Eq: Large Cap
(New York)
Few remember how this very long bull market started, but it happened with some very badly blown earnings forecasts. At the grim bottom of the Financial Crisis in 2009, analysts were expecting double digit declines in corporate earnings. Instead, earnings rose, starting what is a bull market entering its tenth year. Now, Bloomberg says, blown earnings forecasts will be what turns this bull into a bear. Analysts tend to be comically wrong on earnings forecasts at the most pivotal moments, and with sentiment looking very strong, it may very well be a similar miss to 2009 that sends the bull market off its lofty perch.
FINSUM: A big earnings miss right when the economy looks strong would be very jarring for investors and sow a lot of doubt about the future. This call seems plausible to us.
(New York)
Many who are worried about the future of the stock market take solace in the fact that the US economy looks strong. If the economy is doing so well, the market is less likely to fall, or so the logic goes. However, looking at history, that understanding is unwarranted, as stocks lag well in advance of economic downturns. In fact, the market usually tops out well before any economic downturn begins, and by the time a recession actually starts, stocks will have long since been in a bear market.
FINSUM: This is an excellent point. Just as the current bull market started during the fallout of the Financial Crisis, the bear market will probably start when the economy looks like it is in full swing.
(New York)
Aside from the general tensions over rising rates and what they mean for the economy, investors need to pay attention to another important consideration. That consideration is that with each basis point of increase, stocks are looking less attractive as the allure of dividends fades. While for years the view has been that “there is no alternative” to investing in equities because of weak bond yields, that perception is now fading as yields rise to a place where they start to offer acceptable returns. “Investors now have a viable alternative to cash with yields finally above inflation levels”, says the chief investment strategist at BlackRock.
FINSUM: It might not a recession, but the simple emergence of a viable alternative might be what ultimately unwinds this bull market.
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(New York)
There are currently a lot of catalysts for small caps. The idea of favoring the segment started around the time of Trump’s election, when import tariffs seemed likely. Trump’s America first stance was also generally seen as favorable to small caps, which tend to have a high proportion of domestic sales compared to their larger cap peers. Now, with Trump set to implement metal tariffs and the threat of a trade war looking like a reality, small caps may once again shine, as they would be shielded from most of the international trade fallout. Furthermore, small caps will benefit the most from the new tax cut package.
FINSUM: There are a lot of catalysts that will help small caps. It seems like a great time to buy.
(Chicago)
McDonalds’ stock has not been doing so well lately, but guess what, that has not diminished its prospects. Well, at least not in the eyes of Wall Street stock analysts. McDonalds had a great 2017, but has fallen 12% this year. The introduction of its new $1-$2-$3 menu is part of the reason. However, most analysts still rate it a buy and it looks like a good long-term value proposition. The stock currently trades for 20x earnings, versus a high of almost 25 last year.
FINSUM: We think CEO Steve Easterbook is a great leader for the company and we have high long-term conviction for old Mickey Ds.
(New York)
Okay investors, hold on to your hats. A big name has just come down with a stern and gloomy warning for the markets. JP Morgan is saying that stocks may have a giant bear market. How big? Try a 40% correction, according to the bank’s co-president. Daniel Pinto, the bank’s co-president who oversees trading and investment banking, says that markets are bound for a big correction because of fears over rising interest rates and inflation. The bank thinks the market will see a two- to three-year downturn where prices will fall up to 40%.
FINSUM: This is a big correction that JP Morgan is calling for. We do think the market might go through a rough patch, but we don’t know if it is going to reach these kind of Financial Crisis era proportions.