U - BUZZ Investing: Stock Markets Fall Amidst 'Higher For Longer'

2023-10-25 03:20:00 ET

Summary

• Equity markets took a hit due to the 'higher for longer' interest rate scenario, alongside a hawkish outlook from the Fed which plans reduce only twice in 2024.
• During the Period, the S&P 500 Index fell 3.4% while the BUZZ NextGen AI US Sentiment Leaders Index (the “BUZZ Index” or “Index”) fell 5.5%.
• The BUZZ Index returned -5.68% during the month of September compared to a return of -4.77% for the S&P 500 Index during the same period.

Equity markets took a hit due to the 'higher for longer' interest rate scenario, alongside a hawkish outlook from the Fed which plans reduce only twice in 2024.

Domestic equities fell during the recent period between Index selection dates (September 14, 2023 to October 12, 2023, the “Period”). Investors increasingly adjusted forward expectations to reflect the prospect that interest rates will remain ‘higher for longer’ – an outcome many had failed to anticipate.

During the Period, the S&P 500 Index fell 3.4% while the BUZZ NextGen AI US Sentiment Leaders Index (the “BUZZ Index” or “Index”) fell 5.5%. As expected, the U.S. Federal Reserve (“the Fed”) temporarily paused its interest rate increase initiative at the Federal Open Market Committee meeting held on September 20th.

Despite the pause, the committee signaled its intention to raise interest rates one additional time during 2023. The signaling underlines their hawkish outlook, further evident in the committee's updated dot plot projections.

The new projections now forecast only two reductions in 2024, a decrease from the four projected in the June 2023 update. The yield curve flattened on the events as longer-dated treasuries sold off and yields rallied, with the 10-year note closing the period yielding 4.70%, up 41bps, while the 2-year note gained just 6bps to yield 5.07%.

The table below presents the Federal Reserve's dot plot of projected midpoint levels for the Fed Funds Target Rate at the end of 2024, as outlined after the June 2023 and September 2023 meetings.

It reveals an increase in the median projected midpoint levels of the Fed Funds Target Rate for 2024, from 4.375% to 5.125%. This shift indicates that fewer FOMC voting members anticipate rate cuts in 2024.

Fed Dot Plot – 2024 Year-End Projected Levels ^*

Source: BUZZ Holdings ULC as of September 2023.

^* The Fed dot plot depicts each Fed official’s projection of the appropriate midpoint of the Fed Target Rate at the end of a calendar year.

The BUZZ Index returned -5.68% during the month of September compared to a return of -4.77% for the S&P 500 Index during the same period. Year-to-date, the BUZZ Index leads the S&P 500 with returns of 27.07% and 13.07%, respectively, as of the end of September.

Shares of Palantir Technologies Inc. Pace Advancing Stocks within the BUZZ Index

Shares of Palantir Technologies Inc ( PLTR ) paced advancing stocks within the BUZZ Index during the recent Period. Amidst the ongoing Middle East conflict, PLTR’s shares have been on an upward trend.

On October 7th, Israel officially declared war on Hamas in response to a coordinated attack by the Islamist militant group, which has led to over 1,400 primarily civilian Israeli casualties.

Given PLTR’s contracts with various global government and defense agencies, investors anticipate increased demand for the company's data software products due to heightened geopolitical tensions.

Furthermore, PLTR recently announced a new contract with the U.S. Department of Defense worth up to $250 million through 2026. This contract aims to support artificial intelligence ((AI)) and machine learning ((ML)) capabilities for Combatant Commands, Armed Services, the Intelligence Community, and Special Forces. PLTR has had a partnership with the US Army since 2018.

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.

Shares of EV manufacturers were featured in the top detractors to BUZZ Index performance for the second consecutive Period. Rivian Automotive Inc. ( RIVN ) and Lucid Group Inc. ( LCID ) fell 19.8% and 15.6%, respectively, during the Period.

Shares of Rivian ( RIVN ) plummeted over 22% on October 5th following its announcement of a $1.5 billion convertible bond offering.

While RIVN concluded Q2, 2023 with positive production results, it remains vulnerable to the market's aversion to unprofitable high-growth stocks, as it has recorded over $1 billion in losses this year against revenues of $1.2 billion while maintaining an ambitious goal of delivering 52,000 EVs in 2023.

LCID’s stock dipped during the period as it introduced the more affordable Air Pure variant of its luxury electric sedan to boost demand. Concerns about the sustained demand for its flagship Air model have weighed on Lucid's shares throughout 2023.

The luxury sedan's premium pricing, along with rising consumer borrowing costs and recent price reductions from rivals like Tesla Inc. ( TSLA ), have raised investor apprehensions about the company’s near-term prospects.

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 – Carvana Co.

Returning to the BUZZ Index this month is Carvana Co. ( CVNA ). Once a thriving used-car retailer, CVNA saw a significant boost in its business during the disruptions caused by the COVID lockdowns in 2020, primarily due to the surge in used car prices.

However, as the world gradually returned to normalcy and used vehicle prices began to decline, CVNA found itself burdened with a substantial inventory of cars it had acquired at higher prices.

Adding to its challenges, the aggressive increase in interest rates over the past two years resulted in a sharp decline in used car sales, further exacerbating CVNA's financial woes.

This downward spiral led to a staggering 90% decline in the company's stock between August 2021 and August 2022, pushing CVNA perilously close to bankruptcy earlier this year.

However, in a turn of events, CVNA successfully restructured its debt with creditors and raised fresh capital in July. Since then, CVNA's share price has staged a remarkable comeback, surging by over 500% from its lows.

This resurgence in performance has rekindled positive investor sentiment towards the stock. This month, CVNA is the largest new addition to the BUZZ Index, with a 1.54% weight.

Carvana Co. Stock Price | April 2017 – October 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 October 2023 Rebalance Highlights

NextEra Energy Inc.

Making its debut in the BUZZ Index this month is NextEra Energy ( NEE ), a notable player in the energy utility sector in the United States. Founded with roots tracing back to the 1920s, NextEra has evolved into the third-largest utility company in the country, primarily operating in the state of Florida.

Distinguished by its commitment to clean energy, the company currently sources approximately 40% of its energy from non-fossil fuel alternatives like wind and solar. Over the years, it has earned the distinction of being the world's largest renewable energy generator.

NextEra's impressive journey has mirrored its stock performance, which has soared by a remarkable 800% since the Global Financial Crisis. However, on September 27th, the company's management surprised the market by revising its downward growth outlook. This unexpected move led to a cascade of analyst downgrades and a subsequent 30% decline in the stock over the following two weeks.

Interestingly, this drop in stock price has sparked a surge in investor sentiment, as some may perceive the correction as an excessive reaction and a compelling buying opportunity. Consequently, NextEra Energy made its entrance into the BUZZ Index this month, carrying a weight of 0.65%.

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