Every advisor is likely already aware of the huge ruction that occurred in money markets this week. A number of short-term stresses sent over-night borrowing rates up to 10% this week before the Fed had to intervene to inject tens of billions of Dollars of liquidity to calm things down. Most media outlets have explained this as a number of cyclical short-term factors, without really giving any specifics. The whole episode has been curiously vague. This has led to an unusually fertile environment for rumors and speculation.
FINSUM: So our readers will know that we have been reporting for years, and we must say that this has been one of the oddest, mostly poorly reported, and vague events we have ever covered. None of the cited reasons of this money market flare up make much sense relative to the scale of money the Fed has pumped in. One of the best rumors we have heard is that there may be a bank failure coming. Just before this market flare up, oil jumped almost 20% in a day, its single largest one-day move ever. That kind of black swan event could easily destabilize a large financial institution if it was positioned the wrong way, and ultimately led to the kind of short-term funding desperation we saw before the last Crisis. This analysis is probably all wrong, but the situation must be taken seriously.
Elizabeth Warren is currently the only candidate that is really rising in the polls, and that is terrifying Wall Street. The far-left candidate has the most comprehensive plans to change the status quo of the financial system and she is gaining traction with voters. That is making Wall Street very nervous. Famed investor Leon Cooperman said he expected a year-plus long bear market with losses of 25% or more if either Sanders or Warren wins the election. Biden currently still leads Warren, but the gap is close, with his advantage down to 31% to 25% of Democratic voters.
FINSUM: Our own feeling on this is that Warren may have the momentum to win the bid, but that it will likely prove quite hard for her to win the general election, as her policies are very progressive for middle-of-the-road voters.
With the Fed coming in less dovish than expected this week, there is suddenly much more anxiety in the market. Without a clear direction on rates, and with lingering worries about the economy, the outlook for stocks and bonds is not clear. And as we all know, markets hate uncertainty. Accordingly, the search for the best recession-proof stocks continues, and we have a new proposal today: fast food stocks. As consumer spending falls in a recession, bargain-providing companies, like fast food, often do well. The sector also provides healthy dividends. Take a look at the usual suspects: McDonalds, Wendy’s, and Chipotle, and some you may not have thought of, like Cracker Barrel and Restaurant Brands International.
FINSUM: The “Dollar menu” suddenly becomes very attractive to the American consumer when times start getting tough. These stocks seem a good bet, especially because they have solid dividends, which should provide some protection in case a downturn doesn’t happen.
Just before the launch of the new suite of iPhones and other Apple products last week, things were looking bleak for the company. There was remarkably little pre-launch excitement and it seemed like this was going to be a rather boring round of updates for the iPhone. However, initial sales momentum is looking strong and could bode well for the company. There are also some one-off factors that could make Apple’s stock pop. According to Evercore, “We think there is inherent upside to Sept-qtr EPS given AAPL isn’t staggering their launches but announcing all the three products simultaneously … This we think will have a positive impact to revenues and EPS in the sept-qtr, though depending on the reception of these products it may be more of a pulling in of revenues from Dec-qtr”.
FINSUM: The iPhone 11 is a little more differentiated than everyone thought, and it seems to have sparked more interest than expected. This may be a less gloomy replacement cycle than expected.
It has been a decade in the making, but it finally, unceremoniously, happened. The AUM in passive investment vehicles, like ETFs, has finally overtaken that in actively managed ones, like mutual funds. As of August 31, money in passive funds totaled $4.27 tn, just a touch higher than the $4.25 tn in actively-managed funds. In a good summary of the overall change in landscape, the Wall Street Journal says “That shift lowered the price of investing for individuals, reduced the influence of stock pickers and turned a handful of Wall Street outsiders into the biggest power brokers in the industry”.
FINSUM: Every advisor reading this column knows exactly why this happened, but it is nonetheless a landmark moment. It is also perhaps a warning sign—which side is driving the market?