'Negative-beta' stocks offer a way to ride out volatility, say Evercore strategists
Energy stocks feature prominently on a list of so-called 'negative-beta' equities.
Bonds are blowing up (in a bad way), so what can an investor do to hedge a portfolio from the risks the artificial-intelligence trade will fizzle as well?
Earlier this year, famed energy trader John Arnold stumbled on a super simple portfolio - 50% technology, 50% energy -and honestly it's hard to argue with, with a 37% year-to-date performance, according to MarketWatch's latest calculations. Granted it's by definition not the most diversified grouping, but right now it's a way to ride the AI trade without worrying much about what the U.S. or Iran will do next.
Evercore strategists led by Julian Emanuel have a different way to hedge. They look for stocks that move in the opposite direction to the market, or what in finance terms is called negative beta.
They do so in a quantitative way, screening for stocks whose rolling, six-month one-day percentage change is inverse to the S&P 500 daily's movements. In September, there were 115 of those companies. That is a huge number - there hasn't been anything like that since the dot-com bubble burst.
But unlike the dot-com bubble bursting, the AI trade is continuing. "Investors have proactively sought diversification in a bull market world where the top 10 stocks (heavily AI exposed) in the S&P 500 are 38% of the index while index correlations (a mean reverting relationship) sit at generationally attractive lows," said Emanuel and team.
The negative-beta stocks worked particularly well during the volatility when the Iran war was first launched, as well as the blowup of hedge fund Situational Awareness in July.
This year, the basket of negative-beta stocks has delivered results in line with the tech-charged S&P 500. "Buying negative-beta stocks helps a long term oriented portfolio 'ride out' volatility events, with interest rate, geopolitical and midterm election uncertainty the catalysts for another such event as September gets underway," the analysts said.
The list of stocks skew towards energy - just as Arnold's portfolio relies on those stocks as a geopolitical hedge - but also includes utilities and staples. But what's also on the list are insurers, which benefit from higher investment income as yields push to multi-year highs. The firm only named 20 out of those 115 stocks but the list includes CF Industries (CF), APA (APA), LyondellBasell Industries $(LYB)$, Occidental Petroleum $(OXY)$ and ConocoPhillips $(COP)$.
The market
U.S. stock futures (ES00) (NQ00) weakened on worries about rising bond yields BX:TMUBMUSD10Y and elevated oil prices (CL00).
Key asset performance Last 5d 1m YTD S&P 500 7631.47 -0.60% -1.36% 11.48% Nasdaq Composite 26,099.77 -0.20% -1.83% 12.30% 10-year Treasury 4.82 16.70 20.30 64.80 Gold 4354 -6.32% 1.07% 0.50% Oil 90.51 10.50% 20.55% 57.66% Data: MarketWatch. Treasury yields change expressed in basis points
The buzz
Iran on Wednesday fired at U.S. miliary bases across the Gulf after a U.S. barrage against Iranian military targets, including one that reportedly hit a wedding.
Dell Technologies (DELL) lifted its revenue and AI server sales target.
Palo Alto Networks (PANW) reported stronger than forecast results as its CEO said new AI capabilities prompt cybersecurity demand.
MongoDB (MDB) beat revenue forecasts but results from its Atlas cloud database disappointed investors.
Broadcom (AVGO), which makes custom AI chips for companies including Alphabet's Google, reports results after the close.
Europe's largest airline Ryanair said winter jet-fuel prices of $140 per barrel are prompting it to cut winter capacity.
The economics calendar includes the ADP employment gauge, due at 8:15 a.m. Eastern, and the Federal Reserve's Beige Book of economic anecdotes, due at 2 p.m. The Bank of Canada makes its interest-rate decision at 9:45 a.m., where its assessment of the U.S.-Canadian trade spat will be in focus.
The AI investment map: from tokens to megawatts.
The chart
Hyperscalers are issuing so much debt that they may be causing an imbalance at the long end of the yield curve. JPMorgan Asset Management's Michael Cembalest calculates that the debt issuance by the five hyperscalers, plus Nvidia, equates to 70% of new Treasury long duration borrowing. He adds that the Treasury twist program of buying back long-dated securities while borrowing more from the short end of the curve pales in comparison to the Fed's program from 2011 and 2012 - some 25% of that size, while the outstanding stock of Treasuries with maturities longer than 10 years has risen from $1 trillion to $5.8 trillion.
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