(New York)

The markets nosedived again today as recession fears are spiking amongst investors globally. While US investors got a bit of a reprieve from the trade war due to the announcement that new tariffs had been delayed, bad economic data out of Germany and China made a global recession look more likely. The big selloff not only dragged US bonds into a 2/10-year inversion, but also inverted the UK yield curve for the first time since 2008. German bonds saw yields fall to a record low (in negative yield territory).

FINSUM: The doom and gloom is warranted given the current backdrop, but it is also not unreasonable to think the current “wall of worry” is the perfect mountain for this bull market to climb.

(New York)

The US’ leading bond manager has just made a bold call. Pimco thinks that US bond yields will follow Europe and go negative. Speaking about the market situation more broadly, Pimco says “The next several years could be the exact opposite of what we saw in the past five to 10 years … That was high returns on financial assets and low volatility. That will be turned upside down”. Pimco is particularly concerned about a recession, believing it would send yields sharply lower. However, that is no sure bet, because if the trade war gets sorted out sooner than expected, yields would likely move higher quickly.

FINSUM: Yields moving lower seems to be the path of least resistance, so we think that is the direction that bonds will trend.

(New York)

Something discouraging is happening to the US real estate market. Home prices and sales are continuing to be weak despite a huge drop in mortgage rates. Lower mortgage rates should have given a boost to new home sales and construction, but the opposite has occurred. Home price gains and sales have slipped considerably and permits for new construction have fallen 6.6% in 15 months.

FINSUM: The question, as ever, is whether the weakness in housing is presaging an economy-wide recession, or is just an isolated situation. We favor the latter.

(New York)

Low volatility stocks have been the hero of the volatility over the last year. In the past 12 months, the S&P 500 has returned 3.2%. That compares to a whopping 14% plus for low volatility stocks, such as in the S&P 500 low-vol index. By definition, low volatility stocks are boring (think utilities, insurance, and REITs) and have stable earnings. That works well for defending against market swings, but the protection means that valuations are WAY above their long-term average (three standard deviations above). That said, falling rates are very helpful to this class of stocks, so there is wind at their backs.

FINSUM: Despite quite high valuations, we think low vol stocks will continue to do well so long as the trade war continues to plague markets.

(New York)

There are a lot of safe havens that people are trying to use to defend against market turbulence right now. The two that immediately come to mind are Treasury bonds and gold. However, those are clearly overbought, so where is another good place? Some REITs are offering very attractive defensive profiles. REITs generally do well during periods of falling rates as their yields become ever more attractive. They were beat up during the rate rises of 2018, but have surged this year, up 20%. What is very compelling, though, is that despite the big rise, REIT valuations are just now returning to their average historical valuations. Speaking about the nature of REIT cash flows, especially regarding long-term leases, “The cash flow is locked in, and that’s just not the case for most of the stock market”, says and Eaton Vance Real Estate fund manager.

FINSUM: Certain REITs seem like they could be a very good buy right now given that they are not overpriced and have falling rates as a tailwind.