Investment-grade bond yields again approach multi-decade highs: Interest rates globally are on the rise, but the pace of future increases may slow down depending on upcoming economic data. This environment is creating opportunities for investors to get higher returns on investment-grade bonds than they have been able to in years.
Stock price ups and drawdowns: “The stocks of the best wealth creators over time went through substantial drawdowns, a measure of the decline in a stock price from the top to the bottom over a particular period. For example, Apple, which created nearly $2.7 trillion in wealth from its IPO in 1981 to the end of 2022, suffered three drawdowns of 70 percent or more over that span. These included 74 percent from May 1983 to August 1985, 80 percent from February 1992 to December 1997, and 79 percent from March 2000 to March 2003. Apple was the top wealth creator through the end of 2022, but most investors would have struggled to hold the shares through these declines. The shares of Amazon offer another case, having suffered a drawdown of more than 91 percent from February 2000 to September 2001 on their way to being among the best wealth creators.”
Source: Hendrik Bessembinder, Link to Article
On Aug. 1, Fitch Ratings cut the United States to a AA+ rating from AAA: The U.S. is now considered a AA-category issuer for the first time since Treasuries rated in the 1960s. We believe that the loss of AAA-status is unlikely to have a significant impact on U.S. treasures. The issues that Fitch and countless other economic commentators are rightly stated, and well-known – particularly weaknesses in the U.S. budget process.
Sector Concentration: The seven largest stocks in the U.S. equity market can be categorized as “tech” companies, and their average value has nearly doubled this year. Over the past century, it has not been uncommon to see the largest stocks lead market performance. Financial and transportation sectors in the 19th century during industrialization. At the peak of the energy crisis, in 1980 energy made up nearly 30% of the S&P500 before being surpassed by the dot-come bubble in 2000. We are currently approaching these sector concentration levels.
When do we feel interest rate increases? When interest rates go up, the typical lag to see the effects in our economy is a year. Bearing that in mind, we’ve only seen the first six months of 2022 in the knock-on effects. With the assumption of the Fed ending rate hikes at 5.50%, that means 1.50% will be added to the cost of borrowing in the 6 months beginning in 2024.
U.S. savings running out: In a study undertaken by the San Francisco Fed, they calculated that only $500 billion remained unspent by April of this year, that that any residual savings will likely be spent by December. As a result of mid-2021 government assistance programs, savings increased by $2.2 trillion.
Recession Scorecard: We track seven economic indicators to predict the likelihood of a recession. As of now, three of these indicators are in a concerning "red" zone, suggesting a recession may be on the horizon. Two are in a "yellow" caution zone, suggesting they might turn negative soon. The remaining two indicators are in the "green" zone, suggesting the economy still has some room for growth. On sum of these indicators, we see a growing probability of a U.S. recession later this year.
See our full report: Global Insight
Stay tuned for more insights and happy investing!