Displaying items by tag: S&P 500

(New York)

Not only did the stock market fall 3-4% yesterday, but something very unusual happened alongside it—yields rose. Historically speaking, it is rare for yields to rise when there is a big stock selloff, as investor generally flee to the safety of Treasuries. Selloffs can portend economic weakness to come, which makes bonds seem more attractive.

FINSUM: This is quite a worrying development and is reflective of the current environment. No one can get comfort from the “safe haven” of Treasuries because it seems very likely yields will keep rising on the back of the strong economy. In other words, there is no place to hide (other than in hedged investments).

(New York)

One of the most ominous signs surrounding the equity market this year are the inflow numbers into stock funds. In 2017, $517.2 bn of new money flowed into US ETFs and mutual funds from the start of the year through September. This year that number is down by almost 50% for the same period, as only $281.7 bn has flowed in. Actively managed mutual funds are seeing net withdrawals. According to Deloitte “It feels like investors are in the early stages of positioning themselves for a potential downturn … [they] are returning to cash and relatively defensive positions”.

FINSUM: Retail inflows and outflows have never been a very good indicator of coming market performance (much like sentiment), so take these figures with a grain of salt.

(San Francisco)

Want to find a good test for whether the Fed has hiked rates too far? Look no further than everyone’s favorite, the FANG stocks. There is an increasing risk that the Fed may get very hawkish with its rate hikes, and if that happens, FANGs will show the pain first, says Julius Baer & Co. Baer thinks that the S&P 500 might sink 20% on the back of rate hikes before the Fed starts to moderate its action. It believes FANGs will feel the brunt of the losses. The NYSE FANG+ index peaked three months ago and has fallen 13% since June.

FINSUM: We do not disagree that rate hikes could cause market losses, but we don’t know why FANGs would feel the most heat other than the simple fact that they have gained the most.

(New York)

JP Morgan has put out an interesting piece of analysis this week. The banks says that the Fed, and Chairman Jerome Powell in particular, have cost investors over $1 tn this year just through his statements. For some reason, the market particularly dislikes hearing Powell. On average, the market drops significantly (0.40% or more) when the Chairman speaks. Further, his remarks usually cause an intraday inflection point, which means he is actually the one moving the markets, it is not just bad timing. JP Morgan summarizes that “While we acknowledge that it is not possible to attribute the market impact of each speech with certainty, simple math indicates that about $1.5 trillion of U.S. equity market value was lost this year following these speeches”.

FINSUM: We do not think this is anything to do with Powell specifically. It is more just about being a Fed chairman during a rising rate era.

(Chicago)

Small cap stocks have been taking it on the chin. They have been getting hammered this week, and their performance (Russell 2000) has lagged the S&P 500 by almost 3% the last few days. That is a rare occurrence, which means there may be a buying opportunity. After such a bout of bad performance, the Russell 2000 has historically outperformed the S&P 500 by a percentage point over the next 20 days.

FINSUM: This could be a good short-term buying opportunity, but as ever, we struggle with these kinds of trade ideas because they seem to be based purely on historical precedent and lack any catalyst.