Eq: Large Cap
(New York)
Whether investors like it or not, it appears a real trade war has begun. While the US-China spat is getting the most headlines, including President Trump enacting blockages to Chinese investment into the US, we are also putting tariffs on other major trading partners like Canada and the EU. With this new reality taking hold, here are four ETFs that will thrive in the trade war. The first two are the Financial Sector SPDR and the SPDR S&P Regional Banking ETF because Financials are a “screaming buy” according to BNY Mellon Investment Management. Bank revenues are very healthy and the sector is insulated from trade war. The final choice is the Invesco S&P SmallCap Industrials, which will prosper as the economy expands and whose constituents have much lower international exposure versus their larger cap peers.
FINSUM: These seem like well-thought and diversified choices. We are slightly nervous about financial stocks at the moment because of the yield curve, but small caps definitely seem like an excellent choice.
(Beijing)
If we think the trade war is being rough on our markets, just take a look at China. The country’s benchmark Shanghai Index is down 22% since its peak in January, and the yuan is dropping as well. In addition to Trump’s rhetoric and the threat of a trade war, China is also seeing weakening domestic economic data.
FINSUM: China is a lot more exposed to the trade war than the US. It has less broad and deep financial markets, so there are not as many places for investors to hide, and its economy is much more export-reliant, making it more vulnerable to tariffs.
(New York)
The Volcker Rule was one of the more divisive aspects of the Dodd-Frank legislation. The rule virtually outlawed proprietary trading, but arguably led to less liquidity, especially in fixed income markets. Now the rule has been partially pulled back, and there are is a view to gutting it entirely, but some warn about the dangers of doing so. According to the Financial Times, there are big risks to repealing the rule as it would arguably bring back the casino mindset that dominated big bank trading before the Crisis.
FINSUM: Banks are doing very well and the trading system has operated quite smoothly since the introduction of the Volcker Rule. We see no legitimate reason to overturn it.
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(New York)
Investors need to take notice, a bear market is arriving. Trade wars and rising rates have been plaguing equity markets, and US indices seem to have already seen their peaks. But while the US market is still holding on, investors need to take notice that both China and emerging markets are both flirting with bear markets, with China crossing into one this week. The threat of a trade war and a strengthening Dollar are both weighing on international stocks, and are threatening to crimp economic output. Morgan Stanley is warning of a big drop in the MSCI emerging markets index. According to the Bank’s strategy team, “This is a dangerous market … We now think we’re heading to an outright bear market”.
FINSUM: If there is a global recession coming, it seems like one that will start overseas and filter back to the US. The big question is whether that recession will lead to major asset meltdowns, such as in corporate debt.
(New York)
A flattening yield curve is almost universally seen as bad news, and with good reason. A flattening curve is one of the most reliable recession indicators, with a yield curve inversion successfully portending the last six recessions. Now that we are close to an inversion, experts are weighing on how to play it. One thing to remember is that the peak in stocks tends to not come until several months after the inversion itself, so it is not an immediate divestment indicator. One analyst from Canaccord Genuity says to get overweight “financials, info tech and industrials with an intermediate-term time horizon”. Utilities and REITs are another area to look.
FINSUM: A flattening yield curve is going to be frightening to everyone, especially in the current environment, so our own view is that the peak in stocks may be much nearer to the inversion this time (or it might have already happened).
(New York)
Hedge fund managers have seen a real decline in their reputations over the last decade. Chronic underperformance and the rise of passive vehicles has led to a high degree of skepticism. Therefore, take their comments with a grain of salt. That said, the hedge fund community is ever more loudly saying a new crisis is on the way. Particularly in Europe, famed managers are saying a repeat of the Crisis is coming. These names include Crispin Odey, Alan Howard, Greg Coffey, and Russell Clark.
FINSUM: There is a lot of doom and gloom out there, but there has been for years (periodically). Everyone was saying the same thing in 2015, and here we are three years later with markets much higher and the economy doing well. That said, we do see some storm clouds brewing.