Eq: Total Market
(New York)
The market is right around all time highs and economic and earnings figures are healthy, all signs that the market is headed higher. That said, prices could take a dip at any time and many are worried about a reversal. Some are particularly worried about funds having to sell stocks to rebalance their holdings of equities versus bonds (which have performed poorly of late). So how can one profit from a market fall? Here is a good options strategy for doing so: buy S&P 500 put options at $287 and simultaneously sell $285 put options, both of which expire May 3rd. The market volatility has been low, so the options are cheap, and the spread strategy limits losses.
FINSUM: If you are just playing for volatility based on a likely rough month-end rebalancing, then this could be a good strategy.
(New York)
A top hedge fund manager known for correctly calling both the 200 and 2008 crises, has just put out a very bearish call. Jeremy Grantham, from GMO, is warning investors that the next 20 years of returns are going to be very disappointing. Grantham thinks that even a dovish Fed can’t save this market, saying “you can’t get blood out of a stone”. His view is that the market will return only 2% a year for the next decade, way lower than the ~6% average. “This is not incredibly painful, but it’s going to break a lot of hearts when we’re right”.
FINSUM: We have personally met Grantham and respect him, but this view is ridiculous to us, as it would be from anyone. Tell what the market might do for the next 2-3 years, fine, but making a call on the next two decades is hopeless.
(New York)
Stocks are once again nearing all-time highs, which is understandably making investors nervous about a repeat of the fourth quarter occurring. While that fear is healthy, the reality is that the underlying conditions of the market are a world different now. Not only are valuations lower, but the economy is looking robust, and perhaps most importantly of all, the Fed has let off the gas pedal with hikes, which puts recession risk much lower. All of these factors seem to conspire to make a perfect environment for stock price appreciation.
FINSUM: Anyone who reads FINSUM knows we lean towards bearish news, but the truth is that our better judgment is telling us that now is probably a time to be optimistic, as the trifecta of reasonable valuations, a solid/strong economy, and a dovish Fed, are in place.
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(New York)
The ECB put out research today making an argument that we hadn’t heard very much—that any trade war would hurt the US most of all. According to the ECB, “if Donald Trump’s administration was to raise tariffs and other barriers on imports by another 10 per cent — and other countries were to retaliate — growth would drop more sharply in the US than in either the euro area or China” (quoted from FT). The ECB found that one year of heightened trade tensions could knock 2% off US GDP.
FINSUM: The analysis of the actual economic impact may be credible, but the ECB is totally missing the point about the China. The risk for them is not just economic, but social and political—because they have an unelected government, officials there are under extreme pressure to keep the people happy with economic growth.
(New York)
Where is the economy headed? Investors seem to be torn at the moment. On the one hand they seem to feel that the economy must be headed south because of the long running expansion and recent inversion, but on the other, there is little data to really back up that claim. Accordingly, every new piece of economic data is being closely watched right now. The newest in is retail sales, which had fallen a bit recently. Today, though, is a different story, with March retail sales seeing their biggest jump in 18 months, rising 1.6% month on month.
FINSUM: Seeing evidence that consumers still look healthy is a testament to the fact that the underlying economy still looks strong.
(New York)
Goldman Sachs put out a bearish article today that is calling for the tail end of this bull market. The bank thinks the rest of this year is going to be a dud and that PE multiples will not rise above 17. Therefore, they are suggesting a group of stocks that can thrive in such an environment. Here is a selection of 10 of their 20 choices: Texas Instruments, VeriSign, Gilead Sciences, Abbvie, Amgen, Starbucks, Lam Research, AT&T, Foot Locker, HanesBrands.
FINSUM: Appears like there are a lot of defensive stocks in this basket, which seems like a good plan for a sideways or bearish market.