Investors are losing their taste for chasing U.S. stock gains in the options market and are eying downside protection as the S&P 500′s rally wobbles at the start of 2024.
The S&P 500 was down 1.7% over the first four trading days of the year, its worst stumble out of the gate since 2016. That comes after a surge in which the S&P 500 rose 11% during a dizzying fourth-quarter rally. The index gained 24% in 2023.
Many believe a pullback is par for the course after such sharp gains. The most widely followed gauge of downside protection - the Cboe Volatility Index - is trading within 2 points of a four-year low hit late last year, a sign that investors remain sanguine.
Nevertheless, other barometers show investors may be expecting more speed bumps in the near term. One measure of two-month S&P 500 skew - an options market gauge for the relative demand for upside call contracts versus downside put contracts - has crept up to its highest level since late October, though it is still near a multiyear low hit last month.
The tech-focused Nasdaq Composite and the Russell 2000 index of small-cap stocks show similar upticks in skew measures. Calls convey the right to buy shares at a fixed price in the future and are favored by investors looking to place relatively inexpensive bets on stock price gains.
Steve Sosnick, chief strategist at Interactive Brokers, said the recent stumble in stocks has prompted investors to take a more balanced approach to risk following a rally in which many market participants chased the gains in equities.
“We were euphoric into the end of the year,” he said. “It wasn’t just a modest end-of-the-year rally ... this was ferocious, buy everything, pay any price, stuff,” Sosnick said, noting robust activity in upside call options in December.
Some U.S. data has bolstered the case for a cautious outlook. U.S. employers hired more workers than expected in December while raising wages at a solid clip, Friday’s report showed, casting some doubt on financial market expectations that the Federal Reserve would start cutting interest rates in March.
That data was counterbalanced by a report showing the U.S. services sector slowed considerably in December, a survey showed on Friday.
A further test could come next week, when the U.S. is set to release its highly awaited consumer price report and earnings season kicks off.
December’s rush into upside calls may be one reason skew measures slipped to historic lows last month, as many were fearful of “missing out” on the rally in the final weeks of the year, said Christopher Jacobson, a strategist at Susquehanna Financial Group.
With the rally running into turbulence at the start of the year, investors have been less inclined to bet on upside, helping skew measures rebound, Jacobson said.
-- Saqib Iqbal Ahmed, Reuters
Also see: Short sellers lost US$195-billion in 2023 bets against U.S., Canadian stocks: data provider
This is the Globe Investor newsletter, published three times each week. If someone has forwarded this e-mail newsletter to you or you’re reading this on the web, you can sign up for the newsletter and others on our newsletter signup page.
Stocks to ponder
First Quantum Minerals Ltd. (FM-T) The copper producer has begun 2024 looking like a winning stock, but David Berman says its early rebound may add another layer of risk to an investment that has been reeling from setbacks related to the company’s huge copper mine in Panama.
The Rundown
2024 is shaping up to be a good year for dividend investors
Thanks to softening inflation, falling bond yields and expectations that the Bank of Canada will cut interest rates several times this year, dividend stocks are blossoming again after spending the past couple of years in the cold. John Heinzl recaps how the fourth quarter looked for his model dividend growth portfolio.
Why the BoC will be forced into cutting rates sooner - and to lower levels - than most people think
The consensus on Bay Street and at the Bank of Canada suggests there has been a structural shift higher in interest rates. Economists David Rosenberg and Atakan Bakiskan aren’t buying this higher-for-longer argument. Here they explain why, noting that this will translate into a weaker Canadian dollar but strong gains in bonds.
Six BoC rate cuts, lower home prices, sticky wage growth: What TD’s chief economist sees for 2024
To gain a sense of where economic conditions and rates are headed, Jennifer Dowty speaks with TD’s chief economist, Beata Caranci. She sees more rate cuts heading our way than even the markets do, but is holding firm with predictions that housing prices will weaken further.
Here’s what really is behind bitcoin’s recent rally
Here we go again. As late as Oct. 11, 2023, the value of a bitcoin BT was US$28,414. By this week, its value shot up nearly 60 per cent to about US$45,000. What made bitcoin more valuable now than it was in October? Is it simply because many people think it is more valuable now or is expected to become more valuable? Value investing professor Dr. George Athanassakos and attorney and bitcoin book author Bob Seeman don’t think it’s that simple, and offer quite a different explanation.
Others (for subscribers)
The highest-yielding stocks on the TSX, plus risk data
Number Cruncher: Five dividend-paying stocks with plans for a spinoff in the coming year
Friday’s analyst upgrades and downgrades
Thursday’s analyst upgrades and downgrades
Friday’s Insider Report: A million-dollar purchase and $34-million sale
Monika Rizk: Bullish on Badger Infrastructure Solutions
Canadian dollar forecasts raised by analysts banking on Fed rate cuts
Globe Advisor
Why this money manager sold Brookfield Infrastructure and added more small-cap stocks
Are you a financial advisor? Register for Globe Advisor (www.globeadvisor.com) for free daily and weekly newsletters, in-depth industry coverage and analysis.
Ask Globe Investor
Question: I am looking to hopefully generate some U.S. dollars in dividends and down the road some stock appreciation. Proceeds might be used for purchasing a U.S. property or renting. – Dennis F.
Answer: For starters, you need a U.S. dollar trading account, if you don’t already have one. Then it’s a case of selecting which dividend securities you want to own. There are two possibilities.
The first is to invest in one or more U.S. dividend ETFs. This provides diversification and relieves you of the burden of selecting individual stocks. One interesting fund to look at is the Invesco S&P High Dividend Low Volatility ETF (SPHD-A). It’s coming off a bad year, but that’s because a large percentage of the portfolio is invested in interest-sensitive securities. Rising interest rates hit those stocks hard but it now appears that rates have stabilized and may turn down in 2024. That would be a great boost for real estate securities, which make up almost 18 per cent of the portfolio, and utilities, which account for 17 per cent. If the market reacts as expected in 2024, that will set the stage for some nice capital gains on top of healthy monthly distributions. These are currently about $0.17 per unit for a projected twelve-month yield of 4.8 per cent based on a recent price of $42.46. (All figures in U.S. dollars.)
For a more conventional ETF, consider the iShares Core Dividend Growth ETF (DGRO-A). It invests in a well-balanced portfolio of dividend stocks with financials as the top sector at 18.4 per cent, followed by information technology (17.4 per cent) and healthcare (16.9 per cent). As you can see, this is a very different approach than that of the Invesco fund. This ETF has a better short-term record (up over 10 per cent year-to-date) and has performed well long-term (10.5 per cent average annual return since its inception in 2014).
Alternatively, you can pick your own stocks. Some of the highest yielders on our recommended list are Atlantica Sustainable Infrastructure PLC (AY-Q, yield 8.2 per cent), Western Union (WU-N, yield 8 per cent, Verizon (VZ-N, yield 7.1 per cent), AT&T (T-N, yield 6.7 per cent), and Duke Energy (DUK-N, yield 4.2 per cent).
--Gordon Pape (Send questions to gordonpape@hotmail.com and write Globe Question on the subject line.)
What’s up in the days ahead
Gordon Pape will provide his market predictions for 2024.
Rethinking those rate cut bets: World market themes for the week ahead
Click here to see the Globe Investor earnings and economic news calendar.
More Globe Investor coverage
For more Globe Investor stories, follow us on Twitter @globeinvestor
Compiled by Globe Investor Staff