Opinions on Stocks Diverge – Safe Bet? Or Lost Cause?

There were a couple of headlines that caught my attention on Tuesday morning and they seemed to be polar opposite theories regarding stocks. The first headline was from Yahoo Finance and it read, “Stocks a ‘no-brainer’ even without a trade deal.” The second headline was from Bloomberg and it was from a video on the network, “There Isn’t Much Upside From Here in Markets, Says Deutsche Bank’s Huynh”.

Still, a third news item got my attention while watching Bloomberg this morning. Bill Gross, the former head of Pimco, has launched his own website after retiring from Janus Henderson earlier this year. He issued his first investment outlook since leaving Janus Henderson and he used the title of “The Fixx”. Ironically The Fixx had a hit with the song Saved By Zero in 1983.

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Looking back to the first headline, the comment “no-brainer” was plucked from a note to clients from Savita Subramanian and the equity strategy team at Bank of America Merrill Lynch. What the headline failed to mention is that the note went on to say stocks remain a “no brainer” relative to bonds.

The team from BAML went on to note that the dividend yield of the S&P 500 is greater than the yield on the 10-year treasury notes. The yield for the S&P is at 1.93% while the yield on the 10-year is at 1.73% at this time. It first exceeded the 10-year back in August, but it remains higher today. According to BAML, such occurrences have been very bullish for stocks. In 94% of past cases where the S&P yield exceeded the 10-year, stocks outperformed bonds by an average of 23 percentage points in the following 12 months.

The second headline came from an interview on Bloomberg with Tuan Huynh, Emerging Markets Chief Investment Officer for Deutsche Bank. “From our perspective, we don’t really see much further potential,” Huynh stated when asked if stocks had peaked for this year. He went on to state, “We think there isn’t much upside from here,” and encouraged investors to lock in some gains and look at emerging market bonds as an alternative to developed market bond markets.

As for the Bill Gross story, the legendary investor pointed to the huge drop in the 10-year yield as a major catalyst for stocks this year. He estimated that it has boosted stock prices by 15% in 2019. He went on to warn investors, “prepare for slow economic growth globally and an end to double-digit market price gains of months and years past.”

Personally, I am leaning toward the cautious side with Mr. Huynh and Mr. Gross. I do think there are opportunities with specific stocks and with specific industries, but I think the overall market will struggle over the next 12 months. Even if we get a trade deal between the U.S. and China, that isn’t going to jumpstart the global economy all of a sudden. It will certainly help, but I can actually see a deal potentially marking the crescendo for the market. Many investors have remained in the market for fear of missing a rally induced by a trade deal and once a deal is actually reached we could see investors start selling into the rally.

We might not necessarily see a huge bear market in the next year, but I just don’t see the S&P registering double-digit gains. There will be companies that have strong earnings and revenue growth, solid ROE and profit margin numbers, and maybe a little pessimism pointed at them—those are the companies that will see strong stock performance for the coming year. At least that is my opinion, but those are the types of opportunities I am always looking for. It might just be a little harder to find such companies in the coming year if the global economy continues to slow.

If I am correct about how the overall market does in the next year, it will be interesting to see how investors react. There has been a big movement toward index investing in the last few years with passive investment management growing in popularity with active management declining in popularity.

About Rick Pendergraft

Rick has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick’s analysis process includes fundamental, sentiment and technical analysis. Rick started college as an education major, wanting to teach economics, but eventually changed to majoring in Economics and received a Bachelor of Science in Economics from Wright State University. His desire to inform and educate people is at the heart of his writing.

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