Displaying items by tag: correction
Global and US stocks are teetering on the brink of a major correction right now. US indexes fell around 3.5% and fears over the spread of coronavirus and its impact on the economy continue to rattle the psyche of markets. One analyst summarized the deepening fears of the virus’ potential impact this way, saying “When countries are closing borders, the threat of an outbreak is becoming more pronounced in Europe and the Middle East and supply chains are just going to be more disrupted, how do we model risk when we can’t even model economics with any confidence?”.
FINSUM: There was an early morning bounce in Asian markets that fizzled. The news today is not any better than yesterday. It is easy to imagine the bottom temporary falling out of markets.
The bond market looks primed for a big correction, says a top asset manager. Bonds have been surging in price as yields fall because of fears over coronavirus, but they seem likely to have a sharp pullback once the news cycle focusing on the virus moves on. That is the argument coming out of asset manager WisdomTree. According to the firm’s head of Fixed Income Strategy, if we have a sharp “V” shaped recovery, then bonds might see yields jump sharply (and prices fall sharply).
FINSUM: WisdomTree made one other excellent point that is not as obvious. US companies are starting to seek alternative suppliers away from China. As this happens, there is likely to be a transitory pickup in inflation since prices are probably going to be higher from suppliers outside of China. Accordingly, bond markets might also react sharply to a rise in inflation.
Calm and collected asset manager Vanguard has just made an eye-opening call about 2020. The firm’s chief economist and investment strategy chief, Joseph Davis, says there is a 50-50 chance of a correction in 2020. The market hasn’t seen a correction since December 2018, when it dropped to within a hair of a bear market. Davis says he usually sees about a 30% chance for a correction in any given year. Vanguard says that while investors were too pessimistic about recession chances this year, next year they’ll be too optimistic about re-inflation.
FINSUM: Seems a reasonable call, if rather safe.
One of the world’s most respected financial columnists—John Authers—has just put out an article arguing that we may be at the bond market’s Dotcom moment. Authers cites the gigantic hoard of negative yielding debt, as well as many charts of soaring 100-year bond prices (check out Austria’s and Mexico’s), to show that the bond melt up may be set to reverse. He argues that at some point soon (it could have already started with the reversal in ten-years yesterday) that investors will revolt against super-low yields, sending prices lower and yields higher. Authers thinks the spark may be unexpectedly higher inflation, which would undermine the whole premise of recent gains. Tariffs are inflationary by definition, so it is not far-fetched to think this could occur.
FINSUM: We think it would take a significant catalyst to cause a big bond pullback (like a much higher than expected inflation report, a suddenly hawkish Fed etc). That is not out of the question, but it does not seem likely.
Beyond high valuations and a potentially worrying economy (not to mention a trade war), there is something else investors need to worry about. Goldman Sachs is warning investors that S&P 500 companies are engaging in unsustainable financial payouts. The bank shows that in the year ending in March, companies in the index spent about 104% of their free cash flow on buybacks and dividends. It is the first time since before the Crisis that companies spent more on payouts than they generated in free cash flow.
FINSUM: So far this behavior is not hurting companies because investors are okay with extra leverage given the likelihood of Fed easing, but this is definitely a warning sign of financial excess.