Each week, Charles-Henry Monchau, CIO of Bank Syz, presents 7 graphs characterizing the most important events of the past week.
Chart 1: The S&P 500 flirts with the bear market
US stocks continued their negative weekly performance streak. The S&P 500 Index records its seventh consecutive week of losses. The reason: rising inflationary pressures, which could force consumers to reduce discretionary spending, effectively increasing recession risks. During Wednesday’s trading session, US stocks suffered their biggest daily decline since June 2020. Disappointing results from several major US retailers (Target, Walmart, Lowe’s and Home Depot) weighed on overall market sentiment. Investors seem concerned that retail giants will be forced to pass higher costs on to customers more in the coming months, which could put even more pressure on inflation. Comments from several Fed officials during the week did little to allay market fears about the pace of rate hikes. U.S. macro data, meanwhile, fell for the fifth straight week, with Citigroup’s Economic Surprise Index slipping back into negative territory, posting its weakest weekly close since November 2021.
During Friday’s session, the S&P 500 index briefly entered a bear market, breaking the 20 percent decline from the highs. The S&P broke the 3855 point support to hit its lowest level since March 2021. However, the main US index rebounded at the end of the session to end the session unchanged.
Chart 2: Stock and bond yields are diverging…finally
The US 10-year bond yield was nearly 3.00% for the week before falling to 2.77%, its lowest level in a month. While bond yields and equity markets have moved in tandem over the past few months, the dichotomy between bond and equity markets seen last week may signal a regime change in the relationship between equities and bonds.
Diagram 3: The Great Rotation
The Nasdaq has significantly outperformed other major U.S. stock indexes over the past decade, with an annualized performance of 18% per year between 2010 and 2019, up just 3.3% per year between 2010 and 2019, compared to a 13.4% annualized return for the S&P 500
But since the beginning of 2021, the balance of power has completely reversed. An energy ETF ($XLE) is up 112%, while the QQQ (Nasdaq 100 ETF) is down -2.6%.
As illustrated in the chart below, trends of relative over- or underperformance are part of long trends. Technology stocks outperformed energy stocks between 1990 and 2000. Between 2000 and 2008 the energy sector dominated. New trend change between 2008 and 2020 with strong relative outperformance of technology stocks compared to the energy sector.
Is the outperformance in energy seen since 2021 part of a long-term trend that could continue into the current decade?
Chart 4: After Covid, monkeypox?
Complicated week for stock markets, but not for monkeypox vaccine makers… Cases could be accelerating in Europe, a regional World Health Organization (WHO) official estimated on Friday, while at least eight European countries have identified patients, including 20 in the United Kingdom . GeoVax Labs (GOVX) and Siga Tech (SIGA) micro market caps have almost doubled in a week.
Chart 5: The credit market falls but does not collapse
Last week, US high-yield-treasury bond yield spreads hit their highest level since November 2020 at 492 basis points. However, when comparing the magnitude of the “spreads” to other periods of market stress, it is important to note that periods of decline in equity markets led to higher spreads (543 basis points on average). The current yield spread is also the lowest “spread” ever observed.
Chart 6: Fresh widening of Italian spreads
The market appears to have revised upwards its ECB rate hike forecast last week. In fact, the yield curve now expects a rate hike of 104 basis points in 2022 for the eurozone, compared to 86 basis points the previous week. It appears that comments from Mr Knot – a member of the European Central Bank – had an impact on this rise in expectations. In fact, Mr Knot said he was in favor of a 25 basis point hike in July, while mentioning that a larger hike may be warranted.
Interestingly, if the market expects further monetary tightening from the ECB, so-called “peripheral” bond issuers will be hit immediately. For example, risk diversification for 10-year Italian government bonds has recently increased by more than 200 basis points, taking 10-year Italian 10-year government bond yields to over 3%.
Chart 7: Soon the rebound for balanced portfolios?
Diversified portfolios have suffered from performance since the beginning of the year and for good reason… While bonds and equities tend to be weakly or even negatively correlated, the context has been very different in recent months. Not only are the vast majority of equity markets down 15-20% year-to-date, but bonds are also posting double-digit negative performance in 2022. Consequence: One of the worst semesters we know for balanced stock/bond portfolios.
Good news! Analysis of historical performance shows that periods when balanced portfolios declined more than 5% in one quarter were followed by significant rallies the following year – up about 12% on average if we look at historical numbers.
Good week to you all!
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