Eq: Large Cap
(New York)
Remember when everyone was really worried about corporate bonds several months ago? A lot of that anxiety faded as yields tumbled. That led companies to once again issue mountains of debt this year. Now, we are circling back towards worries over a recession, and with that progression there is reason to worry about corporate bonds, especially the BBB variety. The big anxiety, as ever is that a whole section of the BBB bonds universe (the lowest rung of investment grade) will get downgraded to junk status in a recession, causing a massive selloff.
FINSUM: So these fears are not new, but the likelihood of a recession appears to be growing. Here is what really worries us—the BBB market is enormous, amounting to $3 tn in the US versus just $1.2 tn for the whole high yield bond market.
(New York)
The Dow is oversold. That is what at least one Wall Street analyst (and Barron’s) is saying. The manufacturing report this week made recession worries flare up in a big way, leading to a sharp sell-off. However, it may only be a matter of time until the Fed’s more accommodative policy starts rippling through the economy with positive benefits. This is arguably already being seen in the housing market, where new and existing home sales were up sharply in August.
FINSUM: The market may be poised for a nice rebound if economic figures start to improve, as prices are currently being held back by recession fears.
(New York)
Utilities just hit a new high. So what else is new. Utility stocks have been surging this year alongside falling rates, and they are not the only ones. Consumer staples, consumer discretionary and even tech have been rising strongly. Not only do the dividends look appealing, but the stable earnings profile is attractive given the threat of a downturn. What is most impressive is that utilities have held up even though value has been surging. According to Goldman Sachs “With the Fed cutting rates again this week and the 10-year yield at 1.78% [now 1.71%], utilities continue to perform well, despite NT headwinds as broader momentum trades reversed slightly”.
FINSUM: As long as there is downward pressure on rates, we suspect dividend stocks will be strong. But it wouldn’t take much to reverse that.
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(New York)
Dividends hold an interesting place in the current market environment. On the one hand, their yields are looking more attractive after the big fall in bond yields. However, some think the bond rally is very fragile and that it will either fall in a big way or at least stall, in which case the outlook for dividend stocks is bleak. So how to handle the environment? One tip is to buy dividend stocks with the fastest dividend growth, not the highest yield, as they have been fairing the best and will likely be the most resistant to rate fluctuations. One research analyst in the space summarized the situation this way, saying “Companies exhibiting stronger earnings growth to support regular dividend hikes have been in greater demand than those more value-oriented ones offering higher income streams”.
FINSUM: Those with the best trending yields will likely be more defensible than those with higher but more stagnant yields.
(New York)
In what we see as an encouraging sign with some good logic behind it, Credit Suisse has announced that it is going overweight equities despite the cautiousness of all the other big banks. Specifically, Credit Suisse’s wealth management division is going overweight stocks as it sees increased prospects of a US-China trade deal, diminishing political risk in the UK and Europe, and additional stimulus efforts by global central banks. Taken as a combined force, these are quite bullish considerations, says the bank. Credit Suisse had previously been neutral on equities, but the announcement came from the banks’ global Chief Investment Officer.
FINSUM: We are starting to agree with Credit Suisse on the bullishness. The whole market and economy seem to be re-entering the post-Crisis goldilocks phase where the economy was just weak enough for central banks to stimulate (boosting asset prices, but not weak enough to cause any real problems.
(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.