Eq: Total Market
The markets took another dive yesterday, with the Dow losing well over a 1%, the S&P 500 down almost 1.5% and the Nasdaq down over 2%. That loss jolted investors out of the sense that things might be back to normal after a strong recovery in recent days. This all begs the question of whether it is really time to start worrying about a recession? A new study from Bank of America says no. The bank did analysis of economic performance going back to the sixties and have found that compared to previous pre-recession cycles, the US is actually moving away from recession now.
FINSUM: Relying on historical data is probably not going to be very fruitful right now as the pretext (artificially low rates etc.) is totally different for this economic cycle.
BlackRock just reported earnings and the results are not what many expected. Total inflows for the quarter were just $10.6 bn, the lowest since 2016. Interestingly, one of the biggest areas of losses was in passive strategies held by institutional managers, where BlackRock saw $30 bn of withdrawals. The poor results sent BlackRock’s stock to its lowest point since May 2017. BlackRock’s CEO Larry Fink blamed the uncertainty about rates and peak earnings as reasons for the outflows.
FINSUM: What is interesting here is that BlackRock is probably in the best position to keep devouring assets, but even it is having trouble.
Retail stocks have come back in a big way since their slump in 2017. The whole sector seems to be having a revival in investors’ minds, but challenges remain. Rising costs pressures, tariff complications, and a looming backlog of inventory all look bleak. Consumer spending this Christmas may also be subdued. With valuations high again, there are still some great undervalued names, according to Barron’s. For instance, take a look at Nike, Tiffany, and Amazon.
FINSUM: We hardly think Amazon is a retail stock with room to run. That said, Nike and Tiffany are much more interesting as value picks.
Every time there is a bout of volatility, the financial media, and inevitably a few market analysts, forecast that ETFs may be at the center of the next flare up. Yet for the most part, ETFs have held up very well to periods of turmoil. Despite this solid performance though, the creeping logic that they might have a problem lingers. The Financial Times has just posted an article which argues that just as ETFs have managed to magnify the rise in equities, they will also exacerbate the fall. Since so many assets are now in passive funds, the risk of a herd mentality—with all investors having similar stop-loss orders—leading to a big selloff seems likely. Further, since there are fewer active managers playing the role of contrarians as the market falls, who is going to be there to insulate the market when it begins to tumble?
FINSUM: The ETF structure has proven itself quite resilient so far. We are not saying there won’t be a problem, but we feel like the underlying problem in the next meltdown might not have to do with ETFs themselves, rather it may just be magnified by them.
Whether investors like it or not, the market seems to have finally come to grips with the reality of higher rates. That realization has started to change the performance of different assets from even a week ago. So who will win and who will lose? On the positive side, financials and banks seem likely to benefit, as they make a great deal of their income from interest. Energy and materials stock are likely to shine as well as they benefit from the expanding economy. On the losing side will be utilities, housing, and autos stocks, all of which are sensitive to higher rates in their own ways. No one can be sure how tech might respond, as the sector is young enough that there is not good evidence to say how it might react.
FINSUM: The business case for how most sectors will be impacted by higher rates is clear. If only share performance were so simple.
One of the big mysteries in this recovery has been the fact that wages have not risen much despite the fact that employment has expanded greatly. Investors have gotten used to massive amounts of new jobs being created, but also to quite meager wage gains. Economists have been somewhat stumped as to why, but a new explanation makes a lot of sense—monopsony. Those with an economics background will immediate recognize the term. It refers to when there are many suppliers of something but only one buyer. In this case it is being applied to the labor market—there are tons of available workers, but quite few employers, especially in more isolated locations. This means the employer has sole negotiating power in dictating wages, leading to widespread wage stagnation despite a competitive labor market.
FINSUM: This seems like the outcome of all the corporate consolidation that has occurred over the last few decades. There are less employers, so they collectively have more power to hold down wages.