Year: 2021

We Identified Stocks We Thought Would Do Well and Bad with Rising Inflation, Here Is How They Are Doing So Far.

Posted onAuthorGeorge Arzumanyan, CFA, CIMA(R), MAFF(R), CVA(R)

As many of us might know, inflation has been on the rise. According to the Bureau of Labor Statistics, the annual inflation as of September 2021 is 5.4 percent. In our previous blog post published on April 19, 2021, we identified 10 Nasdaq-100 stocks that we expected to do well with rising inflation and 10 Nasdaq-100 stocks that would not do well in such an environment. Using the MacroRisk Analytics® platform, we look at the performance of these stocks and compare them to how the Nasdaq-100 index as a whole has fared so far. In addition, we identify another two sets of 10 Nasdaq-100 stocks that we expect to do well and not do well if inflation rises. Financial advisors and investors need to be aware of how inflation might impact their portfolios and assets.

To perform the comparison, using the MacroRisk Analytics portfolios tool, I created an equally weighted portfolio of 10 stocks that were expected to respond positively to rising inflation (blue line in the chart below) and an equally weighted portfolio of 10 stocks that were expected to respond negatively (pink line). Then I compared these two portfolios to the performance of the Nasdaq-100 Index (green line) using the MacroRisk Analytics performance report. The chart below shows this performance from April 13 through October 13, 2021, a six-month period. (The starting date is April 13, 2021, because data as of this date were initially used in the previous blog post to identify the two sets of 10 stocks.)

As can be seen, the portfolio of 10 stocks that we expected to do well in a rising inflation environment (blue line) did indeed do better than the Nasdaq-100 Index (green line) and the portfolio of 10 stocks that we expected to do worse in such an environment (pink line). The performance of the latter portfolio (pink line) and the Nasdaq-100 Index was somewhat similar over the six-month time period.

The table below shows the return and risk characteristics of the two portfolios and the index. The “top 10 inflation” portfolio also had lower risk than the index as represented by the standard deviation and the lower semideviation statistics, a good feat considering this portfolio consists of only 10 stocks while the index has 102 stocks.

So far, we have identified how the stocks we selected six months ago have performed through the present day. Next, I use the MacroRisk Analytics screening tool to identify new sets of stocks that we expect to do well and not well if inflation rises.

The table below shows 10 stocks out of the Nasdaq-100 Index that we expect to have the largest positive response to inflation as a proportion of total economic risk as of October 13, 2021.

The third column represents the proportion of total economic risk that inflation represents for an asset. The higher the number, the more significant the expected effect of inflation changes are on an asset’s stock price versus the other 17 economic factors in the MacroRisk Analytics model.

The fourth column represents the expected percentage change in a stock’s price given a one standard deviation increase in inflation.

The table below shows 10 stocks out of the Nasdaq-100 Index that we expect to have the largest negative response to inflation as a proportion of total economic risk as of October 13, 2021.

In summary, this post analyzed the performances of two sets of stocks, identified in our previous blog post, that we expected to do well and not so well in a rising inflation environment. We then identified new sets of stocks using the most recent available data. Inflation is only part of the total economic risk, and other economic risks can have a big impact on the performances of individual stocks and portfolios. MacroRisk Analytics provides the proprietary and patented tools to help you measure these economic risks.

This post is possible thanks to MacroRisk Analytics®. This platform provides investment research for 30,000+ individual names as well as investor portfolios. The MacroRisk Analytics® model uses 18 macroeconomic factors to break down the economy’s impact on investment value. Using this patented research, our team has twice won the William F. Sharpe Indexing Achievement Award for ETF/Indexing Paper of the Year. Click here to access this award-winning investment research today! You can find our other blog posts by going to www.macrorisk.com.

Top 10 Nasdaq Stocks with Largest Relative Exposures to Inflation – April 13, 2021 Update

Posted onAuthorGeorge Arzumanyan, CFA, CIMA(R), MAFF(R), CVA(R)

This post provides 10 stocks out of the Nasdaq-100 Index that investors can expect to benefit from a rise in inflation and 10 stocks that are expected to be negatively impacted by a rise in inflation. Financial advisors and investors need to be aware of how inflation is likely to impact their holdings and portfolios. We performed the analysis using the MacroRisk Analytics® platform as of April 13, 2021.

The Eta® profile by MacroRisk Analytics demonstrates an asset’s historical exposures to 18 economic factors in the MacroRisk Analytics model. CPI, or inflation, is one of these factors. If an asset has a positive exposure to inflation, we can expect it to benefit from a rise in inflation.

The MacroRisk Analytics platform makes it easy to identify stocks that have positive or negative exposures to inflation or any other factor in its model. Mondelez International (ticker: MDLZ) is one such company. According to its Eta profile shown below as of April 13, 2021, it has a large positive exposure to CPI as a proportion of its total economic risk (i.e., other economic exposures in the graph below). The MacroRisk Analytics model predicts the company’s stock price might increase approximately 27% with a one standard deviation increase in inflation, keeping other factors constant.

We used the MacroRisk Analytics screening tool to identify 10 stocks out of the Nasdaq-100 Index that one can expect to have the largest positive exposures to inflation as a proportion of total economic risk. Here are the results using data as of April 13, 2021.

The third column represents the proportion of total economic risk that inflation represents for an asset. The higher the number, the more significant the expected effect of inflation changes are on an asset’s stock price versus the other 17 economic factors in the MacroRisk Analytics model.

The fourth column represents the expected percentage change in a stock’s price given a one standard deviation increase in inflation.

Investors can expect Mondelez International (ticker: MDLZ) to have the largest positive inflation exposure as a percentage of its total economic risk (19.1%). If inflation increases one standard deviation, the stock’s price is expected to increase by about 27%, keeping other factors constant. The company operates in the confectioners’ industry and is one of the world’s largest snack companies with famous brands such as Chips Ahoy!, Ritz, Oreo, and others.

During the past 10 years, Mondelez International has enjoyed a positive exposure to inflation as demonstrated by the heat map shown below. Red represents positive and blue represents negative exposure to an economic factor.

Intuitively, this predicted positive response to inflation makes sense given that raw material costs are a small percentage of total operating costs, their businesses are not particularly labor intensive, yet, within their markets, they enjoy pricing power that allows them to raise their product prices in response to a surge in inflation.

The table below shows 10 stocks out of the Nasdaq-100 Index that are expected to have the largest negative response to inflation as a proportion of total economic risk as of April 13, 2021.

Micron Technology (ticker: MU) has inflation risk that represents 15.8% of its total economic risk. If inflation rises by one standard deviation, the stock’s price is expected to drop by approximately 38%, keeping other factors constant. The company operates in the semiconductors industry and provides memory and storage microchips.

Over the past ten years, Micron Technology’s response to inflation has varied. From May 2011 through approximately February 2018, it had a detrimental exposure to inflation (blue markings for the CPI factor) followed by a positive exposure (red markings) until about May 2020 and has recently reverted back to having a negative exposure to inflation.

Intuitively, this makes sense given that all but Kraft Heinz are technology companies where the sale price of their products are usually set by long term contracts, thus providing little short term pricing power when inflation surges.

This post presented stocks out of the Nasdaq-100 Index that have the largest positive and negative exposures to inflation risk. Given the recent expansionary fiscal and monetary policies, a rise in inflation is a possibility. Thus, it is essential to identify assets that one can expect to benefit from or be negatively impacted by an inflation rise. This identification allows one to adjust one’s portfolio appropriately.

This post is possible thanks to MacroRisk Analytics®. This platform provides investment research for 30,000+ individual names as well as investor portfolios. The MacroRisk Analytics® model uses 18 macroeconomic factors to break down the economy’s impact on investment value. Using this patented research, our team has twice won the William F. Sharpe Indexing Achievement Award for ETF/Indexing Paper of the Year. Click here to access this award-winning investment research today! You can find our other blog posts by clicking here.

Edited by Bob Hanisee and Rania Sullivan.

Economic Sensitivities of the Nasdaq-100 Index – March 19, 2021 Update

Posted onAuthorGeorge Arzumanyan, CFA, CIMA(R), MAFF(R), CVA(R)

Recently, many of us had probably noticed that when the 10-year U.S. government bond yield increased, the Nasdaq-100 Index tended to drop in value. This post will demonstrate what other economic exposures of the Nasdaq-100 are using the patented 18-factor model created by MacroRisk Analytics®. Financial advisors and investors can use this information to better understand the risks and opportunities involved with an investment in the Nasdaq-100.

The MacroRisk Analytics model correctly identifies the relationship we had recently seen where the Nasdaq-100 would drop in value when the 10-year treasury yield increased. Using the Eta® Profile available on the MacroRisk Analytics platform, we can quickly identify this and other relationships the Nasdaq-100 has to other economic factors.

The Eta® measure in the graph below demonstrates the sensitivity of an asset to the economic factor. It reflects the expected change in an asset’s value given a one standard deviation increase in the economic factor. For instance, if the M2 Money factor increases by one standard deviation, the Nasdaq-100 is expected to increase 34.55% keeping other factors constant.

We can see that the Nasdaq-100 has a negative exposure to the intermediate government bond yield (i.e., the 10-year treasury yield). A negative exposure means that we can expect the asset to benefit if the economic factor decreases and vice versa. In other words, if the 10-year treasury yield increases, we can expect the Nasdaq-100 to drop in value holding other factors constant. This relationship is what we have recently seen happen in the market. While the chart above shows the economic sensitivities as of March 19, 2021, a similar relationship to the 10-year treasury yield existed at the beginning of 2021 before the interest rate spiked.

The chart also illustrates that the Nasdaq-100 does have other exposures to the economy, and in some cases, the profile deems these exposures to be stronger, more important exposures than the exposure to the intermediate government bond yield. For instance, we can expect the Index to have the biggest exposure to the M2 Money factor. This factor measures the money supply that includes cash, checking deposits, and easily convertible near money. In this case, the exposure is positive meaning that we can expect the Nasdaq-100 to benefit if M2 Money increases.

The Nasdaq-100 has the second largest exposure to the short-term government bond yield. This exposure is positive meaning that we can expect the Index to increase in value if the aforementioned factor increases and vice versa.

The table below demonstrates MacroRisk Analytics’ patented Eta® measures (i.e., economic sensitivities) of the Nasdaq-100 as of March 19, 2021. The table lists the sensitivities in descending order based on their absolute values.

This post’s goal was to help the reader understand the economic exposures of the Nasdaq-100 Index beyond what one may have deduced by observing the recent relationship between the 10-year treasury yield and its impact on the Nasdaq-100 value. Understanding the sensitivities of the Nasdaq-100 can help financial advisors and investors identify which economic factors are of more importance. This allows investment professionals to position their portfolios appropriately. 

This post is possible thanks to MacroRisk Analytics®. This platform provides investment research for 30,000+ individual names as well as investor portfolios. The MacroRisk Analytics® model uses 18 macroeconomic factors to break down the economy’s impact on investment value. Using this patented research, our team has twice won the William F. Sharpe Indexing Achievement Award for ETF/Indexing Paper of the Year. Click here to access this award-winning investment research today! You can find our other blog posts by clicking here.

Edited by Rania Sullivan.

Economic Climate for the Nasdaq-100 Stocks – February 10, 2021 Update

Posted onAuthorGeorge Arzumanyan, CFA, CIMA(R), MAFF(R), CVA(R)

The stock market seems to be on a tear lately, a great contrast to about a year ago when the markets started to get roiled by Covid-19 developments. This post   uses the patented research on the MacroRisk Analytics® platform to demonstrate the economic climate for the Nasdaq-100 (NDX) stocks as of February 10, 2021  . This information may assist financial advisors and investors in navigating the current economic environment.

To demonstrate this, we use MacroRisk’s economic climate rating (ECR). This robust rating measures the expected impact of the current economic climate for individual assets (including stocks, funds, and many others) over the next six to 12 months. The ECR is a five-star scale where one indicates substantial economic storms in the forecast, and five indicates positive tailwinds with a favorable climate. A three ECR indicates a neutral economy.

As of February 10, 2021, the average ECR is 3.5. This rating means that investors can expect the economic climate to be neutral to favorable for the Nasdaq-100 stocks, on average.

Also, the distribution of ECR looks positive. The graph below shows that there are more Nasdaq-100 stocks for which the economic climate will most likely be favorable (e.g., ratings of four and five) than those stocks for which the climate is expected to be not favorable (e.g., rating of one and two). As of February 10, 2021, there are no stocks in the Nasdaq-100 Index for which the economy is expected to be very unsuitable (e.g., rating of one).

The MacroRisk Analytics model uses 18 macroeconomic factors to determine a stock’s sensitivities to changes in the economy. The ECR combines the economic sensitivities of a stock to the economy with what is actually happening in the economy to determine if the economy is expected to be suitable, not suitable, or neutral for the particular stock.

To illustrate what is currently happening in the economy, we will use the MacroRisk Analytics platform to give us an overview of the state of the economy as of February 10, 2021.

The bars in the graph above indicate where the particular economic factor is relative to its recent moving average. If the bar is above zero, this means that the factor is trending up relative to its recent average and vice versa. The bars highlighted in red bring our attention to the factors most worth paying attention to as they are potentially exhibiting strong, non-random movements. As of February 10, 2021, international factors such as the dollar/euro exchange rate, Tokyo stock exchange, and U.S. agricultural exports are three critical factors. A fourth important factor is the domestic U.S. inflation (i.e., CPI).

Finally, below are ten stocks out of the Nasdaq-100 Index (NDX) that are proposed to be at least somewhat suitable in the current economy (i.e., ECR of four or higher) and that have the highest up-market beta relative to NDX meaning that these stocks tend to go up more than NDX when NDX goes up. The chart shows the data as of February 10, 2021.

The ECR has changed drastically from about a year ago when the ECR was stormy for most Nasdaq stocks. The above data show the economic outlook is expected to be much improved for most Nasdaq-100 stocks. Also, it seems that international factors and U.S. inflation are of more importance now as they exhibit the biggest changes relative to their recent averages. Finally, this post provides a list of ten Nasdaq-100 stocks with an ECR of four or five stars, with the highest up-market beta relative to NDX.

This post is possible thanks to MacroRisk Analytics®. This platform provides investment research for 30,000+ individual names as well as investor portfolios. The MacroRisk Analytics® model uses 18 macroeconomic factors to break down the economy’s impact on investment value. Using this patented research, our team has twice won the William F. Sharpe Indexing Achievement Award for ETF/Indexing Paper of the Year. Click here to access this award-winning investment research today! You can find our other blog posts by clicking here.

Edited by Rania Sullivan.