Breaking Down Volatility with Rubber Bands

INSIGHTS for INVESTORS  

A Tale of Two Markets

Investors are right to be confused by markets that are in a historically unusual place with many asset classes muddling along with little to no return, and indices that seem to belie greater strength than is actually the case with a closer look.

As JPMorgan noted this week, “As of last Friday’s market close, the top 10 stocks in the S&P 500 accounted for 90% of the index’s year-to-date gains. While market breadth has been narrow and returns have been highly concentrated, the rally has broadened out relative to May, when the S&P 500’s 10 largest names accounted for all of the year-to-date gains. This decline in concentration can be attributed to surprisingly resilient economic data, which in turn has fueled better than expected profit growth and stock market performance. In fact, with the 2Q23 earnings season coming to a close, profits have surprised to the upside, with particular strength in the consumer sectors, construction, travel and streaming/gaming. With that being said, the recent broadening has been moderate at best, and mega-cap tech stock valuations remain stretched. The top 10 stocks currently account for over 30% of the index, which is down from the peak levels we saw in April/May but still extremely high relative to the last 25 years.” (see accompanying chart)

Such a bifurcation can cause many investors on a “gut-level” to consider chasing such winners, but as JPMorgan’s comments allude to above, history argues against buying stocks with “stretched valuations” [see also our video this week on the dangers of making the wrong move when investments are stretched to either the upside or downside].

It’s also worth noting, with so many of the above names within the tech sector, that the Nasdaq is still well off its 2021 highs.

Last week, Goldman Sachs summarized the earnings season to date at that point, and general market conditions by stating, “With 80% of the S&P 500 market cap having reported, a tagline for this earnings season may be “better than feared.” As the second quarter progressed, analysts cut YoY EPS growth estimates to –9%. Because of these low expectations, companies beating consensus estimates are only outperforming the S&P 500 by 53 bps on the next trading day, versus a long-term average of 100 bps. We believe this below-average outperformance highlights macro uncertainty and rich valuations.” (see accompanying chart)

Date: 8/4/23

We’d summarize the above, by saying that while not necessarily a time to be “fearful”, it hardly seems an opportune time to be “greedy” either.

Bond Markets Signaling Possible Trouble Ahead

Torsten Slok of Apollo, has shared some wonderful charts the last few weeks pointing out the worsening credit conditions both amongst companies as well as consumers. It is often said the bond market better represents “smart money” and thus is a better indicator than the equity markets of the true state of the economy.

Here are some of the key charts/data we think are particularly important to share.

In the first chart, he shares the deteriorating credit conditions as demonstrated by the shift in balance between credit upgrades and downgrades. He cautions, “With the Fed funds rate staying at the current level for a couple of years, high cost of capital will continue to create problems for more and more companies characterized by high leverage and low earnings.”

Date: 8/15/23

In the next chart, he looks at what he refers to as the “weakest links” which he defines as “loan issuers rated B-minus or lower with a negative outlook.” Companies falling into this category are also on the rise which you can see from the chart below.

Date: 8/13/23

All of which is culminating in what ultimately will matter to the economy and markets, which are bankruptcy filings (see accompanying chart).

Date: 8/11/23

And to conclude this journey/thought, we’ll point to another piece he shared where he points out that such companies, as outlined in the charts above, that largely make up those in the high-yield bond and levered loan indices make up approximately 12% of all U.S. employment at around 19 million people. He states, “With interest rates staying high for at least another year, the downside risks to employment continue to be meaningful.” (see following chart)

Date: 7/30/23

While none of this makes for fun or interesting headlines, thus it is likely the first you’ve seen such data, such data is why we, and others’ opinions we’ve shared in recent weeks, believe that the economy may yet experience a recession in the months ahead.

Those well-positioned across asset classes should have nothing to fear, but we’d caution those investors currently or considering concentrated portfolios as a path to future success.

Have a wonderful weekend,

Tim and the team at TEN Capital

DATA, JUST THE DATA

U.S. Jobless Claims – fell by 11,000 initial claims last week for a total of 239,000, in-line with expectations. Continuing claims on the other hand saw an uptick of 32,000 to 1.716 million.

U.S. Retail Sales – rose 0.7% month-over-month in July for a fourth consecutive month of expansion. On an annual basis sales are now up 3.2%. 

U.K. Retail Sales – saw a surprising decline of 1.2% in July versus expectations for just a 0.5% decline. On an annual basis sales are down 3.2%, marking the 16^th consecutive month of decline.

U.S. Housing Starts – Rose 3.9% month-over-month in July to a seasonally adjusted annualized rate of 1.452 million. Single-family homes led the way with a 6.7% uptick in starts. 

U.S. Industrial Production – expanded 1% month-over-month in July for the largest monthly improvement in six months. Year-over-year production slightly improved to -0.2%.

Disclaimer

TEN Capital Wealth Advisors is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC. This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is neither indicative nor a guarantee of future results. The investment opportunities referenced herein may not be suitable for all investors. All data or other information referenced herein is from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other data or information contained in this presentation is provided as general market commentary and does not constitute investment advice. TEN Capital and Hightower Advisors, LLC or any of its affiliates make no representations or warranties express or implied as to the accuracy or completeness of the information or for statements or errors or omissions, or results obtained from the use of this information. TEN Capital and Hightower Advisors, LLC assume no liability for any action made or taken in reliance on or relating in any way to this information. The information is provided as of the date referenced in the document. Such data and other information are subject to change without notice. This document was created for informational purposes only; the opinions expressed herein are solely those of the author(s) and do not represent those of Hightower Advisors, LLC, or any of its affiliates.

Hightower Advisors, LLC is an SEC registered investment adviser. Securities are offered through Hightower Securities, LLC member FINRA and SIPC. Hightower Advisors, LLC or any of its affiliates do not provide tax or legal advice. This material is not intended or written to provide and should not be relied upon or used as a substitute for tax or legal advice. Information contained herein does not consider an individual’s or entity’s specific circumstances or applicable governing law, which may vary from jurisdiction to jurisdiction and be subject to change. Clients are urged to consult their tax or legal advisor for related questions.