(Washington)

Everything you think about the direction of rates could be wrong. That is the general fear after this week’s inflation report. US core consumer prices hit a one-year high in August at 2.4% year-on-year growth, ahead of the Fed’s target. Importantly, it was also a bit higher than expectations. The Fed’s new cutting agenda is partly predicated on the fact that inflation has been so subdued, so any change to that assumption could prove disruptive to a cutting cycle.

FINSUM: We don’t think one month’s report will change the Fed’s path, but it is certainly something to keep an eye on. It is going to make September’s inflation report a lot more important.

(New York)

Over the last few weeks, value stocks have been seeing a comeback. The Russell 1000 Value is up 4.15% this month versus just 1% for the corresponding growth index. This has proved a big boost to dividend paying stocks as they tend to be the most undervalued. That means investors are not only seeing good payout, but also nice capital appreciation. According to Evercore ISI, “The rebound in Value represents a buying opportunity [for income investors] following the rout in August”. Interestingly, the stocks with the lowest dividends have been outperforming higher payers.

FINSUM: If you think rates are headed lower than it is definitely a good time to buy dividend payers, as they will offer nice relative yields and good capital appreciation.

(New York)

So let’s say you are in the bullish camp and think the US-China trade spat will be resolved soon. What is the best way to profit from that development? All stocks will likely rise, and bond yields will probably rise too. But where will the best gains be? How about small caps. The argument here may seem counterintuitive, but shows an evolution in thinking on the part of investors. At the start of the trade war, many thought small caps would do well as they are less exposed to international trade. However, thinking has changed and investors are now much more focused on which sectors are most exposed. This has led small caps to have a rough year compared to large caps, mostly because there are so many financial stocks in the small cap sector. That said, a resolution of the trade war would suspend downward pressure on rates and allow the sectors which have beaten up to flourish, offering disproportionate gains for small caps.

FINSUM: This is a fairly sophisticated argument based on the proportion of beaten up stocks that are in the small cap asset class. However, it does make a lot of sense.

(Beijing)

The US and China might be starting to realize that they really need each other. Each side is feeling the pain, and that is making a deal feel closer. China has seen a 47% rise in pork prices in the last year—a key form of disturbance to its population, and seems to want to resume importing US pork. Trump has just delayed a new round of tariffs as a measure of good faith before Washington and Beijing return to the negotiating table.

FINSUM: It is quite hard to ascertain the degree to which the US and China actually want to close a trade deal. China has grown so large and self-sufficient that it is big enough to get by on its own, which seems to lower its incentive to compromise. The US is in the same position.

(New York)

One of the biggest stocks in the country is sitting relatively unloved and appears ready for an investment. That stock? Bank of America, only the biggest deposit holder in the US. The single most important thing to recognize about the bank is that is a well-run powerhouse commanded by the architect who rebuilt it after the Crisis—Brian Moynihan. The bank has a 2.46% dividend, which is looking sweeter every day. JP Morgan just went bullish on the stock, and if Moynihan sticks with the trend and boosts the dividend and adds buybacks, the future looks very bright.

FINSUM: There are some headwinds given the likelihood of falling rates, but that situation also tends to juice all stock prices, which provides some good downside cover.