There are rising fears about the potential over-valuation of big tech megacaps. While they have risen very strongly this year, their P/E ratios are not the only worry. Regulations are also weighing on investors’ minds, especially after the announcement of the anti-trust probe by the DOJ into Google. That has not stopped the stocks from rallying, however. Most investors are betting that the government’s numerous overtures about anti-trust moves (which have come from both sides of the aisle) are merely saber-rattling.
FINSUM: As it concerns large cap value versus big tech stocks, the answer is simple—it seems like time to buy both. Big tech may keep rising, but there is enough fear to keep other large cap stocks rising as we enter a prolonged recovery, as they have been for several weeks.
Dividends have had a tough year. Because of the pandemic, many companies have had to cut their dividends in the face of losses or declining profitability. Even some who have maintained or raised dividends cannot really afford to do so. Therefore stable, rising dividends with healthy underlying companies are very prized right now. Here are some good names to look at: Whirlpool, Avery Dennison, American Electric Power, and Crown Castle International. All four have recently raised their dividends on the back of robust business. Whirlpool, a major appliance manufacturer seems to be riding the home improvement wave, while Avery Dennison, which makes packaging, is likely benefitting from ecommerce gains. The others (a utility and a cell tower company) have inherently durable businesses.
FINSUM: Cell towers, utilities, and packaging materials seem like very strong areas even if the pandemic gets worse this winter, and there is almost zero rate risk at present.
A new study from Cerulli Associates has found that wirehouses are performing very well in one regard—advisor productivity. The average wirehouse advisor has $175m in AUM, almost double the industry average of $77.9m. Even more amazingly, wirehouse productivity has risen from an average of $148m at the end of 2018 (to $175m at the end of 2019). However, wirehouses are still shedding many advisors to RIAs and IBDs. Cerulli identified two key reasons why. The first is as old as the industry itself—compensation. According to Cerulli, wirehouse advisors are growing increasingly tired of “complicated and sporadically changing compensation grids”. Additionally, support staff is an area where advisors are frustrated, reporting a lack of support staff as an issue at a far higher rates than at other BDs and RIAs.
FINSUM: Wirehouse advisors currently enjoy two advantages—brand strength and scalable firm-wide technologies. Neither is enough to stem the current outflows of advisors, and the technology aspect is quickly being eroded by improving tech stacks for independent advisors.
Markets and polls are favoring Joe Biden to win the presidency, and markets think there are increasing odds that a blue sweep could occur. So if Democrats take over, what does the regulatory environment look like in wealth management? According to legal and policy experts there are a number of key changes. One big high-level difference between Trump and Biden is that Trump has always favored a principals-based approach to regulation in an effort to lower the compliance burden on companies. Biden would adopt a more rules-based approach with stricter enforcement. Here are five key items that would likely change under a new administration: restarting the debate on Reg BI (i.e. trying to get rid of it or modify it), move towards a rules-based approach in many areas, revive the CFPB, create a public credit reporting agency within the CFPB, and replace SEC commissioner Jay Clayton.
FINSUM: All of this makes perfect sense with what Democrats are signaling. We have another key item to add to the list—killing the new DOL proposal and replacing it with a more robust fiduciary standard either through the SEC or DOL.
Large cap value is a very interesting area at the moment. Over the last few weeks there has been a pickup in breadth, with gainers outpacing losers 2-to-1. Megacap tech stocks are not leading the market like they were early on in the recovery. That means the chances for broad market gains are looking stronger. With that in mind, large cap value looks like an excellent choice. Compared to small and midcaps, large caps are less volatile and more diversified. They do have more international exposure (which could be a positive or a negative), but on the whole they appear as though they have as much or more upside potential with less downside risk.
FINSUM: If you believe in a coming broad-based rally in stocks, then large cap value seems like a good place to be.