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Bad Breadth: Whiff of danger as market gains lack scope

Even before Monday’s swoon _ the worst day for stocks on Wall Street in a couple months _ the market was flashing concerning signalsBy STAN CHOE AP Business WriterJuly 22, 2021, 2:47 PM• 3 min readShare to FacebookShare to TwitterEmail this articleNEW YORK — Even before Monday’s swoon — the worst day for stocks on Wall Street in a couple months — the market was flashing concerning signals.Chief among them were sharp moves in the bond market that indicated worsening expectations for economic growth and inflation. Critics also noticed that a dwindling number of stocks was driving the broad market’s rise toward more records.From June 1 through July 16, the S&P 500 climbed nearly 3% and set more than a dozen records along the way. But during that span, 57% of stocks in the S&P 500 fell. They lost an average of roughly 7%, mirror the average gain of the stocks in the index that rose.Strategists at Morgan Stanley call the narrowing leadership in the U.S. stock market “bad breadth,” and they say it’s a sign the market’s run is moving from the early days of its cycle to the middle.Banks, airlines and other industries that depend on a strong economy to thrive were among the losers as doubts crept into the market that the economy could fulfill investors’ lofty predictions.That’s in sharp contrast to the first five months of the year, when 87% of stocks in the S&P 500 rallied and the index rose 11.9%. It’s a concept that market watchers call “breadth,” and they say it’s a healthy sign when many stocks are lifting the market.What’s driving the broad market higher this summer are the relatively few most influential stocks. Apple, Microsoft and other Big Tech stocks all rallied powerfully through June and July, for example, in part because investors expect them to grow almost regardless of the economy’s overall strength.Because they’re so massive, and because the S&P 500 gives more weight to movements by stocks with larger valuations, gains for these Big Tech stocks are masking weakness across much of the rest of the market.American Airlines, Delta Air Lines and United Airlines all lost at least 16% from June 1 through July 16, for example, as worries mounted about slowing economic growth. But to get to the size of one Apple, you would have to combine all three airlines — and multiply that by more than 45 times. Apple stock rose 17.5% from June through mid-July.To be sure, measures of breadth in the S&P 500 are still above their average levels for the past few decades.But breadth has nevertheless narrowed sharply from earlier this year, marking an inflection point for the market. And looking at stocks beyond the S&P 500, which only includes the biggest U.S. companies, accentuates the divergence.While the S&P 500 is still within a few percent of its July 12 record high, the smaller stocks in the Russell 2000 have been scuffling since hitting a peak in March. As of Monday they’d fallen nearly 10% from that high.Stocks from emerging markets have also struggled as the pandemic worsens in many countries due to the delta variant. The MSCI Emerging Markets index, which includes stocks from Brazil, China, India and other developing economies, has been bouncing up and down for months after falling more than 10% from its peak set in February.Strategists at Morgan Stanley say the bull market’s deteriorating breadth seems to be foreshadowing a sharp slowdown in corporate profits and an “economy that may feel worse than most are expecting.”

As stock prices peak, markets begin to fear looming threats

As stock prices peak, markets begin to fear looming threats

NEW YORK — With the U.S. economy humming, corporate profits flowing and stock prices peaking, investors on Wall Street are beginning to pose an anxious question: Is it all downhill from here?Financial markets are always trying to set prices now for where the economy and corporate profits are likely to be in the future. And even though readings across the economy are still at eye-popping levels, investors see some areas of concern.New variants of the coronavirus are threatening to weaken economies around the world. Many of the U.S. government’s pandemic relief efforts are fading. Inflation is raging as supplies of goods and components fall short of surging demand. And the beginning of the end of the Federal Reserve’s assistance for markets is coming into sight.So far, investors have largely put aside nervousness — broad measures like the S&P 500 and Nasdaq composite are hitting record highs. Major stock market averages, in fact, have nearly doubled since bottoming in March 2020.The U.S. recovery from the recession is proceeding so quickly that many forecasters estimate that the economy will expand this year by roughly 7%. That would be the most robust calendar-year growth since 1984.Outside the U.S., too, economies are showing sustained growth. The Chinese economy, the world’s second-largest, has slowed sharply from last year, though Beijing said it grew nearly 8% in the April-June period. And among the European countries that use the euro currency, growth for 2021 is expected to reach a brisk pace of nearly 5%.Still, some sharp moves underneath the stock market’s surface and across other markets show newfound hesitance and anxiety about the potential economic threats. Yields on longer-term U.S. government bonds have sunk, for example, while stocks of companies most closely tied to the strength of the economy have slumped.For now, many voices on Wall Street see the nervousness as merely a blip: They are forecasting stocks and bond yields to rise through the year as the economy and corporate profits continue to grow. Many factors are behind the recent shifts in markets, particularly the sharp drop in bond yields, including some technical ones that likely worsened the swings and may be short-lived.But some of those same analysts also acknowledge that the shifting signals in markets may be an inflection point following months of gangbusters performance and raging optimism. The fear isn’t that economic growth may slow. It’s that any one of threats to the economy will weaken growth too much, too quickly and perhaps even derail the recovery from the pandemic recession and puncture corporate profits.“We don’t see it stalling out or reversing, but it’s clearly aging,” Rich Weiss, senior vice president at American Century Investments, said of the economy’s recovery. “We have this whole deceleration theme going on that ‘The Best Is Yet To Come’ is not the case anymore. We’ve definitely peaked.”Asked why investors would worry about a slowdown when growth rates look so high as to be unsustainable, Weiss suggested that uncertainty can often lead investors to consider a worst-case scenario.“The unknown of what you’re going to do looms large,” he said. “We’ve been riding this humongous reopening economy and reflation trade. Yes, it’s going to slow down, but what is it going to slow down to? If the job market is still weak, do we slow down to something on the order of 4% to 5%” economic growth, “or does it slow down to 2%? That would be a negative surprise that could roil the bond markets and the stock markets.”Concerns first emerged earlier this year in the bond market, which has the reputation of being more rational and sober than the stock market.The yield on the 10-year Treasury, which moves with expectations for economic growth and for inflation, had shot above 1.75% in March after more than doubling in four months. Optimism was rising that life would return to normal as the economy reopened and COVID-19 vaccinations rolled out. But that also fueled worries about sharply higher inflation.The 10-year yield, though, dropped below 1.25% last week. The months-long drop came as investors fell more in line with the Fed’s insistence that high inflation looks to be only temporary. The slide accelerated after a couple of reports that showed economic growth remained strong but not quite as powerful as Wall Street expected.The stock market, which had been gliding to record highs, dropped nearly 1% one day last week. The decline was modest but enough to cause some analysts to suggest that stocks were finally paying attention to the signal from the bond market.Instead, the S&P 500 quickly resumed setting records, the latest on Monday. That’s one of the confounding things for David Joy, chief market strategist at Ameriprise.If the bond market is signaling worries about upcoming economic growth, Joy said, it’s surprising stocks have performed this well. The same goes for “junk” bonds, which are those issued by companies with weak credit ratings. And corporate bonds should be offering more in yields over Treasurys than they are now.“The bond market historically has often provided a good early warning signal,” Joy said. “I don’t know if that’s the case this time, necessarily, because we don’t really know what’s driving rates down.”Besides the worries about peak growth and virus variants, analysts point to other possible reasons for declining yields. They include buying of Treasurys by investors from countries where rates are even lower, pension funds shifting some of their investments from stocks into bonds and a rush of traders simultaneously getting out of bets for rates to keep rising.Though the S&P 500 is close to its all-time high, some market watchers say movements within the stock market have also shown signs of concern. In the past two months, the synchronized moves higher for many areas of the market on flourishing optimism have broken down, say strategists at Deutsche Bank. While big U.S. stocks continue to inch higher, smaller stocks in the Russell 2000 index have stalled since peaking in March — and those companies’ prospects are more closely tied to the economy.

Worried about inflation? Check paystubs, not just pump price

Worried about inflation? Check paystubs, not just pump price

NEW YORK — Everyone would like to get paid more, but the worry on Wall Street is there could be too much of a good thing.Wages are going up for workers across many industries as the economy roars out of the recession. And in terms of inflation, which is the bogeyman for investors right now, a big and sustained gain in wages would be even more dangerous than the price spikes already seen for oil and other commodities.When wages go up, they tend to stay there, unlike the up-and-down vagaries of commodities. Lumber prices have already more than halved, for example, after nearly doubling in the first four-plus months of the year. Few workers would willingly give up all or half of their raises.That’s why the upcoming monthly report on the job market, due Friday, could be an even bigger deal for markets than it usually is. Besides showing how many people employers hired, it will also detail how much wages are rising for workers across the country.Economists expect the report to show a 0.4% rise in average hourly earnings in June from a month before. If they’re correct, it would be the first time growth has been that high for three straight months, at least since such records began a little more than 15 years ago.For now, many investors aren’t that worried. They see wage growth moderating eventually, which would keep a cap on inflation. More people are getting vaccinated, benefits for unemployed workers are getting less generous and reopening schools in the fall will allow parents to return to work. All that should mean employers get more applicants to choose from, easing the pressure to raise pay to fill openings.Other sources of inflation, meanwhile, such as used cars and building materials, should see prices come down as supply bottlenecks and other constraints clear.“We’ve likely already seen the highest monthly inflation readings of 2021,” said Brian Nick, chief investment strategist at Nuveen.The threat is still real, though. Wage growth so far has been driven mainly by middle- and high-paying industries, such as aerospace products and insurance, according to a review by Morgan Stanley. But that’s been broadening out recently.Restaurants, grocery stores and gasoline stations are all seeing elevated wage pressures, for example.Look no further than Chipotle Mexican Grill, which just increased its restaurant wages to an average of $15 per hour. The company raised prices on its menu by roughly 3.5% to 4% to help cover the additional wages.“We really prefer not to” raise prices, CEO Brian Niccol said at a recent conference hosted by Baird. “But it made sense in this scenario to invest in our employees and get these restaurants staffed and make sure that we had the pipeline of people to support our growth.”CFO Jack Hartung said he expects others in the industry will have to follow suit. Otherwise, they’ll lose out on workers.Therein lies Wall Street’s fear about wage growth staying high. On the plus side, higher wages gives workers more money to spend, which in turn drives the economy higher. But in one scenario, companies can’t raise their own prices enough to cover their higher payrolls and maintain profits. That worries investors because stock prices tend to track with corporate earnings over the long term.Even if companies can pass higher costs onto customers, it would likely result in a more lasting era of high inflation. That would dash the Federal Reserve’s insistence that higher inflation so far looks to be only a temporary problem, because it’s a result of shortages and other bottlenecks.Inflation in May hit 3.9%, according to the Federal Reserve’s preferred measure. After ignoring food and energy costs, which can swing sharply from month to month, inflation was at its highest level since 1992.If inflation ends up more stubborn than expected, the Fed would have to raise interest rates more aggressively than it’s signaled. That in turn would take away one of the major reasons for the stock market’s recent run to records: the hardened belief that “There Is No Alternative” to paying ever-higher prices for stocks when bonds are paying so little in interest. It’s become such a ubiquitous belief that it goes by the simple acronym of TINA.So congratulate your neighbor on that raise, and hopefully yourself on yours as well. Wall Street likely won’t.

Even as meme stocks surge, retirement savers stay vanilla

It might seem like everyone else is having a wild time shooting for the stars with GameStop and other meme stocksBy STAN CHOE AP Business WriterJune 17, 2021, 1:10 PM• 4 min readShare to FacebookShare to TwitterEmail this articleNEW YORK — It might seem like everyone is having a wild time shooting for the stars with GameStop and other meme stocks.But just as day-to-day life for most of us is more mundane than the highlights friends post on social media, the majority of retirement savers are sticking to plain vanilla plans. And they’re doing fine for it.Consider the 4.7 million accounts that Vanguard keeps records for in 401(k) and similar plans. Most of them did pretty much nothing last year, other than continuing to send a chunk of their paychecks into their savings. Only 10% made a trade at all in their account during the year.That’s up from 7% a year earlier, as the pandemic roiled investments and triggered the fastest bear market in history. But 90% of those retirement savers not moving their money from one investment to another stands in sharp contrast to the frenzy surrounding GameStop’s stock, which an army of traders sent surging by 1,625% in January.More recently, stocks like AMC Entertainment have had days where they’ve nearly doubled, as a new generation of hyper-online traders rally together on social media to champion the same stocks.So, what did that boring lack of action get the majority of retirement savers? Record heights.At Vanguard, the average account balance rose 20% last year to $129,157 as the S&P 500 rebounded from its early-year plunge to rally. Over the longer term, the average balance is up 65% from 2011.The median balance rose even more strongly: up 30% last year to $33,472. Median means half of all the savers in Vanguard’s survey had balances bigger than that, while half had less.Savers have been getting less active in trading for years in Vanguard’s survey. In 2004, 20% of accounts were making trades, falling to 7% in 2019.This slowed-down approach is what many experts advise. It can be thrilling to trade hot stocks — who wouldn’t want to make 85% in a day, like Clover Health Investments did earlier this month? But research suggests that frequent trading leads to lower returns for most investors.In Taiwan, where researchers led by Brad Barber of the University of California, Davis were able to measure the activity of speculative day-traders over a 15-year period, less than 1% were able to predictably and reliably get good enough returns to make up for the fees they paid.And now that meme stocks have captured the national attention, everyone from the chair of the Securities and Exchange Commission to heads of investment firms are warning investors to consider the risks of fast trading.Besides making relatively few trades last year, retirement savers also stuck with investment choices that tilt closer to the “boring” end of the scale.The majority of savers in Vanguard’s survey, 54%, had all their money in a single mutual fund tied to the year they hoped to retire. These target-date retirement funds automatically take care of how to divvy up investments. They emphasize stocks when retirement is far away and toward more bonds and safer investments when it’s closer on the horizon.Among other encouraging signs from Vanguard’s survey: Few retirement savers had all their money in either stocks or bonds, a sign of taking too much risk or not enough, at 8%. Savers also set aside an average of 7.2% of their pay into their retirement account, up slightly from 7.1% a year earlier.Much of that is by design. Employers in recent years have not only been automatically enrolling their workers into 401(k) plans, they’re also often defaulting to target-date funds and automatically increasing some workers’ contribution rates.It’s crucial that people get it right. Roughly half of the country is in danger of not being able to maintain their standard of living in retirement, even if they work to 65 and annuitize all their assets, according to the Center for Retirement Research at Boston College.