Bottom Line: Price Momentum Drawdown
For those looking for direct MACRO signals on what would cause a larger and more sustained drawdown in the Price Momentum Factor and YTD S&P 500 winners, keep an eye on the 2yr yields. If the 2yr yield breaks meaningfully above the 4.2% level (so heading toward 4.3-4.5%) it would likely be associated with hawkish economic data that forces the Fed to hike rates. The drawdown could be severe given the unusually high level of volatility in the concentrated group of YTD S&P 500 winners and the Price momentum factor.
Relevant News: Index Return Stats
Just 16.9% of S&P stocks (by count) explain 80% of YTD index returns. That is the lowest reading since 1990 and below the Dot Com reading. Contributions from Price Momentum confirm the concentration of returns. The rolling 3mos average of Tech and Deep Cyclicals (Energy, Materials, and Industrials) account for roughly 40% of top decile Price Mo names.
Things to Watch [Consensus, Results]:
Strategy:
Extreme Volatility in YTD Winners Makes it Difficult to Manage Risk– (HERE)
The S&P 500 names that have contributed the most to S&P appreciation this year have 1mo realized vol in the 99th%tile going back to 2010 and 97th%tile on a 3 mos basis back to 2010. The price momentum factor vol is above the 95th%tile and single name stock vol is at the highest level ever relative to S&P index vol. History suggests that such concentration does not necessarily signal an imminent reversal. When Price Momentum is being driven by a narrow set of names, forward 1 week and 1 month returns have been better or roughly in line with all periods for both the Price Mo factor and the S&P Index.
China:
Headwinds for the CNY– (HERE)
The recent 4% appreciation of the CNY has exceeded expectations, but the strengthening trend is likely to stall as China faces slowing domestic growth, likely monetary easing, and tighter controls on capital outflows, all of which weaken support for the currency. While China’s large trade surplus and concerns about CNY undervaluation have increased international pressure (particularly from Europe) meaningful policy action to force appreciation remains unlikely. Beijing is more inclined to address trade imbalances through measures such as reducing export tax rebates rather than allowing significant currency gains, and the prospect of a Plaza Accord-style agreement is remote given China’s distrust of such arrangements. As a result, there is a meaningful risk that USD/CNY ends the year above the market’s current expectation of 6.7.
Financials:
Thoughts from the Road – Changing rate paths, deposit concerns and receiving clarity on Clarity – (HERE)
Banks are benefiting from a higher 2–5 year lending curve, which has improved loan yields faster than deposit costs have risen, supporting both NII growth and profitability. With loan growth accelerating, balance sheet expansion is becoming a more meaningful earnings driver than fixed-asset repricing alone. While potential Fed hikes and higher deposit costs remain risks, any tightening is expected to be gradual, giving banks time to manage deposit betas. The outlook for the Clarity Act remains uncertain and delays would likely be viewed positively by the industry. USB remains a preferred name given strong NII and fee growth trends, favorable curve exposure, improving deposit mix, and a path toward a 3% NIM by YE27.
