Energy stocks went through a long, rough period leading into 2021. Since 2014, the whole sector has been maligned by low prices and sluggish demand. Renewable energy had stolen a lot of attention and funding and the traditional energy sector languished. However, a unique set of economic circumstances means it may be the right time to get back into energy. Oil prices have been rising strongly (a good inflation hedge), which is a nice catalyst, but almost more importantly, higher interest rates—which are clearly on the horizon—are a big headwind for renewables. Renewable energy projects take a great deal of financing and a long time to set up, which means higher rates increase costs and slow down financings.
FINSUM: Energy seems to be getting back in vogue, that said, the rise of ESG standards in debt financing might mean traditional energy projects also suffer.
The Biden Admin has been tip-toeing around crypto regulation since it came into office, but now those public statements are actually materializing in the form of regulation. A top town security memorandum is expected to come down the pipes in the next few weeks which will task separate government agencies to develop regulatory policies around crypto, NFTs, and stable coins. The State Department, Treasury Department, National Economic Council, Council of Economic advisors, and White House Security Council will all be on the job. While the Whitehouse will avoid regulatory suggestions they are putting the burden on these agencies to propose stricter rules.
FINSUM: Crypto regulation isn’t necessarily bad; it's just another closer step toward legitimizing digital currencies in the eyes of countries around the globe.
Direct and custom indexing are all the rage right now and many companies are racing to provide lower fees and smaller minimums. The most advantageous part of direct indexing is its goldilocks solution when it comes to fees, but particularly the active/passive debate mashup. The most talked-about advantage to custom indexing is tax-loss harvesting in the portfolio, but there could be a larger advantage: sectoral macro factors. The Fed is quickly planning on hiking rates which will adversely affect technology stocks, with a custom index you can add/drop targeted sectors that are facing financial headwinds due to policy changes.
FINSUM: This is a nice way to leverage the tailored portfolio that you can get from custom indexing.
New survey data is out regarding how investors are utilizing fixed income ETFs and how they are represented in a portfolio. In 2021 Fixed income represented about 18% of global ETF assets under management, and many investors plan on increasing their use going forward. The number one purpose for fixed income ETFs was for liquidity management as 83% of surveyors use them in this way. However, transition management, derivative complementarity, and tactical adjustments were also highly cited reasons for their use. Many draw on fixed income ETFs for liquidity purposes, and this is particularly evident in the bid-ask spreads. Relative to their underlying securities ETF spreads for HYG were 48x smiler than the underlying assets.
FINSUM: It's clear investors aren’t terribly worried about lower yields and rising interest rates, these ETFs are giving freedom and flexibility in investors’ portfolios.
Many investors and lots of market data suggested that interest rate hikes to the federal funds rate were coming at this last FOMC meeting. However, the Fed made a minor splash by withholding on hiking interest rates, but almost guaranteeing them in march. Higher borrowing costs will come in large part due to rising inflation and running a very tight labor market. Powell said this latest economic expansion varied drastically from the previous with significant growth and higher inflation. Powell also signaled that the Fed will soon begin to unwind the balance sheet as they raise rates. Treasury yields were already on the rise after the Feds statement and stocks ended in losses on the news too.
FINSUM: When the rate hikes come they most likely only happen on the Feds March, June, September, and December meetings because the Fed views its large ‘Summary of Economic Projections as critical to their forward guidance policy.