Eq: Large Cap
(New York)
Morgan Stanley has just come out with a big warning for investors. The bank says that the selloff over the last few weeks, which amounted to around 10% at its peak, was just a tiny start to what is to come. Describing the recent losses as the “Appetizer, not the main course”, Morgan Stanley says that big trouble will occur when growth weakens but inflation keeps moving ahead. “Strong global growth and a good first-quarter reporting season provided an important offset. We remain on watch for ‘tricky hand-off’ in the second quarter, as core inflation rises and activity indicators moderate”.
FINSUM: If growth starts to weaken, but inflation and rates are still rising, that is the catalyst for a big correction, or more likely, a prolonged bear market. But we are not there yet.
(New York)
After years in the doldrums, the country (and world) now seems to be on a definitive path to higher interest rates. This reality has set the markets on fire, with bonds dropping and equities swinging all over the map. Understandably then, investors are looking for safe income even as rates rise, especially those who are headed towards retirement. In response, Barron’s has searched for companies whose free cash flow exceeds their dividend as a way of finding income one can rely on. The names that come up when doing this sort of screen also resonate a sense of stability just by their stature, and include UPS, Cisco, and JP Morgan. Walmart, Pfizer, and 3M are also in the mix, amongst others.
FINSUM: Companies with stable and positive free cash flow margins seem like a good bet for maintaining or raising dividends.
(New York)
This bull market is getting old. We mean very long in the tooth. However, even if you are anxious about a broader downturn, there are still some good plays, says Barron’s. The two big sectors to consider when planning for the end of a bull market include financials and industrials, as both benefit from rising rates. That said, stocks may not perform as poorly as many imagine, as some argue that stocks never fully priced in ultra low rates, so as they rise, they should be less affected.
FINSUM: Stocks not fully pricing low rates is an interesting argument, and it is somewhat supported by the fact that equities did not sell-off alongside bonds when inflation came out the other day. We think of stocks as both an inflation hedge, and as a direct beneficiary of economic growth, which often accompanies rising rates, so we are not too bearish.
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(New York)
Well the market may have been very chaotic in recent weeks, but at least one sector is sending an unequivocal buy signal. That sector is REITs, and the context for the call is that the sector has performed terribly over the last year. REITS were down 5% in 2017 versus an S&P 500 gain of 25%. This year, they are off 10%. Those losses mean REITs are yielding almost 5%. The sector looks fundamentally healthy and will benefit if the economy continues to expand. Big fears over rates rising, which affect REITs, seem to already be priced in.
FINSUM: A simple return to the mean-based investment hypothesis would dictate that REITs should rise, but with so many worries over rates right now, it might take some time for that to play out.
(New York)
There have been a lot of bearish articles lately and few bullish ones. But today we are running are covering an optimistic argument that supports our own view of the market. We have been saying for some time that inflation is not necessarily bad for stocks—they are in fact an inflationary hedge. Now, Barron’s is making a key point about the current relationship between stocks and bonds to show why equities don’t stand to lose much if inflation and rates rise. The reason why is that the spread between equity yields and Treasuries is over 300 basis points, meaning there is a lot of room for rates to move higher before they would be wounded.
FINSUM: We think this is quite an astute view. And while we don’t believe the market is in for another strong run, we think it has a nice cushion for modest gains.
(San Francisco)
Many investors may have noticed that despite the big selloffs of the last two weeks, tech stocks have actually held up quite well. The sector is up 2.8% on the year versus an S&P 500 gain of just 0.2%. However, beware, as that number is largely an illusion. The reason why is that the vast majority of that performance comes down to Microsoft and Nvidia, which are up 5% and 20% this year.
FINSUM: The performance of tech during the recent downturn is largely an illusion, so investors need to be careful taking refuge in the sector.