The S&P 500 is cutting back on some of its losses today as the index is up around 0.4% as of this writing. From a technical perspective, the S&P 500 is currently around similar levels to the June highs, but other than that there is no clear technical support. High yield bonds are another story. Investors often turn to credit markets for confirmation of moves the equities, and while earlier this week credit spreads were ripping higher to confirm the drop in equities, the high-yield bond ETF (HYG) is showing a more promising sign for bulls today. As shown below, HYG has pulled back 3.33% from its high less than two weeks ago, but over the past three sessions, that decline has been paused as the ETF has found support at its 50-DMA (which has also begun to trend sideways).  That is the reverse of what has frequently been observed in the past year as the 50-DMA has gone from resistance to support. At multiple points throughout the past year, the 50-DMA frequently marked a stopping point in short-term rallies. This week, the opposite has appeared to be the case.  Click here to learn more about Bespoke’s premium stock market research service.

It is no secret that 2022 has not exactly been the year of the 60/40 portfolio.  This year has left nothing safe with both stocks and bonds hit hard.  Both are in the red by 10%+ on a year to date basis headed into the final week of August.  In the charts below, we show the year to date total returns of the S&P 500 (y-axis) and the year to date total returns of various ICE Bank of America bond indices (x-axis) through August for each year going back to their respective inceptions (each index began in 1973 except for high yield which began in 1987). No matter which way you cut it, 2022 has been the worst year of the past half century for stocks and bonds combined.

With the S&P 500 down a little over 12% YTD, aggregate bonds (government and corporate bonds combined) are only around one percentage point better. For the comparable time of the year, the only years that also have seen both bonds and stocks sitting on a loss through August were 1973, 1974, and 1981.  The same applies for government bonds. The corporate investment grade bond index has a bit more variety of years with stocks and bonds falling in 1974, 1981, 2008, and 2015. Again though, none of those other years have seen as sharp of a decline as 2022, and the S&P 500’s drop in the same time also ranks as one of the worst. 2022 is the only year that the high yield bond index has fallen simultaneously with stocks, however as we noted earlier, it does not have as long of a history as those other categories. Click here to learn more about Bespoke’s premium stock market research service.

In last Thursday’s Chart of the Day, we highlighted how important dividends are for long-term investment performance. While dividends do help to boost investment returns over the long term, in the short term there is often an ebb and flow of dividend-focused ETFs under and outperforming in terms of price moves. For example, up until June, the S&P 500’s highest yielders measured by the SPDR S&P 500 High Dividend Yield ETF (SPYD) had mostly been trading in the green whereas the S&P 500 (SPY) was deep in the red.

With equities broadly taking a turn lower over the past week, SPYD has held up relatively well when compared to the S&P 500 (SPY).  Even though SPYD has not avoided declines (as we also showed in our decile analysis, the highest dividend payers have only slightly better performance than non-dividend payers), the relative strength line of SPYD versus SPY has broken out of the past couple of months’ downtrend.  That being said, it has not been a sharp move higher like what was observed in the first half of the year, particularly in the second quarter. In other words, the highest yielders are back to outperforming the broader market but not to the same extent as earlier in the year. Click here to learn more about Bespoke’s premium stock market research service.

Using the Russell 3,000 as a benchmark, US equities peaked exactly a week ago and have traded lower in all but one session since.  In all, the Russell 3000 has fallen 4.33% in that time on weak breadth, albeit certain stocks have been hit far harder than others. Breaking the index down into deciles ranked by a variety of factors, performance has generally been the reverse of what we highlighted earlier this month in regards to the rally off of the June 16th low.

Over the past week, stocks with higher multiples and smaller market caps have fallen the most.  Those are also the ones that had become the most elevated above their moving averages after outperforming during the two-month rally from mid-June to mid-August. Conversely, those stocks with more attractive valuations have tended to perform better, although, here too there have been low single-digit percentage declines across deciles. One other interesting point worth noting is how the highest dividend payers have been hit just as hard as other deciles for that category which is a big difference when compared to the spring when the highest dividend payers were the only pocket of positive performance. Click here to learn more about Bespoke’s premium stock market research service.

For the first time in nearly twenty years, the US dollar is more valuable that the Euro, as the EURUSD spot cross dropped below parity (1.00) on Monday (8/22). The last time that the euro was trading at this level versus the dollar, the iPhone wasn’t even a glimmer in Steve Jobs’ eye as it was still more than four years away from its debut! The most recent run through parity comes as the Fed hikes rates aggressively, which inherently boosts demand for US dollars as foreign investors seek more favorable yields. As of this writing, the 10-year US Treasury Treasury note yields 3.0%, while the German and French equivalents are yielding 1.3% and 1.9%, respectively. The spreads are even wider for nearer-term maturities. In addition, Europe is attempting to phase out Russian energy exports, which means that the bloc has had to turn to the US as an alternative source. This, too, increases dollar demand. The chart below summarizes the major events that have impacted the Euro since the turn of the century.  It’s been a wild ride!  Click here to start a two-week trial to Bespoke Premium and receive our paid content in real-time.

The decline in the value of the euro has wide-ranging effects across the economy.  For US companies with operations in Europe, the stronger dollar makes transactions conducted in euros less valuable. Broadly speaking, though, the S&P 500 Index has essentially no correlation to the EURUSD cross. In fact, on a monthly basis, the correlation since the turn of the century has been -0.19, which implies almost no correlation between the two. Looking at the last ten years, the S&P 500 has surged as the euro has lost value, but from 2003 through the 2007 high, the S&P 500 likewise performed very well even as the euro surged.  While a weaker euro most definitely has implications for a number of individual companies, the broader impact on markets hasn’t been as impactful.  Click here to start a two-week trial to Bespoke Premium and receive our paid content in real-time.

The US Dollar Index (DXY) is at the highest level in a little over twenty years today, bringing the total rally off of the January 2021 low to +21.8%. While that is a notable new high, a massive reason for the move has been a result of the Euro as it is now back to parity with the dollar.  The composition of the dollar index places a massive 57.6% weight on the Euro, meaning swings in EURUSD largely impact DXY.  As shown in the chart below, the Dollar index just hit another multi-year high today and is back to levels last seen in the early 2000s.

A stronger dollar hurts companies that generate larger portions of their revenues outside of the US, and we’ve seen that play out in terms of stock market performance during the dollar’s 18+ month rally.  We keep track of geographic revenue exposure for stocks in the Russell 1,000 in our International Revenues Database (available to Bespoke Premium and Bespoke Institutional members).  Below we show the average performance of Russell 1,000 stocks that generate 50% or more of their revenues outside of the US since the Dollar Index’s low in January 2021.  We also show the average performance of Russell 1,000 stocks that generate 90%+ of their revenues domestically, which should benefit from a stronger dollar.  As shown, the average ‘domestic’ stock in the Russell 1,000 has risen 16% during this dollar rally, while the group of internationals (stocks with over half of their revenues generated outside the US) have risen less than 3%.  As for the rest of the stocks in the index which do not fall into either category, the average gain has only been 4.62%.

Taking a more granular look, below we break down the Russell 1,000 into equal sized deciles based on the international revenue exposure with the 10th decile comprised of stocks with 100% of revenues generated domestically. Again those groups with high domestic revenues are massively outperforming with the ninth and tenth deciles having experienced rallies of 14.15% and 17.47%, respectively.  The other end of the spectrum have seen low single digit rallies and even a modest 22 bps decline for the third decile. Click here to learn more about Bespoke’s premium stock market research service.

Given the nature of various businesses, some sectors naturally will have greater domestic/international revenue exposures than others. For example, Utilities and Real Estate whose operations are largely within the US have nearly all of their revenues generated domestically. At the same time, these two defensive groups have been some of the top performing sectors since the dollar’s low.  Energy has posted much stronger returns than any other sector while it also has the fourth highest domestic revenue exposure behind Financials. Materials and Tech have the lowest share of revenues generated within US borders while their returns since last January have been middling.