Tag: securities

Fitch slashes U.S. credit ratings to AA+ from AAA, points to ‘erosion’ of governance

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Fitch Ratings cut its top U.S. credit rating to AA+ from AAA on Tuesday, pointing to “erosion” of governance and the nation’s expected fiscal deterioration over the next three years.

Fitch said eroding governance in the U.S. over the past two decades was among the factors for its downgrade, in a Tuesday evening statement. It also said it expected the general government deficit to climb to 6.3% of gross domestic product in 2023, from 3.7% in 2022, on weaker federal revenues, new spending initiatives and a higher interest burden.

“In Fitch’s view, there has been a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters, notwithstanding the June bipartisan agreement to suspend the debt limit until January 2025,” Fitch said.

“The repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management. In addition, the government lacks a medium-term fiscal framework, unlike most peers, and has a complex budgeting process.”

Fitch warned in May that it might cut the U.S.’s AAA ratings as the latest debt-ceiling fight was dragging on for months without a resolution.

Borrowing costs have climbed as the Treasury Department has unleashed a flood of Treasury issuance since its June debt-ceiling deal to restock it coffers. The 1-month Treasury yield was at 5.36% on Tuesday, while auctions of other Treasury bills maturing in one year often kick off yields north of 5%.

See: ‘Eye-popping’ $1 trillion third-quarter borrowing need from U.S. Treasury raises risk of buyers’ fatigue

Stocks ended trade Tuesday nearing record levels, with the Dow Jones Industrial Average
DJIA,
+0.20%
and S&P 500 index
SPX,
-0.27%
both less than 5% off their highest closing levels from early 2022.

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August 1, 2023
U.S. stocks are expensive by almost any measure. Here’s why they could keep rising anyway.

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It’s become a common refrain among those who believe the 2023 stock-market rally seems too good to last: by almost any measure one chooses, equity valuations in the U.S. are looking stretched.

While this point is generally conceded by equity analysts, it glosses over another debate of potentially greater import. What impact, if any, do so-called fundamental factors like valuation have on stock-market performance, and could we really see them put the breaks on a momentum-driven rally?

At least for now, the answer may be that valuation is taking a back seat to hopes tied to artificial-intelligence and the strength of the U.S. economy fuel optimism that could continue to push the market higher.

“Every investors should explore fundamentals, but you have periods of momentum where fundamentals take a back seat,” said Liz Young, head of investment strategy at SoFi, during a phone interview with MarketWatch.

Valuations are looking stretched

Investors buying stocks today are paying more per unit of expected earnings than at any point since April of 2022, when interest rates were much lower than were they are now. The forward price-to-earnings ratio for the S&P 500
SPX,
-0.23%
currently stands at 19.7, according to FactSet data.

That is higher than the five-year average of 18.6, and the 10-year average of 17.4, FactSet data show.

To be sure, the P/E for S&P 500 index companies masks a remarkably wide dispersion internally. An analysis by Goldman Sachs analysts found that the so called “magnificent seven” technology stocks are currently sporting a P/E of 31, while the remaining 493 companies in the index are being valued at 17.

Another closely watched valuation metric that compares the value investors could reap from owning stocks with that of owning comparatively safer Treasury bonds is looking even more extreme.

The equity risk premium (ERP) has fallen to its lowest level since mid-2002, according to data analysis conducted by MarketWatch and Sierra Investment Management CIO James St. Aubin.

JAMES ST. AUBIN

According to Aubin, the reason investors are willing to accept such a low equity risk premium instead of parking their money in short-term Treasury bills yielding more than 5% is that corporate earnings growth is expected to accelerate markedly starting in 2024.

In the past, investors have been willing to accept a low or even negative ERP if they believed they would be well-compensated for it by explosive earnings growth further out in the future. And the AI craze is bolstering expectations that some of the largest U.S. technology firms could reap windfall profits while boosting productivity across the U.S. economy.

“You’re willing to accept a low ERP, or in the case of the 1990s, even a negative ERP, if you think you’re going to have strong earnings growth,” St. Aubin said during a phone interview with MarketWatch.

Great expectations

Right now, Wall Street analysts expect to see earnings growth rise next year following several consecutive quarters of declines in late 2022 and the first half of 2023.

Although many S&P 500 firms have yet to report earnings for the quarter ended in June, the index is on track to see earnings shrink by more than 7% year-over-year, according to FactSet data. Assuming this comes to pass, it would mark the third straight quarter of year-over-year declines.

If earnings growth ticks higher during the second half of the year, analysts expect 2023 will ultimately yield earnings growth of roughly 1% for the calendar year.

But in 2024, analysts are already penciling in profit expansion of more than 12%, according to FactSet.

A lot of things need to go right for companies to meet this lofty benchmark, St. Aubin said. For example, companies will need to show that they can continue to raise prices even as inflation levels off, while the U.S. economy will need to avoid the recession that many economists still expect will eventually arrive.

Even if everything goes right and U.S. companies beat Wall Street’s expectations, an analysis of historical data suggests investors buying at today’s prices could experience smaller returns over the long term.

What does history tell us?

A regression analysis performed for MarketWatch by St. Aubin using data going back to 1991 found that when stocks are valued north of 20 on a forward price-to-earnings basis, annualized returns over the following decade tend to shrink to less than 5%.

Even if lofty valuations don’t put the breaks on the market rally, their influence could be felt by investors in other ways. For example, given the dispersion between valuations for the market leaders and everybody else, value-conscious investors might start to view small-cap stocks and other underappreciated cyclical sectors as a better buy.

“As valuations reach extremes in some of the sectors, I think it’s natural for people to move away from them. If investors aren’t going to rotate their money out of the equity market, maybe they move into other areas like small-caps that look more attractive,” Young said.

That is already starting to happen, to a degree. The Russell 2000
RUT,
-0.51%,
an index of small-cap stocks, has outperformed even the highflying Nasdaq Composite
COMP,
-0.35%
over the past month, rising 5% to the Nasdaq’s 3.6%, according to FactSet data. Although the Nasdaq is still sitting on a year-to-date gain of 36.5%, compared with the 12.7% for the Russell.

However, July was a good month for U.S. stocks, broadly speaking. Whether August portends the same is unclear. At least one prominent stock-market bull, Fundstrat’s Tom Lee, has advised clients to expect a shallow pullback in August. So far, the main U.S. equity indexes are starting the month in the red, with the S&P 500 and Nasdaq down 0.3% at 4,575 and 14,295 in recent trade.

See: Investors should brace for an August stock-market slump, Fundstrat’s Tom Lee warns

The Dow Jones Industrial Average, by comparison, was little-changed Tuesday afternoon in New York at 35,569.

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August 1, 2023
‘Eye-popping’ borrowing need from U.S. Treasury raises risk of buyers’ fatigue

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Just a day after the Treasury Department released a $1 trillion borrowing estimate for the third quarter, questions are being raised about the extent to which foreign and domestic buyers can continue to keep up their demand for U.S. government debt.

Further details about Treasury’s financing need will be released at 8:30 a.m. on Wednesday. For now, the $1 trillion estimate, the largest ever for the July-September period, has analysts concluding that the U.S. is facing a deteriorating fiscal deficit outlook and continuing pressure to borrow.

At stake for the broader fixed-income market is whether the presence of large ongoing auctions over the coming quarter and beyond will lead to a prolonged period where demand from potential buyers might begin to dry up, Treasury yields edge higher, and the government-debt market returns to some form of illiquidity.

“You can make the argument that since 2020, with the onset of Covid, that Treasury issuances have been met with reasonably good demand,” said Thomas Simons, an economist at Jefferies
JEF,
-1.75%.
“But as we go forward and further away from that period of time, it’s hard to see where that same flow of dollars can come from. We may be looking at recent history and drawing too much of a conclusion that this borrowing need will be easily met.”

Simons said in a phone interview Tuesday that “the risk is that you don’t get continued demand from foreign or domestic buyers of fixed income.” The result could be “six to nine months where the market is fatigued by bigger auction sizes, Treasurys become more and more difficult to trade, there’s a grind higher in yields, and there may be issues with liquidity where markets may not be so deep.” Still, he expects such a period, if there is one, to be less acute than what was seen in the 2013 taper tantrum or last year’s volatility in the U.K. bond market.

On Monday, the Treasury revealed a $1.007 trillion third-quarter borrowing estimate that was $274 billion higher than what it had expected in May. The estimate — which Simons calls “eye-popping” — assumes an end-of-September cash balance of $650 billion, and has gone up partly because of projections for lower receipts and higher outlays, according to Treasury officials.

Monday’s estimate is the largest ever for the third quarter, though not relative to other parts of the year. In May 2020, a few months after the onset of the COVID-19 pandemic in the U.S., Treasury gave an almost $3 trillion borrowing estimate for the April-June quarter of that year.

For the upcoming fourth quarter, Treasury is now expecting to borrow $852 billion in privately-held net marketable debt, assuming an end-of-December cash balance of $750 billion. According to strategist Jay Barry and others at JPMorgan Chase & Co.
JPM,
-1.05%,
the third- and fourth-quarter estimates “suggest that, at face value, Treasury continues to expect a wider budget deficit” for the 2023 fiscal year.

As of Tuesday, investors appeared to be less focused on the Treasury’s borrowing needs than on signs of continued strength in the U.S. labor market, which raises the prospect of higher-for-longer interest rates. One-
TMUBMUSD01Y,
5.400%
through 30-year Treasury yields
TMUBMUSD30Y,
4.100%
were all higher as data showed demand for workers is still strong. Meanwhile, all three major U.S. stock indexes
DJIA,
+0.05%

SPX,
-0.33%

COMP,
-0.41%
were mostly lower in morning trading.

According to Simons, who the most likely buyers will be at Treasury’s upcoming auctions will depend on where the department decides to focus its issuances. If the focus is on bills, then money-market mutual funds could “move some cash over,” he said. And if it’s on long-duration coupons, it would be “real money” players such as insurers, pension funds, hedge funds and bond funds — though much will rely on inflows from clients “before demand would pick up.”

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August 1, 2023

Manufacturing stalled in the first half. But now the stage is set for a recovery, says JPMorgan.

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The Institute for Supply Management’s manufacturing index is due for release Tuesday, which outside of inflationary periods (i.e., now), tends to be one of the more important economic indicators for financial markets, given its record as a bellwether.

ISM manufacturing data during the current rate-hike cycle (in red) has lagged other periods.

Even compared to other rate-hike cycles, the ISM manufacturing series has been one of the worst in history, points out Jason Daw, head of North America rates strategy at RBC Dominion Securities. Daw makes the case that the U.S. economy overall is not very strong for this period of the cycle, and the manufacturing data, not just ISM but also industrial production, has been particularly feeble.

But the call of the day comes from JPMorgan’s economic team. They note that while global manufacturing stalled in the first half, the non-manufacturing components rose at a 3.2% annualized rate, allowing the global economy to grow at an above trend 2.7% rate.

The team led by Bruce Kasman say that the typical channels through which weak manufacturing would bring down the broader economy haven’t materialized. “A major channel by which weakness in goods sectors broadens out is through depressing corporate income and pricing power. While our start-of-year outlook anticipated elevated wage gains to pressure corporate profits, the surprising strength in [first-half] global GDP was accompanied by upside surprises to inflation,” they say. In turn, there have been solid gains in both labor income and profits, and while margins have come off their peaks, they are well above pre-pandemic levels.

Business hiring, they add, is the ultimate signal of confidence, and employment growth has continued even though expectations have soured.

Now, say the JPMorgan team, the stage is set for a goods sector recovery. Labor income, when adjusted for inflation, is rising, while finished goods inflation is falling sharply.

Also, business capital spending continues to expand, particularly in emerging economies outside of China. And importantly, inventories are swinging from a drag to a lift. In the first half, the step down in the pace of stock building depressed global industrial production by 3.4 percentage points.

“Even if the pace of stockbuilding was only to level off, the impulse to global industry would be material. Add to that a potential desire to align the pace to firming demand growth and the boost could generate a jump in factory output in the coming months,” they say.

Finally, they note, the tech spending decline after the 2020 to 2021 surge looks to be ending, and global motor vehicle production is picking up as supply-chain bottlenecks ease.

The markets

After an okay finish for the S&P 500
SPX,
-0.29%
to a strong July, U.S. stock futures
ES00,
-0.36%

NQ00,
-0.42%
were a bit lower as the seasonally weak month of August commenced. Gold futures
GC00,
-1.28%
were trading below $2,000 an ounce. The dollar
DXY,
+0.42%
rose.

For more market updates plus actionable trade ideas for stocks, options and crypto, subscribe to MarketDiem by Investor’s Business Daily.

The buzz

The ISM report is due out at 10 a.m. Eastern, when the job openings and construction spending reports also come out. Monthly auto sales also will be released throughout the day.

Pfizer
PFE,
-0.03%,
Caterpillar
CAT,
+4.05%,
Uber Technologies
UBER,
-3.96%
and after the close, Starbucks
SBUX,
-0.35%
and Electronic Arts
EA,
-0.61%
highlight the day’s earnings reports. Pfizer lowered its sales guidance while Caterpillar beat Wall Street earnings estimates and Uber reported a surprise profit.

JetBlue Airlines stock
JBLU,
-8.56%
slumped as the airline says it no longer expects to report a profit in the third quarter, owing to what it called a challenging environment in the northeast, as well as a preference by consumers for long-haul international flights.

CVS Health
CVS,
+0.48%
is going to cut 5,000 corporate jobs, according to The Wall Street Journal.

Best of the web

BlackRock
BLK,
-0.56%
and MSCI
MSCI,
-0.42%
are targets of a Congressional probe into facilitating U.S. investment in China.

The first new U.S. nuclear reactor in nearly seven years starts operations.

Modern-day Oppenheimers see the future of nuclear energy — and it’s mobile.

Top tickers

Here were the most active stock-market tickers as of 6 a.m. Eastern.

Ticker	Security name
TSLA, -1.13%	Tesla
TUP, +14.28%	Tupperware Brands
NIO, -4.97%	Nio
AMC, -0.27%	AMC Entertainment
PLTR, -2.60%	Palantir Technologies
GME, -1.80%	GameStop
NVDA, -0.74%	Nvidia
AAPL, -0.15%	Apple
NKLA, +14.79%	Nikola
AMSC, +54.02%	American Superconductor

The chart

The inflation-adjusted equity premium is looking pretty bleak. That’s calculated by taking the expected return to the S&P 500 and subtracting 10-year TIPS yields. “While admittedly this graphic is skewed by the few megacaps trading at huge multiples, it’s sobering nonetheless,” says Michael Ashton, better known as the Inflation Guy.

Random reads

Granted, Philadelphia’s a big sports town, but there were actual tailgates to get the Eagles’ throwback Kelly green jerseys that went on sale.

A Chinese zoo has denied that a bear is human after video of the creature standing on two feet.

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 1, 2023

U.S. stocks finish higher as S&P 500, Nasdaq climb for 5th straight month

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U.S. stocks finished higher on Monday, while the S&P 500 and Nasdaq Composite capped off July by recording their fifth-straight month in the green — the longest winning streak in roughly two years for both indexes. The S&P 500
SPX,
+0.15%
gained 6.92 points, or 0.2%, to finish Monday at 4,589.15, according to preliminary closing data from FactSet. For the month of July, the large-cap index increased by 3%. The Nasdaq Composite
COMP,
+0.21%
gained 29.37 points, or 0.2%, to 14,346.02, bringing its July advance to 2.2%. The Dow Jones Industrial Average rose by
DJIA,
+0.28%
100.57 points, or 0.3%, to 35,559.86, notching a 4.8% increase for the month. In another notable move, The S&P 500 Information Technology sector gained 2.4% in July to rise for the 7th straight month, the longest such streak since August 2014.

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July 31, 2023
U.S. corporate bonds flash ‘green light’ for further stock-market gains as equities soar in 2023

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The bond market is expressing confidence in company cash flows, flashing a sign of support for the stock market’s rally, according to DataTrek Research.

“U.S. corporate bond spreads continue to tighten and are now essentially the same as 2017–2019,” said Nicholas Colas, co-founder of DataTrek Research, in a note emailed Monday. “That is a green light for further stock market gains.”

Declining corporate bond spreads over comparable Treaurys signal rising confidence in future cash flows and earnings, said Colas. Both investment-grade and high-yield bonds have broadly seen their spreads tighten over the past few weeks to average levels seen in 2017–2019, when conditions in the economy were generally good, his note shows.

Investment-grade spreads averaged 1.19 percentage points over Treasurys over that stretch, while junk bonds averaged 3.82 percentage points, according to Colas’s research.

“This was a period of generally good economic conditions and just one hiccup in capital markets, namely when the Fed briefly overreached on rate policy in late 2018,” he said.

Weekend Snapshot: Stocks are on a seemingly unstoppable hot streak, but this bond-market ‘tipping point’ could see it end in a hurry

This year, investment-grade bond spreads have recently declined to around 1.22 percentage points and those for high-yield debt have narrowed to 3.78%, the DataTrek note said.

“Corporate bond markets continue to mirror equity market confidence” in stable and strengthening company cash flows, Colas said. “This is not only supporting the ongoing rally in large caps, but also helping small caps outperform in July.”

The Russell 2000 index
RUT,
+1.09%,
which tracks small-cap stocks in the U.S., has climbed 4.9% so far this month, exceeding the S&P 500’s 3% gains over the same period, according to FactSet data. The Russell 2000 has been trailing the S&P 500 in 2023, though, with 12.5% gains so far this year.

Earlier this month, Bespoke Investment Group also pointed to high-yield bonds as the latest indicator confirming the equity market’s rally. The S&P 500, a gauge of U.S. large-cap stocks, has jumped 19.3% this year through Friday.

Citigroup analysts said in a research note on Friday that they raised their 2023 target for the S&P 500 by 600 points to 4,600, while revising up their mid-2024 target to 5,000, from 4,400.

The popular stock-market index
SPX,
+0.15%
closed Friday at 4,582.23.

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July 31, 2023
The ‘narrow breadth’ chorus has fallen silent. What broadening participation in stock-market rally means for investors.

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A wider swath of stocks have joined the S&P 500
SPX,
+0.15%’s
upswing after the so-called Magnificent Seven — Apple
AAPL,
+0.32%,
Amazon
AMZN,
+1.11%,
Alphabet
GOOG,
+0.08%,
Microsoft
MSFT,
-0.72%,
Meta
META,
-2.11%,
Nvidia
NVDA,
-0.04%
and Tesla
TSLA,
+0.37%
— single-handedly propelled the large-cap index into a bull market in early June, with the gauge now up more than 28% from its low notched last October and rising to new highs since April 2022, according to Dow Jones Market Data.

Hopes that the U.S. economy could pull off a soft landing and avoid a recession despite the Federal Reserve’s aggressive interest-rate hikes, as well as receding inflation pressures and expectations for the end of the Fed’s monetary tightening campaign, have underpinned a notable expansion in market breadth over the past two months, according Adam Turnquist, chief technical strategist at LPL Financial.

The S&P 500 Equal Weighted Index
SP500EW,
+0.27%,
which lagged behind the market-cap-weighted S&P 500 index for most of the year, has now kicked back into gear and staged an impressive comeback in July. The equal-weighted index and the S&P 500 each advanced 3.1% this month, according to FactSet data.

The equal weighting eliminates the distortion of the megacap components and significantly changes several sector weightings in the S&P 500, including technology, which drops from around 29% on the SPX to only 13% on the equal-weighted index, said Turnquist in a Friday note. Meanwhile, the industrials sector has the biggest increase in weight, jumping from 9% on the SPX to 16% on the equal-weighted index.

Another way to quantify and compare market breadth is to look at the percentage of stocks on an index trading above their longer-term 200-day moving average (dma), Turnquist said. In general, if a stock is trading above its 200 dma, it is considered to be in an uptrend, and if the price is below the 200 dma, it is considered in a downtrend. Furthermore, a higher percentage of stocks above their 200 dma implies buying pressure is more widespread — suggesting the market’s advance is likely sustainable.

The chart below shows that 73% of stocks within the S&P 500 are trading above their 200 dma as of July 27, which compares to only 48% at the end of 2022. Moreover, the composition of breadth leadership has turned increasingly bullish. The highest sector readings include technology, industrials, energy, and consumer discretionary.

“So not only is breadth on the index robust, but cyclical stocks are also leading,” said Turnquist.

SOURCE: LPL RESEARCH, BLOOMBERG

Wall Street often views broadening participation in the stock-market rally as a measure of health and a constructive sign of the sustainability of the bull market.

Jimmy Lee, founder and chief executive officer of The Wealth Consulting Group said he is seeing “a lot of money” flowing into areas that are not the Magnificent Seven such as stocks in the industrials, financials, materials, energy and even real-estate sectors.

The S&P 500’s industrials sector
SP500.20,
+0.23%
climbed 2.9% in July, while the financials sector
SP500.40,
+0.44%
advanced over 4.7% this month. The S&P 500’s energy sector
SP500.10,
+2.00%,
which had been the biggest laggard when the rest of the markets exited the bear market in June, jumped 7.3% month to date after the U.S. oil benchmark
CL.1,
-0.20%

CL00,
-0.20%
closed above $80 a barrel for the first time since April.

Meanwhile, the tech-heavy S&P 500’s communication-services sector
SP500.50,
-0.03%
rose 6.7% in July, while the consumer-discretionary sector
SP500.25,
+0.56%
gained 2.4% and the information-technology sector
SP500.45,
+0.13%
was up 2.6%, according to FactSet data.

See: Stocks are on a seemingly unstoppable hot streak, but this bond-market ‘tipping point’ could see it end in a hurry

Stephen Hoedt, managing director of equity and fixed income research at Key Private Bank, told MarketWatch in an interview that he doesn’t see “any reason to get bearish here with the fundamentals that are underlying,” which gives investors reason to rotate toward the more cyclical areas such as energy, financials and industrials, while broadening the market away from just being concentrated in the megacap technology names.

“The growth has been a surprise this year for everyone, so that’s what the market got wrong coming into this year. When I look at growth, nominal GDP growth translates directly into earnings and we’ve seen earnings continue to surprise on the upside,” Hoedt said.

Hoedt pointed to the direction of the 12-month forward earnings estimate for the S&P 500 as an important indicator. “As long as the direction of the 12-month forward earnings number for the S&P 500 is going up, it’s really, really difficult to be bearish on the stock market,” he said. “It seems to me that we may start to see another inflection higher in forward earnings revisions that take into account this stronger growth environment that we’re in.”

However, the broadening of the stock-market rally and the bullish sentiment were also driving some on Wall Street to believe stocks are overbought and due for a correction.

Lee said there’s still too much pessimism out there and too much concern that some investors haven’t chased the market yet. “In the second half of this year, when the Fed does stop raising rates and if the economy stays out of recession, you can see major money — trillions of dollars moving from the money market into equities and other risk assets,” he told MarketWatch in a phone interview on Friday.

“When that happens, it’s probably going to push valuations even further. So I would imagine when that happens is when you can expect more of a correction to occur, but I think that we still have more room to go before that happens.”

U.S. stocks ended higher on Monday, finishing up July on a positive note. Three major stock indexes rallied this month, with the S&P 500 up 3.1% and booking its fifth monthly gain. The tech-heavy Nasdaq Composite
COMP,
+0.21%
gained 4.1% month to date, while the Dow Jones Industrial Average
DJIA,
+0.28%
advanced 3.4%, according to Dow Jones Market Data.

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July 31, 2023
Stocks are on a seemingly unstoppable hot streak, but this bond-market ‘tipping point’ could see it end in a hurry

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The S&P 500 index is on the verge of a fifth straight monthly gain in July. It’s a reality that few on Wall Street expected just eight months ago.

As a result, it seems that one by one, equity analysts at the big banks are issuing mea culpas or tweaking their S&P 500 targets.

With so many reconsidering their assumptions about markets and the economy, one analyst who has been bullish for months sees an opportunity to reflect on what Wall Street got wrong in 2023 — and by doing so, pinpoint potential existential threats to the rally that may lie ahead.

Jawad Mian, a longtime financial markets professional and the founder of Stray Reflections, said professional investors and economists generally underestimated just how resilient U.S. corporations, and U.S. consumers, and the broader U.S. economy would be to higher interest rates. At the same time, they failed to fully appreciate inflation’s ability to boost corporate profits over the long term.

So far, stocks have proved resilient to higher bond yields in 2023, but that doesn’t mean they always will be. Mian believes that rising real yields could eventually push past a “tipping point” that would send U.S. equity valuations sharply lower.

“I think what’s happening is we are collectively discovering how high interest rates can go before the economy breaks,” he said.

“I think the 10-year yield is heading toward 5%. But the nuanced take here is the path higher is not troublesome…however, at some point, we’ll reach a level that’s too much,” Mian added during a phone interview with MarketWatch.

The yield on the 10-year Treasury note
TMUBMUSD10Y,
3.962%
stood at 3.955% on Friday.

Past the point of no return

The Federal Reserve pushed its policy interest-rate to its highest level in 22 years earlier this week, and further hikes certainly could push long-dated bond yields higher, Mian said. But the blow that drives markets over the cliff could easily come from somewhere else as well.

For example: Foreign investors, particularly those in Japan, could choose to dump U.S. Treasurys now that they’re being enticed by more attractive yields back home.

Investors received a small taste of what this might look like on Thursday afternoon when a headline about the Bank of Japan’s plans to loosen its grip on its government bond market sent the yield on the 30-year Treasury bond
TMUBMUSD30Y,
4.021%
north of 4%, sparking a selloff in stocks that led to the Dow Jones Industrial Average snapping a 13-day winning streak.

Yields on the 10-year Japanese government bond hit their highest levels since 2014 on Friday after the BOJ confirmed those reports during its July policy meeting.

See: Why U.S. stocks and bonds stumbled on talk of a Bank of Japan policy tweak

Corporate earnings are another puzzle

While it’s important for investors to monitor bond-market threats like this, yields don’t exist in a vacuum. Corporate earnings are another important piece of the puzzle.

Higher yields make bonds more attractive to investors, helping to dim the appeal of stocks, but they also increase borrowing costs for corporations, potentially cutting into profits and pushing companies to lay off employees or enact other belt-tightening measures.

The more pressure companies face from rising borrowing costs, they more likely they’ll need to take more cost-cutting measures like laying off employees.

“Generally speaking, if yields move higher that should put downward pressure on multiples. That’s a risk to the stock market for sure,” said James St. Aubin, chief investment officer for Sierra Investment Management, during a phone interview with MarketWatch.

For now at least, it looks like stocks could continue to ride this wave of momentum higher, even if valuations are looking somewhat stretched relative to recent history already, St. Aubin said. For this to continue though, corporate earnings will need to keep pace with increasingly optimistic expectations.

Already, stock valuations are looking lofty based on the price-to-earnings ratio, one of Wall Street’s favorite metrics for determining how expensive or cheap the market looks.

The forward 12-month price-to-earnings ratio for the S&P 500 index currently stands at 19.4. That’s already higher than the five-year average of 18.6, and the 10-year average of 17.4, according to FactSet data.

Right now, investors are willing to tolerate this because they expect corporate profits to grow substantially in the years ahead, even though profits are expected to contract by 7% in the quarter ended in June, bringing the stretch of negative earnings growth to a third straight quarter.

But in 2024, year-over-year earnings growth is expected to swell to 12.6%. If companies meet, or surpass, these expectations, stocks will likely hold on to their gains, if not continue to climb, St. Aubin said.

However, should earnings growth disappoint, a painful market reckoning might follow.

Since the start of 2023, U.S. stocks have nearly erased all of their losses from 2022, which was the worst year for stock-market performance since 2008, while bonds saw their biggest declines in decades as yields soared driven by inflation and the Federal Reserve’s aggressive interest-rate hikes. Since Jan. 1, the S&P 500
SPX,
+0.99%
has risen 19.3% to 4,582.23, according to FactSet.

The Nasdaq Composite
COMP,
+1.90%
has risen 36.8% to 14,316, while the Dow Jones Industrial Average
DJIA,
+0.50%
is up 7%.

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July 30, 2023
U.S. stocks end a volatile week higher as Dow industrials, S&P 500 notch 3rd straight week of gains

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U.S. stock indexes finished higher on Friday with the Dow Jones Industrial Average and the S&P 500 closing out their third winning week in a row, bolstered by better-than-expected earnings from megacap technology companies and hopes that the Federal Reserve will tame inflation by hiking interest rates aggressively without causing a recession. The Dow industrials
DJIA,
+0.50%
rose 176 points, or 0.5%, to end at 35,459, posting a weekly gain of 0.7%. The S&P 500
SPX,
+0.99%
advanced 1%, while the Nasdaq Composite
COMP,
+1.90%
rose over 2% for the week, according to Dow Jones Market Data. On Thursday, the blue-chip Dow snapped its longest winning streak since 1987 as U.S. Treasury yields
TMUBMUSD10Y,
3.956%
jumped after a news report said the Bank of Japan will discuss tweaking its yield-curve control policy at a policy board meeting on Friday. The Bank of Japan Friday said it would loosen its grip on yields of Japanese government bonds, a decision that pushed the yield on the 10-year JGB to its highest level since 2014, according to FactSet data.

In U.S. economic data, the personal consumption expenditures price index showed U.S. inflation eased 0.2% in June, compared with May’s increase of 0.3%. The rate of core inflation, which omits volatile food and energy prices, rose 4.1% in the last 12 months, down sharply from May’s 4.6% increase, but that still puts it at a more than two-year low. It’s still far above the Fed’s 2% target, however.

Meanwhile, consumer spending rose 0.5% in June in a sign of confidence as inflation eased again and the U.S. economy continued to grow.

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July 28, 2023

August used to be the best month for the stock market. Then it became the worst.

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August the best month for average stock market performance? Or is it the worst?

The answer depends on the period of stock-market history you examine. Over the 90 years from the Dow Jones Industrial Average’s
DJIA,
+0.50%
inception in 1896 until 1986, August on average was far ahead of the other months — more than four times larger, as you can see from the table below. August outperformed the other months’ average by 1.4 percentage points. This difference is significant at the 95% confidence level that statisticians often use when determining if a pattern is genuine.

In the years since then, in contrast, August has been the worst month for the stock market, on average, lagging the other months’ average by 1.7 percentage points. Since 1986, in fact, August has been a worse month for the stock market than even September, whose reputation for stock market losses is widely known.

	August’s average DJIA return	Average return of all other months	August’s rank among all 12 months
1896 to 1986	+1.8%	+0.4%	1^st
After 1986	-0.8%	+0.9%	12^th

If the 36 years since 1986 were all that statisticians had to go on, they would conclude that August’s underperformance was significant at the 95% confidence level — just the opposite of the conclusion that emerges from the 90 years prior. But when analyzing the Dow’s entire history since 1896, August’s performance is no better or worse than average.

This August, in order to use history as a basis for investing, you’d first need to come up with a plausible explanation of what changed in the 1980s that caused August to swing from best to worst.

Though I’m not aware of any such explanation, it’s always possible that one exists. To search for it, I analyzed monthly values back to 1900 for the Economic Policy Uncertainty (EPU) index that was created by Scott Baker of Northwestern University, Nicholas Bloom of Stanford University, and Steven Davis of the University of Chicago. We know from Finance 101 that the stock market responds to changes in economic uncertainty, so we’d be onto a possible explanation of August’s seasonal tendencies if the EPU underwent some fundamental change in 1986.

But no such change shows up in the data. August’s average EPU level is no different than for any of the other months of the calendar, either before or after 1986.

Another possible explanation might trace to investor sentiment. To investigate that possibility, I analyzed stock market timers’ average recommended equity exposure levels, as measured by the Hulbert Stock Newsletter Sentiment Index (HSNSI). I was looking to see if, after 1986, the HSNSI was significantly different at the beginning of August than in other months, on average. The answer is “no.”

A plausible explanation might still exist for August’s change of fortune beginning in the mid-1980s, notwithstanding my inability to find one. But absent such an explanation, the most likely explanation is that it’s a random fluke.

It would hardly be a surprise if randomness is the culprit. Most of the patterns that capture Wall Street’s attention are in fact nothing more than statistical noise. The reason we nevertheless insist that significant patterns exist is because — as numerous psychological studies have shown — we’re hardwired to find patterns even in randomness.

That’s why your default reaction to all alleged patterns, not just those involving August, should be skepticism. The odds are overwhelming that they aren’t genuine. Only if those patterns can survive the scrutiny of a skeptical statistician should you even begin to be interested.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com

More: Puzzled by the stock-market surge? Overshoots are the new normal, Bank of America strategist says

Plus: Here’s how long the stock market rally may last

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July 28, 2023

U.S. stocks open higher after PCE report shows inflation eases again in June

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U.S. stock indexes opened higher on Friday, bouncing back from the previous session’s late day slump and looking to book narrow weekly gains after an inflation gauge that the Federal Reserve follows closely showed further signs of cooling in June. The Dow Jones Industrial Average
DJIA,
+0.50%
rose 223 points, or 0.6%, to 35,511, while the S&P 500
SPX,
+0.99%
gained 0.8% and the Nasdaq Composite
COMP,
+1.90%
advanced 1.1%. The personal consumption expenditures price index (PCE) increased a mild 0.2% from the previous month, the Commerce Department said on Friday. The so-called core PCE rate of inflation, which omits volatile food and energy costs, also rose 0.2% last month. Meanwhile, the U.S. employment cost index, the broadest measure of U.S. labor costs, rose 1% in the second quarter after gaining 1.2% in the first quarter, the Labor Department said Friday. Investors were also digesting the overnight Bank of Japan decision, where policymakers said they would allow “greater flexibility” in its target range for 10-year Japanese government bond yields.

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July 28, 2023
Why U.S. stocks and bonds stumbled on talk of a Bank of Japan policy tweak

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Worries about a possible policy tweak by the Bank of Japan threw a wet blanket on a stretched U.S. stock-market rally Thursday, with the Dow Jones Industrial Average snapping its longest winning streak since 1987 after the 10-year Treasury yield surged back above the 4% level.

The Japanese yen also strengthened after a news report said policy makers on Friday would discuss a possible tweak to the Bank of Japan’s so-called yield-curve control policy that would loosen the cap on long-dated government bond yields.

Nikkei, without citing sources, reported that BOJ officials would talk about the matter at Friday’s policy meeting and that the potential change would allow the yield on the 10-year Japanese government bond
TMBMKJP-10Y,
0.440%
to trade above its cap of 0.5% “to some degree.”

‘Ultimate fear’

Why is that a negative for U.S. Treasurys and, in turn, U.S. stocks?

The “ultimate fear” is that Japanese investors, who have vast holdings of U.S. fixed income, including Treasury notes and other securities, “begin to see a higher level of yields in their own backyard,” Torsten Slok, chief economist at Apollo Global Management, told MarketWatch in a phone interview. That could prompt heavy liquidation of those U.S. positions as investors repatriate holdings to reinvest the proceeds at home.

That dynamic explains the knee-jerk reaction that saw the 10-year U.S. Treasury yield
TMUBMUSD10Y,
4.004%
surge more than 16 basis points to end above 4%, he said. Yields rise as debt prices fall.

The surge in yields, in turn, saw stocks give up early gains, with U.S. indexes ending lower across the board.

What is yield curve control?

The Bank of Japan began implementing yield curve control, or YCC, in 2016, a policy that aims to keep government bond yields low while ensuring an upward-sloping yield curve. Under YCC, the BOJ buys whatever amount of JGBs is necessary to ensure the 10-year yield remains below 0.5%.

Nikkei said a possible tweak would allow gradual increases in the yield above 0.5%, but would clamp down on any sudden spikes, allowing the BOJ to rein in fluctuations driven by speculators.

Global market participants are sensitive to changes in YCC. The BOJ sent shock waves through markets in December when it lifted the cap from 0.25% to 0.5%. Investors were rattled by the prospect of the Bank of Japan giving up its role as the remaining low-rate anchor among major central banks.

BOJ Gov. Kazuo Ueda in May said the bank would start shrinking its balance sheet and end its yield-curve control policy if a 2% inflation looks achievable and sustainable after many years of undershooting.

Yen rallies

The yield on the 10-year JGB has traded above 0.4%, but remained below the 0.5% cap. Continued interest rate rises by the Federal Reserve and other major central banks in the past year have raised worries that the 10-year JGB yield could test the limit, Nikkei reported. Those rate hikes, meanwhile, have added pressure to the yen, whose weakness is seen contributing to inflation pressures.

The yen
USDJPY,
-0.02%
strengthened following the report. The U.S. dollar was off 0.5% versus the currency, fetching 139.48 yen.

The Dow Jones Industrial Average
DJIA,
-0.67%
ended the day down nearly 240 points, or 0.7%, snapping a 13-day winning streak, while the S&P 500
SPX,
-0.64%
declined 0.6% and the Nasdaq Composite
COMP,
-0.55%
lost 0.5%.

Japanese stocks have solidly outpaced strong gains for U.S. equities in 2023, with the Nikkei 225
NIK,
+0.68%
up 26% so far this year versus an 18.7% rise for the S&P 500.

See: Japan’s stock market is roaring 25% higher. These 4 things could keep the rally going.

What’s next

Investors are waiting to see what the Bank of Japan actually has to say.

While the Nikkei report helped “exaggerate” a selloff in Treasurys, the market may be inoculated against bigger swings after the BOJ’s December adjustment to the rate band, said Ian Lyngen and Benjamin Jeffery, rates strategists at BMO Capital Markets, in a note.

The analysts said they expect that “the magnitude of the follow through repricing in U.S. rates will be comparatively more contained than would otherwise be expected.”

More recently, the weak yen has raised the cost of hedging long Treasury positions for Japanese investors. So a stronger yen resulting from a shift toward tighter policy would help make hedging costs for owning Treasurys less onerous for Japanese investors as well, Lyngen and Jeffery wrote, “which over the longer term may begin to make Treasurys more attractive to Japanese buyers and add to the list of sources for duration demand.”

That could make U.S. debt more attractive to new Japanese buyers, Slok agreed.

But that’s oveshadowed by the near-term worry, Slok said, that existing Japanese investors will be inclined to sell Treasurys. Flow data will be very much in focus if the Bank of Japan follows through on the apparent trial balloon floated in the Nikkei report.

Investors will be watching, he said, to see “if the train is leaving the station.”

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July 27, 2023
Former Fed official Clarida backs another interest-rate hike this year

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Former Federal Reserve Vice Chair Richard Clarida on Thursday said he thinks another interest-rate hike this year would be a wise move by the U.S. central bank.

In an interview on Bloomberg, Clarida said the biggest risk for the Fed is to declare “mission accomplished” too early and having to restart rate hikes next year.

“So if I were there, it would skew me to getting in that additional hike this year, and I think some members of the Fed will see it that way,” Clarida said.

Fed Chair Jerome Powell said Wednesday that the Fed will decide what to do about interest rates on a “meeting-by-meeting” basis.

Read: Fed no longer foresees a U.S. recession, highlights from Powell presser

The Fed is forecasting that the unemployment rate will rise to 4.5% by the end of 2024 from 3.6% in June.

That is still a forecast for recession because under the Sahm rule, created by former top Fed staffer Claudia Sahm, the start of a recession is signaled when the three-month moving average on the unemployment rate rises by 0.5 percentage points or more from its low during the past year.

But Clarida said the Fed faces an alternative scenario where inflation picks up again early next year after slowing later this year.

“If the Fed finds itself in March of 2024 with an unemployment rate of 4% and and inflation rate of 4% with some of that temporary good news [on inflation] behind them, they’re in a very tough spot,” he said.

“I do think that’s a risk. It’s not the base case,” he said.

The Dow Industrial Average
DJIA,
-0.61%
was trading slightly lower on Thursday after 13 straight sessions in the green.

The yield on the 10-year Treasury yield
TMUBMUSD10Y,
4.016%
has risen to 3.97%, the highest level in two weeks.

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July 27, 2023

Banc of California is expected to keep leading regional banks higher as PacWest deal ignites sector

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Banc of California Inc.’s proposed agreement to acquire PacWest Bancorp. helped send regional-bank stocks considerably higher on Wednesday. But even after a two-day increase of 12% for its shares, the acquiring bank remains the favorite name among analysts covering regional players in the U.S.

The merger agreement was announced after the market close on Tuesday, but the rumor mill had already sent Banc of California’s
BANC,
+0.62%
stock up by 11% that day. Then on Wednesday, shares of PacWest Bancorp
PACW,
+26.92%
shot up 27% to $9.76, which was above the estimated takeout value of $9.60 a share when the deal was announced. The merger deal, if approved by both banks’ shareholders, will also include a $400 million investment from Warburg Pincus LLC and Centerbridge Partners L.P.

A screen of regional banks by rating and stock-price target is below.

Deal coverage:

With PacWest closing above the initial per-share deal valuation, it is fair to wonder whether or not its shareholders will vote to approve the agreement. In a note to clients on Wednesday, Wedbush analyst David Chiaverini called Banc of California’s offer “fair, but not overwhelmingly attractive,” and wrote that PacWest was “a likely seller before the mini banking crisis occurred in March.”

While Chiaverini went on to predict the deal’s approval by PacWest’s shareholders, he added that he “wouldn’t be surprised if there were some dissent among a minority of shareholders [which could] possibly open the door to the potential emergence of a third-party bid.”

More broadly, Odeon Capital analyst Dick Bove wrote to clients on Wednesday that the merger deal, along with increasing involvement of private-equity firms in lending businesses, the expected enhancement of regulatory capital requirements for banks and other factors could lead to more consolidation among smaller banks.

He went on to write that we might be entering a period for the banking industry similar to the 1990s, “when rules were being changed and acquisitions were rampant,” which “created new investment opportunities.”

The SPDR S&P Regional Banking exchange-traded fund
KRE,
+4.74%
rose 5% on Wednesday but was still down 17% for 2023, while the SPDR S&P 500 ETF Trust
SPY,
+0.02%
was up 19%, both excluding dividends.

KRE holds 139 stocks, with 98 covered by at least five analysts working for brokerage firms polled by FactSet. Out of those 98 banks, 45 have majority “buy” ratings among the analysts. Among those 45, here are the 10 with the most upside potential over the next 12 months, implied by consensus price targets:

Bank	Ticker	City	Total assets ($mil)	July 26 price change	Share buy ratings	July 26 closing price	Consensus price target	Implied 12-month upside potential
Banc of California Inc.	BANC, +0.62%	Santa Ana, Calif.	$9,370	1%	71%	$14.71	$18.58	26%
Enterprise Financial Services Corp.	EFSC, +1.83%	Clayton, Mo.	$13,871	2%	80%	$41.75	$49.25	18%
First Merchants Corp.	FRME, +3.52%	Muncie, Ind.	$17,968	4%	100%	$32.38	$37.33	15%
Amerant Bancorp Inc. Class A	AMTB, +3.47%	Coral Gables, Fla.	$9,520	3%	60%	$20.26	$23.30	15%
Old Second Bancorp Inc.	OSBC, +3.39%	Aurora, Ill.	$5,884	3%	100%	$16.15	$18.50	15%
F.N.B. Corp.	FNB, +2.87%	Pittsburgh	$44,778	3%	75%	$12.91	$14.50	12%
Columbia Banking System Inc.	COLB, +3.95%	Tacoma, Wash.	$53,592	4%	55%	$22.63	$25.32	12%
Wintrust Financial Corp.	WTFC, +3.43%	Rosemont, Ill.	$54,286	3%	92%	$86.05	$95.33	11%
Synovus Financial Corp.	SNV, +6.01%	Columbus, Ga.	$60,656	6%	75%	$34.06	$37.73	11%
Home BancShares Inc.	HOMB, +4.56%	Conway, Ark.	$22,126	5%	57%	$24.09	$26.67	11%
Source: FactSet

Click on the tickers for more about each bank.

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

Any stock screen can only be a starting point when considering whether or not to invest. If you see any stocks of interest here, you should do your own research to form your own opinion.

Don’t miss: How you can profit in the stock market from an incredible financial-services trend over the next 20 years

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July 26, 2023

Dow scores longest win streak since 1987 after Fed decision

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The Dow Jones Industrial Average ended slightly higher Wednesday to book its longest win streak since 1987 after the Federal Reserve announced its decision to raise interest rates. The Dow
DJIA,
+0.23%
rose 0.2% Wednesday, while the S&P 500
SPX,
-0.02%
closed about flat and the Nasdaq Composite
COMP,
-0.12%
dipped 0.1%, according to preliminary FactSet data. The Dow rose for a 13th straight day in its longest win streak since 1987, according to Dow Jones Market Data. As expected by the market, the Fed said Wednesday that it raised its benchmark rate a quarter percentage point to a targeted range of 5.25% to 5.5% in a bid to bring down elevated inflation.

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July 26, 2023
U.S. stocks tick higher, Treasury yields retreat as Fed hikes rates to 22-year high

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U.S. stocks ticked higher while Treasury yields declined Wednesday afternoon in New York after the Federal Reserve raised its benchmark policy rate target to the highest level in 22 years. The S&P 500
SPX,
-0.29%
was off by 10 points, or 0.2%, at 4,557.65, having pared an earlier decline. The Dow Jones Industrial Average
DJIA,
+0.02%
shifted into the green, and was up by 22 points, or 0.1%, at 35,460, leaving it on track to extend its winning streak to a 13th session — what would be the longest daily winning streak since 1987. The Nasdaq Composite
COMP,
-0.47%
was off by 49 points, or 0.4%, at 14,091. Treasury yields tipped lower, with the 2-year note yield off by 3 basis points at 4,874%. Bond yields move inversely to prices.

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July 26, 2023
British billionaire owner of Tottenham football club charged with ‘brazen’ insider trading

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U.S. prosecutors have called an offsides on the British billionaire owner of Tottenham Hotspur soccer team, charging him with a “brazen insider-trading scheme,” in which he passed secret stock tips worth millions to his girlfriends, private pilots and assistants for years.

Joe Lewis, 86, who is one of the richest people in the United Kingdom, is accused of taking inside information about companies in which he was a large investor and handing it out to people around him for them to use to get rich.

“Notwithstanding his vast personal wealth, Lewis provided the inside information to his employees, romantic partners, and friends as a way to give them compensation and gifts,” federal prosecutors wrote in an indictment filed in New York.

Prosecutors say Lewis, who Forbes has estimated to be worth $6.1 billion, carried on with the scheme from 2013 through 2021, helping his employees and friends make millions of dollars in illicit gains.

Some people who benefited from Lewis’ loose lips included staff on his private, $250 million super yacht, the Aviva.

In some cases, prosecutors allege Lewis gave his pilots short-term, $500,000 loans to buy stock and then pay him back after they scored big based on his tips.

“Thanks to Lewis, those bets were a sure thing,” said Damian Williams, the U.S. attorney for the Southern District of New York. “That’s classic corporate corruption. It’s cheating and it is against the law.”

Lewis’ private equity company, Tavistock Group, has investments in hundreds of companies ranging from agriculture, sports, resort properties and life-sciences businesses. The firm owns works of art by painters like Pablo Picasso, Henri Matisse and Gustav Klimt.

Investigators say Lewis shared information about publicly-traded life-science groups Solid Biosciences
SLDB,
+0.88%
and Mirati Therapeutics
MRTX,
-2.43%,
as well as beef producer Australian Agricultural Co.
AAC,
-2.79%
and a special purpose acquisition company, BCTG.

Prosecutors also allege that he hid how much of a stake he owned in cancer therapeutics company Mirati “through a pattern of false filings and misleading statements” in order to manipulate markets.

A message sent to representatives of Tavistock wasn’t immediately returned.

Making his fortune as a currency trader, Lewis became more widely known when he acquired the Tottenham football club in 2001 for $35.5 million.

He has lived as a tax exile in the Bahamas for years.

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July 25, 2023
Dow scores 11th day of gains, books longest win streak in six years

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U.S. stocks closed higher, with the Dow posting its longest win streak in over six years, according to Dow Jones Market Data. The Dow Jones Industrial Average
DJIA,
+0.52%
gained about 184 points, or 0.5%, ending near 35,411, according to preliminary FactSet data. With 11 straight sessions of gains, it was the blue-chip gauge’s longest streak of win since Feb. 27, 2017, according to Dow Jones Market Data. The S&P 500 index
SPX,
+0.40%
advanced 0.4%, with the energy sector leading the way higher, and the Nasdaq Composite Index
COMP,
+0.19%
ended up 0.2%. Stocks have been charging higher in 2023 despite the dramatic pace of rate hikes from the Federal Reserve since last year. Focus is on Wednesday’s Fed rate decision, with U.S. central bankers expected to raise rates by another 25 basis points to a 5.25%-5.5% range, potentially marking the last in this cycle as its inflation fight appears to be pay off. Energy prices rose Monday, with U.S. West Texas Intermediate crude for September
CL00,
+0.13%
delivery ending at $78.74 a barrel, the highest for a front-month contract in three months, according to Dow Jones Market Data.

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July 24, 2023
‘Oppenheimer’ gives stock investors another reason to be bullish about nuclear energy

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One of the hottest movies of the summer is the staggeringly good biopic “Oppenheimer,” about the man who oversaw the frantic race to develop the atomic bomb during World War II.

The atom bomb dropped on Hiroshima, Japan on Aug 6, 1945 was a fission-style device. This also happens to be the same basic physics behind nuclear reactors that are in use today. It’s a reminder that technology can be, at its essence, agnostic: Whether it is used for malevolent or benevolent purposes (in nuclear fission’s instance, an instrument of death or clean, carbon-free electricity) depends upon the intent of the user.

Fission reactors generate about 10% of the world’s electricity today. The United States gets even more of its electricity this way, about a fifth.

These percentages are likely to rise as global demand for electricity — and concerns about global warming and climate change — rise. This will present opportunities for long-term oriented investors. The lion’s share of this demand — about 70%, says the Paris-based International Energy Agency (IEA), will come from India, which the United Nations says is now the world’s most populous country, China, and Southeast Asia. Put another way, “the world’s growing demand for electricity is set to accelerate, adding more than double Japan’s current electricity consumption over the next three years,” says Fatih Birol, the IEA’s executive director.

While fossil fuels remain the dominant source of electricity generation worldwide — the Central Intelligence Agency estimates that it provides about 70% of America’s electricity, 71% of India’s and 62% of China’s, for example—the IEA report says future demand will be met almost exclusively from two sources: renewables and nuclear power. “We are close to a tipping point for power sector emissions,” the IEA says. “Governments now need to enable low-emissions sources to grow even faster and drive down emissions so that the world can ensure secure electricity supplies while reaching climate goals.”

“ The Biden administration is a big booster of nuclear energy. ”

It’s helpful that the Biden administration is a big booster of nuclear energy, which the White House sees as an integral part of its broader effort to move the U.S. economy away from fossil fuels. The Department of Energy says that the country’s 93 reactors generate more than half of America’s carbon-free electricity. But price pressures from wind, solar and natural gas (which the feds call “relatively clean” even though it emits about 60% of coal’s carbon levels) have putseveral reactors out of business in recent years.

The bipartisan infrastructure bill that Biden signed into law in November 2021 includes $6 billion, spread out over several years, for the so-called Civil Nuclear Credit Program, designed to keep reactors — and the high-paying jobs that come with them — running. If a plant were to close, it would “result in an increase in air pollutants because other types of power plants with higher air pollutants typically fill the void left by nuclear facilities,” the administration says. U.S. Energy Secretary Jennifer Granholm has said the Biden administration is “using every tool available” to get the country powered by clean energy by 2035.

The private sector is beginning to stir. Last week, Maryland-based X-Energy said it would build up to 12 reactors in Central Washington state, for Energy Northwest, a public utility. These wouldn’t be the behemoth-type reactors we’re used to seeing, but “advanced small, nuclear reactors.” X-Energy, which is privately held,  has also been selected by Dow
DOW,
-1.40%
to construct a similar facility in Texas.

Other companies are also rolling out new technology to meet demand. Nuclear fusion — a breakthrough in that it creates more energy than the Oppenheimer-era fission model and at a lower cost — is likely to be the basis for reactors in the years ahead; the Washington, D.C.-based Fusion Industry Association thinks the first fusion power plant could come online by 2030. After seven rounds of funding, one fusion company, Seattle-based Helion Energy, is currently valued at around $3.6 billion, and appears headed for a public offering.

Here too, the Biden administration is getting involved. In May, the Department of Energy announced $46 million in funding for eight other fusion companies. “We have generated energy by drawing power from the sun above us. Fusion offers the potential to create the power of the sun right here on Earth,” says Granholm.

There are several opportunities here for long-term investors. You can pick your way through any number of publicly held companies, including more traditional utilities, or spread your bet across the industry through a handful of exchange-traded funds. The largest of these is the Global X Uranium Fund
URA,
+0.78%,
with about $1.6 billion in assets. It’s up about 9% year-to-date. The VanEck Uranium + Nuclear Energy Fund
NLR,
+0.41%
is up almost 10% and sports a 1.8% dividend yield. These are respectable year-t0-date returns, even though they lag the S&P 500
SPX,
+0.32%
(up close to 19%) by a wide margin.

More: Net-zero by 2050: Will it be costly to decarbonize the global economy?

Also read: Fukushima’s disaster led to a “lost decade” for nuclear markets. Russia, low carbon goals help stage a comeback.

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July 24, 2023
Here are 4 of the biggest changes to the Nasdaq 100 from Monday’s special rebalancing
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New weightings for the largest stocks in the Nasdaq 100 are taking effect on Monday following the index’s second “special rebalancing” in 25 years.

See: Nasdaq rebalancing is coming, and it’s boosting interest in Friday’s $2.3 trillion option expiration
These new levels were shared ahead of time with Goldman Sachs Group Chief U.S. Equity Analyst David Kostin. Kostin and his team have published a report on the changes that was shared with Goldman clients and the press last week.

Here are four of the most important shifts highlighted in Kostin’s note:

The seven stocks with the heaviest weightings in the Nasdaq 100 are seeing their collective weight reduced to 44% from 56%.

At the sector level, information technology will continue to account for roughly half of the index, but the sector’s weight will decline to 49% from 51%.

Apple Inc.
AAPL,
+0.56%
and Microsoft Corp.
MSFT,
+0.19%
will remain the index’s largest constituents, but their index weights will be reduced by roughly four percentage points — to 12% and 10%, respectively.

Broadcom’s index weight is seeing the biggest increase, and will see its weighting increase by 64 basis points to 3%.

The Goldman analyst summarized how the new weightings would impact the index’s 25 largest constituents in the chart below.

GOLDMAN SACHS

According to Nasdaq representatives, the Nasdaq 100 is the most popular of the exchange’s indexes. So far this year, it has outperformed the Nasdaq Composite, a broader index including every company traded on the exchange. The Nasdaq 100 is up 41.2%, to the Composite’s 34.4%, according to FactSet data.

EPFR data show $261 billion in mutual fund and exchange-traded fund assets are benchmarked to the Nasdaq 100, including the Invesco QQQ Trust Series
QQQ,
+0.11%,
better known by its ticker QQQ. More than $250 billion of this money is invested in passive benchmark-tracking strategies.

Nasdaq decided to implement the special rebalancing earlier this month to try and ward off concentration risk after its seven largest components surged earlier this year. According to its official index-management methodology, Nasdaq aims to keep the combined weighting of its largest constituents to 40%.

Kostin said he doesn’t expect these changes to have much of an impact on markets, arguing that the previous special rebalancing didn’t move the index much, either.

Both the Nasdaq 100 and Nasdaq Composite were slightly lower on Monday as big-tech names continued to lag the S&P 500 and suddenly high-flying Dow Jones Industrial Average
DJIA,
+0.57%,
just like they did last week.

Nasdaq 100-tracking QQQ
QQQ,
+0.11%
was off by 0.2% at $374 per share Monday morning, while the Nasdaq Composite
COMP,
+0.19%
was down 0.2% at 14, 013.
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July 24, 2023

Tag: securities

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