Eq: Total Market
Stock investors and bond investors are showing a big disconnect right now. That mismatch in sentiment could cause some big losses. Fixed income investors have been buying bonds aggressively, keeping yields pinned at low levels and the curve very flat. However, equity markets have been rallying strongly, which will alleviate some pressure on the Fed, allowing them more margin to raise rates again. However, the bond derivatives market shows the market is betting there is a 98% chance rates are in exactly the same place as now in one year’s time.
FINSUM: Bond investors are too comfortable with the Fed right now. Powell et al have been quite hawkish for awhile now, only very recently backing off. We don’t think it would take much to get them back on track, and the equity market is paving the way.
It’s that time of year. Analysts from many banks are putting out their top picks for the year. The picks we are featuring focus mostly on the large cap space. The picks come from a range of different analysts and include: Google, Amazon, American Eagle, Broadcom, Deere, McDonald’s, Microsoft, and Salesforce.
FINSUM: Deere and McDonalds are interesting for us. Deere because farm equipment demand could be quite heavily impacted by US-China trade tensions, which makes this one a risky bet. McDonalds is a stock we are bullish on because of its menu changes and modernization efforts. We think it has a lot of business it can steal back from the likes of Shake Shack and Chipotle if it continues to make its menu fresher and more healthful and its store more appealing.
Financial advisors are a conservative bunch, so we know that there has been some very anxious feelings over the last couple of weeks as would-be Democrat presidents have announced their intentions for big tax hikes. How about 70% top tax rates and major wealth taxes? Some, like Bernie Sanders and Chuck Schumer, have also recently posed putting restrictions on buybacks. With all this in mind, here is a list of stocks that would be most in trouble from the Democrat plans that are currently on the table. According to Barron’s, the most at risk are Citigroup, Whirlpool, American Airlines, Union Pacific, and Boeing, but Walmart and Harley-Davidson could also be exposed.
FINSUM: This list was rather simply done—the companies that had reduced headcount the most and also bought back shares. However, as we move towards the election, it is time to start considering the risks to different stocks.
One of the hottest trades in the last several months has been to buy a basket of low volatility stocks. The idea is that one can insulate their portfolio from the market’s fluctuations by buying stocks that are less likely to see swings in value. The problem is, the trade has gotten very crowded. Legal & General Investment Management says that “Low volatility might be becoming vulnerable as investors chasing recent performance and buying into gloomy 2018 outlooks flock into it … It is becoming a relatively consensus position, which for us is a warning sign”.
FINSUM: Low volatility stocks held up well in the tumultuous fourth quarter, but the attractiveness of the strategy has made valuations quite high. Such stocks typically lag in upward markets, so there does seem to be some significant risk here.
We ask you, readers, to name the single most important factor that has supported stock prices through all the turmoil over the last year. We bet more than half of you uttered “earnings” to yourself. Earnings have grown strongly in the last year, something that helped keep prices stable despite big geopolitical worries. However, there pillar of the market may now be crumbling as analysts have just turned the earnings outlook negative for the first time in three years. Analysts now expect first quarter earnings to decline by almost 1% from last year. By contrast, at the end of December, expectations were for a 3.3% gain. Most expect the weakness to come from margins, not top line growth.
FINSUM: Continued strong earnings were supposed to be one of the positives this year. If earnings sputter out, what is there to hold up the market in the face of so much uncertainty?
For the last six months, there has been a lot of focus in the media and amongst analysts that a recession will be arriving in 2020. 2019 always seemed to close of a call because of how the economy was trending, but 2020 seems to be a safe bet based on some of the indicators out there. Now, JP Morgan is saying a recession in 2020 is unlikely. The catalyst for the change? The Fed. Strategists at JP Morgan concluded “If the Fed is less spooked by full employment, more tolerant of an inflation overshoot and less anxious to reach restrictive policy, then 2020 might not be a year to think about recession and so late 2019/early 2020 would be premature to position defensively cross-asset”.
FINSUM: This analysis is dead simple, but we would agree. If the Fed is less hawkish, then it will prolong this cycle.