(New York)

The S&P 500 and most major indexes have been fairing poorly very recently. However, that presents a major opportunity, says Morgan Stanley strategist Michael Wilson. Morgan Stanley says that as the market declines, now is a great time to shift out of growth stocks and into value. Growth stocks’ forward earnings multiples versus value stocks do not merit further outperformance, so its seems likely that value stocks may start to shine. Energy, industrials, and financials value stocks seem a smart choice, says MS.

FINSUM: This makes sense to us. As economic growth starts to taper, the big valuation gap between growth and value stocks seems likely to fade, meaning the latter should outperform. But then again, that would go against a decade of momentum, so it is a dicey bet at best.

(New York)

One of the largest banks on Wall Street has just gone on the record calling for a major equity market firestorm. In an unusual move, Citi questions the recent rise in stocks and contends that things may unravel quickly. “It may be that easing trade tensions and China’s policy response are comforting investors, but the move has the hallmarks of herd instincts at work”. Citi continued, “riding the tailwinds of easy policy and fiscal stimulus, but these drivers are failing. Meanwhile storm clouds are gathering and risks look biased to the downside”. Goldman Sachs seconded the views, saying that market gains had been too narrow and would lead to “large drawdowns”.

FINSUM: It has been quite puzzling that stock prices have moved higher and higher even as the trade war was looking worse and worse and the Fed continued to be committed to its tightening path. Sharp reversal coming?

(New York)

Investors may need to be very worried about stagnant bond yields. After many weeks of pause, bond yields finally look set to move higher. The ten-year Treasury is approaching 3% and as the good market mood and good economic news continues, it seems there could a surge higher in yields. European yields have also been moving sideways for some time. Improving trade relationships, great earnings, and good economic data mean that the bond market may react all at once in the near-term.

FINSUM: This is an interesting argument—bond yields have been quite stagnant despite good news, and they may ultimately react all at once. Seems plausible right now.

(Chicago)

Barron’s has put out an interesting article outlining a key correlation in the muni market. We thought it was worth some coverage. A new study out of the University of Illinois has found that muni bond yields tend to lose when local newspapers shut down. Local media often keep local government spending in check and work as a balance on corruption and mismanagement. A multi-year study of the muni market found that yields tended to rise when these papers shut down. The authors summarize “The loss of monitoring that results from newspaper closures is associated with increased government inefficiencies, including higher likelihoods of costly advance refundings and negotiated issues, and higher government wages, employees, and tax revenues”.

FINSUM: This makes perfect sense to us. The problem is that local newspapers have a bleak future at the moment, so the hopes of them serving as a watchdog in the future looks highly unlikely.

(San Francisco)

Last week’s nosedive in Facebook shares was nothing short of historic. Twitter followed close on its heels. The big question for investors is whether these flops signal anything about the greater market, or were they just idiosyncratic falls? The answer is that they may. Stocks are very concentrated at the moment, with a small group of tech stocks—the FAANGS—driving the gains. Therefore, losses in that group could drive down the whole market, and even be seen as a bellwether. Today’s concentration is roughly on par with 1999, but differently, all the leaders are in the same sector—tech, making the market more vulnerable. Because tech companies are also the engine for growth, their predicted expansions make up an even larger share of forecasted earnings growth than their current market capitalization.

FINSUM: We see the point of this argument, but we do want to point out one important caveat: the word “tech” itself. We use that term very liberally today. While it is easy to say the concentration is dangerous because all the constituents are “tech”, Amazon, Apple, Facebook, and Netflix are all very different businesses, so perhaps not as intercorrelated as “tech” would indicate.

(New York)

The S&P 500 just recently emerged from its longest correction period in over 30 years. The big question is what will it do next. Well, there are a number of key issues/events that could either send it tumbling again, or push it higher. Three are easy to see on a timeline: this Friday’s jobs report, a Fed policy meeting, and another week of corporate earnings (140 companies in the S&P 500). There is also the looming trade war/tariff issue that could threaten the market, or support it, at any time.

FINSUM: Look out for the jobs report this Friday. There is going to be very high expectations, and if things don’t go as planned, the market could have a seriously adverse reaction.

(New York)

A 7% yield admittedly sounds attractive. However, what if it comes from a shipping company, and at the beginning of a trade war no less? That must be crazy. Think again, says Barron’s. The company is Triton International, which is the largest shipping container lessor in the world, owning 3.5m containers. It is a highly experienced operator and has 26% market share. However, worries over a trade war have hammered the stock, which is down 18% this year and trading at just over 7x earnings. Fears of how a trade war might affect its business look overblown and a fair market valuation for the company seems about 40% higher.

FINSUM: So this is a bet that the market will reevaluate the stock’s business model and see it is not that vulnerable. Sounds like a risky bet to us, but a 7% yield is nice cushion.

(Miami)

Bad news continues to mount in the real estate market. While commercial real estate is seeing big players move out as prices are rich and inventory plentiful, residential real estate has been healthier but is just showing the first signs of strain, with inventories rising and home sales dropping. Now, more bad news. New data shows that foreign investment in US real estate is dropping quickly. In the year ended in March, sales of US homes to international buyers dropped 21% to $121 bn, the biggest ever annual drop. The drop will mostly affect high-priced US destinations like New York, San Francisco, and Miami, where foreign buyers account for a much larger percentage of the overall market, especially at the high end.

FINSUM: The bad news is starting to pile up for real estate. One wonders how a downturn might play out. Given that lending for residential real estate has been modest compared to pre-Crisis, we don’t expect this to be a grave correction.

(Istanbul)

Emerging markets have had a rough year, with many major indexes, including in China and Brazil being in or near bear markets. This has led to a great deal of anxiety over the direction of assets, both stocks and bonds, in EM nations. Well, July may be the start of a new phase, at least according to Goldman Sachs. The bank says the emerging markets have hit their bottom and are now poised for a rally. Goldman reminds investors that big asset price moves in EMs are not uncommon, and that this year’s losses are quite ordinary.

FINSUM: The big question here is whether EM equities or credit are a better bet at the moment. Looking historically, credit seems to have a better risk/reward proposition when getting in early in a rally.

(New York)

The Wall Street Journal has put out an article painting an interesting, and perhaps realistic, view of how the trade war might play out. Their argument is essentially that the market itself will stop any trade war from becoming too serious. The WSJ says it best, “If the Trump trade war starts to squeeze economic growth, markets will react badly. When this happens, the impatient American president will have no choice but to declare victory, call off the war, and limit the damage”.

FINSUM: We tend to think this view is probably correct. That said, these kind of tariff wars can have unintended consequences that could make the damage more extensive and permanent than it is currently easy to foresee.