(Houston)

It is a trying time to be picking where to allocate capital. Bonds are getting walloped and rate rises and trade war fears are weighing on stocks. Recession looms as a threat. With all that in mind, Goldman Sachs thinks it is a good time to buy MLPs. MLPs have been roughly flat this year, but GS thinks good times are ahead. Kinder Morgan is one of the bank’s top picks and they believe the sector will rise on improving cash flow and gains that result from simplifying their corporate structures (most will likely change to C-Corps following last year’s change in the tax code).

FINSUM: MLPs have been pretty flat and this is not the first time Wall Street analysts have called for a surge. Still, this is interesting to consider.

(New York)

The US economy is on fire. Growth is strong, consumer confidence is high, and (somewhat worryingly) the Fed is almost giddy. However, even the greatest optimists will have a gnawing fear caused by the US housing market, which has been in decline for the past handful of months. The huge rising gap between home prices and wages has finally stalled the market, all while rates move higher and dampen demand. The big risk that no one is pointing out, though, is how that trouble in housing will flow through to the broader economy. It will likely not be via mass mortgage defaults and foreclosures like last time, but rather through a severe tightening of purse strings. The big rise in home prices means Americans disproportionately hold their wealth in home values, so a decline will cause a major loss of wealth, and thus spending, seizing up the economy.

FINSUM: In 1978 a 20% decline in home prices would have caused a 1% decline in aggregate income. Today, the same decline would cause a five percent drop, or about $600 bn of lost equity. Housing may still lead the economy downward.

(New York)

Some are very worried a junk bond bear market might be on its way. Not only are rates and yields rising fast, but there has been a huge run up in high yield prices over the years, with a simultaneous surge in bottom rung BBB bonds. However, despite this scary back drop, the market has been doing well and looks set to continue to do so. “The key dynamic in the high-yield market is recession … There’s a possibility of some economic shock that isn’t apparent right now, but you don’t have the classic signs pointing to recession”, says one CIO. High yield’s spread to Treasuries recently touched its lowest point since the Crisis, and in a twist, the lowest rated bonds (CCC) are performing the best this year.

FINSUM: This is quite confounding in many ways, especially considering there have been significant outflows from junk bond funds and investors can get good returns from investment grade.

(New York)

Many are worried the bond market turmoil will grow worse. Bonds sold off fiercely last week, and the US jobs report, while not as great as expected, still reinforced the fact that rates are headed higher as the economy strengthens. However, many economists and analysts think the rise in yields will abate or even reverse in the coming weeks. Yields are at 3.23% on the ten-year Treasury now, but the average forecast of 58 economists surveyed says they will end the year at 3.08%. Even the worst bond market bears, like Goldman Sachs, think yields will only rise gradually to finish the year at 3.4%.

FINSUM: Our personal view is that yields had their big move upward and will probably now trade in a band at least until the next Fed meeting.

(San Francisco)

Want to find a good test for whether the Fed has hiked rates too far? Look no further than everyone’s favorite, the FANG stocks. There is an increasing risk that the Fed may get very hawkish with its rate hikes, and if that happens, FANGs will show the pain first, says Julius Baer & Co. Baer thinks that the S&P 500 might sink 20% on the back of rate hikes before the Fed starts to moderate its action. It believes FANGs will feel the brunt of the losses. The NYSE FANG+ index peaked three months ago and has fallen 13% since June.

FINSUM: We do not disagree that rate hikes could cause market losses, but we don’t know why FANGs would feel the most heat other than the simple fact that they have gained the most.

(New York)

Is this a watershed moment for the equity market or just another small blip in the exorable march higher? That is the question investors are asking themselves this week after the losses of the last few trading days which occurred as a response to quickly rising yields. Many analysts and Wall Street veterans think that heavy pressure will be on equity prices as yields move towards 3.5%. According to BNY Mellon, as yield move higher is hurts “investors’ ability to call this stock market reasonably valued”. Some investors are more sanguine, believing the market can handle higher rates.

FINSUM: One of the biggest signs here does not have to do with yields themselves. Rather, some big money managers are admitting that they are rotating some money out of stocks and into bonds to reap the gains of higher yields. That will likely be the biggest challenge for stocks.

(New York)

ETFs are a product that has been growing at breakneck speed. AUM in the product is approaching $4 tn, which is astonishing given that it has really only taken a decade to get there, but still quite a bit smaller than the $16 tn in mutual funds. Experts say that the ETF market is going to increasingly resemble the mutual fund market as offerings diversify into smart beta, thematic ETFs, customizable ETFs, and fixed income. The last area—fixed income—is where creative indexing makes the most sense, as doing so can account for the common weighting issues that are much riskier in bonds than in equities (you don’t want your largest holding to be the issuer with the most debt).

FINSUM: The logic for fixed income ETFs is very strong, especially given how illiquid and restrictive buying bonds directly is. However, smart beta and other active ETFs (which are more expensive) don’t really have a big leg up on experienced mutual funds.

(New York)

Investors need to be careful, real estate looks likely to take a pounding in the coming months. While all the focus on the big jump in yields has been on how it has impacted bonds and stocks, one of the big risk areas is real estate. Unlike other parts of the economy and markets, real estate has been teetering for some time, with months of weak performance. REITs and real estate stocks have been selling off strongly over the last couple of days and the reason is clear—the last thing the already weak housing market needs is higher borrowing costs.

FINSUM: We think the move higher in rates and yields could spell a significant downturn for real estate. Prices are so high and demand is already starting to dry up, so higher yields may have a further dampening effect.

(Washington)

The midterm elections are just around the corner and there is some anxiety over how they might impact stocks. The last few days have been poor, while the preceding month had been good. Barron’s argues that the election will be bullish for stocks. The reason why is that no matter what happens, stocks look likely to rise. Even when the sitting president’s party loses seats, stock tend to gain, and the year after such a loss tends to be the best year of a president’s term. One of the reasons why is that the party in power typically undertakes economic stimulus after their defeat. The Wall Street Journal summarizes “Either way, many believe that stocks will get a boost after the midterm elections as investors will be contending with one less uncertainty”.

FINSUM: We think the election will be good for stocks as well. If the democrats see success, there is less risk of a brutal trade war. If the Republicans win, there is probably more pro-business policies put in place.

(New York)

Fighting the impact of rising rates on one’s portfolio is likely a primary goal of many advisors and investors right now, so we will be running a series of stories on the topic. For instance, Goldman Sachs has just released a new ETF in the area. In what is being called “smart beta exposure to bond markets”, Goldman has launched the Goldman Sachs Access Inflation Protected US Bond ETF (GTIP). The fund selectively chooses Treasury Inflation Protected Securities and costs 0.12% per year. “TIPS present an attractive diversification opportunity for many investors with relatively low correlations to other major asset classes”, says Goldman.

FINSUM: TIPS seem like a good investment right now, but we wonder how this will perform versus other rate hedged ETFs, most of which seem to have a different angle.. On the plus side, it is quite low cost.