Charts of the Week: Stock scenarios and considering the peak Fed rate
This week’s charts cover the following data:
Even amid financial stress, banks are leading earnings growth in Europe
Tip: this chart allows for?change region ?functionality. It also requires a subscription to the?Macrobond/FactSet Equity Factor Aggregates ?add-on database.
It might be counterintuitive in a year that has seen a series of US bank failures and the demise of 166-year-old Credit Suisse – but banks are driving earnings-per-share growth in the basket of large-cap European stocks tracked by Macrobond and FactSet.
As the sectoral breakdown in our chart shows, aggregate EPS is up 12.5 percent. Industrials are the second-biggest contributor to that gain after financial stocks. Energy is the largest negative contributor.
The end of the zero-interest rate era means banks are making more spread on their core lending business. ING of the Netherlands became the latest big European bank to beat profit forecasts this week.
And?as Bloomberg News recently wrote , smaller European banks have been more tightly regulated; larger banks have mostly been cutting their US exposure; and European banks don’t face the same level of deposit competition from money-market funds as US banks do. So far, Credit Suisse is seen as an idiosyncratic one-off.
A dashboard for the 60/40 portfolio (versus going all-in on stocks)
Traditionally, financial advisers recommended that investors with a moderate risk threshold put 60 percent of their money in equities, with the rest in bonds. Over the long haul, most academic research agrees that stocks outperform bonds, but a healthy slice of fixed income was recommended to provide downside protection and income.
Post-2008, this so-called “balanced” portfolio would have done well; tech stocks surged, and bonds benefited from ultra-low interest rates. But in 2022, 60/40 had one of its worst years ever.
Our dashboard explores how different blends of equities and fixed income would have performed since 2020, including last year’s?annus horribilis. For stocks, we chose the S&P 500; for bonds, we chose the US 10-year Treasury.
Damage from last year’s bond rout means that to have generated any kind of absolute return over the past 3 ? years, investors would need to have been at least 40 percent invested in stocks. A 60-40 portfolio would have made an average of just 3.5 percent per year, roughly in line with inflation.
If we’ve seen our last rate hike, history suggests upside for equities?
The Fed recently hiked rates to a 16-year high. Well-known bond fund manager Jeffrey Gundlach?decreed this week ?that “the Fed will not raise rates again.”
If Gundlach is right, history suggests that stocks have upside from here.
领英推荐
As our chart shows, the S&P 500 has risen an average of 12.2 percent in the 12 months that follow an end to a tightening cycle. The 25-75 percentile range includes cycles where the benchmark rose from about 12 percent to almost 30 percent.
This?updates a previous chart, in December , to overlay the stock benchmark’s performance over the past year, assuming that this month’s rate increase was indeed the peak.?
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