Displaying items by tag: stocks

(New York)

One of the big questions in this market fall is why junk bonds aren’t tumbling in tandem with stocks. Generally speaking, high yield bonds trade in the same direction as small cap stocks as they are driven more by company fundamentals than other areas of the bond market. However, in the recent rout, this was not the case, as junk bonds have continued to perform well. When both markets fall in unison, it usually means there is big trouble brewing, but when they have become uncorrelated, it can mean there is a rally to come. For instance, in 2011, small caps fells strongly, but junk only a touch. In the following months, small caps surged 15%.

FINSUM: We think this is a positive sign for small caps, as high yield investors are not worried about company fundamentals.

(New York)

Yesterday’s relief rally has already turned sour. Earnings out of Amazon and Google greatly disappointed the market and shot the Nasdaq down as far as 3% in premarket trading. However, despite all the trouble, Wells Fargo says it is the best time to buy stocks since before Trump’s presidency. According to the head of the Wells Fargo Investment Institute, “We believe that this isn’t the end of the cycle or the bull market, and we favor deploying cash now—or even allocating incrementally over the coming days and weeks”, continuing “Current conditions have the potential to create some of the best entry points into equity markets since the November 2016 elections”. That said, Wells Fargo acknowledges that we are at the end of the “easy period” of low volatility and an accommodative Fed.

FINSUM: It is anybody’s guess as to whether this view is right, but we reluctantly tend to agree that stocks are probably going to recover from this bout of volatility sooner rather than later.

(Washington)

For the most part, President Trump has been seen as quite positive for markets. The big rally in his first year cemented that idea, and for most of this year, stocks were in good shape. However, here is an interesting fact—equity valuations are now lower than when he took office. As the media puts it, “the Trump Bump is turning into the Trump discount”.

FINSUM: Two thoughts occur here. The first is that a big reason why valuations have fallen is because earnings are so good, and a lot of that has to do with the Republican-led tax package, so it is not fair to turn that into a negative. Secondly, most of the market trouble stems from the trade war, so it is more an isolated case of policy than a broad effect. In fact, what could be better than good share appreciation without a rise in valuations? It is exactly what you are looking for as an investor—something that earns well but doesn’t look increasingly overpriced.

(New York)

The market is not doing well this month. That is probably a serious understatement, in fact. Yet, that leaves room for opportunity, both in aggregate, but also in specific shares that might lead in these tougher times. Retail is an interesting choice right now, as the economy is still doing well and we are headed into the busy holiday shopping period. With that in mind, take a look at Gap, Foot Locker, and Michael Kors Holdings, all of which look cheap “relative to their respective sectors” and have “identifiable catalysts between now and year-end”, according to analysts at Jefferies.

FINSUM: Retail is interesting to us at present because it is not overly rate sensitive and is heading into its strongest period of the year right when the economy is looking best. That said, we are worried about consumer spending falling on the back of these equity losses.

(New York)

Value investing has been dead for a long time. So long in fact that many of its strongest disciples are even starting to wonder if it will ever return. Well, something interesting has happened this month. The broader market was down 8.9%, but the S&P Value Index only fell 5%, showing that value stocks have actually been outperforming the market during the recent turmoil. BlackRock is sticking to value stocks, with the head of factor-based investment strategy commenting that “We find the economic rationale still holds … We’re comforted by 90 years of long-run data, where value time and time again outperforms growth”. One of the issues for investors is that there is no clear way to define value, as each index uses its own metrics.

FINSUM: Value stocks do seem interesting right now, as this is the kind of environment where they would thrive. But do you determine value based on price to book, P/E ratio, returns, or something else?