Barron’s Weekend Summary: Bonds are not in a good place now.
Cover:
-Bonds are not in a good place now. Yet, rarely has the timing to buy them been better. The supposedly secure Treasuries are on track to lose money for three consecutive years, declining 42% over that period. Other bonds, whether mortgage-backed securities or high-quality corporates, have also taken a beating, leaving investors with losses from what are supposed to provide ballast in a portfolio. But the end of the bond bear market is upon us. Traders see only a 25% chance of another rate hike this year, possibly at the Fed’s meeting in December. Hedge fund manager Bill Ackman, a prominent bond bear, recently closed out his bets against Treasuries. What’s more, continued geopolitical unrest or signs of a recession could restore the core market—government-backed debt and high-grade corporate bonds—to its position as a haven, a role it had abdicated in recent years.
Interview:
-Young Americans are experiencing a surge of unhappiness, according to anecdotal evidence and social science research. Its roots aren’t clear, but the Covid pandemic may have contributed, as has social media, based on a lawsuit filed on Oct. 24 against Meta Platforms by 42 state attorneys general, who allege that Facebook and Instagram purposefully ensnared children and teens to the detriment of their long-term physical and mental health.
David Blanchflower, a British-American labor economist, has studied happiness and mental-health trends for decades, and his new academic research, conducted with Alex Bryson, a professor of quantitative social science at University College London, confirms how bleak things have become. It isn’t just that young adults feel sad or unhappy for a day or two; 12% of 23-year-old women, they found, report that every day of their lives is a bad mental health day.
Tech Trader:
-Technology stocks dropped to correction levels last week, after they posted earnings that either fell below expectations – including some of the world’s largest companies – or that failed to issue optimistic guidance factors. On Wednesday and Thursday, the NASDAQ Composite fell 4.1%, the tech-heavy index’s worst two-day stretch of the year. The index has fallen 12% since July. The most notable of these were META and Alphabet. Indeed, both companies earned well above expectations, but the results led to fresh concerns about cloud and ad spending.
The Trader:
-Chip stocks have been getting crushed recently—and ON Semiconductor Has been a notable example of this trend. ON is cheap now, and could pop if it beats earnings expectations on October 30. ON stock is down about 25% to a recent $81.16 from its record high hit this summer amid tech-sector weakness and concerns about restrictions on exporting to China. The decline was compounded by a selloff in the chip sector on Wednesday caused by Texas Instruments, which missed sales forecasts when it reported earnings after Tuesday’s close and said it saw weak demand from industrial customers.
-Bond yields are showing signs that they have peaked. If they keep dropping, it would make a host of stocks look attractive. Utilities are the ideal prospects for this dynamic. The Utilities Select Sector home to regulated utilities such as Duke Energy
and Dominion Energy is down almost 17% for the year, versus double-digit gains for the S&P 500. That puts the sector on pace for its worst annual underperformance on record, according to Dow Jones Market Data.
Features:
-Exxon Mobil said that it should be able to keep producing oil for years to come. But that prospect has been overshadowed by otherwise disappointing news. Some of Exxon’s lesser-watched businesses have been struggling. Earnings from sales of chemicals, for instance, fell sharply because supply is outpacing demand, hurting margins. And earnings have suffered even as the company is set to spend more money on capital projects than some analysts had expected. Exxon reported adjusted third-quarter earnings of $2.27/share, below expectations for $2.37. Revenue of $90.8 billion missed expectations for $93.4 billion. The stock was down 2% on Friday, while stock in Chevron, whose earnings miss was significantly worse, fell 5%. Exxon stock fell even though management is increasing the quarterly dividend to 95 cents from 91 cents, boosting the dividend yield to 3.6% at current prices.
-The Federal Reserve’s restrictive monetary policy has apparently managed to cool down inflation (based on September results) relative to a year ago. Nevertheless, American consumers are continuing to spend and this could complicate the fed’s goal of keeping inflation down. Based on the core personal-consumption expenditures price index, which excludes the more volatile food and energy sectors, the pace of inflation slowed in September to 3.7% year over year, according to the latest Bureau of Economic Analysis data, released Friday. That’s in line with forecasts and slightly below the 3.8% revised rate recorded in August. Core PCE is closely studied by the Fed.
Europe:
-The European Central Bank stopped its course its unprecedented streak of 10 consecutive interest-rate hikes since July 2022, as the Eurozone faces growth headwinds and persistent inflationary pressures. The ECB followed the lead of the Federal Reserve, which paused its campaign of rate-hikes last month and is expected to keep monetary policy unchanged next week. The backdrop in the US is starkly different, however, with lower inflation and stronger economic growth. The US economy grew strongly in the third quarter, according to Thursday’s preliminary print of gross domestic product. The ECB’s pause, on the other hand, comes after a spate of economic data that showed a weakening Eurozone and underscored the ECB’s challenge in bringing inflation back to the 2% medium-term target without causing recession.
Emerging Markets:
-Argentina’s long-suffering bonds slid another 10% after Sunday’s first-round presidential election, which saw sitting economy minister Sergio Massa leap from third place in an August primary to first with 37% of the vote. Massa now looks like the favorite going into a Nov. 19 runoff with libertarian firebrand Javier Milei. “It’s Massa’s election to lose,” says Shannon O’Neil, senior fellow for Latin American studies at the Council on Foreign Relations. Voters choosing an economy minister who is presiding over 100%- plus annual inflation and a 5% contraction in the latest quarter might seem curious, until the alternatives are considered. Argentines soured on Milei, a self-described anarcho-capitalist who scored a shock victory in the primary. They were spooked by his promises to “burn down” the central bank and replace the peso with the dollar, and past tweets describing Argentine-born Pope Francis as an imbecile and “representative of the evil one in the house of God” didn’t help his cause either. Milei finished second in the latest round with 30% of the vote. Patricia Bullrich, political successor to right-of-center President Mauricio Macri, whom Argentines chucked out four years ago, lagged behind with 24%.
Commodities:
-China is reminding us that lithium is not the main ingredient in a lithium-ion electric vehicle battery. That distinction goes to graphite, which is used to make the anode, or negative pole, of EV batteries, accounting for up to half their weight. More than 90% of anode-ready graphite is produced in China. Beijing called attention to this fact on Oct. 20, a few days after the U.S. ratcheted up controls on semiconductor exports to China. Graphite sales from China will require a license as of Dec. 1. Xi Jinping’s government slapped similar restrictions this summer on two rare earth metals common in electronics manufacturing, gallium and germanium. Gallium prices have jumped by half since then, data provider Argus reports. A graphite squeeze could have a stronger impact still, says Ross Gregory, a partner at Korea-based consultant New Electric Partners. “Rare earths was a flesh wound,” he says. “Graphite would cause some internal bleeding.”
Streetwise:
-Jack Hough urges you to beware of giant yields in Annaly Capital Management, a large mortgage investment company with more than 25 years in the business. Annaly boats a dividend yield of 17%. That’s nearly twice as high as the average return for the stock market. It’s more than four times what retirement planners say you can safely spend from a portfolio. It’s a jackpot with a ticker symbol. But can you trust this yield? Hough suggests you should not, comparing the attractive yield to the colors on a rainforest frog: “it’s nature’s way of telling you that this thing could be secreting enough toxin to kill 200 monkeys, so look but don’t lick.”