Weight loss drugs cause bariatric surgical companies to shed revenues
Stocks had a mixed close and recently sleepy Dow Jones Industrial Average is in a rare winning streak. Tech stocks slid yesterday after soft earnings announcements from Tesla and NVIDIA, while TSMC warned that chip demand is down.
A tale of two asset classes. Remember when it was considered prudent to own some bonds alongside your stocks? The primary reason was for asset class diversification. You see, historically bond prices and stock prices are inversely correlated with each other. That is to say when one went up the other went down… sort of, but close enough to the truth. What this ultimately meant was that if stocks sold off, your bonds would trade higher thus minimizing the overall portfolio losses. Over the long term that is generally still true and there is significant value in having a well-diversified portfolio as it helps investors tailor the volatility of their portfolios to their particular appetite. There are lots of rules of thumb on exactly what the right blend of asset classes are but generally speaking clients who can afford to have more volatility in their portfolios would likely have little or no bonds, opting to accept volatility for the potential for greater gain. The reverse is true for investors who cannot afford to take on higher volatility and are willing to accept lower potential returns for higher certainty. Imagine if you are planning to retire soon and you are in a volatile portfolio. You would be running the risk of your portfolio being down when you need the money the most. Imagine that you were planning to retire in 2022 and you decided to go all in on stocks in late 2020 as stocks began to rally. It is easy to see the gaffe in hindsight (as hindsight is always 20/20 on Wall Street), but in 2020 who could have predicted last year’s inflation explosion and market rout? This all makes sense in theory and over the long term. However, there are exceptions, and 2022 was unfortunately one of those exception years.
You have heard me say many times that last year’s markets provided no safe haven for investors leaving even the most seasoned Wall Streeters grabbing for antacid tablets . The two most popular asset classes stocks and bonds both suffered last year. Check out the following chart which shows the S&P returns along with the total bond market for 2022. It is clear from the chart that everything was swinging from the top left to the bottom right… which is um not usually good.
The good news is that not only did the declines come to halt by year-end, but stocks began to gain strength. This is clearer on the next chart which shows the same chart for 2023 year to date. The S&P is up by some ~18% and bonds are up by +2.24%. Check out the chart and keep reading.
Now, that is more like it. Even if you owned both stocks and bonds… or either, you would be up for the year. On the surface that is good news, but unfortunately, that means that stocks and bonds are still correlated, so if things sour for this rally and correlation remains positive, both asset classes will suffer – together. This is a challenge when it comes to portfolio management and diversification. But don’t worry, I will leave you with some positive news, and… sorry, another chart. First, I will tell you that there are many more asset classes than just stocks and bonds, and that even within those GIANT aggregates, there are many less-correlated sub-classes. However, if you want to stay high-level and old-school and focus on just stocks and bonds, if you can be patient and have a long-term focus (which I often suggest), the future may be brighter. Check out this 20-year chart of the S&P500 and the total bond market. Focus on the lower panel which shows their correlation. Negative correlation (shaded in red) is what we would prefer for diversification, while positive correlation is great when everything is going up (like this year) but blisteringly painful when everything is going down (like last year). We can see from this chart that we have experienced a spate of positive correlation since the pandemic, but historically the asset classes remain negatively correlated. More red than green. That is good news if you like to own both stocks and bonds to limit potentially large losses.
WHAT IS HAPPENING IN THE PREMARKET?
Intuitive Surgical Inc (ISRG) shares are lower by -4.22% in the premarket after the company announced that it beat estimates for EPS and Revenues. The stock is trading lower due to the fact that bariatric surgery revenues are declining as interest in the new class of weight loss drugs becomes more popular (I am SURE that you heard). Potential average analyst target upside: +0.3%.
Comerica Inc (CMA) shares are higher by +3.16% in the premarket after the company announced that it beat EPS and Revenue estimates by +6.97% and +52.36% respectively. What’s more, the company’s average deposits met analysts’ expectations and the company relayed that consumer deposits were normalizing after March’s volatility. Dividend yield: 5.36%. Potential average analyst target upside: +2.5%.
ALSO, this morning: Regions Financial, Roper Technologies, AutoNation, and Huntington Bancshares beat estimates for EPS and Sales, while American Express and Interpublic Group came up short.
YESTERDAY’S MARKETS
Stocks had a mixed close yesterday as tech shares weighed down indexes after soft earnings announcements. The S&P500 declined by -0.58%, the Dow Jones Industrial Average climbed by +0.47%, the Nasdaq Composite dropped by -2.05%, and the Russell 2000 Index fell by -0.89%. Bonds declined and 10-year Treasury Note yields gained +10 basis points to 3.85%. Cryptos lost -0.92% and Bitcoin traded lower by -0.77%. The S&P ESG Index lost -0.87%.
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