CSGKF - BUZZ Investing: Stock Gains Mask Increasing Volatility And Narrowing Breadth
2023-04-26 04:19:00 ET
Summary
- Domestic equities rallied during the recent period between Index selection dates (March 9, 2023 to April 13, 2023).
- Some market commentators noted the ‘narrow leadership’ of the group as a troubling indicator for future returns, citing the lack of broad participation in the rally.
- The gains achieved during the Period were overshadowed by increased volatility observed across equity markets.
- Year-to-date, the BUZZ Index leads the S&P 500 with returns of 22.76% and 7.50%, respectively, as of the end of March.
Domestic equities rallied during the recent period between Index selection dates (March 9, 2023 to April 13, 2023, the “Period”). Mega-cap technology-focused stocks, including Alphabet Inc (NASDAQ: GOOG ) (NASDAQ: GOOGL ), Apple Inc (NASDAQ: AAPL ), Meta Platforms Inc (NASDAQ: META ), Nvidia Corp (NASDAQ: NVDA ), Amazon.com Inc (NASDAQ: AMZN ), Microsoft Corp (NASDAQ: MSFT ), and Tesla Inc (NASDAQ: TSLA ) fueled gains, with those seven stocks accounting for 50% of the gains of the S&P 500 Index during the Period. The aforementioned stocks dominated first-quarter performance, with those seven stocks accounting for over 80% of the S&P 500 Index’s Q1 gains. Some market commentators noted the ‘narrow leadership’ of the group as a troubling indicator for future returns, citing the lack of broad participation in the rally.
The gains achieved during the Period were overshadowed by increased volatility observed across equity markets, as investors considered the impact of a sudden domestic banking crisis relative to ongoing inflationary concerns. The widely followed CBOE Volatility Index (the “VIX”) soared above 30 during March as investors braced for a potential banking crisis following the collapse of US regional banks SVB Financial Group ( SIVBQ ) (formerly NASDAQ:SIVB) and Signature Bank (NASDAQ: SBNY ), followed by the fall of Credit Suisse Group AG ( CS ) (SW: CSGN). SIVB, the country's 16th-largest bank by assets and the preferred bank for many technology and venture-backed start-ups, experienced a classic ‘bank-run’ triggered by depositors who rushed to withdraw funds amidst growing anxiety about the bank’s solvency. New York-based SBNY, which focused its activities on the cryptocurrency segment in recent years, fell days later as investors lost confidence and initiated a run on deposits. SIVB and SBNY were subsequently taken over by federal regulators and mark the second and third largest bank failures in US history, trailing Washington Mutual, which collapsed during the 2008 financial crisis.
The sudden collapse of SIVB and SBNY led many to fear contagion may spread across the broader domestic banking ecosystem. Social media fearmongering proliferated, with some highly followed online commentators disparaging fractional reserve banking and suggesting the entire system was ‘technically bankrupt.’ On Sunday evening, March 12, the U.S. Treasury, the Federal Reserve (the “Fed”), and the Federal Deposit Insurance Corp. (“FDIC”) jointly sought to calm investor anxieties by announcing the government would invoke the “systemic risk exception” and would back SIVB and SBNY customer deposits beyond the federally insured ceiling of $250,000. Calls for the Fed to pause their interest rate hiking program escalated while some market commentators insisted an interest rate ‘cut’ was now required to stave off a potential banking crisis.
The Fed chose to ‘stay the course,’ raising its target rate by 25bps during its March 22nd meeting. Following the Fed meeting, Swiss banking giant Credit Suisse Group AG collapsed, forcing Swiss regulators to broker a fire-sale of the storied firm to rival UBS Group AG ( UBS ) (SW: UBSG) for CHF $3B. Continued stress in the banking sector contributed to a dramatic repricing of expectations of forward interest rates. At the start of the Period, investor expectations were for the Federal Funds rate to approach 5% through Q3 2023; however, within 10 days of the initial SIVB crisis, expectations were revised lower by over 75 bps. By the Period’s end, forward rate expectations rebounded; however, they remain well off their highs, forecasting interest rate cuts in the months ahead.
The BUZZ NextGen AI US Sentiment Leaders Index (the “BUZZ Index” or “Index”) returned 5.16% during the month of March compared to a return of 3.67% for the S&P 500 Index during the same period. Year-to-date, the BUZZ Index leads the S&P 500 with returns of 22.76% and 7.50%, respectively, as of the end of March.
Fed Funds Rate: Forward Expectations
Source: Bloomberg.
Shares of GameStop Corp. Pace Advancing Stocks within the BUZZ Index
Shares of GameStop Corp. (NYSE: GME ) paced advancing stocks within the BUZZ Index during the recent Period. Viewed by many as the original ‘meme’ stock, GME surprised some investors with a strong fourth-quarter earnings report which showed the company’s cost reduction plan was progressing while both revenues and earnings exceeded analyst expectations. GME surged by over 35% on the day of the earnings release and gained 28.7% during the Period. Very few traditional analysts cover GME (likely due to its continued perception as a ‘meme’ stock) with no “buy” recommendations for the company before the earnings release, one firm rating the stock a “hold” and two firms rating the stock a “sell.”
| Top BUZZ Index Contributors: March 9, 2023 – April 13, 2023 |
| Company |
| Ticker |
| Average Weight (%) |
| Return Contribution (%) |
| GameStop Corp |
| GME |
| 3.38 |
| 0.85 |
| Meta Platforms Inc |
| META |
| 3.30 |
| 0.68 |
| Coinbase Global Inc |
| COIN |
| 3.31 |
| 0.61 |
| Alphabet Inc |
| GOOGL |
| 3.22 |
| 0.50 |
| Intel Corp |
| INTC |
| 2.06 |
| 0.46 |
| Microsoft Corp |
| MSFT |
| 2.98 |
| 0.44 |
| Nvidia Corp |
| NVDA |
| 3.31 |
| 0.43 |
| Advanced Micro Devices Inc |
| AMD |
| 3.15 |
| 0.35 |
| Amazon.com Inc |
| AMZN |
| 3.11 |
| 0.34 |
| Palantir Technologies Inc |
| PLTR |
| 2.97 |
| 0.33 |
Source: BUZZ Holdings ULC, Bloomberg. Past performance is no guarantee of future results. Index performance is not illustrative of fund performance. Not intended as a recommendation to buy or to sell any of the securities mentioned herein.
The top detractors to performance predominantly featured stocks in the Industrial sector as investors rotated away from the group, favoring the prospects of technology-oriented stocks during the Period. Airline stocks American Airlines Group Inc (NASDAQ: AAL ), United Airlines Holdings Inc (NASDAQ: UAL ), and Delta Air Lines Inc (NYSE: DAL ) were all featured in the top detractors to performance as each fell following disappointing first-quarter earnings, and guidance. The airlines broadly cited increasing costs arising from new pilot labor agreements as a catalyst for the disappointing results.
| Bottom BUZZ Index Contributors: March 9, 2023 – April 13, 2023 |
| Company |
| Ticker |
| Average Weight (%) |
| Return Contribution (%) |
| Plug Power Inc |
| PLUG |
| 0.82 |
| -0.29 |
| Block Inc |
| SQ |
| 1.23 |
| -0.19 |
| American Airlines Group Inc |
| AAL |
| 0.66 |
| -0.16 |
| United Airlines Holdings Inc |
| UAL |
| 0.13 |
| -0.12 |
| Caterpillar Inc |
| CAT |
| 0.65 |
| -0.10 |
| Alcoa Corp |
| AA |
| 0.10 |
| -0.09 |
| Enphase Energy Inc |
| ENPH |
| 0.97 |
| -0.09 |
| Goldman Sachs Group Inc/The |
| GS |
| 0.83 |
| -0.08 |
| Delta Air Lines Inc |
| DAL |
| 0.11 |
| -0.07 |
| Schlumberger NV |
| SLB |
| 0.11 |
| -0.07 |
Source: BUZZ Holdings ULC, Bloomberg. Past performance is no guarantee of future results. Index performance is not illustrative of fund performance. Not intended as a recommendation to buy or to sell any of the securities mentioned herein.
Sentiment Stock Highlight – Block, Inc.
On March 23, Hindenburg Research (“Hindenburg”), a forensic financial research firm focused on activist short selling, released a scathing report on Jack Dorsey’s Block, Inc. (NYSE: SQ ), accusing the digital payments company of inflating user metrics and intentionally ignoring fraudulent activity on its platform. Recall Hindenburg was the research firm that recently published allegations of fraud against India-based conglomerate Adani Enterprises (IN: ADE), which led to a 70% decline in ADE’s stock price. To some market observers, the ADE report bolstered Hindenburg's credibility in the industry. Hindenburg claimed Block disregarded AML/KYC laws in its efforts to report growth at the company, citing interviews with former employees which exposed a poor regulatory culture at the company. Block’s stock declined nearly 15% on March 24th, the day Hindenburg released its report, and subsequently traded within a narrow range. Despite the controversy, investor sentiment appears to disagree with the accusations featured in Hindenburg's report, as positive investor sentiment has increased following its release. This month, SQ’s stock weight in the BUZZ Index rose from 1.45% to 2.96%.
Block Stock Price | January 2021 – April 2023
Source: BUZZ Holdings ULC, Bloomberg. Past performance is no guarantee of future results. Index performance is not illustrative of fund performance. Not intended as a recommendation to buy or to sell any of the securities mentioned herein.
BUZZ Index April 2023 Rebalance Highlights
Financials
Last month, the global financial landscape witnessed a near-banking crisis which some compared to the sector’s troubles during the Global Financial Crisis of 2008. The shock announcement by SVB Financial Group (formerly NASDAQ: SIVB) regarding its liquidity issues precipitated massive withdrawals of deposits. This classic bank run left the bank on the brink of insolvency. The rapid pace of interest rate increases over the past year, coupled with a sudden loss of deposits, exposed the vulnerabilities in SIVB’s mismanaged bond portfolio and put the spotlight on other regional banks facing similar risks. To restore confidence, the Federal Reserve and CDIC acted swiftly to effectively safeguard deposit structures within the country, quickly quelling the crisis. Many bank stocks plummeted initially before recouping some of the losses as the situation improved. This month, the BUZZ Index contains 17 financials stocks, including regional and niche banks such as New York Community Bancorp (NYSE: NYCB ) and Charles Schwab (NYSE: SCHW ), bringing the total weight of the sector within the Index to 27%. The jump in the financials weight is the biggest ever for the Index. Increasing positive investor sentiment may suggest that many bank stocks will continue to recover from the latest banking crisis.
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BUZZ Investing: Stock Gains Mask Increasing Volatility And Narrowing Breadth