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COTW: Black Friday 2024

Black Friday online shopping reached a new record high in 2024. Adobe Inc. reported on Saturday that Americans spent approximately $10.8bn online on Friday, a 10.2% increase from the previous year.

COTW: A Lesson in Investment Risk

With Thanksgiving this week, what better time to revisit the classic analogy provided by Nassim Taleb in his 2007 book, The Black Swan.

COTW: The Fiscal Deficit

Despite the pandemic having ended several years ago, the U.S. economy continues to be driven by crisis-era government spending, which is producing multi-trillion-dollar deficits with no end in sight.

COTW: The September CPI Report

The Consumer Price Index (CPI) rose 0.2% in September, bringing the year-over-year increase to 2.4%. This marks a slight decline from the 2.5% annual rate recorded in August, and is the lowest annual rate since February 2021.

COTW: Inflation and Rate Cut Expectations

With both core and headline inflation above the official 2% target for over three years, financial conditions at their loosest since May 2022, and the labor market not showing signs of significant cooling, it’s debatable whether the Fed’s recent 50 basis point rate cut—historically reserved for times of crisis—was justified.

3Q, 2024 Asset Class Return Quilts

The quarter was strong for most risky assets, particularly in rate-sensitive sectors and asset classes such as small caps, utilities, and REITs, helped by the first U.S. interest rate cut and growing expectations of further cuts later this year.

COTW: Profitable Small Caps

U.S. small-cap stocks have performed well, gaining 11% year-to-date. However, the market remains selective: only profitable small-cap stocks are doing well, while unprofitable companies continue to lag.

COTW: Base Effects

Base effects impact how an inflation print appears. For example, if the 12-months-ago print had unusually high inflation, this year’s inflation rate might seem lower, even if prices are still rising. This is because prices are being compared to already elevated levels from the previous year. In the U.S., core inflation has been above the Fed’s 2% target for over three years.

COTW: Gold Performance in September

Gold prices historically experience a phenomenon known as the “September curse,” which refers to a consistent decline in gold prices during this month. This trend has been observed since 2017, with gold prices dropping every September during this period, averaging a decline of 3.2%.

COTW: Rising Rate Cut Expectations

As widely expected, the Federal Open Market Committee (FOMC) kept interest rates unchanged at the July 31 FOMC meeting. However, minutes from the meeting, which were released on Wednesday, revealed a willingness to start cutting rates as concerns about the labor market have begun to outweigh inflation concerns.

COTW: July Jobs Report

According to the Bureau of Labor Statistics, Hurricane Beryl, which formed on July 8, had no significant impact on the national employment and unemployment data for July. The unemployment rate rose to 4.3% in July, with only 114,000 new jobs added over the month, notably lower than anticipated.

COTW: The Yen Carry Trade

The carry trade strategy involves borrowing Japanese yen at a 0% interest rate and investing in higher-yielding assets abroad to earn a profit.

COTW: Market Breadth

A handful of mega-cap technology companies are largely responsible for the S&P 500’s strong year-to-date returns of 16.3%. However, market participation has been historically narrow, with only 22% of S&P 500 members outperforming the broader index, a level well below the historical average of 52%.

2Q, 2024 Commentary: Status Quo

U.S. markets delivered mixed results in the second quarter. Large cap stocks climbed 4.3% while small cap stocks declined by 3.3%. Bonds ended the quarter up 0.1%.

COTW: ISM PMIs

The ISM Manufacturing PMI registered 48.5 in June, down from 48.7 in May, indicating contraction in the manufacturing sector for the third consecutive month.

2Q, 2024 Asset Class Return Quilts

Q2 was a good quarter for most risky assets, particularly U.S. large-cap stocks, with those benefitting from the artificial intelligence (A.I.) theme, including mega cap tech and utilities, driving markets.

COTW: S&P 500 Returns & Incumbent Political Parties

Negative stock market returns have impacted election outcomes, but positive returns have had less of an impact.—i.e., negative returns ‘guarantee’ loss, while positive returns don’t necessarily guarantee wins.

COTW: FOMC Rate Decisions in Election Years

Between 1994 and 2023, the Fed has hiked interest rates during the months of May to November in an election year only 16% of the time. In contrast, the Fed has only cut rates 3% of the time during the same period of an election year since 1994.

May 2024 Commentary: Power Play

May was nearly ideal for most asset classes, and U.S. equities performed best as large cap and small cap stocks both rose 5%. Intermediate-term bonds ended the month up 1.7%—their best monthly return this year.

COTW: Stock Splits

On June 7th, Nvidia executed a 10-for-1 stock split, where each shareholder received nine additional shares for every share they owned at the market’s close on the day of the split.

COTW: BNPL

Buy Now, Pay Later (BNPL) is a financial service that allows consumers to purchase products immediately and pay for them over time through a series of installments.

April 2024 Commentary: Policy Tug of War

In April, rising bond yields and increased geopolitical tensions pressured the stock
market, and U.S. large cap stocks declined 4.1% while small cap stocks ended the
month down 7.0%.

COTW: Treasury Issuance

Treasury last week announced second and third quarter borrowing estimates. 2024 issuance on track to surpass 2023 as the highest after 2020…

COTW: Gold Miners

Gold miners have lagged behind physical gold due to rising operational costs and country-specific challenges….

COTW: AI & Nuclear Power

Tech firms and Silicon Valley billionaires have increasingly focused on nuclear energy as a sustainable solution to meet the growing energy demands of energy-intensive AI.

COTW: Record Office Vacancy Rates

The dramatic rise in office vacancy rates across the U.S. in recent years can largely be attributed to the shift in workplace dynamics post-COVID-19, with a significant number of employees now working in a hybrid model from home.

1Q, 2024 Asset Class Return Quilts

Q1 saw robust returns across most risky assets, particularly in stocks, supported by stronger-than-expected economic growth, and a resilient consumer.

COTW: Cocoa Prices

Cocoa prices have risen more than 140% this year. The recent uptick in cocoa prices is the result of disruptions affecting both supply and demand.

COTW: End of an Era

On Tuesday, the Bank of Japan announced a significant (and highly anticipated) policy move last week by ending its negative interest rate policy and making its first rate hike in 17 years.

February 2024 Commentary: Navigating the Bull

Equity market returns were robust in February. U.S. small cap stocks led the rally, up 5.7%, and the S&P 500 set new highs, marking a rare occurrence of gains in 16 of the past 18 weeks, something not achieved in more than 50 years.

COTW: Consumer Sentiment

The February University of Michigan consumer sentiment survey showed a mixed trend, with a preliminary reading of 79.6 unexpectedly declining to 76.9 in the closing days of the month.

COTW: AWS Revenue

Over the past 12 months, AWS revenue alone exceeded the revenue of Nvidia ($45 billion), Visa ($33 billion), Disney ($89 billion)…

January 2024 Commentary: The Size Divide

The U.S. economy grew by an annualized 3.3% in Q4 2023, beating expectations. Consumer confidence rose significantly due to lower inflation expectations and a robust labor market, despite some signs of cooling.

COTW: Rate Cuts

As of February 5, the implied Fed funds rate for December 2024 was 4.14%.

COTW: The Trillion Dollar Market Cap Club

U.S. companies that currently have a market capitalization of $1 trillion or more include Apple, Microsoft, Alphabet (Google), Amazon, Meta (formerly Facebook), and Nvidia.

COTW: Bitcoin Spot ETF

While bitcoin initially declined following the SEC approval, what the longer-term impact on the historically volatile cryptocurrency’s price will be remains to be seen.

4Q, 2023 Commentary: Balancing Act

Despite early 2023’s recession fears and banking crisis, the market rallied with U.S. large cap stocks up 26.3% and U.S. intermediate-term bonds up 5.5%, buoyed by moderating inflation.

4Q, 2023 Asset Class Return Quilts

In equities, U.S. Large Cap stocks were the top performers over 2023, with gains driven by Technology, Communication Services, and Consumer Discretionary sectors.

COTW: Santa Claus Rally

The Santa Claus Rally refers to a phenomenon in the U.S. stock markets where there is often an uptick in stock prices in the last five trading days of December and the first two trading days in January. On average, the Santa Claus rally has historically produced an excess return of +1.5%. Returns during the Santa Claus Rally period have been positive 79% of the time.

November 2023 Commentary: Retail Therapy

Underneath strong consumer spending levels lies growing credit reliance, hinting at an unsustainable trend that could foretell increased economic and market volatility.

October 2023 Commentary: ‘G’ is for Government

The U.S. government added $532 billion in debt outstanding in October, while facing future budget strains due to a record (and growing) $659 billion in interest outlays, signaling additional challenges for government spending productivity and overall fiscal health.

COTW: October

October seems to be a historically important month for the S&P 500, with some key moments throughout history all occurring around mid-October

3Q 2023 Commentary: Drained

The Bloomberg U.S. Aggregate Bond Index, which ended the quarter down 3.2%, is down 15% over the past three years in the largest three-year decline in history.

COTW: The Rule of 72

The “Rule of 72” is a simple formula used in finance to estimate how long it will take to double an investment’s value by dividing 72 by the annual interest rate or annual growth rate. Over the past four decades, declining cash yields, proxied by the 3-month Treasury yield, have extended the doubling time for cash investments

COTW: Yen-tervention

The Japanese yen has been dropping sharply over the past few days, after the Bank of Japan announced that it has kept interest rates in negative territory, at -0.1%.

COTW: One Year Later

On September 23, 2022, the British government announced its largest tax cuts since the early 1970s, primarily funded through borrowing, totaling over $196 billion in projected costs over the coming years. This announcement led to a sharp increase in gilt yields, further driven higher by existing worries about inflation, interest rates, and the long-term sustainability of UK government finances.

August 2023 Commentary: Goodbye, August

The S&P 500 experienced a 1.6% decline in August but remains 18.7% higher on the year, while the Bloomberg Aggregate Bond Index is up a paltry 1.4% for the year to date.

COTW: The September Effect

September has historically been one of the worst-performing months, particularly over the last two decades. Referred to as the “September Effect,” this phenomenon reflects a tendency for stocks, notably the S&P 500, to exhibit poor performance during September. The most notable declines occur within the initial half of the month, with an average drop of 5.7%.

July 2023 Commentary: Hot Streak

Markets continued their hot streak in July, and the S&P 500 posted its fifth consecutive month of positive returns, ending the month up 3.2%.

COTW: Wages and Sentiment

After 24 consecutive months of negative growth, real wages turned positive for the first time in June, as wages outpaced inflation for the first time since 2021. Real average hourly earnings remained positive in July, for a second consecutive month.

COTW: The July Rally

The July Rally refers to the historically strong performance of U.S. large cap stocks in the month of July. Since 1920, July has been a top-performing month

2Q, 2023 Asset Class Return Quilts

U.S. stocks continued to push higher during the quarter. The S&P 500 ended the first half of the year up 16.9% and is now up 24.4% since it’s October lows.

COTW: The Magnificent Seven

First, it was FAANG: Facebook, Apple, Amazon, Netflix and Google. Now, it’s the Magnificent Seven: Meta, Apple, Alphabet, Nvidia, Microsoft, Amazon, and Tesla.

COTW: Disconnect

The S&P 500 is up nearly 17% year-to-date and now up more than 20% since the October 2022 lows. However, with full year 2023 earnings per share estimates down 3.3%, there seems to be a disconnect.

Market Note: Going Digital

The SEC has never approved a spot bitcoin ETF, despite there being more than 30 applications over the past five years, but Blackrock’s filing is the first to address key SEC concerns.

COTW: Seasonal Strength?

The first half of this year has been anything but ordinary—characterized by a banking sector in March, a widespread acceleration in AI adoption and interest in May, and the recent rally of the S&P 500 into a bull market. When looking at historical returns since 1928, the S&P 500 could be entering into a period of seasonal strength over the next couple of months.

May 2023 Commentary: Bulls, Bears, and Bots

In late May, an agreement was made to suspend the debt ceiling until January 1, 2025. As part of the agreement, student loan payments will resume within the coming months, barring a Supreme Court ruling in favor of Biden’s forgiveness plan.

COTW: Ongoing Banking Stresses

BTFP usage skyrocketed in March, reaching a peak in April. Since then, BTFP usage remained elevated, albeit at relatively consistent levels. On May 3, BTFP usage started to climb again, and reached record-level use in the first week of June.

COTW: Interest in AI

More recently, interest in AI has boomed, driven largely by the launch of ChatGPT in November last year.

COTW: Unstoppable Tech

Overall, the S&P 500 is up 9.9% year-to-date. However, this perceived market strength is not indicative of the average public company’s performance. Instead, a handful of stocks—Meta, Apple, Microsoft, Amazon, Nvidia and Alphabet—have been driving market strength.

COTW: Longer-Term Inflation Expectations

When asked during the latest FOMC meeting in early May whether the Fed would accept a prolonged period of 3% inflation, Fed Chairman Powell clearly reiterated their goal of lowering inflation to 2%, stating, “We’re not looking to reach 3% and drop our tools. We have a goal of getting to 2%.”

April 2023 Commentary: A Series of Unfortunate Events

As the debt ceiling debate intensifies, Congress remains at an impasse and has largely ignored warnings from Treasury Secretary Yellen, who now estimates that the U.S. will run out of funds to pay bills by June 1.

COTW: Entrenched Inflation

After peaking at 9.1% in June last year, the April CPI print shows that inflation has slowed to 5.0%, indicating the continued cooling of inflation off record-high levels. While this should have been a welcome sign for U.S. consumers of prices starting to ease, there has instead been an uptick in expectations of inflation remaining higher for longer.

1Q 2023 Commentary: Tick Tock

Despite a barrage of economic and policy news, the quarter will be remembered most for the failures of Silicon Valley Bank and Signature Bank.

COTW: The Consumer Squeeze

The latest CPI print seems to show good news: Inflation increased by 5.0% year-over-year, and is finally showing signs of easing after peaking at 9.1% in June 2022. However, this is still well above the Federal Reserve’s 2.0% target, which means that there’s still a way to go before prices stabilize.

COTW: Tighter Lending Standards

Long before the collapse of Silicon Valley Bank and Signature Bank, U.S. banks had started to report tightening lending standards for commercial and industrial loans for firms of all sizes. The chart below shows how, throughout the first two months of the year, at least 44% of domestic banks have reported tightened lending standards. With Q1 2023 data due in May, which will include the impact of the recent financial stability, expectations are for banks to accelerate loan tightening conditions.

COTW: Sticky Inflation Measures

Last week, several important inflation measures were released. The Personal Consumption Expenditure (PCE) Price Index moved down to 5.0% in February, from 5.3% in January. However, since its peak of 7.0% in June 2022, there has been only a very slow downward trend over the last 9 months. It remains well above its 20-year average and the Fed’s target of 2.0%.

COTW: Extreme Interest Rate Spreads

The spread between interest paid on a bank’s liabilities (e.g. deposits) and the interest received on assets (e.g. investments), known as the Net Interest Margin (NIM), is a key driver of bank profitability. Banks generally benefit from higher interest rate environments as they are able to delay raising interest on deposits, while benefitting from higher interest income from investments.

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