3 reasons why volatility could come roaring back to a stock market that’s drifting along near record highs, according to UBS

NYSE Trader
Traders at the New York Stock Exchange.

  • A key tracker of stock-market volatility at its lowest since early 2020 at the same time that US stocks are at record highs.
  • Investors should anticipate Wall Street’s so-called “fear gauge”, or VIX, to come off those lows in the coming months, said UBS.
  • Volatility may pick up pace as investors wrestle with inflation worries and COVID-19 variants.
  • See more stories on Insider’s business page.

Wall Street’s key measure of stock-market volatility is at its lowest since the COVID-19 crisis took off in the US last year, but that calmness will likely break over the next few months, according to UBS.

The US stock market has soared to record highs in 2021 on the back of accelerating coronavirus vaccinations worldwide and roughly $5 trillion in financial aid deployed by the US government to mitigate the pandemic’s economic damage. The vaccinations and stimulus packages have been laying the groundwork for a further reopening of the world’s largest economy as people begin to rebuild work and school routines and spend the money sent to them by Uncle Sam.

The S&P 500 index has shot above the 4,100 level and the Dow Jones Industrial Average tracking blue-chips is at its strongest levels, driven by cyclical sectors such as energy and industrials that stand to benefit from increased economic activity.

Wall Street’s so-called “fear gauge,” at the same time, has dropped below the 17 level, the lowest since early February 2020, before the World Health Organization declared the coronavirus outbreak a pandemic. But don’t expect the Cboe volatility index to continue to stay that low, said the world’s largest wealth manager in a note published Friday.

UBS noted a news report that at least one investor bought about $40 million in VIX call options that indicate the buyer expects market volatility to pick up pace over the next three months. One or more investors anticipated the VIX to reach above the 25 level and rise towards 40 by mid-July, Reuters reported, citing trading data.

“We see reasons to expect periodic bouts of higher volatility in the near term,” said Mark Haefele, chief investment officer at UBS Global Wealth Management, in the note.

Growth vs inflation

Firstly, investors may be torn between optimism over accelerating economic growth and worries over higher inflation. Among the signs that recovery is taking further hold was the recent and strongest reading in services-sector activity since 1997 from the Institute for Supply Management. European growth should also strengthen as vaccinations increase.

“Still, as pent-up demand meets supply constraints, a pickup in inflation could well unsettle investors,” said the investment bank. This week, Dallas Federal Reserve President Robert Kaplan said inflation could rise “well in excess of 2.5%,” over the summer, which would be well above the Fed’s 2% target.

COVID-19 strains

Investors have so far looked through news about variant strains of COVID-19. “This optimism could be put to the test by the spread of new variants of the virus, especially in areas where the vaccination effort has been progressing well, such as in the US.”

UBS noted “pockets” of rising infections in Ohio and Wisconsin.

Trading activity

Volatility has been “sporadically heightened” by a rise in institutional and retail activity in the options market, along with the increased share of growth stocks in major equity indexes, said UBS.

“In the first quarter we saw retail activity driving volatility in individual stocks, such as GameStop, which spilled over into broader market swings,” said Haefele.

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US companies are expected to see their strongest profit growth in nearly 20 years after downward revisions were ‘too aggressive’

oil texas
First-quarter earnings projections for the energy sector have more than doubled.

  • Earnings for S&P 500 companies are expected to rise by 6% in the first quarter of 2021, according to FactSet data.
  • A 6% increase would mark the largest rise since the firm starting tracking the bottom-up EPS estimate in early 2002.
  • The energy and materials sectors are on track to post double-digit increases in earnings.
  • See more stories on Insider’s business page.

Expectations for quarterly earnings growth are at their strongest in about two decades as analysts pencil in the impact of the US economy’s acceleration out of recession, led by projections for earnings in the energy sector to more than double.

A big wave of financial reports should hit Wall Street in mid-April, with big banks including JPMorgan Chase, Goldman Sachs and Wells Fargo among the companies that will kick off the first-quarter earnings season for 2021.

Ahead of that, Wall Street analysts are looking for S&P 500 500 companies overall to post a 6% increase in bottom-up per-share earnings, according to FactSet. A 6% rise would represent the largest increase since the financial-data firm began tracking the earnings estimate in the second quarter of 2002. Earnings, on average, are currently expected to come in at $39.86 per share.

The bottom-up EPS estimate is an aggregation of the median first-quarter earnings-per-share estimates for all of the companies in the S&P 500, FactSet said in a note published Thursday.

The projected 6% increase stands out in part because a bottom-up EPS estimate usually decreases during a quarter. FactSet said during the past five years, the estimate has recorded a decline of 4.2% during a quarter, and during the past 15 years, it has tended to post a decrease of 5.1%.

Analysts “may have been too aggressive in their downward revisions to EPS estimates during the first half of 2020 at the height of the COVID-19 lockdowns,” wrote John Butters, senior earnings analyst at FactSet, in looking at the factors behind the boost in first-quarter projections.

The global economy sunk into recession last year as the coronavirus pandemic forced businesses worldwide to close or reduce operations to curb the spread of the respiratory disease. The US economy contracted by 33% in the second quarter of 2020.

But analysts in the third quarter of 2020 began raising their earnings expectations for that quarter and beyond. FactSet foresees US gross domestic product expanding by 5.7% in 2021, higher than the projected 4% rate on December 31.

Read more: Goldman Sachs says buy these 33 stocks now as profits rebound for companies that suffered the most during the pandemic

Rising commodity prices and interest rates also appear to be fueling upward revisions. Oil prices have jumped by more than 20% to top $59 a barrel during the first quarter and the yield on the 10-year Treasury note quickly scaled up above 1.7% during the first three months of this year from 0.92%.

The highest percentage increases in bottom-up EPS estimates are for the energy, materials, and financials sectors as they are “likely benefitting from either higher commodity prices (Energy and Materials) or higher interest rates (Financials),” said Butters.

Per-share earnings estimates for the energy sector have shot up by 123%, to $2.55 from $1.14, the largest boost in projections among the 11 sectors tracked on the S&P 500 index. The financial sector is forecast to post a collective earnings increase of about 13% for the first quarter.

“Finally, companies in the S&P 500 have been much more optimistic in their EPS guidance than normal,” said Butters, noting that 61 companies have issued positive first-quarter guidance, well above the five-year average of 35.

“If 61 is the final number for the quarter, it will mark the highest number of S&P 500 companies issuing positive EPS guidance for a quarter since FactSet began tracking this metric in 2006,” he said.

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Stocks were the only major asset class that gained in the first quarter, but Bank of America says ‘anemic’ returns may be on the horizon

Bank of America trader NYSE
A trader with Bank of America/Merrill Lynch works on the floor of the New York Stock Exchange in New York, on May 10, 2011

Stocks were the only major asset class (not including cryptocurrencies) that saw gains in the first quarter of 2021, but according to Bank of America’s sentiment indicators, “anemic” returns may be on the horizon.

In a note to clients last week Bank of America analysts reviewed the performance of all major asset classes in the first quarter.

The analysts found that stocks were the lone bright spot so far this year. All 11 equity sectors posted gains through the end of March, with cyclicals leading the charge.

The energy (+29.3%), financial (+15.4%), and industrial (+11.0%) sectors were the best performing groups, posting double-digit gains in the period, while the utilities (+1.9%), tech (+1.7%), and consumer staples (0.5%) sectors performed the worst.

The S&P 500 rose 6.2% in the quarter to record highs of over 4,000.

Bank of America said the rise in stocks was mainly due to “unprecedented monetary and fiscal stimulus,” which allowed “low-quality” stocks (those rated “B” or lower in S&P quality rankings) to outperform “high quality” stocks (those rated “B” or better).

The stimulus also led to a rotation away from highly valued tech names and into value plays. According to Bank of America, the first quarter “marked the biggest rotation into Value since 2001.”

Despite the strong performance from equities, Bank of America warned of dangerous “euphoric sentiment” in the markets.

Read more: BANK OF AMERICA: Buy these 14 semiconductor stocks poised to benefit from Biden’s multitrillion-dollar infrastructure plan – including one set to surge 39%

According to the firm’s Sell Side Indicator, a contrarian gauge of Wall Street sentiment, optimism over the past twelve months has risen three times the typical rate following bear markets since 1985.

Bank of America’s sentiment indicator is now at a 10-year high and the closest it’s been to a contrarian “sell” signal since May 2007.

When the “sell” signal flashed over a decade ago, the S&P declined 13% in the following 12 months.

Bank of America recommended clients stay invested, but “go up in quality” to names with stronger balance sheets and less debt.

The investment bank said clients should focus on investments in areas sensitive to “the real economy” like cyclicals, industrials, and small caps stocks amid record fiscal stimulus and President Biden’s new infrastructure plan.

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Stock futures extend gains and yields rise after March jobs report outstrips expectations

NYSE Trader smile happy
  • S&P 500, Dow and Nasdaq-100 futures each rose Friday after data showed the US economy added 916,000 jobs in March.
  • Long-dated Treasury yields also rose after the report beat expectations of 660,000 jobs.
  • The stock market will reopen and trading will resume on Monday.
  • See more stories on Insider’s business page.

Stock futures extended gains and Treasury yields rose Friday after a larger-than-expected addition of 916,000 US jobs in March underscored expectations the world’s largest economy continues to recover from the COVID-19 crisis.

The moves in futures and government bonds took place during the Good Friday holiday. Full equity trading will resume on Monday and the bond market will close early on Friday, at 2 p.m.

Dow Jones Industrial Average futures were up by 180 points and popped up as much as 218 points, or 0.7%, after the Labor Department released its monthly jobs report. Dow futures had been up by 0.2% just before the data arrived. S&P 500 futures rose 0.5% and Nasdaq-100 futures tacked on 0.4% after pre-data gains of 0.3% each.

Economists surveyed by Bloomberg had expected, on average, nonfarm payrolls to climb by 660,000. The latest report also included upward revisions in January and February for a combined addition of 156,000 jobs.

“The equity market party is in the early stages as the US will likely add between 500,000 and a million jobs over the next few months,” wrote Edward Moya, a senior market analyst at Oanda, in a Friday note. “US stocks will remain attractive, but that could change quickly if Treasury yields start to surge again.”

Friday’s gains in stock futures suggested that Wall Street could see more record highs on Monday. The S&P 500 on Thursday powered through the 4,000 mark for the first time after President Joe Biden late Wednesday outlined an eight-year infrastructure plan to invest in upgrading and modernizing transportation systems, roads, bridges and broadband, among other items.

In the bond market, the benchmark 10-year Treasury yield rose to 1.70% as prices fell. The yield was at 1.68% before the March data. The 30-year Treasury yield also rose, to 2.357% from 2.328%. Bond yields have been climbing this year as investors price in expectations for further economic growth and higher inflation to accompany the expansion.

The US Dollar Index also gained ground, up at 93.04 from 92.86 before the payrolls report.

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S&P 500 tops 4,000 as Wall Street cheers Biden’s $2 trillion infrastructure plan

Traders work on the floor of the New York Stock exchange
Traders work on the floor of the New York Stock exchange

  • The S&P 500 topped the 4,000 mark for the first time as second-quarter trading kicked off.
  • Stocks rose after President Joe Biden outlined his $2 trillion multi-year infrastructure plan.
  • The 10-year Treasury yield edged lower after weekly jobless claims rose by more than expected.
  • See more stories on Insider’s business page.

US blue-chip stocks hit record highs on Thursday, starting off the second quarter with a bang, after President Joe Biden’s plans to spend $2 trillion to upgrade and modernize US infrastructure ignited investor risk appetite, boosting equities and commodities.

The S&P 500 pushed past the 4,000 level for the first time, getting off to a strong start for April, a month that typically has been one of the strongest in the year for the benchmark index.

Here’s where US indexes stood at 09:57 a.m. on Thursday:

Tesla shares were among so-called green stocks that rose after Biden late Wednesday outlined an eight-year plan for investments in transportation systems, including shifts toward electric vehicles, as well as spending on broadband and roads. He’s also aiming for investment in other areas such as child care.

Biden’s plan will also include an accompanying tax hike for corporations, something which could temper some of the enthusiasm on Wall Street, analysts said.

“The larger impact to markets will be whether or not the corporate tax rate is raised to 28% — or somewhere in between there and the current 21% level — and whether or not a global minimum tax on corporations can be established,” Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, said in a note.

“It’s likely that the stock market can withstand a hike in the corporate tax rate to 25%, but unclear how much room there is above that if stocks are going to keep moving higher between now and year-end,” he said.

Meanwhile, the 10-year Treasury yield fell below 1.7%, as bond prices rose following the release of US jobless claims data that cast some doubt on the robustness of the labor market. Claims totaled 719,000 last week, higher than the median estimate of 678,000 from economists surveyed by Bloomberg. The reading also marked the second increase in three weeks.

Elsewhere, US-listed shares of Nio and Xpeng jumped after the China-based electric vehicle manufacturers reported strong first-quarter delivery figures.

Gold rose 0.7% to $1,727.15 per ounce. Long-dated US Treasury yields eased, with the 30-year yield falling 6 basis points to 2.368%, while the benchmark 10-year yield also fell 6 basis points to 1.697%, still close to its highest since the onset of the pandemic last year.

Oil prices rose as OPEC and its allies met to discuss their production strategy. Brent crude futures, the global benchmark, gained 1.7% to $63.80 a barrel, while West Texas Intermediate crude traded up 2.1% at $60.41 a barrel.

Bitcoin was last up 0.7% on the day at $58,961.

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Corporate share buybacks are at a record high but capex and tax demands may slow the pace, says BofA

US dollar bill
  • A four-week average of share buybacks hit a record of nearly $2 billion, according to research from Bank of America.
  • Wall Street may be on track for $900 billion of gross S&P 500 buybacks in 2021.
  • But buybacks may slow down if companies put more cash into capital expenditures.
  • See more stories on Insider’s business page.

Share repurchases by corporations reached record highs in March, but buybacks may slow if companies decide to swing their cash into capital expenditures or if they adhere to tax regulations stemming from the government’s stimulus efforts, said Bank of America.

The four-week average of repurchases by corporate clients hit record highs “after a big resurgence in buybacks this month” that put transactions at nearly $2 billion, said a team of equity and quant strategists led by Jill Carey Hall in a research note released Wednesday.

If corporate client buybacks continue at the pace of $21 billion year-to-date or more than $80 billion annualized, that would imply more than $900 billion of gross S&P 500 buybacks in 2021, the strategists said. It said it based that figure on a roughly 9% average share of S&P buybacks over the last five years.

“This would be above 2018’s peak $800 billion levels and nearly double 2020’s depressed $500 billion levels, suggesting upside risk to our forecast for no net EPS impact from buybacks to the S&P,” BofA said.

Recent repurchases have been prominent in the tech sector, with near-record buybacks in each of the last six weeks.

However, the strong pace of overall stock repurchases “may not persist if cash deployment priorities shift more toward capex, which investors want and where corporates have underinvested,” said BofA. It referenced its Fund Managers Survey issued March 16 that showed “investors now want capex” and not buybacks or debt reduction.

“We see multiple tailwinds for capex including the cyclical rebound, a potential infrastructure bill and US re-shoring,” or relocations by companies back in the US, Carey Hall said.

President Joe Biden is set later Wednesday to unveil a $2 trillion infrastructure bill that’s expected to focus on investments including in roads, bridges, and broadband.

“What else can curtail buybacks? Payback for stimulus (i.e., higher taxes) which could cost 5-10% EPS growth,” said BofA.

Biden is expected to propose that his eight-year infrastructure plan be paid for with tax hikes on corporations. Earlier this month, Biden signed off on a $1.9 trillion fiscal stimulus package.

BofA said single-stock corporate buybacks in tech last week hit roughly $1.61 billion. March was a relatively rough month for large-cap tech shares as investors rotated from the high-flying group and into small-cap and cyclical shares. The rotation has been stoked in part by the vaccination of millions of Americans that’s been leading more businesses to resume normal operations.

BofA said it’s starting to see a pickup in buybacks in other sectors including consumer discretionary, health care and financials. The Federal Reserve said last week that as of June 30 it will lift share buyback and dividend-payout restrictions on banks that pass stress tests. The Fed last year imposed the restrictions as a way to safeguard the financial system in the face of the COVID-19 pandemic.

Last week, corporate buybacks reached $143 million for consumer discretionary stocks and $119 million in health care shares, BofA data shows.

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Stocks look ‘resilient’ as investors pour $120 billion into equity ETFs in the face of rising rates, BlackRock says

trader Gregory Rowe
  • Inflows into equity ETFs of $120 billion are outpacing inflows to bond ETFs, BlackRock said in a note Monday. 
  • Stocks and bond yields generally have been moving higher simultaneously as the US growth picture improves. 
  •  Value and cyclical stocks are finding favor among investors, said the asset manager. 
  • Visit the Business section of Insider for more stories.

Inflows into the equity market are strong despite the spike up in rates as investors respond to economic growth prospects by embracing risk and not staging a “taper tantrum”, BlackRock said in a note Monday.

Equity exchange-traded funds have raked in $120 billion so far this year, outpacing inflows into fixed income ETFs by 4:1, according to iShares data outlined by Gargi Chaudhuri, head of US iShares markets and investments strategy at BlackRock.

That rush of investor cash into equities has taken place at the same time that Treasury bond yields have made notable moves higher, including a jump past 1.5% on the 10-year yield last week.

“That’s not because the stock and bond markets have become untethered, but rather because rates are moving for the right reason: stronger U.S. growth,” wrote Chaudhuri in the note, describing equities as “resilient”. 

Economists have broadly been increasing their forecasts for economic growth as vaccinations to prevent COVID-19 continue to accelerate. Meanwhile, House representatives in Washington last week passed a proposed $1.9 trillion stimulus bill, sending it to the Senate for approval. The US economy in 2021 could grow by the most in decades, said John Williams, president of the Federal Reserve Bank of New York, last week.  

“Unlike previous bouts of rising rates (like the Taper Tantrum of 2013), equity investors have generally responded with risk-on reallocations into pro-cyclical exposures this time around,” said Chaudhuri.

The response by investors could also be explained by real rates remaining “extremely accommodative” at around -70 basis points after the recent rise, she added. Real interest rates exclude the effects of inflation.

ETFs skewed towards value and cyclical stocks will keep benefiting as rates continue to rise and the yield curve steepens, Chaudhuri said, “with over $8 billion of ETF inflows to the value factor corroborating this view.” The inflows of $8 billion represent nearly as much as the previous six months combined, BlackRock said.

Meanwhile, earnings forecasts for 2021 and 2022 should increase through the spring and summer, “further cushioning in the impact of the rise in Treasury yields,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics, in a Monday note.

Shepherdson said the spread between Treasuries and the S&P 500 earnings yield recently fell to 115 basis points after widening by 363 basis points at the peak.

“A narrower spread is no guarantee of future equity gains, but it ought to provide of measure of comfort,” he wrote.

This article and headline has been corrected from an earlier version that said $8 billion has flowed into ETFs this year. That figure refers to inflows into value stock ETFs. The correct figure for year-to-date inflows into ETFs is $120 billion. 

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EVs and clean tech are bubbles that will deflate as economic recovery prompts rethinking of ‘aspirational’ sectors, says JPMorgan

elon musk journalists crowd no mask tesla construction
Elon Musk talks to journalists at the construction site of the Tesla Giga-Factory in Grünheide near Berlin, Germany, September 3, 2020.

  • Bubbles in EV and clean-tech technology portions of the market began forming when the COVID-19 pandemic was growing in early 2020, says JPMorgan 
  • Investors are reassessing a “reset” agenda as economic recovery takes hold and bidding up oil and travel stocks. 
  • Tesla shares continued to selloff during Tuesday’s session. 
  • Visit the Business section of Insider for more stories.

Bubbles in electric-vehicle and clean-technology stocks will deflate as investors look for exposure to a recovery in the world’s largest economy, with oil and hospitality stocks emerging among such plays, said JPMorgan on Tuesday.

The bubbles trace back to February and early March 2020 when the coronavirus crisis began tightening its grip on US markets. Rallies were tied to the outlook for certain technologies, ideologies and policies and “only to a smaller extent to retail paycheck and popularity and momentum chasing,” said Marko Kolanovic, head of macro quantitative and derivatives strategy at JPMorgan, during a Tuesday conference call held by the investment bank.

“Really they took off with COVID. There was this premise that we’re going to close and reinvent and redesign the world and reimagine,” he said.

He noted that the bubbles were not directly related to classical economic cycles and rather driven “by a reset agenda.”

But with economic activity accelerating, “what you’re seeing is oil moving up, copper moving up, retail names,” and gains in shares of cruise lines and airlines, said Kolanovic. He pointed out that the energy sector is still down by 50% over the year.

“As the real economy is recovering some of these, call it, aspirational market segments are probably going to deflate,” he said.

Oil prices and hospitality stocks were hit hard as the pandemic forced businesses worldwide to temporarily close, and in some cases multiple times, to curb the spread of the virus.

Retail investors “may get disillusioned a little bit with some of these names” in the bubbles. “You obviously had a lot of short-squeezing along the way last year. [Treasury Secretary] Janet Yellen had some comments about crypto yesterday so I think you may see some ‘pouring the cold water’ on the whole innovation angle,” rather than a “pop that takes out everything,” said Kolanovic.

JPMorgan during the conference call did not specify any particular stocks at risk of a correction.

But broader EV-sector weakness was seen in Tuesday’s session, with Tesla, Nio and Nikola all down. Tesla in particular has seen an eye-popping rally.  Shares climbed by more than 450% since early March through last Friday. The stock on Monday was hammered down 8.6% and continued to sell off on Tuesday.

Tesla’s slide also comes alongside a drop in bitcoin this week following a massive February rally, during which the car maker announced it had made a $1.5 billion investment in the cryptocurrency. Yellen on Monday told CNBC that bitcoin is “an extremely inefficient way of conducting transactions, and the amount of energy that’s consumed in processing those transactions is staggering.”


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Socket Mobile spikes 980% after announcing barcode scanner for all iPhone 12s

iPhone 12
  • Socket Mobile stock jumped as much as 980% after it uveiled its new DuraSled barcode scanner for the iPhone 12.  
  • DuraSled is the company’s first enterprise-grade barcode scanner for iPhone 12s.  
  • Socket Mobile will sell three models of the DuraSled scanner. 
  • Visit the Business section of Insider for more stories.

Socket Mobile stock was up by nearly 1,000% on Tuesday, propelled by the company’s launch of its DuraSled barcode scanner for Apple’s iPhone 12.

The company said DuraSled is its first enterprise-grade barcode scanner for the iPhone 12, iPhone 12 Pro, iPhone 12 Pro Max and iPhone 12 Mini. The DuraSled will give users of iPhone 12 models access to “professional-grade” scans. Such work includes delivery services, stock counting and ticketing.

Socket Mobile shares leapt to an intraday high of $35, a 980% bounce from their closing price of $3.24 on Friday, the last full day of trading before Monday’s Presidents’ Day holiday.

Socket said the DuraSled scanner will allow employers to support workers with iPhone 12 phones along with supporting older iPhone series ranging from the iPhone 6 to iPhone 11. The DuraSled itself comes in three models. 

Shares of Socket were on course Tuesday to rise by about 1,480% over the past 12 months.




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