Goldman Says Investors Forget Many Stocks Love Higher RatesBy
Traders paying similar amount for rate-sensitive, S&P hedges
U.S. stocks have seen more volatility since Friday’s selloff
Amid all the hemorrhaging in dividend stocks whacked by higher bond rates, Goldman Sachs Group Inc. says investors are missing a chance in another group that usually benefits.
They’re referring to the companies poised to gain the most from a rate hike, a group dominated by financial firms such as Bank of America Corp. and Bank of New York Mellon Corp. While investors should be getting bullish on this collection given their rate sensitivity, the cost to hedge them is no different from the broader S&P 500 Index, suggesting that traders are foregoing an opportunity, according to Goldman.
Volatility erupted last week as Federal Reserve officials warned against waiting too long to raise rates, spurring the S&P 500’s worst day in two months and snapping U.S. stocks out of a months-long slumber. The selloff took its biggest toll on companies with higher dividends as a 13 basis-point jump in Treasury yields over four days made payouts less attractive. Goldman sees evidence in options that corners of the market paid too high a price.
The market “is not differentiating among stocks where rate increases could be a positive or a negative,” Goldman derivatives strategists Katherine Fogertey and John Marshall wrote in a client note on Wednesday. “A sooner-than-expected hike could result in these stocks trading up sharply, but the options market is largely discounting / overlooking this possibility.”
Helping fuel the bull case for Goldman’s basket of rate-sensitive stocks is the possibility of outsize profit growth during a period when the S&P 500 is expected see a sixth straight quarter of contraction. The group has the potential to exceed earnings estimates by an average of almost 50 percent as higher rates boost yields on cash holdings, according to Goldman.
The S&P 500 slipped 0.4 percent to 2,139.12 at 4 p.m. in New York, while Goldman’s rate-sensitive group lost 1.1 percent.
For their assessment of hedging costs, Goldman analysts looked at the price of puts relative to calls for a basket of 12 companies with liquid options. They used the same measure -- known as skew -- to assess the average company in the S&P 500, then compared the two groups on a six- and 12-month basis. It’s the same, they found.
That’s because prices are swinging so much investors have been unable to exercise much discretion, according to Mark Sebastian of Option Pit. After trading in the tightest range in history for almost two months, the S&P 500 moved more than 1.4 percent on a closing basis for three consecutive days, sending the CBOE Volatility Index above 15 for the first time in 46 sessions.
“The more the market moves, the more volatility correlates,” Sebastian, trader and founder of Option Pit, a Chicago-based education and consulting firm, said by phone. “When things calm down and the VIX goes back down to 12 or 13, you’ll start to see differentiation again.”
The normalization of hedging costs for U.S. stocks may also be a reflection of investors purchasing broad swaths of protection in funds such as the SPDR S&P 500 ETF, rather than concentrating in one specific area, according to Sebastian.
Since last Friday’s 2.5 percent selloff, the ETF has seen open interest on puts surge to the highest since November 2014. Trading volume in bearish contracts has also climbed. In the four days, the SPDR S&P fund has seen average put volume of 2.5 million shares per day, compared to 1.5 million over the past three years.
“A lot of the downside skew hedging is done on the more global macro level,” said Sebastian. “Some investors are thinking they can make their dollars hedging the S&P 500 and buying the sectors that they think are going to outperform, rather than trading the individual ETFs.”
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