(New York)

JP Morgan has gone on the record with two worrying recession warnings this week. The first came from the consumer focused analyst in their research division, who warned that the US consumer—who has been the key support for the economy—will weaken rapidly in 2020. Now, the analyst at JP Morgan who covers GE says that markets are likely to sink alongside falling economic expectations. The key point being made is that just having lower expectations won’t allow markets to rebound. “Don’t expect to see enough to justify a meaningful rebound in sentiment”, he said.

FINSUM: The whole of the economy, other than consumers, has been pretty weak lately. If the consumer falters, it is hard to imagine the US staying out of a recession for long.

(Shanghai)

The US is considering some new rules that could cause a stock market calamity in China. The government is considering putting new restrictions on US capital flowing to the Chinese mainland. The move is considered the third and worst-case-scenario stage for Chinese markets in the current trade war. In particular, the big risk is that MSCI de-lists Chinese stocks from its broader indexes, meaning all that capital would need to be pulled out. That amount is currently around $50 to $60 bn.

FINSUM: This is not hugely massive, but it is certainly enough to hurt markets on a technical front, but perhaps even more from a perception angle.

(New York)

If you are looking for some good muni bonds to add to your portfolio, take a look at an interesting new offering from a group of US universities. Georgetown, University of Pennsylvania, and Rutgers have all issued “century” muni bonds, and they may prove a good investment. Rutgers’, as an example, yields 3.9% and has an A+ rating, a significant spread to the typical 3.2% yield on other long-term muni bonds. Even BBB bonds, which are in a tenuous position, are only yielding 3.2%.

FINSUM: The yield is great, but your great grandchildren will be getting the principal back!

(New York)

It actually took longer than we expected. Last week there was a big splash in markets and media when Schwab, TDA, and E*Trade all cut their commissions in response to a first move by Schwab. Now, unsurprisingly—except for how long it took—Fidelity has followed suit. The unique part about Fidelity’s move is that in addition to free trades, it is also offering free money market funds for any cash left in accounts. Those are currently 1.58%, and way ahead of the near zero yield you get on cash at Schwab, TDA, and E*Trade.

FINSUM: The whole market has gone to zero on trading commissions. One wonders if the same is going to happen on large ETFs.

(New York)

Have you ever thought to yourself “I would love if they could put the downside protection of structured products into an ETF”? Probably not, but someone did, as there is a new category of ETFs, called Buffer ETFs, which are seeing big capital inflows. The ETFs work by guaranteeing only a certain level of losses in exchange for limiting potential gains. The ETFs have a year-long term, and their details change constantly. But a good example would be one with a 9% “buffer”. This means that if the ETF loses 12% in the year, the holder would only see a 3% loss and the product provider would absorb the rest. The first and only provider of these ETFs is called Innovator and has partnered with MSCI, Nasdaq and more to create a handful of exchange traded funds. Check out KOCT, NOCT, EJUL, and IJUL.

FINSUM: These are very tricky ETFs, just like the structured products from which they drew their inspiration. That said, they seem like they have some utility if they are executed properly.

(New York)

If there were ever a small cap sector overwhelmed by their larger cousins, it would be in technology. Small cap tech stocks are so overshadowed by FAANGs and the like that one would be forgiven for not even realizing they exist. However, they do, and they may very well be a good buy at the moment. The S&P 600 Small-Cap Technology currently trades at half the valuation of the S&P 500 Technology index, way down from its historical spread. What’s more, profit estimates are healthier too. Calling small cap stocks “mini-fangs”, Leuthold Group argues that “the mini-Fangs offer a significantly higher growth profile at a substantially lower valuation”.

FINSUM: A couple notes here. Firstly, the FAANGs aren’t even really “tech” stocks anymore after the sector realignment, so the valuation comparisons are not perfect. Secondly, what is the catalyst? Leuthold argues that if the economy does a little better than expected then higher inflation will boost tech stocks. That sounds flimsy.

(New York)

It may seem overly bearish right now, but put this one in the “take note” category. A hedge fund manager on Bloomberg yesterday argued that the market looks set for a bear market downturn very similar to last year. According to the manager, a mix of liquidity constraints, insufficient Fed support, and large geopolitical issues, could all combine to drive prices down 20% or more in benchmark indices. The most interesting part of this argument is that he contends the pressures will create this downturn in the next few weeks.

FINSUM: Last year’s bear market was principally about investors worrying the Fed would hike the market into a recession. That is a completely different backdrop from right now. We don’t discount the chances for a downturn, but this logic does not seem sound to us.

(New York)

The likelihood of a recession is growing. Weak manufacturing data this week accompanied by poor jobs data this morning is once again driving fears that the economy may be headed for a downturn. Accordingly, Goldman has put out a recommendation for the best stocks to hold for the forthcoming recession. According to the bank, stable growth stocks fare best in an environment of slowing growth and rising uncertainty. As a reminder, stable growth stocks are those on the less risky end of the growth curve, a group which has been underperforming fast-growing stocks by a considerable margin. Some names to look at include Fiserv, Autozone, Amdocs, Omnicom, Johnson & Johnson, and Walmart.

FINSUM: We quite like Autozone and Walmart for their consumer-staple characteristics and unique abilities to hold up well in a recession.

(New York)

Remember when everyone was really worried about corporate bonds several months ago? A lot of that anxiety faded as yields tumbled. That led companies to once again issue mountains of debt this year. Now, we are circling back towards worries over a recession, and with that progression there is reason to worry about corporate bonds, especially the BBB variety. The big anxiety, as ever is that a whole section of the BBB bonds universe (the lowest rung of investment grade) will get downgraded to junk status in a recession, causing a massive selloff.

FINSUM: So these fears are not new, but the likelihood of a recession appears to be growing. Here is what really worries us—the BBB market is enormous, amounting to $3 tn in the US versus just $1.2 tn for the whole high yield bond market.

(New York)

It was uncertain for a while, and still is, but markets are increasingly expecting the Fed to cut rates again this month. Investors now put around a 75% chance that the Fed will slash rates by another 25 bp this month. The interesting thing is at the beginning of this week, the market’s odds were under 40%. However, the release of weak manufacturing data a few days ago sent expectations surging that the Fed would once again step in.

FINSUM: New jobs report data out today will only bolster the case for further rate cuts.