S&P 500: Yen Carry Might Be Over, But Don’t Discount Currency Issues Too Lightly

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S&P 500: Yen Carry Might Be Over, But Don’t Discount Currency Issues Too Lightly

The rose 4.50% last week, but the YTD return of 17.85% as of Friday, August 19th, ’24 is still short of the YTD weekly close high of 18.57% as of the week of July 12th, ’24.

Interestingly, the S&P 500 traded up through its 50-day moving average on Wednesday, August 14th, while the settled just on top of its 50-day moving average on Friday, August 16th – which implies tech is still lagging a little.

The 60/40 balanced account return ended 2024 with a new high in terms of its YTD return with the 60% / 40% portfolio returning 17.36% as of Friday, August 16th, versus the previous weekly high close of 18.57% as of July 12th ’24. Bond YTD returns are a little higher as of August 16th, versus July 12th, which is where the 60% / 40% portfolio is getting the help or attribution.

Put another way, on July 12th, the S&P 500 was up 18.57% YTD, while the AGG (Barclay’s Aggregate) was up just 0.95% or 95 bp’s YTD, while as of Friday, August 16th, the YTD return for the S&P 500 was +17.36%, while the AGG was +3.04% YTD.

Even international had a good week last week, perhaps on the dollar continuing to weaken, as measured by the UUP.

S&P 500 data: 

• The forward 4-quarter estimate fell last week to $258.31 from the prior weeks $258.77, and the quarter’s first print in early July ’24 of $261.39. The familiar pattern of forward EPS estimates is returning, after that very strong Q1 ’24 earnings season, where S&P 500 earnings and the forward estimate saw sequential increases each week;
• The PE ratio on the forward is now 21.5x after that strong week of performance for the S&P 500. Last week, the PE was 20.6x.
• The S&P 500 earnings yield dropped sharply this week, to 4.65% versus last weeks 4.84%, and the quarter’s start at 4.69%.
• The S&P 500 EPS “upside surprise” ******** lower than the past 5 quarters at +4.5%, actually about 50% lower than previous quarters reaching back to late ’22.
• The average high-yield credit spread closed this week near +346 the equivalent Treasury, up from the lows of +310 in late July ’24. YTD returns on high-yield () and short-maturity high-yield () are quite positive at +5.62% and +5.47%. Even high-yield muni’s have performed nicely this year: Nuveen’s muni high-yield and short-term high yield have returned 6.47% and +7.80% as of Friday, August 16th, ’24.

The tech sector always gets a lot of media attention, so it helps to watch the fundamentals or the expected earnings growth for the sector.

• On July 1 ’24, the technology sector was expected to grow EPS +18.6% for the calendar year, while as of Friday, August 16th, 2024, that expected growth rate is now +18.5%. Not a real big change so far.
• For ’25, the tech sector was expecting +20.1% EPS growth for the calendar ’25, while as of Friday, August 16th ’24, the data is now projecting a +21.2% growth rate.

Don’t bet the farm on it, but not only is the consensus estimates expecting faster tech sector growth in ’25 vs ’24, but the expected EPS growth revisions are higher (seeing positive or upward revisions) for next year.

The frenzy around the “ carry” trade seems kind of ridiculous now, but be careful about discounting currency issues.

Some of the worst corrections in the tech and growth stock run in the late 1990s (which means the S&P 500 and the Nasdaq) were around currency issues: the Thai baht and Malaysia ringgit devalued sharply in late July, 1997, and while it got some attention, no one ever suspected that it would result in rolling devaluations across Asia in late 1997, (even Hong Kong, and back then the HK dollar was tied to the US dollar), which ultimately culminated in the Long-Term Capital collapse in August, September and early October of 1998. (There was a good book written about how long-term capital blew up as Wall Street banks shorted it’s positions. )

Watch the yen. It’s up 6% the last month as measured by the PowerShares Yen Trust (NYSE:) (ticker FXY). The Bank of Japan (BOJ) has already said they will stop raising rates (for now), but Japan’s inflation may not give them a choice.

Take all this for what it’s worth. My experience over 25 years is that shocks like this – rapidly strengthening yen as Japan raises short-term interest rates –  aren’t remedied overnight. The Bank of Japan may learn what Ben Bernanke learned in 2007 and 2008 i.e. markets will go where they want to go, regardless of central bank intent.

Japan has now slipped to the world’s 5th largest economy, in the last 30 years, after being #2 during the 1980’s and most of the 1990’s. (China is now #2.)

Disclaimer: None of this is advice or a recommendation, just an opinion. Past performance is no guarantee of future results. Investing can involve the loss of principal even for short periods of time. Readers should gauge their own comfort with portfolio volatility and adjust accordingly. All EPS data is sourced from LSEG.

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