Tag: securities

Dow ends up 200 points, stocks score back-to-back gains

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U.S. stocks scored back-to-back gains on Monday in an attempt to claw back ground in a rough August for equities. The Dow Jones Industrial Average
DJIA,
+0.62%
rose about 213 points, or 0.6%, ending near 34,560, according to preliminary data from FactSet. The S&P 500 index
SPX,
+0.63%
closed 0.6% higher and the Nasdaq Composite Index
COMP,
+0.84%
gained 0.8%. Investors kicked of the final week of August on an upbeat note, while largely focusing on Thursday’s inflation data and Friday’s monthly jobs report to help inform the Federal Reserve’s path on interest rates and its inflation fight. The 10-year Treasury yield
TMUBMUSD10Y,
4.203%
eased back to about 4.20% late Monday after its sharp rise a week ago to its highest level since 2007. The Dow still was off about 2.8% so far in August, while the S&P 500 index was 3.4% lower and the Nasdaq was down 4.5%, according to FactSet.

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August 28, 2023
Investors parked heavy in cash may be making a ‘mistake’, Nuveen says

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Investors sitting on the sidelines in cash and in money-market funds might consider moving into longer-dated bonds sooner rather than later, according to Saira Malik, chief investment officer at Nuveen.

As look at historical returns shows the broader $55 trillion U.S. bond market typically outperforms short-term Treasurys at the end of past Federal Reserve rate hiking cycles since the 1990s.

The bond market produced an average 5.5% three-month rolling return following the last rate hike (see chart) in the past four Fed hiking cycles, while short-term Treasurys returned 2.1%.

This data includes the three-month rolling average performance of bonds in all Federal Reserve rate-hiking cycles since 1990 (1995, 2000, 2006 and 2018) based on the Bloomberg U.S. Aggregate Bond Index and the Bloomberg U.S. Treasury 1-3 Year Index

Bloomberg, Nuveen

Of note, the magnitude of the bond market’s outperformance faded by 12 months versus short-term positions, when looking at the Bloomberg U.S. Aggregate Bond Index’s performance relative to the Bloomberg U.S. Treasury 1-3 Year Index.

“The broad market typically experienced a strong relief rally immediately after the Fed pause and mostly outperformed the following year,” Malik said, in a Monday client note. “This lends further credence to our view that overallocating to cash or short-term government debt could be a mistake — and that investors may want to start closing their duration underweights.”

Individuals can gain exposure to Wall Street bond indexes through related exchange-traded funds, including the iShares Core U.S. Aggregate Bond ETF
AGG
and the SPDR Bloomberg 1-3 Year U.S. Treasury Bond UCITS ETF
UK:TSY3
for short-term Treasury exposure.

Fed Chairman Jerome Powell signaled on Friday that additional rate hikes might be needed to keep the U.S. cost of living in retreat, even though rates already sit at a 22-year high and inflation has fallen sharply in the past year, while speaking at the annual Jackson Hole gathering in Wyoming. He also reiterated a vow to keep rates at a restrictive level for a while to keep inflation in check.

Malik pointed to cooling housing inflation as a positive sign on the inflation front. Home buyers have pulling back as the benchmark 30-year mortgage rate hit an average of 7.31%, the highest levels since 2000.

She also expects U.S. economic growth to slow and a “partial retracing” of the 10-year Treasury yield
BX:TMUBMUSD10Y,
following its surge in recent weeks.

“Historically, the 10-year yield has peaked within the last few months of the final rate hike in a tightening cycle. We expect this hike will occur at either the September or November Fed meeting, and that the 10-year yield will decline through year-end.” Yields and debt prices move opposite each other.

Related: Pimco emerges as a buyer in Treasury market selloff, says Bond Vigilante theme ‘a bit extreme’

Stocks were higher Monday, with the Dow Jones Industrial Average
DJIA
up 0.5%, the S&P 500 index
SPX
0.3% higher and the Nasdaq Composite Index
COMP
up 0.4%, according to FactSet.

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August 28, 2023
Fed’s Powell leaves investors with a cloud of uncertainty. Why the U.S. stock market faces a difficult week ahead.

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The U.S. stock market recovered from a three-week losing streak this week, though release of Nvidia’s earnings and a speech by Federal Reserve Chair Jerome Powell at the Jackson Hole Economic Symposium provided some volatility, but the artificial intelligence boom offset rising bond yields.

Next week, the July personal consumption expenditure index, the Fed’s preferred measure of inflation, and the latest monthly employment report will offer another trial for the markets as investors assess whether stocks can defend their recent gains under the “cloudy skies” of uncertainty over the economic outlook.

On Friday, Fed Chair Powell said the central bank is prepared to raise interest rates further until policymakers are confident that inflation is on a convincing path toward the Fed’s 2% target, but he admitted they remain unsure of whether more rate hikes are needed as the economy may not have felt the full effect yet of the monetary tightening over the past year and a half.

“Powell is in this position where he’s trying to summit one of the Grand Tetons and he doesn’t do that without pausing and catching his breath,” said Johan Grahn, head ETF market strategist at Allianz Investment Management. Grahn thinks the Federal Open Market Committee is debating whether they have reached the “summit,” or one of the “peaks,” or are at a “false summit” in their endeavors to curb inflation through interest-rate hikes and demand moderation.

“Powell needs these ‘data clouds’ to give him a sign so that they know if the work is done, and I don’t believe that he will know that between now and September,” Grahn said.

Powell’s heavily anticipated address at the Kansas City Fed’s annual symposium in Jackson Hole, Wyoming came days after Nvidia
NVDA,
-2.43%,
the chip maker at the forefront of an industry-wide AI frenzy, delivered blowout earnings that surpassed Wall Street’s estimates, thanks largely to a boom in revenue from generative AI. However, both events were largely in line with expectations eliciting yawns from a sleepy August Wall Street, said market analysts.

U.S. stocks finished the week mostly higher with the Dow Jones Industrial Average
DJIA
down 0.5%, while the S&P 500
SPX
gained 0.8% and the Nasdaq Composite
COMP
climbed 2.3% for the week, according to Dow Jones Market Data.

See: Hot U.S. economy pushes real yields to around 15-year highs after Powell’s Jackson Hole speech

However, the biggest event for markets is always the next one.

With the second-quarter earnings reporting season coming to an end, major economic data in coming days will provide some guidance on the resilience of the U.S. economy and whether the Fed will raise interest rates further at its September 19-20 policy meeting.

“There’s a dearth of corporate news that’s really going to move the markets, which means traders and investors are going to focus their attention on the macro components,” said Anthony Saglimbene, chief market strategist at Ameriprise Financial.

Next week, the markets will get the latest reports on the jobs market, including the July Job Openings and Labor Turnover Survey (JOLTS) due out on Tuesday, followed by August ADP’s National Employment Report on Wednesday. The Labor Department’s August nonfarm payrolls report will center stage on Friday.

The U.S. economy is expected to add 175,000 new jobs in August, down from 187,000 in the prior month, economists polled by the Dow Jones estimate. The percentage of jobless Americans seeking work is forecast to remain unchanged at 3.5% from the previous month. The central bank in June predicted unemployment would climb to 4.1% by the end of 2023, compared with 4.5% in March’s prediction, according to the quarterly Summary of Economic Projections.

Meanwhile, the Bureau of Economic Analysis on Thursday will release its Personal Consumption Expenditures (PCE) Index — the Fed’s preferred inflation gauge — for July.

Annual U.S. inflation in July is forecast to creep back up to 3.3% year-over-year from 3% in the prior month, while consumer prices are expected to rise another mild 0.2% for the month. The so-called “core” PCE is also expected to tick up slightly to 4.2% from 4.1% in June, according to Wall Street analysts polled by Dow Jones. The core rate omits volatile food and energy costs and is viewed by the Fed as a better predictor of future inflation trends.

Powell, during his speech at Jackson Hole, pointed to the core PCE as his focus. “The lower monthly readings for core inflation in June and July were welcome, but two months of good data are only the beginning of what it will take to build confidence that inflation is moving down sustainably toward our goal,” Powell said.

Investors need the “Goldilocks scenario” where economic growth is slowing, but not falling off a cliff, which would suggest that the Fed is closer to being done raising interest rates, Saglimbene told MarketWatch in a phone interview on Friday. “Any stronger than expected economic data, such as hotter-than-expected PCE inflation and employment report, may be greeted by the market as negative.”

While the July PCE report will be the “linchpin” for the September policy meeting, the data would have to skew significantly away from expectations in order for policymakers to take “one more step up this proverbial mountain,” said Grahn.

However, the assessment of the precise level of monetary policy restraint is complicated by uncertainty about the duration of the lags with which monetary tightening affects economic activity and inflation, Powell said on Friday, noting “the wide range of estimates” of these lags suggests that there may be “significant further drag” in the pipeline.

“The lag effect, in my opinion, overshadows the concern that two months of good inflation readings is not a trend,” Grahn told MarketWatch via phone on Friday. “The lag effect is starting to work its way into the economy, but it’s not reasonable to believe it will show the full impact in the next four weeks, so I would expect a meeting in September with a decision to nothing.”

Overall the U.S. stock market has slumped this month as August once again lives up to its dismal reputation for stocks. The S&P 500 has lost nearly 4% so far this month, on course for its biggest monthly loss of 2023, while the Dow Jones Industrial Average was down 3.4% and the Nasdaq Composite has dropped 5.3% month-to-date, according to Dow Jones Market Data.

These pullbacks are seen as a sharp contrast to the AI-driven rally earlier this year when the Nasdaq Composite had its best first-half performance since 1983, as investors hoped the Fed might be able to back off its inflation battle more quickly than markets have expected.

However, recent strong economic data has raised concern that the Fed will keep its benchmark lending rates higher for longer than anticipated, which triggered a jump in longer-dated Treasury yields.

The 10-year Treasury note yield
BX:TMUBMUSD10Y
rose to its highest level since November 2007 on Monday, according to Dow Jones Market Data. Elsewhere, a slowdown in China’s economy after emerging from COVID-19 lockdowns, the lingering debt troubles in its real-estate sector and the uncertainty of Beijing’s policy support are also feeding into broader unease in the U.S. financial markets.

See: Global investors expect China to deliver a massive fiscal stimulus. Here’s why it may never arrive.

August is historically not the best month for the U.S. stock market. Investors came into August of 2023 with five straight months of gains for the S&P 500 index and the Nasdaq Composite, so there was an “excuse” for investors to take profits on megacap technology companies which are trading at “rich valuations,” Saglimbene said.

The weekly AAII Investor Sentiment Survey shows bullish sentiment decreased and is below average for the second consecutive week in the seven days to Wednesday. In the most recent survey, only 32.3% of respondents had a bullish outlook for the stock market, which is below the historical average of 37.5%.

However, historical data shows that September may not look much better than August as September is traditionally the weakest month for U.S. stocks. The S&P 500 and the Dow industrials each has lost an average of 1.1% in September dating back to 1928 and 1896, respectively, according to Dow Jones Market Data.

See: Here are the odds that the stock market will crash

Moreover, there’s still a concern that the Fed is going to raise interest rates again and may slow the economy more than expected, which may end up causing a recession in 2024, said Saglimbene.

“I don’t think traders are ready to step into the market and buy based on these declines, but I do think if we see more pressure in September while macro conditions are holding up, you’re going to have more investors step in and start buying, and that could be more supportive [for stocks] in the back half of this year when seasonality trends get better.”

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August 27, 2023
Jackson Hole recap: Fed rate hikes likely on hold for ‘several meetings’

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Federal Reserve Chair Jerome Powell set a high bar for additional interest-rate hikes, economists said Sunday in their commentary on all the talk at the U.S. central bank’s summer retreat in Jackson Hole, Wyo.

Michael Feroli, chief U.S. economist for JPMorgan Chase, said that the Fed chair certainly did not give a clear signal that more tightening was coming soon. He noted that Powell stressed the Fed would “proceed carefully” and balance the risks of tightening too much or too little.

“We remain comfortable in our view that the FOMC will stay on hold for the next several meetings,” Feroli said.

Read: Powell unsure of need to raise interest rates further

The caveat to this forecast is if inflation surprises to the upside or the labor market does not continue to soften.

Ian Shepherdson, chief economist at Pantheon, said that Powell’s speech seemed hawkish to some, particularly because the Fed chair made threats to hike again.

But Shepherdson said he thought the Fed “is likely done.”

“Behind the caveats, Mr. Powell’s speech fundamentally was optimistic, though cautious,” Shepherdson said.

Boston Fed President Susan Collins also emphasized patience in an interview with MarketWatch on the sidelines of the Jackson Hole summit.

Read: Fed has earned the right to take its time, Collins says

Other regional Fed officials who spoke “hinted that further action may be needed, but also observed that inflation is moving in the right direction and that the surge in yields would help cool down the economy,” said Krishna Guha, vice chairman of Evercore ISI, in a note to clients.

Traders in derivative markets expect a rate hike in November, but it is a close call, with the odds just above 50%.

The Monday following Jackson Hole has historically been an active one in the markets, across asset classes.

The 10-year Treasury yield
BX:TMUBMUSD10Y
ended last week just above 4.2%.

Read: Market Snapshot on Powell’s stance

The first test of the careful and patient Fed will come this coming Friday, when the government will release the August employment report.

Economists surveyed by the Wall Street Journal expect the U.S. economy added 165,000 jobs in the month. That would be the weakest job growth since December 2020.

In his speech on Friday, Powell emphasized that evidence that the labor market was not softening could “call for a monetary policy response.”

Economists at Deutsche Bank think an upside surprise in the employment data could provide enough discomfort for the Fed, and raise expectations for further tightening.

Other top global central bankers spoke at Jackson Hole, including European Central Bank President Christine Lagarde, Bank of Japan Gov. Kazuo Ueda and Bank of England Deputy Governor Ben Broadbent.

Guha of Evercore said he detected a careful effort by the officials not to surprise markets.

The exception to this rule might have been Bundesbank President Joachim Nagel, who said in a television interview that it was too early for the ECB to think about a rate-hike pause.

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August 27, 2023
How the stock market’s performance under Biden is worse than under Obama or Trump — in one chart

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U.S. stocks so far haven’t fared as well under President Joe Biden as they did in Donald Trump’s single term or in either of Barack Obama’s two terms.

The research team at Wilshire Indexes is pointing that out this month with the chart below, which features the FT Wilshire 5000
XX:W5000FLT,
an index that aims to reflect the performance of the total U.S. stock market.

U.S. stocks haven’t performed as well in Biden’s current term as they did under Obama or Trump.

Wilshire Indexes

Biden and his allies could be worried about how stocks
SPX
are doing, and it’s possible his administration will try to help the market somehow in 2024, according to Philip Lawlor, managing director of market research at Wilshire Indexes.

“With the 2024 election in sight, the disparity in cumulative equity return generated so far under the Biden administration compared to the superior return trajectory delivered by the Trump and Obama presidencies could cause some concern,” Lawlor wrote. “Electoral cycle logic points to the Biden administration doing its utmost to ensure that the gap closes next year.”

Biden officially launched his re-election campaign in April, and the Democratic incumbent and his cabinet officials have traveled around the U.S. in recent months to talk up their economic policies, including measures such as the Inflation Reduction Act.

When asked about the stock market’s struggles earlier this year, one White House official told MarketWatch that the administration wants to see “strong performance,” but he also noted that roughly half of Americans don’t hold stocks and highlighted other economic indicators.

“The markets are going to go up and down. The main measure that the president has about the state of the economy is, how are middle-class families doing?” said Bharat Ramamurti, deputy director of the White House’s National Economic Council.

“Do they have good-paying jobs that allow them to support themselves and their families? Are they seeing their wages go up? Do they feel like they have good opportunities to advance in their career, good opportunities to switch jobs and make more money? Or live in a better neighborhood, or whatever the case may be? By those metrics, we think that the economy is doing very, very well.”

Republican presidential hopefuls made their economic pitches at a debate on Wednesday night in Milwaukee, with Florida Gov. Ron DeSantis, who is currently running second in GOP primary polls, saying the country “must reverse ‘Bidenomics’ so that middle-class families have a chance to succeed again.” Trump, the current frontrunner in the 2024 primary, skipped the debate and instead released an interview just before the event kicked off.

Betting markets tracked by RealClearPolitics give Biden a 35% chance of winning the 2024 presidential election, while Trump is at 27% and DeSantis is at 6%.

Stocks
DJIA

COMP
were higher in choppy trading Friday after Federal Reserve Chair Jerome Powell warned that the central bank may need to raise interest rates even higher to temper a strong U.S. economy and quell inflation, while assuring investors that the Fed would proceed cautiously.

From MarketWatch’s archives (Dec. 31, 2022): U.S. stocks log their worst year since 2008, crushed by Fed’s rate hikes

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August 25, 2023
Why this abstract concept could rattle stocks when Powell speaks at Jackson Hole

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There’s one big, but theoretical, concept that has the potential to shake up the stock market the most on Friday, when Federal Reserve Chairman Jerome Powell is scheduled to deliver a speech at an annual symposium held in Jackson Hole, Wyo.

It has to do with the neutral rate of interest. That’s the level of real short-term interest rates that’s expected to prevail when the U.S. economy is at full strength and inflation is stable. The real neutral rate — known alternatively as r* or r-star— is estimated to be around 0.5%, after subtracting the Fed’s 2% inflation target from policy makers’ latest forecasts for where the fed funds rates is likely to be in the long run. And that neutral rate may be moving higher, given how the economy is performing right now.

Read: Jackson Hole meeting: When is Jerome Powell’s speech? What investors need to know.

Settling on the right theoretical level for the neutral rate matters because the U.S. economy appears to be accelerating, even after the Fed has hiked rates by more than five full percentage points to a 22-year high of 5.25%-5.5%. The world’s largest economy grew at a solid 2% pace in the first quarter, followed by a 2.4% pace for the second quarter. Now, the Atlanta Fed’s GDPNow model is forecasting a third-quarter growth rate of 5.8% for real gross domestic product — a number that’s drawn plenty of skeptics, but underscores just how well the economy seems to be doing.

See: R-Star Is the New Buzzword. Listen for It at Jackson Hole.

“The notion of a higher r-star or neutral rate has crept its way into the marketplace and has been a hot topic lately,” said Thomas Urano, co-chief investment officer at fixed-income money manager Sage Advisory in Austin, Texas, which oversaw $23 billion as of July. “The market is trying to digest where the Fed views this neutral rate and is looking to get a little more clarity as Powell speaks in Jackson Hole.”

If the neutral rate is higher than previously thought, that means policy makers might need to hike the fed-funds rate target even further, in addition to holding borrowing costs higher for longer and delaying the timing of their first rate cut.

Traders and investors are well aware that the Fed is likely to keep interest rates higher for longer, and they’ve pushed out their expectations about the timing of the first rate cut next year, according to Dan Eye, chief investment officer for Pennsylvania-based Fort Pitt Capital Group, which manages $4.9 billion in assets.

However, the market is not yet fully positioned for the Fed to put rate hikes back on the table, Eye said via phone on Wednesday.

Dow industrials
DJIA,
the S&P 500
SPX,
and Nasdaq Composite
COMP
are respectively up so far this year by 4.1%, 15.6%, and 31.3% as investors and traders hold out hope for a soft- or no-landing scenario in which the U.S. economy can emerge relatively unscathed as inflation keeps falling.

As of Wednesday afternoon, all three major stock indexes were higher, led by a 1.8% advance in the Nasdaq Composite as investors await a fiscal second-quarter earnings announcement from chip maker Nvidia Corp.
NVDA,
+2.84%
that’s due after the close.

Any remarks by Powell on Friday that can be interpreted as suggesting that more rate hikes are likely to come will produce volatility and “a downdraft in stocks,” Eye said. The best possible outcome for stock investors would be if Powell “stresses data dependency and says that policy makers will continue to consider the cumulative impact of rate hikes that have been done already.”

The theme of the Kansas City Fed’s Jackson Hole symposium, being held Thursday-Saturday, is “Structural Shifts in the Global Economy,” a topic that’s led to the growing expectation that Powell will address where he and the Fed currently see the neutral rate.

In the run-up to Friday’s Jackson Hole speech, the Treasury market has already priced in a scenario of better-than-expected U.S. economic growth, with 10- and 30-year yields reaching multiyear highs on Monday and last week. Though both yields pulled back on Tuesday and Wednesday, they could bounce back again if investors sell off long-dated government debt in response to Powell’s remarks, investors said.

The recent rise in yields has been blamed, in part, for August’s decline in U.S. stocks, with the S&P 500 down more than 3% so far this month.

“Powell has to sound hawkish, he cannot afford not to do so” because “any signal that the hiking cycle is done will probably lead to such a bullish response in risk assets that it will loosen broader financial conditions,” said strategist Rikkert Scholten at Rotterdam-based Robeco, which oversees $194 billion.

Still, Robeco’s investment team also expects the Fed chairman to stress data dependence as a way of “credibly” keeping his options open.

Brad Conger, deputy chief investment officer at Hirtle Callaghan & Co. in West Conshohocken, Penn., which manages $18.5 billion in assets, said he believes the Fed is near the end of its rate-hiking cycle, which began in March 2022.

Nevertheless, “any discussion about a higher natural rate of interest due to the shifting structure of the economy would set off a bout of uncertainty,” he said. Natural rate is the phrase used to describe where the neutral rate may settle over the longer run.

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August 23, 2023
How Nvidia’s Jensen Huang may be driving Fed rate-hike expectations

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“‘You could ask who is really running the show? Jerome Powell or Jensen Huang? Amazingly, it may not be Powell, but Jensen Huang who is driving Fed expectations.’”

— Ben Emons of NewEdge Wealth.

Those are the words of Ben Emons, a senior portfolio manager and the head of fixed income at NewEdge Wealth in New York, who identifies reasons why artificial-intelligence leader Nvidia Corp.
NVDA,
-2.77%
is demonstrating central-bank-like powers.

It starts with the idea that the Santa Clara, California-based chip designer — which reports fiscal second-quarter earnings on Wednesday — acts as a bellwether for AI-capital expenditures that are likely to boost productivity across the U.S. economy. And in the bond market, a surge of AI-related expectations is translating into higher real yields, which reflect inflation-adjusted growth in gross domestic product and productivity, he said.

Read: Nvidia’s stock snaps losing streak and sits 1% below record close as earnings optimism builds

Higher real yields in the U.S. are a key reason why 10-
BX:TMUBMUSD10Y
and 30-year Treasury yields
BX:TMUBMUSD30Y
climbed to multi-year highs through Monday. Real yields, as measured by rates of Treasury inflation-protected securities, offer a glimpse of how the market expects the U.S. to perform when inflation isn’t a factor.

Read: Rise in Treasury yields is almost entirely due to one factor, strategist says

“The bigger macro story behind Nvidia as the bellwether of artificial intelligence is the role it plays in the economy, which is proving to be stronger than anyone thought it would be,” Emons said via phone on Tuesday. “People connect AI to productivity and productivity leads to growth, and to some extent this is impacting interest-rate expectations today.”

Amid growing anticipation over Nvidia’s upcoming earnings announcement and Friday’s speech by Federal Reserve Chairman Jerome Powell in Jackson Hole, Wyo., “the probability of a rate hike is creeping higher,” the senior portfolio manager wrote in a note this week. “With each additional dollar increase of NVDA EPS estimates, the probability of a hike by November goes up. NVDA is gaining Fed-like power.”

Need to Know: Nvidia may be the AI stock for now, but here are the picks for later, says Goldman Sachs

A chart provided by Emons shows how the median estimate of analysts for Nvidia’s earnings-per-share in the fiscal second quarter has been rising alongside the market-implied probabilities of a November Fed rate hike.

Source: Bloomberg, Nvidia

In addition, the yield on one of Nvidia’s own corporate bonds, issued in 2020 and maturing in April 2040, has been rising in relation to the 10-year TIPS or real yield “because of the company’s broader effect on the economy,” Emons said.

Source: Nvidia, U.S. Treasury

As University of Pennsylvania Wharton School finance professor Jeremy Siegel explained in a separate interview with MarketWatch, real interest rates track real growth. Improving productivity and stronger growth “mean the Fed won’t be able to cut rates as much as it would otherwise be able to.”

On Tuesday, Treasury yields finished mixed, while Nvidia’s shares closed down by 2.8%, as traders and investors await the company’s earnings report on Wednesday followed two days later by Powell’s remarks.

Analysts expect Powell to address what’s known as the real neutral rate of interest — or the inflation-adjusted level which is likely to prevail when the economy is operating at full strength and price gains are stable — as a way of justifying the higher-for-longer theme in U.S. interest rates.

See also: How higher-for-longer rates are playing out as 10-year yield hits 15-year high

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August 22, 2023
Rise in Treasury yields is almost entirely due to one factor, strategist says

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The recent rise in long-dated Treasury yields boils down to mostly one single thing, which is higher real rates resulting from changing expectations for U.S. economic growth, according to Joseph Kalish, chief global macro strategist at Ned Davis Research.

Kalish attributes 90% of the increase to that factor alone. He points out that 5-
BX:TMUBMUSD05Y,
7-
BX:TMUBMUSD07Y,
10-
BX:TMUBMUSD10Y
and 20-year Treasury yields are all up significantly since 2021-2022. On Tuesday, the 10-year rate finished at 4.327%, slightly off its almost 16-year high. Meanwhile, the 5-year Treasury yield, which reflects the intermediate part of the Treasury curve known as the belly, has trended higher as traders and investors factor in prospects for a stronger U.S. economy beyond the next few years.

Source: Tradeweb

Source: Tradeweb

Ordinarily, Treasury yields tend to rise based on a range of factors, such as the possibility of higher future inflation and investors’ demands to be compensated for that risk. This time around appears to be a bit different.

Real rates, as measured by yields on Treasury inflation-protected securities, reflect the market’s view of how the economy is performing after subtracting inflation. In other words, they present a purer read on how the U.S. is likely to do when inflation isn’t a factor. And right now, real yields are rising on the strength of recent economic data as investors hold out some hope for a soft landing, or scenario in which inflation comes down on its own without a recession or major jump in unemployment, or even no landing at all.

“Bond yields have come a long way in a short period of time,” Kalish wrote in a note distributed on Tuesday. “Nearly all of the rise has been due to higher real yields,” though an increase in the supply of U.S. government debt is also likely playing a contributing role.

As of Monday, 10- and 30-year Treasury yields
BX:TMUBMUSD30Y
had respectively jumped by 105.4 basis points and 91.7 basis points since early April, and closed at their highest levels since Nov. 6, 2007, and April 27, 2011. However, they ended lower on Tuesday at 4.327% and 4.410% as investors and traders took a break from the aggressive selloff of long-dated government debt seen over the past week.

The runup in Treasury yields has been blamed for a stock-market pullback, which has seen the S&P 500
SPX
retreat 4.4% so far in August. The large-cap benchmark remains up 14.3% so far this year.

As traders and investors await Federal Reserve Chairman Jerome Powell’s Jackson Hole address on Friday, Kalish wrote that “the market has been consistently underpricing the risk of additional rate hikes and overpricing the speed of rate cuts.” Powell will be “pleased at the progress on goods inflation, hopeful that the labor market is getting into better balance, but concerned about the economy growing faster than trend.”

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August 22, 2023

Nvidia may be the AI stock for now, but here are the picks for later, says Goldman Sachs

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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:

And a few more:

Read: U.S. stocks may bounce this week, but summer selloff is only halfway done, analysts warn

The markets

U.S. stocks
SPX

COMP
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

‘Own what the Mother of All Bubbles crowd doesn’t.’ This market strategist expects stagflation and is investing for it now.

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
:

“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.

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August 22, 2023

ETF that tracks Jim Cramer’s stock picks to close

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An exchange-traded fund set up to buy stocks recommended by CNBC personality Jim Cramer will be closed and liquidated, its provider said Monday.

Shares of the Long Cramer Tracker ETF
LJIM
will see their last day of trading on Cboe on Sept. 11, which will also be the last day the fund will accept creation units from authorized participants, Tuttle Capital Management said in a news release Monday afternoon.

“We started LJIM in order to facilitate a conversation with Jim Cramer around his stock picks as the other side to the Short Cramer ETF
SJIM,
” said Matthew Tuttle, the fund’s adviser, in the news release.

“Unfortunately, Mr. Cramer and CNBC have been unwilling to engage in dialogue and instead have chosen to ignore the funds, therefore there is no reason to keep the long side going,” Tuttle said. “Going forward we will just focus on the short side.”

CNBC didn’t immediately respond to a request for comment.

The Inverse Cramer ETF aims to achieve the inverse of Cramer’s recommendations by going short anything he recommends buying and going long anything he doesn’t like. The ETFs were launched in March.

The Long Cramer ETF opened at $24.96 on March 2, according to FactSet. It surged in June and early July, closing at a high of $29.42 on July 19. It’s retreated sharply in August, falling 12.1% so far this month, ending Monday at $25.79.

See: ETF focused on Jim Cramer stock picks surged in June, kicks off July with slight gains

The Inverse Cramer ETF, as would be expected, fell sharply in June and early July, but is up 13.1% in the month to date. The Long Cramer ETF is up 3.3% since its launch, while the Inverse Cramer ETF is down 3.9%.

Cramer last October said on Twitter that he welcomed people betting against him, after Tuttle Capital Management filed papers for the ETFs with the Securities and Exchange Commission.

In response to the launch of the ETFs in March, a CNBC spokesperson said that it was Cramer’s mission “to encourage long-term investing and a balanced portfolio that includes index funds and individual stocks.”

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August 21, 2023
Stocks end mostly lower, Nasdaq books biggest 3-week drop since December

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Stocks closed mostly lower Friday, capping off a bruising week of losses as Treasury yields jumped and China’s mounting property woes gripped investors. The Dow Jones Industrial Average
DJIA,
+0.07%
rose about 27 points, or 0.1%, ending near 34,501, according to preliminary FactSet data. The S&P 500 index
SPX,
-0.01%
was nearly flat at 4,370 and the Nasdaq Composite Index
COMP,
-0.20%
shed 0.2%, despite briefly turning positive late in the session. It still was a tough week for equities, with the Dow booking a 2.2% loss, the S&P 500 index a 2.1% decline and the Nasdaq a 2.6%. The Nasdaq also posted its biggest 3-week decline since December 2022, according to Dow Jones Market Data. Yields on the 10-year Treasury rose for a 5th week in the row, with the benchmark
TMUBMUSD10Y,
4.252%
rate briefly touching its highest level since November 2007, before settling back at 4.251% on Friday. China Evergrande’s
EGRNF,

Chapter 15 bankruptcy filing in New York late Thursday kept focus on the wobbling property market in the world’s second-largest economy. Earlier in the week, Country Garden Group missed a dollar-denominated debt payment. Next week investors will be focused on Federal Reserve Chairman Jerome Powell’s speech on Friday at the Jackson Hole economic summit for hints to whether the central bank is likely done hiking rates in this cycle. The Fed’s policy rate sits at its highest level in 22 years.

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August 18, 2023
The selloff in Treasurys isn’t over yet, Barclays warns

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There is room for a continued selloff in U.S. Treasurys which has already pushed 10- and 30-year yields to their highest levels since 2007 and 2011, according to researchers at Barclays.Though the recent selloff took a breather on Friday, the steady drive higher in long-dated yields which unfolded this week left observers warning that the era of low rates may be firmly behind the U.S. as a new normal appears to take shape in the bond market. Long-term rates yields are just beginning to enter ranges that have been historically consistent with where they traded during the early 2000s.Read: Why Treasury yields keep rising,…

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August 18, 2023
U.S. stocks open lower with Dow industrials heading for worst week since March

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U.S. stock indexes opened lower on Friday as the Dow Jones Industrial Average is on pace to book its worst week since March, while the S&P 500 and the Nasdaq Composite are headed for their third straight week of losses. The Dow industrials
DJIA,
-0.26%
was down 156 points, or 0.4%, to 34,328, with the blue-chip gauge dropping 2.7% for the week. The S&P 500
SPX,
-0.54%
lost 0.6% on Friday, on pace to post a weekly decline of 2.7%. The Nasdaq
COMP,
-0.94%
was off 0.9%, losing 3.3% so far this week, according to FactSet data. Treasury yields were slightly lower on Friday morning, with the 10-year yield
TMUBMUSD10Y,
4.234%
down 2 basis points, at 4.27% after rising to its highest level since 2007 in the previous session.

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August 18, 2023
Traders brace for explosion of volatility Friday as $2.2 trillion in stock options expire

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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.

See: ‘This is no longer a buy-the-dip market.’ Why this Goldman Sachs veteran is worried about the stock market.

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August 18, 2023
Treasury market returns are negative again. Why this time for bonds looks different than 2022.

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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.

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August 17, 2023
Stocks post back-to-back loss after Fed minutes point to lingering inflation and rate risks

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U.S. stocks posted back-to-back losses Wednesday after Federal Reserve minutes of its July meetings showed concerns about inflation revving back up. The Dow Jones Industrial Average DJIA fell about 180 points, or 0.5%, ending near 34,765, according to preliminary FactSet data. The S&P 500 index SPX gave up 0.8% and the Nasdaq Composite Index COMP closed 1.2% lower. All three benchmarks booked back-to-back loses, while the S&P 500 ending at its lowest level in more than a month. Minutes of the Fed’s July 25-26 meeting said “most participants continue to see significant upside risks to inflation, which could require further…

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August 16, 2023
The S&P 500 is flashing a warning that U.S. stocks are likely headed lower after breaking below its 50-day moving average

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The S&P 500 on Tuesday closed below its 50-day moving average for the first time since March. It could portend more losses for the index, technical analysts said, suggesting that the summertime stock-market selloff isn’t over yet.

After trending lower all session, the index SPX closed down 51.86 points, or 1.2%, to 4,437.86 on Tuesday, its lowest closing level since July 11, according to FactSet data.

It…

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August 15, 2023
S&P 500 ends at lowest level in a month as investors monitor signs of China’s weakening economy

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U.S. stocks closed sharply lower Tuesday as investors monitored signs of China’s darkening economic backdrop and gauged if a robust U.S. consumer could spell more Federal Reserve rate hikes. The Dow Jones Industrial Average DJIA fell about 360 points, or 1%, to about 34,946, according to preliminary FactSet data. The S&P 500 index SPX dropped 1.2% to about 4,437, its lowest close since mid-July, according to FactSet. The Nasdaq Composite Index COMP ended 1.1% lower. Chinese retail sales and industrial production in the world’s second biggest economy grew less than expected in July. Its growing property woes also contributed…

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August 15, 2023
‘Good news really is bad news’: Stocks hit a roadblock as strong retail sales reinforce soft-landing view

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Investors were jolted by a stronger-than-expected retail sales report on Tuesday, which underscores the dual-edged sword now facing markets.

July’s 0.7% surge in retail sales is helping to bolster the view that a resilient U.S. economy can avoid a recession, despite more than a year of rate hikes by the Federal Reserve. However, the data also serves as another piece of information that some policy makers can use to support even more hikes in the final four months of this year, and left the benchmark 10-year Treasury yield…

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August 15, 2023
Dow, S&P 500 and Nasdaq post gains as big tech stocks rebound

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U.S. stocks closed higher on Monday, with the Dow flipping positive near the closing bell, as technology stocks bounced back. The Dow Jones Industrial Average DJIA rose about 26 points, or 0.1%, ending near 35,308, according to preliminary FactSet data. The S&P 500 index SPX scored a 0.6% gain and the Nasdaq Composite Index COMP closed up 1.1%, booking its best daily percentage climb since July 28, according to FactSet data. The S&P 500’s information technology sector outperformed with a 1.9% gain, while the communication services segment rose 1%. The rally saw shares of Meta Platforms META, Apple Inc. AAPL, Alphabet…

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August 14, 2023