Tag: securities

Stock rally, rate-cut forecasts face test from Powell testimony and jobs report

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A four-month-long U.S. stock market rally, partly fueled by investors’ expectations for interest rate cuts in 2024 by the Federal Reserve, faces a test posed by pair of big events in the week ahead.

The first is Federal Reserve Chairman Jerome Powell’s semiannual testimony to Congress on Wednesday and Thursday, followed by Friday’s official jobs report for February.

Of the two, the nonfarm payrolls data has the potential to move markets more, given what it could signal about the risk that inflation may keep running hot if job gains come in above the 190,000 consensus expectation, according to analysts and investors.

“Inflation has bottomed out, but is still above the Fed’s objective and it seems like more labor-market weakness is going to be needed,” said John Luke Tyner, a portfolio manager at Alabama-based Aptus Capital Advisors, which manages $5.5 billion in assets. “The headlines we’ve been seeing on technology-related layoffs are missing the mark because there’s a resurgence of employment and wage growth in Middle America.”

January’s data proves the point. The month of February began with the release of January nonfarm payrolls, which showed 353,000 jobs created and a sharp 0.6% rise in average hourly earnings for all employees, despite the highest interest rates in more than two decades.

Then came a round of inflation data. Consumer- and producer-price readings were both above expectations for January, followed by last Thursday’s release of the Fed’s preferred inflation measure, known as the PCE, which showed the monthly pace of underlying price gains rising at the fastest pace in almost a year. Meanwhile, personal income grew at a monthly rate of 1% in January.

Fed-funds futures traders have since pared back their expectations for as many as six or seven quarter-percentage point rate cuts by December, and moved closer in line with the three reductions that the Fed signaled would likely be appropriate. However, this has still been enough to hand the Dow Jones Industrial Average
DJIA
and S&P 500
SPX
their best start to a year since 2019, and fueled a four-month rally in all three major indexes. For the week, the S&P 500 rose 1% and the Nasdaq Composite gained 1.7%, but the Dow Jones slipped 0.1%, based on FactSet data.

Broadly speaking, Powell is expected to stick to his script by emphasizing the need for greater confidence that inflation is falling toward the Fed’s 2% objective, before policymakers can cut the fed-funds rate target from its current range of 5.25% to 5.5%, analysts said. He’s seen as loath to say anything just yet that could move markets or rate expectations.

“Powell needs to avoid doing what he did in November and December, which was to juice the market with a very bullish message suggesting that policymakers might be done with hiking rates and that the next moves would be rate cuts,” Tyner said via phone. “The Fed needs to remain unified about the need to be patient, with no rush to cut rates, and about being data dependent, with the current data pointing toward not cutting until later this year.”

Read: No Fed rate cuts in 2024, Wall Street economist warns investors

Aptus Capital’s strategies rely on the use of options overlays to improve results, and the firm is “well-positioned” to capture both upside and downside moves in the market because of a “disciplined approach on hedges in both directions,” the portfolio manager said.

Others see some possibility that Powell’s testimony to the House Financial Services Committee and Senate Banking Committee produces one of two non-base-case results: He could either push back on expectations around the timing or extent of Fed rate cuts this year, or, on the flip side, hint at the need for maintenance rate cuts because of prospects for softer inflation and economic readings going forward.

The rates market is the mechanism by which financial markets would likely react one way or another to Powell’s testimony and Friday’s nonfarm payrolls report — specifically with trading in fed-funds futures and Secured Overnight Financing Rate futures. Any reaction in the futures market would simultaneously impact longer-term Treasurys and risk assets, according to Mike Sanders, head of fixed income at Wisconsin-based Madison Investments, which manages $23 billion in assets.

Fed officials are not likely to have enough confidence that they’ve won the battle against inflation by June, raising the question of whether markets are overestimating policymakers’ ability to start cutting rates by that month, Sanders said via phone.

“Fed officials are more or less committed to cutting rates when appropriate, but are concerned that if they cut too soon they’ll have sticky inflation,” he said.

“The services side continues to be higher than the Fed wants, with much of the disinflation coming from the goods side,” Sanders said. Inflation dynamics are “still not in balance from the Fed’s perspective, and the services side has to be concerning to policymakers, especially in the face of the personal-income growth we’ve seen. It’s going to be status quo until the Fed knows whether the higher inflation prints seen in January were a one-off or if this continues.’’

Analysts said they are particularly worried about supercore inflation, a measure of core services that excludes housing, which is still running at levels which suggest that the services side of the U.S. economy is firing on all cylinders.

No major U.S. data is scheduled for release on Monday. Tuesday brings January factory orders and ISM service sector activity figures for February.

On Wednesday, data releases include ADP’s private-sector employment report, January readings on wholesale inventories and job openings, and the Fed’s Beige Book report. San Francisco Fed President Mary Daly is also set to speak that day.

Thursday’s data batch includes weekly initial jobless benefit claims, a revision on fourth-quarter productivity, the U.S. trade balance, and consumer-credit figures. Cleveland Fed President Loretta Mester is also scheduled to make an appearance. Friday brings an appearance by New York Fed President John Williams and final consumer-sentiment data for February.

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We can tackle climate change, jobs, growth and global trade. Here’s what’s stopping us

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“We must leave behind established modes of thinking and seek creative workable solutions.”

Another tumultuous year has confirmed that the global economy is at a turning point. We face four big challenges: the climate transition; the good-jobs problem; an economic-development crisis, and the search for a newer, healthier form of globalization.

To address each, we must leave behind established modes of thinking and seek creative workable solutions, while recognizing that these efforts will be necessarily uncoordinated and experimental.

Climate change is the most daunting challenge, and the one that has been overlooked the longest — at great cost. If we are to avoid condemning humanity to a dystopian future, we must act fast to decarbonize the global economy. We have long known that we must wean ourselves from fossil fuels, develop green alternatives and shore up our defenses against the lasting environmental damage that past inaction has already caused. However, it has become clear that little of this is likely to be achieved through global cooperation or economists’ favored policies.

Instead, individual countries will forge ahead with their own green agendas, implementing policies that best account for their specific political constraints, as the United States, China and the European Union have been doing. The result will be a hodge-podge of emission caps, tax incentives, research and development support, and green industrial policies with little global coherence and occasional costs for other countries. Messy though it may be, an uncoordinated push for climate action may be the best we can realistically hope for.

“Inequality, the erosion of the middle class, and labor-market polarization have caused significant damage to our social environment. ”

But our physical environment is not the only threat we face. Inequality, the erosion of the middle class, and labor-market polarization have caused equally significant damage to our social environment. The consequences are now widely evident. Economic, regional, and cultural gaps within countries are widening, and liberal democracy (and the values that support it) appears to be in decline, reflecting rising support for xenophobic, authoritarian populists and the growing backlash against scientific and technical expertise.

Social transfers and the welfare state can help, but what is most needed is an increase in the supply of good jobs for the less-educated workers who have lost access to them. We need more productive, well-remunerated employment opportunities that can provide dignity and social recognition for those without a college degree. Expanding the supply of such jobs will require not only more investment in education and more robust defense of workers’ rights, but also a new brand of industrial policies for services, where the bulk of future employment will be created.

The disappearance of manufacturing jobs over time reflects both greater automation and stronger global competition. Developing countries have not been immune to either factor. Many have experienced “premature de-industrialization”: their absorption of workers into formal, productive manufacturing firms is now very limited, which means they are precluded from pursuing the kind of export-oriented development strategy that has been so effective in East Asia and a few other countries. Together with the climate challenge, this crisis of growth strategies in low-income countries calls for an entirely new development model.

“Governments will have to experiment, combining investment in the green transition with productivity enhancements in labor-absorbing services.”

As in the advanced economies, services will be low- and middle-income countries’ main source of employment creation. But most services in these economies are dominated by very small, informal enterprises — often sole proprietorships — and there are essentially no ready-made models of service-led development to emulate. Governments will have to experiment, combining investment in the green transition with productivity enhancements in labor-absorbing services.

Finally, globalization itself must be reinvented. The post-1990 hyper-globalization model has been overtaken by the rise of U.S.-China geopolitical competition, and by the higher priority placed on domestic social, economic, public-health, and environmental concerns. No longer fit for purpose, globalization as we know it will have to be replaced by a new understanding that rebalances national needs and the requirements of a healthy global economy that facilitates international trade and long-term foreign investment.

Most likely, the new globalization model will be less intrusive, acknowledging the needs of all countries (not just major powers) that want greater policy flexibility to address domestic challenges and national-security imperatives. One possibility is that the U.S. or China will take an overly expansive view of its security needs, seeking global primacy (in the U.S. case) or regional domination (China). The result would be a “weaponization” of economic interdependence and significant economic decoupling, with trade and investment treated as a zero-sum game.

“The biggest gift major powers can give to the world economy is to manage their own domestic economies well.”

But there could also be a more favorable scenario in which both powers keep their geopolitical ambitions in check, recognizing that their competing economic goals are better served through accommodation and cooperation. This scenario might serve the global economy well, even if — or perhaps because — it falls short of hyper-globalization. As the Bretton Woods era showed, a significant expansion of global trade and investment is compatible with a thin model of globalization, wherein countries retain considerable policy autonomy with which to foster social cohesion and economic growth at home. The biggest gift major powers can give to the world economy is to manage their own domestic economies well.

All these challenges call for new ideas and frameworks. We do not need to throw conventional economics out the window. But to remain relevant, economists must learn to apply the tools of their trade to the objectives and constraints of the day. They will have to be open to experimentation, and sympathetic if governments engage in actions that do not conform to the playbooks of the past.

Dani Rodrik, professor of international political economy at Harvard Kennedy School, is president of the International Economic Association and the author of Straight Talk on Trade: Ideas for a Sane World Economy (Princeton University Press, 2017).

This commentary was published with the permission of Project Syndicate — Confronting Our Four Biggest Economic Challenges

More: Biden administration’s antitrust victories are much-needed wins for consumers

Also read: ‘Dr. Doom’ Nouriel Roubini: ‘Worst-case scenarios appear to be the least likely.’ For now.

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These ETF strategies won big in 2023. How one analyst sees them doing next year.

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Hello! This is MarketWatch reporter Isabel Wang bringing you this week’s ETF Wrap. In this week’s edition, we look at ETF strategies that have exploded in popularity in 2023, and whether they will continue to gain momentum in the year ahead.

Please send tips or feedback to [email protected] or to [email protected]. You can also follow me on X at @Isabelxwang and find Christine at @CIdzelis.

Sign up here for our weekly ETF Wrap.

U.S. exchange-traded funds have had a strong 2023, attracting around $580 billion in net inflows with assets climbing to a record $8.1 trillion as of December 27, according to FactSet data.

ETFs tracking the large-cap benchmark S&P 500 index
SPX,
which has risen 24.6% this year, have seen the strongest net inflows in 2023 among the nearly 700 funds MarketWatch tracks, according to FactSet data.

The SPDR S&P 500 ETF Trust
SPY,
the world’s largest and oldest ETF with $493 billion assets under management, has recorded the largest net inflows of over $47 billion this year to date, followed by the Vanguard S&P 500 ETF’s
VOO
$41 billion and the iShares Core S&P 500 ETF’s
IVV
$36 billion over the same period, according to FactSet data. 

In terms of year-to-date performance, technology-related stock funds have shown a remarkable turnaround in 2023 after facing a tumultuous bear market the year before. Some of the ETFs tracking the tech-heavy Nasdaq 100 index
NDX
as well as semiconductor stocks are on pace to finish 2023 with gains of more than 50%, thanks to the rise of the “Magnificent Seven” stocks.

The Fidelity Blue-Chip Growth ETF
FBCG
has jumped 58.7% in 2023 to become the best-performing U.S. fund, excluding ETNs and leveraged products, according to FactSet data. The WisdomTree U.S. Quality Growth Fund
QGRW
is up 56.2% this year, while the Invesco QQQ Trust Series I
QQQ
has risen 55.6% in 2023. Gains in all of these funds were fueled by a massive rally in mega-cap technology stocks such as Apple Inc.
AAPL,
+0.22%
and Nvidia Corp.
NVDA,
+0.21%,
which have surged 49% and 239% this year, respectively, according to FactSet data. 

Will these ETF strategies continue to thrive in 2024? Will others emerge to deliver greater returns next year? Here’s how one CFRA ETF analyst sees things shaping up in the new year. 

Tech-driven growth ETFs will continue to stand out in 2024

The recent strong performance of technology and growth-driven ETFs is likely to continue in 2024, although with higher volatility, according to Aniket Ullal, senior vice president and head of ETF data and analytics at CFRA. 

The table below summarizes the best performing ETF sub-categories in 2023, excluding leveraged and inverse ETFs. The best ETF sectors have featured tech- and growth-related themes like fintech, cryptocurrency, semiconductors, software and the metaverse. “These themes are very likely to continue to have a strong year in 2024,” said Ullal.

SOURCE: CFRA ETF DATABASE, DATA AS OF DECEMBER 18, 2023

One concern for investors is whether ETFs linked to technology sectors can continue to appreciate in 2024. But CFRA’s analysts think that some of the largest tech firms have strong balance sheets and cash flows, so they should be “safe havens” with “a growth tilt” next year.

“Despite the AI-driven recent run-up, the tech sector is still growing into its multiple, and ETFs like the Technology Select Sector SPDR Fund
XLK
do not yet have frothy multiples,” Ullal said in a Friday client note. 

See: ‘Magnificent Seven’ up for another bull run? What to expect from technology stocks in 2024.

Meanwhile, the massive amounts of cash parked at U.S. money-market funds could also keep the bull-market rally chugging along next year.

As of December 20, there was still $5.9 trillion sitting in U.S. money-market funds, according to data compiled by the Investment Company Institute. But given the stock-market rally in 2023 and the “likely pivot” to interest-rate cuts next year by the Federal Reserve, Ullal and his team see investors moving money out of cash-like instruments and migrating back to 60/40 portfolios by increasing their equity exposure next year, he wrote. 

Continued growth in options-based ETFs

ETFs using options-based strategies, such as covered-call ETFs or defined-outcome ETFs, have exploded in popularity in 2023. They have “long-term staying power” in sustaining investor interest in the year ahead, said Ullal. 

Specifically, the largest U.S. covered-call ETF, the $31 billion JPMorgan Equity Premium Income ETF
JEPI,
has seen $13 billion in net inflows so far this year and is among the top-five funds attracting the most capital in 2023, according to FactSet data.

A covered-call ETF, or an option-income ETF, is a fund that uses an options strategy called covered-call writing to generate income through collecting premiums. In a covered-call trade, investors sell a call option on an asset they hold, which gives the buyer of the option the right, not the obligation, to purchase the asset from them at a specified “strike” price on or before a certain date.

When the price of the asset goes down and doesn’t reach the “strike” price before the expiration date, the call option will expire as buyers walk away, but investors could still keep the premium as their payout.

That’s why the covered-call strategy usually performs well in a sideways or choppy market environment, because investors will be compensated for giving up the upside in stocks with a higher options premium. 

More on covered-call ETF: This type of ETF is designed to hedge against volatility and help investors navigate a stormy stock market

Ullal attributed the growing popularity of options-based ETFs to the success of JEPI as well as ETF firms relentlessly expanding their covered-call and buffer-ETF suites in 2023, even though these strategies tend to underperform in a rapidly rising stock market. 

“The flows are probably moderate [in 2024] relative to what we’ve seen so far, but I don’t think the flows will be negative or this category will go away,” Ullal said in a follow-up interview with MarketWatch on Thursday. “What’s happening is there are investors who are willing to trade off or sacrifice some [stock] performance for income or downside protection.” 

With that backdrop, Ullal sees options-based ETF strategies continuing to grow in 2024, though they will be put to the test if the current bull-market trend continues. 

Also see: An ETF that can’t go down? This new ‘buffer’ fund is designed to provide 100% protection against stock-market losses

Emerging-markets ETFs without China-related drag

ETF investors may want to “unbundle” their emerging-market exposure by reconsidering China-related assets in their ETF portfolios, according to Ullal.

Having a high exposure to China in emerging-market holdings was challenging for ETF investors in 2023, as China significantly underperformed other emerging markets this year due to a slower-than-anticipated post-Covid economic recovery, weakness in the country’s property sector and geopolitical tensions with the U.S., Ullal said.

China exposure in two of the most popular emerging-market ETFs, the Vanguard FTSE Emerging Markets ETF
VWO
and the iShares Core MSCI Emerging Markets ETF
IEMG,
stands at 31% and 24.4%, respectively, according to FactSet data. In turn, VWO has risen 8.3% this year, while IEMG has climbed 10.7% in 2023.

Meanwhile, the SPDR S&P China ETF
GXC
has slumped 12.8% year to date, per FactSet data. But the iShares MSCI Emerging Markets ex China ETF
EMXC,
which has no China exposure, has advanced 18.9% over the same period.

One option for investors would be to calibrate their exposure by combining emerging-market ex-China ETFs like EMXC with China-focused ETFs, Ullal said.

Alternatively, investors could construct the EM sleeve of their portfolios with country-specific ETFs, or use active ETFs like the KraneShares Dynamic Emerging Markets Strategy ETF
KEM,
as that fund’s China exposure is dynamically adjusted based on fundamental, valuation, and technical signals, he added.

Rising demand and competition in active bond ETF category 

The U.S. fixed-income ETF sector is dominated by funds passively tracking Treasury bonds like the 10-year Treasury note
BX:TMUBMUSD10Y,
which has seen declining yields lately as discussions around the Fed’s interest-rate path, and a possible pivot to rate cuts, continue to take center stage heading into 2024.

But MarketWatch reported last week that demand for active bond ETFs has picked up, with Vanguard launching two new active bond funds earlier this month. The desire for active bond ETFs among the firm’s clients has grown significantly over the past two years, John Croke, Vanguard’s head of active fixed-income product management, told MarketWatch.

Meanwhile, the firms that dominate the indexed and active bond ETF categories are different, Ullal noted. In the indexed bond ETF category, Vanguard competes with traditional rivals BlackRock and State Street, while in the active bond ETF category where it is now expanding its footprint, Vanguard is competing with managers like JPMorgan, First Trust and PIMCO. 

“This competition will put pressure on the incumbent players, but will be good for investors, and will be an important trend to watch in the next year,” said Ullal.

As usual, here’s your look at the top- and bottom-performing ETFs over the past week through Wednesday, according to FactSet data.

The good…

Top Performers

 %Performance
AdvisorShares Pure U.S. Cannabis ETF
MSOS 		12.7
Amplify Transformational Data Sharing ETF
BLOK 		10.5
SPDR S&P Biotech ETF
XBI 		9.9
ARK Genomic Revolution ETF
ARKG 		8.3
ARK Innovation ETF
ARKK 		6.4
Source: FactSet data through Wednesday, Dec 27. Start date Dec 21. Excludes ETNs and leveraged products. Includes NYSE-, Nasdaq- and Cboe-traded ETFs of $500 million or greater.

…and the bad

Bottom Performers

 %Performance
iMGP DBi Managed Futures Strategy ETF
DBMF 		-2.9
Vanguard Total International Bond ETF
BNDX 		-2.2
iShares 20+ Year Treasury Bond BuyWrite Strategy ETF
TLTW 		-2.1
VanEck BDC Income ETF
BIZD 		-1.2
Vanguard Short-Term Inflation-Protected Securities ETF
VTIP 		-1.2
Source: FactSet data

New ETFs

  • TCW Group filed to convert its TCW Artificial Intelligence Equity Fund TGFTX into the TCW Artificial Intelligence ETF, and is seeking to convert its TCW New America Premier Equities Fund TGUSX into the TCW Compounders ETF, according to the fund’s prospectus filed with the Securities and Exchange Commission on Tuesday.

Weekly ETF Reads



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The Magnificent 7 dominated 2023. Will the rest of the stock market soar in 2024?

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2023 will go down in history for the start of a new bull market, albeit a strange one.

Despite some year-end catch-up by the rest of the S&P 500 index, megacap technology stocks, characterized by the so-called Magnificent Seven, have dominated gains for the large-cap benchmark
SPX,
which is up 23.8% for the year through Friday’s close.

That’s the result of “extreme speculation,” according to Richard Bernstein, CEO and chief investment officer of eponymously named Richard Bernstein Advisors. And it sets the stage for investors to take advantage of “once-in-a-generation” investment opportunities, he argued, in a phone interview with MarketWatch.

MarketWatch’s Philip van Doorn last week noted that, weighting the Magnificent Seven — Apple Inc.
AAPL,
-0.55%
 , Microsoft Corp.
MSFT,
+0.28%,
 Amazon.com Inc.
AMZN,
-0.27%,
 Nvidia Corp.
NVDA,
-0.33%,
 Alphabet Inc.
GOOG,
+0.65%

GOOGL,
+0.76%,
 Tesla Inc.
TSLA,
-0.77%,
 and Meta Platforms Inc. 
META,
-0.20%
— by their market capitalizations at the end of last year, the group had contributed 58% of this year’s roughly 26% total return for the S&P 500, and that’s down from a breathtaking 67% at the end of November.

The chart below shows that the percentage of stocks in the S&P 500 that have outperformed the index in the year to date remains well below the median of 49% stretching back to 1990:


Richard Bernstein Advisors

Meanwhile, the tech-heavy Nasdaq Composite
COMP
has soared more than 40% this year, while the more cyclically weighted Dow Jones Industrial Average
DJIA,
which hit a string of records this month, is up 12.8%.

The narrowness of the rally gave some technical analysts pause over the course of the year. They warned that that it was uncharacteristic of early bull markets, which typically see broader leadership amid growing confidence in the economic outlook.

Bernstein, previously chief investment strategist at Merrill Lynch, sees parallels with the late-1990s tech bubble, which holds lessons for investors now.

The market performance indicates investors have convinced themselves there are only “seven growth stories,” he said. It’s the sort of myopia that’s characteristic of bubbles.

The consequences can be dire. In the 1990s, investors focused on the economy-changing potential of the Internet. And while those technological advances were indeed economy-changing, an investor who bought the tech-heavy Nasdaq at the peak of the bubble had to wait 14 years to get back to break-even, Bernstein noted.

Today, investors are focused on the economy-changing potential of artificial intelligence, while looking past other important developments, including reshoring of supply chains.

“I don’t think anyone is arguing AI won’t be an economy-changing technology,” he said, “ the question is, what’s the investing opportunity.”

For his part, Bernstein argues that small-cap stocks; cyclicals, or equities more sensitive to the economic cycle; industrials; and non-U.S. stocks are all among assets poised to play catch-up.

“I don’t think one has to be overly sexy on this one…it may not make a huge difference as to how you decide to execute and invest” in those areas, he said. “There’s a bazillion different ways to play this.”

Those areas are showing signs of life in December. The Russell 2000
RUT,
the small-cap benchmark, has surged more than 12% in December versus a 4.1% advance for the S&P 500. The Russell still lags behind by a wide margin year to date, up 15.5%, or more than 8 percentage points behind the S&P 500.

Meanwhile, an equal-weighted version of the S&P 500
XX:SP500EW,
which incorporates the performance of each member stock equally instead of granting a heavier weight to more valuable companies, has also played catchup, rising 6.2% in December. It’s now up 11% in 2023, still lagging behind the cap-weighted S&P 500 by more than 8 percentage points.

Bernstein sees early signs of broadening out, but expects it to be an “iterative process.” What investors should be aiming for, he said, is “maximum diversification,” in direct contrast to 2023’s historically narrow market, which reflects investors rejecting the benefits of diversification and taking more concentrated positions in fewer stocks.

To be sure, while the Magnificent Seven-dominated stock-market rally has attracted plenty of attention, it doesn’t mean those individual stocks have been the sole winners in 2023.

“I will say, ‘magnificent’ is in the eye of the beholder,” said Kevin Gordon, senior investment strategist at Charles Schwab, in a phone interview.

The seven stocks that account for such a large share of the S&P 500’s gains do so mostly due to their extremely “mega” market caps rather than outsize price gains. And that’s just, by definition, how market-cap-weighted indexes work, analysts note.

That doesn’t mean the megacap stocks are necessarily the best performers over 2023. While Nvidia, up 243%, and Meta, up 194%, top the list of year-to-date price gainers in the S&P 500, Apple Inc.
AAPL,
-0.55%
is only the 59th best performing stock, with a 49% gain. Combine that with a $3 trillion market cap, however, and Apple proves one of the biggest movers of the overall index.

What was bizarre about the 2023 rally wasn’t so much the megacap tech performance, Gordon said, but the fact that the rest of the market languished to such a degree until recently.

Clarity around the economic outlook and interest rates help clear the way for the rest of the market to play catch-up, he said. Fears of a hard economic landing have faded, while the Federal Reserve has signaled its likely finished raising rates and is on track to deliver rate cuts in 2024.

For stock pickers that didn’t latch on to the few winners, 2023 was brutal. Passive investors who just bought S&P 500-tracking ETFs should feel good.

So why not just chase the index? Bernstein argues that could spell trouble if the megacap names are due to falter. That could make for a mirror image of this year where gains for a wider array of individual stocks is offset by sluggish megacap performance.

Gordon, however, played down the prospect of “binary outcomes” in which investors sell megacaps and buy the rest of the market.

If troubled segments of the economy, such as the housing sector, recover in 2024, investors “could definitely see a scenario where the rest of the market catches up but it doesn’t have to be at the expense of highfliers,” he said.

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‘The high for equities is not in,’ says technical strategist who unpacks the stocks to buy now.

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Siegel argues that bonds, which have been giving stocks the shove, have proven to be a terrible inflation hedge, but investors have forgotten that given it’s 40 years since the last big price shock. “Stocks are excellent long-term hedges, stocks do beautifully against inflation, bonds do not,” he told CNBC on Tuesday.

Don’t miss: ‘Bond math’ shows traders bold enough to bet on Treasurys could reap dazzling returns with little risk

Other stock cheerleaders out there are counting on a fourth-quarter rally, which, according to LPL Financial, delivers on average a 4.2% gain as portfolio managers snap up stock winners to spiff up performances.

Our call of the day from Evercore ISI’s head of technical strategy, Rich Ross, is in the bull camp as he declares the “high for equities is not in,” and suggests some stocks that will set investors up nicely for that.

Ross notes November is the best month for the S&P 500
SPX,
Russell 2000
RUT
and semiconductors
SOX,
while the November to January period has seen a 6% gain on average for the Nasdaq Composite
COMP.
He says if the S&P can break out above 4,430, the next stop will be 4,630 within 2023, putting him at the bullish end of Wall Street forecasts.

In addition, even with 10-year Treasury yields back at their highs, the S&P 500 is still ahead this week and that’s a “great start” to any rally, he adds.

Evercore/Bloomberg

What else? He says “panic bottoms” seen in bond proxies, such as utilities via the Utilities Select Sector SPD exchange-traded fund ETF
XLU,
real-estate investment trusts and staples, are “consistent with a bottom in bond prices,” which is closer than it appears if those proxies have indeed bottomed.


Evercore/Bloomberg

Among the other green shoots, Ross sees banks bottoming following Bank of America
BAC,
+1.14%
earnings “just as they did in March of ’20 after a similar 52% decline which culminated in a year-end rally which commenced in Q4.”

He sees expanding breadth for stocks — more stocks rising than falling — adding that that’s a buy signal for the Russell 2000, retail via the SPDR S&P Retail ETF
XRT
and regional banks via the SPDR S&P Regional Banking
KRE.

The technical strategist also says it’s time to buy transports
DJT,
with airlines “at bear market lows and deeply oversold,” while railroads are also bottoming and truckers continue to rise.

As for tech, he’s a buyer of semiconductors noting they tend to gain 7% on average in November, and Nvidia
NVDA,
-2.88%
has been under pressure as of late. He also likes software such as Microsoft
MSFT,
+0.82%,
Zscaler
ZS,
+0.66%,
MongoDB
MDB,
+0.90%,
Intuit
INTU,
-1.43%,
Oracle
ORCL,
-0.05%,
Adobe
ADBE,
+0.93%,
CrowdStrike
CRWD,
+0.55%
and Palo Alto Networks
PANW,
+1.38%.


Evercore/Bloomberg

“The strong tech will stay strong and the weak will get strong,” says Ross.

The markets

Stocks
SPX

COMP
are dropping, with bond yields
BX:TMUBMUSD10Y

BX:TMUBMUSD02Y
mixed. Oil prices
CL.1,
+1.82%

BRN00,
+1.69%
have pared a stronger rally after a deadly hospital explosion in Gaza City, with Iran reportedly calling for an oil embargo against Israel. Gold
GC00,
+1.84%
has shot up $35.

For more market updates plus actionable trade ideas for stocks, options and crypto, subscribe to MarketDiem by Investor’s Business Daily.

The buzz

Morgan Stanley
MS,
-6.02%
posted a 10% earnings fall, but beat forecasts, with shares down. Abbott Labs
ABT,
+3.12%
is up after upbeat results and aguidance hike and Procter & Gamble
PG,
+2.91%
is up after an earnings beat. Tesla
TSLA,
-0.89%
(preview here) and Netflix
NFLX,
-1.20%
(preview here) will report after the close.

Read: Ford CEO says Tesla, rival automakers loving the strike. He may be wrong

United Airlines shares
UAL,
-7.83%
are down 5% after the airline lowered guidance due to the Israel/Gaza war. Spirit AeroSystems
SPR,
+22.60%
surged 75% after the aircraft components maker announced a production support deal with Boeing
BA,
+0.88%.

Housing starts came short of expectations, with the Fed’s Beige Book of economic conditions coming at 2 p.m. Also, Fed Gov. Chris Waller will speak at noon, followed by New York Fed Pres. John Williams at 12:30 p.m. and Fed Gov. Lisa Cook at 6:55 p.m.

China’s third-quarter GDP rose 4.9%, slowing from 6.3% in the previous quarter, but beating expectations.

Middle East tensions are ratcheting up with protests spreading across the region after a massive deadly blast at a Gaza City hospital, and airports evacuated across France over terror threats. President Biden told Israeli Prime Minister Benjamin Netanyahu that “it appears as though it was done by the other team.”

Read: Treasury says Hamas leaders ‘live in luxury’ as it unveils new sanctions

Best of the web

Bridgewater says the market has entered the second stage of tightening

Why the FDA needs to halt Cassava Sciences’ Alzheimer’s clinical trials

Hail, heat, rot in Italy push France to top global winemaking spot

Attacks across Europe put Islamist extremism back in spotlight

The tickers

These were the top-searched tickers on MarketWatch as of 6 a.m.:

Ticker

 Security name
TSLA,
-0.89% 		Tesla
AMC,
-0.73% 		AMC Entertainment
AAPL,
-0.39% 		Apple
GME,
-1.20% 		GameStop
NIO,
-2.99% 		Nio
AMZN,
-1.10% 		Amazon
PLTR,
-0.59% 		Palantir
MULN,
-0.06% 		Mullen Automotive
TPST,
-11.20% 		Tempest Therapeutics
TTOO,
-8.20% 		T2 Biosystems

Random reads

Loudest purr in the world. Congrats Bella the cat.

Asteroid sample offers window to ancient solar system

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Here’s where ETF investors could turn to hide as Treasurys sell-off upends U.S. stocks

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Hello! This is MarketWatch reporter Isabel Wang bringing you this week’s ETF Wrap. In this week’s edition, we look at how ETF investors can navigate the choppy financial markets which remain on edge after a sell-off in U.S. government bonds drove long-term borrowing costs to the highest level in more than a decade, undercutting stock prices.

Sign up here for our weekly ETF Wrap.

A renewed rout in the U.S. government bond markets that sent the yield on the 10-year Treasury bond to 16-year highs as a new era of higher-for-longer interest rates takes hold, is leaving ETF investors scrambling for the exits on a wide range of exchange-traded funds in the past week, most notably the iShares 20+ Year Treasury Bond ETF
TLT.
 

TLT, one of the most popular fixed-income ETFs that tracks a market-weighted index of the U.S. Treasury bonds with maturities of 20 years or more, earlier this week suffered its lowest close since the early days of the 2007-2009 financial crisis. The yield on the 10-year Treasury 
BX:TMUBMUSD10Y
slipped 2 basis points to 4.715% on Thursday, after reaching 4.801% on Tuesday, its highest closing level since Aug. 8, 2007, according to Dow Jones Market Data.

See: Bond investors feel the heat as popular fixed-income ETF suffers lowest close since 2007

The bond market, particularly the U.S. Treasury market, has historically been less volatile and and has often performed better than other financial assets during economic slowdowns. However, that doesn’t mean bonds don’t come without their own risks.

Rising yields reflect a diminishing price for the securities when interest rates rise, and hit existing holders of Treasuries.

See: Rising Treasury yields are upsetting financial markets. Here’s why.

The surprising strength of the U.S. economy, as demonstrated by this week’s labor-market data, coupled with hawkish talk from Federal Reserve officials indicating the central bank may need to keep tightening monetary policy, have led to the bond sell-off this week.

Meanwhile, a positive Treasury term premium, or the compensation that investors require for the risk of holding a Treasury to maturity, have also contributed to a steep sell-off as a ballooning U.S. budget deficit and the Treasury’s need to issue more debt have pushed Treasury prices to 16-year lows.

TLT
TLT
has fallen over 50% since its peak in August 2020, according to FactSet data. The losses are “pretty much” what the equity-market loss was from peak to trough during the global financial crisis, said Tim Urbanowicz, head of research and investment strategy at Innovator ETFs. 

“It is not insignificant… It really makes you think about how you’re doing risk management because you can’t have the piece of the portfolio that’s supposed to be the risk mitigator falling the worst we’ve ever seen in the equity-market fall. That’s a big issue,” Urbanowicz told MarketWatch. 

That’s why ETF investors have very few options when developing or adjusting their asset allocation play in the higher-for-longer rates environment, but there are still some shockproof assets for safety, according to ETF strategists. 

Ultra short-term bond funds 

ETF investors that still favor bonds can consider hiding in ultra short-term bond funds to avoid duration risk as the Fed may still need to raise interest rates to curb inflation by the end of 2023, said Neena Mishra, director of ETF research at Zacks Investment Research. 

The SPDR Bloomberg 1-3 Month T-Bill ETF
BIL,
which tracks all publicly issued U.S. Treasury Bills that have a remaining maturity of less than 3 months and at least 1 month, offers a yield of 5.43%. The fund attracted over $1 billion of inflows in the week to Wednesday, the largest inflows among over 800 ETFs that MarketWatch tracked in the past week, according to FactSet data. 

Meanwhile, Mishra said investors who want active management with “better navigation to the markets” can consider the JPMorgan Ultra-Short Income ETF
JPST,
which is an actively managed fund that invests in a variety of debts including corporate issues, asset-backed securities, and mortgage-related debt as well as U.S. government and agency debt. JPST recorded $15 million of inflows in the past week and has yielded 5.76%, according to FactSet data. 

Flows into longer duration bonds, utilities sector

Despite the bond rout hitting the popular TLT fund hard as the 10-year Treasury yield surged, some retail traders have already started to buy the historic dip of the fund devoted to longer-dated Treasuries, said a team of Vanda Research data analysts led by Marco Iachini, senior vice president.

TLT attracted a total of $686 million flows in the week to Wednesday, ranking the 8th out of over 800 ETFs that MarketWatch tracked in the past week, according to FactSet data. 

Along with the strong “dip buying” in TLT, retail traders have also poured an “unprecedented amount” of capital into the utilities sector, Iachini and his team said in a Thursday note. The Utilities Select Sector SPDR Fund
XLU
recorded $141 million of inflows last week, according to FactSet data. 

“While purchases of utilities stocks are typically of a significantly smaller scale than purchases of tech stocks, the inflow seen over the past week is far larger than any other prior 5-day stretch, easily surpassing inflows into the sector at the onset of the Covid downturn,” the Vanda team said. “The flip side of this dynamic is that institutional investors have likely lightened up their utilities exposure during this bond sell-off episode, making the sector a potentially more appealing equity bet should rates be nearing a local peak.” 

See: Utilities stocks ‘decimated’ by rising rates fall into uncommon trading territory, Bespoke chart shows

Small-caps are ‘cheap for a reason,’ so don’t buy them too soon

Many small-cap stocks have traded at a significant discount to their larger-company counterparts, creating an attractive entry point for some investors who think the forward price-earnings ratio for small-caps are low enough to offer potential for outperformance in the longer run. 

However, small caps
IWM
are by nature more sensitive to higher interest rates compared with a lot of the larger-cap stocks which have the ability to be “nimble” with strong cash flow, said Urbanowicz.

“It is really important right now not to just rely on a specific sector but really have that built-in risk management at the index level to take a lot of that guesswork out of the equation,” he added.

See: Small-cap ETFs may look attractive as recession concerns fade, but blindly chasing the rally is not without risk

Defined-outcome ETFs

That’s why Urbanowicz and his team at Innovator ETFs think the increasingly popular defined-outcome ETFs, or the “buffer” funds, could limit the downside risk and help investors navigate a stormy rates environment.

See: An ETF that can’t go down? This new ‘buffer’ fund is designed to provide 100% protection against stock-market losses

For example, the Innovator Equity Defined Protection ETF
TJUL,
the “first-of-its-kind” fund, aims to offer investors the upside return of the SPDR S&P 500 ETF Trust
SPY
to a 16.62% cap, as well as a complete buffer against its downside over a two-year outcome period. 

Meanwhile, the Innovator Defined Wealth Shield ETF
BALT
offers a 20% downside buffer on the SPY every three months, which is a “very shortened outcome period” and doesn’t require the equity market to actually go up for the strategy to appreciate a value, Urbanowicz said. 

“A big reason [to consider this strategy] is it gives investors a place to not only maintain equity exposure, but also to hide out because they [funds] have known levels of risk management that are in place,” he added. 

As usual, here’s your look at the top- and bottom-performing ETFs over the past week through Wednesday, according to FactSet data.

The good…

Top performers

 %Performance
YieldMax TSLA Option Income Strategy ETF
TSLY 		6.2
United States Natural Gas Fund LP
UNG 		2.0
Quadratic Interest Rate Volatility & Inflation Hedge ETF
IVOL 		1.6
Technology Select Sector SPDR Fund
XLK 		0.9
ProShares Bitcoin Strategy ETF
BITO 		0.9
Source: FactSet data through Wednesday, October 4. Start date September 28. Excludes ETNs and leveraged products. Includes NYSE, Nasdaq and Cboe traded ETFs of $500 million or greater.

…and the bad

Bottom performers

 %Performance
AdvisorShares Pure U.S. Cannabis ETF
MSOS 		-11.3
Sprott Uranium Miners ETF
URNM 		-10.6
Global X Uranium ETF
URA 		-10.2
VanEck Oil Services ETF
OIH 		-9.2
SPDR S&P Oil & Gas Exploration & Production ETF
XOP 		-9.1
Source: FactSet data

New ETFs

  • J.P. Morgan Asset Management Friday announced the launch of a new actively managed hedged equity ETF, JPMorgan Hedged Equity Laddered Overlay ETF
    HELO.
    The outcome-oriented ETF invests in U.S. large-cap equities with a laddered options overlay designed to provide downside hedging relative to traditional equity strategies.

  • Zacks Investment Management Tuesday announced the launch of the Zacks Small and Mid Cap ETF
    SMIZ,
    which seeks to generate positive risk-adjusted returns by investing in small and mid-cap companies.

  • Calamos Investments LLC Wednesday announced the launch of the Calamos Convertible Equity Alternative ETF
    CVRT,
     the first product of its kind to provide ETF investors with targeted access to equity-sensitive convertibles.

Weekly ETF Reads

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Should I sign up for a hybrid life-insurance and long-term-care policy through work?

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Got a question about the mechanics of investing, how it fits into your overall financial plan, and what strategies can help you make the most out of your money? You can write me at [email protected].  

I keep getting these emails from my company about a new benefit they are offering that is a combination of life insurance and long-term-care insurance. I really want to get long-term-care insurance, but I don’t know if this is a good deal or not. There’s a deadline on this offer, which makes it seem weird to me. It’s not even our open enrollment period. Why do I have to decide so fast about something so important? I didn’t feel like I could ask somebody at my own company for objective advice, but I don’t know who to ask otherwise. What should I do? 

N.C. employee

Dear N.C. employee, 

You’re not the only one asking this question right now. The number of U.S. companies offering a voluntary benefit that combines life insurance with long-term-care insurance has skyrocketed in the past few years. While there’s no official tally of the offers out there, “our activity has gone up 35% this year alone,” says Dan Schmid, vice president of sales for Trustmark Voluntary Benefits, an insurance company that offers hybrid policies. 

A variety of market forces have led the insurance industry to this point, which sounds arcane, but it matters for your decision tree. To decide whether this is a good deal, you have to consider whether a better offer might come along.  

Better offers were certainly available years ago, when many employers offered group policies for stand-alone long-term care with generous benefits, and you could also more readily get coverage as an individual. But the market for this kind of policy imploded because costs were too great for the insurance companies, especially in a low-interest-rate environment. 

In the past few years, the COVID-19 pandemic shifted people’s thinking about future healthcare costs, and legislation is pending across the country — and is already in force in Washington state — to mandate that companies provide this coverage in order to alleviate the burden on Medicare and Medicaid. On top of all that, the economy has changed, and now interest rates are high, along with inflation, which is changing the pricing dynamic. 

To meet demand, insurance companies came up with today’s hybrid offerings. For the employer-sponsored plans, you can typically get coverage up to certain limits without passing any health checks — what’s known as guaranteed-issue in the business. Your spouse or other dependents who qualify will most likely have to go through underwriting, though. 

You pay the premiums out of your paycheck, and you can take the policy with you after you leave the job, so it can stay in force for your lifetime. You build up value as you go. If you should have a long-term-care need, the policy will pay out a monthly amount for a specific time period, like three or five years. Whatever is left at your death goes to your heirs. 

Policies range in price and vary by the age of the enrolled person, but a typical one would cost about $3,700 per year for a woman in her early 50s, with premiums rising over the life of the plan or if you choose to add to the death benefit over time. That would get you up to a $400,000 long-term care benefit, paid at $8,000 a month for 50 months, and a $200,000 death benefit. 

Here’s the big catch: There’s typically no inflation adjustment for the benefit amount. The amount needed for long-term care today is likely to be $400,000 for the typical married couple, notes retirement expert Wade Pfau, who calculated a case study for the upcoming edition of his Retirement Planning Guidebook. 

That $8,000 monthly benefit would seem to meet that need now, but what about in 30 years, when that 50-something woman is in her 80s? The benefit dollar amount stays the same, but inflation could turn her need into $725,000 with inflation of just 2%. And to be honest, even today, $8,000 is unlikely to fully cover a month in an assisted-living facility, which runs more like $12,000.  

“Inflation is a big deal, so you just have to take that into consideration,” says Howard Sharfman, senior managing director at NFP, an insurance brokerage. 

That means if you think your eventual need would be $20,000 a month, you should purchase enough coverage to get there. But to get that bigger policy — which also would likely come with a six-month exclusion for pre-existing conditions — you will exceed the guaranteed-issue threshold and would have to pass the medical tests. And in any case, you probably wouldn’t even find a policy that offers that level of benefit. 

Should you take what you can get? 

The hard-sell pitch for hybrid long-term-care policies is literally this: Something is better than nothing. And the decision is on a deadline because companies have found that motivates people to act. 

It could very well be true that something is better than nothing. 

“For some people, it’s going to be outstanding, because they’ll put in money and never need the benefit and their heirs will get a death benefit,” says Jesse Slome, director of the American Association for Long-Term Care Insurance. “For a more significant number of people who buy it and need long-term care, the benefit will be sufficient. They’ll make do and manage with that.”

The alternative is self-funding, which makes sense mathematically but perhaps not behaviorally. Take the pricing example of the 50-year-old paying $3,700 a year for 30 years, not counting premium increases. If you took that amount and invested it yearly, you’d have $153,000 after 20 years at 7% returns. That’s nearly the policy life insurance benefit. Add another 10 years to that — presuming you wouldn’t need long-term care until you hit 80 — and you’d have a nest egg of nearly $350,000. 

“If you invested that amount in a diversified portfolio, you could probably expect to get a higher return than through an insurance product,” Pfau says. 

The truth, however, is that people may not do that, and so the death benefit in a hybrid policy acts as a kind of forced savings and investment plan, where you get back what you put in, plus a little interest. 

“There can be some psychological benefits to having some coverage,” Pfau notes. 

Will something better come along? 

It’s not hard to imagine that the industry might find other ways of delivering a long-term-care benefit to consumers who desperately need it, without bankrupting the companies that provide the insurance. 

Already some companies are experimenting with different kinds of hybrid offerings — like John Hancock, which also bundles wellness programs into its policies. 

And people are beginning to think differently about why you get long-term-care insurance — it’s less about a return on investment and more about protecting the next generation. “Insurance works best when it’s low probability, low cost. With long-term care, it’s not a low probability. There’s a good shot you’ll use the benefits, which makes it very expensive to get,” says Pfau. 

So should you take your company’s offering? At the end of the day, it only matters that you understand the need that’s coming and try to find a way to save for it, whether it’s through an insurance policy or by saving on your own. If you feel too rushed, then wait and see what comes next.

More from Beth Pinsker

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‘Own what the Mother of All Bubbles crowd doesn’t.’ This market strategist expects stagflation and is investing for it now.

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There’s always a bull market somewhere — if you can find it.

Keith McCullough encourages investors to join him in the hunt. You’ll need to be agnostic and open-minded, the CEO of investment service Hedgeye Risk Management says. If you’re wedded just to U.S. stocks, or the market’s latest darlings, you’re setting yourself up for disappointment — particularly in the hostile environment McCullough sees coming.

This coming challenge for U.S. stock investors, in a word, is stagflation, McCullough says. Stagflation — higher inflation plus slow- or no economic growth — is hardly a bullish outlook for stocks, but McCullough’s investment process looks for opportunties wherever they may be. Right now that’s led him to put money into health care, gold, Japan, India, Brazil and energy stocks, among others.

In this recent interview, which has been edited for length and clarity, McCullough takes the Federal Reserve and Chair Jerome Powell to the woodshed, offers a warning about the potential fallout from Powell’s upcoming speech at Jackson Hole, Wyo., and implores investors to discount happy talk and always watch what they do, not what they say.

MarketWatch: When we spoke in late May, you criticized the Federal Reserve for being obtuse and myopic in its response to inflation and, later, to the threat of recession. Has the Fed done anything since to give you more confidence?

McCullough: The Fed forecast of the probability of recession should be trusted as much as their “transitory” inflation forecast or a parlor game. People should not have confidence in the Fed’s forecast. The “no-landing” or “soft-landing” thesis is looking backwards. The Fed is grossly underestimating the future, doing what they always do, in looking at the recent past.

Their policy is wed to what they say. They claim they’re not going to cut interest rates until they get to their target. But any hint of the Fed arresting the tightening gives you more inflation. So there’s this perverse relationship where the Fed is the catalyst to bring back the inflation they’ve spent so much time fighting. 

Read: ‘The Fed is way late and they’ve already screwed it up.’ This stock strategist is banking on gold, silver and Treasurys to weather a recession.

MarketWatch: U.S. Inflation has come down quite signficantly over the past year. Doesn’t that show the Fed is well on the way to achieving its 2% target?

McCullough: A lot of people are peacocking and declaring victory over inflation when we’re about to have reflation that sticks. We have inflation heading back towards 3.5% and staying there.

Our inflation forecast is that it’s set to reaccelerate in the next two inflation reports, which will lead to another rate hike in September. The Fed’s view is that until they get to the 2% target they’re not done. A lot of people are really confident because inflation went from 9% to 3% that it’s getting closer to 2%, therefore the Fed is done. Given what Fed Chair Jerome Powell said, the next two inflation reports are critical in determining whether we hike rates in September. I think maybe even one in November. This is a major catalyst for the next leg down in the equity market.

The Fed is going to see inflation go higher, and they’ve already articulated to Wall Street that no matter what happens, that should constitute a rate hike. That’s a policy mistake. They’re going to continue to tighten into a slowdown. When the Fed tightens into a slowdown, things blow up.

MarketWatch: By “things blow up,” you mean the stock market.

McCullough: I don’t think the Fed cuts interest rates until the stock market crashes. The Fed is going to be tightening when the U.S. economy and corporate profits are at a low point, going into the fourth quarter. It’s not dissimilar from 1987 where all of a sudden a market that looked fine got annihilated in very short order. There are a lot of similarities to 1987 now; the market’s quick start in January, people in love with stocks. That’s a catalyst for the stock market to crash.

When the Fed has an inconvenient rule, particularly for the U.S. stock market, they just move the goal posts or change the rule. If they actually started to cut interest rates, inflation would go up faster. This is exactly what happened in the 1970s and what Powell explains is the risk of going dovish too soon – that he becomes [much-criticized former Fed chair] Arthur Burns. That’s why you had rolling recessions in the 1970s; the Fed would go dovish, devalue the U.S. dollar
DX00,
-0.21%,
and the cost of living for Americans would reflate to levels that are prohibitive.

People can’t afford reflation at the gas pump, or in their health care. It’ll be fascinating to see how Powell pivots from fighting for the people to bailing out Wall Street from another stock market crash, which will therein create the next reflation.

“ ‘The Federal Reserve has set the table for a major event in the U.S. stock market and the credit market.’”

MarketWatch: Speaking of a Powell pivot, the Fed chair speaks at Jackson Hole this week. Last year he put markets on notice for rate hikes. What do you think he’ll say this time?

Powell’s going to see inflation accelerating. I think Jackson Hole is going to be a hawkish meeting. That might be the trigger for the stock market.

Take the bond market’s word for it.  The bond market is saying the Fed is going to remain tight and seriously consider another rate hike in September. The reasons why markets crash in October during recession is that the fourth quarter is when companies realize that there’s no soft landing and they need to guide down.

The Federal Reserve has set the table for a major event in the U.S. stock market and the credit market. We’re short high-yield and junk bonds through two ETFs: iShares iBoxx $ High Yield Corporate Bond
HYG
and SPDR Bloomberg High Yield Bond
JNK.
 On the equity side the best thing is to short the cyclicals; I would short the Russell 2000
RUT.

MarketWatch: What’s your advice to stock investors right now about how to reposition their portfolios?

McCullough: Own what the “Mother of All Bubbles” crowd doesn’t. The things we’re most bullish on include gold
GC00,
+0.21%.
 The Fed is going to keep short term rates high and both the 10 year and 30 year go lower. Gold trades with real interest rates. I think gold can go a lot higher, towards 2,150. Our ETF for gold is SPDR Gold Shares
GLD.

Also, you can be long equities and not take on the heart-attack risk that is the U.S. stock market. I’m long Japanese equities — ETFs for this include iShares MSCI Japan
EWJ
and iShares MSCI Japan Small-Cap
SCJ.

We’re long India with iShares MSCI India
INDA
and iShares MSCI India Small-Cap
SMIN.
Both Japan and India are accelerating economically. Were also long Brazil iShares MSCI Brazil
EWZ,
which is weighted to energy. We are bullish on energy. 

MarketWatch: Clearly accelerating inflation and slowing economic growth is an unhealthy combination for both investors and consumers.

McCullough: What I’m looking for, with inflation reaccelerating, is stagflation.

Stagflation pays the rich and punishes the poor. You want to be the landlord. The prices of things people own are going to go up, and the prices of things you need to live are also going to go up. So for example, we are long energy, uranium and timber as stagflation plays. ETFs we’re using for that include Energy Select Sector SPDR
XLE,
Global X Uranium
URA,
and iShares Global Timber & Forestry
WOOD.

One positive thing that happens from stagflation is that because it’s so hard to find real consumption growth, there’s a premium on the growth you can find.

If there is something that actually accelerates, then those stocks will work, which puts a nice premium on stock picking. You can be long anything that is accelerating because so many things are decelerating. So avoid U.S. consumer, retailers, industrials and financials, which are all decelerating. Health care is our favorite sector, which we own through the ETFs Simplify Health Care
PINK
and SPDR S&P Health Care Equipment
XHE.

Instead, people are betting we’re going to go back to some crazy AI-led growth environment. Now everyone thinks everything is AI and rainbows and puppy dogs. I’m old enough to remember we were in a banking crisis in March. From an intermediate- to longer-term perspective, I don’t know why you wouldn’t want to protect yourself until this inflation cycle plays out.

Also read: Jackson Hole: Fed’s Powell could join rather than fight bond vigilantes as yields surge

More: Will August’s stock-market stumble turn into a rout? Here’s what to watch, says Fundstrat’s Tom Lee.

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You can still run with the stock market’s bulls, but watch the exits

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The stock market, as measured by the S&P 500 Index
SPX,
-0.64%
), has been moving upward. The U.S. benchmark index is essentially crawling up the higher “modified Bollinger Bands” (mBB), which is a bit of an overbought condition, but not a sell signal.

The next major resistance appears to be in the 4650 area, which at one time seemed far away but is now within range. There is minor support at 4527 (last week’s lows), with stronger support below that, at 4440, 4385, 4330 and 4200. Given the strong upward momentum of the market, a couple of those could be violated without giving the bull market any problem, but a fall below 4330 would be a game changer.

The S&P 500 has recently closed above the +4σ mBB, which sets up a “classic” sell signal. That “classic” signal was generated on Thursday when SPX closed below the +3σ Band — 4560. But we do not trade the “classic” signals, preferring to wait for the further confirmation of a McMillan Volatility Band (MVB) signal. Just because a “classic” sell signal has occurred does not mean that a MVB sell signal will automatically follow. We will keep you up to date on these developments weekly.

Equity-only put-call ratios have continued to edge lower as stocks have risen. This means that the put-call ratios are still on buy signals, but they are in deeply overbought territory because they are so low on their charts. The computer programs that we use to analyze these charts are once again warning of a sell signal, but we prefer to wait until we can visibly see the ratios begin to rise before taking on any negative position based on these ratios. Despite the fact that these ratios are at lows for the last year or so, it should be noted that they were much lower all during the 2021, as that bull market was pressing forward, and eventually gave way to a bear market.

Market breadth has been generally positive. Both breadth oscillators are on buy signals and are in overbought territory. They could withstand a day or two of negative breadth and still remain on those buy signals. Perhaps more importantly, cumulative volume breadth (CVB) is approaching what could be a major buy signal. If CVB makes a new all-time high, then SPX will follow. CVB is within just a small distance of its all-time high and could attain that today. Doing so would mean that an upside target of 4800+ would be in force for SPX.

New Highs on the NYSE continue to dominate New Lows, so this indicator remains strongly positive for stocks.

VIX
VIX,
+9.25%
is languishing between 13 and 14. As long as this continues, stocks can rise. The only time problems would surface would be if VIX spurted higher. So far, that hasn’t happened. It appears that “big money” still has some fear of this market, so they are buying SPX puts, keeping VIX a bit elevated. It should also be noted that VIX normally makes its annual low in July and begins to rise in August. So that is a potentially negative seasonal factor on the horizon.

The construct of volatility derivatives remains bullish for stocks, since the term structures of both the VIX futures and of the CBOE Volatility Indices continue to slope upwards.

Overall, we are maintaining our “core” bullish position because of the bullish SPX chart. We are raising trailing stops and rolling deeply in-the-money calls upward as we go along. Eventually, we will trade other confirmed signals around that “core” position.

New recommendation: Potential CVB buy signal

We made this recommendation last week and recommended using the cumulative total of daily NYSE advancing volume minus declining volume as a guide. That cumulative total did reach our projected value as of July 26. In reality, the “stocks only” CVB ended just shy of a new all-time high. We are going ahead with the recommendation, since the way that we stated it last week did generate the buy signal.

Buy 4 SPY Sept (29th) 480 calls: Since CVB reached a new all-time high, we are going to buy SPY
SPY,
-0.66%
calls with a striking price equal to SPY’s all-time high. We will hold without a stop initially.

New Recommendation: Emerging markets ETF (EEM)

There has been a high-level buy signal generated from the weighted put-call ratio for the Emerging Markets ETF
EEM,
-1.23%.
Put buying has been extremely strong for more than a month and is now is abating. This has generated the buy signal.

Buy 5 EEM Oct (20th) 41 calls in line with the market

We will hold these calls as long as the EEM weighted put-call ratio remains on a buy signal.

Follow-up action: 

We are using a “standard” rolling procedure for our SPY spreads: in any vertical bull or bear spread, if the underlying hits the short strike, then roll the entire spread. That would be roll up in the case of a call bull spread, or roll down in the case of a bear put spread. Stay in the same expiration and keep the distance between the strikes the same unless otherwise instructed. 

Long 800 KOPN: 
KOPN,
-4.76%
The stop remains at 1.70.

Long 2 SPY Aug (4th) 453 calls: This is our “core” bullish position. The calls have been rolled up three times. Stop out of this trade if SPX closes below 4330. Roll up every time your long SPY option is at least 6 points in-the-money.

Long 1 SPY Aug (4th) 453 call: Bought in line with the “New Highs vs. New Lows” buy signal. The calls have been rolled up three times. Stop out of this trade if, on the NYSE, New Lows outnumber New Highs for two consecutive days. Roll up every time your long SPY option is at least 6 points in-the-money.

Long 2 PFG Aug (18th) 80 calls: This position has been was rolled up twice. We will hold this PFG
PFG,
-1.07%
position as long as the weighted put-call ratio remains on a buy signal.

Long 10 VTRS
VTRS,
-1.43%
August (18th) 10 calls: The stop remains at 10.15. 

Long 5 CCL
CCL,
+3.23%
Aug (18th) 17 calls: Raise the stop to 17.10.

Long 2 PRU
PRU,
-0.46%
Aug (18th) 87.5 calls: We will continue to hold these calls as long as the weighted put-call ratio remains on a buy signal.

Long 8 CRON
CRON,
-1.66%
Aug (18th) 2 calls: Hold these calls without a stop while takeover rumors play out.

Long 6 ORIC
ORIC,
-9.06%
Aug (18th) 7.5 calls: The stop remains at 7.40.

Long 2 EW
EW,
-9.78%
Aug (18th) 95 puts: Continue to hold these puts as long as the weighted put-call ratio remains on a sell signal.

All stops are mental closing stops unless otherwise noted.

Lawrence G. McMillan is president of McMillan Analysis, a registered investment and commodity trading advisor. McMillan may hold positions in securities recommended in this report, both personally and in client accounts. He is an experienced trader and money manager and is the author of the best-selling book, Options as a Strategic Investment. www.optionstrategist.com

©McMillan Analysis Corporation is registered with the SEC as an investment advisor and with the CFTC as a commodity trading advisor. The information in this newsletter has been carefully compiled from sources believed to be reliable, but accuracy and completeness are not guaranteed. The officers or directors of McMillan Analysis Corporation, or accounts managed by such persons may have positions in the securities recommended in the advisory. 

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‘I’m 62 and ready for my golden years’: I’ve $1.7 million in annuities, Roths and index funds. Can I afford to never work again?

Post By Stock , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

I’m going to preface this by saying that I know I am in a great long-term position. It’s the short term that is of concern.

I am 62, single with no dependents. I own my smallish home outright and it’s worth $1 million due to the location. I own my car outright and I have no debt. My IRA and small Roth accounts have about $350,000 with an additional $840,000 in two guaranteed-income deferred annuities rolled over from a couple old 401(k)s in 2020. There’s $520,000 in my regular brokerage accounts (mostly Vanguard Index funds). I have $42,000 invested in two eReits and $10,000 in Series I Bonds. I have $71,000 in a higher-yield savings account and $12,000 in a checking account.

I had always planned to retire at 65 and live off my savings until filing for SSI between 67 and 70 (approx $3,400 to $4,100, depending on when I file). A year ago at 61, I abruptly quit a good-paying new job due to a bad work environment, and a week later, my elderly parent had a serious medical issue. I decided to take time off to help navigate care, and just be present — without all of the stress of a pretty demanding job. A year after quitting, I figured out that I have no desire to go back to what I was doing and, quite frankly, have to desire to work at all! 

“‘I’m not afraid of running out of money long term. It’s the next 5 to 7 years that are really causing me heartache.’”

So here (finally) is my concern. My expenses are at least $3,000 per month give or take. Given what I have in savings and no plans to file for Social Security Insurance for at least five years, what do I continue to live on, especially if I don’t go back to work? I most likely have some house expenses (new roof, garage door, etc.) in the near future, plus, I want to travel sooner than later so $71,000 won’t last that long especially with this inflation. Do I sell off some of my mutual fund shares to boost my savings? 

At some point (most likely in the next two years) there may be about $75,000 of inheritance, but I’m not factoring that into the equation for now. I think I’ve done almost everything right, and I’m ready for my golden years. I’m not afraid of running out of money long term. It’s the next five to seven years that are really causing me heartache. What are your thoughts?

Short-term Angst

Dear Angst,

Life is short, but we all hope for a long retirement, and it’s easy to lose sight of what’s important when we are “nose-down” in the rat race. We only have one life, and most of us, if we’re lucky, have two parents and/or sometimes one good parent. If we are blessed with one or both, it’s a gift if we can afford to take that time with them, especially if they have pressing medical issues. Thankfully, you had planned ahead, and you were able to do just that.

Many people reevaluated their relationship to work in recent years. You did so because you became a caretaker. The most fortunate among American workers were allowed to work from home from 2020, and where their work was the umbrella that protected their financial life and gave them the funds to live their life, by the end of the pandemic, that umbrella became their life which gave them the ability to work. It’s a profound change.

I’m going to take a wild guess here — well, not so wild — and say that a lot of people are reading your letter with their mouths agape, with not a small amount of envy. Some may see a touch of humble bragging to your financial achievements, but you acknowledge that you are in a healthy financial position, and have endeavored to do everything right. That, I’m sure, involved sacrifices along the way. So bravo to you. From a gratitude point of view, your financial list is a good one.

There are a couple of wrinkles, which may be useful for others to be aware of. Robert Seltzer, founder of Seltzer Business Management in Los Angeles, said he would not recommend a client to roll their 401(k)s into annuities due to their higher fees and lack of flexibility. Without working, your only taxable income would be derived from retirement account distributions and investment income — but if your taxable income is less than $41,675, therefore, you would pay no capital gains tax. 

Is it a good time to liquidate some stocks? You’ve played the long game. The S&P 500
SPX,
-0.29%
is up 2.7% over the past year; many people close to retirement have been spooked by stock-market volatility since 2020, but the S&P has increased more than 30% since the last trading session of 2019 — before the pandemic. Assuming you’ve been investing for the past three decades or more, and have experienced the miracle of compounding over that time, the time to enjoy your life is nigh. 

“‘Assuming you’ve been investing for the past three decades or more, and have experienced the miracle of compounding over that time, the time to enjoy your life is nigh. ‘”


— The Moneyist

Something to consider as you age: “As you transition from the accumulation stage of life to the distribution stage, it is important to recognize that your risk tolerance is changing,” says Mel Casey, a senior portfolio manager at FBB Capital Partners. “If the brokerage account index funds are all in stock funds, this should be addressed. A rebalancing over time to reduce stocks and increase bonds may lower the risk and prepare the account for eventual distributions.”

Meet with a financial adviser and work out your short- and long-term needs: what your income looks like before and after you tap your Social Security benefits. The good news is you have a healthy income awaiting you when you finally start drawing down money from your retirement accounts. It helps enormously that you have paid off your home — property taxes, insurance, food prices, car payments, gas, health insurance, etc. notwithstanding.

About that health insurance. No doubt you are already aware that this will be an extra expense before you qualify for Medicare at age 65. The average annual health-insurance premium for 2022 was $7,911 for single coverage, up slightly from $7,739 in the prior year, according to KFF, formerly known as the Kaiser Family Foundation, a nonprofit headquartered in San Francisco, Calif. (You can read more about signing up for Medicare and what it will cost here.)

Casey also has thoughts on healthcare costs as you get older. “You have three years until you can apply for Medicare and that will be an important time in terms of choosing the appropriate path,” he says. “In the meantime, some form of health insurance is advisable, if only to eliminate the ‘tail risk’ of a serious injury or illness which could erode this healthy savings very quickly.”

Withdrawing money for retirement

You could cover a substantial part of your expenses from your brokerage account and Roths ($870,000) or annuities ($840,000). While you have done a great job in growing long-term assets, there are relatively few liquid, short-term assets (emergency reserves), says Randall Watsek, financial adviser with Raymond James. “For someone in retirement without earned income to draw on for living expenses, having at least five years of reserves might greatly lower their stress level,” he adds.

Ideally, you want to take Social Security between 67 and 70. “From an average life expectancy basis, it works out roughly the same, whether you take Social Security at 62 or 70,” Watsek says. “You get more small payments if you take it earlier, or fewer large payments if you take it later. It makes most sense to delay Social Security if you have a family history of living into your 90s or 100s or if you’re still working.”

But if your parents have a history of living a long life, and you currently have good health, Seltzer said he would be open for more discussion about what age you should start claiming Social Security, and he would explore whether you are comfortable waiting until you reach 67 or 70 years of age. (This would warrant further discussion with your own financial adviser, and you can reevaluate your position every 12 months.)

As my colleague Alessandra Malito points out, help comes in many forms: financial consultant, wealth manager and investment adviser. Choose a fiduciary who is required to act in your best interests (rather than giving you advice with one eye on your needs and another eye on their commissions). In order to become a certified financial planner or CFP, you must complete a certificate or degree program, 6,000 hours of related experience and have passed an exam. 

“Broker-dealers are advisers who primarily sell securities and often charge commissions on their recommendations. Commissions aren’t inherently bad, but clients should understand what they’re being charged for and feel comfortable with those fees before proceeding with the advice,” Malito writes. Certified public accountants, chartered life underwriters, certified employee benefit specialists respectively deal with accounting, life insurance and benefits.

“The rule of thumb for taking distributions during retirement is 4%,” Seltzer added. “If you took a very conservative distribution rate of 3%, it would amount to $52,500 which is almost 50% higher than your expenses of $36,000. So, by living off of a mix of savings, distributions from the annuities and capital gains from your brokerage account, you should meet his cash-flow needs with paying very little tax.”

You’re doing just fine. Your $75,000 inheritance will also give you some freedom for the next year or two, and help you get over the finish line. If you travel, think about Airbnb-ing
ABNB,
+1.69%
your home, which would cover your accommodation costs. It may also encourage you to try living in a place for a month or more. As a cardiologist might tell a patient when they’re putting them on medication for the first time, “Start low, go slow.” Take your time. Don’t make any big decisions.

As one member of the Facebook
META,
-0.50%
Moneyist Group said, “If you’re a man please marry me!” I’ll leave that with you with God’s and your fiduciary’s blessings.

“Assuming you’ve been investing for the last three decades or more, and have experienced the miracle of compounding over that time, the time to enjoy your life is nigh.”


MarketWatch illustration

Readers write to me with all sorts of dilemmas. 

You can email The Moneyist with any financial and ethical questions related to coronavirus at [email protected], and follow Quentin Fottrell on Twitter.

By emailing your questions, you agree to have them published anonymously on MarketWatch. By submitting your story to Dow Jones & Co., the publisher of MarketWatch, you understand and agree that we may use your story, or versions of it, in all media and platforms, including via third parties.

Check out the Moneyist private Facebook group, where we look for answers to life’s thorniest money issues. Readers write to me with all sorts of dilemmas. Post your questions, tell me what you want to know more about, or weigh in on the latest Moneyist columns.

The Moneyist regrets he cannot reply to questions individually.

More from Quentin Fottrell: 

‘He’s content living paycheck to paycheck’: My husband won’t work or get a driver’s license. Now things have gotten even worse.

My wife wants us to spend $5,000 to attend her cousin’s destination wedding. I don’t want to go. Am I being selfish?

‘I feel used’: My partner stays with me 5 nights a week, even though he owns his own home. Should he pay for utilities and food? 



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#ready #golden #years #Ive #million #annuities #Roths #index #funds #afford #work