(New York)

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.

(Beijing)

This story is not getting much attention in the US, but we thought it too big to ignore. S&P Global, one of the world’s leading credit raters, just announced that a “debt iceberg with titanic credit risks”. S&P says that China has seen a massive rise in borrowing by its local governments, much of it hidden from view, and the the excessive borrowing poses grave risks. The ratings agency says there is between $4.3 tn to $5.8 tn of off-balance sheet debt held by local governments following “rampant” borrowing. The debt is hidden is what are called “Local government financing vehicles” (LGFVs), which were entities used to raise debt before local governments were allowed to issue bonds in capital markets.

FINSUM: This is a pretty scary story that only the FT seems to be covering. It makes one wonder if LGFVs will be the acronym at the center of the next crisis.

(New York)

One of the challenges that all advisors are dealing with at the moment is how to handle rising rates and their affect on portfolios. There are good options out there for handling the challenge, like rate hedge ETFs, but within the efforts to defend against losses, there have a been a few hard-to-predict moves. One big surprise has been the performance of utilities stocks. Utilities generally lose when rates rise as their yields look relatively less attractive. However, utilities are outperforming the market, with a flat performance this month through Monday, and a 6% gain in the last three months. Explaining the gains, one fund manager says “'In a market like this, in a dramatic sell-off, the rotational effects will be higher than the interest rate effect”.

FINSUM: We sort of understand the safe haven status, but how does a rate-sensitive sector become a safe haven from rate-driven losses? Nonetheless, utilities stocks are doing well.

(Washington)

Investors need to be aware that big political news may be released any minute. That may not sound like much of a statement these days, but Bloomberg is reporting that Robert Mueller may release the findings from his investigations very soon. Bloomberg says Mueller is under immense pressure to release the findings of his probe or cease his investigation. He is especially under pressure to release whether he has found evidence of collusion between Trump and Russia and whether the president did anything to obstruct justice.

FINSUM: It seems likely that these findings won’t be released until after the midterms, but you never know if a politically-motivated early release right before the election might occur.

(San Francisco)

In what would likely come as the biggest IPO in recent memory, Uber says it is planning for a potential IPO in 2019. Parties close to Uber say that its bankers delivered valuation proposals for an IPO in the range of $120 bn. That is an eye-opening figure because it is almost double the company’s valuation from its most recent funding round 2 months ago. There are no guarantees the company will go public next year, but its CEO has said it is aiming for a public debut in the second half of 2019.

FINSUM: We do not think that valuation is out of the question given how much investor anticipation there might be for this IPO. The IPO market has been red-hot, so nothing seems out of reach.

(New York)

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.

(New York)

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.

(New York)

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.

(New York)

Want to maintain your portfolio’s income, but also afraid of rising rates? Many are, as it is a difficult challenge keep income high but not experience losses. With that in mind, here are a handful of mutual funds which should help do just that. One area to look for diversified income right now is in multi-asset income funds. Some of the best are the American Funds Income Fund of America (AMECX), the Vanguard Wellesley Income (VWINX), the BlackRock Multi-Asset Income (BAICX), the JPMorgan Income Builder (JNBAX), and the Principal Global Diversified Income (PGBAX).

FINSUM: Many of these funds are quite old and have had great performance. Fees are all over the map, but one of the areas where they tend to succeed is in having good performance with lower volatility than the market as a whole.

(New York)

By now one would have expected junk bonds to have experienced a large selloff. The sector already had a low spread to Treasuries, has mountains of fringe credits, and has been facing a period of rising rates. Yet, high yield has been performing very well, with the weakest credits, paradoxically, performing best. There has been no sustained flight out of the sector, and spreads are higher than at the start of the month, but still not even where they were for much of the year.

FINSUM: The big risk here is that investors aren’t being paid enough for the risks they are taking. The whole junk sector, not to mention the loads of BBB credits that are technically investment grade, are very susceptible to recession and higher rates. At some point there are going to be some major losses.