M14 BARRON’S September 30, 2019
Market View
A Sampling of Advisory Opinion
A Time for Caution
Cumberland Advisors Market Commentary
by Cumberland Advisors
cumber.com
Sept. 25: Treasury yields dropped through-
out the third quarter of 2019, with the big-
gest decline being the 30-year. The drop in
yield across the Treasury curve was pro-
pelled by global recession fears, concerns
about low inflation, and the ongoing trade
war with China.
The [fixed-income] market shifted focus
to the Sept. 18 Federal Open Market Com-
mittee meeting to see if the Federal Re-
serve would cut interest rates at a second
consecutive meeting and whether the cut
would be another 25 basis points [one
quarter of a percentage point] or possibly
a more aggressive 50 bps.
The [central bank’s] characterization of
inflation was unchanged, and growth con-
tinued to be described as “moderate.” The
Fed also continued to emphasize that it will
“act appropriately” to sustain the economic
expansion, leaving future cuts on the table.
As the quarter closes, we are maintain-
ing a defensive approach in the face of
market uncertainty. As long as the trade
war continues to weigh on the global econ-
omy, we expect to see volatility, while an
agreement would probably send rates
higher. In the meantime, we plan to be
conservative while looking for opportuni-
ties moving forward. —DANIELHIMELBERGER
The Utilities Paradox
Morning Briefing
by Yardeni Research
yardeni.com
Sept. 26: After days like Tuesday, it’s easy
to understand why “safety sectors”—
perceived as less risky than average—have
been in vogue. President Donald Trump’s
speech to the United Nations dashed in-
vestors’ hopes for a quick trade agree-
ment. He bluntly described how the Chi-
nese steal U.S. technology and benefit
from unfair trade practices, and later
painted U.S. tech companies as enemies of
democracy. The day ended with Speaker
Nancy Pelosi announcing that the House
of Representatives is beginning a formal
impeachment inquiry into Trump. Another
banner day in U.S. politics.
Safety sectors ruled the day on Tues-
day, continuing the outperformance that
has accelerated since late summer.
Ironically, the S&P 500 utilities stock
price index is at a record high, even
though its market-capitalization share of
the S&P 500 index is at an all-time low.
The industry’s stock performance has been
helped by price/earnings multiple expan-
sion. The S&P 500 utilities trade at a for-
ward multiple of 19.8, 3.4 points higher
than a year ago. But that’s far below the
55.6 “P/E” of the 10-year Treasury note.
Utilities also offer a nice dividend yield,
relative to other S&P 500 sectors’. A slug-
gish global economy combined with low in-
flation could make dividend payers attrac-
tive for some time. Here’s are the dividend
yields offered by the various S&P 500 sec-
tors: energy (3.47%), real estate (3.16),
utilities (3.11), consumer staples (2.87),
communication services (2.32), financials
(2.11), materials (1.98), industrials (1.94),
S&P 500 (1.92), health care (1.71), informa-
tion technology (1.38), and consumer
discretionary (1.30).
Investors’ love affair with utilities has
some foundation in fundamentals. Analysts
expect the sector to grow earnings moder-
ately, by 4.2%, in 2019. That makes utilities
the fourth-fastest-growing among the S&P
500’s 11 sectors.
However, investors buying utilities to-
day may be fighting yesterday’s war.
Looking forward to 2020, traditional
growth sectors are forecast to have much
faster earnings growth than utilities and
other safety sectors.
Perhaps that explains why both high-
growth and defensive names are having a
banner year. Investors willing to look
ahead can justify buying S&P 500 tech,
communications, and consumer-discretion-
ary sectors because of their faster earn-
ings growth, while defensive investors or
those looking for income can turn to utili-
ties, real estate, and staples.
—EDYARDENI
Tune Out the Background Din
Commentary
by Advisors Capital Management
advisorscapital.com
Sept. 24: Investors may be pleased to re-
alize that the S&P 500 has risen 19% year
to date, even as they lament that the mar-
ket has slowed down considerably this
quarter, having risen just 0.9% thus far.
Moreover, the ride has been a bumpy one,
and reflects the many news headlines
about the economy, monetary policy, and
other disruptions, such as the attack on
Saudi oil.
We know that long-term investing
requires staying well exposed to the forces
driving long-term stock appreciation, while
finding defensive positions to cushion the
downside. It is our view that the under-
lying fundamentals supporting the market
are solid, so the market should continue its
irregular ascent, and investors should take
advantage of random setbacks to add to
positions.
—JOANNEFEENEY
Beware a Weaker Greenback
Momentum Strategies Report
by Clif Droke
clifdroke.com
Sept. 26: Will the U.S. intervene to
weaken the dollar? For the first time in
years, monetary policy is being coordi-
nated on an international level with the
aim of easing monetary conditions and
stimulating the global economy. But in
spite of the best efforts of bankers, one of
the biggest problems facing the world
economy is something they’re not pre-
pared for, namely potential turmoil in the
currency market.
Earlier this summer, it was reported
that the Trump administration was dis-
cussing the possibility of intervening in
the currency market to weaken the dollar.
The last time the U.S. intervened was in
2011, which involved an attempt at weak-
ening the Japanese yen, following a de-
structive tsunami in March that year. This
intervention involved the New York Fed-
eral Reserve and the Bank of Canada sell-
ing yen in exchange for their own curren-
cies, and also involved participation from
the Bank of Japan. The intervention
proved to be successful in weakening the
yen on a short-term basis.
Trump is reportedly concerned that the
dollar’s continued strength could under-
mine the U.S. economy and thereby
weaken his chances at re-election next
year. Trump also apparently blames the
Fed’s “high” interest rates (relative to low
U.S. Treasury yields) for the greenback’s
strength. He also blamed the European
Central Bank, or ECB, for the dollar’s
strength, recently tweeting: “They [the
ECB] are trying, and succeeding, in de-
preciating the Euro against the VERY
strong Dollar, hurting U.S. exports....And
the Fed sits, and sits, and sits. They get
paid to borrow money, while we are paying
interest!”
While global investors are still averse
to riskier assets like stocks, the U.S. dollar
is still very attractive to many as a haven.
The dollar has also recently benefited
from the sharp decline in the British
pound on Brexit-related concerns.
While a stronger dollar can be benefi-
cial for U.S. consumers, its continued
strength will eventually weaken the econ-
omies of countries that are reliant on ex-
ports. Emerging nations that depend
heavily on agricultural and commodity-
based exports are especially vulnerable to
dollar strength. —CLIFDROKE
To be considered for this section, material,
with the author’s name and address, should
be sent to [email protected].
“Fundamentals are solid, so the market should continue its irregular ascent, and investors should
take advantage of random setbacks to add to positions.” —JOANNEFEENEY,Advisors Capital Management