One of the biggest banks in the country has just offered a very bullish view. BAML says the US will avoid a recession. The comments come from the bank’s CEO, Brian Moynihan, who believes that growth will slow, but then flatten out and not go into a recession. “Everything we see in our customer base is consistent with a slowdown to 2% and a flattening out from there”, he says.
FINSUM: We found these comments to be genuinely interesting because BAML has a view on the economy that few do. Not only are they the largest consumer bank, but also the biggest mortgage lender. That means they can watch the pace of deposit growth and borrowing in a very direct way, and thus can take the economy’s pulse.
Many investors may not be aware of it, but those with assets in the sector could be sorry. Alcohol stocks, and specifically bourbon shares, are in a bubble. Tech has stolen all the limelight, but whiskey stocks—one of America’s oldest industries—have had a great decade. Millennials have revived American whiskey makers, such as Brown-Forman and MGP Ingredients, the latter of which’s shares have jumped from $6 in 2014 to $98 in 2018! P/E ratios are at about 30x and the stocks have recently started to fall sharply. It looks like the bubble is bursting.
FINSUM: The performance of this sector is pretty amazing—doubled revenues in the last decade. That is outstanding for such an old industry. However, valuations seemed to have significantly outpaced realistic value.
Do you remember those glory years between the taper tantrum and the end of 2017? The time when inflation was low, but not totally weak, growth was solid but not great, and the Fed decided to do nothing and say little? That was the time when the market surged. Well, those days may be here again as the economic signals right now, and the Fed’s language, are starting to look like they are returning to the post-Crisis “new normal” of moderate growth and inflation, but not enough to bring on a policy response.
FINSUM: Our own view is that we are not headed for recession, but rather a return to the pre-tax cut rate of growth and inflation. This is a solid setup for markets as it produces a dependable environment and a good atmosphere for corporate earnings growth.
It has been a long time since value stocks had a chance to shine. A LONG time. Growth stocks have handily outperformed their growth cousins, so much so that even some diehard value investors have talked about giving up on the practice. Value stocks took a pounding in March following the Fed’s dovish turn and spreads versus the market’s most expensive stocks are at their widest in 70 years. This means it may be a good time to buy, says Bernstein’s equity research team. If you look away from financial value stocks, the sector did not actually get wounded much last month. The reason why it may be time to buy is two-part: the first is that value stocks tend to outperform when the economy is slowing, but not in outright recession. The second is that high value stock spreads are seen all across the economy, and not just in challenged sectors, which means they are less likely indicative of real challenges and are more likely just a market symptom.
FINSUM: We understand this analysis, but have to disagree. We just don’t think the old precedents for value stocks hold much water at the point. Our view is that as growth slows, investors will buy the stocks with the most growth, not the cheapest ones.
Headline fourth quarter growth got downgraded this week to just 2.2% (from 2.6%). That may not seem like a devastating fall, but if you take a closer look at the figures, they are worse than at first glance. In particular, it becomes clear that growth was actually weakening all throughout 2018 (versus 2017). While the fourth quarter especially showed weakness, it was really only two one-time quirks that kept growth as high as it was for the year: increased military spending and higher spending by non-profits. Neither of those factors are very tied to the underlying economy and consumers.
FINSUM: This is pretty eye-opening and does sap our confidence a bit. Consumer spending also barely rose in January, which is another negative sign.