Tag: nqalert

Today’s Big Picture

Asia-Pacific equity indexes ended today’s session slightly mixed as China’s Shanghai Composite eked out a 0.04% loss and India’s Sensex closed down 0.19% while Hong Kong’s Hang Seng rose 0.10%, Australia’s ASX All Ordinaries gained 0.31%, Taiwan’s TAIEX advanced 0.93% and Japan’s Nikkei was up 1.03%. South Korea’s KOSPI led the way, finishing 1.80% ahead on the day. By mid-day trading, European equity indices are down across the board and U.S. futures point to a weak open later this morning.

We are starting this shortened trading week off with a modest amount of new company news, no earnings reports, and a handful of fresh economic data that shows the Services economy outside the U.S. held up better than expected in June. Given the lack of inflation-related data this week, the June jobs data for the U.S. will likely take up a lot of the market conversation this week, particularly around the speed of the economy and prospects for a recession. That will also make tomorrow’s June Services data for the U.S. and Friday’s June Employment Report worth watching. 

As those reports are issued, we and others will be looking to see what the data does to the Atlanta Fed’s GDPNow model. Last week’s updates pointed to the likelihood the U.S. could be in a recession as GDP expectations for 2Q 2022 were slashed to -2.1% vs. the May 17 reading of +2.5%. That sharp revision shows how quickly the economic landscape changes hammered stocks in June. Questions remain as to whether inflationary pressures have indeed peaked, but even so, efforts to reduce consumer pain continue. According to reports, Chinese tariff relief appears to be back on the table at the White House. Similar to the proposed gas tax holiday, there are questions as to how effective such a move would be in reducing pricing pressures. 

Beyond the U.S., readers will want to keep a close watch on covid cases in China. The number has been on the upswing and led the country to double the number of cities, including those around Shanghai, restricting local movement as of earlier today. According to data published by Nomura, this latest measure affects regions that account for approximately 15% of China’s GDP, up from 10% last week. This is likely to have an impact on supply chain woes, and will have a ripple effect on the U.S. economy as well.

Data Download

International Economy

Last night saw the release of Chinese Services PMI for June which at 54.5, surprised 5.5 points to the upside from estimates of 49.0, showed a big improvement from the previously reported 41.4 and, for the first time since the adoption of Zero Covid policies in February, showed growth in the Chinese service sector.

Japan also released Services PMI yesterday at 54.0 which came in higher than estimates of 52.3 and the previously reported 52.6.

Final June Services PMI for the broad Eurozone was announced this morning at 53, slightly higher than initial estimates along with UK Services PMI which was reported at 54.3, almost a full point higher than preliminary figures.

Norwegian offshore oil and gas workers went on strike over pay today, a move that could cut Norway’s oil output by 15% later this week should the strike escalate as expected. Meanwhile, reports also suggest Russia could temporarily shut down the Nord Stream 1 Pipeline, the European Union’s largest piece of gas import infrastructure, for annual maintenance. 

Domestic Economy

At 10:00 AM ET, we will see the results of MoM May Factory Orders and MoM Durable Orders, both of which are expected to show a 0.50% rise over the previously reported figures.

Markets

While Friday saw the markets rally heading into the holiday weekend, that move didn’t take the sting out of what was one of the worst half-year starts for stocks in 50 years. The Atlanta Fed updated its estimate for Q2 GDP from roughly -1% to -2.1% on Friday and even though that update, if realized, would put us firmly in recession territory (2 consecutive quarters of GDP contraction) the markets responded positively. This could mean that investors are thinking the slowdown we are seeing in the economy could lead the Fed to not be as aggressive in hiking interest rates later this year as was previously thought. 

Here’s how the major market indicators stack up year-to-date:

• Dow Jones Industrial Average: -14.42%
• S&P 500: -19.74%
• Nasdaq Composite: -28.87% 
• Russell 2000: -23.05%
• Bitcoin (BTC-USD): -58.63%
• Ether (ETH-USD): -70.12%

Stocks to Watch

Before trading kicks off for U.S.-listed equities, no companies are expected to report their latest quarterly results but given we are in the quiet period for companies, readers should be on watch for earnings pre-announcements.

Ford Motor (F) is expected to report its monthly U.S. sales today, and while some will be eyeing its total data there will be those that focus on how its all-electric F-150 Lightning has performed. 

Tesla (TSLA) shared it delivered about 255,000 vehicles in the June quarter, down from about 310,000 in the March quarter but a tad better than the 250,000 consensus estimate. This morning the company confirmed a new software update that enables its vehicles to scan for rough roads, including potholes, to help avoid them damaging the vehicles by adjusting the suspension. Tesla also shared its Model Y has joined the fleet of the Leewood, Kansas police department as a patrol car.

Smart electric scooter company Niu Technologies (NIU) sold 208,857 units in 2Q 2022, including e-motorcycles, e-mopeds, e-bicycles, kick-scooters, and e-bikes, representing a 17.4% YoY drop.

Nokia (NOK) announced it won a five-year deal with Norwegian mobile operator Ice to upgrade and expand its 5G radio network infrastructure nationwide.

InterDigital (IDCC) announced it signed a multi-year, worldwide, non-exclusive, royalty-bearing license with Zebra Technologies (ZBRA) that covers InterDigital’s standard-essential patents related to 4G and 5G wireless, and WiFi technology.

Rocket Lab USA (RKLB) announced it successfully deployed a pathfinding satellite for NASA, setting it on a course to the Moon.

Healthcare Trust of America (HTA) reported that it has signed its highest level of new leases since going public in 2012

Bloomberg reports a consortium backed by KKR (KKR) is emerging as the frontrunner to buy a controlling stake in the towers unit of Deutsche Telekom (DTEGY).

IPOs

As of now, no IPOs are slated to be priced this week. Readers looking to dig more into the upcoming IPO calendar should visit Nasdaq’s Latest & Upcoming IPOs page.

After Today’s Market Close

No companies are expected to report their quarterly results after equities stop trading today. Those looking for more on which companies are reporting when, head on over to Nasdaq’s Earnings Calendar. 

On the Horizon

Wednesday, July 6

• Germany: Factory Orders – May
• Eurozone: Retail Sales – May
• US: Weekly MBA Mortgage Applications
• US: S&P Global Services PMI (Final) – June 
• US: ISM Non-Manufacturing Index – June
• US: JOLTS Report – May 
• US: FOMC Meeting Minutes – June 

Thursday, July 7

• Japan: Leading Indicators – May
• Germany: Industrial Production – May
• US: Challenger Job Cuts – June 
• US: Weekly Initial & Continuing Jobless Claims 
• US: Import/Export – May
• US: Weekly EIA Natural Gas Inventories
• US: Weekly EIA Crude Oil Inventories

Friday, July 8

• Japan: Household Spending – May
• Japan: Economy Watcher Current Index – June
• China: Inflation Rate and Producer Price Index – June
• US: Employment Report – June
• US: Consumer Credit – May

Thought for the Day

“The life of the nation is secure only while the nation is honest, truthful, and virtuous.” ~ Frederick Douglass

Disclosures

• Niu Technologies (NIU), Tesla (TSLA)are constituents of the Tematica BITA Cleaner Living Index
• Niu Technologies (NIU), Tesla (TSLA) are constituents of the Tematica BITA Cleaner Living Sustainability Screened Index
• InterDigital (IDCC), Nokia (NOK) are constituents of the Tematica BITA Digital Infrastructure & Connectivity Index

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Wall Street has endured the most painful first half in more than 50 years. Severe bouts of volatility are expected to continue in the near term amid geopolitical tensions, sky-high inflation and Fed’s aggressive stance. In times of such uncertainty, it’s as important to get rid of fundamentally weak toxic stocks as it is to invest in attractively valued companies possessing fundamental strength.

Generally, toxic stocks are vulnerable to external shocks and are loaded with high levels of debt. Also, the price of toxic stocks is irrationally high. The unjustifiably high price of the toxic stocks is only short-lived as the intrinsic value of these stocks is lower than the current bloated price. The inflated price of the toxic stocks can be ascribed to either an irrational exuberance associated with them or some serious fundamental lacunae in the stock. If you own such stocks for a long period, you are likely to witness huge erosion in your wealth. Zalando SE ZLNDY, Radius Global Infrastructure Inc. RADI, Ormat Technologies ORA and Ligand Pharmaceuticals LGND are a few such toxic stocks.

Investing success hinges upon precise identification of overpriced stocks and fairly priced ones. However, the over-hyped toxic stocks and the correctly priced stocks are mingled in the marketplace in such a way that it becomes very tough to differentiate between them. Investors who can pinpoint the toxic stocks and discard them at the right time are likely to gain.

On the other hand, if you can figure out the toxic stocks correctly, you may gain by resorting to an investing strategy called short selling. This strategy allows you to sell a stock first and then buy it when the price falls. While short selling excels in bear markets, it typically loses money in bull markets. So, picking up toxic stocks and abandoning them at the right time is the key to protect your portfolio from big losses. Profits can be made by short-selling them.

Screening Criteria

Here is a winning strategy that will help you to identify overpriced toxic stocks:

Most recent Debt/Equity Ratio greater than the median industry average: Ahigh debt/equity ratio implies high leverage. High leverage indicates a huge level of repayment that the company has to make in connection with the debt amount.

P/E using 12-month forward EPS estimate greater than 50: A very high forward P/E implies that a stock is highly overvalued.

% Change in F (1) and F (2) Estimate (12 Weeks) less than -5: Negative EPS estimate revision for this fiscal year and the next during the past 12 weeks points to analysts’ pessimism.

Zacks Rank more than or equal to #3 (Hold): We have not considered Buy-rated stocks that generally outperform the market. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Here are four of the 35 toxic stocks that showed up on the screen:

Zalando: Headquartered in Berlin, Zalando is an online fashion retailer. The company offers clothing, sports products, shoes, bags and other accessories for men, women and children. The Zacks Consensus Estimate for ZLNDY’s 2022 earnings and sales implies a year-over-year decline of 73% and 13%, respectively. The estimate for 2022 and 2023 earnings has moved south by a penny in the past seven days. Zalando currently carries a Zacks Rank #4 (Sell) and has a VGM Score of F.

Radius Global: New York-based Radius Global, through its subsidiary AP WIP Investments LLC, is an owner of a growing, diversified portfolio of primarily triple net rental streams from wireless operators and tower companies for properties. The Zacks Consensus Estimate for RADI’s 2022 bottom line is currently pegged at a loss of 7 cents a share. The estimate has deteriorated from earnings of 6 cents a share 60 days ago. The consensus mark for earnings for the next year has also declined 20 cents over the past 60 days. Radius Global currently carries a Zacks Rank #4 and has a VGM Score of F.

Ormat: Nevada-based Ormat company designs, develops, owns and operates clean, environmentally friendly geothermal and recovered energy-based power plants. The Zacks Consensus Estimate for ORA’s 2022 earnings implies a year-over-year decline of 12.2%. The consensus mark for 2022 earnings has moved south by 4 cents over the past seven days. For the next year, the estimate has also declined 6 cents over the same timeframe. Ormat currently carries a Zacks Rank #4 and has a VGM Score of D.

Ligand: Ligand is a biotechnology company focused on the development and licensing of biopharmaceutical assets. This California-based firm’s business model is based on developing or acquiring royalty revenue-generating assets and coupling them with a lean corporate cost structure.The Zacks Consensus Estimate for LGND’s 2022 earnings and sales implies a year-over-year decline of 66% and 40.6%, respectively. The Zacks Consensus Estimate for Ligand’s 2022 earnings has moved south by 34 cents per share over the past 30 days. LGND currently carries a Zacks Rank #4 and has a VGM Score of C.

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Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.

Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.

Zacks Names “Single Best Pick to Double”

From thousands of stocks, 5 Zacks experts each have chosen their favorite to skyrocket +100% or more in months to come. From those 5, Director of Research Sheraz Mian hand-picks one to have the most explosive upside of all.

It’s a little-known chemical company that’s up 65% over last year, yet still dirt cheap. With unrelenting demand, soaring 2022 earnings estimates, and $1.5 billion for repurchasing shares, retail investors could jump in at any time.

This company could rival or surpass other recent Zacks’ Stocks Set to Double like Boston Beer Company which shot up +143.0% in little more than 9 months and NVIDIA which boomed +175.9% in one year.

Free: See Our Top Stock and 4 Runners Up >>

Click to get this free report

Ligand Pharmaceuticals Incorporated (LGND): Free Stock Analysis Report

Ormat Technologies, Inc. (ORA): Free Stock Analysis Report

Zalando (ZLNDY): Free Stock Analysis Report

Radius Global Infrastructure, Inc. (RADI): Free Stock Analysis Report

To read this article on Zacks.com click here.

Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

By Anna Mehler Paperny

TORONTO, July 3 (Reuters) – Health authorities across Canada have cut the hours of hospital emergency departments and urgent care clinics in recent weeks, a move that in some cases may extend through the summer, due to a surge in patients and staff shortages.

The situation, clinicians say, is tied to a resurgence of viral infections such as COVID-19 among adults and children and a push by others to seek care delayed by the pandemic, and exacerbated by the high number of healthcare workers who are sick or burned out.

The strain has led to scenes of clogged hospital hallways and overflowing clinic waiting rooms, hours-long waits for inpatient care and occupancy rates of more than 100% at children’s hospitals. It also has rekindled debate about systemic problems in the government-funded healthcare system.

On Thursday, the Perth and Smiths Falls District Hospital in eastern Ontario announced that its emergency department in Perth would be closed from Saturday to Thursday due to a COVID-19 outbreak affecting its staffing.

“It’s like the four horsemen of the apocalypse all descending on us in health care at once,” said Alan Drummond, a family and emergency physician based in the town, which is home to about 6,000 people.

Drummond, who spoke with Reuters before the closure was announced, sees patients waiting 20 hours to be admitted, a situation that can lead to a deterioration in their condition or even medical errors. He blames the situation on years of inadequate funding of hospital beds and community care.

While hospitals in small towns and cities in Canada do sometimes reduce their hours, it is rarer for regional health hubs to do so.

Ontario’s health ministry would not say how many hospitals in the province, Canada’s most populous, are affected by partial or temporary closures, but said it has taken measures to address the issue, including retaining nurses and other healthcare workers.

“Sometimes hospitals must make the difficult decision to close their emergency departments temporarily so that operations can continue throughout the rest of the hospital,” a ministry spokesperson said.

Hospitals in Quebec, the country’s second-largest province, New Brunswick and Manitoba also have partially shut departments or temporarily cut hours for anywhere from a couple of weeks to a number of months, according to statements from the hospitals.

In Kingston, Ontario, the Hotel Dieu Hospital’s Urgent Care Clinic reduced its hours over the Canada Day long weekend. A spokesperson for the Kingston Health Science Centre described the move, which began on Friday, as a planned one-time reduction, but added that it was expected that “staffing shortages and the current surge in patient volumes will continue throughout the summer.”

Children have been hard hit by the healthcare crunch as youngsters with no prior exposure to a number of viruses succumbed to illness during the spring as many people abandoned the use of face masks used to prevent the spread of COVID-19.

The Children’s Hospital of Eastern Ontario in Ottawa, the nation’s capital, ran at between 110% and 120% capacity for weeks in May and early June. Occupancy was a record high for the month of May, a spokesperson said.

Low staffing and surging patient loads is “kind of like that perfect storm,” said Katharine Smart, a pediatrician who is the president of the Canadian Medical Association.

FUNDING DEBATE

Canada has the fourth-lowest number of funded acute care beds per capita among countries in the Organisation for Economic Cooperation and Development, according to the OECD, and the Commonwealth Fund ranked Canada’s health system second-last among 11 rich countries.

Some critics blame underfunding of the healthcare system dating back to the 1990s, when Canada’s federal government cut spending to get the country’s deficit under control.

Others, such as the right-leaning Fraser Institute, say the government-funded system itself is the root cause of the problems, prescribing a move toward a privately-paid model.

Canada may have little time to waste.

Rami Rahal, a vice president at the Canadian Partnership Against Cancer, said there is a danger that cancer illness and deaths could worsen in the country due to lengthy periods in which screening was skipped or delayed and treatment postponed.

“We can’t hire our way out of this crisis,” he said. “We have to find innovative ways of delivering care.”

(Reporting by Anna Mehler Paperny; Editing by Paul Simao)

((Anna.MehlerPaperny@thomsonreuters.com; 647-225-9609;))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

By Nichola Saminather

TORONTO, July 3 (Reuters) – Canada is persisting with its fairly relaxed approach to regulating funds claiming environmental, social and governance (ESG) credentials despite recent allegations of “greenwashing” elsewhere that have spurred other regulators including the U.S. Securities and Exchange Commission to consider tightening rules.

The Canadian Securities Administrators (CSA) issued guidance for ESG funds early this year that simply clarified how existing regulations apply to them. A CSA spokesperson told Reuters this guidance is adequate, but market experts say the lack of firm rules risks eroding confidence in the industry.

Canadian responsible equity funds’ assets under management grew 24% from a year earlier to C$22.4 billion ($17.3 billion) in May, according to Refinitiv data. Globally, assets in such funds totalled $3.3 trillion.

The CSA has acknowledged the growth has increased the potential for “greenwashing,” an overstatement of ESG credentials by businesses or funds.

Recent allegations of “greenwashing” at Bank of New York Mellon BK.N, Deutsche Bank’s DBKGn.DE DWS Group and Goldman Sachs GS.N have prompted greater scrutiny of ESG funds.

Regulators in the U.S. and Europe are considering introducing mandatory disclosure requirements for ESG funds, given the surge in interest.

The CSA’s guidance calls for alignment between a fund’s name and investment objectives; disclosure of investment strategies used to achieve objectives; and explanations of how ESG factors are evaluated and monitored.

It doesn’t explicitly define ESG, or require measurable ESG outcomes, allowing funds to label themselves as such even when they don’t materially further ESG objectives, said Murray Gold, partner at law firm Koskie Minsky.

“The essential greenwashing problem is that people are buying into these funds because they believe they’re going to improve something,” Gold said. When regulators allow funds to use words “as they wish,” they look “embarrassingly weak,” he added.

The CSA spokesperson said current disclosure requirements are broad enough in scope to cover ESG-related funds and that the regulator will consider future policy initiatives as needed.

ESG Global Advisors Senior Advisor Dustyn Lanz said if the SEC’s proposal is enacted, expected in fiscal 2023, it will be easier for Canadian funds to label themselves ESG than U.S. ones and could hurt the credibility of Canada’s ESG funds industry.

The lack of requirement to disclose quantifiable ESG impact for funds making such claims in Canada, in contrast to the SEC’s proposal, could also lead to “impact washing,” he added.

A CSA review of ESG-related funds’ regulatory disclosures before issuing the guidance found gaps including failure to disclose how ESG factors were evaluated and holdings that did not fit with fund names or objectives.

“It just means they haven’t caught up with the new guidelines yet,” Lanz said. “But it raises the question: When will the CSA start enforcing its guidance?”

But the guidance is a good first step, allowing the regulator to determine if rules are needed, said CFA Societies Canada Managing Director Michael Thom.

The CSA has also separately proposed climate-related reporting requirements for companies to help inform investment decisions, which Thom said would be a “critical building block” for funds’ disclosures.

The CSA spokesperson said staff are reviewing comments received and proposals by counterparts including the SEC and the International Sustainability Stands Board to help inform their recommendations to regulators.

“Corporate disclosure improvements relating to ESG… would be a massive step forward in then enabling investment product disclosure,” Thom said.

($1 = 1.2915 Canadian dollars)

(Reporting By Nichola Saminather Editing by Denny Thomas and Diane Craft)

((Nichola.Saminather@thomsonreuters.com; +1 647 480 7519;))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

• The S&P 500 had its worst first half since 1970 
• The 10yr UST Yield gained 199 basis points to a high of 3.5% 
• Economic measures of inflation hit 40-year highs while market measures are in freefall 
• Markets are pricing a 3% – 3.25% FFR by the end of 2022 and rate cuts in 2023 
• Consumer sentiment is at record lows 

Total Returns:

This year has been a painful year for investors, with most U.S. equity benchmarks down between 20% and 35% from their respective 52-week highs. The S&P 500 registered its worst first half (-20%) since 1970 and its 2nd worst 1H since its inception in 1957. The broad large-cap index declined 16% in Q2 2022, which is its fourth-worst quarter this millennium, behind only the worst quarters of the Global Financial crisis (Q4 2008), the Covid crisis (Q1 2020), and the end of the Dotcom bubble (Q3 2002).   The growth-heavy Nasdaq 100 declined in five of the first six months this year which marked both its worst 1H (-30%) in 20 years (Q2 2002) and its worst quarter (-22% in Q2) since Q4 2008 (Lehman Bros.). The small-cap Russell 2000 cemented its worst 1H performance (-23%) since its inception in 1979. The relative outperformer was the Dow which declined 15% in the 1H of 2022; however, June was its worst-performing month this year.   
 
Soaring inflation, increasingly hawkish global central banks, the Russian war, China lockdowns, food and energy shortages, and growing recession fears continue to be the primary headwinds driving the risk-off price action and record low sentiment.   
 
At the start of the year, markets were pricing in three 25bp FFR rate hikes for all of 2022. At the recent peak on June 14th, they were pricing close to twelve 25bp hikes. Over this period, the 10YR U.S. Treasury Yield rose as much as 199bps from 1.51% to 3.50%, while the national 30-year fixed-rate mortgage nearly doubled from the low 3% level towards 6%. The Bloomberg U.S. Aggregate Bond Index declined 11% in the 1H of 2022. In the prior 45 years dating back to 1976, it has only had four annual declines, with the steepest being 2.9% in 1994.

Over the last three FOMC meetings, the Fed hiked the FFR three times in increasing increments of 25bps (March), 50bps (May), and 75bps (June). June marked the first 75 bps rate hike since 1994. Markets were pricing in a 50bps hike until three sessions before the JFOMC when the monthly CPI (May) and consumer sentiment (June) data came in much worse than expected, raising fears that inflation was becoming more entrenched. That same week the Swiss National Bank surprised global markets with a 50bps rate hike, its first hike in 15 years. Brazil’s central bank raised its lending rate by 50bps, and the Bank of England raised its rate by 25bps while simultaneously cutting its Q2 GDP outlook to -0.3%. Many global central banks are far behind the curve, which has contributed to the worst inflation in more than 40 years. They are now being forced to catch up with rapid tightening that is negatively impacting global economies and capital markets, reducing the likelihood of a soft landing and increasing the possibility of a recession.   
 
Economic measures of inflation remain elevated, with the most recent core CPI (May) excluding food and energy coming in at 6% YoY, down slightly from the peak of 6.5% YoY in March. Headline CPI (May) reached a new 40-year high of 8.6% YoY. Core PPI (May) was 8.3% (YoY), down from its recent peak of 9.6% YoY in March, while headline PPI came in at 10.8%, down from its recent peak of 11.5% in March. The PCE deflator (May) was 6.3% YoY, down from a high of 6.6% in March. Core PCE (May) came in at 4.7% YoY, down from the recent high of 5.3% in February.   
 
While economic measures of inflation are at or near multi-decade highs, market measures of inflation tell a different story. 5YR breakevens retraced 120bps from their peak of 3.76% in March to a low of 2.56% in June, while 10YR breakevens gave back 78bps from 3.08% in March to a low of 2.29% in June. The typically less volatile 5YR Forward breakevens, capturing years 6 through 10 of the 10YR breakeven, fell 64bps from a high of 2.68% in April to its June low of 2.03%.   

Total Returns: 

The Russell 1000 Large-Cap Value Index (RLV) outperformed the Russell 1000 Large-Cap Growth Index (RLG) by more than 15 percentage points through 1H 2022. This is Value’s 2nd best outperformance since the inception of the Russell indices in 1978. Value’s record outperformance took place in 2000 when the Value Index outperformed Growth by 28 percentage points. 2000 started a streak of seven consecutive years of Value outperformance. From a technical perspective, the below relative strength chart plotting the ratio of Growth over Value (RLG / RLV, weekly period) depicts a textbook “bearish reversal” pattern (double top), which was confirmed in April of 2022 on the break below the prior low. The ratio is currently trading just below the prior support suggesting Value’s outperformance could still be in the early-to-mid stages of a longer-term trend. 

Total Returns: 

Ten of 11 sectors are in the red YTD. Energy is the lone sector in the green (+32% YTD) despite declining nearly 17% in June. All eleven sectors were lower in both June and Q2. Notable standouts include Consumer Discretionary, with a 26% decline in Q2. its worst quarter since its inception in 1989, while Communications and Technology each declined more than 20% in Q2. The standout in June was the Materials sector which declined nearly 14% and may support the viewpoint that peak inflation is behind us.   
 
The below weekly period chart of the S&P 500 Materials Index shows a convincing breakdown below an 11-month support level which projects a minimum measured move, based on traditional technical analysis, down 6-7% to the 427 level. 

Rates, Commodities and the Dollar 

The chart below plots the U.S. Treasury Yield Curve at the end of 2021 (blue) and the end of 1H 2022 (red). The biggest net advance (lower panel) was led by the 12M, 6M, 2yr, and 3yr maturities, and the 10yr is inverted versus the 3yr, 5yr, and 7yr.   

The long-term chart of the 10YR UST Yield (quarterly period) going back to the late 1970s shows a “bullish breakout” in Q2 above a clearly defined, 40-year downtrend line. Despite reaching a high of 3.50% in June, it closed the month back below 3%, which has been a level that has previously marked major highs and lows going back to 2003. While there are a growing number of market measures suggesting peak inflation could be behind us, which is one argument supportive of bonds and lower rates, the Fed’s QT program and the increasing supply of Treasuries coming down the pipe are fueling debate regarding the future path of rates.

The Bloomberg Commodity Index (BCOM) gained 19% in the 1H, following a 27% gain in 2021. However, it retraced nearly 17% from its highs in March, and June was its 3rd worst monthly decline (-11%) since 2008. WTI Crude declined 8% in June, which ended a streak of six consecutive monthly gains. WTI finished the 1H with a gain of 41%, following a 55% gain in 2021. After peaking in March at $130.50, its highest level since 2008, it has since been consolidating in a sideways range following a prior steep uptrend. Separately, the U.S. Strategic Petroleum Reserve (SPR) is down to its lowest level since 1986.   

Copper declined more than 27% from its March highs and -20% YTD. Over the latter half of June, the copper to gold ratio (chart below), a popular barometer of global economic activity, has broken a 15-month support level and has already retraced most of the parabolic uptrend previously made in Q1 2021. The ratio finished June at its lowest level since February 2021, which favors a bias for continued downward movement.   

The increasingly hawkish Federal Reserve, along with the global “risk-off” price action, led to a 10% gain in the US Dollar Index (DXY). The Euro declined 8% in the 1H vs. the greenback, while the Japanese Yen was down 18%. While most global central banks are tightening monetary policy via rate hikes, the Bank of Japan is an outlier. To the detriment of its currency, the BoJ has implemented yield curve control (YCC) by locking its long rate at 25bps. While the Yen has already depreciated a significant amount, it made a significant technical breakout back in April when it crossed above a 15-year resistance level. From a technical perspective, breakouts from long-term bases signal the start of a new trend that can often be more powerful and longer-lasting than what many would normally expect.   

Corporate Earnings 

Q2 earnings season is on the horizon. Reported earnings and management guidance are likely to have a significant impact on the stock market. According to Factset, 103 S&P 500 companies have provided guidance for Q2, of which 70% have been negative. This compares to the five- and 10-year averages of 60% and 67%, respectively. The earnings growth rate is expected to be 4.3% which would mark the lowest since Q4 2020 (3.8%). Revenue growth is expected to be 10.2% which would mark the sixth consecutive quarter above 10%. However, Q3 and Q4 earnings growth rates are both expected to be above 10%. A key question is whether companies can continue to enjoy the record operating margins seen over the past few quarters. As of June 24th, the forward 12-month PE ratio for the S&P 500 is 15.8, which is below the five- and ten-year averages of 18.6 and 16.9. 

Looking Ahead

There is a great deal of uncertainty for the 2H of 2022 regarding economic growth, earnings growth, inflation, rate hikes, quantitative tightening, the Russian war, and food and energy supplies. While economic measures of inflation are hovering at 40-year highs, market measures have been rapidly falling since early June. The labor market and unemployment are still positive; however, consumer sentiment reached a record low in June. The steep selling initially led by high multiple growth stocks has rotated into the Value, defensive, and commodity groups. It is unclear how sensitive the economy is to rapidly rising rates. The overnight FFR is currently at the 1.50% – 1.75% range. While the bond market is currently pricing an FFR range of 3% – 3.25% by the end of 2022, it is also pricing in a 50bps rate cut in 2023, which implies an increasing risk of recession and a dovish pivot by the Fed. Both commodities and rates are continuing lower starting July, and the 10yr UST Yield hit a low of 2.79%. The big banks kick off earnings season in the next two weeks, and markets will be keenly focused on management’s commentary and guidance.   

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