This commentary was issued recently by money managers, research firms, and market newsletter writers and has been edited by Barron’s.
Lasting Pain for Labor
Headlines
Cresset
Sept. 10: Celebrating Labor Day prompted us to reflect on today’s labor market. Employers added 1.4 million jobs in August, according to last Friday’s Labor Department report. The unemployment rate, which peaked at nearly 15% in April, declined to 8.4%, putting it below the peak reached during the financial crisis. Some of the most recent gains, however, will be temporary: The federal government added nearly a quarter-million census workers. Job growth appears to be slowing as gains have declined in each of the last three months. The economy is currently operating with about 11.5 million fewer jobs than it had in February, meaning it is about 7% smaller.
Economists increasingly believe that remote working will permanently alter downtown business districts, as companies postpone or scale back their office footprints. Over many decades, an ecosystem centered around white-collar workers flourished in central business districts, creating what was estimated to be as many as 100 million jobs, including dry cleaners, gyms, restaurants, and coffee shops. Businesswear retailers Brooks Brothers and J Crew have filed for bankruptcy protection. Starbucks estimated that abandoned urban corridors have cost it $2 billion in lost revenue.
The “Zoom economy” threatens to upend business travel, including airlines, limo services, hotels, and fine dining. Business travel is lucrative, accounting for nearly 70% of airline revenue, yet less than 15% of seats. The Wall Street Journal estimated that $2 trillion in corporate travel will not be spent this year. Air-transportation jobs have already shrunk by one-fifth, and that’s before Congress’ aid for airlines is set to expire at the end of this month. Nearly one-quarter of mortgage-backed loans extended to hotels were delinquent at least 30 days in July. Meanwhile, JPMorgan, Ford Motor, Twitter, and REI have each announced their vision of a permanent work-from-home environment. REI will be abandoning and selling its recently built campus in Bellevue, Wash.
—Jack Ablin
Strategies for a Sideways Market
Systems & Forecasts
Signalert Asset Management
Sept. 10: Past seasonality statistics suggest that stock returns may be minimal in September and October. Uncertainties surrounding the Covid-19 pandemic’s effect on global economies, the availability of safe vaccines, and the U.S. presidential election are leading to a wide dispersion of year-end S&P 500 targets by Wall Street strategists. It may be prudent to be cautious and not chase the current rally, since my research suggests that the S&P 500 index may have a hard time meaningfully staying above the 3,389.78 level of Aug. 18th. If stocks are indeed headed sideways, then strategies such as covered call positions, high dividend-yielding stocks, and riskier corporate bonds (both high-yield and floating-rate) should serve you well.
—Marvin Appel
ESG Funds Favor Industrials
Investment Strategy Research
RBC Capital Markets
Sept. 10: The shift toward sustainable investing has accelerated in 2020. Inflows into our global universe of sustainable equity funds (Morningstar-tracked global, U.S., and sector-focused equity funds with at least 20% of their assets under management in U.S. stocks that have a clear, heavy focus on sustainable investing practices) hit new highs in the second quarter of 2020. Additionally, third-quarter inflows appear to be off to a strong start, with July monthly flows hitting new records, as well. One recent trend that we think has helped inflows has been the performance of these funds. So far in 2020, we’ve found that relative fund track records have been stronger for actively managed ESG equity funds than actively managed traditional funds (a continuation of 2019 trends), particularly during the stock market drawdown. In the rally period, relative fund track records have been fairly similar for the two groups.
The growing popularity of ESG is a positive for the Industrials sector. Compared to traditional actively managed equity funds, actively managed sustainable equity funds are overweight the Industrials sector. At the industry level, overweights are largely driven by Electrical Equipment, Machinery, Building Products, and Commercial Services and Supplies (where we find specific names that are closely tied to environmental themes like the transition to a low-carbon economy and water scarcity), and more than offset relative underweights to Aerospace & Defense. XYL [ Xylem ], TT [ Trane Technologies ], and WM [ Waste Management ] top the list and are also much more popular in actively managed ESG funds than in traditional actively managed equity funds.
—Sara Mahaffy and team
$3 Trillion Deficit, and Counting
Daily Pfennig
The Aden Forecast
Sept. 9: Well, the CBO (Congressional Budget Office), the guys who count the beans, said yesterday that through the 11th month of the fiscal year (August) the federal deficit was $3 trillion, with another month to go. For those of you new to class, the U.S. budget year is September to September. That number of $3 trillion is $1.9 trillion more than the same period last year, and more than double the largest yearlong deficit on record, according to the CBO, which then went on to give excuses for the size of the deficit, due mainly to the costs associated with the Covid-19 virus spending. Well, that may be some of the deficit but not all of it. Before April began, our budget deficit was already $743 billion for six months of the budget year. That would have been annualized to 1.486 trillion. Still an unsightly number, if you ask me!
—Chuck Butler
Rotating Into Unloved Stocks
Nolte Notes
Kingsview Investment Management
Sept. 8: Could we finally be seeing the beginnings of a market correction that has been expected for the better part of two months? The tech run was going to end at some time, and without as much as a good reason (yet), investors started taking profits in companies that have run up two- to three-times their level just a few months ago. The broader market held up relatively well, but the tech market is providing some similarities to the late 1990s, if not with stratospheric valuations, but with still historically high price-to-earnings estimates. Given that earnings will take a few years to once again reach the Dec. 31, 2019, peak, today’s prices project a total return of only a few percentage points from here. Better hunting grounds are in the stocks that have been left behind, like small U.S. and even international stocks. Staying away from tech in 2000-03 allowed investors to avoid the brutal 50% drawdown by tech issues in the aftermath of the 2000 tech bubble.
We are shifting toward value and taking profits in many of the technology-sector ETFs and individual names that have run up so much this year. While not yet increasing cash, we think the neglected parts of the market can do well through year end, even if tech struggles.
—Paul Nolte
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The Labor Market Could Suffer Lasting Pain as WFH Takes Off - Barron's
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