(New York)

If you think the economy is going to keep humming along, then buy small caps, as they look set to gain the most from that scenario, at least according to Leuthold group. Small caps look likely to benefit disproportionately from the rising inflation and higher appetite for risky assets that accompany a strong economy. That said, small caps have lagged large caps for the last decade, so there is some reason to be skeptical about this call. Accordingly, “If 2020 should prove difficult for earnings growth, we would expect large-caps to maintain their earnings growth superiority”.

FINSUM: We can see the economy continuing to roll, but we have a harder time seeing inflation jumping up. We think the status quo will continue.

(New York)

Morgan Stanley’s earnings this week were an absolute blow out for the Street. The bank beat all expectations and performed exceptionally well. For us, the earnings really feel like a salute to the whole wealth management industry, as it was Morgan Stanley’s pivot to focus more on that business that has made it the reliable earnings machine that it has become. Revenue from wealth management accounted for around 40% of the whole bank’s revenues, and was up 11% on the year.

FINSUM: Wealth management is a rock solid and capital light business, and MS’ earnings are a testament to that. Gorman’s choice to focus on this segment of their business a few years ago was a very smart one.

(New York)

At this point it might seem natural to think that the stock market simply rises a bit everyday. Stocks have been so steady and so quiet for so long that it is almost disconcerting. The current “quiet” streak is one of the longest ever. The current number of days without a 1% move is the sixth longest streak since 1969 and the third longest since 1995. One analyst described the situation this way, saying “Right now it’s very, very tough to fight this trend … There’s a reinvigoration in the idea that we will see better growth”.

FINSUM: The huge rise in stocks from the Crisis through the last decade was generally characterized by steadiness. We don’t see this as any surprise.

(New York)

For many, many years muni bonds have been the go-to for tax-free income. While their yields were lower than conventional credits, there was usually a significant cost-savings by investing in the bonds because of the lack of taxation. However, the muni market is so over-bought that it is very difficult to find bonds where that is still the case. Prices have moved yields so low that there are virtually no savings versus Treasuries. 2019 saw muni bonds experience their highest inflows since 2009, and according to Morningstar “For most taxpayers, there’s no longer a significant yield advantage for muni funds after you take taxes into account”.

FINSUM: Weak yields and no savings, which is going to push investors to buy ever riskier munis. Boom time coming for lower-rated credits?

(Beijing)

It has been more than 18 months of brinksmanship in the making, but the US and China are apparently set to seal a phase one trade deal. The deal will be signed at 11:30 am in the White House. The deal leaves out a lot of the most difficult and contentious issues between the countries, but is a sign that things are improving. The FT summarizes the substance of the deal this way, saying “It commits China to making $200bn in additional purchases of US goods, including farm products, and other pledges on currency and intellectual property, in exchange for a small rollback in some tariffs and an indefinite hold on further punitive measures out of Washington”.

FINSUM: The key thing here is that both countries want this work out and this deal is a step in the right direction. We find this quite positive in the grand scheme of things.