Stock Market Today: March 13th - 17th, 2023

Welcome StonkForums to the trading week of March 13th!

This past week saw the following moves in the S&P:


S&P Sectors End of Week:


Major Indices End of Week:



Major Futures Markets on Friday:


Economic Calendar for the Week Ahead:


What to Watch in the Week Ahead:

(N/A.)

 

"Worst Since Lehman": Banks Break The World Again

Last week we detailed BofA's Michael Hartnett's warning that "The Fed will tighten until something breaks".

Well, something just broke...



SVB's collapse - the second biggest US bank failure in history - dominated any reaction to this morning's mixed bag from the BLS (hotter than expected earnings growth, rising unemployment (especially for Latinos), better than expected payrolls gains).

Things started off badly as SVB crashed 65% in the pre-market before being halted. SVB bonds were puking hard and when the FDIC headline hit, the bonds collapsed further...



Source: Bloomberg

A number of small/medium sized banks were clubbed like a baby seal...



Source: Bloomberg

And the KBW regional bank index crashed (down 9 of the last 10 days and 20% in that period). The 18% drop this week was the index's worst drop since Lehman (Sept 2008)...



Source: Bloomberg

And as you'll see below, that started to have some notable impacts on the most arcane of global systemic risk red flag signals...

• TED Spread at YTD highs (systemic risk rising)
  
  
• Global USD Liquidity tightest in 2023 (foreigners paying up for USDollars)
  
  
• Global Bank Credit Risk rising
  

The worst week for stocks in 2023... On the week, all the US majors were down hard with Small Caps crashing 9%, S&P, Dow, and Nasdaq over 4% lower...



The Dow has been underwater on the year for over a week and is now down 4% in 2023. Today's ugliness smashed the S&P 500 and Russell 2000 down to unchanged on the year...



Source: Bloomberg

All the US Majors are now back below their 200DMAs...



Unsurprisingly, financials were the week's biggest sector laggards but all were red on the week...



VIX exploded higher on the day, back above 28 and recoupling with equity weakness...



Source: Bloomberg

On the week, Treasuries saw a wild ride but yields ended dramatically lower across the curve with the shorter-end outperforming (down almost 30bps on the week)...



Source: Bloomberg

The 2Y yield is down over 50bps in the last two days, the biggest 2-day drop since Lehman (Sept 2008)...



Source: Bloomberg

The 2Y Yield is back below the Fed Funds rate once again, and will likely be considerably further below it after the next Fed meeting...



Source: Bloomberg

The 10Y yield puked back to 3.70% - one month lows - after testing 4.00% for two weeks...



Source: Bloomberg

Notably, Specs are practically still at their most short ever in bonds - so this week's plunge in yields was hurting a lot of people...



Source: Bloomberg

No extreme moves in the TED spread yet (although its back YTD highs as systemic risk increases)...



Source: Bloomberg

Global bank credit risk is on the rise too...



Source: Bloomberg

The dollar ended higher against its fist peers on the week - after major ups (hawkish Powell) and downs (SVB sparking dovishness)...



Source: Bloomberg

Global dollar liquidity tightened dramatically this week as the world reached for USDs at much more aggressive costs...



Source: Bloomberg

Bitcoin puked back down to $20,000 - 2 month lows - and found support...



Source: Bloomberg

Solana and Litecoin were hit really hard this week with BTC and ETH down about 10% and Ripple holding close to unch...



Source: Bloomberg

Against all the carnage, bullion joined bonds in the safe-haven camp, with gold spiking back above $1870 - one month highs...



While oil was up today, WTI ended lower on the week back to a $76 handle...



The 'panic' across markets had a dramatic effect on Fed rate trajectory expectations with the Fed's terminal rate expectations plunging over 55bps since the post-Powell spike earlier in the week, and 40bps of rate-cuts are now priced-in by year-end...



Source: Bloomberg

Additionally, expectations for The Fed's action in March are hawkishly higher on the week (but down today) with around a 40-50% chance of 50bps hike priced in...



Source: Bloomberg

To put that shift in context, the term structure has dropped and twisted significantly since Wednesday...



Source: Bloomberg

Just to really rub in what the fuck just happened... the market was pricing in over 3 25bps rate-hikes to Jan 2024 on Wednesday... and now its pricing in around half of one rate-hike...



Source: Bloomberg

Finally, we give the last word to Eric Johnston at Cantor Fitzgerald:

“Three days ago the view in the market was that economy was teflon vs the rate hikes and that there were not going to be any financial accidents because we have made it this far without much damage,” he wrote.

“What has now changed is that people now realize that we are not teflon and there can be impact and very negative impact at that from these hikes. It is not about which bank is next, or who has similar exposure, or will depositors be made whole. It is about there likely being more time bombs out there that we have no idea about right now. That is what has changed, people no longer believe we are teflon...finally.”

Maybe keep your eyes out for other bank CEOs dumping millions in their own stock...



Makes you wonder eh?

Returning full circle to the start of today's market summary, we are reminded of Michael Hartnett's closing remarks: "The market stops panicking when central banks start panicking."

 

Payrolls Strong but Unemployment Rises: All Mixed Up
Posted on March 10, 2023

Another month, another solid employment report. Employment rose by 311,000 in February, on the back of 504,000 in January and 239,000 in December. It’s certainly been a warm winter. This is the labor market that refuses to give in, despite the Fed throwing almost 500 bps (5%-points) of rate hikes at it and gearing up for more.



But the unemployment rate rose …
Yes, the unemployment rate rose to 3.6%, up from 3.4% in January. However, that was entirely for positive reasons.

The unemployment rate, as the Bureau of Labor Statistics (BLS) measures it, is the number of people unemployed who are looking for work divided by the size of the labor force. Last month, the number of unemployed people that are looking for work rose by about 240,000. However, that’s because 419,000 people “entered” the labor force, i.e., started looking for work. That’s a sign of a healthy labor market. People will start looking for work only if they think they can get a job.

The labor force measure has issues related to how participation is measured – they count someone as being in the labor force only if someone is looking for work. But a lot of people may not do so for any number of reasons, including not feeling confident in the job market or non-economic reasons like not having access to childcare. The measure also can fall over time because of a lot of retiring baby-boomers.

One way to get around these issues is to look at the employment-population ratio for prime age workers, i.e., workers aged 25-54 years. This measures the number of people working as a percent of the civilian population – think of it as the opposite of the unemployment rate, and because we use prime age, you get around the demographic issue as well.

The good news is that the prime-age employment-population ratio just hit 80.5%, which is close to the highest level we’ve seen in a couple of decades.



It helps to recall that we just had a multi-generational black swan event in the form of a pandemic. But once everything re-opened, the expectation was that things would bounce back immediately. And a lot of numbers did, including GDP, employment, and consumption.

However, there were also a lot of people who left the labor force amid the pandemic. And what we’re seeing now is that each month there’s a continuous flow of people back into the labor force, and these people are finding jobs quickly. Just over the past six months, 1.5 million more people have come into the labor force as prospects for finding a job improve.

Make no mistake, this is a really strong labor market in my opinion.

Is the labor market too strong?
It’s weird to even ask that question, but it matters for the Federal Reserve. In their model for the economy, they see a tight labor market as one that results in stronger wage growth. And strong wage growth can drive demand higher, pushing up prices and inflation.

Well, hopefully, they can rest a little easy on that front. Average hourly earnings rose just 0.2% in February. Over the past three months, wages have been growing at an annualized pace of 3.6%, well below the 6%+ pace we saw last year. It’s getting very close to the pre-pandemic pace of 3.1%.



This backs up other evidence that wage growth is indeed easing, including the Employment Cost Index, which is the gold standard of wage growth measures. The ECI was running at an annualized pace of 4.2% in Q4 2022, down from 4.8% in Q3. The January-February hourly earnings data suggest that wage growth continues to decelerate.

The big question is whether the Fed buys this. Powell’s comments this week in front of Congress did not inspire confidence. It looks like a string of hot economic data has left them questioning their decision to ease the pace of rate increases from 50 bps to 25 bps (as of February) – and wondering if they should move that back up to 50 bps at their March meeting. At this point, markets think the outcome is a coin toss, which is not great as Powell simply injected maximum uncertainty into markets.

But looking beyond the Fed’s March meeting, the big picture is that the labor market appears to remain really strong. This means the economy also remains strong, and that’s not a bad thing as far as markets are concerned. Though it also means the Fed is likely to keep interest rates higher for longer.

Panic! At the Fed?
Posted on March 9, 2023

Federal Reserve Chair Jerome Powell’s comments this week during his semi-annual testimony in front of Congress did not inspire much confidence with respect to the path for monetary policy. It seems like Fed officials’ are confused as to what they want to do next.

Case in point: last month, Powell said that the “disinflationary process has started.”

Since then, we’ve had a run of strong economic data, including January payrolls, retail sales, and inflation. And it looks like that was enough to spook the Fed. The shift was clear in Powell’s statements this week:

“Inflationary pressures are running higher than expected at the time of our previous Federal Open Market Committee (FOMC) meeting.”

And

“The ultimate level of interest rates is likely to be higher than previously anticipated.”

At the same time, he also said:

“If – and I stress that no decision has been made on this — if the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.”

Markets were clearly taken aback by his comments, with equities falling 1.5% on Tuesday (March 7th) and rate hike expectations rising.

This becomes clear if you look at expectations for their March meeting. Last Friday, markets were expecting a 0.25% increase in the federal funds rate, pricing the probability of that at 72%.

That’s shifted significantly since Powell’s comments this week. Investors moved the probability of a 0.25% increase down to 28%, and the probability of a 0.50% increase rose to almost 80%.

This is a huge shift, especially this close to a meeting. Typically, the couple of weeks prior to the meeting is a “quiet period,” where Fed officials don’t give speeches or comments, i.e., anything that may lead to a shift in expectations. The last time this happened was in June 2022, when the Wall Street Journal reported that the Fed was considering raising rates by 0.75% instead of the 0.50% they guided markets toward.



There’s not much reason to panic
To be clear, the January data was hotter than expected. But this is just one month of data and is likely a rebound from the relatively soft December data (which, at the time, led to increased recession calls) and perhaps positive weather-related effects.

We’re yet to get February data, but it’s hard to believe the string of hot data continues into February and March.

Take vehicle sales, for example. Sales surged 19% in January to a 15.9 million annualized pace, the highest since May 2021. But sales pulled back to 14.9 million in February. So the trend is still positive, but nothing suggests that the economy is overheating to the extent that the Fed has to up-end market expectations for upcoming policy.



The Carson Investment Research team has been in the camp that the economy will avoid a recession this year. As we’ve discussed before, we believe consumers are in good shape, and real incomes are rising, which should keep consumption humming along.

This gets to the point that we don’t see the Fed cutting rates any time soon. Expectations for the terminal rate, i.e., the highest rate the Fed will get to, also rose this week. At the beginning of the year, investors expected the terminal rate to end up around 4.9%. That’s now increased to about 5.6% on the back of strong economic data.



The good news is that, at the end of the day, positive economic data is positive. This perhaps explains why equities have remained resilient this year. The S&P 500 is up just under 4% year-to-date, despite rate expectations repricing higher.

That’s a big shift from last year and a positive one. And we believe equities have the potential to remain resilient, even as the economic data (and the Fed) swing back and forth.

This Doesn't Happen Often
Fri, Mar 10, 2023

After a surge earlier this week that took the yield on the two-year US Treasury up above 5% for the first time since 2007, concerns over the health of bank balance sheets have caused a sharp reversal lower. From a closing high of 5.07% on Wednesday, the yield on the two-year US Treasury has plummeted to 4.62% and is on pace for its largest two-day decline since September 2008. Remember that?

A 45 basis point (bps) two-day decline in the two-year yield has been extremely uncommon over the last 46 years. Of the 79 prior occurrences, two-thirds occurred during recessions, and the only times that a move of this magnitude did not occur either within six months before or after a recession were during the crash of 1987 (10/19 and 10/20) as well as 10/13/89 when the leveraged buyout of United Airlines fell through, resulting in a collapse of the junk bond market. As you can see from the New York Times headline the day after that 1989 plunge, just as investors are worrying today over whether we're in for a repeat of the Financial Crisis, back then they were looking at 'troubling similarities' to the 1987 crash. The year that followed the October 1989 decline wasn't a particularly positive period for equities, but a repeat of anything close to the 1987 crash never materialized.





50-DMAs Couldn't Hold
Thu, Mar 9, 2023

Worries about banks today left major US index ETFs across the market cap spectrum back below their 50-day moving averages. The uptrend channels that have been formed over the last six months are also getting tested with this week's move lower. You can see the current set-ups in the snapshot from our Chart Scanner tool below.



Looking at our Trend Analyzer, every sector ETF except for Technology has now moved back below its 50-day moving average. Six of eleven sectors are actually oversold (>1 standard deviation below 50-DMA), with Financials (XLF) and Health Care (XLV) at "extreme oversold" levels. XLF had been up more than 8% on the year about a month ago, but it's now down 1.93% YTD.

Technology (XLK) and Utilities (XLU) are the only two sectors up over the last week. Interestingly, Utilities (XLU) has been one of the worst performing sectors so far this year, while Tech has been the best.



With Financials seeing such a sharp decline this week, below is a snapshot of various banks and brokers in the sector with the ones highlighted in red all now trading at least 5% below their 50-DMA. As shown, Charles Schwab (SCHW) is down the most over the last week with a decline of 12.6%, which has left it 16.4% below its 50-DMA and down nearly 20% on the year. Other names like Bank of America (BAC), JP Morgan (JPM), and Raymond James (RJF) are in extreme oversold territory as well. Of the major banks and brokers listed, Goldman Sachs (GS) has actually held up the best over the last week with a decline of just 2%.



Bearish Sentiment Remains
Thu, Mar 9, 2023

The S&P 500's swings higher and then lower over the past week have left sentiment little changed. For the American Association of Individual Investors' (AAII) weekly survey, 24.8% of respondents reporting as bullish compared to 23.4% the previous week. That is the second higher reading in a row but still well below the recent high of 37.5% from one month ago.



Along with a modest bounce in bullishness, bearish sentiment has taken a modest decline falling from a recent high of 44.8% last week down to 41.7% today. That is the first decline in a month, leaving it in the middle of its range since the start of last year.



Given the moves in bullish and bearish sentiment, the bull-bear spread remains skewed in favor of bears for the third week in a row.



Following a sharp eight percentage point decline last week, neutral sentiment has bounced rising to 33.4%. Albeit higher, outside of last week, that reading would be the lowest since the end of 2022.



Although recent weeks have seen the AAII survey return to deeply bearish sentiment, other surveys are not nearly as pessimistic. While the AAII survey's bull-bear spread sits well over a standard deviation below its historical average, the NAAIM Exposure index continues to show only modestly long positioning among active managers. Currently, that reading is 0.2 standard deviations below the historical norm. Meanwhile, the weekly Investors Intelligence survey is actually showing respondents are reporting as more bullish than has been historically normal.



Seasonal Headwinds Dying Down for Claims
Thu, Mar 9, 2023

The S&P 500 is rallying this morning in the wake of today's weekly jobless claims print which gave investors at least some hope that data is flying in the face of the Fed's recent hawkishness. Whereas expectations called for initial claims to remain below 200K for the eighth week in a row, claims jumped by 21K to 211K. That is the highest reading since the week of December 24th.



As we have noted in recent weeks, although the seasonally adjusted number has gone on an impressive streak of sub-200K prints, the unadjusted number never fell below that threshold. This week saw the reading rise to 237.5K, the highest since only the second week of the year. As shown in the second chart below, the first few months of the year have historically seen claims fall with the current week standing out as one with consistently higher claims week over week. Although the direction of non-seasonally adjusted claims this week is not particularly unusual, the 35.4K increase was much larger than the historical median increase of 14k usually seen for the comparable week of the year.



All of that means that claims in general are following seasonal patterns as could be expected. In the charts below, we show the seasonal factors for initial and continuing claims. Essentially, those factors represent how elevated claims are above what has been normal historically (a reading of 100 would indicate a normal reading). Looking ahead over the next several weeks, seasonal headwinds will persist but not to the same degree as the first couple months of this year. As for continuing claims, the next several weeks will see seasonal factoring more consistently roll over even more sharply as we enter a period of the year with much less of a seasonal headwind.



Like initial claims, seasonally adjusted continuing claims came in above expectations this week rising back above 1.7 million. At current levels, claims matched the recent high from the week of December 17th which is back in the middle of the pre-pandemic range.



A Closer Look at Seasonality
Posted on March 8, 2023

We talked a lot about how February (especially the second half of February) could be a potential break for stocks, well the good news is that we now see many signs of better times potentially coming soon.

Here’s what the average year for the S&P 500 looks like. Looking at the chart below, the blue line shows gains from January through April, and November and December are normal. It is the middle part of the year that stocks tend to struggle.



Lately, things look a little different. Looking at only the past 20 years showed that stocks tended to bottom in March. This is likely due to major bear market lows taking place during this month in 2003, 2009, and 2020.



We’ve shared before that pre-election years tend to be strong for stocks, lower only twice going back to World War II and up nearly 17% on average, making this historically the strongest year of the 4-year Presidential cycle. Looking at these years it is once again common to see the second half of February weakness and a tradeable low in late February.



Building on this, we found that pre-election years of a new President do even better, up close to 20% on average. But wouldn’t you know it, right about now tended to be a consolidation period before late March and April strength.

What about years that started off with big gains? When stocks gained more than 5% in January (like 2023) we found that a consolidation period took place now and into April. The good news is that eventual gains of close to 23% on average were how things ended up, suggesting any potential consolidation here could potentially be used as an opportunity.



Lastly, I’ve seen other places combine many of the things I’ve just discussed and make one composite combining them all. I did that and we called it the Carson Cycle Composite. This proprietary composite looks at the average year, pre-election years, pre-election years under a new President, the past 20 years, and years that had a 5% January. As you can see, this year started off stronger, but as of early March is right in line with what the average composite looks like. Take note, a gain of 15.6% is what has been the average Carson Cycle Composite.



The bottom line is many cycles suggest the potential for some type of a consolidation here and now would be perfectly normal, but the likelihood of strength before the end of the year is quite strong.

Why the Dollar Matters For International Equity Investors
Posted on March 7, 2023

Last year the MSCI EAFE Index, which represents a basket of developed market stocks, fell 14.5%. Meanwhile, the MSCI Emerging Markets (EM) Index lost 20.1%. It turns out the returns for these baskets were higher in local currency terms, and there was a big drag from a stronger dollar. In local currency terms, the MSCI EAFE index lost “only” 6.5%, while the MSCI EM Index lost 15.2%.

2022 was really a tale of two periods when it came to the dollar. Over the first three quarters, the US dollar (USD) appreciated significantly against other currencies. This came on the back of the Federal Reserve surprising investors by taking an aggressive approach to get on top of inflation. This contrasted with other central banks around the world, including in Europe and Japan, who weren’t quite so aggressive – mostly because their economies were weaker than the US, and being overly aggressive ran the risk of tipping things into an immediate recession. As a result, interest rate differentials between the US and other countries grew, and to a first approximation, rising interest rate differentials should boost the currency.

The following chart illustrates how the dollar has typically strengthened when interest rate differentials climb. We saw this is 2014 and again in 2022.



The strong dollar was a big headwind for international equities over the first 3 quarters of 2022.



However, as the Fed started to step back on the size of the rate increases by the end of the year, the dollar started to ease. Which was a tailwind for international equities.



Then we saw another switch this year. As the economic data came in hot, especially the January employment data, investor expectations for Fed rate hikes increased. Which sent the dollar higher once again, yet again creating a headwind for international equities.



All this is a reminder of the currency hurdle that international equities must overcome to offer better performance relative to US equities.

The math for international equities is hard
But let’s try to simplify it a bit.

Consider two investments: stock A with returns of 20% in year 1 and 20% in year 2. Stock B with returns of 50% in year 1 and -10% in year 2. Both assets have an average return of 20%. But the compounded returns are quite different:

• Stock A: (1 + 0.20) x (1 + 0.20) – 1 = 44%
• Stock B: (1 + 0.50) x (1 – 0.10) – 1 = 35%

The compounded return for stock B is lower because of the “volatility drag”. This also gets to the reason why you always want to reduce portfolio volatility.

The currency impact works similarly.

Say an international equity basket appreciates 30% in local currency terms. But the currency depreciates 15% against the USD. The USD return is not 30 – 15 = 15%

Instead, the USD return = (1 + 30%) x (1 – 0.15) = 10.5%

There are 3 pieces to understand here:

• The investor made 30% on their actual international equity investment
• They lost 15% on the currency
• But, they also lost 15% of the 30% equity gain = 4.5% (the “geometric piece”)

Combing the three pieces, we get 30% – 15% – 4.5% = 10.5%

All this to say, you need to get two pieces right when investing in international equities

• One, the direction of the equity basket
• Two, USD vs. local currency

The data bears this out as well. The chart below shows the past 22 years of excess returns for the MSCI EAFE Index against the S&P 500, versus currency returns. You can see that international developed market excess returns are typically negative, i.e., US equities outperform when the USD appreciates. And vice versa.



A similar dynamic exists for EM. A stronger dollar leads to US equities outperforming EM equities and vice versa. In fact, the relationship is even stronger than what we saw above with developed markets.



Part of the reason is that EM local returns are also disadvantaged by a stronger dollar. Normally, you would expect emerging countries to be advantaged by a weaker currency – which makes their exports cheap in international markets, boosting demand for those goods and stimulating domestic activity.

However, it turns out there’s a financial channel that offsets the trade impact. A weaker currency can lead to tighter domestic financial conditions. A lot of EM companies borrow in US dollars (since it’s cheaper to do so), but their revenues tend to be in local currency. So when the dollar appreciates, it increases their debt service costs relative to revenue, thus creating a tougher domestic economic environment.

The currency hurdle is one reason why we are underweighting international equities from a long-term strategic perspective.

However, our near-term tactical view is neutral on developed market equities.

This is because we believe the dollar will see downward pressure as interest rate differentials continue to shrink, and that will provide a tailwind.

In my next post, I’ll discuss why we believe interest rate differentials will shrink or at least not expand as they did in 2022. Including relative central bank policies, inflation, and economic growth.

Stay tuned.

Small Cap Seasonal Strength Ending

There has been much ado about the recent outperformance of small caps versus large caps – it has been impressive and welcomed. When small caps do well it’s a good sign. Many are U.S. based and not multinational or international firms like many large caps are. So, when U.S. small caps do well it’s a sign of economic health for the U.S.

Small caps as measured by the Russell 2000 have also led the early stages of this nascent bull market. They were the first to bottom in June 2022 and constructively held that low at the October 2022 bottom. But small-cap outperformance since mid-December may have a lot to do with seasonality.

As detailed on pages 112 and 114 of the 2023 Stock Trader’s Almanac small cap outperformance, known as the “January Effect,” has historically begun to wane in February as the bulk of the move from around mid-December has already occurred.

In the chart here, daily data from July 1, 1979, through March 3. 2023 for the Russell 2000 index of smaller companies are divided by the Russell 1000 index of largest companies, and then compressed into a single year to show an idealized yearly pattern. When the graph is descending, large-cap companies are outperforming small-cap companies; when the graph is rising, smaller companies are moving up faster than their larger brethren. The most prominent period of outperformance generally begins in mid-December and lasts until late-February or early March with a surge in January.

Nothing Beats Long-run Equity Returns
Posted on March 6, 2023

8 Principles of Equities:
#1 – Nothing Beats Long-run Equity Returns
Carson Investment Research recently published our 8 Principles of Equities. The first is the most important—In our opinion, nothing beats long-run equity returns. Not bonds. Not housing. Not gold, oil, or copper. Frankly, it’s not even close. Sure, there may have been periods of exception, but they haven’t lasted long. Yet, it can be easy to lose this perspective, especially during a downturn or heightened volatility and uncertainty. It is during these times that we get a parade of TV and radio ads that act like they have discovered some magical high-return/low-volatility asset, such as real estate, gold, commodities, etc. Certainly, these are useful for meeting retirement goals, especially with portfolio diversification and reducing volatility. However, when it comes to long-term returns, the stock market is arguably the undisputed champ among major asset classes.

We all know the famous long-term investing quotes. We won’t rehash them here. Carson’s Chief Market Strategist, Ryan Detrick, already wrote a great article about how the longer investors hold stocks, the greater the odds of positive returns. Here, we want to illustrate the extent of those returns over other major asset classes.



The chart above shows that stocks have fared quite well relative to other major asset classes. If we just look at 100-year data (1920-2020), equities have outperformed 10 and 30-year Treasury bonds by more than 4.5% per year, corporate bonds by 3.7%, gold by 5.6%, and oil by 8.4%.

What about inflation?
As my colleague, Sonu Varghese, recently wrote, stocks are real assets. The historical data bears this out. Stocks expand their lead over other asset classes in “real” terms, or after inflation. From 1920 to 2020, equities posted annualized real returns of 7.7%. Housing (ex-rents) were just 1.1% per year, and the overall commodity index was actually negative 1.1% per year! Only gold (2.0% per year) and copper (0.5% per year) were positive. The closest annual real return to equities over these 100 years is BBB bonds at 4.2% per year.



To be sure, there have been periods where equities have lost their crown, at least temporarily. However, they have been rare. Since 1800, there have only been 6 decades out of 22 where they weren’t the top performing asset class, or less than 1/3 of the time. Other than equities, only gold has ever been able to repeat as the champion –during the 1970s after the US abandoned the gold standard and the other in the 2000s during the bursting of the dot-com bubble and the global financial crisis.

Unquestionably, stocks are king. However, they are also volatile, so investors should be compensated with higher returns compared to most asset classes. This is why we continue to overweight stocks in our long-term Carson House View allocations. Our next three Principles cover the risk aspect of the stock market, which is the part that usually keeps investors from reaping all of its rewards.

We look forward to diving deeper into these soon.

Why Invest in Stocks When Bond Yields are High?
Posted on March 3, 2023

TINA, or “There is No Alternative,” was the theme of the last decade as interest rates were close to zero. Yields on long-term bonds weren’t much above that. So, stocks were the “only alternative” if someone wanted reasonable returns.

But now it looks like there is an alternative, thanks to the Federal Reserve’s aggressive rate hikes. CREAM, or “Cash Rules Everything Around Me,” looks attractive enough to replace TINA.

Three-month treasury bills, which could be considered the best proxy for a liquid and “risk-free” asset, currently yield about 4.9%, while 10-year treasury notes yield around 4%. These yields are salivating, more so because we haven’t seen anything like it in 15 years.

Consider stocks on the other hand. And instead of dividend yields, let’s look at earnings yields. Earnings yields that are corrected for cyclical effects are a good predictor of long-run real returns for stocks (I’ll come back to the “real” part shortly). For example, if a company paid out all earnings as dividends, then the earnings yield would equal the dividend yield.

Earnings yield is basically the inverse of the Price to Earnings ratio. There are myriad approaches to estimating earnings, but let’s keep it simple. For example, if a stock trades at $100 and its expected earnings per share over the next 12 months is $5, it has a forward P/E ratio of 20. And an earnings yield of 5/100 = 5%. Meaning every dollar invested in the stock would “yield” 5 cents.

At the end of 2019, the S&P 500 was trading with a forward P/E of 18.5, i.e., with an earnings yield of 5.4%. Which was pretty good when you consider that 10-year treasuries were yielding about 1.7%. It implied an “equity risk premium” of about 3.4%— which is the excess return investors require to hold risky assets like stocks.

Right now, the S&P 500 is trading at a forward P/E of 17.5, which translates to an earnings yield of 5.7% and a tad better than the pre-pandemic yield. The problem is that with 10-year treasury yields around 4%, the implied equity risk premium (ERP) has seen a sharp compression, as shown in the chart below.



Which gets to the title of this piece: why should I invest in stocks when risk-free yields are as high as they are?

Not a great timing tool
For one thing, the ERP, as calculated above, is not a great indicator of future returns, let alone a timing tool that tells you when to hold stocks and when to shift to bonds. The last time the premium was as low as today was in June 2007, when it was 1.6%.

• Over the next ten years, bonds had an average annualized return of 4.5% versus 7.2% for the S&P 500— and that came despite a 50%+ pullback in 2008-2009!
• Over the next 15 years, bonds had an average annualized return of 3.3%, versus 8.5% for the S&P 500—and you had two massive pullbacks, in 2008-2009 and 2020.

In any case, this approach to calculating the ERP has its faults.

Stocks are real assets
One problem with the above approach for calculating the ERP is that stocks are real assets whose prices rise with inflation. Also, corporate earnings move higher with inflation since companies are able to pass along rising input costs over time to their customers. As Jeremy Schwartz at WisdomTree points out, this pricing power is evidenced by the fact that long-term earnings and dividend growth had outpaced inflation (even during the 1970s and 1980s when inflation was high). Cliff Asness at AQR makes the same case here, arguing that the appropriate comparison is earnings yield to real risk-free yields, as opposed to nominal yields.

The picture looks a little better when you do that, though the ERP determined that using this approach is still lower than what it was pre-pandemic. That is because real risk-free yields, as measured by inflation-indexed treasury bonds, have climbed sharply since then. The 10-year real yield was close to zero at the end of 2019 and fell as low as -1.2% in August 2021. The Fed’s aggressive rate hikes resulted in a dramatic upward shift in 2022, with the 10-year real yield currently around 1.6%.

The chart below shows ERP estimated using real yields. It’s fallen to 4.2%, but that’s still some serious premium. Which is why we continue to overweight stocks over bonds for our long-term Carson House View allocations.



An even better alternative
So far, we’ve been looking at earnings yields and risk premiums for the broad stock market, as measured by the S&P 500. And as we saw, it may not be the greatest timing tool with respect to stocks vs. bonds. But it can help point you toward more attractive parts of the stock market.

Look one step below the broad stock market index, and there are some large variations. Especially if you separate value stocks from growth stocks.

Value stocks typically tend to have lower P/E ratios (and higher earnings yields) than growth stocks, which typically have high P/E ratios (and lower earnings yields).

When real yields were zero or negative, the relatively low earnings yield on growth stocks didn’t matter. Investors could bank on potentially high long-term earnings growth in the future.

But the premium over real yields has shrunk dramatically over the past year as real rates rose. It’s currently at 2.9%, close to its 20-year low of 2.7%.

Contrast that to the risk premium for value stocks, which is currently at a relatively attractive level of 5.4%.



The chart below shows the difference between earnings yields of Value and Growth stocks. It’s currently at 2.6%, which is well above the 20-year average of 1.8%.



This is a big reason we are currently overweight value stocks in our Carson House View allocations.



Footnote: S&P 500 and bond returns are calculated via Factset using the S&P 500 Index and the Bloomberg US Aggregate Bond Index, respectively.

 

Here are the percentage changes for the major indices for WTD, MTD, QTD & YTD in 2022-



S&P sectors for the past week-

 

Here are the current major indices pullback/correction levels from 52WK highs as of week ending 3.10.23-


Here is also the pullback/correction levels from current prices-


Here are the current major indices rally levels from 52WK lows as of week ending 3.10.23-

 

​

Here are the upcoming IPO's for this week-

 

Stock Market Analysis Video for March 10th, 2023
Video from AlphaTrends Brian Shannon


ShadowTrader Video Weekly 3/12/23
Video from ShadowTrader Peter Reznicek
(VIDEO NOT YET POSTED!)

 

StonkForumers! Come join us on our stock market competitions for this upcoming trading week ahead!-

========================================================================================================

StonkForums Weekly Stock Picking Contest & SPX Sentiment Poll (3/13-3/17) <-- click there to cast your weekly market direction vote and stock picks for this coming week ahead!

Daily SPX Sentiment Poll for Monday (3/13) <-- click there to cast your daily market direction vote for this coming Monday ahead!

========================================================================================================

It would be pretty sweet to see some of you join us and participate on these!

I hope you all have a fantastic weekend ahead!

 

​

Here are the most anticipated Earnings Releases for this upcoming trading week ahead.

***Check mark next to the stock symbols denotes confirmed earnings release date & time***

Monday 3.13.23 Before Market Open:

Spoiler: CLICK HERE TO VIEW MONDAY'S AM EARNINGS TIMES & ESTIMATES!

(T.B.A.)

Monday 3.13.23 After Market Close:

Spoiler: CLICK HERE TO VIEW MONDAY'S PM EARNINGS TIMES & ESTIMATES!

(T.B.A.)

Tuesday 3.14.23 Before Market Open:

Spoiler: CLICK HERE TO VIEW TUESDAY'S AM EARNINGS TIMES & ESTIMATES!

(T.B.A.)

Tuesday 3.14.23 After Market Close:

Spoiler: CLICK HERE TO VIEW TUESDAY'S PM EARNINGS TIMES & ESTIMATES!

(T.B.A.)

Wednesday 3.15.23 Before Market Open:

Spoiler: CLICK HERE TO VIEW WEDNESDAY'S AM EARNINGS TIMES & ESTIMATES!

(T.B.A.)

Wednesday 3.15.23 After Market Close:

Spoiler: CLICK HERE TO VIEW WEDNESDAY'S PM EARNINGS TIMES & ESTIMATES!

(T.B.A.)

Thursday 3.16.23 Before Market Open:

Spoiler: CLICK HERE TO VIEW THURSDAY'S AM EARNINGS TIMES & ESTIMATES!

(T.B.A.)

Thursday 3.16.23 After Market Close:

Spoiler: CLICK HERE TO VIEW THURSDAY'S PM EARNINGS TIMES & ESTIMATES!

(T.B.A.)

Friday 3.17.23 Before Market Open:

Spoiler: CLICK HERE TO VIEW FRIDAY'S AM EARNINGS TIMES & ESTIMATES!

(T.B.A.)

Friday 3.17.23 After Market Close:

Spoiler: CLICK HERE TO VIEW FRIDAY'S PM EARNINGS TIMES & ESTIMATES!

(NONE.)

 

And finally here is the most anticipated earnings calendar for this upcoming trading week ahead-
($ZIM $ARCO $ADBE $FDX $DG $ARRY $GTLB $STNE $CPRX $BHIL $BBAI $SKLZ $XPEV $ZEV $FIVE $APRN $LU $OTLY $PATH $S $JBL $EGRX $SENS $INSE $MMAT $FREE $WSM $AQN $BVH $SIG $GETY $HEAR $LEN $TBLT $GRWG $BLDE $BZFD $AGEN $JILL $GRCL $HGTY $KOPN $MOMO $AMRS $CAL $RFIL $MYO $ONDS $PRVB $GERN)


If you guys want to view the full earnings post please see this thread here-

• Most Anticipated Earnings Releases for the week beginning March 13th, 2023 <-- click there to view!

 

Top of the morning StonkForumers! Happy Monday to all of you and welcome to the new trading week and a frrrrrrrrrrrresh start. Here is a quick check on those futures as we are a little over 2 hours from the cash market open.

GLTA on this Monday, March the 13th, 2023!

 

Good Monday morning StonkForumers!

Here is this morning's pre-market news thread for those of you wanting to get a quick read before today's open-
<-- click there to read!

Hope everyone has a great trading week ahead!

 

Morning Lineup - 3/13/23 - Seven Dangerous Words
Mon, Mar 13, 2023

Phrases like the seven words above never seem to be made when markets and the economy are running smoothly, and we’ve heard a number of similar phrases like this made by officials over the weekend and this morning. That’s definitely not to say that the events of the last week and today are a repeat of 2008, but these types of comments almost never have their intended purpose of providing comfort to investors.

What’s happened over the weekend has been notable and will have both intended and unintended ramifications down the line. With deposits at US banks having essentially been backstopped by the actions of the Federal Government, one could argue that the banking system has been de facto nationalized, and the consequences of that are completely unknown, so we won’t even begin to speculate.

The flight to safety has been incredibly pronounced in the Treasury market as the 2-year yield is down nearly 50 basis points (bps) this morning after falling 29 bps on Friday and 20 bps Thursday. What’s truly remarkable about these declines is that they came just after the 2-year yield topped 5% for the first time since June 2007. Going all the way back to 1977, the last time the 2-year yield dropped more than this in a three-day span was just after the 1987 crash, and then before that, it happened in multiple periods from late 1979 through early 1983.



Finally, despite little direct connection between what’s going on with SVB and other US regional banks, European bank stocks have also seen sharp declines in the last two days as the STOXX 600 Bank Index is down over 9%. Analysts are out defending the banks as having ‘limited risk’. That may be true with regards to SVB and other regional US banks specifically, but European banks aren’t immune to the overall trend impacting US banks (a rapid surge in interest rates shortly after central bank officials were assuring markets that any increase in rates would be gradual).

 

Here is a final look at today's market and futures maps, as well as how each sector performed individually at the close on Monday, March 13th, 2023.

 

just wanted to again send some much love and appreciation for keeping these weekly threads active always @stock1234!

want to also apologize for my own continued lack of activity in here as well.

if i'm being honest, i haven't really been following the daily market action closely at all anymore.

not necessarily that i don't want to, but moreso that my mom had a bit of an unfortunate setback the other week with her post-knee replacement surgery. hence, i've been needed at her side more than ever lately and it's admittedly been eating most of any free time that i get on anymore.

i do wish there were some more participants in this thread. with the site being up for over 3 years now, one would have expected some additional regular posting members by now haha. but that never quite materialized on here it seems.

it's fine i guess. site will remain running, and i'll continue with my daily updates on the threads that i normally post each day. but if y'all's have noticed lately, i've been running those updates a lot sooner in the mornings now, as opposed to the afternoons as again my time has been quite limited over the past bit due to the aforementioned reasons i laid out above.

hope you've been doing great and thx again for all you do in here on a day in and night out basis @stock1234 for this honestly cannot be said enough times!

funny, the markets went through their highest volatility week of the year this past week and i hardly was paying attention to it which is a bit sad as you guys know i live for days like those lol

still do try to catch some of the action the best i can but those days have been truthfully close to non-existent over the past few weeks due to being very tied up with other more important things in the IRL atm.

 

Don't Forget About CPI
Mon, Mar 13, 2023

With all the worry about the potential for bank runs, you may have forgotten that there's a CPI report tomorrow morning. After January data came in higher than investors had hoped, consensus forecasts for Tuesday's February CPI are calling for a 0.4% m/m increase on both a headline and core basis. Based on recent trends, while the bias towards higher-than-expected readings hasn't been as extreme as it was just a few months ago, lower-than-expected headline readings have been hard to come by over the last year with just three in the last 12 months.



In terms of seasonality, history isn't really on the side of those who are looking for a lower-than-expected report tomorrow. Going back to 1999, headline CPI reports released in March have been lower than expected just two times which is easily the lowest of any month. In total, of the 24 CPI reports released in March since 1999, 10 have been higher than expected, 12 have been inline, and two have missed forecasts. Will tomorrow be the third time the charm?

 

A Look at the Financial Sector's Weighting
Mon, Mar 13, 2023

At its YTD high back on February 7th, the S&P Financial sector ETF (XLF) was up more than 8% on the year. Since that high, the sector has fallen more than 13% and is now down more than 6% YTD.

With systemic risk in the Financial system making front-page headlines again, we checked in on the sector's weighting in the S&P 500 to see how it compares to where things stood back in the mid-2000s ahead of the Financial Crisis. Below is a look at the Financial sector's weighting in the S&P going back to 1990. As of this writing, the Financial sector has a weighting of 10.73% in the S&P. That's down a full percentage point from where it was at the end of February.

What's interesting to note is how much smaller the sector is today compared to its weighting back in early 2006 when we were on the cusp of the Financial Crisis. At its peak in early 2006, the sector's weight in the S&P had ballooned to 22.4%, which made it the largest sector of the S&P at the time. When the Financial sector, which is a sector meant to service the rest of the economy becomes the largest sector, something's off! Of course, the Financial Crisis following the bursting of the housing bubble of the mid-2000s corrected this problem, as the Financial sector's weighting fell from north of 22% down to south of 9% when the bottom was finally put in back in early 2009. During this latest bout of issues for Financials, the sector is still big enough to be the third largest sector in the S&P behind Tech and Health Care, but it's not nearly as "weighty" as it was before the Financial Crisis, and its weighting has actually been trending lower for the last 7-8 years.

 

Top of the morning StonkForumers! Happy Tuesday to all of you and welcome to the new trading day and a frrrrrrrrrrrresh start. Here is a quick check on those futures as we are a little under an hour from the cash market open.

GLTA on this Tuesday, March the 14th, 2023!