(New York)

Ever since the stock market’s then peak in January 2018, bonds and stock have had a very close relationship. Equities have been tracking the performance of the investment grade bond sector. When yields rose late last year, stocks plummeted. The opposite is happening this year, and in that change lays a predicament for shares. Yields have fallen so deeply this year, and equity prices risen so high, that it appears unlikely stocks can rise much further as the benefits of lower rates have already been fully priced in.

FINSUM: While we are generally incredulous of these types of arguments, we cannot help but feel a confluence of circumstances (an earnings recession not the least of them) are coming together in such a way that equities seem likely to have a correction.

(Houston)

Oil prices are going to get some support as OPEC is planning to cut its output. That won’t be welcome news to those at the pump this summer, but it is good for the oil industry. Within the cuts, there will be winners and losers. One big worry is that the cuts won’t even work because there is still too much production from the US and because the primary fears are on the demand side, not the production side. The key is to buy oil stocks that can thrive in a low price environment and deliver improving returns to investors. These include EOG Resources, Suncor, Pioneer Natural Resources, NRG Energy, and Delek.

FINSUM: Oil stocks are deeply out of favor right now, so this is quite a contrarian call, but given the catalyst of OPEC cut they may be a solid bet.

(New York)

Investors need to take note, as one of the biggest equity research divisions on Wall Street has just turned overwhelmingly negative on equities. And this is not the “stocks will struggle in coming years” kind of call, it is an argument for right now and published yesterday. The bank has lowered its allocation to stocks, saying that the outlook for markets over the next three months is very poor. Morgan Stanley says equities prices are way too high and expectations for major rate cuts are already priced in, leaving little room for appreciation. They also think valuations are too high given deteriorating manufacturing and economic data.

FINSUM: Morgan Stanley is basically saying that the market is primed for disappointment because all the positive outcomes have already been priced in. Not unrealistic.

(Washington)

Donald Trump’s surprise victory in 2016 was preceded by a nice run-up in markets, and the same thing seems to be happening right now. The market’s continued rise appears to point to an underlying confidence in the economy, and the more it goes up, the more out-of-touch Democrats’ negative attacks on the US economy and society may seem to voters. “The markets are starting to embrace the idea that Trump wins reelection. Most of the people in the markets don’t like him personally, but they like his policies”, said a veteran fund manager at AGF investments.

FINSUM: We have to agree with the assessment that a continued rise in the economy and markets would not be favorable to Democrats’ chances.

(New York)

A lot of of investors don’t really know what to do with Wall Street equity research. While certain analysts are very insightful, the misaligned interests and intentional underestimation sometimes make it hard to separate what to listen to from what to ignore. However, there is a clear way to make purchases based on Wall Street forecasts—when there is a heavy consensus on a stock, buy it. The key signals to look for are when price targets are similar across all analysts, and when all are saying “overweight” or buy. Such occurrences are not as common as many might think, but they are very potent when they do appear.

FINSUM: This makes some sense as equity research analysts are a reflection of the general sentiment amongst institutional investors. If all seem to be positive, then the underlying feeling on that stock is bullish.

(New York)

Gold just took the jobs report on the chin. As our readers will know, the US jobs report from Friday was nothing short of stellar, with the job creation numbers blowing away all expectations, and in doing so, lowering the odds and potential pace of Fed rate cuts. That led to a big sell-off in gold on Friday that followed an even larger one Monday. Gold lost almost 4% over just two days last week.

FINSUM: The jobs report simultaneously sapped gold of the fear boost it gets from worries about the economy, as well as the potential benefit of lower rates.

(Washington)

Will the US and China make a substantial trade deal? That is a trillion Dollar question for markets. Some argue that China may defer doing any deal and take the risk that Trump does not win the election, effectively letting the clock run out. However, an astute view is that China might be desperate to do deal while Trump is still in office. The reason why is that if Trump were to lose to a Democrat, who in all likelihood would be a more conventional US president that takes a much friendlier approach with international allies, then China would be in a very compromised position. A Democratic president would likely approach the Chinese trade deal with a much more united front of trade allies, which would be a worst case scenario for Beijing.

FINSUM: The irony of this is that Trump has been by far the hardest president on China in memory, but at the same time, the Chinese have the best chance at a good resolution by dealing with him.

(New York)

The yield curve inversion has largely faded from headlines. Things that become the status quo often do! But in that development lays a hidden but worrying truth—the longer the yield curve is inverted, the more likely it is that there will be a recession. The inversion has been in place for over a month now and it is actually getting worse, with long-term yields continuing to drop. A yield curve inversion has proceeded every US recession in the last 50 years.

FINSUM: If the Fed proceeds with cuts, it seems like the inversion may abate. But then again, the rate cut would be an implicit admission that we are on the way to a recession.

(Chicago)

There is no arguing it, small caps have had a rough year. While the S&P 500 is up 9.4% from a year ago, the SmallCap 600 is down 8.4%. The divergence has been surprising to many, as several macro trends appear favorable for small cap appreciation, such as the trade war. However, for small caps to really get wind in their sails, things needing to be looking up in the economy, which seems unlikely in the short term. Therefore, one of the best ways to bet on size in your portfolio is to buy a specialized fund like the iShares Edge MSCI USA Size Factor ETF, which holds stocks in inverse proportion to their size. The smaller the stock, the greater its weight in the fund, helping investors skew towards small stocks, but not totally away from larger ones. The fund has outperformed the S&P 500 this year.

FINSUM: This is a very specialized angle, but does make some sense. We agree with the assessment of small caps right now—the underlying economy is not favorable for small cap bullishness.

(New York)

Here is a data signal most of the market is not paying attention to when it comes to recession forecasting: nationwide capital expenditure, or Capex. Morgan Stanley’s index of capex has shrunk to its lowest level in two years, as the high from the Trump tax cuts wears off for companies and they tighten purse strings. Capex growth is likely to weaken from 11% last year to just 3% this year. According to the deputy CIO of State Street, “Low capex growth is very worrying … You’re starting to see the trade tensions and the macro growth concerns play out in business confidence — companies won’t open a new factory if they think we’re on the cusp of a recession”.

FINSUM: This is a worrying sign but not wholly unexpected given the waning benefits of the tax cuts. However, even though this is expected, it does not mean it won’t hurt the economy.