It might seem a bit counterintuitive right now, but that may be exactly why it is a good bet. REITs have been beaten up pretty badly, and on the surface they seem likely to stay that way. Offices, retail, and other parts of the commercial real estate world look to remain weak, but Citi’s private bank thinks there is value in the sector. As to their role in a portfolio, Citi says REITs “are a way to play the U.S. economic recovery and global economic recovery without being too concentrated in the Microsofts of the world, and to add to portfolio yield on top of that while we wait for that recovery”. REITs are yielding about 7% on average and the market has been so beat up that they look underpriced relative to the value of their underlying assets.
FINSUM: The key here is either broad long-term exposure, or shorter tactical exposure to sectors that don’t look likely to be hurt (e.g. industrials, which benefit from growth in ecommerce).
No matter how good you may feel about stock indexes being back near all-time highs, one fact cannot be ignored: the market seems to be heavily overweight on the five largest tech stocks— Microsoft, Facebook, Google, Apple, and Amazon (the new acronym, named by Goldman is FAAMG). These stocks have been powering the market, but the whole situation feels like past peaks where their outperformance could not go on forever. Concentration in the S&P 500 is now at its highest in decades, with those five names accounting for 22% of the total capitalization, up from just 16% a year ago. According to Barron’s “Simple arithmetic limits the continued outperformance of the biggest names, the Goldman team observes, because many portfolio managers have 5% limits on holdings of any given stock. The strategists’ analysis shows that the average large-cap mutual fund already has a 5% position in Microsoft and about 4% positions in the other big four names.”.
FINSUM: It seems these stocks are reaching their institutional allocation limits, which mans retail needs to power them higher. The whole situation feels ripe for a correction.
It took almost ten years, but gold finally just passed its nominal all-time high (set way back in 2011 during the European debt crisis). That is not a good sign for the market. Gold is rising because of increasing worries about a prolonged economic downturn caused by a renewed COVID second wave. Gold hit $1,944 per troy ounce today, cruising past its previous high of $1,921 per ounce. “Gold has finally come on to Main Street as an asset people actually need to have”, says the CEO of Sprott, a precious metals specialist.
FINSUM: Gold has been helped by fears over the economy, and the fact that rates are near zero, which flatters zero-yielding gold.
Republicans are supposed to debut their new stimulus package today—after a long wait that neither side was happy about—but the details are still unclear. Some prominent party members hinted at details of the proposal on CNN yesterday. So far, it looks like enhanced unemployment benefits will be continued, but at a lower amount, an eviction moratorium would be extended, and direct $1,200 payments may continue for a subset of Americans. Republicans say they want to negotiate a stop-gap deal while a larger package is hashed out. House speaker Pelosi wants the full package negotiated now.
FINSUM: Given the length of time it may take to hash out a complete new deal, millions of Americans would probably be happy if a basic short-term package was agreed ASAP.
If Biden wins the presidency and Democrats take the House and Senate, tax hikes look inevitable. Biden is already publicly planning for them, and the way the polls are going, advisors would be wise to give the eventuality some thought. Even if Democrats don’t win the Senate, there may still be a tax overhaul. With that in mind, these are the stocks likely to be the hardest hit by a Democrat-led tax package. Based on Biden’s plan, it looks like a 10% rise in overall corporate taxes. Zion Research is leading the charge into the analysis, and here is an overview (quote from Barron’s): “Zion notes that 117 companies [in the] S&P 500 have over $100 million in net income that had cash tax rates less than 15%. Biden’s plan for a 15% minimum tax on book income would mean that group combined pays another $37 billion in taxes. According to Zion, nearly half of that would come from five companies: Berkshire Hathaway (ticker: BRK.B), Intel (INTC), AT&T (T), Duke Energy (DUK) and Amazon.com (AMZN). Biden called out Amazon specifically during his speech, when he said, ‘The days of Amazon paying nothing in federal income tax will be over’”.
FINSUM: This is quite astute analysis as these are stocks that are benefiting in a very significant way from the current tax regime. Amazon seems to have a big risk here that is not properly understood by the market.