Eq: Total Market
(New York)
The last month has been an unusually tough market. While the volatility itself is not highly irregular, what has been difficult is the rise of correlation. Over the last month, the market has traded the same way a whopping seven times. On those days, stocks, bond yields, and commodities have all traded in the same direction. When that happens it is very hard for investors to find a place to hide.
FINSUM: A couple of months ago using bonds as a safe haven seemed like a good idea. But prices have gone up so astronomically without a real change in the economy, that fixed income is looking like a fragile place to hide.
(New York)
Stop worrying so much about the US economy. That is what Bank of America is saying. The bank’s CEO went on the record yesterday explaining the simple reason that the US will avoid a recession. That reason? US consumer health. Moynihan cited internal statistics from BAML that showed that consumer spending has risen almost 6% in Bank of America accounts in the last 12 months versus the previous 12 months, showing that consumers are healthy. Consumer spending makes up 68% of the US economy. Moynihan was dismissive of the yield curve inversion, saying it is likely just a product of an influx of money because of negative yields elsewhere.
FINSUM: Bank of America is the largest US deposit holder, so it has an unparalleled insight into consumer spending. We think this is quite a positive sign.
(New York)
What is the biggest risk to the equity market right now. Is it a recession? Is it a trade war? Neither, it is something much more mundane—earnings, at least according to John Hancock Investment Management. Analysts, and the market by extension, are expecting big earnings growth in 2020. And we mean big—the average analyst estimate for S&P 500 earnings growth is 10.5%. That seems like a huge number given that earnings growth in 2019 is set to be only 1%, and has been flat for a couple of quarters. It is made even more unrealistic by the direction of the economy. John Hancock says that defensive sectors like utilities, pipelines, and electricity grids should hold up best in the possibly forthcoming recession.
FINSUM: 10.5% earnings growth in 2020 sounds frankly laughable right now. That said, the market can adjust to these kind of expectations fairly fluidly, so a downturn in expectations may not wound equities all that much.
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(Washington)
President Trump threw out an idea for a tax cut this week, then immediately backtracked by calling it unnecessary. The idea, however, appears sound. Trump proposed a payroll tax cut that would primarily help middle and lower class workers (in addition to a capital gains tax cut via indexing to inflation). That would make a lot of sense right now, as it would increase the spending power of the masses, increasing consumption and inflation, and lowering un-utilized manufacturing capacity.
FINSUM: We really like this idea of a payroll tax cut because it would help reverse some of the adverse affects of the wealth inequality that has built up since the Crisis. The more capital is concentrated in a small pool the less of it gets spent (i.e. a single person can only spend so much), which slows the economy. If you increase the spending power of the majority of Americans a lot more will get spent, boosting the economy.
(New York)
We guarantee that we have a great recession signal in hand that you have not been paying attention to: RV sales. Yes, you read that right, RV (recreation vehicle) sales. Elkhart, Indiana is the epicenter of motorhome production, and their product has proven to be a reliable recession indicator. “The RV industry is better at calling recessions than economists are”, says one economics professor at Ball State University. The big worry is that shipments of RVs are down 20% this year, a big drop.
FINSUM: This seems like a classic consumer discretionary spending leading indicator. And it is not looking good right now.
(New York)
There are a lot of safe havens that people are trying to use to defend against market turbulence right now. The two that immediately come to mind are Treasury bonds and gold. However, those are clearly overbought, so where is another good place? Some REITs are offering very attractive defensive profiles. REITs generally do well during periods of falling rates as their yields become ever more attractive. They were beat up during the rate rises of 2018, but have surged this year, up 20%. What is very compelling, though, is that despite the big rise, REIT valuations are just now returning to their average historical valuations. Speaking about the nature of REIT cash flows, especially regarding long-term leases, “The cash flow is locked in, and that’s just not the case for most of the stock market”, says and Eaton Vance Real Estate fund manager.
FINSUM: Certain REITs seem like they could be a very good buy right now given that they are not overpriced and have falling rates as a tailwind.