Footnotes & Flashbacks: Asset Returns 3-10-24
We look at asset returns in a week with UST support and tighter spreads in a market bracing for inflation input and Fed signals.
A modestly favorable UST curve move and a slight tightening of spreads helped fixed income returns the past week and got duration out of the negative return dog house for the 1-month period.
The overall profile of returns across our 31 asset class line items remains heavily biased to the positive side for the 1-week, 1-month, 3-month, and LTM time horizons.
The equity market breadth is better than the mixed reviews it gets in some headlines with Mid Caps and Small Caps hanging tough and a cross-section of cyclical, multiplier-effect industry groups performing well.
The big event this coming week will be CPI and PPI after jobs came in strong last week but with some clanking under the hood on higher total unemployed.
After a strange week of very visible conflicting views on the economy (see Employment: Real Numbers vs. Fictitious Dystopian Hellscapes 3-9-24), asset returns offer the relief of objective price and income math. The State of the Union Rebuttal was indeed a strange one. Facts matter. Asset returns are good, GDP growth steady, inflation declining so far, and job adds high (see Payroll Feb 2024: Record, Revisions, Reality 3-8-24). This week, the worry is that inflation progress flattens and fears increase that there will be more delays in Fed cuts.
The above chart updates the running returns for the debt and equity benchmarks we track for the high level recap. We line up the asset returns in descending order of 1-year total returns. We see fixed income creeping back into the black for the 1-month period after IG Corporates and UST were negative for 1-month returns in last week’s issue.
We detail the UST action in our separate Footnotes publication on the State of Yields to be posted later today. The 10 to 12 bps move lower in the UST from 5Y to 10Y was good news for bonds this week. The 1-year move in bond benchmarks are mixed while the 3 years shows the deadly dose of duration pain taken in the more curve-sensitive bond indexes.
For equities, the week was a rougher one as we cover in the benchmark and ETF section further below. The NASDAQ, S&P 500, and the Dow all took a good haircut this week for the rolling 1-month measure with a new week in and old week out, but the broad market remains very strong over 3 months and 6 months. The LTM returns offer a reminder of the impressive rebound off the 2022 beatdown. The Russell 2000 stayed relatively flat for the rolling 1-month metric.
The above chart updates the 1500 and 3000 series with Growth taking a hit for the rolling 1-month but still running closer to Industrials, Financials, and Value over 3 and 6 months. For the trailing 1 year, it is still no contest with Growth far ahead but much closer to Industrials over 3 years. Energy has been picking up the pace this month but still a distant single digit return for 1 year while riding high oil prices that came with the Ukraine-Russia War in 2022.
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 charts below stays consistent with recent Footnotes publications with the positive return side of the scoresheet continuing its streak.
The past week posted a strong performance at 25 positive and 6 negative, after the prior week posted 23 positive and 8 in the negative range across the 31 line items. That compares to prior weeks at 29-2, 16-15, 18-13, 21-10 and 26-5 for the remainder of the rolling 7 weeks. After some mixed weeks in January, the positive bias has been steady.
This past week comes with the asterisk that the major large cap broad benchmarks were negative for the week across the S&P 500, Dow, and NASDAQ. The small cap Russell 2000 was positive as was the Mid Cap benchmark. Tech tasted some pain with the Tech ETF (XLK) negative and the same for the Equal Weighted NASDAQ 100 ETF (QQEW) and such Mag 7 heavy benchmarks as Consumer Discretionary (XLY) and Communications Services (XLC).
As you glance at the positive vs. negative symmetry across the timelines captured above, the question, “Was that good or bad?” is not one that you can fail to answer correctly in an interview (or IQ Test). That is, unless you are a partisan moron (most families have a few in the attic, left and right). No shortage of those. That positive assessment of total returns comes with the asterisk of it being a backward-looking factual question. That said, the question, “Could it have been better?” is a fair one. So is the question “Where does it go from here?”
A fair debating point is to argue about what the right fiscal policy response would have been in 2021 and 2022, what worked and what did not work, who made the decision (for or against what did or did not work). There is the question of which fiscal proposals were a very fortunate miss (we would put “Build Back Better” in the very good miss (!) bucket in terms of the potential macro fallout).
The jobs created and the disasters avoided are often a matter of opinion, but the economy would be in much worse shape without the multiplier effects of construction, longer-tailed mega projects, and various incentives and investment programs.
We would love to see a debate between Biden on the infrastructure bill Trump opposed and see how he articulates his views on the CHIPS Act and investment in EVs. The same folds into health care repeal threats (the ACA/ObamaCare) and what that would mean for wide swaths of the consumer sector and their financial health.
The trick is whether Trump would let Biden answer the questions and whether Trump would answer any questions directly. That has been tested in court with Judges overseeing court cases. The talk about debates is hollow without hard-and-fast rules (including mic volume control). Biden should call him out but set the rules. Then if Trump says “no”, Biden can do some Larry Bird trash-talking at him (Hey Orange Guy, do you have a single fact in your head. I am going to factually dunk on you!) Dare to dream that Trump would agree to rules and actually obey them.
A series of topical debates can look back at the inflation spiral of 2022 and frame underlying causes other than just “Biden did it” from the lofty thinkers. See how Biden and Trump handle that. We can also look back at 2018 numbers under Trump where cash was the best performing asset at under 2% and ask “What went wrong? Was it tariffs? The Fed?” (see Histories: Asset Returns from 2016 to 2023 1-21-24).
The asset returns always offer good proxies for performance and forward guidance and expectations on inflation and the Fed. Many believe the market is always forward looking (that draws a lot of skeptics on the question of “How far ahead? The election? The next quarter? The next Fed move? This month? Lunch?), so the disconnect between the securities markets and polls is striking.
There are always good point-counterpoint debates to have on policy decisions, underlying drivers of economic performance, the role of monetary policy and other twists and turns. Unfortunately, those assigned talking points in Washington don’t exactly raise the bar.
The Magnificent 7 heavy ETFs…
Some of the benchmark and industry ETFs we include face 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.
We already covered the broad market and tech-centric underperformers earlier, but the winners are more in the “Worst shall be first” profile with Regional Banks (KRE) rallying on NYCB headlines and attempts to calm the markets around contagion effects. We see some interest rate sensitive sectors winning such as Utilities (XLU), Real Estate (XLRE), and long duration 20+ year UST ETF (TLT) in the top quartile for the week.
The 1-month time horizon weighed in at 30-1 with only Transports (XTN) very slightly negative. That is a much-improved 1-month mix from 24-7 last week. From a broader market perspective, we see Mid Caps and Small Caps in the bottom half of the top quartile with some “economy multiplier effect” sectors in the upper half including Materials (XLB) and Builders (XHB) while Energy is getting back into gear with E&P (XOP) and Midstream (AMLP). Industrials (XLI) made the top 10 with the yield curve support helping Utilities (XLU) and Real Estate (XLRE).
The 3-month time horizon pitches a shutout on bad news at 31-0 and Builders (XHB) well ahead at #1. Despite the soft week for Mag 7 and tech this past week, the 3-month time horizon shows the entire top quartile generating double digit returns. That is obviously a hefty run rate.
The balance of sectors shows Builders (XHB), Financials (XLF), Industrials (XLI) and Midcaps (MDY) in the top 5 with only Communications Services (XLC) of the Mag 7 heavy ETFs cracking the top 5. That offers some reassurance on breadth.
The 3-month returns show 13 of 31 in double digit returns for 3 months and 19 of 31 over a +5% return for the rolling 3-months. That is pretty good return math. For fixed income, the sobering reality is the adverse YTD curve moves leave the bottom quartile with 6 of 8 being in the form of bond ETFs.
The trailing year is not in line with the “US as a Soviet soup line” backdrop being painted by partisans trash-talking the economy. We see a score of 27-4 LTM with interest rate sensitive Utilities (XLU) and long duration UST (TLT) in the red. Base Metals (DBB) has been a consistent struggle against global cyclical themes (led by China demand questions) and Regional Banks (KRE) still feeling the pain of March 2023 and some recent revisits to asset quality fears and deposit anxiety.
The Fed and the timing and magnitude of fed funds cuts faced a schizophrenic market wrapped around the question “Is good bad?” for this LTM period, but a lot of success in inflation moving to 2% handle PCE has helped. That is the same for CPI at 3% handles as balanced factors ease anxiety around the downside of good news such as rising PCE. Household consumption will get checked again this week with Retail Sales. PCE and Investment has been solid enough in the GDP picture (see 4Q23 GDP: Second Estimate, Moving Parts 2-28-24).
See also:
Employment: Real Numbers vs. Fictitious Dystopian Hellscapes 3-9-24
Banks: Leveraged Loans, Classified, Special Mention Mix 2-28-24
BB vs. CCC: Quality Spread Differentials, Yield Relationships, Relative Returns 2-20-24
HY vs. IG Quality Spread Differentials and Comparative Returns 2-6-24
BBB vs. BB: Revisiting the Speculative Grade Divide Differentials 2-5-24
Histories: Asset Returns from 2016 to 2023 1-21-24
Credit Performance: Excess Return Differentials in 2023 1-1-24
Footnotes & Flashbacks: Asset Returns 1-1-24
Footnotes & Flashbacks: State of Yields 1-1-24
Return Quilts: Resilience from the Bottom Up 12-30-23
HY Refi Risks: The Maturity Challenge 12-20-23
Coupon Climb: Phasing into Reality 12-12-23
HY vs. IG Excess and Total Returns Across Cycles: The UST Kicker 12-11-23
HY Multicycle Spreads, Excess Returns, Total Returns 12-5-23