This commentary was issued recently by money managers, research firms, and market newsletter writers and has been edited by Barron’s.
Harry Katica Sectors and Stocks
June 12: I I though we were finished seeing 1,000-point moves in the
Dow Jones Industrial Average.
Those roller- coaster swings in March felt like an Olympic toboggan ride. Just when things were settling down, [Fed Chairman Jerome] Powell threw a hand grenade at investors, reminding markets that we are not out of the woods yet. This volatility could become a permanent fixture in the financial markets…
Thursday’s winners were the defensives, which have historically outperformed during the slowdown phase of a market cycle. Consumer staples and utilities offer stable growth and attractive dividends. Software, social media, biotech, and home builders are unlikely bedfellows, but they seem to do well when there are concerns about the economy.
The cyclicals took the biggest beating on Thursday. Declines of 7%-9% were suffered by industrials, materials, financials, and energy. With one wave of the pen, Powell wiped out two weeks of gains. These sectors may have further to fall if a second wave [of the coronavirus] causes further unrest. In my eye, there is solid support another 3%-5% down from current levels…
BMO Capital Markets
June 11: In 150 years of data, there has never been a recession that has spanned the globe to the extent of the 2020 version. The World Bank estimates that nearly 93% of the world’s economies will see an outright drop in GDP this year. To put that in context, just over 60% fell in 2009, and even in the early 1930s, the figure peaked at just over 80%.
That widespread damage also reflects amped-up globalization and openness from prior decades. One may well ask: Which economies may actually post “growth” this year? China, Vietnam, Bangladesh, Egypt, and Kenya, to name a few.
Bearish On the Dollar
UBS House View—Daily US
June 10: We see the U.S. dollar as vulnerable over coming months for three main reasons:
• Safe-haven flows into the U.S. currency are ebbing. Market confidence has been increasing over recent weeks that the worst of the Covid-19 crisis is passing. The
U.S. Dollar Index
(DXY) reached a peak of around 103 on March 23, at the same time as broad risk aversion reached its height and global stocks reached their lows. Since then, the DXY has fallen back to 96.
• The Federal Reserve has been the most aggressive of the major central banks in monetary easing. The U.S.’s interest-rate premium over other major G10 nations has been eroded during the course of the Covid-19 pandemic. At the start of 2020, the two-year Treasury yield was 215 basis points above the equivalent German bond. Now the gap is just 81 basis points, down from a recent peak of 320 basis points in November 2018. Meanwhile, the Federal Reserve’s balance sheet has grown by $3 trillion over the course of the pandemic, at least twice as much as the growth in the European Central Bank’s balance sheet.
• Political tensions have been rising in the U.S., with President Donald Trump coming under criticism for his handling of the Covid-19 pandemic and recent civil unrest. Recent polls are suggesting a win for Democratic presidential candidate Joe Biden. The resulting political uncertainty, specifically in relation to regulations and taxes, is also likely to weigh on the U.S. currency.
We are negative on the dollar, particularly if the outlook for recovery from the Covid-19 pandemic moves toward our upside scenario. We expect dollar weakness to be most pronounced against the pound and Swiss franc.
—Mark Haefele and team
Industrial Stocks Are Too Cheap
Causeway Capital Management
June 8: Is a dollar of earnings from a software firm that has yet to return capital to shareholders twice as valuable as a dollar of earnings from a global industrial conglomerate with over a century of brand-building and operational expertise?
Even giving technology firms full credit for their disruptive potential, we believe these differentials are unsustainably wide. We have been taking advantage of this market dislocation to add to capital-goods stocks and other economically sensitive companies. From a valuation perspective, it is perversely reassuring to hold securities that trade at Great Financial Crisis valuation troughs—or lower—but with more admirable characteristics, such as stronger balance sheets and more profitable business mixes than they had during the last recession.
Many industrial companies found themselves on the wrong side of the Covid-19 shutdowns, but adept managements aren’t letting this crisis go to waste. At many companies, managements are cutting costs, reorganizing operations, and employing automation tools that should allow them to reach high levels of efficiency. In the meantime, they are ensuring they have sufficient liquidity to weather a prolonged shutdown. Driving down costs makes a return to revenue growth even more profitable. Like a coiled spring, this expansion in latent profitability should ultimately warrant outperformance from quality cyclical stocks as economies reach recession lows and markets anticipate economic recovery.
The Fed Throws a Party
Portfolio Strategy Letter
Investment Research Associates
June 7: The recovery appears underway globally, and re-openings will add to the party. Markets are also looking at the lack of relapses of substance anywhere with regard to the coronavirus, which means reopenings can continue. And along with this combination of much better-than-anticipated news, markets are looking at and absorbing record levels of concerted global monetary stimulus that is more than twice as large as occurred during 2008-09 and growing, along with record levels of coordinated global fiscal stimulus policy that is far above 2008-09 levels and growing.
To many, massive quantitative easing and coordinated monetary and fiscal stimulus in 2008-09 produced the weakest economic recovery in U.S. history, but also one of the strongest asset bubbles ever. Right now that thought is overwhelming demonstrations in cities and nearly everything else. So if we double the size of 2008-09 stimulus efforts, we might get asset bubbles galore Part II—at least until and unless the virus comes back with force, or until and unless the unintended negative consequences of such massive reflation come home to roost.
Already we’re seeing a potential top in the bond market that bears watching, along with a dropping U.S. dollar that bears close watching, too. Gold and silver and commodity markets are picking up steam. Even Bitcoin is potentially carving a multi-year bottom that would break out above the $10,502 level. But these problems have some room to flare before they become big. For now, the Fed is throwing a record party, and most stocks and most country markets are participating.
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