Displaying items by tag: bear market

In an article for the Financial Times, Derek Brower discussed recent weakness in energy stocks due to increasing worries of a recession despite a recent string of strong earnings reports. This follows a two year rally which was fueled by production cuts in 2020, a better than expected economy, and the war in Ukraine. 

Last year, the energy sector was up more than 50%, while the S&P 500 finished down double-digits. This year in contrast, the S&P 500 has an 8% gain, while the energy sector is down 5%.

According to Wall Street analysts, investors are looking past companies’ strong results due to expectations that recent trouble in the banking sector will translate into reduced economic activity and demand for crude oil. 

Another indication is that dividend yields in energy stocks are nearly double those found in financial stocks and quadruple those of tech stocks. Inflation is proving to be a significant headwind as production costs have increased, eroding margins with lower oil prices. Another is that productivity in the Permian Basin has declined by 30% over the last 2 years, another reason that margin contraction is likely.

Finsum: Following major outperformance in 2022, energy stocks have underperformed so far this year due to increasing recession fears.

Short-term dated options are continuing to grow in popularity which many analysts are warning could have unintended consequences for market stability according to a Reuters article by Saqib Iqbal Ahmed.

The fastest growing segment is zero days to expiry (ODTE) options, where traders are looking to profit from small, intraday market moves. Most options are based on indices, popular ETFs, or single stocks. As of March 2022, the daily notional value of all ODTE trades had exceeded $1 trillion.

The contracts are popular among buyers, because small moves in the underlying instrument can result in huge moves for its derivatives. For sellers, the appeal is that the options decay in value and the trade can be closed at the end of the day. 

However, many warn that large positions in these options could set off a ‘squeeze’ in the event of an unexpected, intraday move. This would cause option sellers to take large losses and potentially force hedging which could exacerbate the move in the underlying instruments. According to JPMorgan, it would be a similar dynamic to the ‘Volmageddon’ crash of 2018 when many inverse volatility products crashed due to a large spike in the VIX.

Finsum: A new threat to market stability is the rise of ODTE options which are becoming very popular with retail and institutional traders. However, they do have the potential to exacerbate large, intraday market moves. 

After a tough year for the markets, asset managers are bracing for cost-cutting in 2023. Revenues were down across the industry last year as falling markets hit both management and performance fees. In the U.S., total assets in mutual funds and ETFs dropped 17 percent between the start of 2022 and the end of October, according to data from the Investment Company Institute. This will force asset managers to cut costs and make tough decisions this year about how to grow. Some asset managers are predicting that the downturn will accelerate the shift by clients from mutual funds and brokerage accounts to other ways of investing, such as ETFs, separately managed accounts, and model portfolios. Martin Small, head of BlackRock’s US wealth advisory business and the firm’s incoming chief financial officer, told Financial Times, “Whenever there are super shocks in the market, people make big changes to their portfolios. This is when people do deferred maintenance. In U.S. retail markets, there is a move from brokerage accounts to fee-based advisory, which means more model portfolios and more ETFs.”

Finsum:After a tough year in the markets, some asset managers are predicting a shift towards model portfolios, ETFs, and SMAs for clients.

According to a new report by Edelman Financial Engines, inflation, recessionary fears, and geopolitical uncertainty are undermining financial confidence. The report found that just 23% of more than 2,000 adults that were polled earlier this fall felt “very comfortable” about their finances and only 12% consider themselves wealthy. Even high-net-worth investors are concerned about their finances. Only 44% of millionaires feel “very comfortable” about their finances, with only 29% feeling wealthy. Jason Van de Loo, head of wealth planning and marketing at Edelman Financial Engines, had this to say about the results, “Becoming a millionaire was always the pinnacle of financial success. But at a time when inflation and stress levels are up, and markets and portfolios are down, very few Americans actually feel wealthy.” Edelman Financial Engines also found that most adults feel less financially secure than they would have hoped at this stage in their life. The results match similar responses from other surveys. A separate report by Bank of America found that 71% of workers feel their pay isn’t keeping up with the rising cost of living which brings the number of people who feel financially secure to a five-year low.

Finsum:A poll conducted by Edelman Financial Engines revealed that Americans are less confident about their finances due to inflation and recessionary concerns.

Yields on developed market government bonds have been soaring this year, as a result of higher inflation, sharp rate hikes, and quantitative tightening. The latter of which is what has traders nervous right now. The Federal Reserve is looking to increase the pace of winding down its nearly $9 trillion balance sheet, while the European Central Bank has also been looking to shrink its €5 trillion bond portfolio. Central banks built up their balance sheets with bond purchases to help provide a stimulus for the economy, but with the current high inflation, banks are now looking to sell those bonds. With the bond market already facing pressure due to the rate hikes, further quantitative tightening could make trading even more difficult by worsening liquidity and increasing volatility. The Bank of England has already been forced to delay its quantitative tightening due to turmoil in the UK bond market. That turmoil, which also spread to the U.S. and European bond markets, has only added to the liquidity and volatility concerns.

Finsum:An increase in Quantitative Tightening by central banks could lead to more volatility in the bond markets.