Eq: Large Cap
(New York)
It is a rough time to find income. The big move downward in yields has crimped payouts to a significant extent. So where can investors find good yield without taking excess risk? Treasury yields are paltry, most stocks aren’t offering much, and high yield bonds look vulnerable in the context of a possible recession. So where can investors look? The answer might be RMBS, or residential mortgage backed securities, especially those unbacked by federal agencies. These are offered by a number of high profile funds, such as the Pimco Mortgage Opportunities and Bond Fund (PMZIX), or the Metropolitan West Unconstrained Bond fund (MWCIX). Yields are typically between 3% to 5%, and critically, the underlying return is linked to the health of the US consumer, a group that has been doing very well despite broader macroeconomic headwinds.
FINSUM: We like this call given the housing market is not broadly feeling bubbly and consumers seem to be in quite good shape.
(New York)
Despite the seeming progress in the trade war this week, markets took a negative turn today. The reason why? The August jobs report. The US economy only added 130,000 new jobs in August, fewer than expected. Economists thought the economy would add 173,000 jobs. The August figure is also down substantially from July’s 159,000 figure.
FINSUM: The irony of the market falling on this jobs report is that it will likely support Fed rate cuts, which everyone seems to want. We think of this as a sort of goldilocks report—not too weak to make you worry, but weak enough to support loose monetary policy.
(New York)
Advisors and their clients love dividend stocks. They have some of the stability and income of bonds, but also all of the capital appreciation characteristics of equities. However, advisors may want to stop buying them, argues Barron’s. The reason why is that most of the big fall in bond yields is likely priced in, which means likely all of the gains for dividend stocks have already been made and there is likely little appreciation left. Accordingly, the path of least resistance is probably down.
FINSUM: The big fall in bond yields was bullish for dividend stocks as they get comparatively more attractive as yields fall. However, if the fall in yields stalls, it is hard to imagine dividend stocks could go anywhere but downward.
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(New York)
Walmart did something a lot of conservatives may not like this week—they announced that they would stop selling ammunition for assault weapons. Despite the political turbulence it may cause for the company, it could have a bullish effect on the stock in the long run. The reason why might not be obvious at first glance, but immediately becomes so once you hear it—the ban on assault weapons ammunition will give the company a higher ESG score, which means it may be included in more funds by default, and thus see increased buying.
FINSUM: Whatever your politics on this move, from an investment perspective this could be bullish.
(New York)
It has been a rough road for equities this month. Benchmarks are down 5% and there has been frequent whip-sawing action based on data and news over the trade war. Despite the fears, JP Morgan is telling investors that it is time to buy. The bank’s equity strategists, led by Mislav Matejka think that stocks are going to turn the corner very soon. The bank thinks three elements may catalyze a move higher into the year end—restarted ECB easing, a bigger than expected Fed rate cut, and improving technical indicators on signs the market has bottomed out.
FINSUM: The Fed and the ECB could certainly help support stocks, but it hard to imagine benchmarks gaining much if we keep up the frenzy of trade war news.
(New York)
It is finally happening—riskier junk bonds are seeing outflows as investors shy away from the lowest rated credits. Junk bonds have been coated in Teflon for the most part, with the riskiest bonds rallying for several months. But recently, alongside recession fears, investors have been more anxious about how such credits might fare in a downturn. Accordingly, spreads between CCC-rated bonds and BB-rated bonds have jumped to 8%, the highest level since 2016.
FINSUM: This makes a lot of sense, and is one of the more logical moves in the high yield market we have seen in some time.