Eq: Total Market
(New York)
Is this a watershed moment for the equity market or just another small blip in the exorable march higher? That is the question investors are asking themselves this week after the losses of the last few trading days which occurred as a response to quickly rising yields. Many analysts and Wall Street veterans think that heavy pressure will be on equity prices as yields move towards 3.5%. According to BNY Mellon, as yield move higher is hurts “investors’ ability to call this stock market reasonably valued”. Some investors are more sanguine, believing the market can handle higher rates.
FINSUM: One of the biggest signs here does not have to do with yields themselves. Rather, some big money managers are admitting that they are rotating some money out of stocks and into bonds to reap the gains of higher yields. That will likely be the biggest challenge for stocks.
(New York)
ETFs are a product that has been growing at breakneck speed. AUM in the product is approaching $4 tn, which is astonishing given that it has really only taken a decade to get there, but still quite a bit smaller than the $16 tn in mutual funds. Experts say that the ETF market is going to increasingly resemble the mutual fund market as offerings diversify into smart beta, thematic ETFs, customizable ETFs, and fixed income. The last area—fixed income—is where creative indexing makes the most sense, as doing so can account for the common weighting issues that are much riskier in bonds than in equities (you don’t want your largest holding to be the issuer with the most debt).
FINSUM: The logic for fixed income ETFs is very strong, especially given how illiquid and restrictive buying bonds directly is. However, smart beta and other active ETFs (which are more expensive) don’t really have a big leg up on experienced mutual funds.
(Washington)
The midterm elections are just around the corner and there is some anxiety over how they might impact stocks. The last few days have been poor, while the preceding month had been good. Barron’s argues that the election will be bullish for stocks. The reason why is that no matter what happens, stocks look likely to rise. Even when the sitting president’s party loses seats, stock tend to gain, and the year after such a loss tends to be the best year of a president’s term. One of the reasons why is that the party in power typically undertakes economic stimulus after their defeat. The Wall Street Journal summarizes “Either way, many believe that stocks will get a boost after the midterm elections as investors will be contending with one less uncertainty”.
FINSUM: We think the election will be good for stocks as well. If the democrats see success, there is less risk of a brutal trade war. If the Republicans win, there is probably more pro-business policies put in place.
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(New York)
JP Morgan has put out an interesting piece of analysis this week. The banks says that the Fed, and Chairman Jerome Powell in particular, have cost investors over $1 tn this year just through his statements. For some reason, the market particularly dislikes hearing Powell. On average, the market drops significantly (0.40% or more) when the Chairman speaks. Further, his remarks usually cause an intraday inflection point, which means he is actually the one moving the markets, it is not just bad timing. JP Morgan summarizes that “While we acknowledge that it is not possible to attribute the market impact of each speech with certainty, simple math indicates that about $1.5 trillion of U.S. equity market value was lost this year following these speeches”.
FINSUM: We do not think this is anything to do with Powell specifically. It is more just about being a Fed chairman during a rising rate era.
(New York)
A trade war is in full swing. While the US finally closed an updated trade deal with Mexico and Canada this weekend, the big battle with China is still revving up. Both sides have raised tariffs considerably in recent weeks and have canceled various negotiations and meetings. With that in mind, Goldman has put out a list of stocks they say will perform well in the ongoing trade battle. Overall, Goldman says shares with high and stable margins are in the best position to pass along cost pressures, which means they are the best bet for investors. “Companies with high pricing power are well-positioned to pass through input cost pressure to consumers, preserving high margins … The market typically rewards companies with high margins when the outlook for corporate profitability worsens”, says the bank. Some of the stocks listed include Autozone, Adobe, Coca-Cola, VeriSign, Ralph Lauren, and Expedia, among a total list of 33 companies.
FINSUM: We like the approach and diversity of this list of shares. We do think a commanding market position will be key to maintaining margins, so agree with Goldman’s view here.
(New York)
The big question on every investor’s mind (and Wall Street’s) is when the US recession will arrive. With the economy doing so well, and certain indicators flashing negative, a recession in the next few years looks all but certain. But how soon? Some say it will be by the end of 2019, others think that is too aggressive. Well, a survey of US business economists has just been published that shows a majority of them believe the recession will arrive before the end of 2020. Most precisely, 66% believe a recession will occur before the end of that year.
FINSUM: This seems like a fair representation to us, but predicting the timing of recessions is notoriously difficult, so there may be little value in this survey.