It’s that time of year. Analysts from many banks are putting out their top picks for the year. The picks we are featuring focus mostly on the large cap space. The picks come from a range of different analysts and include: Google, Amazon, American Eagle, Broadcom, Deere, McDonald’s, Microsoft, and Salesforce.
FINSUM: Deere and McDonalds are interesting for us. Deere because farm equipment demand could be quite heavily impacted by US-China trade tensions, which makes this one a risky bet. McDonalds is a stock we are bullish on because of its menu changes and modernization efforts. We think it has a lot of business it can steal back from the likes of Shake Shack and Chipotle if it continues to make its menu fresher and more healthful and its store more appealing.
As analysts and the market try to sort out how the new division in Congress will play out in markets, one beneficiary is becoming increasingly clear. Aerospace analyst Ron Epstein of Merrill Lynch had this to say the day before last week’s election, “The change to Democratic control of the House is the best scenario for defense spending. It points to upside in the defense budget. Gridlock keeps budgets intact, and defense is a bipartisan issue”. That argument is a bedrock of the new view that defense stocks are likely going to surge in the new Congressional environment. Epstein points out that aerospace companies are simultaneously seeing commercial and defense businesses growing strongly.
FINSUM: Earnings seem like they will stay in very good shape for the defense sector, and because budget changes look unlikely, the whole industry seems to be in for smooth sailing.
US stocks have simply blown away the world this year. The S&P 500 is up around 9% while global shares are down 6%. The outperformance has been driven by a supportive tax policy, great economic performance, and a pro-business attitude out of the White House. However, JP Morgan says that the outperformance of US stocks relative to the globe is set to stop. US stocks and global ones will move towards parity in coming quarters as the stimuli helping American shares wanes. The parity will not come from global stocks catching up as much as the US will stagnate or fall.
FINSUM: When we take everything into account right now, we are feeling increasingly positive about the the next year. We think Democrats winning the House would be favorable for shares as it would calm money managers’ worries about some of the GOPs more extreme positions (e.g. trade war). This could bring on a “goldilocks” scenario, where the economic and political conditions are just right for stocks to move strongly higher.
The Financial Times has just published a new story which chronicles the performance of active fund managers in 2014. The results are startlingly poor. Only 14% of large cap core mutual funds have beaten the S&P 500 so far this year, and active long-short hedge funds have returned just 1% on average. According to research done at Wharton, fully 90% of active managers underperformed the market. It has been well-covered that active managers often struggle, but 2014 has been infamously bad. The reversal in oil prices caught many managers with wrong-way bets, interest rates were supposed to rise, and many picked small caps over large caps, as in low interest rate environments small caps have historically outperformed. This last point, so-called dispersion, has been one of the phenomena of this year. Large cap stocks have strongly outperformed their smaller cousins, which has greatly hurt active fund managers, who have a small cap bias in order to distinguish themselves from the index.
FINSUM: This story really sums up the abominable year active managers have had. There are two views here—either there is no where to go but up, or this is the start of a bearish run. Given the wealth of evidence that has emerged this year, one would be very wise to consider the role of active managers in their asset allocation.