Investing principles, plus debt service costs, gas prices, IPO returns, and leading economic indicators
The Sandbox Daily (9.21.2023)
Welcome, Sandbox friends.
Today’s Daily discusses:
debt service costs could approach historic level
gas prices climb to $4/gallon
1-year median IPO return underwhelms
leading economic indicators continue to show weakness ahead
Let’s dig in.
Markets in review
EQUITIES: Dow -1.08% | Russell 2000 -1.56% | S&P 500 -1.64% | Nasdaq 100 -1.84%
FIXED INCOME: Barclays Agg Bond -0.68% | High Yield -0.71% | 2yr UST 5.144% | 10yr UST 4.494%
COMMODITIES: Brent Crude -0.29% to $93.26/barrel. Gold -1.38% to $1,939.9/oz.
BITCOIN: -1.38% to $26,573
US DOLLAR INDEX: +0.28% to 105.412
CBOE EQUITY PUT/CALL RATIO: 0.79
VIX: +15.85% to 17.54
Quote of the day
“The intelligent investor is a realist who sells to optimists and buys from pessimists.”
- Benjamin Graham, The Intelligent Investor
People love lists. It helps organize their brain.
Here are 10 ideas to consider when building a durable portfolio to withstand market cycles and human emotion – and get you from point A to point B.
Time in the market beats timing the market
Setup a reasonable savings plan and automate it
Diversify your investments
Reduce investment costs (internal fees, transaction charges, products with layers of fees, etc.)
Don’t forecast the economy
Rebalance your portfolio (time-based rules or percentage bands are two examples)
Manage expectations (be realistic and sensible)
Extend your time horizon
Create buy and sell disciplines
Minimize tax liabilities
These are battle-tested principles that should increase your probability of success.
Source: Carl Richards
Debt service costs could approach historic level
Higher interest rates that persist at prevailing yields will push up debt servicing costs in the coming years.
Relative to GDP, the burden of interest payments has increased from a low of 1.7% in September 2022 to 2.0% in August 2023.
Assuming the universe of global bonds maturing in the next three years are refinanced at current market yields, J.P. Morgan’s August estimate of the annual interest expense incurred as a share of global GDP will approach 2.6% – up from their 2.3% September 2022 estimate and approaching the late-2009 peak.
Source: J.P. Morgan
Gas prices climb to $4/gallon
Gas prices in the United States have climbed above $4/gallon for the 1st time this year.
In fact, since bottoming at $3.203 for the week beginning December 26th, 2022, gas prices are now ~25% higher.
After declining most of 2H22 and contributing as a deflationary tailwind for CPI, this trend is heading the other direction in 2023.
1-year median IPO return underwhelms
Goldman Sachs analyzed over 5,000 IPOs completed during the past 25+ years, and based on the initial 12 months following the day of IPO, the median stock has not kept pace with the Russell 3000 benchmark – irrespective of market conditions.
Weak sales growth and a lack of profitability were the fundamental reasons for underperformance.
Leading economic indicators continue to show weakness ahead
While a number of recent economic indicators show a diminishing risk of recession in the near-term, the Conference Board’s Leading Economic Index (LEI) suggests the sky is not all clear.
The leading indicators sank -0.4% in August, and the decline marked the 17th contraction in a row. Declines of this magnitude – the index is now down 10.5% from its December 2021 peak – have always been associated with recession.
The Conference Board publishes leading, coincident, and lagging indexes designed to signal peaks and troughs in the business cycle for major global economies. Many economists and investors track this measure closely.
The majority of LEI components have deteriorated over the past six months, pointing to persistent weakness in activity.
As shown below, such a streak of consecutive monthly declines has led to recessions each time; the only instances we’ve had more consecutive declines were the recessions that started in 1973 and 2007. The pandemic-related recession is the outlier, but given the unexpected and somewhat random nature of the pandemic, it is not surprising that this indicator or any other leading indicator could not forecast it.
The rate of decline in the LEI and the weak indicator breadth are historically consistent with falling economic activity. The Conference Board is forecasting a decline in real GDP growth from 2.2% in 2023 to 0.8% in 2024.
The forward-looking indicators suggest the near-term outlook for growth remains uncertain but leans negative. While no forecasting system is perfect, this one has a pretty good track record.
That’s all for today.
Welcome to The Sandbox Daily, a daily curation of relevant research at the intersection of markets, economics, and lifestyle. We are committed to delivering high-quality and timely content to help investors make sense of capital markets.
Blake Millard is the Director of Investments at Sandbox Financial Partners, a Registered Investment Advisor. All opinions expressed here are solely his opinion and do not express or reflect the opinion of Sandbox Financial Partners. This Substack channel is for informational purposes only and should not be construed as investment advice. The information and opinions provided within should not be taken as specific advice on the merits of any investment decision by the reader. Investors should conduct their own due diligence regarding the prospects of any security discussed herein based on such investors’ own review of publicly available information. Clients of Sandbox Financial Partners may maintain positions in the markets, indexes, corporations, and/or securities discussed within The Sandbox Daily. Any projections, market outlooks, or estimates stated here are forward looking statements and are inherently unreliable; they are based upon certain assumptions and should not be construed to be indicative of the actual events that will occur.