Yields on Treasuries shot higher following the June ADP private sector jobs report which came in much stronger than expected at 497,000 vs 228,000. This is a continuation of a trend in recent months, showing that economic growth and the labor market are defying consensus predictions of a recession.

In fact, many analysts now believe that the economy could be re-accelerating which has major implications for fixed income and equities. Immediately following the report, odds increased for rate hikes at the next 2 FOMC meetings, and odds for a cut in the first quarter of 2024 sharply declined.

Higher yields and tighter monetary policy are certainly headwinds for equities and fixed income. Additionally, one of the catalysts for the recent rally in equities has been expectations of an imminent Fed pivot given weakening inflation and a softening labor market. Yet, data over the last month have made it clear that the Fed still has more work to do to achieve its objectives.

It’s also interesting to note that yields on shorter-term Treasuries are now approaching their highs from early March. Further, the decline from March into May following the collapse of Silicon Valley Bank and distress at other regional banks has been entirely reversed. 

Finsum: Fixed income weakened following the ADP jobs report which showed that private sector hiring was twice as strong as expected. Ultimately, the report likely means that rates will go higher and stay elevated for longer than expected.

In 2022, the energy sector was one of the few parts of the market that delivered positive returns for investors due to higher than expected global demand while supply was impacted by Russia’s invasion of Ukraine. However, the story is much different in 2023 as the sector is down 4% YTD, while the S&P 500 is up more than 16%. 

In Q2, energy stocks also lagged the market as covered by David Meats for Morningstar. Not surprisingly, the major reason is that oil prices were down by 10% and natural gas was off by 27%. Many were caught offside by weakness in oil given cuts from OPEC over the past few months.

According to Meats, energy stocks remain overvalued as most investors continue to assume higher prices. While he is shying away from most parts of the energy sector, he sees value in oilfield services. 

He believes the global oil market will be in a small deficit over the next couple of quarters due to the aforementioned cuts from OPEC in addition to stronger than expected economic growth. In total, he expects 2024 production to be about 1.1 million barrels per day lower than 2023. 

Finsum: Energy has underperformed in 2023 despite cuts from OPEC and a better than expected economy. While most energy stocks are not attractive from a value perspective, oil services are an exception.

In an article for MarketWatch, William Watts covers comments from Fundstrat’s Thomas Lee where he discusses why falling volatility is one of the major factors behind the stock market rally in 2023. YTD, the S&P 500 is up 16%, and the index is more than 25% higher from its lows last October. 

Equally impressive is that the stock market has recovered more than half of its losses. At its nadir, the market was down by 25% from its all-time high set in January 2022. Currently, it sits just 9% off these levels.

According to Lee, the volatility index is the biggest influence on S&P 500 performance, eclipsing other variables like the US dollar, earnings, rates, monetary, or fiscal policy. However, Lee’s view is not the consensus as many continue to see the market as being in a bear market rally rather than a new bull market.

These skeptics point to historically high valuations for the stock market in addition to analysts’ expectations of a modest decline in earnings per share over the next few quarters. Another headwind is that inflation continues to be stickier than expected resulting in the Fed continuing to hike further. 

Finsum: Fundstrat’s Thomas Lee was one of the few to be bullish on stocks entering 2023. He remains bullish and believes the plunging volatility index is a major factor driving returns.

In a piece for Bloomberg, Michael McKenzie and Ye Xie discuss recent economic data which has dispelled the notion that the economy is on the verge of a recession. This has resulted in traders pushing back their timeline of when the Fed will start its rate-cutting cycle and increases the odds that the Fed will continue hiking rates.

Both developments are bearish for fixed income. YTD, the asset class has enjoyed strong gains but this was, in part, due to expectations that inflation and economic growth will continue trending lower, leading to a pivot in Fed policy.

In addition to these catalysts, inflows into fixed income have been strong as traders look to lock in higher yields. Yet, these yields are here to stay at least for some time given the stickiness of inflation and the resilience of the labor market and consumer spending. 

Clearly, the market has been caught off guard as well. This is evident from the huge jumps in yields on short-term Treasuries following better than expected jobs reports in recent months. Additionally after a short blip higher, jobless claims are once again trending lower, indicating that while turnover has increased, the economy continues to add jobs. 

Finsum: Fixed income has performed well YTD, but the asset class’ gains are eroding as the odds of a recession and imminent Fed rate cut cycle have diminished. 

In an article for SmartAsset, Patrick Villanova CEPF discusses the pros and cons of investing for retirement in TIPS, Treasuries, and annuities. All of these are methods for retirees to generate income during their retirement. And, this is increasingly needed given that traditional pensions are being phased out of existence. 

TIPS are treasuries that are designed to protect against inflation. In essence, the yield is fixed, while the principal varies based on inflation. Some will create income through buying TIPS of different maturities, creating an income stream that is indexed to inflation. 

An annuity functions similarly but without the inflation component. Essentially, it’s a way to turn cash into an income stream. Treasuries are the most straightforward vehicle for saving, and it’s the benchmark that other methods are compared against. 

According to Villanova, the best strategy ultimately depends on a retiree’s lifespan and the rate of inflation. Assuming a moderate inflation rate of 2.5%, Treasuries would outperform annuities and TIPS slightly. If inflation returned to levels seen in the past decade, then Treasuries would perform the best. If inflation were to average 5%, then the TIPS strategy would handily outperform Treasuries and annuities.

However, annuities would handily outperform in the event that a retiree lives longer than 20 years. Given that the income of annuities is fixed, the value of this income would be diluted by higher levels of inflation. 

Finsum: Annuities, TIPS, and Treasuries are 3 of the most popular methods to create income during retirement. Patrick Villanova compares and contrasts each to see which is the best strategy for retirees.