(New York)

Dividend stocks have gotten a whole lot harder to choose this year. It used to be that you could pick a wide selection of stable decent-yielding stocks and hold them for the long haul. However, COVID has disrupted that in many ways, as it has disproportionately weakened some sectors and disrupted many business models. With that in mind, here are three key lessons to remember when choosing dividend stocks in 2020: expect lower payouts, be wary of financing, don’t chase after yields. The first one is simple—many companies have had to cut dividends and many more will. The second is highly related to the first: be wary when companies have to use debt in order to maintain a dividend. In that sense, simply maintaining the dividend is not necessarily a sign of strength. Finally, and most interestingly, is the lesson about not chasing yields. Because yields are so low, dividend stocks are likely to see gains anyway, so it is more important to focus on the sustainability of dividends than chase yields that might collapse.

FINSUM: All of these lessons make a great deal of sense in the current environment. We particularly like the idea that stocks which don’t have the very highest dividends might actually produce the best combined returns.

(New York)

Well it took seemingly forever, but it finally just happened—the merger of Schwab and TD Ameritrade has just closed after a lengthy process. It will take 2-3 years for the operational end of the two custodians to become integrated, but in a corporate sense, they are united. The deal has made many RIAs, particularly those on the smaller end, nervous. TD Ameritrade was known for its excellent service of smaller RIAs, whereas Schwab was known for the opposite. Accordingly, many fear that under the new Schwab-led company, smaller RIAs might be forgotten. The combined entity now controls 51% of the RIA market with more than $2 tn in assets.

FINSUM: This is quite concerning for smaller RIAs, many of whom are thinking of switching to Fidelity or smaller rivals. Also of note, Schwab has not formally announced what they are going to do with TDA’s Veo One platform.

(New York)

The fixed income market used to be where you went for safety and steady income. Those days seem long ago, and fixed income is not just as likely as any other asset class to eb the riskiest and most volatile in your portfolio. Between COVID and the Fed, interest rates are extremely low, with yields low and bond price very high, and vulnerable. Some have been comparing the situation to Japan in the 1990s and beyond, but there is a huge difference that makes the US bond market much worse than Japan ever was—inflation. When Japan started its massive zero rate, ultra-low yield period, it was experiencing deflation, which meant there was still a positive real rate. But that is not true in the US today, as yields are actually well below real-world inflation, meaning genuinely negative real interest rates.

FINSUM: There is ultimately going to have to be a reckoning in the bond market, because real returns are not sustainable. That said, it does not seem like the Fed is going to let that happen any time soon.

(Boston)

Anyone who sell variable annuities, or even has a passing familiarity with the business, know that the headline above is a controversial one. The reason why is that the first version of the DOL rule caused annuities sales to drop. Even though that rule was vacated, it had already changed the structure of the market. However, Harvard is now saying the rule actually helped the VA industry. It says fees were lower and returns higher, that the rule did not force smaller investors out of the market, and that captive brokers put more weight on client interests. However, those in the annuity industry say the report is completely biased and that the researchers went in with the intention of proving the exact points they already assumed were true. Critics cited a number of flaws with the study, such as the methodology for calculating expenses and commissions.

FINSUM: While it is clear that variable annuity product suites, including fees and commissions, came down because of the rule, it does not seem clear that it helped everybody in general because of differing market access based on investor size.

(New York)

A lot of investors are hoping a new government stimulus package will be a shot in the arm for markets. However, the reality might be something much more disappointing. While a deal would be a nice benefit for the economy, the weight of an autumn case surge and a highly volatile election are heavy on the shoulders of markets. According to one market strategist at Miller Tabak, “We believe an agreement on a new fiscal plan is likely, but we’re not so sure it will help the stock market rally in a sustainable way. The market is still quite overvalued and the combination of the weakening employment picture plus a second wave of the virus does not bode well for any improvement for the ‘E’ part [earnings] of the P/E ratio going forward”.

FINSUM: The stimulus deal will likely be good for a 0.50% move in indexes, but with little continued benefits. It just doesn’t seem enough to re-spark the bull market given everything else going on.

(New York)

The market seems to be in a tussle with itself. On the one hand, some investors are feeling bullish on the economic outlook, while many others feel the recovery is losing momentum. The data isn’t helping because it seems to validate both sides. For instance, jobs recovery numbers have been strong (disappointing somewhat today though) and the overall dip in output is not as bad as many expected. Metals prices, like silver and copper, have been rising, a leading indicator of growing economic activity. However, consumers seem to be hurting with real income dropping tangibly because of the end of government stimulus checks.

FINSUM: It increasingly seems like a k-shaped recovery is taking hold on the sector level. Certain areas of business are doing very well, while others like airlines, retail and more are doing poorly. This appears to mirror what is happening in consumer spending, where the upper middle and wealthy are surviving fine, but the middle and lower classes are getting hurt badly.

(New York)

Goldman Sachs is stressed about the election. In particular, they are concerned about what a contested outcome could mean for stock prices. Because of that, they think the debates which started this week have the potential to be an “important catalyst for investors to assess risks”. The debates have the possibility of swinging the election strongly one way or the other, which means they can be tipping points for investors. “One way to lower the odds of a contested outcome (that brings noise and volatility) is via a large margin of victory that cannot be undermined”. That said, according to the bank’s strategists, even a big win could have risks: “Although undoubtedly under the clean-sweep scenario there is the negative implications for risk assets to be considered, stemming from a Democratic legislative agenda including higher corporate taxes and increased capital-gains taxes”.

FINSUM: Goldman is making it abundantly clear that they think most paths for the market lead lower—likely until the end of the year. With Trump now having COVID, that makes uncertainty even higher.

(Washington)

There has been a lot of speculation that with Biden leading in the polls, Reg BI may be likely to get scrapped next year. Now obviously no one has great insight into how the election will go, but according to former regulators, even if Biden gets elected, it seems unlikely the rule would get scrapped. According to a former regulator at FINRA, the SEC has both cultural and structural barriers to overturning the rule. The SEC is run by a group of five commissioners, no more than three of whom are allowed to be from one party at any given time. Furthermore, while the White House does appoint a head of the commission, the group likes to set its own fresh agenda, and therefore largely sets its own objectives. According to Thomas Selman, a former vice president for regulatory policy at the Financial Industry Regulatory Authority, to “reverse it right away, it's just not something they have an appetite for”.

FINSUM: No one is certain how this will play out. However, in our view the most likely path is not getting rid of the rule, but rather much stricter enforcement of it. The rule itself leaves much to enforcement discretion, so that seems an easier avenue than scrapping and re-creating a new rule.

(New York)

Any advisor can tell you that while Modern Portfolio Theory (MPT) has a lot of strengths, it also has many shortcomings as it relates to investor psychology. For instance, Modern Portfolio Theory asserts that multiple aims can be achieved within the same portfolio, but this does not mesh well with how investors think about money—where each account has its own life purpose. Secondly, risk is an area of major disconnect. Portfolio Theory looks at risk in terms of historical standard deviations of volatility, whereas humans think of risk in more life-relevant terms: what I my portfolio does earn enough to pay for my child’s tuition? This is where goals-based investing comes in, as it focuses on how portfolios can be constructed—and reported on—in such a way as to match investor psychology about the life goals they are trying to achieve.

FINSUM: MPT has been revolutionary for quantifying risk and return profiles, but for many it simply does not resonate on the “human” level needed for some advisors to motivate and connect with their clients.

(Washington)

Reg BI was technically implemented three months ago, but it is still a little bit of an unknown quantity. More than just the shortness of its tenure, the fact that the SEC has explicitly said it is going to be light on enforcement during COVID means the pace of adaptation and understanding has been slower. Well one interesting aspect is emerging—the rule seems to give brokers a huge legal advantage when they get sued. According to a panel of top industry lawyers, the “informed consent” part of the rule means that Reg BI essentially creates a buyer-beware trap for clients. This will make it very hard to prevail over an advisor in a dispute. According to a law professor at Georgetown “If you take the recommendation, that becomes consent … The commission uses words that will live a long time on the defense side. When there has been full and fair disclosure, informed consent is present where the customer affirms by accepting the recommended action”. The language of the rule is claimed to be so obtuse that most clients will never read or understand it.

FINSUM: This was hinted at by those that opposed the real, but the scale of the advantage for brokers is only now being realized. That said, the effectiveness of Reg BI will largely come down to enforcement, which will likely shift over time.