avg. yield 15-year Avg. yield Relative yield 5-year Avg. relative yield 10-year Avg. relative yield 15-year Avg. relative yield Schwab U.S. Dividend Equity ETF 3.99% 3.41% 3.20% 3.16% 2.6 2.1 1.8 1.6 S&P 500 1.55% 1.62% 1.79% 1.92% Source: FactSet The Schwab U.S. Equity ETF’s relative yield is 2.6 — that is, its dividend yield is 2.6 times that of the S&P 500, which is much higher than the long-term averages going back 15 years. If we went back 20 years, the average relative yield would be 1.7.
Examples of high-quality stocks with high relative dividend yields
After narrowing down the Russell 1000 to about 225 stocks with relative dividend yields of at least 1.1, Justman and Brown cut further to about 80 companies with a long history of raising dividends and with strong balance sheets, before moving further through a deeper analysis to arrive at a portfolio of about 40 stocks.
When asked about oil companies and others that pay fixed quarterly dividends plus variable dividends, he said, “We try to reach out to the company and get an estimate of special dividends and try to factor that in.” Two examples of companies held by the fund that pay variable dividends are ConocoPhillips
COP,
-0.29%
and EOG Resources Inc.
EOG,
+0.52% .Since the balance-sheet requirement is subjective “almost all fund holdings are investment-grade rated,” Justman said. That refers to credit ratings by Standard & Poor’s, Moody’s Investors Service or Fitch Ratings. He went further, saying about 80% of the fund’s holdings were rated “A-minus or better.” BBB- is the lowest investment-grade rating from S&P. Fidelity breaks down the credit agencies’ ratings hierarchy.
Justman named nine stocks held by the fund as good examples of quality companies with high relative yields to the S&P 500:
Company Ticker Dividend yield Relative yield 2023 return 2022 return Return since the end of 2021 CME Group Inc. Class A CME,
+0.47% 2.04% 1.3 31% -23% 1% Home Depot, Inc. HD,
-0.39% 2.79% 1.8 -3% -22% -25% Lowe’s Cos., Inc. LOW,
+0.27% 2.17% 1.4 3% -21% -19% Morgan Stanley MS,
-1.54% 4.24% 2.7 -3% -10% -13% U.S. Bancorp USB,
-0.25% 5.89% 3.8 -22% -19% -37% Medtronic PLC MDT,
-4.32% 3.62% 2.3 1% -23% -22% Texas Instruments Inc. TXN,
-0.21% 3.30% 2.1 -3% -10% -12% United Parcel Service Inc. Class B UPS,
-0.16% 4.17% 2.7 -8% -16% -23% Union Pacific Corp. UNP,
+1.52% 2.52% 1.6 2% -16% -15% Source: FactSet Click on the tickers for more about each company, fund or index.
Now let’s see how these companies have grown their dividend payouts over the past five years. Leaving the companies in the same order, here are compound annual growth rates (CAGR) for dividends.
Before showing this next set of data, let’s work through one example among the nine stocks:
-
If you had purchased shares of Home Depot Inc.
HD,
-0.39%
five years ago, you would have paid $193.70 a share if you went in at the close on Oct. 10, 2018. At that time, the company’s quarterly dividend was $1.03 cents a share, for an annual dividend rate of $4.12, which made for a then-current yield of 2.13%. - If you had held your shares of Home Depot for five years through Tuesday, your quarterly dividend would have increased to $2.09 a share, for a current annual payout of $8.36. The company’s dividend has increased at a compound annual growth rate (CAGR) of 15.2% over the past five years. In comparison, the S&P 500’s weighted dividend rate has increased at a CAGR of 6.24% over the past five years, according to FactSet.
- That annual payout rate of $8.36 would make for a current dividend yield of 2.79% for a new investor who went in at Tuesday’s closing price of $299.22. But if you had not reinvested, the dividend yield on your five-year-old shares (based on what you would have paid for them) would be 4.32%. And your share price would have risen 54%. And if you had reinvested your dividends, your total return for the five years would have been 75%, slightly ahead of the 74% return for the S&P 500 SPX during that period.
Home Depot hasn’t been the best dividend grower among the nine stocks named by Justman, but it is a good example of how an investor can build income over the long term, while also enjoying capital appreciation.
Here’s the dividend CAGR comparison for the nine stocks:
Company Ticker Five-year dividend CAGR Dividend yield on shares purchased five years ago Dividend yield five years ago Current dividend yield Five-year price change Five-year total return CME Group Inc. Class A CME,
+0.47% 9.46% 2.44% 1.55% 2.04% 20% 42% Home Depot Inc. HD,
-0.39% 15.20% 4.32% 2.13% 2.79% 54% 75% Lowe’s Cos, Inc. LOW,
+0.27% 18.04% 4.14% 1.81% 2.17% 91% 109% Morgan Stanley MS,
-1.54% 23.16% 7.62% 2.69% 4.24% 80% 108% U.S. Bancorp USB,
-0.25% 5.34% 3.60% 2.78% 5.89% -39% -26% Medtronic PLC MDT,
-4.32% 6.65% 2.90% 2.10% 3.62% -20% -9% Texas Instruments Inc. TXN,
-0.21% 11.04% 5.24% 3.10% 3.30% 59% 82% United Parcel Service Inc. Class B UPS,
-0.16% 12.23% 5.56% 3.12% 4.17% 33% 56% Union Pacific Corp. UNP,
+1.52% 10.20% 3.37% 2.07% 2.52% 34% 49% Source: FactSet This isn’t to say that Justman and Brown have held all of these stocks over the past five years. In fact, Lowe’s Cos.
LOW,
+0.27%
was added to the portfolio this year, as was United Parcel Service Inc.
UPS,
-0.16% .
But for most of these companies, dividends have compounded at relatively high rates.When asked to name an example of a stock the fund had sold, Justman said he and Brown decided to part ways with Verizon Communications Inc.
VZ,
-0.94%
last year, “as we became concerned about its fundamental competitive position in its industry.”Summing up the scene for dividend stocks, Justman said, “It seems this year the market is treating dividend stocks as fixed-income instruments. We think that is a short-term issue and that this is a great opportunity.”
Don’t miss: How to tell if it is worth avoiding taxes with a municipal-bond ETF
[ad_2]
-
If you had purchased shares of Home Depot Inc.
-
Will Israel-Gaza war sink stocks and shake the global economy? Watch oil prices.
[ad_1]
Wall Street on Monday shook off a bout of selling sparked by the Israel-Gaza war.
That’s in keeping with the historical tendency of investors to look past geopolitical conflict and human tragedy, but it isn’t necessarily the last word. That last word will likely belong to oil traders.
“Oil rallied today yet remains below the near-term peak from last month. If oil prices rise higher for longer, the global economy could feel a resurgence of inflation during a period when investors are hoping inflation is clearly decelerating,” said Jeffrey Roach, chief economist for LPL Financial, in emailed comments.
Roach also noted that, in general, markets tend to have difficulty pricing the difference between a temporary shock and a permanent shock.
For now, however, the jump in oil prices isn’t signaling a permanent shock. Sure, Brent crude
BRN00,
+0.11% ,
the global benchmark, jumped 4.2% on Monday to end at $88.15 a barrel, while West Texas Intermediate crude
CL.1,
+0.07% CL00,
+0.07%
surged $3.59, or 4.3% to $86.38 a barrel — the biggest one-day jump for both grades since April 3.See: Here’s what Israel-Gaza war means for oil prices as fighting continues
The jump was impressive, but it comes after a big pullback last week that saw both WTI and Brent retreat from 2023 highs near $100 a barrel.
So if crude can manage to close above those highs — $93.68 a barrel for WTI — investors across other markets will likely take notice.
What would it take to drive crude back toward the highs? The focus is on Iran.
The Wall Street Journal on Sunday reported that Iranian security officials helped plan the attack by Hamas. The Israeli military has said there is no concrete evidence of Iranian involvement, according to news reports.
A direct role by Iran, a longtime ally of Hamas, would raise the threat of a broader conflict.
Some analysts have put Iranian crude production at more than 3 million barrels a day and exports above 2 million barrels a day — the highest levels since the Trump administration pulled the U.S. out of the Iranian nuclear accord in 2018, according to the Wall Street Journal. Sales fell to around 400,000 barrels a day in 2020 as the U.S. reimposed sanctions.
“If Israel discovers that Iran played a role in Hamas’ attack, it could retaliate militarily. At the very least, any warming of relations between Iran and the West is now on hold and this will limit incremental oil supply,” said Nicholas Colas, co-founder of DataTrek Research, in a Monday note.
It’s a reminder that “while neither Israel nor Gaza are major oil producers, everything that happens geopolitically in the Middle East invariably ends up affecting oil prices,” he said.
The potential for a broader conflict could lead to a “sharp market correction,” argued Olivier d’Assier, head of applied research, APAC, at Axioma.
The scale of the conflict, the largest since the Yom Kippur War 50 years ago, renders comparisons with how markets have shaken off past geopolitical incidents, but they may be irrelevant in terms of stress testing, he argued.
“The closest historical scenarios we could use would be 9/11 and the start of the Ukraine war. But because both took place on Western soil, they might not be adequate,” d’Assier said.
On Monday, however, remarks by Federal Reserve officials ultimately trumped the rise in crude prices and jitters over the Middle East. Dallas Fed President Lorie Logan and Fed Vice Chair Philip Jefferson both noted the rise in long-term Treasury yields and their role in tightening financial conditions, which investors took as a signal the Fed may not be as likely to further raise interest rates.
See: An Israel-Hamas war could change what the Fed does about interest rates
Stocks turned north after a morning dip, with the Dow Jones Industrial Average
DJIA
rising nearly 200 points, or 0.6%, while the S&P 500
SPX
also advanced 0.6% and the Nasdaq Composite
COMP
gained 0.4%.For now, market participants appear set to look ahead to economic data later this week, including September consumer-price index and producer-price index readings.
[ad_2]
-
‘Anxiety’ high as stock market falls, bond yields rise — what investors need to know after S&P 500’s worst month of 2023
[ad_1]
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.”
[ad_2]
-
Are we bored yet? Retail investors slowing their roll on AI stocks, according to this chart
[ad_1]
There are more signs that investors are cooling a bit on the hot artificial intelligence play, though no one appears ready to let go of their Nvidia stock just yet.
That’s according to Vanda Research analysts, who shared a chart of their latest weekly data showing how retail investor’s net purchases of AI-themed stocks is “steadily waning”:
Marco Iachini, senior vice president, Giacomo Pierantoni, head of data and Lucas Mantle, data scientist at Vanda, said they’ve also noticed fewer news stories covering the sector as well, in their Vandatrack weekly comment that published Thursday.
The fervor for AI-related stocks and technology took off earlier this year, with a pinnacle moment in May when Nvidia
NVDA,
-2.89%
made big predictions on a boom for demand for its AI-related chips. Shares of the company are still up 211% so far this year, but enthusiasm for many tech stocks faded in August as China and interest rate-hike worries cropped up and some companies stressed AI benefits might not happen right away.That said, Vanda analysts don’t expect Nvidia will feel the hurt of any such waning interest. They point out that short interest in the chip maker has seen a “considerable decline,” in line with its soaring stock price.
“This phenomenon suggests that bearish institutional investors, including long/short hedge funds, may have been compelled to cover their short positions,” said Iachini and his team. “As a result they are unlikely to want to sell the stock in the near term barring strong conviction to do so.”
“It is crucial to recognize that a slowdown in retail demand, by itself, is improbable to trigger substantial price movements, without active bearish participation from institutional investors,” they added.
However, the story is different for smaller AI-related companies such as smaller-cap C3.ai
AI,
-2.78%
as seen in their chart:For C3.ai, they see a selling trend persisting in coming weeks. The AI software group’s shares are up 154% so far this year, but down 9% this month, taking a hit recently from solid quarterly results that came with forecasts for a bigger-than-expected full year loss. Analysts aren’t quite giving up — among 10 covering the company tracked by FactSet most have hold or a similar rating.
“We believe C3.ai is taking the proper steps to capitalize on Generative AI, but it will take time to prove out,” said a team of analysts at Oppenheimer led by Timothy Horan, after those results were released on Sept. 7. They rate the company perform.
Vanda analysts said another exception to an AI buying slowdown has been IonQ
IONQ,
-6.21% ,
“a relatively small quantum computing company that has been outperforming its AI-related counterparts.” They noted “remarkably resilient” demand for the stock, as short interest also increases rapidly.“This juxtaposition raises a cautionary flag, as a potential weakening of retail interest, coupled with speculative institutional investors accumulating short positions, could create a demand-supply imbalance, potentially triggering a selloff,” they said. Shares of IONQ have soared 422% year-to-date. The company lifted its lifted full-year bookings guidance last month as it reported blowout second-quarter sales.
Young Money blogger Jack Raines highlighted the slowing interest in AI in a post on Thursday , citing data from analytics firm Similarweb that showed ChatGPT traffic down 3.2% in August, after 10% declines in June and July.
“While ChatGPT will probably experience a resurgence this fall as students return to the classroom and expedite their homework via chatbot, it seems like talks of AI disrupting/replacing anything and everything have cooled down,” he said, adding that the “initial euphoria was a bit much.”
Deutsche Bank strategists hopped on the topic in a note to clients entitled “Even hype needs a summer break,” on Thursday, noting how AI interest waned as investors went to the beach and the media turned its attention to extreme weather and “silly season” stories.
“Under the surface, though, there have been important developments indicating a slow maturing of the cycle, of the underlying technologies and of attitudes to a revolution in waiting,” said a team led by analyst Adrian Cox.
Those include Ai being the “elephant in the earnings room,” this summer that also brought a steady stream of AI-related tech announcements. Another theme “Your job is safe..for now,” came via fresh evidence that AI might boost rather than replace white-collar jobs, while yet another saw U.S. politicians also got involved.
This week saw Tesla CEO Elon Musk telling Capital Hill politicians that a new federal agency to oversee AI development is a must.
Another big theme that erupted this summer was the chatter by contrarian commentators questioning the hype around generative AI. Cox alluded to the Similarweb report that got everyone excited as it showed Chat GPT traffic falling to 1.4 billion visitors in August from 1.8 billion in May.
“The bigger picture is that open.ai had zero visitors before the launch of ChatGPT less than a year ago and is now No. 28 in the world, according to Similarweb,” said the Deutsche Bank team.
[ad_2]
-
Why Ray Dalio says cash is ‘temporarily’ good: ‘I don’t want to own debt’
[ad_1]
““I don’t want to own debt, you know bonds and those things.””
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
[ad_2]
-
Watch this ‘canary in the coal mine’ for signs of trouble in markets, Neuberger Berman CIO says
[ad_1]
Neuberger Berman, an asset manager with eight decades under its belt, is on the lookout for cracks in credit markets from the Federal Reserve’s rate-hiking campaign.
Erik Knutzen, chief investment officer of multi asset, worries that several factors could be a tipping point for the economy, from an economic slowdown in China to U.S. consumers finally becoming exhausted by higher rates.
Yet Knutzen expects the high-yield, or junk bond, market to serve as the “canary in the coal mine” for broader market volatility, acting as “perhaps the most visible threat, and therefore one we think could be priced in sooner than later.”
The Bloomberg U.S. High Yield Bond Index has returned 6.4% through the end of August, producing one of the year’s highest gains in fixed income, helped along by a “resilient U.S. economy coupled with still-available financial liquidity,” according to the Wells Fargo Investment Institute.
But Knutzen worries that as the high-yield maturity wall draws closer, “the first policy rate cuts get priced further and further out, raising the threat of expensive refinancings.”
The 10-year Treasury yield’s
BX: TMUBMUSD10Y
climb to a multidecade high in August of almost 4.4% left many major U.S. corporations in early September hesitant to borrow beyond 10 years.Starting next year, some $700 billion of high-yield bonds are set to mature through the end of 2027, with a big slice of the refinancing need coming from companies with riskier credit ratings below the top BB ratings bracket.
The junk-bond maturity wall.
Bloomberg, Wells Fargo Investment Institute, Moody’s Investors Service
The two big U.S. exchange-traded funds linked to junk bonds are the SPDR Bloomberg High Yield Bond ETF
JNK
and the iShares iBoxx $ High Yield Corporate Bond ETF
HYG,
both up 1.8% and 1.5% on the year through Monday, respectively, while offering dividend yields of more than 5.8%, according to FactSet.Of note, fixed-income strategists at the Wells Fargo Investment Institute also said they see risks emerging in junk bonds for companies rated B and below, particularly with spread in the sector trading less than 400 basis points above the risk-free Treasury rate since July. Spreads are the premium that investors are paid on bonds to help compensate for default risks.
Top corporate executives appear hopeful that the Federal Reserve will cut rates sooner than later. Fed Chairman Jerome Powell said in Jackson Hole, Wyo., in August that the central bank is prepared to keep its policy rate restrictive for a while to get inflation down to its 2% target.
To that end, Neuberger Berman, which has roughly $443 billion in managed assets, sees several sources of volatility lurking through year’s end, and has a “defensive inclination” in equity and credit, favoring high-quality companies with plenty of free cash flow, high cash balances and less expensive long-term debt.
U.S. stocks booked gains on Monday after a week of losses, with the S&P 500 index
SPX
and Nasdaq Composite Index
COMP
scoring their best daily percentage gains in about two weeks. The Dow Jones Industrial Average
DJIA
advanced 0.3%.[ad_2]
-
Wall Street’s most bullish strategist warns of choppiness in stocks, still sees the S&P 500 touching a record high this year
[ad_1]
Recent weakness in the U.S. stock market is likely to persist over the near-term, according to Wall Street’s most bullish strategist, who still thinks the S&P 500 is on a path to a record high this year.
John Stoltzfus, chief investment strategist at Oppenheimer Asset Management Inc., in late July projected the S&P 500 would rise above 4,900 by the end of 2023. That is the highest price target for the large-cap index among 20 Wall Street firms surveyed by MarketWatch in August.
It implies the S&P 500 would rise above its earlier closing record high of 4,796 reached on Jan. 3, 2022 by the end of the year. The path up, however, could get bumpy.
“Bullishness [in the stock market] is relatively high while the Fed remains shy of its inflation target,” said a team of Oppenheimer strategists led by Stoltzfus in a Sunday note. They also said, “we persist in suggesting that investors curb their enthusiasm [in the stock market] for a long rate pause or even a rate cut and instead right-size expectations.”
Expectations that the Federal Reserve is nearing an end to its current interest-rate hiking cycle, as well as optimism around artificial intelligence boosted the U.S. stock market in the first seven months of 2023. However, the rally came to a brief halt in August as investors worried the Fed could be forced to keep rates elevated as a batch of stronger-than-expected economic data and rising oil prices fueled concerns that still-sticky inflation would mean that borrowing costs will stay higher for longer.
Investors should not brush off those pressures, even through the Fed appears to be nearing the end to its current rate-hike cycle, Stoltzfus and his team said. “The stickiness evidenced in food, services, energy and other prices warrants the Fed remaining vigilant along with a potential for one more hike this year and perhaps another next year,” they said.
See: When will consumers stop buying more stuff? It’s a key question for the stock market.
However, Stoltzfus doesn’t see current headwinds for stocks as something that would prevent the S&P 500 from achieving his team’s new peak target.
Stock-market investors expect this week’s August inflation report to offer more clarity on whether the central bank will continue to ratchet up its fight against inflation. The headline component of the consumer-price index is forecast to accelerate to 0.6% in August from July’s 0.2% gain, while the core measure that strips out volatile food and fuel costs is expected to rise a mild 0.2% from a month earlier, according to a survey of economists by The Wall Street Journal.
Meanwhile, a key Wall Street volatility index also pointed to “some choppiness” in the stock market in the near term to keep investors on their toes, said Stoltzfus. The CBOE Volatility Index
VIX,
at a level of 13.82 on Monday, hovered around its 12-month low and traded about 30% below its one-year average level of 19.9, and 37% below its two-year average of 21.88 (see chart below).Stoltzfus and his team suggest that investors use market weakness to seek out “babies that get thrown out with the bath water” in periods of volatility. They said the S&P 500 Energy Sector
XX:SP500.10
looks increasingly attractive as policy makers in the U.S. and abroad strive to contain inflation and manage economic growth.“We believe that prospects are looking better that the Fed’s success thus far in bringing down the rate of inflation could lead to a [rate] pause next year, thus lessening pressures on economic growth,” the strategists said. An improved economic growth, along with fiscal stimulus from investment in stateside infrastructure projects and stateside chip manufacturing efforts, could contribute to profitability in the energy sector into 2024, the team added.
The Energy Select Sector SPDR Fund
XLE,
which is seen as a proxy of the energy sector of the S&P 500, has advanced 3.9% year to date versus a 8.5% increase in the price of the U.S. benchmark West Texas Intermediate crude oil
CL00,
+0.03% CL.1,
+0.03% ,
according to FactSet data.Oil futures
CLV23,
+0.03%
BRNX23,
-0.03%
traded at their highest levels of the year on Monday morning, a week after Russia and Saudi Arabia caught markets off guard with their output cut extension announcements, but they settled modestly lower on Monday afternoon.See: Energy ETFs are outshining the S&P 500, but it’s not just because of the oil rally
Stoltzfus in late July projected the S&P 500
SPX
would rise above its record high by the end of 2023, lifting his year-end price target for the large-cap index to 4,900 from an earlier 4,400 projection from December. It implies a 9.2% advance from where the S&P 500 settled on Monday, at around 4,487.U.S. stocks finished higher on Monday, boosted by technology shares as Nasdaq Composite
COMP
advanced 1.1%. The S&P 500 was up 0.7% and the Dow Jones Industrial Average
DJIA
ended 0.3% higher, according to FactSet data.[ad_2]
-
The iPhone 15 is coming: Everything to expect from Apple’s big event
[ad_1]
For Apple fans, it’s almost that time of year again.
The company is expected to launch the iPhone 15 at an event Tuesday, but don’t get too excited about the new phone. This year, the biggest change from Apple
AAPL,
+0.35%
could be the iPhone’s price.Apple tends to introduce new iPhones every year in the fall, and lately, the company has been keeping prices the same even as it upgrades the technology. That may not be the case this year, though, with some thinking that Apple could boost the price of its Pro-level models by $100 or $200 compared with what an iPhone 14 Pro currently sells for.
That’s notable because iPhones are already pretty expensive, with the cheapest iPhone 14 Pro option selling for $999 and the priciest iPhone 14 Pro Max configuration going for $1,599.
“Given the popularity of the iPhone 14 Pro models compared to the iPhone 14 models, Apple may believe consumers will be willing to pay more without much fuss,” Monness, Crespi, Hardt & Co. analyst Brian White wrote in a recent report. “Moreover, Apple may feel a price hike is warranted given the inflationary forces that have disrupted the economy over the past couple of years.”
Morgan Stanley’s Erik Woodring is less certain that Apple will hike prices broadly. The company could boost the price of its Pro Max phone by $150 to account for an expected new rear-facing periscope lens, but it’s “very un-Apple-like to raise prices across the board in the midst of a smartphone market down 11%,” he wrote. He said he expects the company to keep prices the same on the regular Pro model and its two base-level options.
One key issue for iPhone enthusiasts — and Apple investors — is when the new phones will be ready for sale. Most of the iPhone models Apple introduced last year hit stores in mid-September, but there are some concerns about potential production delays this year.
Read: Waiting for the iPhone 15? You might have to hold out longer than you think.
“The broad availability of the iPhone 15 Pro Max could be October given some manufacturing challenges,” BofA Securities analyst Wamsi Mohan wrote recently.
iPhone feature updates have become more incremental in recent years, and Apple watchers aren’t expecting anything groundbreaking this time around either. New iPhones always tend to be a little faster than their predecessors, and this year’s models might charge more quickly too. There’s a catch, though, as Apple is expected to switch out its proprietary Lightning cable for the more universal USB-C cord.
While the Pro models get a lot of attention, White said that those looking to buy base-level models could see some enhancements. Reports “have highlighted the potential for the iPhone 15 and iPhone 15 Plus to be graced with certain features found on last year’s more expensive Pro models, including the A16 chip, Dynamic Island, and a 48-megapixel camera,” he wrote.
Why go Pro? Apple could move to a titanium frame from its prior stainless-steel casing and make camera enhancements. Mohan highlighted the potential for a periscope-type telephoto lens on Max versions.
Apple fans “should also see more casing quality color differentiation between the Pro and regular series to help drive vanity switchers to the higher-priced models,” Jefferies analyst Andrew Uerkwitz wrote recently.
There could be a dark blue color option for the iPhone Pro line this year, for example, according to 9to5Mac. That said, those content with the base-level model might be enticed by a pink version of that phone, with 9to5Mac noting that that’s one of several rumored pastel color options.
Read: Here’s why Wall Street may be overreacting about Apple’s China’s challenges
Apple is also expected to refresh its Apple Watch lineup at Tuesday’s event. Bloomberg News has reported that the Apple Watch Series 9 could feature a faster processor, though it will have the same general design as past models. Apple is also expected to keep the look the same on an upgraded version of its Ultra Watch, and that might come in a black color option.
The event kicks off at 1 p.m. Eastern time Tuesday and will be available for live viewing on Apple’s site.
[ad_2]
-
Trouble in paradise: Shock guilty plea roils case of yoga gurus charged with stealing millions from bipolar Malibu doctor
[ad_1]
Their shared hippie spirit brought them together over a vegan potluck dinner, but the prospect of years in federal prison for allegedly stealing millions from a mentally-ill Malibu doctor, has driven a wedge between them.
A federal fraud prosecution against a pair of yoga gurus accused of siphoning cash from Dr. Mark Sawusch’s $60 million fortune took a significant turn at the end of August when one pleaded guilty and agreed to testify against the other, her ex-boyfriend, according to court documents and people familiar with the matter.
Anna Moore’s guilty plea before a federal judge in Los Angeles on Aug. 28 represents a serious legal challenge to her longtime partner, Anthony Flores, who faces decades behind bars if convicted in the case. Flores pleaded not guilty after his arrest in January.
Details of Moore’s agreement with federal prosecutors remain under seal, but people familiar with the matter say her ultimate sentence in the case will largely be determined after her level of cooperation is evaluated. A sentencing hearing for Moore was set for Nov. 6.
“We are aware of Ms. Moore’s decision to plead guilty. Obviously this changes Mr. Flores’ legal situation in the case, and we are currently reviewing our options,” Flores’ attorney Ambrosio Rodriguez said.
Messages left with Moore’s attorney weren’t immediately returned. A spokesman for the U.S attorney’s office for the central district of California declined to comment.
The tragic end to Sawusch’s life began on June 23, 2017, when the brilliant, but troubled, ophthalmologist met Flores and Moore in a chance encounter at a vegan ice cream parlor in Venice Beach, Calif.
Flores, who went by Anton David, was a guru-esque figure with long, flowing hair and a beard. He worked as a hair stylist on film shoots. Moore, a pixie-like blond, was an actress and singer. The couple had met years earlier at a vegan potluck dinner and had fallen in love over what they described as a shared hippie spirit. Together, they ran a yoga center in Fresno, Calif., while going back-and-forth to L.A.
Their spiritual vibe cast a spell on Sawusch, who had just days earlier been released from a mental health facility, where he had been committed after suffering a breakdown, court filings said. Within a week, Flores and Moore had moved into Sawusch’s multi-million dollar beachfront home in Malibu, Calif., federal prosecutors said.
Over the next year, the pair gained increasingly firm control over the doctor’s life and finances, with Flores establishing power of attorney over Sawusch’s vast fortune while plying him with a steady diet of marijuana and LSD as he also underwent experimental ketamine treatments for his bipolar disorder that left him addled, investigators said.
Sawusch later died in May 2018 of a lethal mixture of ketamine and alcohol, according to a coroner’s report. The Los Angeles County medical examiner’s office ruled the death an accident.
In her guilty plea, Moore said she was not immediately aware of the scope of Flores’ alleged efforts to steal the doctor’s money, but admitted that following Sawusch’s death she participated in a later effort in probate court to keep the stolen money. Prosecutors have alleged that this was a separate fraud.
When Sawusch’s family sought to take control of his estate, they discovered that almost $3 million had been transferred from his accounts to ones controlled by Flores in the days before and after the doctor’s death, federal prosecutors said.
Sawusch’s family launched a civil lawsuit against the yogi couple and convinced a California state judge to issue a restraining order freezing Flores’ and Moores’ accounts, and order they return the money. Instead, federal prosecutors say, the two engaged in a second fraud by making false claims in probate court that Sawusch had verbally told them he would give them a third of his fortune plus his Malibu beach house.
The couple claimed that the doctor had given them the money in return for them taking care of him and as part of an effort to protect his fortune from his family, from whom he was estranged. The family said those claims were untrue and that the pair had kept Sawusch isolated from his friends and family.
Eventually, the couple returned around $2 million of the doctor’s money, but around $1 million remained unaccounted for, according to federal prosecutors.
Flores and Moore broke up during the pandemic after nearly a decade together. Moore moved to Mexico while Flores remained in Fresno, where he was arrested in late January. Moore was arrested at George Bush Intercontinental Airport in Houston upon her return to the U.S. around the same time. Both have been held without bail since.
Read the series:
Part 4: Money, mania and LSD: A Malibu doctor’s tragic final weeks under yoga gurus’ sway
[ad_2]
-
Stock market’s 2023 run may hit roadblock after August’s energy-led boost to U.S. CPI
[ad_1]
August was a hot month and it wasn’t just about the weather. Financial markets are now bracing for what’s likely to be a rebound in headline U.S. inflation next week, fueled by higher energy prices.
Barclays
BARC,
+0.18% ,
BofA Securities
BAC,
+0.62% ,
and TD Securities expect August’s consumer price index to reflect a 0.6% monthly rise, up from the 0.2% monthly readings seen in July and in June. In addition, they put the annual CPI inflation rate at 3.6% or 3.7% for last month, which compares with the 3.2% and 3% figures reported respectively for the prior two months.While Federal Reserve policy makers and analysts are loath to read too much into one report, August’s CPI has the potential to disrupt expectations that getting back to the central bank’s 2% target will be easy. Inflation has instead been nudging back up since June, with the likely rebound in August being regarded as primarily driven by the energy sector. What now remains to be seen is how much longer energy prices will remain elevated and whether they’ll begin to feed into narrower measures of inflation that matter most to the Fed.
Read: Stock-market investors just got reminded that the inflation fight isn’t over
“We’re going to see a spike in gas prices and other commodity prices driven by supply cuts, which means headline CPI goes back up,” said Alex Pelle, a U.S. economist for Mizuho Securities in New York. Via phone on Friday, Pelle said that prospects for a hotter August CPI report have already been factored in by financial markets, with all three major U.S. stock indexes heading for weekly losses.
How investors react to next Wednesday’s data will likely come down to whether the rebound in headline figures is seen as “a one-off” or something that gets repeated, and “what that means for the bottoming off of inflation,” Pelle said. “The equity market is going to have some trouble in the fourth quarter after a pretty impressive first half. Earnings expectations are still pretty high, but the macro-driven backdrop is challenging.”
Rising energy prices in August have already spilled into the month of September, with gasoline reaching the highest seasonal level in more than a decade this week. Voluntary production cuts by Saudi Arabia and Russia are a major contributing factor curtailing the supply of crude oil into year-end, and Goldman Sachs has warned that oil could climb above $100 a barrel.
In financial markets, there’s one group of traders which is telegraphing that the final mile of the road toward 2% inflation won’t be smooth.
Traders of derivatives-like instruments known as fixings anticipate that the next five CPI reports, including August’s, will produce annual headline inflation rates above 3%. Though policy makers care more about core readings that strip out volatile food and energy prices, they’re aware of how much headline figures can impact the public’s expectations.
Source: Bloomberg. The maturity column reflects the month and year of upcoming CPI reports. The forwards column reflects the year-ago period from which the year-over-year rate is based.
At BofA Securities, U.S. economist Stephen Juneau said August’s CPI won’t necessarily change his firm’s view that inflation is likely to move lower next year and fall back to the Fed’s target without the need for a recession. BofA Securities expects just one more Fed rate hike in November and will maintain that view if August’s CPI report comes in as he expects, Juneau said via phone.
After stripping out volatile food and energy items, BofA Securities, along with Barclays and TD Securities, expects August’s core CPI readings to come in at 0.2% month-over-month — matching June and July’s levels — and to fall to 4.3% on an annual basis.
Based on core measures, August’s report wouldn’t “change the narrative all that much: Everything points to a moderation in price growth,” Pelle said. “There’s a reason why food and energy are typically excluded,” and “we don’t want to put too much stock into one month.”
As of Friday afternoon, all three major U.S. stock indexes were headed higher, with the S&P 500 attempting to snap a three-day losing streak. Dow industrials
DJIA,
the S&P 500
SPX
and Nasdaq Composite
COMP
were respectively on track for weekly losses of 0.7%, 1.2%, and 1.7%. They’re still up for the year by more than 4%, 16% and 31%.Meanwhile, Treasury yields turned were little changed on Friday as fed funds futures traders priced in a 93% chance of no action by the Fed at its next policy meeting in less than two weeks, and a more-than-50% likelihood of the same for November and December — which would leave the Fed’s main policy rate target between 5.25%-5.5%.
“There is a risk that investors are too complacent about the inflation report,” said Brian Jacobsen, chief economist at Annex Wealth Management in Elm Grove, Wis. “We might not get to 2% inflation as quickly as many hope.”
[ad_2]
-
What’s missing for investors in new $60 billion corporate borrowing blitz
[ad_1]
Another big corporate borrowing blitz to kick off September has gotten under way, but this one isn’t looking like the rest.
Instead, the flurry of new bond issues shows how the Federal Reserve’s higher interest rate environment has begun to seep in a year later, by making major companies far more hesitant to tap credit for longer stretches.
“The…
[ad_2]
-
C3.ai, GameStop, UiPath, ChargePoint, Yext, BlackBerry, and More Stock Market Movers
[ad_1]
This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers visit http://www.djreprints.com.
https://www.barrons.com/articles/stock-market-movers-3fac9192
[ad_2]
-
As U.S. stock-market investors celebrate soft economic data, is bad news becoming bad news again on Wall Street?
[ad_1]
With second-quarter earnings season now largely behind the market, stock investors have been focusing on the latest economic data.
They have, for the most part, been reacting positively to “bad economic news,” or any data that may point to an economic slowdown.
It’s been almost nine months since the trend emerged, as softening economic data and lower inflation may mean the Federal Reserve can stop raising interest rates, said Chris Fasciano, portfolio manager at Commonwealth Financial Network.
Traders in federal-funds futures, as of Friday, are pricing in an over 90% chance that the Fed will hold its policy interest rate unchanged at its September meeting, and a roughly 35% likelihood that the U.S. central bank will raise interest rates by 25 basis points in November.
U.S. stocks closed the week higher ahead of the Labor Day holiday weekend, after data released Friday indicated a cooling labor market, though there was speculation that a “mirage” concerning the conclusion of summertime jobs may have factored. The U.S. created 187,000 new jobs in August, while the unemployment rate jumped to 3.8% from 3.5%.
The data support the narrative of a gradual slowdown in the labor market, but there are no signs that the economy is weakening significantly, according to Richard Flax, chief investment officer at Moneyfarm.
Also read: ‘Near perfect’ jobs report has traders expecting Fed to be done hiking rates this year
“The economic data has not been bad. It is just softening. If you saw really bad economic data, that wouldn’t be taken particularly positively,” Flax said.
Meanwhile, “what we’re experiencing is a rolling recession,” said Jamie Cox, managing partner at Harris Financial Group. “Recession activity actually goes from sector to sector, but it doesn’t translate into this big broad-based decline.”
However, if investors see a significant decline in the housing and labor markets, that could change the narrative, Cox noted.
To break the cycle in which bad economic news is good news for stocks, economic data have to be much worse than now, indicating more damage from high interest rates, noted Flax.
The trend may also reverse if there is a “meaningful downgrade” of corporate earnings expectations, said Flax. “I think you need to see it when macro data translates into weakened profitability.”
Investors should also be alert of the possibility that inflation may accelerate again, according to David Merrell, founder and managing member at TBH Advisors.
Data showed that the personal consumption expenditures price index rose a mild 0.2% in July, but the yearly inflation rate crept up to 3.3% from 3%, the government said Thursday.
“Inflation overall has been trending down nicely. But if it starts to kick back up, that could mean bad news becomes bad news now,” said Merrell.
If investors start to treat bad economic news as bad news for the stock market, it could put pressure on the 2023 stock-market rally, with the S&P 500
SPX
up 17.6% since the start of the year and the Nasdaq Composite
COMP
up 34%.In the past week, the Dow Jones Industrial Average
DJIA
climbed 1.4%, the S&P 500 advanced 2.5% and the Nasdaq gained 3.2%, according to Dow Jones Market Data. The S&P 500 posted its biggest weekly gain since the week ending June 16.This week, investors will be expecting data on the July U.S. international trade deficit and the ISM services sector activity for August on Tuesday, weekly initial jobless benefit claims data on Thursday, and the July wholesale inventories data on Friday. They will also tune into the speeches of a number of Fed speakers, looking for clues on whether the central bank is ready to be done with its rates hikes.
Economic calendar: On this week’s economic-data docket are the Fed Beige Book, factory orders, unemployment claims and more
[ad_2]
-
Wall Street is raising quarterly profit forecasts for the first time in two years, and executives are relaxing about recession prospects
[ad_1]
After nearly two years of concerns about a recession, growing optimism about the economy is starting to filter down into Wall Street’s expectations for individual companies’ quarterly results, with analysts growing more upbeat about corporate profit in the months ahead
While expectations for those quarterly results usually trend lower as earnings season arrives, analysts over the past two months have actually nudged their profit forecasts higher for the first time in two years, according to a FactSet report released Friday….
[ad_2]
-
Fed rate hikes can end now that U.S. job gains are the size of an economy like Australia’s, says BlackRock
[ad_1]
The Federal Reserve can probably end its inflation fight now that the U.S. labor market is cooling after generating a historic 26 million jobs in roughly the past three years, according to BlackRock’s Rick Rieder.
“In fact, 26 million jobs is like adding an economy the size of Australia or Taiwan (including every man, woman, and child),” said Rieder, BlackRock’s chief investment officer in global fixed income, in emailed commentary following Friday’s monthly jobs report for August.
The August nonfarm-payrolls report showed the U.S. adding 187,000 jobs, slightly more than had been forecast, but also pointing to an uptick in the unemployment rate to 3.8% from 3.5%.
“Remarkably, 22 million people were hired between May 2020 and April 2022, and 11 million were added to the workforce from June 2021 to May 2023, as the economy has opened up massive amounts of roles for fulfillment,” said Rieder.
He expects wage pressures to ease, he said, and thinks the “economy may now have fulfilled many of its needs,” which should make the Fed feel more confident in “the permanence of lower levels of inflation,” so that it can slow or stop its interest-rate rises by year-end.
Hiring in the U.S. has slowed, except in education and in healthcare services, when looking at private payrolls based on a three-month moving average.
Payrolls are slowing in many sectors, expect education and healthcare
Bureau of Labor Statistics, BlackRock
The Fed has already raised interest rates in July to a 5.25%-to-5.5% range, a 22-year high, with traders in federal-funds futures on Friday pricing in only about a 7% chance of a Fed rate hike in September and favoring no hike again at the central bank’s November policy meeting.
Rieder of BlackRock, one of the world’s largest asset managers with $2.7 trillion in assets under management, said he thinks a Fed pause or outright end to rate hikes could calm markets, even if the Fed, as BlackRock expects, keeps rates high for a time.
U.S. closed mostly higher Friday ahead of the Labor Day holiday weekend, with the Dow Jones Industrial Average
DJIA
up 0.3%, the S&P 500 index
SPX
up 0.2% and the Nasdaq Composite Index
COMP
0.02% lower, according to FactSet.The 10-year Treasury yield
BX:TMUBMUSD10Y
was at 4.173%, after hitting its highest level since 2007 in late August, adding to volatility that has wiped out earlier yearly gains in the roughly $25 trillion Treasury market.Read on: This hadn’t happened on the U.S. Treasury market in 250 years. Now it has.
[ad_2]
-
Nvidia may be the AI stock for now, but here are the picks for later, says Goldman Sachs
[ad_1]
Wall Street looks ready to build on Monday’s gains, the first in five sessions for the S&P 500
SPX
and Nasdaq Composite
COMP.
That’s as expectations build around Nvidia, which has had a lackluster August, to knock it out of the park with earnings on Wednesday.Investors have had months to focus on AI darlings such as Nvidia. In our call of the day, Goldman Sachs takes a look at stocks to trade after the big AI trade. A team led by strategists Ryan Hammond and David Kostin complied a basket of companies with the biggest potential long-term earnings per share boost from the impact of AI adoption on labor productivity.
Their analysis indicates that following widespread AI adoption, EPS for the median stock in that basket could be 72% higher than the baseline, versus 19% for the median Russell 1000 stock.
“We estimate the potential productivity-related EPS boost from increased revenues or increased margins, using a combination of company-level estimates of the share of the wage bill exposed to AI automation and the labor cost to revenue ratio,” said the Goldman team.
Since early 2023, when AI emerged as a theme for investors, they note their long-term basket of stocks has outperformed the equal-weight S&P 500 by just 6 percentage points, far less than near-term beneficiaries such as Nvidia
NVDA,
-0.49% ,
Microsoft
MSFT,
+0.94%
or Meta
META,
+0.51% .
Goldman Sachs Investment Research
“The estimated AI-driven earnings boost is likely to occur over the next few years, but should be reflected in stock valuations sooner. However, the eventual share price impact will depend on the ability of companies to use AI to enhance earnings,” said Goldman.
While unable to pin it exactly, Goldman expects AI adoption will start to a have a “meaningful macro impact” between 2025 and 2030, with regulatory constraints and data privacy concerns likely to slow widespread adoption. Nearly 75% of CEOs see AI take-up impacting companies or cutting labor needs within the next five years, even if they don’t right now.
Firms with the biggest workforce exposure to AI and larger and more innovative ones, will likely adopt generative AI earlier than others, say the strategists. They say to “expect valuation multiples for these companies to increase first as the adoption timeline crystallizes, even if actual adoption and the associated EPS boost is occur later.”
Goldman’s estimates on the potential earnings boost for those long-term AI beneficiaries consist of several factors: the share of each company’s wage bill exposed to AI automation, how much of a company’s wage bill is exposed to AI automation and labor cost as a share of revenue.
“For the typical Russell 1000 stock, 33% of the wage bill is potentially exposed to AI automation and labor costs currently represent 14% of total sales. The potential boost from higher sales would increase earnings by 11% and reduced labor costs would increase earnings by 26%, all else equal,” say the strategists.
Here is a taster of their long-term AI beneficiaries basket:
Goldman Sachs
And a few more:
Goldman Sachs
Read: U.S. stocks may bounce this week, but summer selloff is only halfway done, analysts warn
The markets
U.S. stocks
SPXCOMP
are trading mixed. The yield on the 10-year Treasury
BX:TMUBMUSD10Y
is steady at 4.33%.For more market updates plus actionable trade ideas for stocks, options and crypto, subscribe to MarketDiem by Investor’s Business Daily.
The buzz
Microsoft
MSFT,
+0.94%
has proposed a Ubisoft license to win U.K. regulatory approval for its Activision Blizzard
ATVI,
+1.09%
buyout. Activision shares and Ubisoft
UBI,
+9.93%
surged in Paris.On the heels of a 7% surge, EV-maker Tesla
TSLA,
+2.77%
is up 1.8%.Opinion: SoftBank’s Arm is going public, but it faces a rapidly growing threat
Lowe’s shares
LOW,
+3.34%
are up after the DIY retailer’s earnings topped expectations, though it notes lower discretionary demand.Among Monday’s late earnings news: Fabrinet
FN,
+27.25%
is up 18% after the high-tech manufacturing services company upbeat forecast, with new AI products helping drive results. Videoconferencing group Zoom Video Communications
ZM,
-4.15%
is up 4% after reporting an earnings jump and guidance.Read: Why Amazon is this analyst’s top internet stock pick
The world’s biggest miner BHP
BHP,
-0.98%
reported a 58% slump in annual profit amid tumbling commodity prices in part due to China’s economic troubles. U.S.-listed shares are up 4%.Arm Holdings filed its long-awaited IPO, which could be the year’s biggest. The chip designer aims to raise up to $10 billion with a valuation of $60 billion to $70 billion.
Existing home sales for July are due at 10 a.m., with several Fed speakers throughout the day: Richmond Fed President Tom Barkin at 7:30 a.m. and Chicago Fed President Austan Goolsbee and Fed. Gov. Michelle Bowman both at 2:30 p.m.
Best of the web
New video shows the day police raided 98-year old Kansas newspaper owner’s home.
Hitler’s birth house in Austria will be turned into a police station with a human rights training center.
The tickers
These were the top tickers on MarketWatch as of 6 a.m.:
Ticker Security name TSLA,
+2.77% Tesla NVDA,
-0.49% Nvidia AMC,
-17.31% AMC Entertainment NIO,
-1.87% Nio APE,
-11.32% AMC Entertainment Holdings preferred shares TTOO,
-6.13% T2 Biosystems GME,
-3.63% GameStop AAPL,
+0.63% Apple MULN,
-19.19% Mullen Automotive AMZN,
+0.15% Amazon.com The chart
Is tech dancing to the beat of its own drum? The Chart Report flagged this one from Scott Brown, founder of Brown Technical Insights, showing performance of the Technology Select Sector SPDR ETF
XLK
:
@scottcharts
“It’s only been a week, but consensus and conventional wisdom suggest higher yields are bad for Growth/Tech stocks. Meanwhile, Tech is acting like it never got the memo. It’s still too early to tell if Tech is trying to tell us something, but Scott points out that the sector is facing a crucial test this week at the March 2022 highs (around $163). $XLK is solidly above $163 after today’s bounce, but where it ends the week will likely hinge on $NVDA, as the company releases earnings on Wednesday evening,” says Patrick Dunuwila, editor and co-founder of The Chart Report.
Random reads
“We are the champions.” Spain erupted in celebrations to welcome its Women’s World Cup victors. And England’s Lionesses got a 1,000 soccer-ball tribute.
No, Tropical Storm Hilary didn’t flood Dodger Stadium.
These thirsty beer-drinking thieves are raccoons.
Need to Know starts early and is updated until the opening bell, but sign up here to get it delivered once to your email box. The emailed version will be sent out at about 7:30 a.m. Eastern.
Listen to the Best New Ideas in Money podcast with MarketWatch financial columnist James Rogers and economist Stephanie Kelton.
[ad_2]
-
Traders brace for explosion of volatility Friday as $2.2 trillion in stock options expire
[ad_1]
It’s that time again: monthly stock-market options for August are set to expire on Friday, potentially spurring more volatility in stocks after a bruising three-week run.
U.S. stock option contracts with a notional value of $2.2 trillion are set to expire, according to Rocky Fishman, founder of newly formed strategy firm Asym 500 and a former head of index derivatives strategy at Goldman Sachs Group. Notional value measures the market value of the stocks, indexes and exchange-traded funds controlled by the options, although the premiums paid by holders of the options are worth much less.
ASYM 500
Fishman noted that the size of option-market open interest expiring on Friday is about average for an off-month expiration.
Monthly options expire every month, but once a quarter — in March, June, September and December — an event known as “Triple Witching” takes place, causing notional value of expiring options to swell as quarterly and sometimes calendar-year options expire along with monthlies and weeklies.
Sessions where monthly options expire often see higher-than-normal volatility, and options-market analysts warned that the same could happen on Friday.
Charlie McElligott, a longtime derivatives strategist who publishes research on Nomura’s trading desk, warned clients that option dealers are “short gamma” heading into Friday’s expiration, increasing the potential for option dealers to exacerbate market volatility. McElligott illustrated this tendency in the chart below.
NOMURA
Why are dealers short gamma, and what does this mean? As stocks have stumbled, option traders have been buying put options and selling call options. As a result, dealers could be forced to hedge their positions by buying futures if stocks rise and their customers close out their short-call positions, or selling futures to hedge the risk of puts moving into the money.
This would serve to exaggerate the market’s move in either direction, driving a rising market higher and a falling market lower, McElligott said.
Dealers could hit “peak short gamma” if the S&P 500 falls to 4,320, sending a wave of puts into the money. If that happens, it’s possible dealers could slam stocks lower as they rush to avoid being on the hook for puts sold to customers. The S&P 500
SPX
finished Thursday at 4,370.36.
NOMURA
Gamma is used by options analysts to describe how quickly an option’s delta changes. Delta represents how sensitive the price of an option is to moves in the underlying asset. When options are about to expire, delta typically increases dramatically, since small moves that put it closer to being in or out of the money can have a dramatic impact on the option’s price.
Brent Kochuba, founder of SpotGamma, also cited risks tied to dealers’ short-gamma position in research shared with clients. SpotGamma shares data and analytics about the option market.
“We have been watching market gamma fall into negative gamma territory all month. Once it entered that range, price action became visibly choppier, as expected during these conditions,” he said in written commentary shared with MarketWatch and SpotGamma clients.
Option contracts give traders the right, but not the obligation, to buy or sell the underlying asset or currency. Often, options tied to stock-market indexes like the S&P 500 are settled in futures or cash. Options tied to exchange-traded funds like the SPDR S&P 500 ETF Trust
SPY,
which tracks the S&P 500 index, are settled in shares of the ETF.A put option allows the buyer the right, but not the obligation, to sell shares at an agreed-upon price known as the “strike price.” A call option, conversely, gives the holder the right to buy shares. Put options tend to appreciate when the underlying stock or index falls, while the opposite is true for calls.
U.S. stocks finished lower on Thursday, with the S&P 500 and Nasdaq Composite poised to record a third straight weekly decline, what would be the longest such streak for the S&P 500 since February.
The S&P 500 was off by 0.8% on Thursday, while the Nasdaq Composite
COMP
fell by 1.2% to 13,316.93. The Dow Jones Industrial Average
DJIA
shed 290.91 points, or 0.8%, to 34,474.83.In addition to monthly options expiring Friday, weekly options known as “zero days until expiration” or “0DTE” options could further complicate the market’s reaction. A veteran Goldman Sachs Group strategist warned earlier this week that 0DTE traders have been limiting upswings in stocks while piling on the pressure when markets sink.
[ad_2]
-
Treasury market returns are negative again. Why this time for bonds looks different than 2022.
[ad_1]
Yearly returns in the Treasury market slipped into negative territory this week as the market sold off on signs that the Federal Reserve may need to keep rates high for a while to contain inflation.
While negative returns might stir bad memories of last year’s shocking losses for bonds, stocks and nearly everything else, investors holding Treasury debt issued at 2023’s higher yields might want to sit back and take stock.
“This is the top thing we hear,” said Ryan Murphy, director of fixed-income business development at Capital Group, of evaporating returns in what’s been a tough August. “You saw the worst bond market in 40 years last year. Investors, they are tired, and feel beaten up.”
Murphy’s message to clients is this: “In bonds, you earn the money over time.” And those dwindling bond returns since January? “Approach it with a deep breath, and know this is going to work out in the end.”
Capital Group’s laid-back style and lack of “a star CEO” earned it recognition by Institutional Investor in March as “a new bond leader” without a king, in large part because it attracted $100 billion in funds over the past five years, or twice the total of its peers.
Recent volatility in interest rates again zapped yearly gains in many bond funds, as Fed officials continued to warn that a roaring labor market and robust spending could keep inflation from receding to the central bank’s 2% annual target.
The spike in long-term bond yields makes older, lower-yielding securities look comparatively less attractive. That’s reflected in the yearly return on a key Bloomberg U.S. government bond and note index, which turned negative for the first time since March (see chart), when several regional banks failed, stoking fears of a broader banking crisis.
Returns on U.S. government bonds turn negative for the year.
FactSet
However, a look back at August 2022 shows the 10-year Treasury yield starting around 2.6%, according to FactSet.
By contrast, Treasury bill yields
BX:TMUBMUSD06M
neared 5.5% on Thursday, or “north of anything we’ve seen over the past 15 years,” Murphy said. And for investors looking to lock in longer-term yields, the 10-year Treasury rate
BX:TMUBMUSD10Y
touched 4.307% on Thursday, its highest level since November 2007, according to Dow Jones Market Data.See: How BlackRock’s Rick Rieder is steering his active fixed-income ETF as bond funds struggle
“It’s becoming more expensive for the government and companies to finance debt because of the rapid climb in rates,” Murphy said of the drag of higher long-term interest rates.
On the flip side, it’s also been one of the best stretches for lenders and bond investors in terms of getting paid to act as creditors since the 2007-2008 global financial crisis, but without a U.S. recession — or at least not yet.
What’s also different from last year is that the Fed already jacked up interest rates to a 22-year high of 5.25%-5.5% in July, and has signaled it’s likely nearly finished with hikes in this cycle.
Record cash on the sidelines
Murphy pointed to a mountain of cash on the sidelines, in the form of assets in money-market funds, as another potential stabilizer for markets.
Assets in money-market funds hit a record $5.57 trillion for the week ending Wednesday, according to data from the Investment Company Institute.
“What’s really interesting is that there’s been two bursts of investors going into money-market funds. There was a big shift right at the onset of COVID, and another burst over the past 12-18 months since the beginning of the rate-hiking cycle,” Murphy said.
Looking back to 2008, he pointed to a similar buildup in money-market assets, and a roughly $1.1 trillion wall of cash subsequently leaving the sector, as financial assets began to recover in the wake of the financial crisis.
“What we did see, while not all of it, was a healthy amount went back into fixed-income in the following years,” Murphy said.
Stocks closed lower Thursday and were headed for another week of losses, with the Dow Jones Industrial Average
DJIA
2.3% lower on the week so far, the S&P 500 index
SPX
down 2.1% and the Nasdaq Composite Index off 2.4%, according to FactSet.[ad_2]
