Volatility (the key to 2023?), plus rate hikes in Europe, stock buybacks, and Groundhog Day
The Sandbox Daily (2.2.2023)
Welcome, Sandbox friends.
Today’s Daily discusses the impact of volatility on markets in 2023, (multiple) rate hikes across the Atlantic, corporations are binging on stock buybacks, and Groundhog Day.
In other news, Beyonce announced she is touring for the first time since 2016 (don’t worry, ticket sales will be staggered to avoid the Taylor Swift debacle), while seven-time Super Bowl champion and G.O.A.T. Tom Brady swears he’s retiring for real this time (racking up 117 million views on Twitter alone!).
Let’s dig in.
Markets in review
EQUITIES: Nasdaq 100 +3.56% | Russell 2000 +2.06% | S&P 500 +1.47% | Dow -0.11%
FIXED INCOME: Barclays Agg Bond +0.11% | High Yield +0.57% | 2yr UST 4.108% | 10yr UST 3.398%
COMMODITIES: Brent Crude -0.78% to $82.19/barrel. Gold -0.82% to $1,926.9/oz.
BITCOIN: -1.23% to $23,494
US DOLLAR INDEX: +0.53% to 101.753
CBOE EQUITY PUT/CALL RATIO: 0.59
VIX: +4.81% to 18.73
VIX the key to unlocking markets?
It's no coincidence that both stock AND bond volatility peaked (and subsequently collapsed) when the inflation narrative peaked back in mid-October. That’s when we received the +0.44% MoM headline inflation reading, causing the S&P 500 to gap down pre-market over -2% to only end the day positive (+2.60% in fact) on the back of a fierce intra-day rally.
When inflation “hit a wall” in October, so did bond and equity volatilities as shown below. The BofA Move Index (bond volatility) is now at the lowest levels since early 2022. The equity volatility measure (VIX) is down to 17-18, the lowest levels since 2021.
And falling volatility should be great for asset prices. In fact, after a negative return year (like 2022), the median equity gain the next year is +22% (win ratio 83%, n=23) when the VIX falls, versus equity losses with a median -23% return (win ratio 14%, n=7) when the VIX continues rising.
And as the scatter plot below highlights, we can see the sizable influence of the VIX. Even in “All Years,” the bifurcation in outcomes shows VIX is a key differentiating input in realized returns – the average return for the S&P 500 when VIX is down (+14.9%) versus when the VIX is up (+3.5%).
Is 2023 all about volatility?
Source: FS Insight
Rate hikes across the Atlantic
Now, it’s Europe’s turn. After the Federal Reserve delivered its 0.25% rate hike yesterday, Europe’s major central banks raised their target interest rates by 0.50%.
The European Central Bank announced it would raise its key deposit rate to 2.50% – its 5th large increase in a row and highest level since 2008 – and signaled it would enact another half-point rate increase in March. Meanwhile, the Bank of England delivered its 10th consecutive interest rate increase when it raised its key lending rate to 4.00%.
Investors are watching closely for signs that central banks will pause their aggressive rate increases as the pace of inflation starts to moderate in a number of large economies.
The eurozone economy has proved unexpectedly resilient to Russia’s invasion of Ukraine, growing slightly at the end of last year despite higher energy prices that triggered sharp declines in business and consumer confidence, as well as avoiding an energy crisis thanks to both a mild European winter and efforts to maintain high gas-storage levels.
Source: Bloomberg, Financial Times
Corporations binge on buybacks
Corporate America continues to splurge on its own shares, adding fuel to the new year rally while simultaneously rewarding shareholders.
In the 1st month of 2023, announced buybacks more than tripled to ~$132 billion from a year ago, reaching the highest total ever to start a year. Chevron Corp. (CVX) leads the ack with a $75 billion stock buyback program, while Meta Platforms Inc. (META) is 2nd with its own $40 billion allocation.
In a November note from Goldman Sachs strategist David Kostin, the investment bank forecasted buybacks would fall 10% in 2023 due to economic headwinds, and in the event of a recession, the team predicted buybacks could drop by 40%. Whoops!
When a company is flush with cash, it can reinvest in a number of ways to grow its business (buy other companies, invest in R&D, acquire new technologies or equipment, hire more workers, etc.) or it can reward its shareholders via dividends and/or share repurchases.
Source: Birinyi Associates, Goldman Sachs Global Investment Research
Groundhogs make for horrible meteorologists
Six more weeks of winter!
Crowds gathered at Gobbler’s Knob in Pennsylvania to watch the world’s most famous groundhog, Punxsutawney Phil, open his scroll in tradition and read aloud “I see a shadow on my stage and so, no matter how you measure, it’s six more weeks of winter weather!”
The analytics firm FiveThirtyEight dug into the numbers and – shocker! – groundhogs make for terrible meteorologists, with Punxsutawney Phil only accurate ~36% of the time. Other furry friends of his aren’t much better, either.
Source: FiveThirtyEight
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.