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U.S. stocks edge up as data offsets Fed hiking fears

Thu, 18th Aug 2022 21:22

Aug 18 - Welcome to the home for real-time coverage of markets brought to you by Reuters reporters. You can share your thoughts with us at markets.research@thomsonreuters.com

U.S. STOCKS EDGE UP AS DATA OFFSETS FED HIKING FEARS (1605 ET/2005 GMT)

Wall Street edged higher on Thursday, bolstered by a positive first-quarter sales forecast from Cisco and strong data that offset fears the Fed's rate hiking plans to tame inflation could sharply slow the economy and reduce corporate earnings.

Energy was the biggest gaining sector, with Exxon Mobil, Chevron and Conocophillips among the top six stocks lifting the S&P 500. Cisco, Nvidia and Broadcom were the other big contributors and made info tech the No. 2 gaining sector.

Real estate was the biggest declining sector, down 0.75%.

Small caps, transports and semiconductors all outperformed the benchmark index. Value stocks rose 0.28% to outpace growth's 0.17% gain.

The number of Americans filing new claims for unemployment benefits fell last week and the prior period's data was revised sharply lower, suggesting the job market remains robust despite slowing momentum caused by higher interest rates.

To be sure, the unemployment claims report, the most timely data on the economy's health, could give the Fed more ammunition to deliver another hefty rate hike next month.

"It is too early to look for a pivot in Fed policy, says Mark Haefele, chief investment officer at UBS Global Wealth Management.

Wednesday's minutes showed no signs of a pause in the Fed's hiking cycle, the Fed will look through recent commodity price weakness and more signs of an easing labor market are needed, he said.

With the S&P trading above its 75th percentile on a forward-earnings basis and the 10-year Treasury yield at its midpoint, that suggests equity markets are a bit out of whack, says Jack Ablin, chief investment officer and founding partner at Cresset Capital Management.

At year-end 2013, the benchmark note was at about the same rate as now, showing little valuation expansion or contraction, Ablin said in a note. That indicates the stock market is about 9% higher than 2023 earnings expectations suggest it should be.

Below is a snapshot of closing market prices:

(Herbert Lash)

HEDGE FUNDS' EDGE OVER THE S&P 500 SLIPS IN JULY (1345 EDT/1745 GMT

Hedge fund data provider PivotalPath is out with its report on how funds performed in July, a month in which most major asset classes shook off the lows reached in June.

Hedge funds were no exception. PivotalPath's Composite Index, which tracks funds of various strategies, rose 0.9% last month.

That fell far short of the S&P 500's 9% jump in July.

However, when zooming out for the year, PivotalPath's Composite index has lost 2.2% compared to the S&P 500 which is down more than 10% year-to-date.

Still, the Composite’s (cumulative) spread above the S&P 500 declined back to around 10%, which is the historical average dating back 25 years, PivotalPath reported.

Growth-focused hedge fund strategies made a comeback as investors crept back into the sector, with PivotalPath's FAANG, Mobile Payments and Food Delivery baskets up between 15% and 19%.

Still, the overall Technology, Media and Telecom sector remains the weakest equity subsector, down 19% year to date.

Throughout this year, PivotalPath's data showed Managed Futures and Global Macro strategies have generated the most alpha, or returns relative to the benchmark. Managed Futures generated 12.9% and Global Macro 9.3% relative to the S&P 500 on a 12 month rolling period.

However, both those strategies declined amid the broader market rally in July, losing 2.5% and 0.8%.

PivotalPath's Equity Diversified Index added 2.9% in July, although it is still down 6.8% for the year.

Regionally speaking, U.S. Long/Short strategies outperformed European ones, rising 4.1% versus 2.9%. (Lisa Mattackal)

INFLATED VALUATIONS POSE A STOCK MARKET CANARY (1337 EDT/1737 GMT

Over the past decade a significant portion of the U.S. equity market's return is derived from a "speculative" component that is based on expectations of future returns instead of sound fundamentals, O'Shaughnessy Asset Management says.

Historical data shows that multiple expansion, an increase in the price-earnings ratio, until recently accounted for about 6% of the S&P 500 composite's return, says OSAM's Jamie Catherwood in a report called "Why Fundamentals Matter."

But over the past decade multiple expansion has risen to account for 24% of a stock's return, or more than the 15% a company's dividend payout provides, he says.

"Multiple expansion simply reflects the willingness of investors to pay more for each $1 in earnings that a company generates," Catherwood says.

Companies that primarily generate returns from multiple expansion are susceptible to wild swings because it's the least tangible source of total return.

Powerful narratives used to entice investors influence a speculative component of certain companies and their stock performance.

For example, at the beginning of the pandemic when many people said certain business practices had irrevocably changed, shares of work-from-home stocks like Zoom Video Communications Inc traded at 464.8x next year’s earnings, Catherwood said, citing research by Kailash Concepts.

(Herbert Lash)

CHINA'S ECONOMY WIELDS A DOUBLE-EDGED SWORD (1215 EDT/1615 GMT)

China's economic woes may pose a double-edged sword. That is, it has the potential to drag down global inflation and at the same time weigh on worldwide growth.

China surprised everyone earlier this week by slashing two key lending rates and easing reserve requirements for national banks – moves intended to bolster wilting economic activity in the world's second-largest economy, says Jack Ablin, chief investment officer and founding partner at Cresset.

Policymakers in Beijing face several major issues stemming from a property bubble to COVID lockdowns, Ablin says. In turn, weakening Chinese demand is spilling over into the economies of some of the country's key import partners in Europe and Asia.

"This couldn't come at a worse time for Germany, which is grappling with Russian-induced energy shortages heading into the winter. German factory orders have plunged nine per cent over the last 12 months," he says.

But China weakness may be a blessing in disguise for countries grappling with commodity shortages and elevated inflation, because China is one of the world’s largest commodity consumers.

However, at the same tine, China’s economy is also "injured" and therefore it can’t be expected to contribute to the kind of growth and demand that, historically, it has provided.

"Beijing has been quick to point out that its 5.5% annual growth target is guidance, rather than a hard target, conceding that achieving it would be unlikely this year. The recent slowdown has taken even Beijing leadership by surprise. Never in their history have they missed their growth target by such a large margin."

SOMETIMES IT'S BETTER TO BE LATE WHEN ENTERING THE MARKET(1100 EDT/1500 GMT)

It's always tough to fall back on rules when it comes to the stock market, but here are two that you can count on, courtesy of Dan Suzuki, deputy CIO, at Richard Bernstein Advisors:

As Suzuki sees it, this year's sell-off has been the market's way of "trying to hit investors over the head" with the notion that they should avoid clinging to yesterday's winners, but he believes few seem to be listening.

"Rather than rotating portfolios away from bubble assets, investors tend to view the initial price declines as attractive opportunities to buy secular growth at huge discounts. Yet the history of bubbles suggests that they don't return to being great investments after just six months of selling off."

Suzuki notes that during the 2000-2002 dot-com crash — a bear market which lasted two-and-a-half years — the NASDAQ 100 Index had 16 distinct bear market rallies exceeding 10% during its 83% decline, with three of those rallies exceeding 30%.

One mistake that Suzuki believes many investors make is buying early so that they "can be there at the bottom." Yet, he says history suggests that it's better to be late than early.

In fact, he says that in seven of the last 10 bear markets, being late has been the better strategy. Not only does this tend to improve returns while drastically reducing downside potential, but this approach also gives investors more time to assess incoming fundamental data.

As an aside, Suzuki says the only instances in the past 70 years where it has been better to be early were in 1982, 1990 and 2020.

"But in each of those instances, the Fed had already been cutting interest rates. Given the high likelihood that the Fed will continue to tighten into already slowing earnings growth, it seems premature to be significantly increasing equity exposure today."

WALL STREET SLIPS AS DATA DIMS INFLATION OUTLOOK (1015 ET/1415 GMT)

Stocks on Wall Street slipped on Thursday after a decline in jobless claims showed strength in the U.S. labor market, a sign that's good for corporate profits but it likely will make the Fed's job harder as it tries to tame inflation.

The number of Americans filing new claims for unemployment benefits fell last week and data for the prior period was revised sharply down, suggesting labor market conditions remain tight, though higher interest rates are slowing momentum.

"Unfortunately, what's good for the American worker is bad for the Fed's attempt to being inflation back down to 2%," said Chris Zaccarelli, Chief Investment Officer for Independent Advisor Alliance.

"This will complicate their job and cause them to raise rates higher and for longer than many people currently expect," he added.

Expectations that inflation peaked in July sparked a risk-on rally in recent weeks. The focus now has moved to the Fed's annual Jackson Hole symposium next week for signs of whether the Fed pivots to less aggressive interest rate hikes ahead.

Early Thursday, communication services and healthcare are among weaker S&P 500 sectors, while energy is the leading gainer.

Under the surface, semiconductors are outperforming, posting a more than 1% rise.

Below is a snapshot of early market prices:

(Herbert Lash)

COPPER/GOLD RATIO AND THE U.S. 10-YEAR TREASURY YIELD (0900 EDT/1300 GMT)

Market watchers study the copper/gold ratio for potential clues into where the U.S. 10-Year Treasury yield may be headed:

On a weekly basis, the copper/gold ratio put in a bottom in early April 2020. This, just several weeks after stocks put in a major low and pandemic pessimism had started to morph into re-opening optimism.

Shortly thereafter, in July, the 10-Year Treasury yield also bottomed on a weekly closing basis.

Given that the ratio and the yield had both gone through multi-year declines, their rolling 50-week correlation swelled to a robust 0.86 in May 2020 (1.00 is a perfect positive correlation).

The ratio and the yield then rose together and in June 2021 the correlation hit 0.95!

The copper/gold ratio then peaked in October 2021, or a month before the Nasdaq and Russell 2000 recorded their record highs. The S&P 500 peaked in early January.

The correlation then broke down sharply as the ratio failed to confirm the yield's explosive rise into its June high. The yield then abruptly reversed and collapsed from a high of 3.4980% to a low of 2.5160% in less than two months.

That said, the copper/gold ratio bottomed in mid-July and turned up. The yield has since popped back up to the 2.90% area.

The correlation has fallen to around -0.45, or a near four-year low. Looking back over the last two decades or so, its reading is now well inside the zone from where the copper/gold ratio and the yield have then tended to become more in-sync with each other. Thus, traders will be watching for the correlation to turn up and become positive again, to suggest in what direction, whether up or down, that yield may run again.

Meanwhile, traders are also watching the yield's action vs its 200-month moving average, now around 2.63%. After closing above this long-term moving average on a monthly basis in April for the first time since September 1987, the yield is attempting to end above it for a fifth-straight month.

(Terence Gabriel)

FOR THURSDAY'S LIVE MARKETS' POSTS PRIOR TO 0900 EDT/1300 GMT - CLICK HERE:

(Terence Gabriel is a Reuters market analyst. The views expressed are his own)

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