Is it safe?
By David Nelson, CFA CMT
In decades past, strategists and portfolio managers looked forward to the next investment conference, scanning the globe for fresh ideas. Today of course we live in a different world. Gone are the 5-star hotel rooms, cocktail receptions and working breakfast and lunch seminars. It’s true some firms are still trying to pursue an in-person dynamic but when large bulge bracket investment houses like Goldman Sachs choose a virtual footprint, you can bet this is a trend that is likely to last a while.
I rarely take the day off on holidays and today I find myself in sweats, feet up on the coffee table with two laptops on the couch. One to watch the replays of Goldman’s Global Strategy Conference and the other to take notes. I find it a healthy exercise to read and watch just about any piece of research I can get my hands on. Not so much for the incremental idea but to challenge my own thinking and make sure my strategies and outlook are well grounded. Living in a silo with blinders on is no way to run money. Ultimately, all investors struggle to answer the same question; Is it safe?
Coronacrisis vs other bear markets
Data by Goldman
I think the most compelling chart came from Goldman’s Chief Global Equity Strategist Peter Oppenheimer. I don’t think it’s a surprise to anyone that the post pandemic recovery is unlike any since 1970. The speed and magnitude has even outpaced the rise following the financial crisis.
Data by FactSet
David Kostin’s 5100 target for the S&P is pretty close to the consensus earnings growth for 2022. If those estimates hold it’s a reasonable target. It includes the likely beneficiaries to a Fed hiking cycle led by value, industrials and financials. The wild card of course is inflation and whether the current FOMC playbook is enough to tackle the rising prices every American is paying from the pumps to the grocery.
Expected Sector Winners vs Losers
Data by Goldman
Probability for the first hike in March stands at 76% with as many as 3 more to follow this year. That of course has enormous implications for equity and sector positioning. Year to date, the playbook is playing out as expected with the baton being passed from growth to value. Long duration equity i.e., growth faces increased challenges if the rising rate scenario holds true.
The biggest risk to this line of thinking is that it is starting to become consensus. When everyone rushes to the other side of the lifeboat accidents happen. Everyone including yours truly has encouraged adding to value and stocks with strong free cash flow and reduce expensive or non-profitable equity. Despite my concern that much of the street is fishing in the same hole, I still believe the thesis will bear fruit despite several hiccups along the way.
The first will be the any sign of an economic slowdown. Any whiff of economic contraction enough for even the perception the Fed might blink will force a rush back into growth making Growth at Any Price look good again.
The Wealth Effect
Ultimately, I believe the Fed will be forced to maintain its resolve and stamp out the punishing effects of inflation, even if it means sacrificing the wealth effect we enjoy from stocks. It’s true commodity inflation can reverse course in a heartbeat especially if the expected economic upswing stalls. Unfortunately, wage inflation is rarely transitory. Employers will find it very difficult to take back recent wage gains and benefits even in the face of a downturn.
The push back against globalization adds to the inflationary backdrop. Bringing supply chains home isn’t just good business it’s a national security imperative. However, those changes come with a financial cost.
Taiwan is at risk and China remains an adversary in every sense of the word. There are few issues embraced by both sides of the political aisle but keeping mission critical industries healthy and less dependent on our adversaries has been championed by congressional leaders from both parties.
Today, leading semiconductor companies like Micron (MU) and Intel (INTC) are expected to build facilities here in the United States looking to become less dependent on overseas’ supply. China’s forced labor and history of stealing intellectual property will bring even more jobs home or at the very least move sourcing to other areas of the world. Any of the above will add to costs and in the end the price to the consumer.
I haven’t even left the couch
All in I’ve enjoyed today’s virtual investment conference. The day is only half over. I’ve had 3 home espressos, breakfast, finished an article, put together all the trades for tomorrow’s open and haven’t even left the couch.
Kicking off the shortened holiday week Goldman (GS), Charles Schwab (SCHW) and PNC (PNC) report before the open Tuesday. Goldman will likely get the most attention, especially on the heels of a BofA downgrade last week pointing to challenges in capital markets. Smaller competitor Jefferies (JEF) fell short on key metrics maybe heightening the concern heading into this week’s number. My quant models force me to hold GS into the report. Trading at 9x forward earnings with a better than 2% dividend should be enough to offset some of the recent challenges highlighted by the street. Expectations are for $11.77 but as usual the outlook on the call will be more important than the headline print.
I’ll be back with more as the week unfolds.
*At the time of this article some funds managed by David were long GS & MU