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Taking Higher Interest Rates in STRIDE

Spotlight on Commodities: Inflation and Innovation

Making a Virtue of Necessity

Will Diwali Light Up Demand for Gold in the Fourth Quarter?

Amid the Energy Rally, Tracking ESG Bond Index Performance

Taking Higher Interest Rates in STRIDE

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Fei Mei Chan

Former Director, Core Product Management

S&P Dow Jones Indices

When it rains, it pours, and there’s no lack of bad news in 2022. The equity market is in solid bear territory, with the S&P 500® down 22% YTD. Inflation is high, and the Federal Reserve has aggressively hiked interest rates in recent months. The latest cycle of rate increases has happened faster than at any time since 1988. Rates have increased in both nominal and real (inflation-adjusted) terms. The current real yield curve sits significantly higher than at its most recent trough in July 2020.

Higher interest rates are often perceived to be bad for equity performance. Although it doesn’t always work out that way, this year, that prediction has come to fruition. Poor equity returns, other things being equal, are unpleasant for investors’ retirement portfolios. But generating returns is just one aspect of providing retirement security. An equally important aspect is to convert those cumulative returns into a sustainable, inflation-adjusted income stream. The S&P STRIDE Index Series is designed to facilitate both income generation and preserve purchasing power.

Targeting a dollar value of portfolio assets by retirement is aspirational. But budgeting for a stream of consumption costs post-retirement is actionable. The S&P STRIDE Series indicizes retirement income plan structures traditionally offered by annuities or defined benefit plans. Income costs are discounted back to today’s value using real interest rates. Higher rates imply lower costs of generating retirement income.

Our quarterly S&P STRIDE Dashboard provides regular updates on changes in the cost of retirement income. Exhibit 2 shows the cost for a dollar of retirement income for each of the 13 vintages that the S&P STRIDE Indices track.

Since real interest rates have risen dramatically in the past year, the cost of retirement income has declined significantly (lowest since 2015), particularly for longer-maturity vintages.

Additional resources:

Introducing the S&P STRIDE Index Series

Making STRIDEs in Evaluating the Performance of Retirement Solutions

The posts on this blog are opinions, not advice. Please read our Disclaimers.

Spotlight on Commodities: Inflation and Innovation

What could the convergence of inflation and interest rate tightening mean for commodities? CME Group’s Blu Putnam takes a fundamental look at global commodity markets with S&P DJI’s Jim Wiederhold and Kelsey Stokes.

The posts on this blog are opinions, not advice. Please read our Disclaimers.

Making a Virtue of Necessity

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Craig Lazzara

Managing Director, Index Investment Strategy

S&P Dow Jones Indices

When the market declines by nearly 24%, as the S&P 500® did in the first nine months of 2022, investors typically lick their wounds and wonder what comes next. Spoiler alert: I don’t know. But there are ample historical data to explore amidst our befuddlement.

First, the bad news: Exhibit 1 shows that there is very little relationship between trailing returns and future returns. These data comprise every nine-month period since 1971, not just the January-September intervals; the exact correlation between the last nine months’ returns and the next nine months’ returns is 0.006. A statistician’s best guess of the next nine months’ returns would simply reflect the median return of the series, ignoring whatever the last nine months’ returns had actually been.

But there’s good news hidden within Exhibit 1. The market has no memory; the best guess of future returns does not depend on the immediate past.

Exhibit 2 shows this a bit more clearly. This exhibit groups our observations into deciles, based on trailing returns. The bottom decile thus contains the worst 10% of nine-month returns (including, we need hardly add, the first nine months of 2022). Over all nine-month periods in the last 50 years, the median return was 9.5%. When historical returns were in the bottom decile, the median return in the next nine months was 10.8%, a not-inconsiderable improvement over the global median.

Exhibit 3 gives us more detail on results after a bottom-decile experience; the median return in the subsequent 12 months is 16.6%, well above the unconditional median (14.0%).

Although these results are drawn from a full 50 years of data, we can draw similar conclusions if we limit ourselves to periods of relatively high inflation. The U.S. Consumer Price Index (CPI) rose above 6.0% in 1973 and remained elevated until 1982; after 1982, the CPI remained below 6.0% until this year. If we look only at those high inflation years, we see similar results, as Exhibit 4 illustrates.

Nothing in these data is certain, of course. After a bottom decile performance, the market might decline further, or might not rebound as much as is typical. Uncertainty is the investor’s constant companion, but historical data can at least give us some clues to the future. Bad returns occasionally come. But the fact that they have come in the last nine months does not make it more likely that they will come in the next nine months. Long-term investors should bear the long-term results in mind.

The posts on this blog are opinions, not advice. Please read our Disclaimers.

Will Diwali Light Up Demand for Gold in the Fourth Quarter?

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Jim Wiederhold

Former Director, Commodities and Real Assets

S&P Dow Jones Indices

During the Diwali festival in India, retail gold demand tends to pick up, offering a floor to global gold prices or the potential impetus to push prices seasonally higher. Several years of lower-than-expected gold demand suggest that there is room for an uptick in demand in Q4 2022 for India’s second-largest import by value. India plays a crucial role in the gold market, with global annual imports of gold moving back and forth between India and China as the biggest net importer.

Gold prices have moved lower over the course of 2022, as many central banks across the globe have embarked on rate hiking regimes in order to get control of inflation. Gold in India hit another new low, as the U.S. dollar continued to make new highs on the back of the U.S. Fed announcing one of the most aggressive rate hiking campaigns in decades. The Reserve Bank of India (RBI) also increased interest rates, but not as aggressively in comparison, given that inflation has risen but is not as high as in the U.S. Expectations are for the RBI to hike less in coming meetings, while the U.S. Fed could continue to increase rates at large clips, which could lead to further weakness in the short-term gold price, given it is historically negative correlation to the U.S. dollar.

There are potential tailwinds in the short term for gold outside of the demand from the Diwali festival. Gold has been known as an inflation hedge due to its use as a store of value. Recently, it has not held up to that claim; inflation has soared higher, while gold prices have lagged other commodities. If we look back historically to other high inflation periods in the 1970s and mid-2000s, gold tended to lag other commodities prices higher and usually did so in the second half of these high inflation time periods. Will this time echo those prior periods? It’s hard to say with other potential new stores of value present that were not available in past high inflation environments, like cryptocurrencies.

S&P Dow Jones Indices produces numerous gold-related indices, as well as multi-asset indices using gold futures as constituents. Check out our website for more information on our gold index offerings.

This article was first published in The Economic Times on Oct. 8, 2022

 

The posts on this blog are opinions, not advice. Please read our Disclaimers.

Amid the Energy Rally, Tracking ESG Bond Index Performance

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Catalina Zota

Associate Director, Fixed Income Product Management

S&P Dow Jones Indices

Year-to-date, global stock and bond market returns have been mired in red. The picture has been consistent across the various bond and equity sectors, except for Energy and Utilities stocks, posting YTD returns of 48.8% and 5.5%, respectively. Before this Energy rally, the iBoxx MSCI ESG Advanced USD Liquid Investment Grade (IG) Index was launched to reflect the performance of U.S. dollar-denominated IG corporate debt issued by companies that have an above-average environmental, social, and governance (ESG) rating compared to peers. The Oil & Gas sectors are excluded from the index, instead seeking exposure to companies that have a higher ESG rating (as measured by MSCI ESG research data). Companies involved in business controversies and UNGC global norms violations are not included.

The iBoxx MSCI ESG Advanced USD Liquid IG Index had a YTD return of -15.66% versus the benchmark’s YTD return of -16.06% (see Exhibit 2). Compared with the benchmark, there was 2.82% underweight in bonds with over 20 years to maturity (YTM), as well as 2.16% and 1.30% overweight in bonds with 1-5 and 5-10 YTM, respectively. As a result, the ESG index had lower duration and convexity compared with the benchmark.

The ESG index underweighted lower-rated bonds (BBB) by 6.94%. The index composition has led to lower yield and coupon rate for the ESG index, at 4.98% and 3.52%, respectively.

Exhibit 4 shows a comparison of index performance for the past five years (rebased to 100). The iBoxx MSCI ESG Advanced USD Liquid IG Index has performed comparable to the benchmark in terms of total return, despite missing the entire Energy sector, which accounted for 7.88% of the benchmark as of Aug. 31, 2022. Thus, the similar performance can be attributed to index construction, namely the additional ESG business activity screens and higher rated, best-in-class companies measured by their ESG rating. On a YTD basis, the iBoxx MSCI ESG Advanced USD Liquid IG Index has provided a consistent risk/return profile compared with the benchmark.

ESG has tremendous opportunity for growth in the global bond market that reached USD 126.9 trillion in 2021.1 The U.S., the most liquid market in the world, was responsible for USD 49.7 trillion (38.7%) of global bond issuance. The ESG bond market has grown from less than USD 1 trillion in 2017 to over USD 2.1 trillion in 2022.2 The ESG market is estimated to reach USD 3.5 trillion by the end of 2025 based on the growth rate of the iBoxx MSCI ESG Advanced USD Liquid IG Index.3 This exponential growth is fueled by regulatory movement toward a greener and more sustainable economy in the U.S. and the EU. The Federal Reserve is considering the implementation of systemic climate risk (CRISK)4 bank stress tests in 2023, and the SEC has opened consultations for index providers to disclose data on ESG-labeled products.5 The EU Taxonomy requirements will push companies to further improve their ESG credentials and align their business activities with at least one of the six objectives for a more sustainable future (only two of the six EU objectives are mapping to company sectors at this time). Many other regulations, such as SFDR Articles 8 and 9, will push index providers and asset managers to be even more selective of the companies included in the funds.

In the U.S., there are headwinds in the ESG market. States such as Florida and Texas banned ESG-labeled products from the state pension funds. A debate emerged along political lines, which trickled down into the financial industry regarding the performance and validity of ESG-labeled products. This brief analysis of the iBoxx MSCI ESG Advanced Liquid IG Index shows that, despite market turbulence, well-constructed ESG products remain as competitive as the broad market.

1 Capital Markets Fact Book 2022, July 2022, SIFMA

2 ESG bond market measured by the iBoxx MSCI ESG Advanced USD Liquid IG Index.

3 ESG bond market is estimated based on the growth rate of the iBoxx MSCI ESG Advanced USD Liquid IG Index from Jan. 31, 2018, (historical back-tested data) to Aug. 31, 2025.

4 Jung, H., Engle, R., Berner, R., Climate Stress Testing, September 2021, Federal Reserve Bank of New York Staff Reports, no. 977 https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr977.pdf

5 Securities and Exchange Commission, 17 CFR Parts 270 and 275, https://www.sec.gov/rules/other/2022/ia-6050.pdf

The posts on this blog are opinions, not advice. Please read our Disclaimers.