|Day's range||1,697.69 - 1,715.08|
|52-week range||1,444.97 - 1,715.08|
(Bloomberg) -- Small-cap shares are a good hedge for potential downturns, volatility strategists say. Credit Suisse Group AG adds that investors who aren’t “feeling” Bernie Sanders’s prospects risk being blindsided by the U.S. election.But overall, stock swings shouldn’t impress.UBS Group AG strategist Stuart Kaiser predicts realized volatility on the S&P 500 Index will drop from about 19% in the first half of the year to 12% in the second half as growth trends turn positive and inflation momentum goes negative. Credit Suisse strategist Mandy Xu says it’ll average 13% over 2020 given that the Federal Reserve is on hold and likely to ease further if downside risks materialize. The VIX’s mean will be 15, Xu predicts, down slightly from 15.4 in 2019.“Policy risks or a more significant growth slowdown are needed to shift volatility notably higher,” Kaiser wrote in his 2020 outlook Wednesday.That doesn’t mean they see a boring year.“While trade risk has receded, geopolitical risks have emerged,” Xu wrote on Monday. “From the 2020 U.S. election to ongoing tensions in the Middle East, a number of catalysts could drive the VIX to excess of 25.”Xu and Kaiser like hedges on the iShares Russell 2000 exchange-traded fund. A slowdown in the economy could have a bigger effect on shares of small companies, which are highly cyclical and affected by trade tensions, Kaiser said, adding that his firm’s growth outlook for the first half of the year is below consensus.Cantor Fitzgerald LP chief market strategist Peter Cecchini agrees.“We not only prefer Russell 2000 put spreads to the S&P 500,” he wrote Thursday, “we are now high conviction that long-ish dated Russell put spreads are a must to any high-yield or equity portfolio with significant long exposure. The volatility surface allows hedged investors to effectively implement downside strategies in risk asset markets, which have generally lost their minds.”Tallbacken Capital Advisors LLC’s Michael Purves, however, advocates hedges on the VanEck Vectors Semiconductor ETF or the Technology Select Sector SPDR Fund as opposed to the Russell 2000 ETF. Small caps are among sectors that “have a lot of catch-up to do,” he said Thursday, while there are hints of “an early stage of a pivot” lower in momentum for semiconductors.Trading the ElectionThen there’s the U.S. election, which Kaiser says is “more tactical than structural” as a market event. He recommends trades like one- to three-month puts on the S&P 500.“We don’t expect the election alone to drive a regime shift in realized volatility,” he wrote. “We see the election as more of a tactical trade in the run-up to Election Day.”Xu points particularly to the Democratic primary as a potential surprise, given that volatility appears to be more affected by Elizabeth Warren’s poll numbers than those of Sanders, who is currently in a strong position in surveys.Volatility markets are “yet to feel the Bern,” she wrote, noting that long-dated volatility on assets like managed-care stocks “normalized with Warren’s fall in the polls. Yet investors seem to be forgetting about Bernie…”Societe Generale SA strategists led by Vincent Cassot recommend a long February-March futures spread, as well as shorting the VIX February 16 put versus the March 16-13 put spread. “February-March will be the most significant period in deciding the Democratic nominee for the U.S. presidential election in November,” they wrote in a note Friday. Trades from UBS include:Upside in Germany or Hong Kong in case of a risk/growth reboundGo long the Japanese yen in case U.S. growth slows and risk markets come under pressureShort oil volatility; selling upside on United States Oil Fund “is attractive”Trades from Credit Suisse include:Sell a June put on the Invesco QQQ Trust Series 1 to buy a call spread on the firm’s view of improving margin headwinds and strong earnings growthFor a cheap upside play, buy the S&P 500 June 103% call contingent on the SPDR Gold Shares fund being above 103% at expirationFor a macro risk-off hedge, try a June Euro Stoxx 50 95% put contingent on the euro/dollar pair being below 1.09, as that the region’s equities and currency tend to move together during periods of market stress(Adds Societe Generale recommendation)To contact the reporter on this story: Joanna Ossinger in Singapore at firstname.lastname@example.orgTo contact the editors responsible for this story: Christopher Anstey at email@example.com, Cecile Vannucci, Cecile GutscherFor more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
(Bloomberg) -- A new decade, a new record for U.S. stocks, which started this year much as they ended the last. But while large-cap equities thundered along, one pocket of the market was left out of the first-day festivities.For bulls heading into the new year betting on small caps, Jan. 2 was a disappointment. While the S&P 500 climbed 0.8% to a fresh high, the Russell 2000 of smaller firms fell 0.1%. Relatively speaking, the group, often considered as a leading indicator of the domestic economy, hasn’t had such a lousy start since 2013.While one day isn’t enough to get worked up over, the poor return for now defies consensus that a pickup in economic growth will lift smaller companies. The bad day coincided with a flattening yield curve in the bond market, a sign that investors may be adjusting growth assumptions after assets from equities to fixed income delivered the best year in a decade in 2019, according to Larry Weiss, head of equity trading at Instinet LLC in New York.“There is always some anxiety about how the markets will follow up a big year,” Weiss said in an interview. “Many still think we can avoid a recession in 2020, but signs seem to be pointing to some slower growth.”Large-cap equities have seen a lot of big starts over the last few years. The S&P 500, which jumped 0.84% Thursday, surged 0.83% in the first session of 2018 and 0.85% in 2017. Meanwhile, the Russell 2000 fell for the fourth day in five, bucking gains in the broad market. Part of the performance reflected a big difference in sector compositions between small- and large-cap stocks.Tech and communication stocks, some of the day’s winners, make up only about one fifth of the Russell 2000 while comprising a third of the S&P 500. On the other hand, the biggest losers such as utilities and real estate, have a bigger share in small-caps.Still, such diverging performance isn’t what bulls expect to happen. In a December survey conducted by Bloomberg, four of the five strategists predicted small-cap stocks will beat the S&P 500 in 2020, helped by relatively attractive valuations and a pickup in growth.Small caps have trailed the market in each of the past three years as profit slumped the most since 2009 and frequent recession fears drove investors into the safety of larger firms. While the economy is poised to improve, it may not be strong enough to fix the core problem for small-caps: a lack of earnings power, according to Michael Kantrowitz, head of portfolio strategy at Cornerstone Macro LLC.About 22% of companies in the small-cap universe are unprofitable, the highest proportion in the past 25 years outside recessions, data compiled by Cornerstone showed. Meanwhile, their leverage ratio, or debt versus equity, has surpassed their larger counterparts for the first time.“Growth hasn’t been strong enough to really lift some of the zombie, small-cap companies,” Kantrowitz said. “Even when we re-accelerate, like we believe in 2020, it’s going to be a mild re-acceleration because we already have full employment,” he said. “For small-cap companies that don’t earn a profit, we think investors will continue to shun these names.”To contact the reporter on this story: Lu Wang in New York at firstname.lastname@example.orgTo contact the editors responsible for this story: Brad Olesen at email@example.com, Chris NagiFor more articles like this, please visit us at bloomberg.com©2020 Bloomberg L.P.
(Bloomberg Opinion) -- The date: Aug. 5, 2011. This columnist had just celebrated his 22nd birthday. Those in the Obama administration were far less cheerful: S&P Global Ratings announced it would downgrade America’s credit rating for the first time ever, even though lawmakers had finally agreed to a hard-fought compromise on raising the debt ceiling.“The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics,” S&P said in its statement. Market strategists warned that “sovereign credit quality is going to remain under pressure for years to come.”This episode could be considered a crowning achievement of the Tea Party movement, which traces its name back to a rant against the federal government from CNBC’s Rick Santelli in February 2009. It ushered in a wave of hard-line Republicans in the 2010 midterm elections, like Senator Mike Lee of Utah and Senator Rand Paul of Kentucky, who vowed to save the U.S. from “a mountain of debt that is devouring us.” Grover Norquist, president of Americans for Tax Reform, praised the debt-limit deal, saying that “in five to 10 years it will lead to a different country.”Norquist was right. But probably not in the way he expected.Since August 2011, the U.S. public debt has increased by almost $9 trillion, to $23 trillion, and virtually no one has batted an eye, S&P included. Benchmark 10-year Treasury yields are lower, not higher.(2) Main Street hasn’t faced any hint of runaway inflation. Government debt hasn’t crowded out companies from borrowing and investing. Simply put, nothing the Tea Party warned about has come to pass.Perhaps this is why, in what may ultimately be seen as a watershed moment, the House Budget Committee last month held a hearing titled “Reexamining the Economic Costs of Debt.” The session included testimony from four economists, including Randall Wray, a senior scholar at the Levy Economics Institute of Bard College and a leading thinker in Modern Monetary Theory. Though he wasn’t given much time to speak, when he did, he told lawmakers this: “We do not have to repay the debt — what we have to do is make the interest payments.”If there were one sentence that captured the drastic change in economic thought over the past decade, that might just be it. (As a reminder, MMT argues that sovereign governments with their own currency can’t go broke and can spend until inflation becomes an issue.)The shift from the Tea Party to MMT reveals two crucial and interrelated themes of the past 10 years. First, it shows that former Federal Reserve Chairman Ben S. Bernanke was right: “Monetary policy cannot be a panacea” to cure all that ails developed-market economies. Second, relying solely on central banks tends to create financial-asset distortions that foster income inequality and dissatisfaction among broad swaths of the world’s population.Wray says Americans don’t seem to have confidence in their elected representatives to do the right thing when it comes to the economy. And perhaps Congress doesn’t believe in itself, either. “In the aftermath of the global financial crisis, there was a tremendous overreaction against fiscal policy in favor of putting all the trust in monetary policy,” he said in a phone interview. “It caused unnecessary suffering and secular stagnation in the U.S. and abroad. We can’t continue this way.”Consider the Atlanta Fed’s wage-growth tracker for prime-age U.S. workers, currently at 3.9%. It bottomed out at a record low 1.6% at the end of 2010, down from 4.2% before the recession began. It didn’t reach 3% for another four years and still hasn’t reached the levels seen from 1999 through 2001.The S&P 500 Index, on the other hand, has produced a 15% annualized total return since the recession. It’s setting record after record — something President Donald Trump likes to trumpet. The Russell 2000 Index has gained an average of 13.5% a year, while high-yield corporate bonds have produced a 9.1% annualized return in the past 10 years. Basically, holders of financial assets have had a great decade while those who rely on salary bumps have fallen behind.An MMT-inspired fiscal policy, in theory, would hope to change that. None other than Ray Dalio, founder of Bridgewater Associates, has said he sees MMT as “inevitable.” Policy makers, he says, have to figure out “how to get the economic machine to produce economic well-being for most people” when typical central-bank tools fail. He sees a coordination of fiscal and monetary policy as the only answer.The big question, Dalio says, is whether elected officials can responsibly push and pull on the economy. Wray thinks they can. “Give the policy makers the truth, and if you believe in democracy, you’ve got to trust them to do the right thing,” he said. “I don’t think there’s any danger that just because they realize the government can’t run out of money, let’s spend until the cows come home. I’ve never met any politician who wants inflation.”Of course, there are still any number of lawmakers — mostly, but not exclusively, Republicans — whose views are rigid as ever about the budget. “I certainly don’t want my grandkids to see the crisis scenario in which the interest rate on the debt will skyrocket abruptly because investors will no longer have confidence in our government’s ability to pay its bills,” lamented Steve Womack, an Arkansas Republican, at the House hearing. Ralph Norman, a Republican from South Carolina, peppered Wray with questions, including if he had ever run a business or knew the inflation rates in Chile, Peru and Venezuela. “Hyperinflation hurts the little man,” he warned.And for every big-name investor like Dalio who’s sanguine about MMT, there’s at least one who dismisses it outright. Jeffrey Gundlach, chief investment officer at DoubleLine Capital, has blasted it as a “crackpot idea.”By now, MMT economists are no strangers to ad hominem attacks. “The most important thing is just the weight of the evidence,” says Stephanie Kelton, a professor of economics and public policy at Stony Brook University who is also an adviser to the Bernie Sanders campaign and has written occasionally for Bloomberg Opinion. “At some point, people become increasingly willing to rethink the theories, the models, the conventional wisdom because all of the things that were supposed to happen kept not happening.”Kelton points to Japan, which is running a debt-to-GDP ratio of about 238% with low inflation and interest rates locked near zero, as an example of failing conventional wisdom. “Increasingly you’re hearing central bankers talking openly and candidly about a need for a fiscal partner,” she said in a phone interview. “There’s growing but reluctant acceptance of the idea that fiscal policy is going to have to take on a bigger supporting role — and maybe even a starring role.”This is where Representative Alexandria Ocasio-Cortez’s Green New Deal, or something like it, comes into the picture. Wray co-wrote a paper titled “How to Pay for the Green New Deal,” in a nod to John Maynard Keynes’s 1940 book “How to Pay for the War.” To consider how far MMT still has to go, just consider Wray’s view of taxes:“It is possible that we will need to constrain domestic consumption in order to release resources for the GND effort in a noninflationary manner. The problem is not that we cannot financially afford the GND — government can always bid resources away from private use by paying higher prices — but spending on the GND will generate private income that can support higher bids in competition with the government for scarce resources. This is the real reason that tax hikes might be desirable: to reduce private income and thereby remove competition for resources.”To condense the argument: Taxes are not about raising revenue for the government. They’re to reduce spending power to avoid price inflation.For many people who have just a cursory understanding of the U.S. monetary system, this can be difficult to grasp.(1) After all, it has been a long time since fiscal policy has played a “starring role,” as Kelton says. It’s why Wray has to go back to World War II for any sort of comparable government initiative.It’s still far too soon to say whether MMT will catch on in the 2020s. But in some ways, the Trump administration has washed away what remained of the Tea Party’s resolve. In a bipartisan move, the House this month passed two spending bills that provide $1.4 trillion to fund the U.S. government. The U.S. will almost certainly run at least a $1 trillion annual deficit in the coming years.The Peterson Foundation, one of the last voices calling for fiscal restraint, bemoaned the budget deal: “Another $400 billion in debt is the worst possible holiday gift for our children,” the group said. “We should be looking at ways to reduce our interest burden so that we can fund important national priorities.”That sounds awfully familiar. One of Peterson’s tweets last month was flooded with replies of the “OK Boomer” meme. It’s one example of how MMT has a passionate and growing base of supporters who are tired of the way Washington has operated for decades.For all its connotations with Sanders, Ocasio-Cortez and democratic socialism, Wray doesn’t see MMT as some sort of showdown with capitalism. Quite the opposite — he imagines what a World War II-like effort would look like if instead of producing guns and bombs, the government turbocharged renewable energy projects that would last for generations.The past 10 years have been defined by relatively restrained fiscal policy and unprecedented stimulus measures by central banks. If the 2020s turn out to be the decade that governments step up to the plate, what might America look like come December 2029?“Last time around, in spite of all the sacrifices of the war, we had the golden age of U.S. capitalism,” Wray said. “What are we going to have after this 10-year period? There’s no reason to believe it’s not going to be this new era of high productivity with environmental sustainability, high wages and full employment.”(1) JPMorgan Chase & Co., for instance, estimated that the downgrade would raise the nation’s borrowing costs by $100 billion a year.(2) That includes myself. Almost 10 years ago to the day, I was taking a macroeconomics final exam at Northwestern University with Robert Gordon, who literally wrote the book on the topic.To contact the author of this story: Brian Chappatta at firstname.lastname@example.orgTo contact the editor responsible for this story: Daniel Niemi at email@example.comThis column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.Brian Chappatta is a Bloomberg Opinion columnist covering debt markets. He previously covered bonds for Bloomberg News. He is also a CFA charterholder.For more articles like this, please visit us at bloomberg.com/opinion©2019 Bloomberg L.P.
S&P500; closed Monday at historical highs, adding 0.55% on the day close. Both expected new Fed interest rates cut and possible US-China trade deal served as key drivers of recent market growth impulse. President Trump, in his Twitter, did not manage to avoid this event, attributing these merits to himself.
As we near the end of October 2019, a very interesting price setup is taking place across many of the US market sectors recently. We only have a total of about seven trading days left in October 2019 and the Financial Sector ETF is rolling over with what appears to be an Engulfing Bearish price pattern near price channel highs. Additionally, the tech-heavy NASDAQ (NQ) has been mostly weaker compared to the ES and YM.
We’ve been writing about the broader US stock market for many months – highlighting the Pennant/Flag formations that have continued to set up since early 2018. Sometimes, the keys to really understanding what is transpiring behind the scenes in the US markets is to pay attention to various market segments and to consider applying some “outside the box” thinking.
Thursday, investors can expect the weekly initial jobless claims figures, as well as existing home sales for the month of August.
Outspoken former White House Communications Director Anthony Scaramucci claims the president is 'unhinged' and in 'steady decline.'
Still, we believe the energy sector is setting up another great trade opportunity for skilled technical traders. Watch how this sets up below $46 and watch for deeper price moves below $45. Once the momentum base is set up, the upside price move should be very clean and fairly quick.
Stocks actually spent most of the session under pressure, but a late session rally helped the S&P; 500 and Dow erase those early losses. The late surge was fueled by a recovery in industrial, energy and health care stocks. Higher U.S. Treasury yields helped bank stocks post solid gains.