Yes, the market is at or near all-time highs. Yes, the Fed is dovish, which is mildly bullish for markets (or very bullish if the economy stays in decent shape). However, equities are sending some strong warning signals too. In particular, two sectors which often act as bellwethers are showing that the market may be headed for a decline. Both small caps and transportation stocks have been struggling, a development usually associated with a market headed south. The sectors have declined at a rapid pace, and relative to the S&P 500 as a whole, are at their weakest point since 2009.
FINSUM: This is a signal similar in nature to the yield curve inversion. Is it material or just an aberration? Anyone’s guess.
The dovishness from the Fed has been bullish for most of the debt market, with sovereign yields falling and corporate debt getting a boost. However, the riskiest corner of the market, triple C junk bonds, have been left out, with the group falling by 1.5% since May. Triple B bonds, by comparison, were up. The odd part about the losses is that signs of an interest rate cut are usually very bullish for junk bonds because they would mean lower interest burdens for the companies. That said, anxiety about the economy is high enough that such benefits were negated.
FINSUM: This whole situation makes sense in that the downside risk of a sinking economy is greater than the upside of lower interest rates for this subsector. Thus, the bonds are losing. In other parts of the credit spectrum, the risk-reward balance is different.
Bernie Sanders has just made his big pitch to America’s Millennial generation. The candidate has vowed to eliminate all student loan debt for both undergraduates and grad students, and make all future tuition free. To fund the $1.5 tn write-off, he is planning a new tax on stock, bond, and financial derivatives trades which he forecasts would bring in $2.4 tn over a decade. One of the things that differentiates this plan from others, like Warren’s, is that it will eliminate all debt, not just that of the lowest income borrowers.
FINSUM: This is an interesting plan from a strategic perspective because it not only appeals to the left and the young, but also the richest of the young because it would eliminate all debt regardless of income. This point has brought criticism from some Democrats.
RIAs all over the country have been quite confused over the last couple of weeks. Ever since the SEC’s infamous change from “and” to “or” regarding fiduciary duty and a new ban on the use of the word for certain advisors, RIAs have been unsure about whether they are allowed to called themselves “fiduciaries”. On the one hand, the ban of the term’s use for certain groups made it seem like they could not use it, while on the other the technical definition of their duty had changed such that they no longer need to be fiduciaries to in order to comply with the SEC’s rules on defining an RIA. The SEC cleared up confusion late last week, however, saying that RIAs could continue to call themselves fiduciaries as the ban on use of the word does not apply to them, and nothing has changed to limit their use of the term.
FINSUM: While many RIAs are unhappy with the recent changes because of how they will water down the RIA brand, at least the SEC was very quick to clear up this confusion.
One of the biggest banks in the country has just offered a very bullish view. BAML says the US will avoid a recession. The comments come from the bank’s CEO, Brian Moynihan, who believes that growth will slow, but then flatten out and not go into a recession. “Everything we see in our customer base is consistent with a slowdown to 2% and a flattening out from there”, he says.
FINSUM: We found these comments to be genuinely interesting because BAML has a view on the economy that few do. Not only are they the largest consumer bank, but also the biggest mortgage lender. That means they can watch the pace of deposit growth and borrowing in a very direct way, and thus can take the economy’s pulse.