Wealth Management

As the summer ends and fall rolls around, it’s natural to expect a surge in market volatility. This is even more relevant this year given that stocks have enjoyed a period of low volatility and gently rising prices throughout most of the summer despite a variety of challenges such as rising rates, stubborn inflation, and pockets of weakness in the economy.

 

Further, history shows that periods of sharp increase in rates can often trigger stress in parts of the financial system that can have knock-on effects in the real economy. The most recent example is the crisis in regional banks due to an inverted yield curve which could have negative effects on the flow of credit in the economy.

 

For ETFTrends, Ben Hernandez discusses how direct indexing benefits from these surges in volatility. Direct indexing differs from traditional investing in funds as it allows investors to re-create an index in their portfolio. 

 

This allows tax losses to be harvested as losing positions can be sold with the proceeds re-invested into stocks with similar factor scores. Then, these losses can be used to offset gains in other parts of the portfolio, leading to a lower tax bill. 


Finsum: Direct indexing has many benefits but the most impactful in terms of alpha is its ability to generate tax savings for clients during volatile markets. 

 

Entering 2023, many were expecting a big year for gold due to high inflation, rising recession risk, and considerable amounts of geopolitical turmoil. Yet, this hasn’t come to fruition. Gold prices enjoyed a decent rally in the first-half of the year but has given back the majority of these gains in recent weeks.

 

The most likely culprit is that real interest rates continue to rise as inflation moderates, but the Federal Reserve continues to hike rates. When real rates are rising, gold becomes less attractive as an investment because it offers no return to inventors. However when real rates are negative and/or falling, gold becomes more attractive to own. Thus, the best combination for gold prices would be a weak economy coupled with high inflation. As long as the economy continues to defy skeptics, a breakout for gold prices is unlikely.

 

The metal hit an all-time high of $2,078 in March 2022 following Russia’s invasion of Ukraine when geopolitical tensions culminated. It re-tested these levels in March of this year following the crisis in regional banks when many thought the Fed would have to intervene and possibly cut rates to support the banking system. Since then, prices have declined by about 6%. 


Finsum: Gold prices have stagnated following strong performance in the first-half of the year. Currently, prices are likely going to move lower as long as Treasury yields keep chugging higher.

 

The first-half of the year was defined by stock market strength and bond market wobbliness. In the second-half of the year, we are seeing an inversion of sorts as the bond market has weakened, while the stock market has been giving back recent gains.

 

This is a natural consequence of the market consensus being upended as it’s clear that the Fed is not going to budge from its ultra-hawkish stance for at least the rest of the year, inflation is stickier than expected, and that the economy is resilient enough to continue evading a recession. Treasury yields are also responding with the 2-year note yield reaching 5%, and the 10-year yield breaking out above 4.2%. 

 

Previous instances of Treasuries reaching these levels have resulted in equity weakness as it portends greater stress for banks, housing, and other parts of the economy. However according to Yardeni Research, bond weakness is more driven by a widening federal deficit and a better than expected economy. Another factor is the ‘pricing out’ of pivot in Fed policy from the second-half of this year to later in 2024. 

 

The firm sees the market continuing to rise despite yields remaining elevated and believes the S&P 500 will make new highs next year. 


Finsum: US Treasury yields are rising and leading to a pullback in the stock market. Some of the factors are the resilience of inflation, a stronger than expected economy, and a wider than expected federal deficit.

 

 

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