U.S. Equity
- The Energy sector led Q2 S&P 500 earnings growth, up 6.7% YOY. Excluding Energy, the S&P would be reporting an earnings decline of 3.7%. On a calendar year basis, earnings growth has increased 8.9% on the whole but excluding Energy is only up 2.4%. From a sector return stance, Energy is significantly outperforming the rest of the index at +44.7% YTD, in the black with only Utilities (+3.4%).
- One theme of retail earnings has been inventory builds. Discretionary spending companies are hurting while essential spending has increased significantly due to inflation.
- Historically, the S&P 500 advances in 52% of trading days. For 2022 YTD, the index has been positive only 44% of days, the lowest percentage of positive move days since 2002.
International Equity
- Key influences recently providing US companies an advantage appear to be unwinding lower tax rates and tax shelters, offshore labor arbitrage, low interest rates, and owning little debt. Without these factors, companies outside the US appear more attractive.
- From 2008 through 2021, 2017 was the only year international equities outperformed US equities. During that period, US stocks outperformed by 262%. In comparison, this is dwarfed by a 374% outperformance by international from 1982 – 1989.
- Europe has been rapidly filling gas storage facilities in advance of winter, though forecasts point to a milder and drier than average season. EU-wide reserves have reached 80% of capacity, ahead of a Nov. 1 goal and Germany hit its 85% target a month early.
Fixed Income
- Better than expected economic data supported the market rally prior to Fed Chair Powell’s Jackson Hole remarks that the fed will remain committed to combating inflation, even if it brings “pain.”
- Global bonds tumbled into a bear market (a -20% drawdown), as of September 1st, for the first time since the Global Agg index incepted in 1990. A US 60% stock/40% bond portfolio measured by the S&P 500 and the Bloomberg US Agg was down 13.9% YTD at August month end. This is the worst 8-month return of that portfolio since the 1976 inception of the US Agg index.
- As interest rates rise across the world, nearly all of the $2.6T negative yielding debt is confined to the Japanese market due to the Bank of Japan’s repressive policy regime. In late 2020, nearly 75% of the $18T negative yielding debt was Euro denominated.
Equity Long/Short
- Data from Futures contracts point to an increase in bets that the S&P 500 will decline. A hedge fund driven institutional short position of more than $125B has been building up, around $25B greater than any point in the last six years.
- A prominent market commentator stated that the hardest hit companies, many still unprofitable, have been leading the mid-summer recovery. It was noted that interim rallies prior to the tech bubble hitting bottom were led by premature bargain hunting.
- A measure of sentiment as calculated by the Hulbert Nasdaq Newsletter Sentiment Index, which tracks average recommended stock allocations by short-term market timers, has returned to “extreme levels of bullish optimism.” Strategists note that buy ratings are back to 2000 and 2007 peaks.
Disclaimers:
The views expressed herein are those of Asset Consulting Group (ACG). They are subject to change at any time. These views do not necessarily reflect the opinions of any other firm. This report was prepared by ACG for you at your request. Although the information presented herein has been obtained from and is based upon sources ACG believes to be reliable, no representation or warranty, express or implied, is made as to the accuracy or completeness of that information. Accordingly, ACG does not itself endorse or guarantee, and does not itself assume liability whatsoever for, the accuracy or reliability of any third party data or the financial information contained herein.
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