This commentary was issued recently by money managers, research firms, and market newsletter writers and has been edited by Barron’s.
THINK Economic and Financial Analysis
April 10: The U.S. consumer price inflation report showed prices fell 0.4%, month on month, in March, dragging the annual rate of inflation down to 1.5%. This was a touch weaker than the -0.3% M/M figure expected, with energy responsible for most of the decline—this component saw price falls of 5.8% M/M as gasoline prices began their long descent.…
We see further downside risk to inflation in coming months. Huge falls in energy prices will continue to feed through into lower retail gasoline prices, utilities, and other components, which account for around 8% of the index. Shelter, at 33% of the basket, is also likely to be weak.…
We hear the argument that the Federal Reserve’s “unlimited” quantitative easing is bound to eventually generate inflation, but we heard that after the Fed’s QE1, QE2, and QE3 programs. The key question is, will the money find its way into the pockets of consumers, or is it going to stay in financial assets? Last time, QE contributed to asset-price inflation, yet CPI remained stubbornly low, and, at least at this stage, we see little reason for it to be different this time.
These Sectors Could Be Winners
by Yardeni Research
April 8: Every sector of both the economy and the
index is suffering from the unfolding recession caused by the Great Virus Crisis, or GVC. But unlike the Great Financial Crisis, the fiscal and monetary responses have been immediate and unprecedented this time. The scale of the stimulus is so huge that Melissa [Tagg] and I call it “B-52 money.” Bazooka and helicopter analogies seem so yesterday and puny.
The biggest losers of the GVC are getting lots of government support, particularly the airlines and small businesses. Cruise lines are mostly out of luck. So are auto manufacturers and dealers, as well as home builders. Now, consider some of the potential winners within the S&P 500 sectors:
1) The health-care sector is full of overwhelmed companies. But that’s good for their business, and the government is pouring tens of billions of dollars into the sector.
2) In consumer staples, bricks-and-mortar nonfood retailers and restaurants are hurting, but online retail sales are booming. Grocery and drugstores can barely restock their bare shelves fast enough to meet demand.
3) In communication services, theaters and amusement parks are closed, but video streaming services are streaming as never before.
4) In the information-technology sector, demand for home-office technologies is booming, along with traffic on the cloud.
5) Congress is working on another stimulus package, which may include infrastructure spending, benefiting the industrials.
Dividend Stocks Disappoint
U.S. Focus: Equities
by Ned Davis Research
April 8: One advantage of dividend stocks is supposed to be that they hold up better during periods of market weakness. That hasn’t been the case this cycle. Dividend payers have underperformed nonpayers. Not only have nonpayers outperformed, but the highest yielders have underperformed the lowest yielders.
We see four reasons that dividend stocks, and high yielders in particular, have underperformed. First, investors have feared dividend cuts. Over the long run, companies that have cut their dividends have underperformed.
Some stocks have high dividend yields for a reason: Investors don’t believe that the dividends are safe. Sector analysis implies that may be the case now. Since the Feb. 19 high, the highest-yielder group is dominated by energy, consumer discretionary, and financial stocks that are most vulnerable to cuts.
One way to measure whether dividends are safe is with the interest coverage ratio, or earnings before interest and taxes divided by interest expense. A higher interest coverage ratio implies a lower risk of default. Across all 11 sectors, dividend-paying stocks in the highest quartile by interest-coverage ratio have outperformed stocks in the lowest quartile since Feb. 19.
One of the clearest signs of confidence that a management team can give investors is to grow its dividend. Dividend growers have outperformed other S&P 500 stocks, and with a higher Sharpe ratio. The fastest dividend growers have outperformed the slowest growers by 665 basis points [6.65 percentage points] since Feb. 19. We continue to prefer dividend stocks that are growing dividends and have strong balance sheets and interest-coverage ratios.
—Ed Clissold, Thanh Nguyen
Time to Sell Bonds
The Aden Forecast
by The Aden Forecast
April 8: There’s a good chance that the huge, mega bull market in bond prices that started almost 40 years ago may be coming to an end. That’s one good reason, among many, why we recommended selling your U.S. government bonds. This also goes for foreign bonds, corporate bonds, junk bonds, and basically any bonds. The global situation is precarious. All bonds have become more risky. So it’s best to stay on the sidelines, at least for the time being. Plus, our technical indicators are reinforcing this.
Bond prices have risen too far, too fast. They’re overextended, which means they’re due for at least a good-size downward correction. But it could end up being much more than that. If inflation eventually takes hold, bond prices could get hammered. They could stay under downward pressure in the years ahead, simply because inflation is the bond market’s worst enemy. And with money-creation running full speed ahead, this is indeed a possibility.
—Mary Anne Aden, Pamela Aden
Volatility Anomaly Bodes Well
by The Leuthold Group
April 7: A rare situation currently [is] evident within the financial markets. The stock market’s
volatility index remains near its 99th percentile since 1990, but the bond market’s MOVE volatility index has recently collapsed and is now lower than 84% of the time. This combo—a very high VIX with a low MOVE—has historically happened less than 10% of the time.
Moreover, when stock and bond volatility has been this diverse—stock vol very high, with bond vol below average—stock market returns have typically proved to be superior. When financial-market volatility is in the state it is currently, although the stock market has tended to be about 22% more volatile (i.e., the standard deviation of returns is about 21.4% versus 17.5%), the average annualized price performance of the S&P 500 has been [an] almost 21% gain compared with only a little more than 7% the rest of the time.
Who knows what the next several weeks will bring for the stock market? A retest of its March lows? A new crisis low? Or a surprising grind higher? Nonetheless, facing such uncertainty with a rare VOL anomaly has historically proved comforting for the stock market.
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