(New York)

Picking stocks is about the hardest thing one can do right now. The market has risen so much—and seems to be defying gravity—that it is hard to know where to allocate money. On the one hand, growth stocks look ludicrously priced, while on the other, value has been underperforming for over a decade. With that said, here are some stocks that are still providing a good discount but look likely to rise as the performance of their underlying business improves. The first place to look is at beaten-up financial stocks, such as those in the KBW bank index, which is down 30% for the year despite big gains in the market. However, sentiment is turning positive. According to RBC, “Based upon the valuations and the outlook for the economy in 2021, we believe bank stocks can be purchased with the expectation the group outperforms the general market over the next 12-18 months”. The stocks to look for are Bank of America, Truist, TCF Financial, Western Alliance, BankUnited, and Investors Bancorp.

FINSUM: Banks are always a bet on the economy, and given their heavily maligned share prices and the general trajectory of the recovery, seem a wise bet. The only lingering risk in our minds (other than a weak recovery) is how continued ultra-low rates might hurt their earnings over the long haul.

(New York)

Muni bonds have been on a relentless rally. Any advisor is surely aware of this because there is likely a lot of their client’s money in the space. The inflows have been so sharp, and the price action so swift, that average ten-year yields in munis are at 0.7%, the lowest since the 1950s. At the same time, the COVID pandemic has decimated local and state budgets and there is a $1 tn budget deficit. Worse, the federal government has no clear plans in place to help local and state governments, meaning such municipalities may not be bailed out any time soon.

FINSUM: So on the one hand you have soaring prices, and on the other, significantly eroding credit quality. In any normal circumstance this would be seen as a bubble. However, given that Washington does seem likely to offer some aid to local governments, a meltdown will probably be avoided—but not without some volatility along the way.

(Washington)

The Fed made some highly anticipated policy adjustments at the end of last week. This was not about short-term rate moves either, but rather about its long-term role in the recovery and how it plans to manage the economy. The biggest change seems rather small in wording. The Fed basically corrected its mandate to say that it would not automatically tighten policy just because employment had reached or exceeded what it consider to be “full employment”. In effect, this means that the Fed is ready, willing, able to let the economy run very hot for many years. Analysts think the Fed will likely not hike again until at least 2024.

FINSUM: So the Fed is going to be very accommodative for the next several years. It is starting to feel like equity valuations are going to have no choice but to rise as the Fed has taken “there is no alternative” to a never-before seen level for equities.

(San Francisco)

The CME Group has published a piece about the outlook for FAAMG stocks in the context of the underlying economy. The CME notes that the FAAMG stocks now account for 22% of the total S&P 500, so their influence is skewing investors’ view of the underlying economy. The reality is that the S&P 500 minus those five stocks is a much more accurate—and much bleaker—representation of the economy. CME says that as the reality of a slow recovery starts to play out in the market’s consciousness, there is bound to be a correction in FAAMG stocks.

FINSUM: The law of gravity would seem to dictate that a fall in FAAMG is inevitable, but what is the catalyst for such a move? Their earnings are good as is growth momentum.

(San Francisco)

The wealth management market is already in shock from Democrats’ tax proposal—think top tax rates of over 65% for high tax states. Remember that a large majority of states charge taxes on residents, including big ones like New York and California, where large numbers of America’s wealthy reside. Now, California, the largest and one of the most influential states in the union, has just put out a proposal for taxing wealth, not income. The plan comes from the state’s legislator. Here are the basics of the plan: “The state would apply a 0.4% rate to all net worth above $30 million for single or joint filers. The tax would apply on wealth above $15 million per spouse for married taxpayers who file separately. Net worth would include all assets and liabilities held globally by a taxpayer”, according to Barron’s.

FINSUM: Two eye-opening things here. Firstly, Democrats have a veto-proof supermajority in the state legislature, so passing this will be much easier than elsewhere. Secondly, how much will this influence other states? It was easy to see how left-leaning states influenced others as it regarded state-level fiduciary rules.