Our bond/stock asset allocation model indicates that bonds are the asset class currently offering the most value, as interest rates have risen and stocks have recovered some of the ground they lost last year. But stocks are not yet seriously overvalued. Our model takes into account current levels and forecasts of short- and long-term government and corporate fixed-income yields, inflation, stock prices, GDP, and corporate earnings, among other factors. The model output is expressed in terms of standard deviations to the mean, or sigma. The mean reading from the model, going back to 1960, is a modest premium for stocks of 0.15 sigma, with a standard deviation of 1.0. The current valuation level is a 0.70 sigma premium for stocks, which is inside the normal range but up from the 0.50 sigma premium at the beginning of the year. Other measures also show reasonable valuations for stocks. The current forward P/E ratio for the S&P 500 is 17, which is within the normal range of 10-21 and down from 22 a year ago. And the current S&P 500 dividend yield of 1.6%, while below the historical average of 2.9%, is up from an ultralow 1.2% as recently as 2021. Based on the current valuation levels, as well as our interest rate and earnings forecasts, we have called for a recovery in stock prices in 2023 from bear-market lows and are now boosting our year-end S&P 500 target to 4,600. Our current recommended Asset Allocation Model for Moderate accounts is 67% Growth assets, including 65% equities and 2% alternatives; and 33% Fixed Income, with a focus on opportunistic segments of the bond market.
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U.S. stocks closed lower Monday, after Russia on the weekend was rocked by a brief revolt from the Wagner mercenary force. The Dow Jones Industrial Average DJIA, -0.04%
fell about 11 points, or less than 0.1%, ending near 33,715, according to preliminary FactSet data, giving up earlier gains in the final moments of trade. The S&P 500 index SPX, -0.45%
fell 0.4%, while the Nasdaq Composite Index COMP, -1.16%
closed down 1.2%. Stocks have been struggling to extend a recent rally driven by a handful of technology stocks that earlier in June lifted major indexes to their highest levels in more than a year. Investors and oil markets were on edge Monday after a brief mutiny in Russia over the weekend raised concerns about potential disruptions to global oil supplies. U.S. crude prices edged higher Monday, with West Texas Intermediate oil for August CL00, +0.53%
A nascent category of mental health treatments is getting a major cash infusion.
Blake Mycoskie, founder of the canvas-footwear phenomenon TOMS Shoes, has committed to giving $100 million to support psychedelic research and access, Mycoskie told MarketWatch in an exclusive interview. The money will help fund academic institutions investigating psychedelics’ potential to treat anxiety, depression, post-traumatic stress disorder and other mental-health issues, as well as nonprofits helping to connect patients in need with psychedelic treatments.
Traditional psychedelics include hallucinogens like LSD and psilocybin, or “magic” mushrooms–recently legalized in Oregon and Colorado. Other drugs that can alter mood and perception–such as ketamine and MDMA, also known as ecstasy–aren’t classical psychedelics but are broadly included in the research and policy discussions generating a surge of interest in this class of treatments. The U.S. Food and Drug Administration, for example, has granted psilocybin and MDMA “breakthrough therapy” status, a designation designed to expedite development and review of drugs for serious conditions, and could approve MDMA for treatment of PTSD as soon as next year.
Given the rapid developments in the field, ”we really need to get this right, and we really need to have these foundations and nonprofits funded properly,” therapists trained, and clinics open and running smoothly, Mycoskie said. “I felt a real sense of urgency,” he said, and asked his wealth manager, “what’s the most that I can give?”
The $100 million answer to that question amounts to about a quarter of Mycoskie’s net worth and marks a major milestone in psychedelics’ delicate image transformation. Shedding some of their dangerous-party-drug reputation, psychedelics are gaining attention from top pharmacologists, the scientific community, biotech companies and investors who see them as a critical part of the solution to America’s mental health crisis.
Cracked open
Mycoskie, 46, said his interest in psychedelics dates back to 2017, when a friend returning from a trip to Central America described his incredible experience with ayahuasca, a plant-based psychedelic brewed into a tea. As an entrepreneur under intense pressure to perform, Mycoskie said, he decided to try it for himself. The experience “cracked me open, and it connected me more to my faith in God, made me feel that we were all connected and everything was fine and perfect,” he said. “I came back just feeling like, wow, that was more powerful than any therapy I’d ever done.” He later tried MDMA-assisted therapy, he said, which also helped him process issues that traditional talk therapy had left unresolved.
Realizing how many people could benefit from similar treatments, Mycoskie started giving money to academic groups and the Multidisciplinary Association for Psychedelic Studies, or MAPS, a nonprofit organization. He also got involved in last year’s Colorado ballot initiative, which legalized psilocybin and several other psychedelic substances, including ibogaine, which has shown potential to treat substance-use disorders. Mycoskie has already given about $10 million to psychedelic research and access, he said, and plans to give about $5 million annually for 18 more years.
Mycoskie was a bit squeamish at first, he acknowledges, about publicly backing research on drugs that are largely illegal. “Am I going to get held up at TSA every time I go through the airport?” he remembers thinking. The U.S. Drug Enforcement Administration categorizes LSD and MDMA alongside heroin as “schedule one” drugs, defined as “drugs with no currently accepted medical use and a high potential for abuse.” But with growing public awareness and acceptance of the drugs’ potential as mental-health treatments, he said, he felt emboldened to make a big public commitment, and “the research has caught up,” he said. “It’s important that people like myself put their name out there and their money out there to show that this really is a path forward,” he said.
Mycoskie’s $100 million commitment “is the biggest that we’ve ever seen in the psychedelics space,” said Joe Green, president of the Psychedelic Science Funders Collaborative, a nonprofit supporting philanthropy in the field, and a MAPS board member. Now that research has made great strides to support use of the medicines as mental-health treatments, that money can help ensure that “these actually come to the world in a safe and beneficial way,” Green said. With certain treatments legalized in Oregon and Colorado, for example, “the system requires licensed guides, facilitators, licensed service centers,” he said. “It’s not like cannabis medical–you won’t be able to take the mushrooms outside the service center.”
Psychedelic therapeutics market could be worth more than $8.3 billion by 2028
Mycoskie plans to publicize his pledge at the Multidisciplinary Association for Psychedelic Studies’ psychedelic science conference–billed as “the largest psychedelic conference in history”–this week in Denver. On the agenda: Sessions ranging from state policy and regulatory considerations to clinical trials of psilocybin- and MDMA-assisted therapy and “sex and psychedelics: weaving altered states for healing and pleasure.”
The news comes as lawmakers on both sides of the aisle are pushing for new funding for research into the use of psychedelics to treat PTSD in military service members as part of the fiscal year 2024 National Defense Authorization Act, which the House Armed Services Committee will consider Wednesday.
Already, public companies like Atai Life Sciences ATAI, -6.91%,
Compass Pathways CMPS, -3.37%
and Cybin CYBN, +6.81%
are developing therapies based on psychedelic substances. The psychedelic therapeutics market could be worth more than $8.3 billion by 2028, according to InsightAce Analytic. Even the federal government is throwing money at this niche, funding efforts to develop psychedelic mental-health treatments without the hallucinogenic side effects.
More than one in five U.S. adults live with a mental illness, according to the National Institute of Mental Health, and less than half of the roughly 58 million adults with any mental illness are receiving treatment. Suicide rates, which have been on a long upward trajectory, declined briefly between 2018 and 2020 before returning to peak levels in 2021, according to the Centers for Disease Control and Prevention. Nine out of 10 U.S. adults believe the country is suffering a mental health crisis, according to a survey last year by CNN and KFF, a health policy nonprofit. And commonly prescribed antidepressants, such as selective serotonin reuptake inhibitors (SSRIs) don’t work well for many patients.
Nushama, a New York City wellness center offering ketamine-based therapy.
Courtesy of Nushama and Costas Picadas
Mental illness “is truly an epidemic, and we are losing the fight,” said Dylan Beynon, CEO and founder of Mindbloom, which offers a telehealth ketamine treatment program. While there are some existing solutions that are helping to bend the curve, he said, more research and educational support for providers and patients is needed, he said.
Indeed, some substantial hurdles still separate psychedelic mental-health treatments from many of the patients they might benefit, including a lack of insurance coverage for the currently legal treatments and debate over how to administer them safely. In the case of ketamine, for example, which is FDA-approved as an anesthetic and used off-label as a mental-health treatment, some providers favor in-person guided sessions while others, like Beynon, advocate for telehealth prescribing–a model that boomed during the pandemic.
Some experts have lately warned that the practice of psychedelic medicine may be getting ahead of the science. Given the growing public and commercial interest, “there is the risk that use of psychedelics for purported clinical goals may outpace evidence-based research and regulatory approval,” the American Psychiatric Association said last year in a position statement on psychedelic and “empathogenic” agents–a category that includes MDMA.
Mycoskie has also made some investments in the psychedelics space, although he said profits aren’t his motivation. He has invested in Mind Medicine Inc. MNMD, -0.50%,
which says it is developing “psychedelic inspired medicines” that aim to treat the underlying causes of distress in the brain. And Mycoskie helped fund a public benefit corporation linked with MAPS, which is taking MDMA through the FDA approval process–an investment that will pay dividends when the treatment is commercialized, he said.
Providers currently offering ketamine treatments say they’re eager to expand into MDMA and other therapies in the category as soon as they’re legal. Mindbloom, for example, currently offers a ketamine treatment program that’s available through telehealth in several dozen states and aims to start offering MDMA-assisted therapy late next year after FDA approval is finalized, Beynon said. Psilocybin-assisted therapy could come a couple of years after that, he said.
Nushama, a New York City psychedelic wellness center that offers ketamine-based therapy, delivered through in-person IV infusions, also hopes to expand into MDMA when it’s approved, said co-founder Jay Godfrey.
Treatment without the trip
Still on the horizon: New treatments that could produce psychedelic medicines’ mental-health benefits without the trip. University of North Carolina School of Medicine pharmacology professor Dr. Bryan Roth is leading an effort to create new medications for depression, anxiety and substance abuse that work similarly to psychedelics but without the hallucinogenic, disorienting side effects. His effort is backed by a $27-million grant from the Defense Advanced Research Projects Agency. Such treatments, Roth said, could help the many patients for whom such psychedelic effects are unappealing or ill-advised–such as military service members. “You would never want to give psilocybin or ketamine to somebody who has a gun,” Roth said.
Having worked with Vietnam veterans suffering from PTSD while training as a psychiatrist earlier in his career, Roth said, he’s keenly aware of the need for safe and effective treatments. “There was nothing we could give them for their symptoms,” he said. “The most we could do was give them medications to stop their ability to have dreams, so they wouldn’t have nightmares. That was basically it.”
“Undoing 52 years of propaganda is a heavy lift,” said Nushama co-founder Jay Godfrey.
Costas Picadas
Roth’s team has already developed compounds that have shown antidepressant effects without psychedelic side effects in mice, he said. The team is now working to find a clinical candidate suitable for testing in humans, he said.
Treatments that can help “break bad emotional or psychological patterns without scary, high-friction psychedelic experiences would be a great thing for patients, providers and the healthcare system,” said Mindbloom’s Beynon.
Much more remains to be done to reduce the stigma associated with psychedelics, experts say. It has been 52 years since President Richard Nixon declared drug abuse “public enemy number one,” and billions of dollars have been spent since then telling people that “these medicines are dangerous, that they’re addictive, and that they’ll fry your brains,” Godfrey said. “Undoing 52 years of propaganda is a heavy lift, but one thing I’m optimistic about is that the outcomes are starting to speak for themselves.”
Even with U.S. stocks in a new bull market, investors aren’t showing many signs of backing away from money-market funds and other cash-like investments offering yields of about 5%, the highest in about 15 years.
Money-market funds hit a record of $5.9 trillion in assets as of Tuesday, signaling a continuing drain out of bank deposits into higher-yielding “cash-like” investments, according to Peter Crane, president and publisher of Crane Data.
According to MarketAxess CEO Chris Concannon, there are signs Treasury ETFs are on the cusp of substantial inflows.
“We’re about to see what I’d call [a] bond renaissance,” the electronic-trading platform CEO told CNBC’s “ETF Edge” this week. “The Fed is still taking action, so I would expect bond yields overall to remain relatively high and attractive.”
In late March, the Federal Reserve raised rates by a quarter point — its ninth hike since March 2022. Next Wednesday, Wall Street will get the Fed minutes from the last policy meeting and more clarity on what may come next.
VettaFi vice chairman Tom Lydon sees a similar pattern.
“They’re starting to move back not just into Treasurys, but into corporates and high yields with the idea that we may be able to lock in longer duration and longer payment for those higher rates, [and] with the idea that we’re not going to see higher rates a year from now,” he said.
VettaFi’s latest data finds international and U.S. fixed income exchange-traded funds saw about $45 billion in inflows since the beginning of the year. Meanwhile, it found corporate bond ETFs saw $6 billion in outflows in the first quarter
Lydon speculates the renewed interest is caused by investors losing faith in traditional 60/40 investment portfolios.
“We’ve seen a lot of advisors take a little bit off the table, both in the equity side and the fixed income side,” he said. “So, safety is key until we start to see confidence that the Fed really has some handle on inflation and [there’s] stability in the marketplace.”
Opinions expressed by Entrepreneur contributors are their own.
Explainer videos are one of the most potent tools that startups can use to secure seed funding.
What? Yes. Explainer videos have emerged from just being marketing material. Do you know that most video game, online card game and board game companies use explainer videos dedicatedly to raise funds?
Why?
Explainer videos have the magic to deliver the in-person game-playing experience to the investors(as well as customers), where they can visually understand the addictive factor and the ‘can-go-viral’ side of the games.
Ok. You may have already seen those emotional explainer videos where NGOs explain their charitable side, their entire workflow and the impact it’s driving. Those videos wow everyone, especially the donors. Similarly, your potential investors just want to understand some of the simple attributes of your product or service.
Is there a real demand for your product? Is it market fit? Can it turn more heads gradually? Is there an X-factor that sets your product apart from its competition?
And, the best way to explain all these? A well-designed explainer video, hands down.
Statistically, around 59% of senior executives, veterans and tech pundits who make the major decisions prefer explainer videos to any other form of content that explains a business model.
That’s where explainer videos come into the seed funding scenario
Firstly, explainer videos have become an essential tool for startups seeking seed funding. They provide a visually appealing and easy-to-understand overview of a company’s product or service and allow investors to grasp the business’s potential quickly.
Secondly, the use of animation, graphics, and narration in explainer videos makes complex ideas simple and appealing, which can help startups stand out from the competition and effectively communicate their unique value proposition.
Furthermore, explainer videos can demonstrate a company’s ability to effectively market its product and show its understanding of its target audience. In today’s fast-paced and highly competitive startup ecosystem, explainer videos are a must-have tool for startups looking to secure seed funding.
Explainer videos are now a vital part of entrepreneurs’ early funding procedures. They support the clear, concise and aesthetically appealing communication of the concept underlying the good or service.
The videos act as a primer for potential investors, helping them to comprehend the value proposition and growth potential immediately. Additionally, they allow entrepreneurs to distinguish themselves from the competition and gain investors’ trust by showcasing their creativity and storytelling abilities.
Additionally, explainer videos promote a startup’s passion and energy, which makes it simpler to get seed funding and draw in potential investors.
So, how does a strong explainer video helps you to get seed funding in the cutthroat startup environment of today? This is how:
Improve understanding of the business concept.
Showcase your product’s USP.
Demonstrate market potential.
Build credibility and trust.
Harness a Competitive Advantage.
How to create effective explainer videos for funding
Focus on these fundamental factors:
Clear messaging: The video should clearly communicate the problem that the startup is trying to solve and how their product or service solves it.
Simple visuals: The visuals should be simple, visually appealing and easy to understand, even for those with little prior knowledge of the industry.
Engaging narration: The narration should be engaging, clear, concise and effectively convey the video’s key messages.
Highlighting Unique Value Proposition (UVP): The video should highlight the startups’ unique value proposition and explain why their product or service differs from what’s already available in the market.
Demonstrating proof of concept: The video should demonstrate the proof of concept, showing how the product or service works and its potential impact.
Showcasing the team: The video should showcase the startup’s team and their expertise, highlighting their ability to execute their business plan.
Short length: The video should be short, ideally under 2 minutes, and straight to the point to hold the viewer’s attention.
Professional quality: The video should have good lighting, sound, and animation to look polished and professional.
Real-world examples of startups that used explainer videos
Dropbox: The popular file-sharing and storage company used an animated explainer video to effectively communicate their business idea and secure seed funding from investors. The video, which has been viewed over 20 million times, provided a simple and engaging way for Dropbox to demonstrate the value of its product.
Airbnb: Airbnb used an explainer video to help secure seed funding for their business. The video highlighted traditional travel accommodations’ pain points and how Airbnb solved these problems with its unique platform. The video effectively communicated the company’s value proposition and helped secure seed funding from investors.
Square: Square, the mobile payment company, used an animated explainer video to effectively communicate their business idea and secure seed funding from investors. The video provided a simple and engaging way for Square to demonstrate the value of its product and helped secure seed funding from investors.
Slack: Slack, a team communication platform, used explainer videos to demonstrate its product’s benefits and attract potential investors. The videos effectively communicated Slack’s unique value proposition and helped simplify the complex concept of workplace communication and collaboration.
Last words
Lastly, explainer videos are clearly essential for startups seeking seed funding. They humanize your branding and enable you to foster the human-like communication effect that influences your potential investors.
They also allow startups to showcase their creativity, storytelling skills and vision for the future. By incorporating an explainer video into the seed funding process, startups can greatly increase their chances of securing funding and setting the stage for long-term success.
These are tricky times in the stock market, so it pays to look to the best stock-fund managers for guidance on how to behave now. Veteran value investor Bill Nygren belongs in this camp, because the Oakmark Fund OAKMX he co-manages consistently and substantially outperforms its peers.
That isn’t easy, considering how many fund managers fail to do so. Nygren’s fund beats its Morningstar large-cap value index and category by more than four percentage points annualized over the past three years. It also outperforms at five and…
Many people are good at saving up money for retirement. They manage expenses and build up their nest eggs steadily. But when it comes time to begin drawing income from an investment portfolio, they might feel overwhelmed with so many choices.
Some income-seeking investors might want to dig deeply into individual bonds or dividend stocks. But others will want to keep things simple. One of the easiest ways to begin switching to an income focus is to use exchange-traded funds. Below are examples of income-oriented exchange-traded funds (ETFs) with related definitions further down.
First, the inverse relationship
Before looking at income-producing ETFs, there is one concept we will have to get out of the way — the relationship between interest rates and bond prices.
Stocks represent ownership units in companies. Bonds are debt instruments. A government, company or other entity borrows money from investors and issues bonds that mature on a certain date, when the issuer redeems them for the face amount. Most bonds issued in the U.S. have fixed interest rates and pay interest every six months.
Investors can sell their bonds to other investors at any time. But if interest rates in the market have changed, the market value of the bonds will move in the opposite direction. Last year, when interest rates rose, the value of bonds declined, so that their yields would match the interest rates of newly issued bonds of the same credit quality.
It was difficult to watch bond values decline last year, but investors who didn’t sell their bonds continued to receive their interest. The same could be said for stocks. The benchmark S&P 500 SPX, -0.20%
fell 19.4% during 2022, with 72% of its stocks declining. But few companies cut dividends, just as few companies defaulted on their bond payments.
One retired couple that I know saw their income-oriented brokerage account value decline by about 20% last year, but their investment income increased — not only did the dividend income continue to flow, they were able to invest a bit more because their income exceeded their expenses. They “bought more income.”
The longer the maturity of a bond, the greater its price volatility. Depending on the economic environment, you might find that a shorter-term bond portfolio offers a “sweet spot” factoring in price volatility and income.
And here’s a silver lining — if you are thinking of switching your portfolio to an income orientation now, the decline in bond prices means yields are much more attractive than they were a year ago. The same can be said for many stocks’ dividend yields.
Downside protection
What lies ahead for interest rates? With the Federal Reserve continuing its efforts to fight inflation, interest rates may continue to rise through 2023. This can put more pressure on bond and stock prices.
Ken Roberts, an investment adviser with Four Star Wealth Management in Reno, Nev., emphasizes the “downside protection” provided by dividend income in his discussions with clients.
“Diversification is the best risk-management tool there is,” he said during an interview. He also advised novice investors — even those seeking income rather than growth — to consider total returns, which combine the income and price appreciation over the long term.
An ETF that holds bonds is designed to provide income in a steady stream. Some pay dividends quarterly and some pay monthly. An ETF that holds dividend-paying stocks is also an income vehicle; it may pay dividends that are lower than bond-fund payouts and it will also take greater risk of stock-market price fluctuation. But investors taking this approach are hoping for higher total returns over the long term as the stock market rises.
“With an ETF, your funds are diversified. And when the market goes through periods of volatility, you continue to enjoy the income, even if your principal balance declines temporarily,” Roberts said.
If you sell your investments into a declining market, you know you will lose money — that is, you will sell for less than your investments were worth previously. If you are enjoying a stream of income from your portfolio, it might be easier for you to wait through a down market. If we look back over the past 20 calendar years — arbitrary periods — the S&P 500 increased during 15 of those years. But its average annual price increase was 9.1% and its average annual total return, with dividends reinvested, was 9.8%, according to FactSet.
In any given year, there can be tremendous price swings. For example, during 2020, the early phase of the Covid-19 pandemic pushed the S&P 500 down 31% through March 23, but the index ended the year with a 16% gain.
Two ETFs with broad approaches to dividend stocks
Invesco Head of Factor and Core Strategies Nick Kalivas believes investors should “explore higher-yielding stocks as a way to generate income and hedge against inflation.”
He cautioned during an interview that selecting a stock based only on a high dividend yield could place an investor in “a dividend trap.” That is, a high yield might indicate that professional investors in the stock market believe a company might be forced to cut its dividend. The stock price has probably already declined, to send the dividend yield down further. And if the company cuts the dividend, the shares will probably fall even further.
Here are two ways Invesco filters broad groups of stocks to those with higher yields and some degree of safety:
The Invesco S&P 500 High Dividend Low Volatility ETF SPHD, -0.33%
holds shares of 50 companies with high dividend yields that have also shown low price volatility over the previous 12 months. The portfolio is weighted toward the highest-yielding stocks that meet the criteria, with limits on exposure to individual stocks or sectors. It is reconstituted twice a year in January and July. Its 30-day SEC yield is 4.92%.
The Invesco High Yield Equity Dividend Achievers ETF PEY, -0.70%
follows a different screening approach for quality. It begins with the components of the Nasdaq Composite Index COMP, +1.39%,
then narrows the list to 50 companies that have raised dividend payouts for at least 10 consecutive years, whose stocks have the highest dividend yields. It excludes real-estate investment trusts and is weighted toward higher-yielding stocks meeting the criteria. Its 30-day yield is 4.08%.
The 30-day yields give you an idea of how much income to expect. Both of these ETFs pay monthly. Now see how they performed in 2022, compared with the S&P 500 and the Nasdaq, all with dividends reinvested:
Both ETFs had positive returns during 2022, when rising interest rates pressured the broad indexes.
8 more ETFs for income (and some for growth too)
A mutual fund is a pooling of many investors’ money to pursue a particular goal or set of goals. You can buy or sell shares of most mutual funds once a day, at the market close. An ETF can be bought or sold at any time during stock-market trading hours. ETFs can have lower expenses than mutual funds, especially ETFs that are passively managed to track indexes.
You should learn about the expenses before making a purchase. If you are working with an investment adviser, ask about fees — depending on the relationship between the adviser and a fund manager, you might get a discount on combined fees. You should also discuss volatility risk with your adviser, to establish a comfort level and to try to match your income investment choices to your risk tolerance.
Here are eight more ETFs designed to provide income or a combination of income and growth:
Company
Ticker
30-day SEC yield
Concentration
2022 total return
iShares iBoxx $ Investment Grade Corporate Bond ETF
The following definitions can help you gain a better understanding of how the ETFs listed above work:
30-day SEC yield — A standardized calculation that factors in a fund’s income and expenses. For most funds, this yield gives a good indication of how much income a new investor can be expected to receive on an annualized basis. But the 30-day yields don’t always tell the whole story. For example, a covered-call ETF with a low 30-day yield may be making regular dividend distributions (quarterly or monthly) that are considerably higher, since the 30-day yield can exclude covered-call option income. See the issuer’s website for more information about any ETF that may be of interest.
Taxable-equivalent yield — A taxable yield that would compare with interest earned from municipal bonds that are exempt from federal income taxes. Leaving state or local income taxes aside, you can calculate the taxable-equivalent yield by dividing your tax exempt yield by 1 less your highest graduated federal income tax bracket.
Bond ratings — Grades for credit risk, as determined by ratings agencies. Bonds are generally considered Investment-grade if they are rated BBB- or higher by Standard & Poor’s and Fitch, and Baa3 or higher by Moody’s. Fidelity breaks down the credit agencies’ ratings hierarchy. Bonds with below-investment-grade ratings have higher risk of default and higher interest rates than investment-grade bonds. They are known as high-yield or “junk” bonds.
Call option — A contract that allows an investor to buy a security at a particular price (called the strike price) until the option expires. A put option is the opposite, allowing the purchaser to sell a security at a specified price until the option expires.
Covered call option — A call option an investor writes when they already own a security. The strategy is used by stock investors to increase income and provide some downside protection.
Preferred stock — A stock issued with a stated dividend yield. This type of stock has preference in the event a company is liquidated. Unlike common shareholders, preferred shareholders don’t have voting rights.
These articles dig deeper into the types of securities mentioned above and related definitions:
Investors withdrew billions of dollars from equity funds at a record pace in the days after the Federal Reserve, the Bank of England and European Central bank raised interest rates in mid-December and reiterated their commitment to lowering inflation, fueling fears of an economic downturn.
Stock funds recorded the biggest ever weekly outflows of $41.9 billion in the week to December 21, with $27.8 billion of which being withdrawn from exchanged traded funds and $14.1 billion from mutual funds, according to analysts at BofA Global Research, citing EPFR Global data in a weekly note.
BofA analysts led by Michael Hartnett, chief investment strategist, attributed the sell-off to “tax loss harvesting,” a strategy that includes deliberately selling an investment at a loss in order to use that loss to offset taxes owed on investment gains.
Meanwhile, passive equity funds saw total outflows of $27.8 billion in the week to Wednesday, while U.S. value funds recorded a weekly outflow of $17.2 billion (see chart below). Both were the biggest sell-off on record.
SOURCE: BOFA GLOBAL INVESTMENT STRATEGY, BLOOMBERG
The BofA’s Bull & Bear Indicator dipped to 3.0 from 3.1 last week, driven by the first bond fund outflows in three weeks. Bond funds recorded net outflows of $10 billion.
For the year however, BofA said equity funds saw total inflows of $166.5 billion. In contrast, bond funds recorded outflows of $257.1 billion.
Not long after the decision, central banks in Europe followed the Federal Reserve in slowing the pace of interest rate increases. Both the European Central Bank and Bank of England hiked their key lending rates by 50 basis points and policy makers at the ECB emphasized that market participants should prepare for a series of rate increases to come.
Earlier this week also, the Bank of Japan (BoJ) stunned markets with an unexpected change to its controversial yield curve control policy. The BoJ, an outlier among major central banks for having maintained rates at the zero lower bound, doubled the cap on the country’s 10-year bond yield TMBMKJP-10Y, 0.383%
from 0.25% to 0.5%, whacking equities in the region and triggering big swings in the U.S. stock market.
Strategists at BofA said they are bullish on commodities instead of credit, and preferred “rest of the world” stocks over U.S. stocks, while favoring small-cap over large-cap.
Sector wise, they preferred value over growth stocks, and industrials and banks over technology and private equity.
During the wildest year for global markets since 2008, individual investors have been doubling down on stocks. Many professionals, on the other hand, appear to have bailed out.
U.S. equity mutual and exchange-traded funds, which are popular among individual investors, have attracted more than $100 billion in net inflows this year, one of the highest amounts on record in EPFR data going back to 2000.
The Biden administration on Tuesday issued a final rule that makes it easier for employers to consider climate change and other so-called environment, social and governance factors when picking investment funds for their 401(k) plans.
The U.S. Department of Labor rule, which takes effect in 60 days, undoes regulations put in place during the Trump administration.
ESG investing is also known as sustainable or impact investing. There are many flavors of ESG funds; they may, for example, funnel investor money into wind and solar companies or those with diverse board members, or steer funds away from firms involved in fossil fuels.
ESG funds have grown more popular in recent years. Investors poured $69.2 billion into them in 2021, an annual record, according to Morningstar. Uptake in 401(k) plans has been slow, however.
The Inflation Reduction Act is expected to further bolster the popularity of ESG investing. The law, which President Joe Biden signed in August, represents the largest federal investment to fight climate change in U.S. history.
Employers have a legal duty to thoroughly assess funds’ risk and return when picking 401(k) plan investments; for example, they can’t subordinate the financial interests of workers in favor of a cause like climate change.
The new ESG rules don’t change these duties.
However, they clarify that businesses can “include the economic effects of climate change and other ESG considerations” when making investment choices — something Lisa Gomez, assistant secretary of labor for the Employee Benefits Security Administration, called “common sense.”
“While climate change is a critical issue, that’s not [just] what this rule is about,” Gomez said.
Employers also don’t violate their legal duty by taking workers’ ESG interests into account when crafting a lineup of 401(k) investment funds, according to the new rule; that may lead to more engagement among workers and therefore more retirement security, it said.
The Biden administration’s action Tuesday follows a March 2021 directive that it wouldn’t enforce the Trump-era rules. The administration then proposed a revision to those rules in October 2021; Tuesday’s action updates that proposal according to comments received from the public.
The new Biden regulations scrap certain elements of the Trump-era rules that Labor Department officials said stymied employers from using ESG funds.
For example, the prior rules didn’t explicitly mention ESG, and they required employers to choose investments based only on “pecuniary” factors — a term that essentially disallowed employers from selecting funds with any sort of “moral” component, Labor Department officials said.
The new Biden administration rules erase that requirement.
“Whether E, S or G, … direct or indirect, big or small, the [ESG] factor also furthers a moral component,” said a senior Labor Department official, who spoke on condition of background only. “ESG has an inherent duality of purpose.”
The new rules also erase a restriction that disallowed employers from using an ESG fund as a default option for workers automatically enrolled in their 401(k) plans — an increasingly popular avenue to boost retirement security. In legal parlance, these funds are known as a “qualified defined investment alternative,” or QDIA.
You probably already know that because of market-capitalization weighting, a broad index such as the S&P 500 SPX, -0.67%
can be concentrated in a handful of stocks. Index funds are popular for good reasons — they tend to have low expenses and it is difficult for active managers to outperform them over the long term.
For example, look at the SPDR S&P 500 ETF Trust SPY, -0.71%,
which tracks the S&P 500 by holding all of its stocks by the same weighting as the index. Five stocks — Apple Inc. AAPL, +0.08%,
Microsoft Corp. MSFT, -0.85%,
Amazon.com Inc. AMZN, -1.11%,
Alphabet Inc. GOOG, -1.08%
But there are other considerations when it comes to diversification — namely, factors. During an interview, Scott Weber of Vaughan Nelson Investment Management in Houston explained how groups of stock and commodities can move together, adding to a lack of diversification in a typical portfolio or index fund.
Weber co-manages the $293 million Natixis Vaughan Nelson Select Fund VNSAX, -0.96%,
which carries a five-star rating (the highest) from investment-researcher Morningstar, and has outperformed its benchmark, the S&P 500.
Vaughan Nelson is a Houston-based affiliate of Natixis Investment Managers, with about $13 billion in assets under management, including $5 billion managed under the same strategy as the fund, including the Natixis Vaughan Nelson Select ETF VNSE, -0.87%.
The ETF was established in Sept, 2020, so does not yet have a Morningstar rating.
Factoring-in the factors
Weber explained how he and colleagues incorporate 35 factors into their portfolio selection process. For example, a fund might hold shares of real-estate investment trusts (REITs), financial companies and energy producers. These companies are in different sectors, as defined by Standard & Poor’s. Yet their performance may be correlated.
Weber pointed out that REITs, for example, were broken out of the financial sector to become their own sector in 2016. “Did that make REIT’s more sensitive to interest rates? The answer is no,” he said. “The S&P sector buckets are somewhat better than arbitrary, but they are not perfect.”
Of course 2022 is something of an exception, with so many assets dropping in price at the same time. But over the long term, factor analysis can identify correlations and lead money managers to limit their investments in companies, sectors or industries whose prices tend to move together. This style has helped the Natixis Vaughan Nelson Select Fund outperform against its benchmark, Weber said.
Getting back to the five largest components of the S&P 500, they are all tech-oriented, even though only two, Apple and Microsoft, are in the information technology sector, while Alphabet is in the communications sector and Tesla is in the consumer discretionary sector. “Regardless of the sectors,” they tend to move together, Weber said.
Exposure to commodity prices, timing of revenue streams through economic cycles (which also incorporates currency exposure), inflation and many other items are additional factors that Weber and his colleagues incorporate into their broad allocation strategy and individual stock selections.
For example, you might ordinarily expect inflation, real estate and gold to move together, Weber said. But as we are seeing this year, with high inflation and rising interest rates, there is downward pressure on real-estate prices, while gold prices GC00, -0.01%
have declined 10% this year.
Digging further, the factors also encompass sensitivity of investments to U.S. and other countries’ government bonds of various maturities, credit spreads between corporate and government bonds in developed countries, exchange rates, and measures of liquidity, price volatility and momentum.
Stock selection
The largest holding of the Select fund is NextEra Energy Inc. NEE, -1.89%,
which owns FPL, Florida’s largest electric utility. FPL is phasing-out coal plants and replacing power-generating capacity with natural gas as well as wind and solar facilities.
Weber said: “There’s not a company on the planet that is better at getting alternate (meaning solar and wind) generation deployed. But because they own FPL, some of my investors say it is one of the largest carbon emitters on the planet.”
He added that “as a consequence of their skill in operating, they re generating amazing returns for investors.” NextEra’s share shave returned 446% over the past 10 years. One practice that has helped to elevate the company’s return on equity, and presumably its stock price, has been “dropping assets down” into NextEra Energy Partners LP NEP, -2.61%,
which NEE manages, Weber said. He added that the assets put into the partnership tend to be “great at cash-flow generation, but not on achieving growth.”
When asked for more examples of stocks in the fund that may provide excellent long-term returns, Weber mentioned Monolithic Power Systems Inc. MPWR, -0.24%,
as a way to take advantage of the broad decline in semiconductor stocks this year. (The iShares Semiconductor ETF SOXX, +0.64%
has declined 21% this year, while industry stalwarts Nvidia Corp. NVDA, +0.70%
and Advanced Micro Devices Inc. AMD, -1.19%
are down 59% and 60%, respectively.)
He said Monolithic Power has been consistently making investments that improve its return on invested capital (ROIC). A company’s ROIC is its profit divided by the sum of the carrying value of stock it has issued over the years and its current debt. It doesn’t reflect the stock price and is considered a good measure of a management team’s success at making investment decisions and managing projects. Monolithic Power’s ROICC for 2021 was 21.8%, according to FactSet, rising from 13.2% five years earlier.
“We want to see a business generating a return on capital in excess of its cost of capital. In addition, they need to invest their capital at incrementally improving returns,” Weber said.
Another example Weber gave of a stock held by the fund is Dollar General Corp. DG, +0.33%,
which he called a much better operator than rival Dollar Tree Inc. DLTR, +0.14%,
which owns Family Dollar. He cited DG’s roll-out of frozen-food and fresh food offerings, as well as its growth runway: “They still have 8,000 or 9,000 stores to build-out” in the U.S., he said.
Fund holdings
In order to provide a full current list of stocks held under Weber’s strategy, here are the 27 stocks held by the the Natixis Vaughan Select ETF as of Sept. 30. The largest 10 positions made up 49% of the portfolio:
You can click on the tickers for more about each company. Click here for a detailed guide to the wealth of information available free on the MarketWatch.com quote page.
Fund performance
The Natixis Vaughan Select Fund was established on June 29, 2012. Here’s a 10-year chart showing the total return of the fund’s Class A shares against that of the S&P 500, with dividends reinvested. Sales charges are excluded from the chart and the performance numbers. In the current environment for mutual-fund distribution, sales charges are often waived for purchases of new shares through investment advisers.
FactSet
Here’s a comparison of returns for 2022 and average annual returns for various periods of the fund’s Class A shares to that of the S&P 500 and its Morningstar fund category through Oct. 18:
The official definition of a bear market is a 20% or greater decline from an index’s previous high. Accordingly, the three major U.S. stock-market benchmarks — the Nasdaq COMP, +0.90%,
the S&P 500 SPX, +1.14%
and the Dow Jones Industrial Average DJIA, +1.12%
— are currently all in a bear market.
Based on my work with stock market strategist Mark D. Cook, a typical bear market goes through nine stages. Right now we are in Stage 4. Keep in mind that a bear market does not always follow these stages in the exact order.
1. Failed rallies: Failed rallies represent the first clue that a bear market is here. Failed rallies often appear before the market “officially” becomes a bear market. If the rally doesn’t have legs and cannot go higher for the next few days or weeks, it confirms that the bear’s claws have sunk in. Along the way, many failed rallies will fool bulls into thinking the worst is over. Watch the rallies for bear-market clues. The rally so far this week is an example. Now in its second day, a failure of this rally would confirm that stocks are not yet out of a bear market.
2. Low-volume rallies: Another bear market clue is that stocks move higher on low volume. This is a clue the major financial institutions aren’t buying, although algos and hedge funds might be. It’s easy for the algos to push prices higher in a low-volume environment, one of the reasons for monster rallies that go nowhere the following day (i.e. a “one-day wonder”).
3. Terrible-looking charts: The easiest way to identify a bear market is by looking at a stock chart. It goes without saying that the charts look dreadful, both the daily and the weekly. While rallies help relieve some of the pressure, they typically don’t last long.
4. Strong selloffs: It’s been a couple of years since markets have experienced extremely strong selloffs, but that record was broken the week of September 26 when the S&P 500 hit a new low for 2022. These strong selloffs are typical of a bear market, followed by rallies that don’t last (a roller-coaster that so far has played out during October).
5. Mutual-fund redemptions: During this stage, after looking at their quarterly and monthly statements, horrified investors throw in the towel and sell their mutual funds (also, some investors refuse to look at those reports). As a result, mutual fund companies are forced to sell (which negatively affects the stock market). Typically, when the indexes fall more than 20%, mutual fund redemptions increase.
6. Complacency turns to panic: As more investor money leaves the market, many investors panic. The most bullish investors are holding on for dear life but are buying fewer stocks. The most nervous investors sell to avoid risking precious gains.
7. All news is bad news: As the bear market pushes stock prices lower, it seems as if most economic data and financial news is negative. Many people become skeptical of the bullish predictions from market professionals, who earlier had promised the market would keep going up. In the depths of the worst bear markets, some bullish professionals are jeered or ignored. Even die-hard bulls are increasingly nervous as the market heads lower and lower (with occasional rallies along the way).
8. Bulls throw in the towel: As trading volume increases on down days, and some investors experience 30% or higher losses, they give up hope and sell. The market turns into a free-for-all as even the Fed appears to have lost control. Many in the media admit that a bear market has arrived.
9. Capitulation: After weeks and months of selloffs (and occasional rallies), many investors are panicked. Investors realize that it may take years before their portfolios will return to breakeven, and some stocks never will. In the final stage of a bear market, trading volume is more than three times higher than normal. Even some of true believers liquidate positions, as many portfolios are down by 40% or 50% and more. Almost every financial asset has fallen, with the exception of fixed income such as CDs and T-bills. Traders or investors who trade on margin feel the most pain.
This bear market is fairly young, but already there have been so many failed rallies that many investors are too afraid to buy. Some investors with cash are looking for bargains, but it takes nerves of steel to buy when everyone is selling.
One of the keys to success in the market is to buy what people don’t want. Here are several ideas of what to do (and it is not too late to act):
During bear markets, a key to survival is diversification. If you are patient and are willing to hold positions for years, dollar-cost average into index funds on the way down.
In the early stages of a bear market, consider moving to the sidelines with CDs or Treasury bills.
Consider building a strong cash position, although inflation will cut into some of those gains. Nevertheless, losing to inflation is better than losing 30% in the stock market. The goal is not to lose money; in a bear market, cash is king.
The length and volatility of every bear market is different. No one can predict how this one will turn out, but based on previous bear markets, there’s still a long way to go before it’s over.
Michael Sincere (michaelsincere.com) is the author of “Understanding Options” and “Understanding Stocks.” His latest book, “How to Profit in the Stock Market” (McGraw Hill, 2022), explores bull -and bear market investing strategies.
Tesla shares could decline dramatically — and that could mean disaster for a number of stocks that have already seen deep share-price cuts, according to equity research firm New Constructs.
The research firm, which uses machine learning and natural language processing to parse corporate filings and model economic earnings, called the stocks in danger “zombie stocks,” and defined them as companies with poor business models that are burning cash at an alarming rate and are at risk of seeing their stock decline to $0 per share.
The research firm estimates there could be some 300 zombie companies across the marketplace.
“The Federal Reserve’s aggressive rate hikes so far in 2022 have ended the era of free money and exposed a worrisome dynamic throughout capital markets: zombie stocks,” wrote New Constructs CEO David Trainer, in a note.
New Constructs does not define Tesla Inc. TSLA, +7.01%
as a “zombie stock,” citing CEO Elon Musk’s ability to raise capital, but does see the electric car manufacturer as a bellwether for the sector. “It shares many of the common characteristics of a zombie stock, such as an outrageous valuation and high cash burn,” wrote Trainer. “We believe Tesla’s unrelenting share price rise over the past three years – where investors completely ignored company fundamentals – inspired the birth of many of today’s zombie stocks.”
The company’s stock was trading around $220 on Monday, an increase of over 1,000% compared to three years ago. But Trainer feels that Tesla is at risk of falling more than 80% to $25 a share.
Tesla’s stock has fallen 37.6% in 2022, outpacing the S&P 500 Index’s SPX, +2.65%
decline of 22.7%.
“Its valuation remains nosebleed high because the cash flow expectations baked into the stock price are unreasonably optimistic,” Trainer wrote. “Our message to investors is to take profits in Tesla and avoid zombie stocks at all costs.”
“Investors are now fed up with these kinds of companies, especially amid this year’s stock market volatility,” wrote New Constructs’ Trainer. “If investors start to give up on Tesla and take profits on the stock, which is up over 1,000% over the past three years, that spells terrible news for all of the other zombie stocks that don’t have the cash-raising luxury that Tesla has.”
