Barron's - September 8, 2020
With U.S. stocks hitting a bout of turbulence last week, investors grappling with increasing market concentration and rising deficits are looking at whether they should plod ahead or rein in market bets. An annual state of the markets outlook by Bank of America Chief Investment Strategist Michael Hartnett offers some context.
In a client note last week, Harnett described a “nihilistic bull market” in both bonds and stocks, signs Wall Street is “too big to fail” and an “epic” polarization in returns, flows, and valuations. Over the last three months, investors’ cash levels have fallen as they rotate to gold, technology stocks, and credit—which saw the third-largest week of flows on record into investment-grade bonds and the seventh-largest ever into emerging market bonds, according to Hartnett.
Given the wild swings in the market year-to-date and the unprecedented stimulus and economic turmoil, it helps to step back and take stock of where markets are. Here are a dozen factoids from BofA’s annual look at the markets that could come in handy at the next Zoom cocktail party:
Central banks have bought $1.4 billion in assets every hour since Covid-19 lockdowns in March.
Some context to Fed’s purchases: The Fed owns 14% of the Treasury market. The Bank of Japan owns 40% of the Japanese government bond market.
One for the gold bugs: Gold, up roughly 30%, is the best performing asset class in 2020, the first time since 2010. So far the most money has flooded this year into commodity and gold funds, followed by technology funds and high-yield bond funds.
Who says safe assets don’t return anything? The annualized return from the U.S. Treasury this year is roughly 39%.
U.S. equities make up a record 59% of the MSCI global equity index. And a bet on emerging markets through the benchmark is largely a China play, with Chinese equities making up a record 42% of the emerging markets benchmark.
That concentration is real: A quarter of the market value of U.S. stocks comes from Facebook, Apple, Amazon.com, Microsoft Corp., and Alphabet’s Google. For comparison: At the peak of the 2000 bubble, the top five technology stocks represented 18.2% of the S & P 500.
Technology dominates globally, with tech companies making up nine of the top 10 companies in the world. But as a caution to how dominance can be fleeting, Hartnett notes that Microsoft is the only company in the top 10 stocks throughout this century.
Valuations are getting lofty: The S&P 500 is trading at a 24 times trailing price-to-earnings ratio. The only time it was higher was in December 1921, when it was 25 times, and June 1999, when it was 30 times.
If you add up the value of global bonds and equities, it equals $212 trillion—a record high and 2.3 times global GDP. While Wall Street has proved “too big to fail” for much of the last decade, Hartnett says central bankers’ policies this year are “more explicitly engineering an overshoot in asset prices” to bring the recession to an end.
Global debt totals $258 trillion, 280% of global GDP—a level that implies lower returns for each dollar borrowed.
That high level of debt is one reason interest rates are so low. It helps service the debt burden. Globally, $14 trillion of bonds sport a negative yield. Forecasters don’t expect bond yields to rise in 2021, according to Hartnett, who adds that bond markets have finally “embraced ‘Japanification’.”
Looking for yield? Spanish and Korean financial companies, Hong Kong and Spanish telecoms, and European energy companies all have dividend yields of more than 5%. Among sovereign debt, Turkey, South Africa, Indonesia, and India all yield more than 6%—but come with their share of risk as these economies are struggling amid the pandemic and its fallout.
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