Eq: Large Cap

(New York)

Some of the biggest names on Wall Street have been calling for a correction recently. Morgan Stanley is chief among them. The bank’s chief equity strategist, Mike Wilson, says he thinks there will be a 10% correction in the near term. According to Wilson—who predicted the last two market sell-offs—we are in a mid-cycle transition phase of a market cycle, which is an environment where equities getting very choppy.

FINSUM: This makes a lot of sense, but feels a little too bearish for us. If earnings can hold up, and inflation continues to moderate, we don’t think a full correction will occur. Flat and/or choppy, fair, but not a full 10% fall from here.

Active funds are finding themselves in a better position than ever. Outflows are at their lowest levels in over half a decade, inflows are starting to swell, so what is the key to their success? The predominant factor driving them is the wide range of dispersion in the stock market’s performance. Sure, the aggregate performance has been great post-pandemic but the difference between the bottom and top quintiles has been above average for the last year. This gives pickers an advantage over passive funds. They are making their picks by not overreacting to inflation news and doubling down on stocks that benefit from stay-at-home orders and the covid environment. Active funds tend to downplay value-oriented stocks, and the few they are bullish on are bargains in communications companies. Finally, Facebook is the through-line, as nearly two-thirds of active funds hold the largest social network.

FINSUM: This is definitely a ‘pickem’ environment with large dispersion in the S&P 500, and broad index/passive funds will lag active managers.

(New York)

While most banks try to stay bullish on market, Bank of America just couldn’t help but get gloomy this week, very gloomy. The bank says that record high prices and placid volatility mean a big correction looms. They believe the market is underpricing the risk of a Fed policy change, and when that comes, it will hit like a hammer. They even gave a name to these bouts of volatility/correction: “fragility shocks”. According to the bank, “We believe the US equity market is underpricing the risks of a looming tapering cycle. After all, the equity market has feasted on record monetary support post-COVID, and the Fed's outlook remains impaired by the extreme uncertainty in the macro forecasts on which they base their decisions”.

FINSUM: This unfortunately makes quite good sense. However, the opposing force here is that the buy-the-dip mentality is strong right now, which could provide support in any short-term sell-off.

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