Bank of America outlines what could make or break an investor’s ability to generate positive stock-market returns over the next decade

NYSE trader
New York Stock Exchange.

  • The buy-and-hold investment strategy that has worked so well may be at risk over the next decade, Bank of America said in a Friday note.
  • The bank forecasts a flat return for the stock market over the next 10 years, unless dividends are reinvested.
  • “The simple act of reinvesting dividends could yield a total return equivalent to the S&P 500 at 6,000 in 2031,” BofA said.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

Investors conditioned to buy stocks and hold for the long-term may be in for a decade of pain if Bank of America’s outlook proves correct.

Led by equity and quant strategist Savita Subramanian, the bank highlighted that its valuation model is currently forecasting a flat return over the next decade for stocks – or 0% – according to a Friday note that cited supply-chain woes and peak globalization.

“COVID-related supply chain issues have spread beyond consumer goods. And longer-term signs of global friction are easy to find. But risk premia barely reflects this,” Subramanian explained.

To combat the potential 0% returns over the next decade, BofA says the number one thing an investor can do is reinvest their dividends.

“The simple act of reinvesting dividends could yield a total return equivalent to the S&P 500 at 6,000 in 2031, assuming long-term average growth and payouts,” the note said.

Hitting that mark in the next 10 years would represent a total return of only 36% for the S&P 500, or an annualized gain of about 3%. That’s just a fraction of the past decade’s return of 360%, representing an annualized return of about 16%, according to data from Koyfin.

But with stocks expensive on nearly every metric, “double digit gains from the benchmark may be hard to repeat,” Subramanian said.

While BofA’s outlook is much bleaker than recent history, it would continue a decades-long trend of dividends driving much of the stock market’s return. Since 1970, 84% of the total return of the S&P 500 can be attributed to reinvested dividends, according to data from Morningstar and Hartford Funds.

To enable dividends to be automatically reinvested, an investor can contact their broker or enable the option online. And if fractional share trading is allowed, investors can manually purchase fractional shares whenever a dividend is paid to their account.

For example, every time Apple pays its quarterly dividend of $0.22 per share, an Apple investor will automatically buy .0015 shares of Apple. Then, compound interest will do the rest of the work.

Read the original article on Business Insider

A startup is asking the SEC for approval to offer 24-hour access to the stock market, report says

Traders work on the floor of the New York Stock Exchange (NYSE) on March 18, 2020 in New York City.

A startup trading platform wants to upend the traditional stock market cycle by proposing a 24-hour trading operation – including weekends and holidays – potentially altering the way investors have traded for decades.

24 Exchange is in the process of completing its application to the US Securities and Exchange Commission and has filed key parts of it with the regulator, including an application for a national stock-exchange license, The Wall Street Journal first reported. There is no guarantee the SEC will approve it.

The vision for the exchange was crafted by Dmitri Galinov, a 20-year electronic trading veteran, who worked at Credit Suisse and founded FastMatch, a foreign exchange trading venue.

“If there is big news over the weekend, you can try to trade, but you really can’t,” the founder and CEO told The Journal.

His vision for the stock market is very similar to the way cryptocurrencies currently trade.

Digital assets trade non-stop, with many of the biggest moves often happening over the weekend. In contrast, traditional stock trading operates from 9:30 am to 4:00 pm ET, Monday through Friday.

Galinov told The Journal his proposition would serve international traders who want to trade US shares. He also noted that demand for a 24-hour cycle has been on the rise, especially from individual investors.

Also part of his proposal to the US regulator is to trade fractional stocks in as little as 1/1000th of a share, he told The Journal, a feature Robinhood Markets and Fidelity Investments already offer.

His three-year-old startup, whose parent firm is based in Bermuda, currently offers foreign exchange and cryptocurrency trading.

The rapid rise of retail investors through the pandemic has been a huge force driving the stock market, enabled by commission-free trading applications, government stimulus checks, and pandemic boredom.

Read the original article on Business Insider

Investors should hold onto their high-growth tech stocks even as interest rate volatility batters the sector, Goldman Sachs says

A trader works on the floor at the New York Stock Exchange (NYSE) in New York, U.S., March 4, 2020. REUTERS/Brendan McDermid
A trader works on the floor at the NYSE in New York.

  • Investors should hold on to their high-growth tech stocks despite this week’s interest rate-induced sell-off, Goldman Sachs said.
  • The bank said the velocity of rate spikes has a bigger impact on high-growth stocks than the absolute level of interest rates.
  • “Our overall macro outlook of low rates and low trend economic growth supports maintaining longer-term positions in high quality secular growth stocks,” Goldman said.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

A spike in interest rates sparked a deep sell-off in technology stocks on Tuesday, but Goldman Sachs says investors should still hold onto their high-growth stocks for the long-term, according to a Tuesday note.

The 10-Year US Treasury yield hit a 3-month high of 1.56% on Tuesday, sparked by fears of rising inflation and uncertainty towards Congress’ ability to raise the debt ceiling before the Treasury runs out of money in mid-October.

But interest rates are still historically low, and a low economic growth environment in the long-term should support valuations for high-quality, high-growth stocks that are benefiting from secular trends, according to Goldman.

“Our overall macro outlook of low rates and low trend economic growth supports maintaining longer-term positions in high quality secular growth stocks,” analysts said.

For now, cyclical stocks may outperform longer-duration technology stocks in the short-term if interest rates continue to rise. But that outperformance will be “more muted” in today’s environment than it was earlier this year due to expectations of slower economic growth, according to Goldman.

In fact, September’s surge in interest rates is less extreme than the interest rate spike seen earlier this year, when a spike in the 10-year yield was in part driven by expectations of a quick vaccination roll-out and a strong rebound. That view has since shifted lower.

“Today, economic growth is decelerating, the FOMC is expected to announce the start of tapering at its November meeting, and our economists have downgraded China’s economic growth forecasts,” Goldman said.

Read the original article on Business Insider

Men over 45 who identify as having ‘excellent investment experience’ are more likely to panic sell during a market downturn, MIT study finds

Trader NYSE
A trader works on the floor at the New York Stock Exchange (NYSE) in New York City, U.S., March 5, 2020.

  • While the S&P 500 has generated an annualized return of 7.5% over the past two decades, the average investor has only seen a return of 2.9%, according to JPMorgan.
  • Now a study from MIT helps reveal which investors are panic selling at the worst possible time.
  • According to MIT, men over the age of 45 who identify as having “excellent investing experience” are more likely to panic sell than other cohorts.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

Panic selling during stock market corrections can be detrimental to the long-term returns of an individual investor, as both the best days and worst days in the market tend to happen in clusters that are extremely difficult to time.

That’s why over the past two decades, while the S&P 500 generated an annualized return of 7.5%, the average investor only saw a gain of 2.9%, according to data from JPMorgan.

Now, a study from MIT has identified the cohort of people that are most likely to panic sell at the worst possible time: men over the age of 45 who are either married or identify as having “excellent investing experience.” Cohorts with more dependents or an account size of less than $20,000 are also more likely to “freak out” and panic sell.

The MIT paper analyzed the trading behavior of more than 600,000 brokerage accounts attached to more than 200,000 households to identify who is selling and potentially be able to predict when they might sell in the future.

And while an individual investors’ initial panic sale can prevent future losses in the ensuing days and weeks, the study found that the biggest detriment to portfolio performance is the reluctance of the individual to buy back into the stock market when the fundamental outlook may still look challenging.

“We measure the opportunity of cost of panic sales and find that, while freaking out does protect investors during a crisis, such investors often wait too long to reinvest, causing them to miss out on significant profits when markets rebound,” wrote Daniel Elkind, Kathryn Kaminski, Andrew Lo, and colleagues.

The study defined a panic sale as a 90% decline in a household’s stock portfolio over a one-month period, of which 50% of the decline can be attributed to trades.

While the study does not define the “why” behind the panic selling trades, any human who has ever put money into a stock or ETF likely knows the gut punch feeling of a 20%, 30%, or even 50% decline in their portfolio value, and the resulting temptation to cut losses and get out.

Those human emotions have not changed in centuries of investing and stock market speculation, and they’re likely to continue as a constant wave of uncertainty clouds markets.

“Panic selling and freaking out are distinct behavioral patterns in finance that differ from other previously studied patterns” like over trading, the study concluded.

Read the original article on Business Insider

Investors should buy any dip in the market as declining COVID-19 cases spur fresh gains for stocks, JPMorgan says

NYSE Trader
A trader works on the floor of the New York Stock Exchange (NYSE) in New York, U.S., March 9, 2020.

  • Investors should treat any sell-off in the stock market as a buying opportunity, according to a Monday note from JPMorgan.
  • That’s because a likely decline in COVID-19 cases will help spur economic growth and drive stocks higher.
  • “We now think that the delta wave has likely peaked and is now receding in the US and globally,” JPMorgan said.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

Any dip in the stock market, like last week’s almost 5% Evergrande-induced decline, should be viewed as a buying opportunity for investors, JPMorgan said in a note on Monday.

The bank believes last week’s selling was driven by technical flows from CTAs and option hedgers, and that nothing has fundamentally changed their overall bullish outlook on stocks.

“Any weakness should be used to add to equities,” JPMorgan said, pointing to an expectation that the reopening trade will resume its upward trend as more cyclical sectors drive the market higher. That view is bolstered by an eventual normalization of monetary policy, which should drive interest rates higher, benefiting the sectors.

The Fed is expected to begin tapering its $120 billion in monthly bond purchases later this year, and 75% of market participants anticipate at least one interest rate hike in 2022.

Another important factor that should help boost equity prices is the decline in COVID-19 cases, which JPMorgan believes has already peaked in the US and globally.

“We now think that the delta wave has likely peaked and is now receding in the US and globally. As long as COVID-19 continues to ease, strong growth should reside ahead and activity should be bound to re-accelerate into 2022,” the bank said.

That pick-up in business activity will be driven by a less uncertain view of the global economy in the wake of COVID-19, and as businesses rebuild their depleted inventories and reinvest in their operations.

Finally, JPMorgan expects positive returns for the rest of 2021 as the stock market exits the weakest month of the year and heads into some of the strongest, based on historical data.

COVID-19 cases
Read the original article on Business Insider

The sell-off sparked by the Evergrande crisis has shaken retail investors’ buy-the-dip mentality, JPMorgan says

NYSE Trader
A trader works on the floor at the New York Stock Exchange (NYSE) in New York City, New York, U.S., March 3, 2020.

  • Retail investors’ confidence in the buy-the-dip trade was jolted after Monday’s stock market sell-off, JPMorgan said in a note.
  • The Evergrande debt crisis sparked $11 billion in outflows from equity ETFs on Monday.
  • “The outflow happened on a down day and is thus inconsistent with the buy-the-dip behavior,” JPMorgan said.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

The Evergrande-induced stock market decline earlier this week jolted confidence in the buy-the-dip trade, JPMorgan said in a note on Wednesday.

The bank highlighted $11 billion in outflows from equity ETFs on Monday, which happened on a day where stocks were down as much as 3%. “The outflow happened on a down day and is thus inconsistent with the buy-the-dip behavior,” JPMorgan said.

Monday’s sharp outflow was one of the largest this year when excluding days with quarter-end option and futures expiry dates, according to the bank. And while momentum traders could have played a significant role in the near 5% stock market correction due to a break-down in certain indicators, retail investors also played a role, JPMorgan said.

Retail investors’ net inflows into equities peaked at around $16 billion in July, before falling to $15 billion in August and declining even further so far in September, JPMorgan said, citing internal research.

“We would need to see more significant inflows into equity ETFs today and the following days to be able to say that retail investors’ impulse into equities and their previous buy-the-dip behavior remains intact,” the note said.

Confidence among retail investors likely surged in recent days given the solid rebound in stocks since Monday’s decline. Despite a decisive breakdown below the technical 50-day moving average earlier in the week, the S&P 500 recaptured that level on Thursday, jumping more than 1%. Now the index is now less than 1% away from reclaiming all of the losses stemming from Monday’s decline.

Equity ETF flows
Read the original article on Business Insider

US stocks struggle to recover from Evergrande rout while investors await the outcome of Fed meeting

Traders work at the trading floor in the New York Stock Exchange on Aug. 19, 2021.
New York Stock Exchange on Aug. 19, 2021.

US stocks struggled to regain their footing Tuesday following a brutal sell-off sparked by beleaguered Chinese developer Evergrande during Monday’s session. Investors, meanwhile, are awaiting the outcome of the Federal Reserve’s two-day Federal Open Market Committee meeting beginning that kicked off on Tuesday.

The Dow Jones Industrial Average and S&P 5oo both ended lower, while the Nasdaq eked out a gain.

Here’s where US indexes stood at the 4:00 p.m. close on Tuesday:

“Financial markets have Evergrande as the top story and will enter wait-and-see mode until a meaningful update from the Chinese government,” Edward Moya, senior market analyst at foreign exchange firm Oanda, said in a note Tuesday. “The Evergrande story won’t lead to contagion in the US but there are so many questions about who will be protected once China says ‘enough’ and swoops in.”

Evergrande, China’s second-largest property developer, has more than $300 billion in liabilities and could miss key interest payments due Thursday. There are no signs yet that the Chinese government will step in to save the company.

On top of Evergrande concerns, investors are anxious about the Federal Reserve’s potential tapering of stimulus and the risk of a prolonged period of inflation.

While several analysts, including those at BlackRock Investment Institute, do not expect Fed Chair Jerome Powell to announce any policy change this month, they are still keeping a close eye on any signal of how he plans to scale back monetary support, which includes tapering asset purchases.

“We expect the Fed to start normalizing policy rates in 2023, a much slower pace than market pricing for lift-off in 2022 indicates,” the BlackRock analysts said in a note.

Another issue that might be discussed, according to Moya, is the multi-million-dollar stock purchases of Dallas and Boston Federal Reserve presidents Robert Kaplan and Eric Rosengren, which involved purchases of big-name firms like Apple, Alibaba, and Tesla.

“If the Fed struggles to deal with intensifying scrutiny after their ethics review, the FOMC could lose two of its hawkish members,” Moya said.

Elsewhere, Fintech firm Revolut plans to offer commission-free stock trading to US clients as the London-based startup takes on rivals like Robinhood and Square amid a boom in retail investing, CNBC first reported Tuesday.

In cryptocurrencies, the US Department of the Treasury on Tuesday revealed it will sanction Russian-owned Suex for its role in laundering financial transactions for ransomware actors, marking the first time the agency has ever blacklisted a cryptocurrency exchange.

Meanwhile, Binance, the world’s largest cryptocurrency exchange, is shutting down cryptocurrency derivative products for existing customers in Australia by the end of the year, the latest bid by the exchange to appease regulators.

Bitcoin hovered just above $42,000 after a broader cryptocurrency sell-off Monday.

Oil prices rebounded. West Texas Intermediate crude climbed 0.31%, to $70.51 per barrel. Brent crude, oil’s international benchmark, rose 0.88%, to $74.57 per barrel.

Gold jumped 0.56%, to $1,774.99 per ounce.

Read the original article on Business Insider

The stock market’s fear gauge could signal more weakness ahead if it closes above this key level, according to technical analyst Katie Stockton

NYSE Trader
A trader works on the floor at the New York Stock Exchange (NYSE) in New York City, New York, U.S., March 3, 2020.


The stock market could still have further downside ahead if the Volatility Index closes above the key 25 level for the second day in a row, according to a Tuesday note from technical analyst Katie Stockton of Fairlead Strategies.

Stockton is keeping an eye on the market’s fear gauge as investors assess the damage from a potential default of China’s second largest property developer, Evergrande.

The potential insolvency risk for Evergrande sent the S&P 500 down as much as 3% yesterday after it became clear that the company may be unable to meet its upcoming debt payments of $83 million on Thursday. Now many market participants are wondering if Evergrande’s $300 billion in liabilities could represent a systemic risk to markets.

According to Stockton, the S&P 500’s decisive close below its 50-day moving average on Monday means secondary support at 4,238 is in play, representing potential downside of 3% form current levels.

“The 5% pullback is differentiated negatively from other dips below the 50-day moving average in that the indicators have seen notable deterioration. The daily MACD indicator is in negative territory and the weekly stochastics have fallen from overbought territory, increasing risk of downside follow-through,” Stockton explained.

Monday’s price action is comparable to the March 4 low, in which the S&P 500 fell decisively below its 50-day moving average. But that price action was reversed on March 5, when the S&P 500 jumped back above its rising 50-day moving average.

“Should we see the same from the S&P 500 today, that would indicate that the pullback has matured already. Otherwise, we would brace for a breach of the cloud and test of secondary support,” Stockton said.

Despite Tuesday’s relief rally of about 0.5%, the S&P 500 still remains 1.5% below its 50-day moving average.

Stockton is watching the 25 level on the VIX to sense if more downside is likely.

“We would be concerned if the VIX closes above 25 for two consecutive days because that would hold bearish implications for the inversely correlated S&P 500,” Stockton concluded.

As of Tuesday afternoon, the VIX traded at 23.57 and hit an intraday high of 25.60.

VIX chart
Read the original article on Business Insider

The odds of a 20% correction in stocks are rising as the market transitions to the next stage of its cycle, Morgan Stanley warns

Traders work at the trading floor in the New York Stock Exchange in New York, the United States, Aug. 19, 2021.
  • The odds of a 20% correction in equities are increasing, Morgan Stanley said.
  • The analysts called this the “Ice” scenario. They also laid out another outcome called “Fire.”
  • “Ice” is if earnings revisions slow down while “Fire” is if the Fed begins to remove monetary accommodation.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

The slump in the benchmark S&P 500 on Monday offers a different sentiment from the market’s seven-month run since the beginning of this year.

It means the odds of a 20% correction in equities are increasing as the market transitions to the next stage of its cycle, Morgan Stanley said in a note published Monday.

Analysts – led by Michael Wilson – called this scenario “Ice,” which would happen if earnings revisions and higher-frequency macro datapoints slow down.

They laid out another near-term risk path for the stock market, called “Fire,” a more optimistic outlook that would occur if the Federal Reserve begins to remove monetary accommodation as the US economy overheats.

Ice, the more likely of the two outcomes, they said, would be “destructive” as it would translate to a 20% correction in the S&P 500, whereas Fire would only lead to a “modest and healthy” 10% correction.

“Will it be Fire or Ice? We don’t know, but the Ice scenario would be worse for markets and we are leaning in that direction,” the analysts said. “We think the mid-cycle transition will end with the rolling correction finally hitting the S&P 500.”

Still, analysts said they are bracing themselves in the event of an Ice outcome.

“We point to downside risk to earnings revisions, consumer confidence, and PMIs,” the analysts said. “These indicators are all highly correlated to S&P price on a rate of change basis, and thus we highlight what downside in these measures could mean for the S&P 500.”

As a result, the analysts said they continue to recommend more defensively oriented quality (healthcare and staples) to protect from the Ice scenario while “keeping a leg in financials” to participate in a Fire outcome.

“Many commentators and clients continue to point to the S&P 500 near all-time highs as a leading indicator and rationale for even higher prices ahead,” the analysts said. “However, in our view, the relative strength of the S&P 500 and Nasdaq 100 is further confirmation that the market understands the mid-cycle transition narrative.”

This mid-cycle transition, the analysts said, is “right on schedule,” especially given the fiscal stimulus during the pandemic.

Read the original article on Business Insider

Stocks actually perform better when investors are uncertain about economic policy, despite fears to the contrary, says a Wall Street chief strategist

NYSE Trader
  • Investors have been trained to believe that the stock market hates uncertainty, but historical performance tells a different story.
  • Since 1985, high levels of economic-policy uncertainty have been associated with solid future stock returns, according to The Leuthold Group.
  • “Investors hoping for more clarity should be careful what they wish for,” chief investment strategist James Paulsen said.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

Investors have been trained to believe that the stock market hates uncertainty, but historical performance tells a different story, according to Leuthold Group chief investment strategist James Paulsen.

In a recent client note, Paulsen highlighted that periods of high economic policy uncertainty have been associated with solid future stock market returns. It makes sense, according to Paulsen, as people remained highly uncertain of Fed and fiscal policy many years into the economic recovery of 2008’s great recession.

Uncertainty is high now among investors as they wonder when the Fed will taper its monthly bond purchases (and by how much), when the Fed will raise interest rates, and whether Congress will be able to spend as much as President Biden wants them too.

Utilizing various indicators that measure fiscal and monetary policy uncertainty, Paulsen found that the only time stock market returns disappointed was when both monetary and fiscal policy uncertainty were below average. “That is, the stock market struggled whenever investors were not worried about economic policies,” Paulsen explained.

On the flipside, when concerns about monetary or fiscal policy were above average, the stock market delivered future annualized returns of about 20%.

“We guess that higher levels of policy uncertainty often result in superior stock returns because it creates a Wall of Worry. When investors are anxious about pending actions of monetary and fiscal authorities, the stock market’s potential upside appears to be much greater than its risk,” Paulsen said.

That plays into the Wall Street adage that the stock market climbs a wall of worry and falls on a slope of hope.

“Investors hoping for more clarity should be careful what they wish for…rather than fear policy uncertainty, stock investors should embrace it!” Paulsen concluded.

Read more: Goldman Sachs shares a ‘consistently profitable’ stock options strategy that capitalizes on earnings and company analyst days – including the 4 trades to make by next week

Stock market returns amid policy uncertainties
Read the original article on Business Insider