Author: George Arzumanyan, CFA, CIMA(R), MAFF(R), CVA(R)

Dollars and “Change”: what’s next for inflation and stocks? A look at the monetary supply

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

As of this writing, the latest U.S. annual inflation rate came at 9.1 percent for the month of June 2022. Milton Friedman, an American economist and recipient of the 1976 Nobel Memorial Prize in Economic Sciences, once said, “inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.” We will share our thoughts regarding the future path of U.S. inflation in the near future (say a year) using the money supply via the monetary base and the M2 money factors. The MacroRisk Analytics platform is utilized to show changes in the money supply and inflation.

As the inflation data in the table below shows, annual inflation had been relatively low from 2012 through 2020, but in April of 2021, annual inflation spiked to 4.2 percent, and we highlight this month in the table below to represent the starting month of a shift in inflation.

The annual inflation rate for the 12-month period ending on the month and year shown:

Source: U.S. Bureau of Labor Statistics

Using the MacroRisk Analytics platform, we will review the relationship between money supply and lagged inflation. The goal is to identify major changes in these factors and when they happened.

The graph below shows the changes in the U.S. monetary base from 2005 until the present (July 14, 2022). The monetary base measures how much currency is actually in the United States. It includes all paper money, coins, and bank reserves. The monetary base spiked starting around March 2020. About one year after the monetary base started to increase, the inflation started to increase in April 2021.

Now, let’s look at the M2 money factor and how it has changed over time, as shown in the graph below. The M2 money is a broader measure of money supply that includes the previously mentioned monetary base plus demand deposits (money in checking accounts), and other saved money (savings accounts, money market funds, and small-amount certificates of deposit). Similarly, M2 money started to increase in March 2020, and about a year later, in April 2021, inflation began to increase. Prior to March 2020, the M2 money supply exhibited steady growth with no significant changes. We think the M2 money factor could be a more reliable and independent variable for predicting changes in inflation than the monetary base discussed previously because a jump in the M2 money factor was followed by a jump in inflation about a year later, whereas when the monetary base substantially increased starting in 2008, it did not cause a significant spike in inflation in the following years.

Now, to the question, will the U.S. inflation slow down or continue to increase in the near future (the next 12 months)?

The monetary base started to drop in December 2021. The M2 money supply slowed down in January 2022, peaked in April 2022, and has been decreasing slightly since then. Based on these two factors, the money supply is tightening (or at least not growing). Since new money is not being introduced into the economy, we expect the inflation rate to decrease starting around the 2nd quarter of 2023 if this downward trend in the money supply continues. Our reasoning for this time frame is that it took about a year after the money supply started to increase (especially the M2 money supply) in March 2020 until the inflation rate also started to increase in April 2021. Since the money supply peaked around the 1st and 2nd quarter of 2022, we predict that in about a year, around the 2nd quarter of 2023, the inflation rate will start to decrease. Until then, the inflation rate might stay at elevated levels.

While the purpose of this post is to explore the relationship between money supply and inflation, there are other variables that can affect inflation. We discuss some of these variables next. First, the central bank is raising interest rates which is expected to slow the economy and decrease demand which, in turn, is expected to put downward pressure on prices. The U.S. might even enter a recession because of this. Second, commodity prices have been dropping lately, which is expected to decrease input prices and again put a downward pressure on retail prices. Oil prices which have substantially increased over the past year, are showing signs of a slowdown where U.S. gas prices are at a two-month low as of July 19, 2022. Decreasing commodity prices could be another sign of a coming recession. Third, U.S. business inventories have been on the rise. Inventories spiked for companies such as Target and Costco. Higher inventory (i.e., higher supply) is expected to put downward pressure on prices. Companies are more likely to provide discounts. It looks like we might be shifting from a period of shortages that might have caused companies to overproduce, resulting in a glut of inventories mentioned previously.

This is why we believe that the U.S. will not experience runaway inflation, but instead we expect the inflation to start decreasing with our estimate sometime in the first half of 2023.

The analysis above was done with the help of the MacroRisk Analytics platform.

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.

Tesla’s Exposures to the Economy – November 13, 2020 Update

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

This post will demonstrate Tesla’s exposures to 18 MacroRisk factors (i.e., economic factors) via the Eta® profile on the MacroRisk Analytics® platform as of November 13, 2020. Understanding these exposures can help financial advisors and investors identify potential economic risks the company is exposed to and invest accordingly. Since the information presented herein uses proprietary and patented analysis, a unique look at Tesla is provided unlike many other posts about Tesla.

An asset’s Eta profile is the combination of its 18 Eta measures. Each Eta measure is a description of how an asset typically responds to a specific change in the economy (based on recent history). Eta measures that are positive indicate that an asset increases in value when the corresponding MacroRisk factor rises; conversely, Eta measures that are negative indicate that an asset’s price decreases when the corresponding MacroRisk factor rises.

The Eta profile for Tesla as of November 13, 2020 is shown below.

The bigger the bar (up or down), the bigger the expected effect the particular economic factor has on Tesla’s stock price and vice versa. If a bar points up, Tesla’s stock is expected to increase if the particular economic factor increases and is expected to decrease if the economic factor decreases. If a bar points down, Tesla’s stock is expected to increase if the particular economic factor decreases and is expected to decrease if the economic factor increases. In other words, when Tesla’s economic factor sensitivity is aligned with what is happening with that economic factor, Tesla’s stock is expected to benefit from the change in that economic factor, and when they are not aligned or are not in the same direction, Tesla’s stock is expected to decrease from that economic factor change.

The table below identifies the exact exposures for each of the 18 MacroRisk factors shown in the previous graph.

The numbers in the table above show the expected effect on Tesla’s price given a one standard deviation increase in the economic factor. To help interpret one of the numbers above, Tesla’s Eta measure of 173.75 for M2 money supply means that if M2 money supply increases by one standard deviation, Tesla’s stock price is expected to increase by approximately 173.75 percent. On other hand, Its stock price is expected to decrease by 173.75 percent if there is a one standard deviation decrease in the economic factor. Definition for M2 money supply can be found here.

As of November 13, 2020, Tesla stock’s biggest exposure was to M2 money supply. We can see that over time M2 money supply has increased which might be a good driver for the stock price going forward. Here is the graph for M2 money supply since 1989.

Tesla also has high exposures to interest rates: short-, intermediate-, and long-term. It is expected to benefit from a decrease in intermediate-term government bond yields and from an increase in short- and long-term government bond yields.

To summarize, this post has shown Tesla’s sensitivities to 18 MacroRisk factors as illustrated on the MacroRisk Analytics platform. Using this information, investors can identify which economic factors are expected to have the biggest effects on Tesla’s stock price.

At www.MacroRisk.com, you are able to generate Eta profile reports for your portfolios as well as thousands of individual assets and much more. We also provide our “The Economy Matters®” reports on Interactive Brokers, FactSet, Capital IQ, and Refinitiv.

Economic Stats of Pharmaceutical Companies Developing a Covid-19 Vaccine

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

This post will analyze and compare some pharmaceutical companies developing a vaccine for Covid-19 from an economic perspective using the Eta® statistics on the MacroRisk Analytics® platform. These statistics can assist financial advisors and investors in understanding what economic forces have been driving the stock prices of these companies and how these companies compare in terms of economic risk.

According to a Forbes article dated June 16, 2020, the following five pharmaceutical companies are developing a Covid-19 vaccine:

The table above presents only some of the companies developing a vaccine for Covid-19. (Moderna is another company, for example, that is developing a vaccine but was not analyzed in this post because its stock does not have at least three years of trading history).

These five companies will be compared using the FiveRisks report by MacroRisk Analytics as of November 6, 2020.

Economic Climate Rating

The first statistic that will be analyzed is the economic climate rating. It is a star rating ranging from one to five stars. A rating of one means that the current economy is expected to not be suitable for the asset (i.e., the economy is expected to provide headwind). A rating of three means the economy is expected to be neutral for the asset. A rating of five means that the current economy is expected to be suitable for and benefit the asset (i.e., the economy is expected to provide tailwind). Here are the economic climate ratings for the five companies.

Novavax had the highest economic climate rating of four meaning the economy is expected to be somewhat favorable compared to other companies for which the economy is expected to be neutral.

MacroRisk Level

The second statistic is the MacroRisk Level (MRL) which measures how sensitive an asset is to changes in the economy. The lower the MRL, the lower the asset’s economic risk is expected to be and vice versa. Here are the MRLs for the five companies and also the median, average, minimum and maximum MRLs for the S&P 500 index for comparison.

As can be seen, Novavax stands out withs a very high MRL of 1983. This is higher than the maximum MRL of 930 in the S&P 500 Index as of November 6, 2020 illustrating the high level of economic risk associated with the stock of this company.

Economy’s Influence

The economy’s influence measures how much of the stock price of an asset is driven by changes in the economy rather than company specific information. The higher the value, the more the asset is driven by the economy and vice versa.

Johnson & Johnson as well as Pfizer have low economy’s influence statistics demonstrating that the stock prices of these companies are believed to be driven more by company specific information than what happens in the economy.

Eta® Value at Risk

The Eta Value at Risk statistic measures the expected percent change in the price of an asset, up or down, given an unexpected event that has a five percent probability of happening (whatever this event may be). This is a measure of risk. The lower the statistic, the lower the expected risk of an asset is believed to be and vice versa.

Again, Novavax illustrates high expected risk with the Eta Value at Risk of 48.9%. This means that given an unexpected event with a five percent probability, its stock price is expected to increase or decrease by 48.9%.

Down-market Beta

The down-market beta measures downside risk. It is the expected percent change in the value of an asset when the S&P 500 Index (in this case) drops. If the down-market beta is less than one, the asset is expected to lose less value than the S&P 500 when the S&P 500 drops. If the down-market beta is higher than one, the asset is expected to lose more value than the S&P 500 Index when the index drops. The lower the down-market beta, the less risky an asset is expected to be and vice versa.

In terms of the down-market beta, all of the subject companies except one have lower risk than the average company in the S&P 500. Novavax has somewhat higher risk than the average S&P 500 company with the down-market beta of 1.14 which means that if the S&P 500 Index drops by one percent, the stock price of Novavax is expected to drop by 1.14 percent (i.e., if the S&P 500 drops by 10%, Novavax is expected to drop by 11.4%).

Summary

The goal of this post was to provide some statistics to analyze some of the pharmaceutical companies currently developing a vaccine for Covid-19 from an economic perspective. These statistics show where these companies stand in terms of economic risk in relation to the S&P 500 Index.

The table below will summarize the statistics presented earlier in this post. These statistics are as of November 6, 2020.

The statistics shown in this post can be accessed through the MacroRisk Analytics platform. This platform helps analyze portfolios and thousands of companies, mutual funds, ETFs, etc. with the economy in mind because The Economy Matters®.

Our “The Economy Matters Reports” are also available through Interactive Brokers, FactSet, Capital IQ, and Refinitiv.

5 Nasdaq Stocks with Most and Least Economic Exposure to Oil

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

The global COVID-19 pandemic and disagreements between Russia and Saudi Arabia caused a one-two punch to the oil prices back in March of 2020. This has created a glut in the oil Market creating disarray amongst OPEC leaders and investors with the futures prices turning negative in April of 2020 for the first time in history. As the economies around the world began to reopen and the OPEC members agreed oil supply cuts, the oil market stabilized with prices continuing to recover.

The MacroRisk Analytics® platform can assist financial advisors in identifying proxy investments, based on economic interactions, that are expected to behave similar to or opposite to oil investments without investing in oil investments themselves (e.g., possibly due to ESG limitations). The proprietary and patented analysis by MacroRisk Analytics allows such an endeavor.

Using the MacroRisk Analytics platform, this post will identify 5 stocks out of the Nasdaq 100 Index that are expected to behave similar to SPDR S&P Oil & Gas Explore & Production ETF (ticker: XOP) and 5 stocks that are expected to behave in an opposite direction.

XOP is an ETF that tracks the performance of oil and gas production and exploration public companies. Using the XOP as a benchmark investment in oil, MacroRisk Analytics can identify potential investments that have similar or different economic exposures to XOP. The Eta® profile, by MacroRisk Analytics, demonstrates these economic exposures. The Eta profile of XOP is shown below:

If a bar is pointing up, the XOP price is expected to increase if that factor increases and vice versa. The magnitudes of the bars also show us the importance of the factors.

To identify our 5 Nasdaq stocks that are expected to behave like XOP, the MacroRisk Analytics platform would look for stocks with similar or opposite Eta profiles to that of XOP. It is very rare to find assets that have the same or opposite Eta profiles exactly but MacroRisk will select investments that are the closest to achieving the specific goal.

Some financial advisors may believe that the oil market would continue its rebound as the economies continue to reopen driving the demand for oil up and the OPEC countries not planning to increase supply. These factors are expected to apply upward pressure to oil prices.

To this end, below are 5 stocks out of the Nasdaq 100 Index that are expected to behave as similar as possible to XOP ETF as of July 19, 2020 using the Eta® tracking error.

On the other hand, other advisors may believe that with the rise of Covid-19 cases in the United States, some states may take steps to slow or implement some economic shutdowns again. This is expected to decrease the demand for oil as economic activity decreases.

To this end, below are 5 stocks out of the Nasdaq 100 Index that are expected to behave as different as possible to XOP ETF as of July 19, 2020 using the Eta® tracking error.

The Investment Ideas Generator by MacroRisk Analytics was used to identify stocks mentioned in this blog post. This tool provides a unique way for financial advisors to find proxy investments out of a buylist (as we just did for oil using Nasdaq 100 stocks) because some advisors may not even be able to take a position in oil-related stocks due to ESG limitations, for example.

Whether you are interested in analyzing oil investments as stand-alone assets or in a portfolio setting and with the economy in mind, MacroRisk Analytics can assist with this as well many other investment analyses. MacroRisk Analytics provides analysis for thousands of stocks, mutual funds, ETFs, and other assets. For sign up, visit http://www.macrorisk.com/subscriptions/.

Some of the MacroRisk Analytics® analysis has been utilized by the Rational Equity Armor Fund (ticker: HDCTX) starting in December of 2019. For more information about the fund, click here.

Mr. Rolland Harris assisted with the preparation of this post.

Unemployment is Significant: A List of NASDAQ Stocks Expected to Benefit from Unemployment Changes

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

The recent economic shutdown has caused the U.S. unemployment rate to skyrocket making it the most significant economic factor since June of 2020 according to the 18-factor MacroRisk Analytics® model. Financial advisors need to pay special attention to the unemployment rate and understand which stocks are expected to benefit from a decrease or an increase in the unemployment rate and potentially adjust the portfolios of their clients accordingly.

Using the MacroRisk Analytics® platform, this post will present 10 NASDAQ-100 Index stocks that are expected to benefit from a decrease in the unemployment rate and 10 NASDAQ-100 Index stocks that are expected to benefit if the unemployment goes up.

The graph below shows the unemployment rate from 1989 through July 14, 2020, and the Covid-related spike in the unemployment is much greater than the one during the 2008-09 market crash. The green bands around the unemployment rate show the expected unemployment range given its recent movement at the time.

Zooming in to year-to-date unemployment rate, we can see just how much above the unemployment rate is compared to the upper bound of the green bands which correspond to the expected range of the unemployment rate based on its recent history (the green bands correspond to two standard deviations around the moving average).

Looking at the MacroRisk’s snapshot below of where the economic factors stand relative to their recent history as of 7/14/2020 clearly shows that the unemployment rate exhibits the most volatility relative to its moving average. The graph below shows how many standard deviations away a factor is from its moving-average. Red factors, such as the unemployment rate, are outside the two standard-deviation range denoted by the dashed lines.

With the unemployment rate factor being so significant in mind, using the MacroRisk Analytics® platform, we present a list of NASDAQ-100 Index stocks that are expected to benefit from a decrease in the unemployment rate and vice versa. These stocks are expected to have the biggest portion of their economic risk correspond to unemployment and where the stocks’ sensitivities to unemployment are negative as denoted by negative signs in the table below (i.e., expected to benefit from a decrease in the unemployment rate).

NameSymbolUnemployment as a Proportion of Economic Risk as of 7/14/2020
Amgen IncAMGN-5.1%
Gilead Sciences IncGILD-4.5%
Walgreens Boots Alliance IncWBA-4.4%
Vertex Pharmaceuticals IncVRTX-3.3%
Intuitive Surgical IncISRG-3.2%
Regeneron Pharmaceuticals IncREGN-3.1%
Biogen IncBIIB-3.0%
Incyte CorpINCY-2.6%
Lam Research CorpLRCX-2.5%
PACCAR IncPCAR-2.2%

Below is a list of 10 NASDAQ-100 Index stocks that are expected to benefit from an increase in the unemployment rate (i.e., these stocks are expected to have the highest positive sensitivity to the unemployment rate as a percentage of their economic risk).

NameSymbolUnemployment as a Proportion of Economic Risk as of 7/14/2020
Facebook IncFB8.4%
eBay IncEBAY5.1%
CoStar Group IncCSGP4.9%
Copart IncCPRT4.7%
Cintas CorpCTAS4.4%
Liberty Global plcLBTYK4.3%
NXP Semiconductors N.V.NXPI4.1%
Adobe Systems IncADBE4.0%
Liberty Global plc cl ALBTYA3.9%
PayPal Holdings IncPYPL3.5%

With the economy opening up, more and more people are expected to return to work which would drive the unemployment down. However, there exists a risk of a second wave of COVID-19 infections which might cause the unemployment to increase if similar shutdown measures are implemented.

You can find the economic exposures (such as the unemployment rate discussed in this post) of thousands of stocks, mutual funds, ETFs, and other assets using The Economy Matters® reports provided by MacroRisk Analytics®.

Some of the MacroRisk Analytics® analysis has been utilized by the Rational Equity Armor Fund (ticker: HDCTX) starting in December of 2019. For more information about the fund, click here.

Mr. Rolland Harris assisted with the preparation of this post.

When so many stocks are down, which are undervalued? MacroRisk’s Relative Value Index can help.

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

The COVID-19 virus continues to spread around the world and seems to have “infected” investors with fear and panic. The market’s volatility has spiked, and major indexes around the world have dropped from their recent highs. In times like these, panic and emotion seem to drive the market swings rather than the underlying economic conditions. Some financial advisors and investors might be trying to take money off the table before they lose more while others jump at this opportunity to purchase assets at fire-sale prices.

To assist financial advisors and investors with investment analysis, we will provide a list of 20 NASDAQ stocks with high market cap and estimate how overvalued or undervalued these stocks are using the Relative Value statistic provided by the MacroRisk Analytics® platform because a reasonable question always arises: is what I plan to purchase undervalued, overvalued, or fairly valued? While typical  analytics products emphasize accounting analysis or technical ratios to determine price valuation, the MacroRisk Analytics platform provides “a better window on the future”®.  Its patented and proprietary tools can help investors take emotions out of the investment decision-making process and focus on how the underlying economic values of their investments, including most stocks and funds traded in the U.S. and Canada.  Of particular note is the “relative value statistic” which presents the extent to which an asset is under- or over-valued; this statistic compares the Eta® price (i.e., MacroRisk’s statistical estimate of an asset’s intrinsic price) to the corresponding market price of the asset.

MacroRisk’s Eta® price estimate is computed using advanced data analysis and considers the specific impacts of these 18 macroeconomic variables:

  1. Short-term government bond yield
  2. Intermediate-term government bond yield
  3. Long-term government bond yield
  4. Corporate bond (BAA) yield
  5. Unemployment rate
  6. Corporate cash flow
  7. Housing starts
  8. Auto sales
  9. New durable goods
  10. Gold index
  11. Energy prices
  12. CPI (inflation)
  13. Monetary base
  14. M2 Money
  15. Euro exchange rate
  16. FTSE 100
  17. Tokyo stock exchange
  18. Agricultural exports

Similar to how factors such as the number of bedrooms, number of baths, square footage, etc. determine the price  of a house, these 18 macroeconomic variables determine the intrinsic value estimate, the Eta® price of an asset.

The relative value statistic is interpreted as follows:

Relative Value by MacroRisk Analytics Valuation Expectation
<1 Expected to be overvalued
1 Expected to be fairly valued
>1 Expected to be undervalued

To illustrate the relative value score, consider the following list of 20 large cap NASDAQ stocks and their corresponding relative value statistics as of 3/16/2020:

Name Symbol Relative Value as of 3/16/2020
CME Group Inc CME 1.361
Exelon Corp EXC 1.306
CSX Corp CSX 1.202
The Kraft Heinz Co KHC 1.161
Automatic Data Processing Inc ADP 1.131
Pepsico Inc PEP 1.128
Mondelez International Inc MDLZ 1.108
Microsoft Corp MSFT 1.102
Intel Corp INTC 1.099
Starbucks Corp SBUX 1.082
Apple Inc AAPL 1.078
Nvidia Corp NVDA 1.057
Intuit Inc INTU 1.043
Analog Devices Inc ADI 1.034
Equinix Inc EQIX 1.027
Qualcomm Inc QCOM 1.016
Comcast Corp CMCSA 0.962
Texas Instruments Inc TXN 0.949
Cisco Systems Inc CSCO 0.948
Marriott International MAR 0.943

According to the current economic conditions, even with all the current social volatility disrupting markets, 16 out of these 20 stocks presented seem to be potential buy targets because their relative value statistics are over 1; their market prices are substantially below MacroRisk’s statistically based  intrinsic values estimates.

During turbulent times that we are currently experiencing, it is ever more important to keep emotions in check while investing. The relative value tool statistic allows investors to take a step back from the speculation going on in the world and focus on whether an asset is expected to be under- or over-valued based on the current economy. The relative value information presented for 20 NASDAQ stocks above uses the underlying economic conditions expected to drive the values of assets over the long-term.

When you are considering changing your holdings, whether in a crisis or not, the Relative Value Index can help pinpoint undervalued opportunities.

www.MacroRisk.com provides relative value and other statistics as well as a selection of patented and  proprietary analysis tools for tens of thousands of stocks, mutual funds, ETFs, and other traded assets. The Relative Value Score for stocks and funds is also included in “The Economy Matters” reports available from numerous platforms.  Click here to see how MacroRisk Analytics can help you. 

Mr. Rolland Harris assisted with the preparation of this post.