At this point, it seems as though the worst of the banking crisis may be over thanks to aggressive actions by the Fed and other central banks. However, the underlying issues facing the economy remain front and center.
In two words, the issue is: higher rates. In more detail, concerns relate to how consumers and corporations react to a world of higher inflation, less accommodative monetary policy, and a higher cost of capital.
The Fed and other central banks increased interest rates in recent weeks. They may be biased to hike again at upcoming meetings due to the most recent CPI prints as inflationary pressures have not abated anywhere close to a comfortable level. At the same time, signs are emerging that economic growth, particularly the robust job market, is slowing. This month’s employment report highlighted how cracks may finally be emerging after years of strong job growth and wage gains. The yield curve as measured by the difference between the US 10-year Treasury and the US 2-year Treasury remains deeply inverted.
Heading into earnings season, stocks face a test of whether they can exhibit resiliency as earnings are poised to decline and valuations have increased since markets bottomed in October 2022. While volatility has decreased, this setup is challenging as investors will need to look through the obvious declines and toward company guidance as to how they intend to navigate the remainder of 2023. Recession in the later half of 2023 or early 2024 does not appear to be priced into valuation multiples. In other words, stocks on an average are not exactly cheap heading into a big test of companies in the S&P 500 Index after reporting two straight quarters of year-over-year earnings declines.
With credit availability getting tighter for consumers and corporations, it is difficult to see how those with weaker balance sheets or more cyclical income streams will fare as well as they did when interest rates were pinned to zero and it was easy to access capital.
On the positive side, policymakers have taken to offsetting stresses with additional liquidity and intervention, but they remain biased toward hiking to address persistent core inflation. However, think of how equity holders of Silicon Valley Bank and Signature Bank fared compared to depositors... not so well.
So, what are investors to do?
While some may be tempted to throw their hands out and stick it out in cash now that it is finally offering an attractive income stream, others may want to look for opportunities in stocks, but where are they?
In this environment, investors may wish to favor larger companies due to their perceived higher quality and greater stability. While size is not directly correlated with traditional quality metrics or vice versa, in times of uncertainty investors tend to paint with a broad brush and in 2023 it appears firmly bigger is better.
Source: Bloomberg, December 31,2009 to April 13, 2023. Subject to Change
For investors looking to take advantage of the trend toward moving up in capitalization to navigate today’s confusing market, they can look toward Roundhill’s BIG ETFs. For the market stalwarts, the FAAMG (i.e., an acronym used to represent large technology companies including Meta, Apple, Amazon, Microsoft, and Alphabet) stocks, investors can turn to the Roundhill BIG Tech ETF (NASDAQ: BIGT). For those looking at the pullback in financial stocks, but want to position themselves toward higher quality companies, the Roundhill BIG Bank ETF (NASDAQ: BIGB) may be an attractive option.
Carefully consider the investment objectives, risks, charges and expenses of Roundhill ETFs before investing. This and other information about each fund is contained in the Prospectus. Please read the prospectus carefully before investing as it explains the risks associated with investing in the ETFs.
Important Risks
The BIGB Fund expects to have concentrated (i.e., invest more than 25% of its net assets) investment exposure in the Banking Industry. Further, the Fund expects to obtain such investment exposure by transacting primarily with a limited number of financial intermediaries conducting business in the same industry or group of related industries. As a result, the Fund is more vulnerable to adverse market, economic, regulatory, political or other developments affecting those industries or groups of related industries than a fund that invests its assets in a more diversified manner. The Financial sector (Banks and capital markets companies, in particular) may be significantly affected by changes in interest rates, catastrophic events, price and market competition, or other changes in government regulation or tax law and/or rate regulation, which may have an adverse impact on their profitability. In recent years, cyber- attacks and technology malfunctions and failures have become increasingly frequent in this sector and have caused significant losses. Please see the summary and full prospectuses for a more complete description of these and other risks of the Fund.
The BIGT Fund expects to have concentrated (i.e., invest more than 25% of its net assets) investment exposure in one or more of the Technology Industries at any given time, which may vary over time. Further, the Fund expects to obtain such investment exposure by transacting primarily with a limited number of financial intermediaries conducting business in the same industry or group of related industries. As a result, the Fund is more vulnerable to adverse market, economic, regulatory, political or other developments affecting those industries or groups of related industries than a fund that invests its assets in a more diversified manner. The value of stocks of information technology companies and companies that rely heavily on technology is particularly vulnerable to rapid changes in technology product cycles. Please see the summary and full prospectuses for a more complete description of these and other risks of the Fund.
The BIG Funds are distributed by Foreside Fund Services, LLC.
