Is tax-loss harvesting for bond funds pressuring yields higher? While patience needed, some positive divergences seen in CCC-BB spreads and Bitcoin/SPX. Array ( [cookie] => 3e4c11-d3372e-e5f04b-220e7a-3559ba [current_usage] => 1 [max_usage] => 2 [current_usage_crypto] => 0 [max_usage_crypto] => 2 [lock] => [message] => [error] => [active_member] => 0 [subscriber] => 0 [role] => [visitor_id] => 170771 [user_id] => [reason] => Usage under limits [method] => ) 1 and can accesss 1

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We discuss: how tax-loss harvesting is hitting stocks (expected) but also likely bonds where 13 of 15 largest bond mutual funds down YTD, something essentially never seen.  Divergences of small-caps vs quality spread is likely positive as is the divergence of bitcoin vs SPY -0.12% .

Please click below to view our Macro Minute (Duration: 6:31).

The S&P 500 is down 2% this week, bringing its loss for the month to -3.5%. Besides a few high-profile negative reactions to earnings (GOOG -1.01%  META -1.06% ), to me, few macro events explain the acute weakness — in fact, US 10-yr yields have been relatively more tame than could explain the -2% decline. It is possible that mutual fund tax-loss selling is playing a bigger role in 2023 than we appreciate:

• The majority of mutual funds have an October year-end (Barrons) and this means we tend to see tax-loss harvesting as we move into the end of the month. 2022 saw this on display as selling of stocks with negative YTD returns were further under pressure towards the end of October 2022.
• This year, not only are there equity tax losses to “harvest” but also bond fund losses. 13 of the 15 largest bond mutual funds and 13 of the 15 the largest bond ETFs are down YTD. Within the last 30 years, this is one of the worst years ever. This selling of corporate and gov’t bonds probably added to some pressure on yields (pushing prices down, yields up).
• Could this amplify what is already a tough week? Perhaps. Tax-loss harvesting is taking place for those equities down YTD. And roughly 50% of the S&P 500 is down YTD. The good news is this selling pressure should abate in coming weeks, as we move into November.
• Despite what many see as a “bad earnings” season, those companies “beating” on EPS are actually doing better than in 1Q23 or 2Q23.
  – 1Q23 beating >2%: +0.2% next 3D
  – 2Q23 beating >2%: +0.3% next 3D
  – 3Q23 beating >2%: +0.5% next 3D
• So, earnings reactions are better but there have been some high profile negative reactions. Overall, with 47% of S&P 500 reported, 79% are beating.
• Despite the elevated VIX (>20), the spread between high-yield and speculative grade bonds, or BB vs CCC, has narrowed. The narrowing of the quality spread is actually a positive sign incrementally and generally takes place when economic momentum is improving. This quality spread has generally rallied since mid-2022 after reaching nearly 2-std deviation wides.
• For the past 20 years, a rally in the quality spread has been associated with outperformance of small-cap stocks. This did not happen this year, in part, we believe due to the combination of:
  – higher interest rates –> hit smaller-caps harder (more leverage)
  – lack of inflows into equities –> hurts smaller stocks
  – general negative sentiment –> small-caps are higher beta
• But in the past few days, we are starting to see some signs of small-cap outperformance. Today, for instance, the IWM -0.18%  finished roughly where it opened, while the SPY -0.12%  finished near the close. According to Mark Newton, Head of Technical Strategy, he believes that a bottom of the relative underperformance of small-caps is near.
• Similarly, since mid-September, Bitcoin and equities have diverged as BTC has gone from $25,000 to $35,000 while the S&P 500 has fallen -6% or worse. Why would Bitcoin diverge from equities?
• There are several possible explanations:
  – BTC is a flight to quality –> but why are bonds down?
  – BTC has specific catalysts like ETF –> maybe but that is more Nov/Jan
  – BTC is sniffing out a future easing of monetary policy –> maybe

BOTTOM LINE: While equities are down sharply YTD, some divergences bear watching

I wish I could say that the selling is coming to an end for equities. There has been a lot of technical damage and this along with the few signs of capitulation (per Mark Newton, see his report from Wed evening) tell me that investors need to be patient. But the window for a tax-loss selling to end is the end of October (next week).

Key incoming data October

•  10/2 10am ET September ISM Manufacturing Tame
•  10/3 10am ET JOLTS Job Openings August Hot
•  10/4 10am ET September ISM Services Tame
•  10/6 8:30am ET September Jobs Report Mixed
•  10/6 9am ET Manheim Used Vehicle Index September Final Tame
• 10/10 11am NY Fed Inflation Expectations Mixed
•  10/11 8:30am ET September PPI Mixed
•  10/11 2pm ET Sep FOMC Meeting Minutes Tame
•  10/12 8:30am ET September CPI Mixed
•  10/13 10am ET U. Mich. September prelim 1-yr inflation Mixed
•  10/16 8:30am ET October Empire Manufacturing Survey Tame
•  10/17 8:30am ET October New York Fed Business Activity Survey Tame
• 10/17 8:30am ET September Retail Sales Data Hot
•  10/17 9am ET Manheim October Mid-Month Used Vehicle Value Index Tame
•  10/17 10am ET October NAHB Housing Market Index Tame
• 10/18 8:30am ET September Housing Starts Tame
• 10/18 2pm ET Fed releases Beige Book Tame
•  10/19 8:30am ET October Philly Fed Business Outlook Survey Tame
• 10/19 10am ET Existing Home Sales Tame
• 10/19 12pm ET Fed (including Powell) at Economic Club of New York
•  10/24 9:45am ET S&P Global PMI October Prelim Tame
•  10/26 8:30am ET 3Q 2023 GDP Advance Strong
•  10/27 8:30am ET September PCE
•  10/27 10am ET Oct F UMich Sentiment and Inflation expectation
•  10/30 10:30am ET Dallas Fed September Manufacturing Activity Survey
•  10/31 9am ET August S&P CoreLogic CS home price
•  10/31 10am ET October Conference Board Consumer Confidence

Key incoming data September

•  9/1 8:30am ET August Jobs Report Tame
•  9/1 10am ET August ISM Manufacturing Tame
•  9/6 10am ET August ISM Services Mixed
•  9/6 2pm ET Fed releases Beige Book Tame
•  9/8 9am ET Manheim Used Vehicle Index August Final Tame
•  9/8 2Q23 Fed Flow of Funds Report Tame
•   9/13 8:30am ET August CPI Mixed
•  9/14 8:30am ET August PPI Tame
•  9/15 8:30am ET September Empire Manufacturing Survey Tame
•  9/15 10am ET U. Mich. September prelim 1-yr inflation Tame
•  9/18 8:30am ET September New York Fed Business Activity Survey Tame
•  9/18 10am ET September NAHB Housing Market Index Tame
•  9/19 9am ET Manheim September Mid-Month Used Vehicle Value Index Mixed
•  9/20 2pm ET September FOMC rates decision Market saw Hawkish
•  9/21 8:30am ET September Philly Fed Business Outlook Survey Mixed
•  9/22 9:45am ET S&P Global PMI September Prelim
•  9/25 10:30am ET Dallas Fed September Manufacturing Activity Survey
•  9/26 9am ET July S&P CoreLogic CS home price
•  9/26 10am ET September Conference Board Consumer Confidence

Key incoming data August

• 8/1 10am ET July ISM Manufacturing Tame
• 8/1 10am ET JOLTS Job Openings Jun Tame
• 8/2 8:15am ADP National Employment Report Hot
• 8/3 10am ET July ISM Services Tame
• 8/4 8:30am ET July Jobs report Tame
• 8/7 11am ET Manheim Used Vehicle Index July Final Tame
• 8/10 8:30am ET July CPI Tame
• 8/11 8:30am ET July PPI Tame
• 8/11 10am ET U. Mich. July prelim 1-yr inflation Tame
• 8/11 Atlanta Fed Wage Tracker July Tame
• 8/15 8:30am ET Aug Empire Manufacturing SurveyMixed 
• 8/15 10am ET Aug NAHB Housing Market IndexTame
• 8/16 8:30am ET Aug New York Fed Business Activity SurveyNeutral
• 8/16 2pm ET FOMC MinutesMixed 
• 8/17 8:30am ET Aug Philly Fed Business Outlook Survey Positive
• 8/17 Manheim Aug Mid-Month Used Vehicle Value IndexTame
• 8/23 9:45am ET S&P Global PMI Aug PrelimWeak
• 8/25 10am ET Aug Final U Mich 1-yr inflationMixed
• 8/28 10:30am ET Dallas Fed Aug Manufacturing Activity Survey Tame
• 8/29 9am ET June S&P CoreLogic CS home price Tame
• 8/29 10am ET Aug Conference Board Consumer Confidence Tame
• 8/29 10 am ET Jul JOLTS Tame
• 8/31 8:30am ET July PCE Tame

Key incoming data July

• 7/3 10am ET June ISM Manufacturing Tame
• 7/6 8:15am ADP National Employment Report Hot
• 7/6 10am ET June ISM Services Tame
• 7/6 10 am ET May JOLTS Tame
• 7/7 8:30am ET June Jobs report Mixed
• 7/10 11am ET Manheim Used Vehicle Index June Final Tame
• 7/12 8:30am ET June CPI Tame
• 7/13 8:30am ET June PPI Tame
• 7/13 Atlanta Fed Wage Tracker June Tame
• 7/14 10am ET U. Mich. June prelim 1-yr inflation Mixed
• 7/17 8:30am July Empire Manufacturing Survey
• 7/18 8:30am July New York Fed Business Activity Survey
• 7/18 10am July NAHB Housing Market Index in-line
• 7/18 Manheim July Mid-Month Used Vehicle Value Index Tame
• 7/25 9am ET May S&P CoreLogic CS home price Tame
• 7/25 10am ET July Conference Board Consumer Confidence Tame
• 7/26 2pm ET July FOMC rates decision Tame
• 7/28 8:30am ET June PCE Tame
• 7/28 8:30am ET 2Q ECI Employment Cost Index Tame
• 7/28 10am ET July Final U Mich 1-yr inflation Tame

Key data from June

• 6/1 10am ET May ISM Manufacturing Tame
• 6/2 8:30am ET May Jobs report Tame
• 6/5 10am ET May ISM Services Tame
• 6/7 Manheim Used Vehicle Value Index May Tame
• 6/9 Atlanta Fed Wage Tracker April Tame
• 6/13 8:30am ET May CPI Tame
• 6/14 8:30am ET May PPI Tame
• 6/14 2pm ET April FOMC rates decision Tame
• 6/16 10am ET U. Mich. May prelim 1-yr inflation Tame
• 6/27 9am ET April S&P CoreLogic CS home price Tame
• 6/27 10am ET June Conference Board Consumer Confidence Tame
• 6/30 8:30am ET May PCE Tame
• 6/30 10am ET June Final U Mich 1-yr inflation Tame

Key data from May

• 5/1 10am ET April ISM Manufacturing (PMIs turn up) Positive inflection
• 5/2 10am ET Mar JOLTS Softer than consensus
• 5/3 10am ET April ISM Services Tame
• 5/3 2pm Fed May FOMC rates decision Dovish
• 5/5 8:30am ET April Jobs report Tame
• 5/5 Manheim Used Vehicle Value Index April Tame
• 5/8 2pm ET April 2023 Senior Loan Officer Opinion Survey Better than feared
• 5/10 8:30am ET April CPI Tame
• 5/11 8:30am ET April PPI Tame
• 5/12 10am ET U. Mich. April prelim 1-yr inflation Tame
• 5/12 Atlanta Fed Wage Tracker April Tame
• 5/24 2pm ET May FOMC minutes Dovish
• 5/26 8:30am ET PCE April Tame
• 5/26 10am ET U. Mich. April final 1-yr inflation Tame
• 5/31 10am ET JOLTS April job openings

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