This commentary was posted recently by fund managers, research firms and market newsletter writers and was edited by Barron’s.
Global investment strategy
November 19: In previous reports, we have argued that inflation in the United States and, to a lesser extent, other major economies would follow a ‘two steps up, one step down’ trajectory with highs and lows. higher lows.
We are currently near the top of these two steps. The pandemic has ushered in a major reallocation of spending from services to goods. U.S. inflation is expected to ease over the next six to nine months as demand for goods slows and supply chain disruptions ease.
The respite from inflation will not last long, however. The labor market is heating up. So far, most of the wage growth has occurred at the bottom of the income scale. Wage growth will broaden in 2022, paving the way for a price-wage spiral in 2023.
We doubt whether fiscal or monetary policy will tighten quickly enough to prevent the emergence of such a spiral. As a result, US inflation will surprise significantly on the upside.
Disturbing change in China
Cumberland Advisors Market Commentary
November 19: In China’s new financial regime, a personal contribution required to resolve a debt problem is now the norm. This new standard exists whether or not it was originally agreed upon. here is the proof [from caixinglobal.com]: “Evergrande Chief borrows $ 105 million against Hong Kong properties.”
Where it leads, no one knows. But it is a change of regime, now applied in the second largest economy in the world. And it applies retroactively to the big actors, who will bow to it because they fear for their safety (maybe their life?). In the financial world, a retroactively applied personal guarantee is a new thing to contend with. It’s like playing checkers with your “must jump” rule and finding the modified rule in the middle of the game.
This means that the conditions for borrowing and using debt and indebtedness are also profoundly changed. The same goes for credit debt analysis. Maybe China will be better in the long run to initiate such discipline, but right now it is administering a shock. We expect more difficulties in Chinese capital markets and with companies that have used U.S. financial markets as sources of capital. We are underweight China in our portfolio of international equity ETFs. We remain cautious about investing there.
Why Powell is the logical choice
Weekly Washington Policy Update
November 19: We still believe the odds are slightly favorable for Federal Reserve Chairman Jerome Powell to be reappointed for another term, although we fully admit that the outlook for Fed Governor Lael Brainard appears to have improved, to both among our contacts and in the prediction markets. In our opinion, the re-appointment of Powell is a logical step for the following reasons:
While both Powell and Brainard would almost surely get Senate confirmation, Powell would go through the process and gain bipartisan support.
Progressive opposition to Powell has been relatively small and rambling.
Powell’s re-appointment could provide minimal political cover to advance the nominations of more progressive candidates to the board of directors and vice-president.
Even though Powell and Brainard appear to have similar views on monetary policy, we believe markets would welcome the continued leadership that comes with a second term for Powell.
One of the phrases you hear most often in Washington is “people are politics”. This maxim holds true across government, but particularly with the Federal Reserve, given its centrality in the global economy. In this vein, we firmly believe that the White House will use its remaining nomination opportunities to advance progressive choices that will prioritize full employment. While discussing open seats on the Federal Reserve Board, we heard the following names mentioned: ECA President Cecilia Rouse, AFL-CIO Chief Economist William Spriggs, Professor Lisa Cook and the economist Seth Carpenter. In recent days, Roger Ferguson’s name has also resurfaced.
Growth trumps value
Views of the house
Truist Consulting Services
November 16: In line with our sector strategy, where we have improved the technology sector, the largest sector of the growth style, we are improving our view of the growth style, relative to value, to Neutral from Less attractive.
The technology has been much stronger in our quantitative work, and its price relative to the wider market recently exceeded the trading range it has been in since September 2020. The consumer discretionary sector, which is the second largest in the growth index, also shows strength in our work.
While we still have a favorable view of cyclical sectors, such as financials and energy, the
S&P 500 Value Index,
our main value benchmark, has a greater weight in defensive sectors, such as consumer staples and utilities, which are registering new low prices relative to the market and where we are underweight in our strategy sectoral.
As a result, the value index does not fully reflect the cyclicality we favor, given that we believe the fear of third quarter growth is in the rearview mirror and the US economy is poised for some positive surprises. This is also another reason why we prefer US small caps, which are more exposed to cyclicality and less exposed to defensive sectors.
Favor fixed income securities
Weekly Market Commentary
Winthrop Capital Management
November 15: Interest rates continue to rise and spreads on riskier assets remain tight. Interest rates have risen more than 60 basis points, as measured by the yield on the 10-year US Treasury, since the start of the year. This has put pressure on the performance of most fixed income asset classes as the total return of the Bloomberg US Aggregate Index is down 1.80% year-to-date.
In addition, investment grade credit spreads have tightened by 10 basis points since the start of the year. With credit spreads trading at historically tight levels, real inflation-adjusted interest rate returns are negative. We expect this phenomenon to persist until next year as the inflation rate remains high.
Given these challenges, the fixed income asset class still plays a vital role in a diversified portfolio asset allocation. Over a 30-year cycle, fixed income securities are invariably the best way to diversify a portfolio and manage performance through volatility in the capital markets. Long-term and short-term correlations between equity and fixed income markets remained negative. With stock market valuations at historically high levels, our assumption about expected returns is significantly lower and portfolio diversification is extremely important.
We are in the process of reducing the large cap growth allocation in the portfolios and adding value-based strategies. In addition, we use short term fixed income strategies in our asset allocation to further protect our portfolios from interest rate volatility. Although the expected returns may be lower, these fixed income strategies should protect capital and offer better protection against rising inflation than general market strategies over the medium term.
—Gregory J. Hahn, Adam Coons
E-mail: [email protected]