Eq: Total Market
One of the big themes in the asset management industry right now is the possibility of consolidation. A big plunge in asset manager share prices and falling fees has added motivation for managers to tie up to increase scale and efficiency. Invesco’s recent deal to acquire OppenheimerFunds is a great example. However, regulators are reporting discussing such deals and are apparently concluding that the passive management business has grown uncompetitive, with just three firms dominating the space. Interestingly, the worries over competitiveness are not centered on the asset management industry itself, but rather how having a few large managers, each of whom own each other and other companies’ shares, makes the whole economy less competitive. The big three asset managers—BlackRock, Vanguard, and State Street, are not the largest shareholders in 88% of S&P 500 companies. This whole situation, and the worries attached to it are referred to as “common ownership”.
FINSUM: One can see how this would make the economy less competitive, but more specifically, it may mean that it is harder for asset managers to push deals through.
One of the most respected hedge fund managers, Jeremy Grantham, believes that this is a false rebound. And not only is it a false rebound, rather, it is the beginning of a big bubble bursting. The head of GMO believes as far as the fourth quarter is concerned, “The volatility is consistent with a bubble bursting”. Though he does caution that stocks could reflate before the burst continues, as they did in 1998-2000. Grantham is famous for his calls of the 2000 and 2008 downturns, but has been criticized for being overly bearish during this bull market.
FINSUM: We do not think there is going to be a further meltdown. Valuations reached their nadir at a 13.6 p/e ratio last month, down from eye popping numbers. Between earnings gains and price declines, we think the worst may be behind stocks for now.
There has been a lot of bearish sentiment over the last couple of months, with more of a positive trend lately. Put this piece in the positive bucket. The argument in question is from Capital Group, a $1.8 tn manager, who contends that while we are in the late stage of an economic cycle, there should still be a couple years of good earnings growth and returns. The late stage of an economic cycle typically lasts 1-3 years, says Capital Group, and that shouldn’t be any different this time. According to the the firm, “Given that this expansion has been pretty measured, I think we’re expecting that the late stage of the cycle will probably also be quite measured as well … And it doesn’t have to end in a recession”.
FINSUM: We really like that final thought. Everything about this market and economy has been steady for years. A slow and steady end makes sense.
Markets are up since Christmas, but anybody who feels like they are on solid footing is probably a fool. So one of the big questions right now is how to play risky markets? Well, Barron’s has just published a piece outlining what they see as the best funds for such an environment. The picks are based on 15-year performance, including how funds performed during the Financial Crisis. Here are some to look at: AMG Yacktman, Parnassus Core Equity, Invesco Dividend Income, JP Morgan Small Cap Equity, and Neuberger Berman Genesis.
FINSUM: Not a bad idea to look at the funds that have been the best overall risk managers.
Many advisors may respect the opinion of Bob Rodriguez. The former fund manager achieved some acclaim by accurately forecasting the Dotcom bust and Financial Crisis. The former CEO of First Pacific Advisors says that a financial crisis is now a “near certainty”. His fear is that excess leverage in the economy, coupled with a recession, will cause a big crisis. He believes “delusional” equity markets are now only starting to recognize this reality.
FINSUM: The preconditions for a crisis are there—a big buildup in corporate debt and pending recession. However, the timing and magnitude are both big question marks.
2019 is often to an uneven start. We have had some good days and some bad ones, but the market has surely not found solid footing or a narrative to drive it. With that in mind, the question of allocation becomes eve more complicated than it was a few months ago. Goldman Sachs has just put out its recommendations and argues that investors should put money back in shares, as they are due for a big rebound. Historically, shares generally bounce back after falling 20% in a quarter, and Goldman thinks there are big returns to be made. Companies seeing margin expansion might be particularly favorable.
FINSUM: The S&P 500 has already advanced almost 10% since Christmas eve, but we are not sold the current tread is upward.