Downgrades Overlooked
The bottom has dropped out for the major US indices today with the Nasdaq down over 2% and S&P 500 down 1.25% as of this writing. The catalyst has been the downgrade of the United States’ credit rating by Fitch from AAA to AA+ . That is the first downgrade of U.S. sovereign debt in almost twelve years and just the second ever. In the charts below, we show the performance of the S&P 500, government debt, commodities, and the US dollar in the year before and the year after the 2011 downgrade.
The S&P 500 has been rallying in the months leading up to this downgrade, however, back in 2011 the S&P 500 had already begun rolling over by the time S&P downgraded US debt. In the wake of that downgrade, the S&P 500 went on to fully erase all of the prior year’s gains. Fortunately, all of those losses were quickly recouped within three months of the downgrade.
As for Treasuries and other US agency debt, performance over the past few months has been the complete opposite of 2011. Of course, the interest rate environment is also completely different now with Fed Funds 500 bps higher than it was at the time of the last downgrade. That being said, in 2011, Treasury yields were on the decline in the months headed into the downgrade, but contrary to what might have been expected, the downgrade itself did not change that trend. This time around has seen yields on US government debt moving in the opposite direction.
Bloomberg’s broad commodity index has been in a similar boat with the past few months seeing a decline compared to the steady uptrend back in 2011 that was uninterrupted by the downgrade.
Finally, we would note the downgrade only acted as a longer-term turning point for the dollar. As shown in the bottom right hand chart, both this year and in 2011, the trade weighted dollar was in a downtrend in the year before the downgrade. But right as S&P changed its rating, the dollar turned higher and continued to rise throughout the following year. In fact, one year out it had erased the entirety of the previous year’s decline.
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Fixed Income Weekly — 8/2/23
Searching for ways to better understand the fixed income space or looking for actionable ideas in this asset class? Bespoke’s Fixed Income Weekly provides an update on rates and credit each week. We start off with a fresh piece of analysis driven by what’s in the headlines or driving the market in a given week. We then provide charts of how US Treasury futures and rates are trading, before moving on to a summary of recent fixed-income ETF performance, short-term interest rates including money market funds, and a trade idea. We summarize changes and recent developments for a variety of yield curves (UST, bund, Eurodollar, US breakeven inflation, and Bespoke’s Global Yield Curve) before finishing with a review of recent UST yield curve changes, spread changes for major credit products and international bonds, and 1-year return profiles for a cross-section of the fixed income world.
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Chart of the Day – A Narrow Range Breaks
Bespoke’s Morning Lineup – 8/2/23 – Downgrade
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Just as Wall Street brokerage firms have been tripping over themselves to upgrade their views of the US economy and forecast a soft landing as opposed to a recession for the US economy, Fitch came out of the blue last night and downgraded their rating of US debt from AAA to AA+. The rationale behind the downgrade had nothing that couldn’t have been said at any point in the last couple of years, so the timing is curious. Then again, if you’re going to issue a downgrade, maybe it’s better to do it during a period of relative calm rather than in the middle of a period of heightened volatility like S&P did back in 2011.
Market reaction to the downgrade has been muted. Equities did sell-off overnight but have rebounded off their overnight lows and are now pointing to a decline of 0.6% at the open. The only economic report of the day was ADP Employment which blew past expectations once again. Earnings results have also been positive, but stock price reactions to those results remains underwhelming as investors start taking profits following the massive gains from the first half of summer.
While the US debt downgrade should theoretically cause higher interest rates, as we saw back in 2011, that was not the reality. This morning, yields are pretty subdued with little in the way of changes across the curve, and any moves have been to the downside. From a longer-term perspective, though, if the charts of the 10-year and 30-year US Treasury yields were stocks, technicians would likely be bullish.
After tests of the 4% level this year back in early March and early July, the 10—year yield is once again bucking up against 4%. The more often the yield tests this resistance level, the weaker it tends to get, so when and if yields do convincingly break through 4%, they’re likely to immediately test the highs from late last year.
If recent moves in the 30-year are any indication, more upside in the 10-year yield is likely. Yields at this part of the yield curve have already broken through this year’s resistance levels and at just under 4.1% are at the highest level since November.
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The Closer – Earnings, Purchasing Managers and Logistics Mangers Updates – 8/1/23
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Looking for deeper insight into markets? In tonight’s Closer sent to Bespoke Institutional clients, we start out with a look at the latest earnings (page 1) followed by a rundown of today’s PMI data (page 2). We then look into today’s release of construction spending data (page 3) and JOLTS findings (page 4). We finish with a rundown of the latest Logistics Mangers Index (pages 5-7).
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Daily Sector Snapshot — 8/1/23
B.I.G. Tips – Economic Zigs and Zags
Bespoke Stock Scores — 8/1/23
Chart of the Day – July Performance Drivers
$10 Trillion Added in Market Cap; 2023’s Best and Worst Through July
The US stock market (using the Russell 3,000 as a proxy) has now seen an increase in market cap of roughly $10 trillion from its bear market low last October through the end of July 2023. As shown below, the peak market cap for the US stock market was $51.5 trillion seen on the first day of 2022. From high to low, total US market cap fell $13.7 trillion during last year’s bear, but since then it has risen back up to $47.7 trillion. To get back to new all-time highs, total market cap would need to rise by roughly $3.8 trillion.
The average Russell 3,000 stock rose 5.74% in July. There were 813 stocks in the index that rose 10%+ in July, including 29 names that rose 50%+ which are listed in the table below. This list is made up of many of the high-fliers during the post-COVID bull that then got slaughtered during last year’s bear. Four names rose 100%: PolyMet Mining (PLM), Quantum-Si (QSI), UroGen Pharma (URGN), and Bridgebio Pharma (BBIO). Other notable names on the list of big July winners include Nikola (NKLA), Upstart (UPST), Carvana (CVNA), QuantumScape (QS), Rivian (RIVN), and Riot Platforms (RIOT). In case you haven’t been keeping track, Riot Platforms used to be Riot Blockchain, and before that, in early 2018 its name was Bioptix and it described itself as a company involved in developing new ways to test animals for disease.
Through July, the average Russell 3,000 stock was up 18.1% year-to-date. Below is a list of the 35 names that are already up 200%+ on the year. Topping the list is Carvana (CVNA) with a YTD gain of 869% after gaining 77.3% in July. Back in December 2022, CVNA had fallen into the $3s, but it’s now back up to the mid-$40s. Next up is Bit Digital (BTBT) with a YTD gain of 638%, followed by Cipher Mining (CIFR), IonQ (IONQ), Riot (RIOT), and Applied Digital (APLD). Similar to the list of July’s biggest winners, the biggest winners YTD are many of the names that got hit the hardest last year, with many falling more than 70% during their bear market drawdowns. Carvana, for example, was actually down 98% from its all-time high when it bottomed in 2022, so even after gaining more than 800% this year, it needs to gain another 700% from here to get back to new highs.
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