(New York)

The market is currently facing a large number of headwinds: higher rates, a flattening yield curve, a growing trade war, and a high degree of international political tension. Yet, according to Barron’s, the path of least resistance for the S&P 500 may be higher. The reason why? Despite all the hovering the market has done this year, one big thing has fundamentally changed very recently—market breadth is increasing. In other words, the number of stocks which are advancing versus declining is improving. When the market does so, it is often a sign of better things to come.

FINSUM: We do take increasing breadth as a positive sign, as it reflects that investors across all sectors are feeling better and not just a handful hiding out in a few places.

(New York)

When big US banks are worried about lending to the commercial property market, one knows things must be getting bad. Big bank executives say they are unwilling to sign off on a number of deals in commercial real estate as the sector looks overheated. For instance, the CFO of JP Morgan Chase said spreads, a proxy for returns, were “under a lot of pressure”. Big banks like JPM and Wells Fargo have been shrinking their exposure to the sector for some time. Market participants say competition in the space is so high that deals no longer provide good risk-return metrics.

FINSUM: It sounds like commercial real estate is maybe just past its peak and headed for a downturn. All of which appears in direct contrast to the residential property market.

(New York)

Anybody who is worried about a pending bond bear market might take some solace in recent news. Bond markets are becoming increasingly skeptical of the Fed’s bullish stance on the economy, and traders believe there won’t be nearly as many rate hikes as the Fed says. The US has just seen a weak inflation report, and a flattening of the yield curve, both at home and in the Eurodollar market, spells ill for the economy. So while the Fed says it will continue to hike rates into 2020, top market analysts are saying things like “The markets are telling us that there is a pretty high risk of economic slowdown or recession at the end of 2019” (Janney Capital Management).

FINSUM: We think the economy will definitely start to weaken before 2020. Perhaps we will not have a deep recession, but we definitely don’t think there will be continuous hikes for the next year and a half, which is good news for bonds.

(New York)

There is no denying it, small cap stocks are having their moment in the sun. The Russell 2000 is up over 10% this year, while the S&P 500 is up only 3.2%. A number of factors are powering them: tax cuts that benefit small companies more than large ones, better US than overseas growth, and a rising Dollar amid heightening trade disputes. In light of this, the WSJ has picked 3 small cap stock funds for investors to consider. They are: DFA US Small Cap Value Portfolio, T. Rowe Price QM U.S. Small-Cap Growth Equity Fund, and the Harbor Small Cap Value Fund.

FINSUM: Reading about their strategies, the T.Rowe offering looks particularly interesting and has the best five-year annualized return of 14.6%.

(New York)

In what certainly seems to be a sign of health for the industry, RIA average account sizes just hit a new high. The average client at a US RIA now has an account averaging $2m (at firms with over $250m in AUM). This is the first time the figure has ever crossed the $2m threshold. Median AUM for firms grew over 16% in 2017, with average revenue increasing to $3.6m. The stats come from an annual Charles Schwab survey, with the firm saying about the healthy results “Firms are fueling their organic growth by differentiating and marketing their value propositions, improving the client experience and strategically expanding their service offerings to meet the needs of their ideal clients”.

FINSUM: The fiduciary duty of RIAs seems to be a differentiated and continued source of new client demand. It is a testament to the quality of RIAs in this country.

(New York)

The media is reacting very strongly to a new move by Morningstar. The legendary fund rating company has just taken the somewhat surprising move of replacing outside funds with some of its own in its “managed portfolio service”, which allows financial advisors to outsource investment decisions to Morningstar. It will now rely on its own funds as the building blocks of those portfolios. Its own funds will be scored by the company itself, but it says an algorithm will do this. The company’s CIO says “We have structures in place to make sure [investment management] is at arm’s length from research. There is structural separation of research and investment management”.

FINSUM: We think this is a ridiculous conflict of interest, made even sillier by the fact that Morningstar acts like an algorithm is any less biased than a human rating system. As if Morningstar did not write the algorithm in the first place…

(New York)

As fees fall, there is an inevitable reality in the US asset management industry—scale is everything. Investors need to deeply understand this concern if they have money in the sector. For instance, analysts and the market are putting so much preference on large managers, that one analyst just upgraded BlackRock to outperform, while downgrading Invesco and WisdomTree, even though BlackRock’s P/E ratio is 18.6, and the latter two’s are an average of just over 10. BlackRock’s stock is down 15% in the last year, while Invesco and WisdomTree have both fallen more than 30%.

FINSUM: The more fees need to be cut because of competition, the more money one needs under management to maintain profitability. Hence the battle for scale.

(New York)

Right now everyone seems to be focusing on the possibility of an inverted yield curve occurring between the 2 and 10-year Treasury. However, that might not be the best recession predictor after all. If you are strictly focusing on yields, then the 1 and 10-year is better, as it gives less false positives. But speaking more broadly, the M1 money supply and housing starts are other great places to look as both tend to peak well before a recession; M1 is usually about a year, and housing starts two years.

FINSUM: The reality is that if you take a broader view, things don’t look too bad. M1 is still growing, as are housing starts, so those indicators look healthy.

(Washington)

Everyday it seems less likely that the current SEC best interest rule, “Regulation best interest”, will make it through to implementation in anything near its current form. Not only has the industry complained about its governing of titles, but many say the rule’s complex grouping-but-delineation between brokers and advisors just doesn’t make sense. Now, the group of advocates that succeeded in bringing down the DOL’s fiduciary rule have officially turned their sights on the SEC rule. The group, called NAIFA, says it supports a best interest standard, but vehemently protests the restriction on the use of titles.

FINSUM: We commiserate with the SEC because we understand the logic they used to make this rule, but we do feel the current iteration is doomed.

(New York)

One of the market’s favorite prognosticators has just called for a big financial crisis. Mark Mobius, 81, veteran investor, thinks that EMs are going to plunge, and that the normalization of interest rates and monetary policy will cause a crisis. “There’s no question we’ll see a financial crisis sooner or later because we must remember we’re coming off from a period of cheap money … There’s going to be a real squeeze for many of these companies that depended upon cheap money to keep on going”, says Mobius.

FINSUM: Emerging markets are currently having a rough time and the rise in rates is going to be turbulent, but calling for a Crisis seems a bit premature.