(New York)

Negative bond yields dominate the globe, and US yields are headed inexorably lower. The bond rally that has unfolded year is hard to over-state, with the 30-year Treasury at an all-time low. However, all those gains look likely to reverse sharply, as signs are on the horizon that US inflation is about to jump. The trend in CPI looks likely to show a bump after a series of lower annual highs. The movement is exactly the same as the one that preceded gold’s big jump this year. According to the data, CPI looks likely to rise to 2.5%, which would virtually eliminate the possibility for negative yields on the 30-year bond.

FINSUM: While calling higher inflation is a dangerous game in the post-Crisis world, the general analysis here is reflective of the fact that yields are way too low for how healthy the economy looks in data.

(New York)

Bank stocks are probably not a good bet right now. They suffer when rates fall and they are quite exposed to economic slowdowns (in other words, ignore the new idea that banks are safe dividend producers like utilities). However, there are some banks and financial stocks that look likely to win in the near- to medium-term. Three names to consider: JP Morgan, Amex, and Discover. JP Morgan is basically just a very healthy bank with increasingly competitive pricing which looks likely to grow EPS nicely over the next few years. Amex is an interesting pick because it has a very high quality customer base, and its unique charge card revenue base is not so exposed to falling interest rates, making it much more defensible in a low rate/recession environment.

FINSUM: The Amex pick is quite unique. Their customer base is higher end, so less affected by recession. And their unique revenue model (for a card company) means they have lower interest rate exposure.

(New York)

This is a tough market. Stocks are right near all-time highs and bond yields are near all-time lows. So how can an investor find steady current income and keep the door open to capital appreciation? Enter an underappreciated asset class—convertible bonds. Often referred to as “equities with training wheels”, convertible bonds have a lot of the upside of stocks due to their conversion feature, but also the downside protection of bonds because of their income feature. According to a convertible fund manager at Franklin, “You don’t get all the equity upside, but you can only fall so far because you have the downside protection of the bond”. Look to find converts with 7% of the equity upside of stocks, but only 50% of the downside risk.

FINSUM: Converts have actually outperformed a 60/40 balanced portfolio historically (by almost 2% per year with a similar level of volatility!). Some funds to look at include FISCX, PACIX, and AVK.

(New York)

Stop worrying so much about the US economy. That is what Bank of America is saying. The bank’s CEO went on the record yesterday explaining the simple reason that the US will avoid a recession. That reason? US consumer health. Moynihan cited internal statistics from BAML that showed that consumer spending has risen almost 6% in Bank of America accounts in the last 12 months versus the previous 12 months, showing that consumers are healthy. Consumer spending makes up 68% of the US economy. Moynihan was dismissive of the yield curve inversion, saying it is likely just a product of an influx of money because of negative yields elsewhere.

FINSUM: Bank of America is the largest US deposit holder, so it has an unparalleled insight into consumer spending. We think this is quite a positive sign.

(New York)

It is finally happening—riskier junk bonds are seeing outflows as investors shy away from the lowest rated credits. Junk bonds have been coated in Teflon for the most part, with the riskiest bonds rallying for several months. But recently, alongside recession fears, investors have been more anxious about how such credits might fare in a downturn. Accordingly, spreads between CCC-rated bonds and BB-rated bonds have jumped to 8%, the highest level since 2016. 

FINSUM: This makes a lot of sense, and is one of the more logical moves in the high yield market we have seen in some time.

(New York)

The muni market has traditionally been a safe haven for investors seeking steady returns. However, things are beginning to change. The huge drop in yields is fueling some very risky behavior in certain corners of the muni bond market. With yields on even the riskiest munis down to about 4%, highly speculative borrowers, such as those building risky mall developments or far-away housing projects are raising muni money through governmental agencies.

FINSUM: Investors need to look out for these kind of deals. However, what could be more troublesome is how they will inevitably end up in many popular funds without investors even having awareness of them.

(New York)

Vanguard made some headlines earlier this month when it re-opened one of its long closed-to-new-investors dividend funds (VDIGX). However, it was not the only fund to reopen, as a whole suite of Vanguard dividend funds are once again available. The funds come in two flavors, active or passive. VDIGX is actively managed and has the best one-year return, but it is almost the most expensive. Check out the firm’s VIG fund (Dividend Appreciation), which has a 11% one-year return and charges only 6 basis points.

FINSUM: This whole suite of funds has a good track record and some have characteristically low fees.

(New York)

What is the biggest risk to the equity market right now. Is it a recession? Is it a trade war? Neither, it is something much more mundane—earnings, at least according to John Hancock Investment Management. Analysts, and the market by extension, are expecting big earnings growth in 2020. And we mean big—the average analyst estimate for S&P 500 earnings growth is 10.5%. That seems like a huge number given that earnings growth in 2019 is set to be only 1%, and has been flat for a couple of quarters. It is made even more unrealistic by the direction of the economy. John Hancock says that defensive sectors like utilities, pipelines, and electricity grids should hold up best in the possibly forthcoming recession.

FINSUM: 10.5% earnings growth in 2020 sounds frankly laughable right now. That said, the market can adjust to these kind of expectations fairly fluidly, so a downturn in expectations may not wound equities all that much.

(San Francisco)

Tech stocks are going to hold up to the next recession in very different ways. Some will prove quite defensible, while others will be wounded badly. On the defensible side, analysts contend that Google, Facebook, Twitter, and Expedia should do well. The core tenet of this argument is that digital ad spend will likely remain robust, keeping their revenues from dropping off too much. However, smaller companies like Cardlytics, Revolve Group, and Quotient Technology seem as though they may be wounded badly. Netflix might be the biggest overall risk, however.

FINSUM: Netflix is the most interesting name to discuss here. So is that ~$12 per month for Netflix a discretionary spend that consumers will cut back on in a recession, or is it now a staple? The answer to that question will decide its performance in the next downturn.

(New York)

Name the two main factors which drove this decade-long bull market. Ours would be the Fed’s easy policy, and huge levels of corporate buybacks. Well, that second one, which has inarguably been at least a core pillar of the bull run, is ending. Companies are pulling away from share buybacks, lessening one of the big price drivers for the market. Buybacks have slipped alongside the market’s trouble, as companies are no longer stepping in to buy shares, sending buybacks to their lowest level in 18 months.

FINSUM: Do you remember the earnings recession that occurred for a few years during this bull market? Buybacks are what kept prices afloat.