On May 19, the S&P 500 opened the day near bear market territory; i.e., at a 20% drop from a recent high. On May 18, the S&P 500 experienced a 4% decline—the largest single-day decrease since June 2020. The last time the S&P 500 entered bear market territory was in March 2020, albeit short-lived, as the market turned around and headed into a two-year rally that peaked in early January 2022.
The current equity market losses (and some corporate bond losses) are primarily the result of several factors: 1) earnings reports from large American retailers, including Walmart and Target, show evidence that the continued high inflation rate may be affecting consumer demand; 2) the war in Ukraine has added to inflationary pressures, prompting the Federal Reserve (Fed) to increase interest rates and reduce bond holdings; and 3) recent COVID-19 shutdowns in China have led to a slowdown in the world’s second largest economy.
Author(s): Jennifer Johnson and Michele Wong
Publication Date: 19 May 2022
Publication Site: NAIC Capital Markets Special Report
The U.S. economy has made a solid recovery as COVID-19 vaccinations were made increasingly available, social distancing began to ease, and businesses gradually reopened. The International Monetary Fund (IMF), among other forecasters, expects the U.S. economy to grow by about 6% in 2021, after contracting about 3.4% in 2020. • Inflation reached a 39-year high of 6.8% in November following a strong rebound from the COVID19-induced recession. • The ‘stronger for longer’ inflation rates prompted the Federal Reserve to accelerate the tapering of its asset purchases and to suggest the likelihood of three rate hikes in 2022. • The 10-year U.S. government bond yield has generally ranged between 1.3% and 1.7% in 2021, increasing from less than 1% in 2020, due in part to fiscal stimulus aiding in economic recovery. • Credit spreads have been muted in 2021 given robust global economic growth, favorable funding conditions, and overall solid corporate performance despite higher costs and supply disruptions. • Global stocks have achieved relatively high returns; in the U.S., the Standard & Poor’s (S&P) 500 posted seven record closing highs in November alone. • The price of oil reached a seven-year high of $85 per barrel in 2021 as demand for oil normalized while the global supply market tightened.
Author(s): : Jennifer Johnson and Michele Wong
Publication Date: 22 Dec 2021
Publication Site: NAIC Capital Markets Bureau Special Reports
This paper introduces a real-time, continuous measure of national sentiment that is language-free and thus comparable globally: the positivity of songs that individuals choose to listen to. This is a direct measure of mood that does not pre-specify certain mood-affecting events nor assume the extent of their impact on investors. We validate our music-based sentiment measure by correlating it with mood swings induced by seasonal factors, weather conditions, and COVID-related restrictions. We find that music sentiment is positively correlated with same-week equity market returns and negatively correlated with next-week returns, consistent with sentiment-induced temporary mispricing. Results also hold under a daily analysis and are stronger when trading restrictions limit arbitrage. Music sentiment also predicts increases in net mutual fund flows, and absolute sentiment precedes a rise in stock market volatility. It is negatively associated with government bond returns, consistent with a flight to safety.
Alex Edmans London Business School – Institute of Finance and Accounting; European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)
Adrian Fernandez-Perez Auckland University of Technology
Alexandre Garel Audencia Business School
Ivan Indriawan Auckland University of Technology – Department of Finance
Publication Date: 14 Aug 2021
Publication Site: SSRN, Journal of Financial Economics (forthcoming)
Expectations of a stronger economy count as a positive development for companies’ earnings prospects, but they are pushing long-term interest rates higher, with the 10-year Treasury recently yielding 1.41% versus 0.93% at the start of the year. That isn’t unusual, since long-term rates typically go up as the economy’s prospects improve, but then again stocks haven’t tended to be as expensive at the start of recoveries as they are now.
The S&P 500 trades at about 22 times analysts’ expected earnings over the next year, according to FactSet, which is close to its highest forward price-earnings ratio in 20 years. In December 2009, six months after the last recession ended, the S&Ps forward P/E ratio was about 14.
As a result, even relatively modest moves upward in Treasury yields, and therefore the relative attractiveness of bonds to stocks, can cause market spasms. This is particularly true of the richly valued technology shares that have been among the biggest market winners since last spring.
The sharp increase this month in U.S. government-bond yields is pressuring the stock market and forcing investors to more seriously confront the implications of rising interest rates.
The lift in yields largely reflects investor expectations of a strong economic recovery. However, the collateral damage could include higher borrowing costs for businesses, more options for investors who had seen few alternatives to stocks and less favorable valuation models for some hot technology shares, investors and analysts said.
As of Friday [Feb 19], the yield on the benchmark 10-year U.S. Treasury note stood at 1.344%, up from 1.157% just five trading sessions earlier and roughly 0.9% at the start of the year.
The scale of trading in GameStop shares is as extraordinary as the daily gains in price, suggesting widespread disturbance to people’s judgment. On Tuesday, $22 billion of shares changed hands, more than in Apple, the world’s largest company, and double GameStop’s market value. Adam Smith, the founder of economics, called speculative manias “overtrading,” and this is what they look like.
The hope of getting rich is only part of what is inflating the bubble. Mr. Kindleberger argued that speculative manias needed innovative sources of financing, and the private traders on r/WSB have one: the shift last year to make trading in options free on Robinhood and several other platforms.