The Sandbox Daily (8.23.2022)
Market's expectation for upcoming FOMC meeting, NBER recession indicators, bonds in portfolio management, crypto takes a breather, streaming surpasses cable, and the (sad) decline in life expectancy
Welcome, Sandbox friends.
Today’s Daily discusses the market’s expectation for the upcoming rate hike at the September 21st FOMC meeting, an update on the variables used by the NBER to gauge a recession, why bonds can still play a role in portfolio management, crypto taking a breather after a strong recovery from the mid-June lows, streaming surpasses cable for the first time, and the decline in life expectancy.
Let’s dig in.
EQUITIES: Russell 2000 +0.18% | Nasdaq 100 -0.07% | S&P 500 -0.22% | Dow -0.47%
FIXED INCOME: Barclays Agg Bond -0.04% | High Yield +0.25% | 2yr UST 3.335% | 10yr UST 3.057%
COMMODITIES: Brent Crude +3.66% to $100.15/barrel. Gold +0.65% to $1,759.4/oz.
BITCOIN: +1.63% to $21,544
US DOLLAR INDEX: -0.41% to 108.512
CBOE EQUITY PUT/CALL RATIO: 0.65
VIX: +1.30% to 24.11
Countdown to FOMC
After months of scorching hot inflation prints, the latest reading from the Consumer Price Index (CPI) report in July was a headline inflation print of +8.5% growth YoY.
In fact, the month-over-month change was -0.02%, a stark contrast from the +0.68% average monthly gain we had experienced over the previous 12 months.
Immediately following the release of the CPI report on August 10th, the odds of a 0.75% rate hike dropped like a stone. However, in the last two weeks and particularly in the last few days, the market has been slowly creeping higher. Per yesterday’s report from Lev Borodovsky and Bloomberg, the market is strongly pricing in another 75 basis point rate hike on the Fed Funds Rate at the upcoming meeting on September 21st.
Up first, however, will be remarks from Federal Reserve Chairman, Jerome Powell, at the upcoming Jackson Hole Economic Symposium on Friday later this week in which the market will be looking for additional guidance on the Fed’s thinking.
Source: The Daily Shot, Bloomberg
Update on the six indicators the NBER uses to define a recession
The National Bureau of Economic Research (NBER), official arbiters of US recessions, look at six monthly indicators in determining whether the nation is officially in a recession and only one is flashing red.
The NBER reviews these six variables to determine the health of the U.S. economy, with most of these inputs being leading or coincident markers to provide economists with real-time data. Five of the six are positive in 2022. Industrial production and employment have surged recently, while manufacturing is the one weak point (true across the global map, as well).
This would suggest the U.S. economy is not in a recession.
Source: Ryan Detrick, St. Louis Fed
Why bonds should still play a role in your portfolio
In response to the resurgent inflation that started in late 2020, the Fed has hiked interest rates four times so far in 2022, raising rates by a total of 225 basis points. In response, bonds have suffered some of their worst losses in decades. In the first six months of 2022, the Bloomberg U.S. Aggregate Bond Index dropped 10.35% – its worst showing in more than four decades.
But investors shouldn’t give up on bonds altogether, as fixed income securities still play a critical role in reducing portfolio risk and can also prove surprisingly resilient, even during periods of rising interest rates. Bonds typically have much steadier performance than equities. Since 1926, for example, stocks have suffered 119 quarters of negative returns. During about two thirds of those periods, bonds had positive returns. What's more, the magnitude of losses for bonds is typically far less, as shown in the table below.
Source: Morningstar
Crypto recoils at channel resistance to take a breather
After a strong July and first half of August, this late summer week offered digital asset investors another “break from the action” after many months of roller-coaster type price action. Bears have dismissed the strong move from the lows, citing a “bear market rally” and “dead-cat bounce,” despite signs of bitcoin and ether outperforming as the market consolidates. In spite of some recent profit taking, bitcoin (+20.7%) and ether (+79.1%) have bounced strongly off the June 18th lows, similar to traditional equity markets (S&P 500, +15.3% and Nasdaq Comp, +19.3%). While some remain hesitant to stay long given the possibility of further downside, one should consider that recency bias, the reflexivity feedback loop, a shift in short-term sentiment, and the upcoming Ethereum “Merge” will all provide interesting dynamics to monitor in the weeks and months ahead.
Source: Eaglebrook Advisors
Streaming surpasses cable for the first time
Nielsen, the global leader in audience data and analytics, announced that streaming usage surpassed cable in July to claim the largest share of television viewing for the first time. Streaming represented a record 34.8% share of total television consumption, while cable and broadcast came in at 34.4% and 21.6%, respectively. Streaming usage has surpassed that of broadcast before, but this is the first time it has also exceeded cable viewing. Among streaming distributors, Prime Video, Netflix, Hulu and YouTube each captured record-high shares again in July after previously doing so in June. Netflix represented the largest share of overall TV viewing for a streaming platform with 8%, boosted by the nearly 18 billion viewing minutes of Stranger Things alone.
So, as the world shifts from traditional cable programming to streaming, it’s worth checking on how pricing shakes out. The average price that American consumers pay for streaming is $20-$30 per month, a far cry from the $79 per month the average cable plan costs. Despite realized or planned price increases from Netflix (three price hikes since 2019) and Disney, streaming costs are still much lower than traditional linear tv cable programming – and consumers have the option to elect what services to sign up for, a much more deliberate and pleasurable viewing experience.
Source: Nielsen, The Hustle, Variety
Life expectancy declines
Overall life expectancy plunged by 1.8 years in 2020, the biggest drop since World War II, as the COVID-19 pandemic ravaged the country. CDC data showed the pandemic, higher drug-overdose deaths, and lower wellness and standard medical procedure appointments were all contributing factors. New York suffered a bigger decline in life expectancy than any other state, with its residents expected to live for three years less in 2020 than they had been expected to live in 2019.
Source: Bloomberg, US Centers for Disease Control and Prevention
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.