Jun 15, 2022
As mentioned in our piece from earlier today, gold did not necessarily deliver superior performance during the last QT cycle. This leaves investors to ponder: which asset classes did deliver substantial returns? Is there anywhere to hide? Although the macroenvironment is vastly different this time around, it is still helpful to look at past occurrences to attempt to put a frame of reference around today’s markets. Major differences include rampant inflation (particularly in commodities), supply chain constraints, lapping stimulus benefits, and weakening economic data. Below, we summarize the performance of the S&P 500, bonds, agricultural commodities, and oil during previous QT cycles.
The S&P 500 outperformed Gold during the last QT cycle, gaining 19.2%, which constitutes an annualized return of 10.1%. The graph below outlines the performance of the S&P 500 ETF (SPY) during different cycles of QE and QT. As you can see, equities were not particularly steady during the last QT cycle, but SPY gained significantly after the Fed announced its intent to slow the balance sheet winddown.
In the last QT cycle, the bond market initially sold off but managed to finish higher for the entire period. The iShares Core US Aggregate Bond ETF (AGG) bottomed at a drawdown of 4.7% about a year after the cycle began but proceeded to gain 6.7% through the final 203 trading days of the cycle. When all was said and done, AGG finished the cycle with gains of 1.7%. Similar to what we saw in gold, much of the gains were seen after the Fed announced its plan to slow the wind-down of the balance sheet. This suggests that rates rose at first but then reversed course when the Fed announced the impending end of QT. So far in the current cycle, AGG has already dropped by 2.7%, but bonds sold off hard in anticipation of QT in late 2021 and early 2022. On a YTD basis, the ETF is down a whopping 12.7%.
Agricultural commodities performed poorly during the last QT cycle, dropping 15.7%. This constitutes an annualized return of -8.9%, but the broader agricultural space was in a downtrend before QT began. Currently, agricultural commodities are in an uptrend, so it will be interesting to watch the price action as QT ramps up. On a YTD basis, the Invesco DB Agriculture Fund (DBA) is up 10.2% and is essentially flat since QT began in early May.
During the last QT cycle, crude oil gained 15.8%, but it would be difficult to attribute these gains to quantitative tightening. Since the Fed began tightening this year, crude oil has jumped 16.0% higher. In the last cycle, oil rallied higher before subsequently crashing, which would certainly be welcomed by many in this cycle. Click here to become a Bespoke premium member today!
Jun 14, 2022
See what’s driving market performance around the world in today’s Morning Lineup. Bespoke’s Morning Lineup is the best way to start your trading day. Read it now by starting a two-week trial to Bespoke Premium. CLICK HERE to learn more and start your trial.
“He says we’re going the wrong way.”
“Oh, he’s drunk. How would he know where we’re going.” – Planes, Trains & Automobiles
Below is a snippet of content from today’s Morning Lineup for Bespoke Premium members. Start a two-week trial to Bespoke Premium now to access the full report.
After four days of basically getting their faces beat inside out, bulls are trying to make a comeback this morning aided in part by a PPI report that wasn’t stronger than expected. Small business sentiment also managed to come in slightly better than expected, although it remains weak. One item covered in today’s Morning Lineup commentary is the fact that inflation expectations in the latest ZEW survey didn’t show a pickup in inflation expectations for the US or Eurozone.
In today’s Morning Lineup, there’s a lot covered as we discuss trading in APAC and European markets (pg 4), whether or not the Fed will go 50 or 75 bps tomorrow (pg 5), overnight economic data in Asia and Europe (pg 6), and much more.
Over the last two years or so, the market has come full circle. In February and March of 2020, there was that five-week period where the only direction the market would move was lower. Shortly after, the Federal Government and Federal Reserve unleashed massive amounts of stimulus, and the market started to turn around. By early 2021, the market had completed a complete 180, and the only direction it could move was higher. Then, late last year as government stimulus started to dry up and the Federal Reserve started to get religion on inflation, cracks in the market started to emerge. By early this year, we were calling it a one-step forward and two-step backward market where every positive day was offset by at least two bad days taking the market to progressively lower levels in the process.
As painful as the one-step forward and two-step backward market felt, at least there were some positive days. Over the last few days, it has become a one-directional market, and the direction has been extreme in the wrong way. Over the last four trading days, the net advance/decline (A/D) reading for the S&P 500 has been negative 400 or lower meaning that in each of the last four trading days there have been 400 more stocks that traded lower on the day than higher. To give you some perspective on how extreme this type of streak is, since 1990, there have been ten years where for the entire 12 months there weren’t even four days where the net A/D reading for the S&P 500 was at negative 400 or lower. As shown in the chart below, there has never been a streak of similar duration, and the only time there were even three consecutive days of -400 readings was in August 2015 at the height of concerns over the Chinese yuan devaluation.
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Jun 13, 2022
In recent years, one of the major arguments made for equity market bulls was the fact that there was no alternative (TINA). TINA was a tough strategy to argue against as fixed income markets were offering incredibly low, if anything in the way of yields, especially relative to inflation expectations. However, the Fed’s hawkish pivot has caused yields to tick significantly higher, reaching the highest level in about a decade in early June. This certainly changes the investment landscape, as alternatives to equities become more attractive and the discount rate used to revert future corporate cash flows to present-day dollars increases.
The 10-year Treasury note is now offering investors a yield of 3.4%, which is more than 2 times higher than the level at the start of the year. Notably, the current 10-year yield of 3.4% is 172 basis points higher than the dividend yield of the S&P 500 (which is 1.6%). This widening spread decreases the attractiveness of equities and increases the appeal of fixed income assets, which can lead to further downside in the S&P 500. Although the spread has moved significantly higher as of late, it is still compressed relative to historical averages, meaning that yields could still rise further and the spread between long-term Treasuries and the S&P 500’s dividend yield would be narrower than the long-term average.
Another metric worth tracking is the earnings yield of the S&P 500 versus the 10-year yield. The earnings yield (the inverse of the P/E ratio) is currently 218 basis points higher than the 10-year yield. If this spread were to turn negative, it would imply that risk-free assets would be generating superior earnings than riskier equities. Nonetheless, the S&P 500 earnings yield is still well above that of the 10-year yield, so equities do still appear attractive on an absolute basis, implying that investors are still being compensated for the excess risk taken by investing in public equities. Throughout history, there have been periods where the earnings yield was less than the 10-year yield for extended periods of time, and while this would seem counter-intuitive, unlike fixed income, where capital appreciation is capped, capital appreciation for equities is theoretically unlimited.
The chart below aggregates the S&P 500 earnings yield, dividend yield, and the 10-year treasury yield. As you can see, the earnings yield has been higher than the treasury yield since 2002. The tightening of this spread decreases the attractiveness of equities relative to 10-year Treasuries, which we have seen occur over the last several months. Click here to become a Bespoke premium member today!
Jun 13, 2022
There’s been no hiding from pain in equity markets since last Tuesday (June 7th). As mentioned in our Morning Lineup today, the S&P 500 is on pace to decline by 1%+ on four consecutive days, and if we hold onto these levels through the close, the index will have dropped over 2% for three consecutive days. This period of weakness comes on the back of another hotter than expected CPI print, continued disruption from the war in Ukraine, and a 10-year yield healthily above 3%. As of midday, the Russell 3000 was down 9.5% since the close on 6/7 and 22% YTD.
As is the case for every pullback, long-term investors should look for beaten-down names with solid growth runways. The first step of this process is to recognize which names have pulled back the most and then begin looking for diamonds in the rough. The table below shows the 18 Russell 3000 members who are down more than 25% since 6/7 with a market cap of at least $1 billion. For the entire Russell 3000, the average stock in the index is down 24.4% YTD (median: -24.3%) and 10.44% since 6/7 (median: -9.86%). Narrowing that field down to stocks with market caps of at least $1 billion, the average stock is down 17.4% on a YTD basis (median: -20.5%) and has traded down by 10.3% since 6/7 (median: -9.8%).
The exposures of these 18 stocks are quite mixed, as the list includes both pandemic darlings (i.e. Opendoor- OPEN, DocuSign- DOCU) and some of the biggest pandemic era decliners (i.e. Carnival- CCL) and Royal Caribbean-RCL). On a median basis, these stocks trade 4.5 times sales and are expected to see revenue increase by 38.6% over the next twelve months. Of these 18 names, Beam Therapeutics (BEAM) is expected to see the largest sales decline (-38.7%) and Norwegian Cruise (NCLH) is expected to see the largest increase (449.8%). Relative to sales, BEAM is the most expensive at 37.4 times LTM sales and OPEN is the cheapest at 0.3X.
Individual stock performance since 6/7 does appears little correlated to YTD performance. As shown, only 8.1% of the variation in the percent change since 6/7 can be explained by YTD performance. Click here to become a Bespoke premium member today!
Jun 13, 2022
Bespoke’s Little Known Stocks (LIKS) report highlights a company that may not be on the traditional radar of most investors. In this report, we provide an in-depth analysis of the little known stock, including industry insights, growth lever analysis, insights to the competitive landscape, equity performance, relative valuation, operational efficiency, pros & cons, and more. Today’s report is about a clean energy company that is well positioned to benefit from the bipartisan infrastructure package.
As always, this report is for informational purposes only and is not a recommendation to buy or sell any specific securities. Investors should do their own research and/or work with a professional when making investment decisions. Highlighting a stock doesn’t mean we are bullish or bearish on it. Our goal is simply to provide readers with facts to help them make informed decisions rather than just opinions.
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