Volatility, plus credit cards, market breadth, America's trade deficit, and the week in review
The Sandbox Daily (4.6.2023)
Welcome, Sandbox friends.
Today’s Daily discusses:
lower vol is not lower risk
survey shows credit card debt on the rise
market breadth is rather narrow
America’s largest trading partners
a brief recap to snapshot the week in markets
Happy Easter and Passover to all those who celebrate.
The next Sandbox Daily will arrive in your inbox on Monday, April 10th.
And don’t sleep this weekend on the azaleas, yellow pins, Amen Corner, and the green jacket at the Masters in Augusta, Georgia!
Let’s dig in.
Markets in review
EQUITIES: Nasdaq 100 +0.74% | S&P 500 +0.36% | Russell 2000 +0.13% | Dow +0.01%
FIXED INCOME: Barclays Agg Bond -0.09% | High Yield +0.44% | 2yr UST 3.829% | 10yr UST 3.303%
COMMODITIES: Brent Crude -0.21% to $84.94/barrel. Gold -0.45% to $2,026.4/oz.
BITCOIN: -0.45% to $28,045
US DOLLAR INDEX: +0.10% to 101.923
CBOE EQUITY PUT/CALL RATIO: 0.66
VIX: -3.56% to 18.40
Quote of the day
“Your problems adjust to their true level of importance after a hard workout and a good night of sleep.”
-James Clear, Atomic Habits
Lower vol is not lower risk
After normalizing at the start of year, cross-asset volatility picked up in March led by a sharp increase in rates volatility. Financial stability concerns around U.S. banking stress, coupled with an expected tightening of credit conditions, led markets to sharply reprice the path for Fed hikes, and the U.S. 2-year Treasury yield experienced the largest weekly decline outside of 'Black Monday' in 1987.
Since then, volatility has settled back down again rather quickly, led by equity volatility – which remains in a narrow range of 18-20. Markets have treated the U.S. bank stress as a domestic-contained growth shock, which had relatively little impact on large cap U.S. stocks; stock prices and valuations were actually boosted by lower bond yields.
Credit markets have reacted more negatively, with credit spreads widening more than implied by the VIX. In part this was due to the direct impact from credit tightening and perceived default risks, but also differences in duration: equities, and in particular the S&P 500, tend to benefit more than credit from falling rates.
While equity volatility (VIX) and to a lesser extent rate volatility (MOVE) have both settled down, a shift to a low vol regime remains unlikely considering still-elevated macro uncertainty, further tightening of credit conditions, central banks in rate-hiking mode, and mixed macro momentum.
Source: Goldman Sachs Global Investment Research
Survey shows credit card debt on the rise
36% of people have more credit card debt than emergency savings, the highest percentage in the 12 years that Bankrate has asked this survey question. This compares to 22% in January 2022 and 28% in January 2020 (pre-COVID).
Millennials (ages 27-42) are the generation most likely to have more credit card debt than emergency savings, with 45% saying they have more credit card debt; GenX (43-58) is right behind at 44% while GenZ (18-26) comes in at 38%.
Source: Bankrate
Market breadth is narrow
Healthy markets are broader markets, but so far this year’s market is extraordinarily narrow.
Narrow markets reflect either eroding fundamentals or alternatives for better risk-adjusted returns elsewhere. Or both.
Source: Richard Bernstein Advisors
America’s largest trading partners
The U.S. trade deficit – the difference in exports and imports – was nearly $1.2 trillion dollars as of 2022, a shortfall/imbalance that has existed over 40 years.
Some of our larger exports include minerals (crude oil, natural gas, soybeans), civilian aircraft engines, vehicles, medical and pharmaceuticals, and gems/precious metals.
Some of our larger imports include vehicles, computers, telecommunications equipment, packaged medical and pharmaceutical treatments, cell phones, crude oil, and consumer goods.
The trade deficit is so important to track because of its role in geopolitics, exchange rates and currency valuations, global supply chains, manufacturing, jobs, and tracking trends across a variety of categories of transactions – to name a few. Given the sheer size of the U.S. economy, it is one of the largest importers AND exporters in the global movement of goods.
Source: Visual Capitalist
The week in review
Talk of the tape: Negative macro surprise momentum seemed to be the big theme this week, a dynamic evidenced by a softer rate backdrop and cyclical factor underperformance with the pickup in hard-landing worries. No reprieve granted from lower rates and anchored inflation-expectations that helped risk sentiment near the end of Q1, particularly in terms of big tech and other growth plays. Perhaps these narratives fit with all the concerns about the recession signaling from the year-long yield curve inversion and synchronized rate hiking cycles around the world, along with the more recent scrutiny surrounding the collapse in money supply growth and tightening lending standards. Growth fears also play into the earnings risk theme, as 1Q23 earnings season kicks off next week.
Bullish dialogues emphasize the Fed’s balance sheet re-expansion, big tech leadership, soft/no landing hopes, a broader (albeit choppy) disinflation trend, elevated cash levels and still below average positioning, technicals holding strong, and the China reopening story.
Negative talking points revolve around the central bank balancing act between inflation and financial stability risks, the higher-for-longer narrative, 10-20% downside risk to consensus earnings estimates, heightened concerns about regional banking and the Commercial Real Estate market, and a broadening of layoffs beyond the technology sector.
Stocks: Stocks ended the week mixed as energy was a top performing sector for the second straight week on the back of higher crude oil prices. West Texas crude oil is up ~6% after OPEC+ announced it was slashing output by 1.16 million barrels per day. Last month, the price of oil dropped to an 18-month low as a glut of supply and fears over the global economy concerned traders. In addition, defensive sectors utilities along with health care were leading performers for the week.
Bonds: The Bloomberg Aggregate Bond Index finished higher, as bond prices appreciated while yields declined. This week’s lighter-than-expected economic prints have led some investors to believe in a Federal Reserve pivot.
Commodities: Energy prices finished mixed as traders remain concerned over the present banking climate and its potential effect on the economy. Crude oil rallied for the third straight week after reaching a 15-month low four weeks ago amid this week’s OPEC + supply cuts. Natural gas prices finished lower for the fourth consecutive week. The major metals (gold, silver, and copper) ended the week mixed. Gold price jumped above $2,010, reaching its highest level since March of last year.
Source: Dwyer Strategy, LPL Research
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.