A Hidden Signal for the Economy
Dear subscriber,
I must admit, I'm surprised by the calm.
Last week, we lamented that the muck and mire of politics were driving markets. We haven't escaped that yet (and probably won't until after the election in November).
The drama continues, but the market doesn't care much...
President Joe Biden has announced he won't be seeking reelection. And the Democratic Party has chosen Vice President Kamala Harris as their presumptive nominee.
Between election polls and prediction markets, the odds of who'll win this race have run a round trip since the debate on June 27.
At the time, the race was a coin flip. Then, Biden tanked the debate... and the assassination attempt boosted Trump's likelihood of a win. But the Democrats' renewed energy has put us back to where we were in mid-June...
A U.S. president hasn't been attacked since 1981. And a sitting president hasn't withdrawn from a race since 1968. Neither is a sign of political stability.
Despite all this, markets remain quiescent.
Measures like the CBOE Volatility Index (or "VIX") and U.S. credit spreads show little fear along with a healthy appetite for risk.
The VIX is known as the "fear index." It gauges how much investors are willing to pay for options that would protect their portfolio from market downside.
When the index is low – like it is today – it means that investors won't pay much. They see little value in insurance, since they don't expect stocks to fall...
And if you look at credit spreads, you can see that investors demand little extra yield for low-quality bonds over safe Treasurys...
It appears as if Wall Street has chosen to watch the horse race rather than react to it.
We don't mind. We prefer when earnings and economics drive the market.
And about halfway through earnings season, we've noticed a striking pattern...
In the S&P 500, 78% companies have announced earnings that have beat analyst expectations. Earnings growth is about 9.8% over the year, and profit margins are good at 12.1%.
This looks like a sign of a vigorous economy, but it has taken a lot of effort to get here. And digging deeper reveals cracks hiding under the surface...
See, the size of the average earnings surprise has only been 4.4%. That's below the five-year average of 8.6%. And only 60% of companies have reported a positive surprise in revenue, which is below the five-year average of 69%.
Put it all together, and this indicates that companies are barely eking out their earnings targets. And they're only doing so by cutting costs... not by growing.
Next week, we'll get earnings reports from four of the "Magnificent Seven" tech stocks that have been driving this market. And the next few months could depend on their results.
What Our Experts Are Reading and Sharing...
Today's hot hedge-fund trade is Turkey. Thanks to the country's high interest rates, you can earn nearly 50% buying Turkish bonds. And according to the Financial Times, hedge funds have poured $24 billion into "carry trades" based on the Turkish lira. Carry trades seem easy. You borrow U.S. dollars at 5%, invest in the lira at 50%, and pocket the difference. But they can cause a rapid crash when they unwind.
What's the best-performing stock of all time? Economist Hendrik Bessembinder recently revealed it in a brand-new research paper published earlier this month. (And we have more on the stock for Stansberry Investor Suite subscribers below.) He also covers the compound returns of more than 29,000 other publicly listed stocks... and the 17 that delivered cumulative returns of more than 5,000,000%. You can read Ben Carlson's write-up on the report on his blog, A Wealth of Common Sense.
Shorting stocks is incredibly difficult. We've only seen specialized professionals do it successfully – oh, and members of Congress. New research forthcoming in the Indiana Law Journal shows that when congressmen bet certain stocks will go down, they tend to beat the market in a big way. And apparently, our congress people love shorting CBOE Mini-SPX options and Treasury exchange-traded funds.
New Research in the Stansberry Investor Suite...
This week, Stansberry Investor Suite subscribers get the full story on the top-ranked stock in the Stansberry Score universe.
The Stansberry Score – a measure only available to a select group of subscribers – ranks nearly 5,000 stocks each day.
It's not for get-rich-quick traders. Rather, our quantitative experts and fundamental analysts designed the score to highlight high-quality, capital-efficient businesses... the kind wise investors buy and hold for years.
This week, we're covering the No. 1 ranked stock out of the current 4,764 stocks we track.
And I'll be honest, this stock comes with a powerful "ick factor" for many. But the numbers don't lie. And this stock has long rewarded investors smart enough to understand just how this business works.
Investor Suite subscribers can read all about it here.
Until next week,
Matt Weinschenk
Director of Research