August 3, 2020 BARRON’S M11
Market View
Europe’s Misery
THINK Economic and Financial Analysis
ING
think.ing.com
July 31:Some records are never to be beaten.
Think of Alan Shearer’s Premier League
goals, Wilt Chamberlain’s 100-point basket-
ball game, Eddy Merckx’s victories in cy-
cling. The second-quarter eurozone GDP fig-
ure should probably go on that list as well; it
would be great if it were never to be beaten.
The -12.1% quarter-to-quarter growth
rate is the worst ever recorded and a pretty
difficult one to interpret. It is a shocking
drop, but understandable as the economy
was shut for a considerable period during
the quarter...The hard part of this recovery
is set to start about now. First of all,
slightly-higher trending new Covid-19 cases
increase the risk of reversed reopenings,
and we’re already seeing local signs of that.
Secondly, cautious increases in unemploy-
ment and bankruptcies and weak invest-
ment will bring to light more characteristics
of a general economic slump. These factors
are likely to drag on for some time, making
a swift recovery to pre-corona levels of GDP
out of the question.
—BERTCOLIJN
Stock-Sector Spotlight
Harry Katica Sectors and Stocks
Saut Strategy
sautstrategy.com
July 31:Strong earnings per share Thursday
from the Titans of Tech show the song re-
mains the same. Organic growth still evades
the industrial economy. While high valuations
could slow them down, the top three—Apple
(ticker: AAPL),Amazon.com(AMZN), and
Facebook(FB)—should hold their own.
Stimulus plays—transportation, materi-
als, housing, and maybe financials—will flip-
flop with every comment from Washington.
After the next stimulus bill gets passed, it
could be a few months before the economy
shows improvement.
Defensive sectors could stay in the mid-
dle. They would do better than most if the
economy stumbles in coming months.
Biotech and pharmaceuticals may be
sidelined by fallout from the recent execu-
tive order on drug pricing. Wall Street is
not a big fan of lower drug prices.
—HARRYG.KATICA
China’s Revival
Eq Strat: The Week in 60 Seconds
Wells Fargo Securities
wellsfargo.com
July 31:U.S. companies continued to report
improving results out of China.General
Electric(GE) said its aviation unit is seeing
a 40% year-over-year global decline in
flights, but “China being down high-single-
digits is encouraging. They were First In
and First Out—perhaps that suggests some
of the potential from here...”Starbucks’
(SBUX) China same-store sales were -16%
in the month of June, but are expected to be
down only 0-5% in the September quarter.
DuPont’s (DD) core Q2 China sales were up
6%, year over year, and 20% sequentially.
Many others reported similar rebounds.
—CHRISTOPHERP.HARVEY,GARYS.LIEBOWITZ,
ANNAS.HAN
“Uncharted” Economic Territory
Hot Charts
National Bank of Canada
nbc.ca
July 30:We now have a fuller picture of this
atypical downturn caused by the economic
lockdown imposed to fight the Covid-19 pan-
demic. The recession may have lasted only
two quarters, but the drop in activity is un-
precedented. Indeed, the record slump in
output of 33% annualized in the second
quarter was an eight-standard-deviation
event, more than three times the size of the
previous record, dating back in to the first
quarter of 1958 (-10%). Several elements of
this morning’s report show that the U.S.
economy is in uncharted territory.
The outsized loss during the quarter, com-
pared to other recessions, was mostly due to
the collapse of 43.5% in consumption on ser-
vices, a category that generally holds up in
economic downturns. Another unusual devel-
opment was that despite labor-market woes,
household disposable income surged 33% on
the back of generous transfer payments from
government. With limited possibility to
spend, the personal savings rate rose to a re-
cord high of 25.7%. The rise in savings of $3.1
trillion during the quarter is twice the drop in
consumption spending, meaning that some of
this extra savings could support consumption
in the months ahead.
—MATTHIEUARSENEAU,JOCELYNPAQUET
High-Yield Bonds Beckon
Carret Credit Insight
Carret Asset Management
carret.com
July 29:We are frequently asked about the
correlation of the high-yield bond market to
the stock market. While we always reference
that high-yield correlation is historically 30%
of equity market volatility, periods like March
provide real-life examples. In March, high-
yield bonds (as measured by theiShares
iBoxx$HighYieldCorporateBondETF,
ticker: HYG) plummeted 21%. We know that
bonds, unlike equities, have maturity dates,
and if a company doesn’t default by the matu-
rity date, bondholders are paid in full. Thus,
downdrafts like March typically prove to be
buying opportunities. The opportunity lasted
a mere few weeks. By quarter-end, the 21%
decline had been meaningfully erased.
The Federal Reserve’s support of the
high-yield bond market is unlike anything
we have ever seen. The Fed is buying
high-yield ETFs and select individual
bonds. The “fallen angel” program is help-
ing BBB-rated companies that fall into
junk territory—Delta Airlines [DAL] and
Ford Motor [F], to name two of the largest
examples. In turn, investor demand for
new issues was met with the largest
monthly high-yield bond issuance ever of
$47 billion in June, topping September
2013’s issuance of $46.4 billion.
The market has improved materially
from the March lows; however, investing in
high-yield bonds during a recession requires
thorough and intense credit research. The
risks are greater today and because of the
Fed intervention, the returns are lower.
—JASONR.GRAYBILL,NEILD.KLEIN
Low Rates Add to Gold’s Glitter
Daily Insights
BCA Research
bcaresearch.com
July 28:The weakness in the U.S. dollar has
supercharged the rally in gold. However,
more than the greenback’s depreciation sup-
ports gold prices.
Our advance/decline line for gold shows
that the yellow metal’s strength is broad-
based against all currencies. This observation
argues that gold has room to increase further
on a cyclical basis. It also confirms that the
main driver of gold prices is the accommoda-
tive monetary policy conducted by all central
banks, not just the Federal Reserve.
The collapse in real yields has been the
link between easy policy and gold. As cen-
tral banks inject liquidity, real rates decline
and the opportunity cost of holding gold re-
cedes. Central banks remain successful in
their easing attempt. Even if nominal yields
are flat or slightly up, inflation expectations
continue to rise and real yields to fall.
Soon, we will reach a point where central
banks will maintain an accommodative pol-
icy, but they will not want to add to the
stock of liquidity. At this point, real interest
rates will stop their decline and gold prices
will likely suffer, especially as the yellow
metal trades above its fair value based on
real interest rates and inflation breakeven
rates. In practice, this means that gold will
remain bid until Treasury yields start tak-
ing off from their 0.6% readings.
—MATHIEUSAVARY
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”Biotech and pharmaceuticals may be sidelined by fallout from the recent executive order
on drug pricing. Wall Street is not a big fan of lower drug prices.”
—HARRYKATICA,SAUTSTRATEGY
This commentary was issued recently by money managers, research firms,
and market newsletter writers and has been edited byBarron’s.