Savings rates, plus 1-day VIX, Microsoft and Google earnings, HY credit markets, and things you can control
The Sandbox Daily (4.26.2023)
Welcome, Sandbox friends.
Today’s Daily discusses:
savers could earn much more on their savings
1-Day Volatility Index goes live
tech titans Microsoft and Alphabet deliver on earnings
what High Yield credit markets are saying
focus on things you can control
Let’s dig in.
Markets in review
EQUITIES: Nasdaq 100 +1.15% | S&P 500 -0.38% | Dow -0.68% | Russell 2000 -0.89%
FIXED INCOME: Barclays Agg Bond -0.37% | High Yield -0.39% | 2yr UST 3.955% | 10yr UST 3.452%
COMMODITIES: Brent Crude -3.74% to $77.75/barrel. Gold -0.26% to $1,999.3/oz.
BITCOIN: +2.07% to $28,191
US DOLLAR INDEX: -0.41% to 101.449
CBOE EQUITY PUT/CALL RATIO: 0.90
VIX: +0.43% to 18.84
Quote of the day
“The secret of getting ahead is getting started. The secret of getting started is breaking your complex overwhelming tasks into small manageable tasks, and starting on the first one.”
- Mark Twain
Savers could earn much more on their savings
Building up your personal savings is one of the most effective ways to maintain the necessary liquidity to meet ongoing expenses, build a safety net if hit with a sudden large expense, and allow flexibility for discretionary spending, among other things.
One way to increase your savings on autopilot is to keep your cash in an account that earns a competitive yield, especially now that short-term yields are no longer anchored to 0%. Americans could be earning more than 4% interest across a variety of accounts and products right now, but few are taking advantage of the opportunity – per a recent survey of nearly 2,500 adults.
Driving the news? Just 7% of savers are earning an APY of 4% or more in a savings account, while 30% of savers are unsure or not earning any interest at all.
Separately, 33% of those surveyed had no savings at all — a whole other problem.
Greg McBride, Bankrate’s Chief Financial Analyst, had this to add: “Higher returns on federally insured savings and money market accounts represent the only free lunch in finance. You get additional return and don’t have to take any investment risk to get it.”
Source: Bankrate
1-Day Volatility Index goes live
CBOE Global Markets, the company behind the volatility indexes such as “VIX,” announced the launch of a new product this week: VIX1D, or the 1-Day Volatility Index.
This iteration is intended to capture volatility expectations for the S&P 500 index over the next trading day; contracts expire within 24 hours. While the tool was created to shed light on investor sentiment over ultra-short time frames, this largely speculative play has left most professional traders unsure of what to make of it.
As shown in the chart below, monthly trading volume and trading share of zero-days-until-expiration (0DTE) option contracts have been expanding for the last several years, so clearly CBOE Global Markets is creating a market of supply to meet growing demand.
"By its nature, the VIX1D Index is expected to generally behave in a more volatile manner than indices that measure a longer time horizon of expected volatility," the exchange network said.
Source: Wall Street Journal, University of Münster
Tech titans Microsoft and Alphabet deliver on earnings
U.S. stocks were mostly lower in today’s session, despite tech giants Microsoft (MSFT) and Alphabet (GOOGL) beating analyst estimates for revenue and earnings.
The market needed strong reports from these two behemoths as investor angst was high heading into the heart of earnings season, and both enterprises delivered strong, disciplined quarters. These two companies make up 20% of the Nasdaq 100.
Microsoft posted better-than-expected earnings and revenue, with its Azure cloud computing business revenue growing 31% (constant currency), though that was down from a year ago when revenue was growing at 51%. Microsoft bought back $4.6 billion of stock in the quarter.
Google parent Alphabet also beat analyst estimates for earnings and revenue for the 1st quarter, and announced a monster $70 billion stock buyback program. Looking beyond the primary Google Search business, key segment YouTube reported a smaller YoY decrease of -2.6% than the company saw in the prior quarter; that’s supportive of the view that Q1 was the low point, especially with management calling out “signs of stabilization” on the earnings call.
Microsoft and Alphabet talked up investments in artificial intelligence for the 2nd quarter in a row, mentioning Nvidia’s chips repeatedly, but their results suggested that any substantial additions to sales will be slow. The tech behemoths have launched an array of products that they promise are packed with generative AI, which creates brand new content from past data.
And for those interested in how we got here, Genuine Impact presents this brief history of artificial intelligence:
The technology giants’ quarterly results jumped the low bar of being better than investors feared, but neither showed the kind of breakneck growth that made them juggernauts. Investors next turn their attention to earnings reports from Meta Platforms, Amazon, and Apple.
Source: CNBC, Reuters, Genuine Impact
High Yield wearing rose-colored glasses?
This chart from Bloomberg provides an interesting analysis of what odds various markets are assigning to a recession.
To help explain the logic, the S&P 500 is pricing in a 60% chance of recession. From the market peak in January 2022 to the trough in October, the market fell 27%. The graph shows that the decline was about 60% of what transpires on average during recessions since 1960. The MSCI ACWI, representing foreign developed markets, is pricing in a slightly higher chance of a recession, while the earnings-per-share (EPS) drawdown thus far is only about 40%, a little bit less. Nevertheless, all three are in the same ballpark.
The yield curve all but guarantees a recession, yet High Yield credit is not pricing in much. So what gives?
As the circled bar shows, High Yield credit spreads are pricing in a relatively small 25% of a recession. Despite recession concerns, corporate bond spreads, which tend to widen before and during recessions, are sending no such signal. One potential reason is that high yield investors are not as concerned about the consequences of a recession. This may be due to the historically low rate of defaults over the last decade. Further tempering yields, high yield debt issuance – aka supply – has been light this year. Backward-looking optimism and little supply may keep spreads down for now, but the high yield bond sector may be most ripe for pain if a recession occurs.
Source: LaDuc Trading
Focus on things you can control
When it comes to investing, there are a myriad of factors outside our control.
Prioritize your time and energy by focusing on the things that matter AND that you can control.
In addition to what is inside the “control” circle below, I would add additional qualifiers like the amount of risk you take, adding diversification to your portfolio via an asset allocation strategy, adherence to a financial plan, asset location across tax-advantaged accounts, and the fees you pay on investment products.
Source: Brian Feroldi
That’s all for today.
Blake
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. Clients of Sandbox Financial Partners may maintain positions in the markets, indexes, corporations, and/or securities discussed within The Sandbox Daily.