March1,2021 BARRON’S 7
STREETWISE
Savita Subramanian of BofA expects a slight
decline for the S&P 500 from here through
December.”Say goodbye to TINA,” she writes.
What to Buy When
Good News Means
BadNewsforStocks
A
quick burst of good news
on the pandemic and the
economy spooked the
bond market this past
week. Stocks buckled like
a dad catching a running
hug that comes with a low
knee strike.
Below arethoughts from Wall Street
strategists on how to position for more
menacingly bright developments. Plus,
following tumbles forTesla(ticker:
TSLA) and Bitcoin, I asked a woman
who has bet big on both—and won—to
lay out the bull case from here.
Last week, I noted that fourth-
quarter earnings for S&P 500 compa-
nies appear to have increased from a
year ago, despite expectations for an
11% decline—one of the biggest upside
surprises in decades. Meanwhile, 45
million Americans have now received
at least their first of two shots of a
Covid-19 vaccine. Tens of millions
more may carry antibodies from infec-
tion, reported or not. A new one-shot
vaccine appears effective. And a $1.
trillion stimulus package could be-
come law by mid-March.
The economy this year should
“run hotter than at any time in the
past 35 years,” wrote Credit Suisse
chief U.S. stock strategist Jonathan
Golub this past week. Investors have
been murmuring that faster growth
could stoke inflation; that higher in-
flation could make the Federal Re-
serve less keen to hold interest rates
near record lows; and that without
the Fed actively flogging savers out of
deposit accounts and into stocks, the
market might sell off.
On Tuesday, stocks did just that
until Fed Chairman Jerome Powell
gently trash-talked the economy, which
seemed to cheer investors, who took it
to mean rates will stay low for years
longer. On Thursday, bond yields
spiked—although by “spiked” I mean
rose quickly to still-pitiful levels.
The question now is whether that
was a hiccup or the start of something
more lasting. Paul Donovan, chief
economist at UBS Global Wealth Man-
agement, expects inflation to be
“higher but not high” this year, and
pose little challenge to investors.
Partly, that is because as economies
reopen, pent-up demand will flow
more toward services than goods. “It
is an unusual person who posts pic-
tures of a new washing machine on an
Instagram feed,” he writes.
Service providers are generally
better able than manufacturers to
quickly increase supply.
Donovan’s colleague at UBS, David
Lefkowitz, head of stocks in the
Americas, notes that the last two
times rates rose by more than a per-
centage point over three months were
in late 2016, when stocks fell no more
than 2% peak to trough, and in
mid-2013, after which the S&P 500
ended the year up 33%. He points out
that pockets of stocks, like utilities,
staples, real estate investment trusts,
and growth stocks, have historically
fared worse.
Stodgy high-yielders are known to
slump when bond yields rise, but that
last group, growth stocks, might
seem an odd fit. Higher yields are
less flattering to the “discounted cash
flow” valuations upon which growth
managers, if not Robinhood meme-
slingers, rely. So shares ofAT&T(T)
and Atlanta-based utilitySouthern
Company(SO) were relatively weak
this past week, but those of Tesla and
Virgin Galactic(SPCE) got clob-
bered.
What to buy now? Lefkowitz rec-
ommends consumer discretionary,
energy, financials, industrials, and
healthcare, and prefers small and
midsize companies to large ones.
Golub at Credit Suisse is bullish, pre-
dicting the S&P 500 index will rise
12% from here this year. He recom-
mends what he calls super-cyclicals,
or companies that stand to get the
biggest charge from economies re-
opening. To find them, his analysts
created what they call an economic
acceleration index, made up of mea-
sures like Treasury yields, high-yield
spreads, and commodity prices, and
then searched for shares that have
demonstrated the strongest correla-
tion to this index. The list includes
casino operatorLas Vegas Sands
(LVS), oil giantOccidental Petro-
leum(OXY),Citigroup(C), and trac-
tor makerDeere(DE).
Savita Subramanian, chief U.S.
stock strategist at BofA Global Re-
search, expects a slight decline for the
S&P 500 from here through Decem-
ber, and is particularly down on
large-company growth stocks. “Say
goodbye to TINA,” she wrote this
past week, a reference to “there is no
alternative,” the battle cry of inves-
tors who buy stocks for lack of better
options.
The 10-year Treasury yield, Subra-
manian notes, recently traded above
the S&P 500 dividend yield. She
reckons the tipping point for inves-
tors shifting funds back to bonds is a
10-year Treasury yield of 1.75%—
about a quarter-point higher than
recent levels.
S
ome growth investors are un-
deterred. I spoke with Cathe-
rine Wood this past week. She
runsARK Innovation
(ARKK), an exchange-traded fund
that returned 152% last year, beating
its peers by more than 100 percent-
age points. The top holding is Tesla—
she bought more this past week, and
when investors heard, the stock
bounced. In another fund, Wood has
loadeduponGrayscale Bitcoin
Trust(GBTC). What’s her bull case
from here?
For Tesla, it’s that the cost of mak-
ing batteries will plunge, and electric
cars will end up much cheaper than
gasoline ones. Plus, the industry will
shift to autonomous driving, where
Tesla has a big head start. Her bear
case involves the autonomous shift
not happening just yet. If that plays
out, she says she still expects Tesla
to more than double in value over
the next five years. Her bull case,
she’s remodeling now. “It should be
out in the next few weeks,” she says.
And Bitcoin? It was recently val-
ued at just over $850 billion. Wood
recounts a 2015 collaboration with
economist Arthur Laffer where the
two concluded that the cryptocur-
rency met all the requirements of
money: “And I said, ‘Art, how big
could this be?’ And he said, ‘Well,
how big is the U.S. monetary base?’ ”
If you’re wondering, the Federal
Reserve Bank of St. Louis puts it at
$5.2 trillion.B
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