Eq: Large Cap
(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.
(New York)
The market had a big sell-off this week when it was announced that top Trump economic adviser, and former Goldman Sachs executive Gary Cohn was leaving the White House. The departure elevated worries about a trade war and left investors feeling that there was no moderating voice left in Trump’s inner circle. However, the Wall Street Journal reminds investors not to be overly worried as this “Teflon” market seems to always shake off fears and heads higher.
FINSUM: The WSJ’s argument is not very strong, but trade war does seem like an issue where fear greatly outpaces reality.
(New York)
Anniversaries offer an opportunity to gain perspective on the market. This week is no different. The S&P 500 just had its nine-year anniversary from its bottom of 666.79 in March 2009. Along the way there have been somewhere around 32 “panic attacks” according to analysts. But despite these, the market is now trading above 2,700.
FINSUM: So the real question is whether that 4x+ rise should make one nervous a new downturn is on the way, or comfortable that we are on an upward trend.
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(New York)
If ever there was a “5 stock” piece that investors might want to read, this is probably it. Barron’s has published an article naming five stocks which will do well as rates rise. Interestingly, these choices are not based on macroeconomics (e.g. REITS do poorly as rates rise), but based on the actual underlying financial obligations of the companies, with pension obligations being the key factor. The five names that come out when one looks at the situation that way are companies which investors will be very familiar with: GM, Ford, Xerox, American Airlines, and General Electric. The piece summarizes the benefits this way, saying “In general, as the health of pension plans improve, so should balance sheets, cash flows, and earnings due to lower pension contributions and costs”.
FINSUM: These look like very good calls because they are not obvious, but the benefits will be in time. Very interesting to see GE on there given its struggles lately.
(New York)
Despite the rally, stocks are still down 5% from the January peak. But Invesco, it is down around 15%, which Barron’s argues presents a great buying opportunity. Invesco’s mutual fund business will earn less income if stocks fall, but unlike others, it may be a big beneficiary of the next bear market. Two reasons for this include Invesco having a strong balance sheet to make low-priced acquisitions when times are tough (as it did during the Crisis) and the fact that it has a great smart beta business, which should do well in tough times. The stock currently trades at a 44% discount to BlackRock on an earnings multiple basis, making the price attractive.
FINSUM: Invesco seems like it would be good to use in a pair trade in a down turn as its relative performance should be better than competitors.
(New York)
One of the financial industry’s most astute crisis callers has just told Barron’s that she thinks we are in for another financial crisis. Sheila Bair, former head of the FDIC, has successfully called the Enron scandal and the subprime crisis, and now she sees another one looming. The context is that Trump and the White House are leading the charge for less bank regulation, which Bair sees as crazy given this point in the cycle. According to her, “To loosen capital now is just crazy. When we get to a downturn, banks won’t have the cushion to absorb the losses. Without a cushion, we will have 2008 and 2009 again.”.
FINSUM: We are not supportive of too much loosening of bank regulation. Banks have been very profitable since the Crisis, and it is not as if the current regulatory paradigm is over-constraining them