MW When stock markets are a mess, this asset is a great guide to risk appetite
By Jamie Chisholm
Critical information for the U.S. trading day
Twenty-nine. That's how many new records the S&P 500 SPX has registered so far in 2024, having closed at a new peak on Thursday (though lower futures on Friday suggest it may not make 30 this session).
Hopes for interest rate cuts later this year and excitement over AI have helped propel the bull run.
And yet, there are many reasons to be wary right now, say the bears. First, an obvious short-term technical one. The 14-day relative strength index of the Nasdaq 100 NDX, whose big tech constituents have been powering the rally, has moved up to 77.5, well above the overbought threshold of 70.
Meanwhile, the market is relying on a narrowing breadth of big cap stocks, which, as the The Chart segment later in this note shows, are notably more expensive than their small-cap cousins.
Those of a bearish nature can rattle off additional concerns. For example Doug Kass, founder of hedge fund Seabreeze Partners Management, says in a new note his worries include that corporate profit expectations are currently "unrealistic" and comparing the S&P 500 dividend yield with Treasury yields means stocks have "rarely been as overvalued against interest rates as they are today."
Kass also reckons domestic political risk is underestimated, investor sentiment remains bullish and fear is absent, while "market structure and investor positioning are potentially toxic market influences."
Ian Culley, investment analyst at All Star Charts, says this week's action, when stocks on Wednesday jumped after soft inflation data then fell back on Fed comments, shows the "market's still a mess."
What's needed, then, is a guide that can see through the daily machinations and give a strong clue to underlying investor sentiment. He suggests keeping an eye on action in high-yield bonds for "risk-on confirmation."
The chart below shows the iShares iBoxx $ High Yield Corporate Bond ETF HYG above the line that gives the performance of the Invesco S&P 500 High Beta ETF SPHB relative to the Invesco S&P 500 Low Volatility ETF SPLV.
The SPHB tracks 100 stocks from the S&P 500 with the highest sensitivity to market movements, or beta, over the past 12 months. The SPLV tracks 100 securities from the S&P 500 with the lowest realized volatility over the past 12 months.
As the chart makes clear, the stock market's risk appetite dovetails very neatly with attitudes towards more risky corporate bonds.
"When investors feel comfortable buying bonds that could end up a zero, riskier stocks with a higher beta outperform their safer alternatives," says Culley.
"If the Nasdaq's new all-time highs are the real deal, HYG should break out of its six-month consolidation and print a new year-to-date high," he says. "A decisive break above 78 will confirm the risk-on stock market rally."
Markets
U.S. stock-index futures (ES00) (YM00) (NQ00) are mostly lower as benchmark Treasury yields BX:TMUBMUSD10Y dip. The dollar index DXY is up, while oil prices (CL.1) rise and gold (GC00) is trading around $2,320 an ounce.
Key asset performance Last 5d 1m YTD 1y S&P 500 5433.74 1.51% 2.58% 13.92% 22.77% Nasdaq Composite 17,667.56 2.88% 5.80% 17.69% 28.19% 10-year Treasury 4.213 -22.60 -21.30 33.21 44.40 Gold 2334.4 1.01% -3.53% 12.67% 18.46% Data: MarketWatch. Treasury yields change expressed in basis points
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The buzz
U.S. economic data due on Friday include the import price index for May at 8:30 a.m. Eastern, followed by consumer sentiment for June at 10 a.m.
Chicago Fed President Austan Goolsbee will deliver a speech at 2 p.m. and Fed Governor Lisa Cook will make comments at 7 p.m. Cleveland Fed President Loretta Mester will be busy, giving interviews to CNBC at 8:30 a.m., Bloomberg at 1:15 p.m., and CNN at 4 p.m.
Adobe shares $(ADBE)$ are jumping 15% in premarket action after well-received results, but RH stock $(RH)$ is diving nearly 12% after posting a bigger-than-expected loss.
Tesla stock $(TSLA)$ is up 1% after it was confirmed that shareholders had passed Elon Musk's $56 billion pay package and the company's reincorporation in Texas from Delaware.
France's CAC 40 equity FR:PX1 index is down 1.7% and the country's government bonds are selling off, pushing up yields BX:TMBMKFR-10Y, as investors continue to worry that a snap election may deliver a right-wing populist administration.
The dollar briefly rose above 158 per yen $(USDJPY.FOREX)$ after the Bank of Japan delayed detailing how it would cut back its bond purchases. The yen later strengthened amid a broad risk-off tone.
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Top tickers
Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.
Ticker Security name GME GameStop NVDA Nvidia TSLA Tesla AAPL Apple AMC AMC Entertainment AVGO Broadcom TSM Taiwan Semiconductor Manufacturing ADBE Adobe SMCI Super Micro Computer AMD Advanced Micro Devices
The chart
A study of forward price/earnings ratios for S&P 500 stocks ranked by market cap shows that large-cap companies are notably more expensive than small caps.
Torsten Sløk, Apollo chief economist, says this is because higher costs of capital are weighing on highly leveraged small-cap companies with low coverage ratios, while the AI story has boosted valuations of mega-cap names.
"With the Fed keeping interest rates higher for longer, and the AI narrative pushing valuations and index concentration to extreme levels, the downside risks to equities are growing," says Sløk.
Random reads
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-Jamie Chisholm
This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
June 14, 2024 06:35 ET (10:35 GMT)
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