Stock Market Today: September 26th - 30th, 2022

Top of the morning StonkForumers! Happy Hump Day to all and welcome to the new trading day and a fresh 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 Wednesday, September the 28th, 2022!

 

Good Wednesday 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 day ahead.

 

Morning Lineup - 9/28/22 - Britain Blinks
Wed, Sep 28, 2022

Equity futures have been whipping around all over the place this morning. After some relatively steep declines overnight, this morning's announcement from the Bank of England to buy long-dated government securities has put some temporary support in the market causing interest rates to pull back from their overnight highs and equity futures to rally. How long this reprieve lasts remains to be seen, but market participants will take any break they can get these days. On one positive note, we would note that from a historical perspective at least, over the last ten years, the upcoming three-month period for equities has been better than any rolling three-month period of the year.



Buying equities during the throes of a bear market can be a humbling experience, and never has that been more true than in 2022. The chart below shows the percentage of time that the S&P 500 tracking ETF (SPY) has traded higher on the day versus the period day's close in each year of its existence. Since its inception in 1993, there have only been seven prior years where SPY traded higher on the day less than half of the time, but this year's current pace of 43.8% is easily the lowest reading since SPY's inception. The forces of gravity on stock prices haven't been this strong or consistent in at least 30 years.

 

Here is a final look at today's market and futures maps, as well as how each sector performed individually at the close on Wednesday, September 28th, 2022.

 

Top of the morning StonkForumers! Happy Thursday to all and welcome to the new trading day and a fresh start. Here is a quick check on those futures as we are a little over 3 hours from the cash market open.

GLTA on this Thursday, September the 29th, 2022!

 

Good Thursday 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 day ahead.

 

Morning Lineup - 9/29/22 - Fundamentals Don't Matter
Thu, Sep 29, 2022

The rally was fun while it lasted. Futures are sharply lower this morning and poised to give up over half of Wednesday's gains at the opening bell. An interview with Cleveland Fed President Loretta Mester where she reiterated her hawkish stance hasn't helped sentiment nor has the fact that initial jobless claims dropped below 200K and continuing claims were also lower than expected. As if that wasn't bad enough, the GDP Price Index and Core PCE were both revised higher. If there's any silver lining to those upwardly revised inflation readings, it's that it will make it more likely that these readings for Q3 show some deceleration.

These days, either all stocks rise, or they all fall. There is little in-between. It’s like flipping a switch. In yesterday’s rally, the S&P 500’s net A/D reading was +477 which was the strongest single-day breadth reading since late July and before that April 2020. Yesterday’s strong breadth reading was the 7th this month and the 31st ‘all or nothing’ day (single day breadth reading either above +400 or below -400) for the S&P 500 this year, bringing the full-year pace to 42. That would be just one shy of the 2020 total of 43 and the sixth highest single-year total since 1990. Besides 2020, the only years with a higher number of all or nothing days were during and coming out of the Financial Crisis from 2008 through 2011.

In a normal functioning market, fundamentals play a large role in the direction of individual stock prices. There are certain times, like now though, where the seas get rough, and Captain Macro takes the helm relegating fundamentals to steerage. If you’ve ever been seasick on a boat, though, the last place you want to be is down below.

 

Here is a final look at today's market and futures maps, as well as how each sector performed individually at the close on Thursday, September 29th, 2022.

 

Should You Hold Bonds in a Portfolio?
Posted on September 27, 2022

This is probably one of the biggest questions we are getting, and with good reason. The Bloomberg US Aggregate Bond Index is set for two consecutive years of negative returns and is currently amidst its worst ever peak-to-trough drawdown, a 15.3% pullback from its most recent high (back in July 2020).



While we expect equities to be volatile, the amount of volatility in bonds is not something that is typically touted as the “conservative” option. But the risk was always present, and a good way to capture that is “duration”.

Duration is the average time over which a bond investor expects to receive all the cash flows of a bond, weighted by the present value of those cash flows. If the yield on a bond is low, the duration will be longer – since you get relatively smaller payments before final maturity. And duration is lower if the yield is higher because you get relatively more payments prior to maturity. Also, longer maturity bonds have longer duration since it takes longer to get all the payments. And vice versa.

The most practical use of duration is that it can give you a good idea of how the price of a bond will change when interest rates change. For example, if a bond has a duration of 3 years, the price of the bond will fall by 3% if interest rates rise by 1%. And by this measure, bonds were at their riskiest level in history at the beginning of 2022, with a duration of about 6.8 years.



A big reason for duration to rise as much as it did was that yields were falling, hitting record low levels of just over 1% in 2020. This is important because, for bonds, yield-to-maturity is the best predictor of future returns (or yield-to-worst, which is used for bonds with callable options). The chart below shows 8-year rolling returns for the Aggregate Bond Index against the yield-to-worst at the beginning of the period (8 years prior).



The good news is that with bonds repricing amid the interest rate surge this year, yield-to-worst for the bond index has increased to 4.6% – it was 1.75% at the end of 2021. And duration has reduced to about 6.3 years now.

But wait, aren’t short-term yields higher than long-term yields?

The short answer is yes. Both short- and long-term interest rates have surged this year thanks to an aggressive Fed looking to get on top of inflation.

Short-term interest rates are typically keyed off current Fed policy, while long-term rates can be thought of as the market’s expectation for the future path of policy rates (to a first approximation). With the Fed being as aggressive as they are, there’s a risk that the economy goes into a recession, and they will have to reduce interest rates in response. So long-term interest rates have not risen as much as short-term rates. At this point rates for 1- through 7-year treasuries are higher than 10-year and 30-year rates.

Which begs the question: why should an investor take more risk, i.e. buying long-term bonds, which have higher duration/risk, for a lower yield (or future return)?



And we agree. On the Carson Investment Research Team, we are heavily underweight long duration bonds.

A recession hedge
At the same time, we have not completely eliminated these bonds from our portfolios. The reason is that we cannot say for certain what economic environment we will be in. The schematic below illustrates the type of asset classes we would like to hold in different economic and inflationary environments. In a low growth, low inflation environment like in the last decade, a stock-bond portfolio works quite well. But in a high inflation environment, we would add commodities and real estate, if growth is high, or inflation-protected securities if growth is weak.



The problem is that we cannot say for certain what regime we will be in going forward. A Fed that raises rates too fast and too high could very well put the economy into a recession, an environment in which consumer incomes fall and inflation pulls back. Obviously, the Fed would prefer for this not to happen, but it is a risk. And for that reason, we want to hedge against that risk.

Typically, longer-term bonds, especially US treasuries have zigged when stocks have zagged. The chart below compares the cumulative performance of the S&P 500 and US treasuries amid the last six major bear markets and subsequent recoveries. Five of these coincided with major recessions (1987 was the exception). As you can see, treasuries have had a positive return when equities were sinking. Even in the 1970s and 1980s – part of the reason is that the bond yield was very high at the time, which helps returns (as I discussed above).



Stocks and bonds have obviously gone in the same direction this year. However, none of the major economic indicators suggest the economy is in a recession right now. That could obviously change over the next year, but in that event, I think the historical evidence suggests that treasuries will provide ballast to the portfolio.

 

Top of the morning StonkForumers! Happy Friday to all and welcome to the final trading day of the week, month and quarter and a fresh start. Here is a quick check on those futures as we are a little over 4 hours from the cash market open.

GLTA on this Friday, September the 30th, 2022!

 

Morning Lineup - 9/30/22 - Q3 Almost Done
Fri, Sep 30, 2022

Futures were a lot higher earlier in the morning but in what has increasingly become the norm this year, those gains were fleeting. Ahead of some important inflation data, equity futures were essentially flat, and the 10-year yield was trading down to 3.7% after topping 4% earlier this week. Nike (NKE) has been a drag on equity prices as the stock is down 10% in reaction to earnings. That would rank as the stock's largest downside gap in reaction to earnings since at least 2001. The other major report since the close yesterday was Micron (MU) and while the company lowered guidance, it's still trading up in the pre-market.

In terms of economic data, Eurozone CPI came in at 10% y/y for the month of September which was nearly a full percentage point higher than August's reading of 9.1%. There's been no let-up in inflation on the other side of the Atlantic. Over here, it's a busy day for economic data to close out the quarter with Personal Income (inline), Personal Spending (stronger than expected), and PCE Core (higher than expected) all being released at 8:30. Chicago PMI will be released at 9:45, and then at 10, we'll close out the quarter's data with Michigan Sentiment.

It's been a lousy back half of the quarter, so just about everyone is happy to see it come to an end, but there are still 6.5 hours of trading to get through.

The Philadelphia Semiconductor Index (SOX) traded lower yesterday as it has on more than half of all trading days this year. As a result, the index is down just under 42% from its record closing high in late December. The current drawdown in the SOX is now deeper than the 35% drawdown from the COVID crash and ranks as the fourth largest decline from a record closing high in the index’s history. The only three that were deeper were two 50%+ declines in the mid to late 1990s, and then the 80%+ drawdown from the dot-com peak. The two drawdowns in the 1990s were short-lived lasting two years or less before new highs were once again reached, but the high from the dot-com peak in 2000 wasn’t eclipsed for another 18 years. One can only hope that in the late 2030s we aren’t finally celebrating the first new high in the Semiconductor index since 2021!

Even though the SOX is down nearly 42% from its all-time high, it may sound hard to believe but throughout its history, it has been further below its all-time high than it is now 57% of the time! With semis consistently trading down so far from record highs over the years, you would think the sector has been a bad investment. Since its inception in 1994, though, the SOX has returned more than 12% annualized on a total return basis. Not bad for an index down over 40% this year.

 

Here is a final look at today's market and futures maps, as well as how each sector performed individually at the close on Friday, September 30th, 2022.