Footnotes & Flashbacks: Asset Returns 4-14-24
Footnotes & Flashbacks: Asset Returns 4-14-24
We have not seen so many tectonic geopolitical and economic moving parts since 1990, so the market will have much to digest this week.
Yo Special K, keep those drones and supplies coming! Trump and the House GOP crazies have our back. Some don't even know we are pals!
The resilience of the market and its ability to block out longer-tailed event risks with a “Call me a few days after it happens” mindset will get tested this week as Israeli responses get handicapped and Israel vs. Ukraine aid legislation comes to a head in a dysfunctional US Congress.
Even before Iran let a few hundred missiles fly, the 1-week returns for our group of 31 benchmarks and ETFs had by far their worst week of the year at 1 positive (Base Metals ETF, DBB) and 30 negative with interest-rate-sensitive equities and financial ETFs on the bottom of the rankings.
The Israel-Iran handicapping has already made last week old news with the new calculus being around oil price action and escalation risk scenarios and with the Ukraine aid issues potentially hitching a ride on the clear need for more aid to Israel.
For the foreign policy wonks and geopolitical game theory gurus, the weekend events are like the Olympics as the Iranian action was clearly a disproportionate response by targeting Israeli soil with hundreds of missiles in a radical departure from the status quo proxy battles.
This week we lead with the 1-week return chart at the top since it speaks for itself. Interest sensitive assets got smacked and banks were hit on the first wave of releases from some mega-banks with JP Morgan as the platinum bank of choice for gauging what trends will be. The market did not like what it heard.
This week and next, we get a wave of other financial sector bellwethers that could offer some color on interest margins, asset quality, commercial real estate, consumer credit indicators, expectations for deal flow and fees, and of course some views on inflation and the Fed.
The weekend pyrotechnics in the Middle East will put an asterisk on earnings season discussions and guidance this week. The market will be thinking in wildly speculative terms around what oil could do based on potential “missiles to follow.” We assume the geopolitical premium on oil is supposed to grow.
2024: Events ‘R’ Us starts up again…
As we mentioned in the U Michigan Consumer Sentiment commentary on Friday (see Consumer Sentiment: Do You Think Scary Thoughts 4-12-24), there is no shortage of risk factors to stack up that can be ignored until they become real or more reliably handicapped using empirical evidence. The number of missiles was pretty empirical. It is always possible to assume that it will all go poisoned pear shaped. The flip side is missing out on sound core fundamentals in the US economy.
At least with the Mideast, some big risks move beyond theories and just “got real” in a hurry. That will lead to a lot of headline-watching and presumably some commentary and color by tomorrow when markets kick into gear.
The tradeoff in the decisions ahead are tricky. On the one hand, Iran crossed a red line in the mode of attack on Israeli soil. On the other, the fair warning given by Iran allowed for less damage than a typical missile attack of the past from Gaza and Lebanon (Hezbollah) on many occasions. Interested parties will be highlighting both angles. Israel has faced massive invasions twice in my lifetime, so leaps of faith are hard to come by in Israel when a nation that sponsors terrorism is aiming at you.
The above numbers show how the last week beat up asset returns for the past 1-month’s running numbers. We see a shutout with all asset subsectors posting negative returns for the trailing 1-month across each of the high-level indexes and benchmarks we track in debt and equity. For the trailing 3-month period, the only lines in the red were the duration-heavy IG bonds and the UST index.
We line up the assets in descending order of 1-year total returns, and those returns remain impressive in equities even if fading in debt. The UST benchmark is negative for the 1-year period. HY bonds rode spread compression, higher coupons, and lower duration exposure.
The laundry list of anxiety for 2024…
Given the weekend events, geopolitical risk should get added onto the risk pricing handicapping list in a bigger way. That would get added to a domestic political laundry list that is no small matter. That includes a fresh threat to elections as domestic political rhetoric raises the specter of what used to be melodrama and “bad TV” hyperbole.
The list of neuroses includes fear of dictatorship in the US, use of the DOJ as a blunt instrument of “the leader,” legal immunity for “The Boss” (a Stalin nickname, so Putin and his buddy like it), deployment of the US military for domestic purposes (there will be no General Mark Milley to impede that this time around, maybe another Michael Flynn type by design). These types of scenarios would be a joke in the past (Nixon looks like a Boy Scout with his enemies list), but this has now shifted into a different realm closer to reality right down to how (and why) the military leadership will be selected.
There is a reason we keep seeing “Survival Food” ads on cable and on the internet. What used to be a punchline about Idaho survivalist compounds, Michigan militias, and “the crazies” stacking canned food and ammo will be less amusing in 2024. The food advertisement we see most often in some valuable time slots is 4Patriots (not an NFL site) on Fox and MSNBC alike as well as CNN. The focus groups or target markets might have button down shirts as well as camouflage grease paint and confederate flags. Crazy times. Those are topics for another day, and they are most certainly not irrelevant to policy handicapping, capex planning, and consumer confidence as the year goes on.
The foreign policy and war themes (Iran, Ukraine) loom large, and that will play into the election year domestic bomb-throwing (we hope that stays metaphorical given the Jan 6 types). For someone who was a bright-eyed little leaguer in 1968 (assassinations, race riots, the next door neighbor in the Battle of Hue (I often took care of his dog) and a fervent Marine GOP-voting father (Wallace-voting mother), George Wallace carrying 5 states (Alabama, Georgia, Arkansas, Louisiana, and of course Mississippi), I don’t remember much flexibility in which channels were to be watched. A lot of news.
One thing is for sure, this year looks set to trump 1968 and be the strangest since 1861 – even factoring in the Great Depression and two World Wars. The idea is the country has evolved across history. That’s the theory.
The above chart updates our 1500 and 3000 series. We at least see two of the trailing 1-month line items in the black with Energy at +9.0% as commodity prices and oil especially have been seeing the risk symmetry shift. We will see where this goes next since so many are getting reschooled on the Strait of Hormuz and the volume of oil that flows through there. The fact that Iran seized a ship there was a footnote on the weekend.
Industrials managed to hold on in positive range over the past month and have been very strong over the trailing 3-months on cyclical themes. The cycle has been steady and even posting more signs of strength, and thus the UST curve action last week. See our separate Footnotes publication on yields we will post later today.
In light of all the events, we would expect the defense sector suppliers and related OEM chain to get some good news this week on aid to Ukraine and Israel unless Congress has lost its mind (in some cases perhaps finds rational, reasoned thought for the first time). Some bellwether defense stocks have done well this month.
The rolling return visual
In the next section we get into the details of the 31 ETF and benchmarks for trailing periods. The collection of four time horizon charts below shows a brutal week. We already posted the 1-week time horizon at the top of this note. All the bond ETFs and all broader stock market benchmarks were in the red again this past week on CPI numbers and more worries about the FOMC’s need to dial back the number and scale of cuts (see CPI March 2024: The Steeplechase Effect 4-10-24).
The past 1-month is now more heavily weighted toward negative returns at 7 positive and 24 lines in negative range. The 3-month horizons returns are fading with the Nov-Dec rebound now out of the 3-month numbers. The trailing year still shows the benefits of the post-2022 risk rebound that gained breadth during the wildly positive finish in Nov-Dec (see Footnotes & Flashbacks: Asset Returns 1-1-24 ).
The Magnificent 7 heavy ETFs…
Some of the benchmarks and industry ETFs we include evidence issuer concentration elements that leave them wagged by a few names. When looking across some of the bellwether industry/subsector ETFs in the rankings, it is good to keep in mind which narrow ETFs (vs. broad market benchmarks) get wagged more by the “Magnificent 7” including Consumer Discretionary (XLY) with Amazon and Tesla, Tech (XLK) with Microsoft, Apple, and NVIDIA, and Communications Services (XLC) with Alphabet and Meta.
The recent diverging performance of the names are stirring debates on new monikers lately (Fab 5 or 4, etc.), but the market caps still are massive and major influences on the headline market cap weighted returns. We also include equal weighted benchmarks for other angles on the S&P 500 (the RSP ETF) and tech (the QQEW ETF).
The 1-month score at 7-24 shows commodities and energy on top across E&P (XOP), Base Metals (DBB), and the broadest Energy sector ETF (XLE). The BDC resilience in the top quartile remains notable in part on the front-end UST support for floating rate assets but also in the sustained confidence in leveraged finance and the credit cycle.
Over on the right, interest rate sensitive assets are feeling pain but that is not a hard-and-fast rule with defensive utilities (XLU) showing some staying power of late. The performance of financials over the past week was bleak with Regional Banks (KRE) struggling more than others over 1-month and 3-months.
In duration sensitive assets, TLT has been negative for 1-week, 1-month, and 3-months. Of the 6 Bond ETFs we track (UST, TLT, AGG, LQD, HYG, and EMB) all 6 were negative for 1-week, all 6 for 1-month, and 5 of 6 (ex-EMB) for 3 months.
The 3-month numbers are holding in well on the great rolling start for equities in 2024 with the score at 23-8 favoring positive. Of the 8 in the red, 5 were bond ETFs and were joined by Regional Banks (KRE) in dead last, Real Estate (XLRE), and the defensive Health Care ETF (XLV).
The year is swinging over to energy for 3 months (XOP at #1, XLE at #2) with Base Metals (DBB) at #3 on cyclical themes with Builders (XHB) at #4. We see a tech-centric name break into the Top 5 in Communications Services (XLC) and round out the top quartile with Industrials (XLI) at #6, Midstream Energy (AMLP) at #7 and NASDAQ at #8.
The 1-year returns remain overwhelmingly positive as highlighted above. The 4 in the red zone include 3 bond ETFs taking a hit on duration. Utilities lagged in theory on interest rate sensitivity as income stocks. The big stories of the past year remain Builders and Tech, but the 2024 story lines could change very quickly pending some decisions by Israel.
In 2024, “events” and more amorphous risks could take over some stretches if the threats are tangible (Iran has oil. Gaza doesn’t). No one can hide from the social media onslaught if information and misinformation get carried away. Trade war risks (notably with China) are no small matter. That in theory should entail pricing in forward risks, but that has not been a hallmark of this market unless it is FOMC forward risk.
As we look back across the decades for periods of event risk, that wild year of 1968 came a year after Moshe Dayan was like an evening news rockstar in 1967. Then came massive unrest and political risk in 1968. The year 2024 looks set to give that year a run for its money depending on how the next few weeks play out.
In the meantime, we have Trump in court starting Monday. There is a very strange feeling about these times as this week brings jury selection before the porn star and Playboy bunny get the headlines. Then comes the lawyer/fixer/felon who “did it” for Trump. That is the same lawyer who threatened schools not to release Trump grades and transcripts. Evangelists better round up twice the usual number of rationalizations. Everyone is still on hold for Supreme Court decisions and notably on immunity. Trump claims no President can function as President without immunity (how did the first 44 ever manage?).
As we go to print, Hezbollah and Israel are exchanging fire across the Lebanon/Israel border and Israel is discussing possible responses to Iran.
See also:
Consumer Sentiment: Do You Think Scary Thoughts 4-12-24
CPI March 2024: The Steeplechase Effect 4-10-24
Credit Markets Across the Decades 4-8-24
Credit Cycles: Historical Lightning Round 4-8-24
PCE Prices, Personal Income & Outlays: Sideways Tone 3-29-24
4Q23: Final Cut, Moving Parts 3-28-23
Pension Profiles: Benefit Drain Rates and Returns 3-22-24
FOMC: Hail Powell the Consistent 3-20-24