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.

In RealMoney, Jim Collins, the founder and President of Excelsior Capital, discusses his DEATH model portfolio which bets against hype-fueled companies via short-selling and put options. 

The portfolio has a 74% gain over the past year, even managing to hold onto impressive gains despite recent strength in equities. It has a simple construction of 10 equally weighted positions. The guiding principle behind the company is to bet against shaky companies with lofty valuations. 

Some examples include Teladoc Health and SelectQuote which were among the best-performing stocks in 2020. However, this resulted in valuations that reached absurd levels. Collins believes that one factor in these stocks’ gains were inflows into Ark Investments’ family of funds as these were two of its largest holdings. Now, these stocks are falling back to Earth in terms of valuation and stock price, while Collins sees more downside. 

Collins believes that these short-selling opportunities emerge when analysts and fund managers stop applying basic principles of valuation to their holdings. He cites Peloton as an example given its massive valuation that was similar to a software company despite the company being in the business of selling exercise equipment which is historically a competitive, low-margin business. 

Finsum: Even with recent strength in equities, Jim Collins continues to see opportunity on the short-side. His DEATH model portfolio is constructed to bet against 10 of the most hype-fueled companies in the market. 

In an article for InvestmentNews, Mark Schoeff Jr. covers the latest developments in the SEC and FINRA’s implementation of Regulation Best Interest (Reg BI). Reg BI was passed in 2019 and implemented in 2020. It requires brokers to only recommend products to customers that are in their best interests, while also informing clients of any potential conflicts of interest and financial benefits to them. 

There were some questions about how Reg BI would fit in along with ‘fiduciary duty’ which is another standard that brokers must abide by. Based on recent SEC comments, it seems as if the Reg BI and fiduciary duty are working in tandem to ensure that brokers are placing their clients’ interests above their own. They also stress that although both may be triggered at different times, they are having a similar impact in terms of promoting better behavior from brokers.

In recent months, enforcement of Reg BI and the fiduciary standard have increased. In part, it’s due to greater clarity around the topic and a change in SEC leadership to Chair Gary Gensler and control of the body by Democrats. Until Gensler’s tenure, Republicans see Reg BI as the primary tool for oversight, while Democrats traditionally favor the fiduciary standard.

Finsum: One area of confusion has been the implementation of Reg BI which overlaps with the fiduciary standard for broker-dealers. Recently, the SEC has been saying that both are effective tools that are resulting in better behavior for brokers.

In an article for Quartz, Nate DiCamillo assesses whether ESG funds are having a positive impact. In theory, ESG investing will compel companies to act more responsibly by accounting for environmental, social, and governmental principles when making decisions.

Critics contend that ESG funds are merely a means for asset managers to collect fees given the murky nature of ESG factor scoring. It also creates an incentive for companies to ‘greenwash’ certain behaviors simply to get higher ESG scores. 

Others are also dismissive of ESG, because it attempts to combine disparate issues into a single product that have little relation to each other. Additionally, there is little evidence that ESG results in better outcomes, yet companies spend more resources to align with these principles to please ESG-focused investors. 

What’s interesting is that the trend may have peaked. In the first quarter of the year, inflows into ESG funds were down by $163 billion compared to last year. In part, it’s due to the partisan backlash against the trend as many conservatives are pushing legislation to ensure that state funds are barred from investing in ESG funds or using ESG to make investment decisions. 

Finsum: ESG investing has become the center of intense controversy. Yet, it remains unclear whether it’s actually effective in terms of reaching its goals. 

Financial advisors looking to build an online presence must have a content strategy that is effective in terms of converting visitors into leads and then into prospects. However, these efforts have to be efficient in terms of impact given the time and energy involved.

In terms of efficiency, the best content strategy for advisors is to create evergreen content. In addition to being effective, evergreen content also has a high return of investment, because it can be reused in the future rather than most other types of content which can be only used once. In contrast, most online content has a short shelf life.

A big challenge for advisors creating online content is that it takes time, patience, and repeated postings to see any results. Ideally, this content is informative, educational, and entertaining while transmitting your authentic personality. 

Some effective strategies for evergreen content are to create posts around topics like savings, planning, and investing that are educational in nature and consistent with your brand and messaging. Another option is to create evergreen content around market events that can be posted on FOMC decisions, elections, or during big swings in the market when people are naturally more interested in financial discussions. 

Finsum: Creating effective online content can be time-consuming and challenging for advisors. However, one strategy is to create evergreen content around topics that can be regularly reused.

In an opinion piece for Bloomberg, former NY Fed Chair Bill Dudley shared his thoughts on why there is likely to be more weakness in Treasuries despite increasing indications that inflation is bending lower. 

While longer-term yields have declined as a result, they are starting to creep higher as the economy continues to show momentum with some signs of an acceleration. Hopes that the Fed’s hiking cycle was over seem premature as Fed funds future markets now show hikes at the next two meetings.

Even if the Fed is close to the end, a robust economy means that rates will likely stay elevated at these levels for a prolonged period of time. Further, Dudley sees structurally large deficits, baby boomers spending down retirement accounts, and capital expenditures in renewables and reshoring supply chains as reasons that inflation is likely to linger above the Fed’s 2% target. 

Higher inflation will also erode returns on longer-term Treasuries, leading to higher yields. This has the potential to cause stress to the financial system as we saw with the regional banking crisis especially as Treasuries make up the capital base of so many institutions. However, Dudley sees one silver lining as it could force politicians to address the country’s weakening fiscal situation.

Finsum: Former NY Fed Chair Bill Dudley doesn’t share the market’s optimism that the worst of the inflation surge is over. He sees structurally higher inflation as a headwind for Treasuries.