(New York)

In another sign of a weakening economic landscape, new retail sales data was released for February, and it was not pretty. The data didn’t just slow, it actually reversed, with retail sales falling 0.2% month over month in February. The data was a big shock as economists were expecting a gain, especially after a revised 0.7% increase in January. The numbers suggest the economy may be in line for a contraction in Q1, as December also saw a big 1.6% decline in retail sales.

FINSUM: There are a lot of economic indicators looking negative right now. We are still optimistic, but the signs are getting harder to ignore.

(New York)

We wanted to write an article about a new fund we discovered in our regular course of business, but that got us excited. One of our gripes with ETFs is that there always seems to be a dearth of ways to express short-term tactical opportunities, or own a fund that does so. That is why we were excited to find a fund in New York Life’s IndexIQ ETF lineup. The fund, the IQ Merger Arbitrage ETF (MNA), seeks to gain capital appreciation by buying companies that have had public takeover announcements. The fund also includes a short on global equities as a partial hedge. Merger arbitrage is a common hedge fund strategy.

FINSUM: This is one of those area where we often wish we had exposure, but don’t have the time to actually enact a strategy, so this IndexIQ fund is very useful. The fund has a 75 basis point expense ratio.

(New York)

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.

(Washington)

The fiduciary rule saga has been long and confusing. Firs the DOL Rule fell flat, then the SEC proposed its own rule, only to face harsh criticism from everyone but the brokerage industry. Now there is a new piece of news that we find encouraging: the SEC is apparently working directly with states as part of an effort to craft a new framework that will eliminate any conflicts with state-level fiduciary rules. The SEC is consulting with states like Maryland, Connecticut, Nevada, and New Jersey to make sure there aren’t grey areas or loopholes that create nightmares for advisors and their clients.

FINSUM: There are two positive developments here. On the one hand, it is great that the SEC is trying to iron out any conflicts with state-level rules, but on the other, it is even better that this consultation might actually lead to the dissolution of those state rules.

(New York)

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.

(New York)

The yield curve is the center of attention right now. The short end is yielding more than the long end, everything feels upside down. So how to play it? Yields on long-term bonds have fallen so steeply that it seems foolish to think they will continue to do so. Inflation is still around and the Fed still has a goal to get the country to 2%, which means yields seems more likely to rise than fall (unless you think a recession is imminent). Accordingly, there are two ways to play this curve. The first is to use a “bullet” strategy by buying only intermediate term bonds, which tend to do well when the yield curve steepens, especially if short-term rates actually fall. For this approach, check out the iPath U.S. Treasury Steepener ETN (STPP). The other option is to remain agnostic as to direction, buying something like the iShares Core U.S. Aggregate Bond fund (AGG).

FINSUM: Our own view is that we are not headed into an immediate recession, and thus the long end of the curve looks overbought.

(New York)

There has been a lot of gloomy reporting on the real estate market lately (admittedly in this publication too), but the reality is that the market is not in as poor shape as many think. Here are two points to digest. The first is that national US home prices rose 4.3% (annualized) in January, down from a 4.6% gain in December, but still solid. The figure is two percentage points below January of 2018. The second point is that with yields having fallen so far, cheap mortgages (think 4% or less) are back. The big reduction in mortgage expense is fueling fast refinancings, but it also seems like enough to boost home purchases.

FINSUM: The bond market and the Fed’s dovishness might prove to be a big support to the real estate market. Also, considering all the gloomy news, a 4.3% annualized gain in January (the month after the stock market rout) does not seem too bad at all.

(New York)

Climate change is becoming more a reality than some distant fear. However, one of the challenges is forecasting how it will play out and impact different asset classes, many of which come as a surprise (e.g. cruise ships being significantly impacted). One of the aspects that everyone expects is that climate change is going to have a negative impact on commercial real estate, especially because so much debt exists in CRE on the coasts. However, the situation is not as grave as many think. If you analyze the performance of the mortgage market following the 2017 Hurricane Harvey disaster in Houston, one finds that the mortgage market was barely hurt. The reason has multiple causes, but one of the key points is that almost all lenders now require borrowers to have full flood insurance, mitigating risks.

FINSUM: Climate change is going to raise costs in the form of insurance premiums, but it doesn’t seem likely to do catastrophic damage. Even residential real estate, while hurt by Harvey, was not nearly as badly wounded as many expected.

(New York)

Advisors tend to really like dividend stocks, and it makes sense why: clients need good income as they head into retirement. However, this desire leads some (especially retail investors) to overreach, choosing high paying, but ultimately fragile or unsustainable stocks. Right now is a good time to be looking for quality dividend payers, as their valuations relative to the market are the lowest in about 20 years. Some high quality names to look at include Macy’s (6.2%), General Motors (4.1%), Kellogg (4.1%), and Verizon (4.2%).

FINSUM: One of the best ways to judge the quality of dividend stocks is through focusing on free cash flow as that measure shows whether companies can really afford what they are paying out without hurting their underlying business.

(New York)

Another day, another round of bad news on the economy. In what comes as another round of disappointing data, GDP for the fourth quarter was just revised downward from 2.6% to 2.2%, showing the economy finished the year on a softer note than expected. The data adds to the list of poor numbers—labor, housing etc—that have been hitting investors.

FINSUM: Weak economic and housing data have been flowing like a hose lately, and today is no different. This will only add to the downward momentum in yields.