The Economic Climate is Stormy for Most NASDAQ Stocks

The market is getting whipsawed by negative news regarding the coronavirus and potential profit and supply chain disruptions, at the same time unemployment rates and interest rates are at record lows.  While the focus is largely on the public health disruptions, eventually the market will again focus on the economy and its impact on profits and growth.  Research by MacroRisk has shown that different companies have different responses to economic variables, and that the same set of economic conditions might be favorable for some companies and unfavorable for others.  The most valuable, and seemingly the most turbulent, stocks appear to be those on the NASDAQ.  In this report, we ask what the economic climate might be for NASDAQ stocks when the social angst calms down and investors care about profits, costs, and more mundane economic factors of investing.

Using the patented and proprietary tools available on the MacroRisk Analytics® platform, we will show the distribution of NASDAQ stocks that are currently expected to be suitable in the current economy to those stocks that are not. This can help investors and financial advisors understand what portion of stocks is expected to benefit from current economic conditions and which portion is not. It will help to answer the following question: what portion of stocks does the economy provide tailwind for, headwind for or is neutral for? This, in turn, can assist in understanding where the overall economy currently stands.

To demonstrate this, we use MacroRisk’s “economic climate rating (ECR)” based on its patented technology. This powerful rating measures the expected impact of the current economic climate for individual assets (including stocks, funds, and many others) over the next six to 12 months.  The ECR is a five-star scale where one indicates substantial economic storms in the forecast and five indicates positive tailwinds and a favorable climate.

As of 3/9/2020, the average economic climate rating is 2.2 for covered NASDAQ stocks (those with at least three years of trading history). Overall, the forecasted economic climate is somewhat unfavorable for NASDAQ stocks.  On the other hand, there are some NASDAQ stocks which seem to have their corporate sales perfectly trimmed to catch the economic breezes, and they receive a 5-star rating.

The distribution of the economic climate rating is presented in the following graph.  The graph below shows that there are more of 1- and 2-star stocks than 4- and 5-star stocks as of 3/9/2020.

The economic climate rating is based on each stock’s unique response to key 18 economic factors in conjunction with the current values of those factors.  The graph below shows the current economy expressed as “z scores”, that is in a way that adjusts for different magnitudes and different volatilities.  In the chart below, each bar shows the current economic value compared to its historical values.  The economic climate rating is computed using the current values and doesn’t include additional economic forecasting.

Given that there are more stocks for which the current economy is expected to not be suitable than those for which it is, investors might consider a more defensive approach to their portfolios. This analysis assumes that the economic factors will continue in their current directions. Alternatively, investors may choose to focus on those where the economy is most favorable.

The next table shows the top 10 NASDAQ stocks in terms of their economic climate as of 3/9/2020. In other words, these are the 10 stocks that are believed to be most undervalued according to the 18 macroeconomic factor MacroRisk model.

MacroRisk Analytics® research is available on Interactive Brokers through our “The Economy Matters®” reports.

MacroRisk Analytics also has a selection of proprietary analysis tools, including the economic climate rating discussed in this post, that use macroeconomic variables to provide information on tens of thousands of stocks, mutual funds, exchange traded funds, and other traded assets. Click here to see how MacroRisk Analytics can help you. 

Economic Outlook for a Stock with the Highest Return-to-risk Ratio in 2019 through June 10

Using patented macroeconomic information provided by MacroRisk Analytics, we will discuss the economic outlook for Tyson Foods Inc. mentioned in our “Stocks with Highest and Lowest Return-to-risk Ratios Year-to-date” blog post on June 12, 2019.

In our previous post, we have identified Tyson Foods Inc. (ticker: TSN) as having the highest return-to-risk ratio out of the S&P 500 stocks from 12/31/18 through 6/10/19. The company’s economic profile as of 6/14/19 as demonstrated in the MacroRisk Report by MacroRisk Analytics is:

MacroRisk Level

The MacroRisk Level (MRL) measures an asset’s sensitivity to economic change (i.e. another measure of an asset’s risk). Tyson Foods’ MRL is 107. Is this number too high, too low? To answer this question, let’s compare Tyson’s MRL to other companies in the consumer staples sector. Using MacroRisk Analytics, we uploaded the consumer staples holdings referencing the XLP holdings (SPDR ETF for consumer staples) as of 6/14/19 into a buylist. Next, we used the FiveRisks+ Holdings Table by MacroRisk Analytics to analyze the sector’s holdings versus Tyson Foods.

Name Symbol MRL
Archer-Daniels-Midland Co ADM 87
Coca-Cola Co (The) KO 103
Sysco Corp SYY 103
Tyson Foods Inc TSN 107
Campbell Soup Co CPB 111
Colgate-Palmolive Co CL 119
Monster Beverage Corp MNST 130
Mondelez International Inc MDLZ 140
Brown Forman Corp BF.B 141
Kimberly-Clark Corp KMB 141

As of 6/14/2019, there were 33 holdings in the consumer staples sector. The tables above show only a few of the holdings within the SPDR Consumer Staples ETF. The tables are sorted by the MRL from lowest to highest. Tyson Foods is similar to Sysco Corp and Campbell Soup in its sensitivity to changes in the economy. Among the 33 holdings in the consumer staples sector, the lowest MRL in 87 (Archer-Daniels-Midland) and the highest is 292 (Walgreens Boots Alliance). As a reminder, the MRL for Tyson Foods is 107. Within the consumer staples sector, Tyson Foods’ MRL percentile rank is 10%. In other words, 10% of companies in the consumer staples have a lower MRL and 90% have a higher MRL (i.e., 90% of the consumer staples sector holdings have higher risk as measured by their stock price response to the economy).

Economic Climate Rating

The Economic Climate Rating (ECR) measures how favorable the current economic climate could be for an asset (i.e., a stock) over the next 6 to 12 months. It is a 5-star scale: 1 being the worst, 5 being the best. Tyson Foods’ ECR is a 4 meaning that the current economy could be considered favorable for the company. Exporting the FiveRisks report by MacroRisk Analytics to an Excel spreadsheet, we can summarize the ECRs as follows:

The distribution of the ratings is positively skewed meaning that there are more companies in the consumer staples sector with ratings below 3. This may indicate that currently, the economy is expected to be neutral or not favorable to the majority of companies in that sector.

Economy’s Influence

The Economy’s Influence shows how much of an asset’s price and value movement is explained by changes in the economy. Our model indicates 82% of Tyson Foods’ stock price is explained by changes in the economy, and we attribute the other 18% to company-specific information. This is a relatively low number because the average portion of the stock price movement that is explained by the economy in the consumer staples sector as of 6/14/19 is approximately 88%. Our model indicates that about 20% of the companies (i.e., their stock prices) in the sector are less influenced by the economy and about 80% of the companies (i.e., their stock prices) are more influenced by the economy.

Eta® Profile

Finally, we would like to show another patented, proprietary economic analysis for Tyson Foods. And, it is the Eta® profile or what we call the “DNA” of the company. If you are a new reader and would like to learn how to understand the Eta® profile, click here. Here’s the Eta® profile for Tyson Foods:

Currently, the company’s top 3 sensitivities are to:

  • corporate bond (BAA) yield
  • CPI (inflation)
  • energy prices

Tyson’s stock price is negatively influenced by the BAA yield meaning that if the BAA yield were to decrease, this would be expected to benefit the stock’s price and vice versa. On the other hand, it is positively influenced by the CPI and energy prices meaning that if these two factors were to increase, this would be expected to benefit the stock’s price and vice versa.

Here’s a variation of the Eta® profile where the current economic status is also presented:

It can be seen that the BAA yield has actually decreased (see the direction of the non-blue bar for the BAA yield factor in the chart above), and the CPI and energy prices have increased relative to their recent levels.

Here’s a graph of Tyson’s stock price versus the S&P 500 Total Return Index from 12/29/2017 through 6/14/2019:

MacroRisk Analytics has a selection of proprietary analysis tools that use macroeconomic variables to provide information on tens of thousands of stocks, mutual funds, exchange traded funds, and other traded assets.  By using these tools to evaluate Tyson Foods (TSN), we believe that the company has lower overall economic risk, and a more favorable macroeconomic status compared to other companies in its sector.  A more detailed examination shows that recent changes in the CPI and Corporate Bond Yields have particular impact. Click here to see how MacroRisk Analytics can help you.