This commentary was issued recently by money managers, research firms, and market newsletter writers and has been edited by Barron’s.
Make Room for Tesla
U.S. Investment Policy Notes
Dec. 23: On Monday, Dec. 21,
(ticker: TSLA) replaced
Apartment Investment & Management
(AIV) in the S&P 500. Tesla was added to the S&P 500 Automobile sub-industry index within the S&P 500 Consumer Discretionary sector. Since Tesla is now the fifth-largest company within the
by market value, sector weightings will change—one quite dramatically. In particular, the Consumer Discretionary sector grew by 13.6% from its Dec. 18 representation within the S&P 500 of 11.2% to the 12.8% exposure as of Tesla’s date of entry on Dec. 21. In order to make room for Tesla, all other sectors initially shrank from as little as 1.2% for energy, to as much as 1.9% for financials and materials.
Green Light for Bank Buybacks
Ivan Feinseth Market View 360
Tigress Financial Partners
Dec. 22: Late last Friday, the Federal Reserve announced the results of its second round of stress tests, allowing the nation’s largest banks to resume share repurchases in Q1 2021, subject to certain limitations, as long as Q4 results meet required levels. The sum of common dividends and share repurchases cannot exceed average quarterly reported net income throughout 2020. The good news is that strong banking results throughout this year, with feared loan-loss levels that never materialized, have helped improve banks’ profits, along with their currently cheap levels of valuation versus book value. Expectations are that the six largest banks could repurchase a total of $11 billion worth of stock in the first quarter of next year.
All the major banks gained yesterday on the news, along with many banks announcing new share repurchases.
(JPM) announced a $30 billion buyback. Morgan Stanley (MS) announced a $10 billion share repurchase. Both
(GS) said they would resume share repurchases next year. The news and announcements highlight the strength in the financial sector and a significant turn in business trends.
Don’t Fear Rising Bond Yields
The Leuthold Group
Dec. 22: The relationship between bond yields and the stock market changes dramatically, depending on whether the 10-year bond yield is above or below 3%. When bonds yielded higher than 3% (almost three-quarters of the time since 1900), the stock market did best when yields dropped (+11.7% annualized return), and struggled when yields rose (-0.2% annualized return).
Nevertheless, with yields below 3%, their impact is nearly the opposite. Stocks increased at just a +4.2% average annualized pace when yields declined from sub-3% levels (only one-third of the gain experienced when bond yields fell from above 3%), and amazingly, when yields climbed from sub-3%, the stock market rose at a +16.8% average annualized clip! Moreover, the frequency of monthly stock-market advances, when yields move up, is also shockingly different. The stock market rose 52% of the time when yields increased from levels above 3%. But, when yields rose from an initial level below 3%, the stock market moved up 68% of the time!
—James W. Paulsen
Dec. 21: We can now safely state that the current environment is the biggest stock-market mania in history, bigger than even the Roaring Twenties that ended in the Great Depression of 1929-1932 and, yes, even bigger than the fantastic tech mania that gripped the nation into the March 2000 peak. We can make this claim based on valuation measures such as Robert Shiller’s CAPE (cyclically adjusted price earnings ratio), now at 33.77, the second highest in history, and the S&P 500 P/E ratio at 37.38, also the second highest in history. In this case, we are ignoring the huge spike in the P/E that occurred in 2008 as earnings contracted precipitously. Neither the Roaring Twenties nor the fantastic tech mania can even remotely match the longevity of this period, despite the sudden and remarkable 27-session 38% collapse that began in February. This was certainly not a typical year!
The last two overly enthusiastic periods ending in 2000 and 2007 were both followed by the worst bear markets in decades, both down 50% from their peak. We are certain that a replay will occur. If our historical and long-tern technical studies pan out, stocks are headed for a 51.5% hit from last Friday’s peak.
—Alan M. Newman
Non-U.S. Stocks Look Alluring
The Market Strategy Radar Screen
Oppenheimer Asset Management
Dec. 21: The decline of the U.S. dollar this year has enhanced returns for U.S. investors in most foreign stocks and indices tied to foreign equity markets. In many markets, local currency returns are substantially lower than returns priced in dollars.
The dollar’s strength over the past few years had been derived from multiple factors, including the relative strength of the U.S. economy, the dollar as a safe-haven asset, and the favorable yield differential of U.S. Treasuries when compared with international sovereign yields.
In our view, the recent weakening of the dollar presents American investors the opportunity to buy foreign stocks ahead of what we expect will be both a domestic and global economic recovery as the world moves (with the aid of vaccines of efficacy) toward a post-Covid 19 environment.
While we can’t predict with any certainty that the dollar will stay at recent levels or even move lower from current levels, past history suggests that as the U.S. moves toward an economic recovery in a post-crisis environment, U.S. consumers’ appetite for imported goods and leisure and business travel to foreign destinations will likely boost foreign currencies, helping foreign countries—particularly those that are export- driven, and those that are U.S.-citizen travel destinations—move toward economic recovery and expansion at a faster pace, which in turn could boost foreign equity prices.
Bitcoin Heads Toward $50,000
Dec. 20: Over the three years since the late-2017/early-2018 bubble burst, cryptocurrency has come of age, with digital assets gaining acceptance from consumers and businesses, and increased interest from institutional investors and governments. So too are financial markets in cryptocurrencies coming of age—Bitcoin futures open interest is six times higher in 2020 than at the beginning of 2018, as a two-way market develops.
Headed into 2021, key fundamental drivers—asset diversification, rising rates and deficits, an incoming administration more sympathetic to the asset class, and newer investors’ comfort with technological innovation and greater tolerance of volatility, whether in stocks or cryptocurrencies—set the stage for Bitcoin to reach $50,000 next year.
—Julian Emanuel, Michael Chu
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