(New York)

Junk bonds have had a rough monthly, and it is not hard to see why. The rise in yields and the anxiety about stocks have combined to push yields on junk steeply higher, from 6.18% on October 1st to 6.61% now. In aggregate, the bonds are down 1%+ this month. However, the truth is that the losses could have been much worse, and within that idea, is an important story. That story is that ETFs, which have offered much greater ease of access to investors, actually seemed to have supported prices in the recent turmoil. The head of bond trading at Oppenheimer put it best, saying “The ETF market, which was supposed to subtract liquidity from credit markets, is actually adding liquidity by aggregating the risk and bringing in people who want to take macro risk as opposed to micro bond level risk … The ETF market ends up providing the live bid-ask spread that even the credit markets themselves cannot generate”.

FINSUM: This is a fascinating argument as it runs counter to the long-running narrative about how fixed income ETFs could cause a big blow up because of a “liquidity mismatch” between ETFs and the underlying asset.

(New York)

If you are looking for the canary in the coal mine for the current market turbulence, look no further than a handful of stocks that should show investors where things are headed. Especially for the Dow. The index’s gains this year have largely come from three stocks: Apple, Boeing, and UnitedHealth Group. 16 stocks in the 30-stock index have losses this year, but because of the quirky way the Dow is calculated, some smaller market capitalization companies have much more weight than larger ones (weighting is done by share price not market cap). Accordingly, this trio has outsized importance to the index, and if they fall, the Dow is likely to get badly hurt.

FINSUM: The Dow is quite funky, but this story points out just how vulnerable the whole index looks right now.

(New York)

Rising rates are good for financials, right? Well, not always, especially for asset managers. The sector is not as directly impacted by rate rises as banks, and investors need to be on the look out for losses. The whole sector is experiencing a grave fee war, with fund pricing recently hitting zero. All managers are now in an effective race to the bottom on fees and only a handful of winners will emerge, all reliant on increasing scale massively to make the low fees viable.

FINSUM: Asset managers are in a nasty and long-term fight. The damage to shares would have been much worse, but the rise in stocks and other assets has boosted AUM, which has offset a lot of the lost revenue from lower fees, helping to insulate the sector.

(New York)

Something very odd happened in markets yesterday—the reaction to a stimulus had gotten so bad, that it reversed the original stimulus. We are of course referring to the fact that the stock sell-off, itself seemingly a response to the rise in bond yields recently, became so bad yesterday, that bond yields finally turned around and moved lower. In other words, bonds scared stocks so much that bonds themselves got scared. The stock market has fallen more than 5% in two days.

FINSUM: This was an interesting, albeit easy to forecast, move. It makes one wonder, which is the cart and which is the horse?

(New York)

The amount of data pointing to recession is growing strongly. Not only are rates and yields rising quickly, but housing has been showing much weakness. Now there is another major leading indicator flashing red—commodities. Commodities are often seen as a key economic bellwether as they tend to show aggregate demand ahead of actual economic figures. By that measure, things are looking bad. Bloomberg’s commodity index has dropped 5% this summer, with both agricultural commodities and metals performing poorly. One factor hurting commodities is the Dollar, as the currency is strong and because commodities are priced in Dollars, it tends to hurt foreign demand.

FINSUM: Everything we are seeing seems to point to a peak. Housing has turned negative, commodities are weakening, and rates are rising. Did the stock market see its bull market peak last week?

(New York)

The Wall Street Journal says the conventional logic as to which stocks are safest during periods of rising rates is wrong. The traditional play is to buy into large, safe, dividend-payers. However, over the last thirty years, those are exactly the stocks to avoid during rising rate periods. A better decision, if history is any guide, is to put your money into small caps and cyclical sectors. Small caps have outperformed large caps by a wide margin in rising rate periods, as have growth investments and cyclical sectors.

FINSUM: Straight dividend payers are not the best choice. Dividend growth stocks are likely a much better choice, and small caps seem like a good idea as well as they tend to see the biggest gains in strengthening economies.

(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)

With rates rising and yields finally responding in a big way, you may have been wondering which ETFs tend to perform well in such periods. With that in mind, here is a list of the best performing ETFs in periods of rising rates (since 2008). The stats are from thirty day periods of rising rates, which have occurred 18 times since 2008. The best four are: VanEck Vector Oil Services ETF (6.53% average gain), the SPDR S&P Regional Banking ETF (4.9%), the United States Oil Fund ETF (4.54%), and the SPDR S&P Oil & Gas Exploration & Production ETF (3%).

FINSUM: Oil and banking, not really a surprise, but certainly a good reminder for investors. The worst performing funds in the same period tended to be gold funds.

(Washington)

The SEC received over 6,000 comment letters in its public comment period for its new best interest rule. The regulator is currently reviewing those, but the big question is what is the rule’s implementation timeline? A top director at the SEC recently declined to comment on a timeline, saying “We are in the process of going through comments to see what changes if any we should be recommending”, but refused to give a date.

FINSUM: The anecdotal evidence and chatter we are hearing is that the SEC is going to try to move quickly to finalize and implement this rule. Stay tuned.

(New York)

It looks like Michael Bloomberg, founder of the eponymous financial data firm, is eyeing a run at the White House. The move, which the Financial Times quipped was one New York Billionaire trying to replace another as president, surprises no one, as Bloomberg has been hinting at his run for some time. He has given over $100m to Democratic candidates for the midterm elections, something a staffer said was “a hell of a lot of IOUs”. Bloomberg will be 78 years old in 2020.

FINSUM: Speaking purely from a competitive standpoint, we have mixed feelings about whether he would be a good candidate for the Democratic party. On the one hand, he is more centrist than a lot of other Democrats, so could get some Republican votes. But on the other, he is also a New York billionaire, which could turn some off.