Massive sales in September reset investor expectations. Why this is good news for stocks.

Michael Nagle / Bloomberg


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This commentary was posted recently by fund managers, research firms and market newsletter writers and was edited by Barron’s.

Reset investor expectations

Market perspective
Truist Consulting Services
September 30: Stocks took a bumpier path in September, in line with typical seasonal weakness and our expectations. As October enters, the choppy waters are expected to continue, given the ongoing political feuds and the debt ceiling drama. That said, as we move forward later in the month, the seasonal environment should become more favorable. In addition, we are encouraged by a sharp reset in investor expectations for the economy, markets and cyclical sectors, including small caps.

Markets are about how data comes in relative to expectations, as opposed to whether the data is good or bad on an absolute basis. Our work suggests that this reset in investor expectations sets the market up for some positive surprises later in the fourth quarter. Thus, we would stay true to the main uptrend in the market and use any weakness over the coming weeks to position ourselves for further strengthening until the end of the year.

The dollar is falling

Equity Market Outlook
Neuberger Berman
September 29: The strategic decision to select stocks, sectors, factors, regions and asset classes that benefit from reflation or disinflation tends to be among the most important for performance over a 5 to 5 horizon. 10 years. Knowing whether we are in a bullish or bearish cycle for the US dollar can serve as a useful benchmark. A bear cycle implies higher US inflation and a bull cycle, lower inflation, relative to the rest of the developed world. So, bearish cycles of the US dollar tend to favor assets, regions, sectors and reflationary factors, while bullish cycles tend to favor more disinflation-oriented allocations.

U.S. dollar cycles have tended to run at a seven to 10 year pace, and we believe the dollar ended a nine year bull run in March 2020 and entered a multi-year bear market. Our view is supported by the International Monetary Fund’s gross domestic product growth projections, which predict a decline in the United States’ proportional contribution to global GDP from 2022, another dynamic historically associated with a weaker dollar. .

Since at least the early part of the 20th century, a weakened dollar and relatively higher US inflation have historically coincided with the outperformance of European stocks over US stocks and emerging markets over developed markets. Among US sectors, traditionally reflationary sectors such as materials, energy, industrials and finance have tended to outperform sectors such as consumer staples, health care and communications services. The pattern generally maintains itself outside of equity assets: a weaker dollar tends to coincide with an outperformance of gold over US Treasuries and industrial metals such as copper over gold.

The stars align for finances

Daily Insights
BCA Research
September 29: US finance has been among the best performing US equity sectors over the past three months. We expect these positive relative gains to continue.

Financials will benefit from the rise in US bond yields over the coming year. Not only are the higher interest rates positive for financials’ net profit margins, they also suggest a good economic outlook. While there are lingering uncertainties about the near-term economic outlook, we expect favorable fundamentals stemming from healthy household balance sheets and the need for businesses to replenish depleted inventories to propel economic expansion over a period of time. from 12 to 18 months. These favorable conditions will allow the Federal Reserve to normalize its economic policy. So bond yields will come under upward pressure – our fixed income strategists expect the 10-year Treasury yield to rise to 2.0% -2.25% by the end of the year. next.

Valuations are also a tailwind. The sector trades at a price to book ratio of 1.67, which is significantly lower than the broad market’s 4.67 and lower than the industry’s historical average valuation haircut. BCA Research’s S&P Financials / S & P 500 valuation indicator is consistent with this message and shows that the sector is deeply in undervalued territory.

We therefore favor an overweighting of financial stocks compared to the market in the broad sense. Given that financials are overrepresented in foreign stock markets relative to US indices, an outperformance of this sector would be a positive wind for European equities relative to the United States. In addition, our European investment strategists recommend that investors favor European banks over US banks, as the former trade at a steep discount.

Housing: no sign of a peak

The Harley Market Letter
The Harley Market Letter
September 28: The data source for residential real estate values ​​is the Case-Shiller House Price Index. This set of indices tracks the value of residential real estate in 20 metropolitan areas in the United States. [S&P CoreLogic Case-Shiller National Home Price Index] is published on the last Tuesday of each month with a two-month lag. Home prices in the United States are once again hitting new all-time highs.

The latest data, released today, reflect national home prices through the end of July 2021. [The Index rose 19.7% in the year that ended in July.] Nationally, home prices continue to accelerate at a breakneck pace. The price remains well above the 18-month moving average. The slope of the monthly price is at an angle hardly ever seen in modern times. My expectation of a major peak in house prices remains the period from November to December 2022. With interest rates close to their all-time lows and an economy running on government money borrowed in epic proportions, the technical foundations remain solid for a continued rise in residential property prices nationwide.

What to buy when yields increase

Blog
Heritage capital
September 27: I’m going to oversimplify and say that when rates are up and 1.4% to 1.75%, value is preferred over growth and cyclical sectors over defensive. When returns are between 1.4% and 1.15% and not increasing, growth is preferred over value and technology with defensive sectors is preferred.

Additionally, when long-term bond yields as measured by 10-year T-bills fall, the market focuses on slower growth, but not necessarily slow or negative growth. In this environment, promising sectors, such as technology, are very favored. Otherwise, sectors that are doing well when the economy is growing rapidly are favored. These would be finance, materials, industry and energy.

Mad Market Math

Overview and comments
Washington Passage Advisors
September 27: The combination of accelerating growth, near zero interest rates and soaring profits is not lost in the market. The total value of US stocks now exceeds $ 51 trillion, an increase of $ 16 trillion from a total valuation of $ 35 trillion before the pandemic. To put the current $ 16 trillion advance into a deeper perspective, remember that it took over 200 years – from the creation of the first American stock exchange in 1790 to just before the financial crisis of 2007 – 09 – for the US stock market to create $ 16 trillion in value. . The post-pandemic rally is notable because of the size of the gains and because the gains occurred during a recession and a global health crisis.

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About Robert Valdivia

Robert Valdivia

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