In what we see as an encouraging sign with some good logic behind it, Credit Suisse has announced that it is going overweight equities despite the cautiousness of all the other big banks. Specifically, Credit Suisse’s wealth management division is going overweight stocks as it sees increased prospects of a US-China trade deal, diminishing political risk in the UK and Europe, and additional stimulus efforts by global central banks. Taken as a combined force, these are quite bullish considerations, says the bank. Credit Suisse had previously been neutral on equities, but the announcement came from the banks’ global Chief Investment Officer.
FINSUM: We are starting to agree with Credit Suisse on the bullishness. The whole market and economy seem to be re-entering the post-Crisis goldilocks phase where the economy was just weak enough for central banks to stimulate (boosting asset prices, but not weak enough to cause any real problems.
If higher inflation could be a headwind to rate cuts by the Fed, then there is new data today that could prove a tailwind. New figures show that retail spending was significantly weaker in August than in past months. The data showed that core retail spending stagnated after several months of strong expansion. The data is crucial because consumer spending, and American consumer health generally, has been a bedrock of the economy.
FINSUM: The American consumer has been keeping the economy afloat despite a lot of negative signs around the margins. This could either be a blip or the start of a worrying trend.
Everything you think about the direction of rates could be wrong. That is the general fear after this week’s inflation report. US core consumer prices hit a one-year high in August at 2.4% year-on-year growth, ahead of the Fed’s target. Importantly, it was also a bit higher than expectations. The Fed’s new cutting agenda is partly predicated on the fact that inflation has been so subdued, so any change to that assumption could prove disruptive to a cutting cycle.
FINSUM: We don’t think one month’s report will change the Fed’s path, but it is certainly something to keep an eye on. It is going to make September’s inflation report a lot more important.
Over the last few weeks, value stocks have been seeing a comeback. The Russell 1000 Value is up 4.15% this month versus just 1% for the corresponding growth index. This has proved a big boost to dividend paying stocks as they tend to be the most undervalued. That means investors are not only seeing good payout, but also nice capital appreciation. According to Evercore ISI, “The rebound in Value represents a buying opportunity [for income investors] following the rout in August”. Interestingly, the stocks with the lowest dividends have been outperforming higher payers.
FINSUM: If you think rates are headed lower than it is definitely a good time to buy dividend payers, as they will offer nice relative yields and good capital appreciation.
So let’s say you are in the bullish camp and think the US-China trade spat will be resolved soon. What is the best way to profit from that development? All stocks will likely rise, and bond yields will probably rise too. But where will the best gains be? How about small caps. The argument here may seem counterintuitive, but shows an evolution in thinking on the part of investors. At the start of the trade war, many thought small caps would do well as they are less exposed to international trade. However, thinking has changed and investors are now much more focused on which sectors are most exposed. This has led small caps to have a rough year compared to large caps, mostly because there are so many financial stocks in the small cap sector. That said, a resolution of the trade war would suspend downward pressure on rates and allow the sectors which have beaten up to flourish, offering disproportionate gains for small caps.
FINSUM: This is a fairly sophisticated argument based on the proportion of beaten up stocks that are in the small cap asset class. However, it does make a lot of sense.