This commentary was issued recently by money managers, research firms, and market newsletter writers and has been edited by Barron’s.
P/Es Under Pressure
March 17: Odds are that the March 8 low in the
fell into bear-market territory on Monday, March 7, from its record high in November. One week later (this past Monday), the
fell into a bear market. They both rallied smartly during Tuesday and Wednesday.
There undoubtedly will be more panic attacks this year. Their catalysts are likely to be less geopolitical in nature and more related to higher-for-longer inflation and the Fed’s lame response to this problem. So [we] expect the pressure on the S&P 500’s forward P/E to continue. We believe that investors can offset that by overweighting energy (as a hedge against inflation), financials (as a hedge against rising interest rates), and information technology (as a bet on the Roaring 2020s scenario).
We also recommend overweighting SMidCaps because their valuation multiples are already very low. What about overweighting Europe in the event that Putin’s War ends soon? That makes sense, although we would continue to overweight the U.S. relative to global markets. Within a global portfolio, we would redistribute some of the market-cap share away from emerging markets (which don’t do well when the Fed is tightening) into Europe.
Energy Transition Delayed
The Sovereign Advisor
Sovereign Asset Management
March 16: With the global energy market in disarray, countries around the world will now have to rethink their energy strategy, as the immediate switch from carbon-based to green energy has been set back indefinitely. This transition will take decades to complete as any thoughtful planning process would conclude. We are already more than a decade into this conversion and we are still only approximately at 3%-plus of total energy being supplied by renewables. Instead, investors should look for governments to switch their strategy toward guaranteeing reliable carbon-based supplies for immediate use.
Two Transportation Picks
The Institutional View
March 16: The Dow Transports just broke out of an 18-month base in relative strength, after hurdling a 13-year downtrend. Historically, the Transports’ strength has correlated with bullish action in cyclical stocks.
We are initiating a Buy on
J.B. Hunt Transport Services
[ticker: JBHT]. I wish that I had “joined the party” of this logistics-services company earlier. But JB Hunt’s advance has begun to accelerate. Place a closing mental stop @182. This is one of the best long-term relative-strength charts within the cyclical sector. JBHT is just now hurdling a huge 30-year base/consolidation. Projects lots more time and percentage outperformance in the years ahead.
[MATX] is a new Buy recommendation. Notice that each consolidation has been quicker than the previous one. That is typical of very strong advances. Place a closing mental stop @84. MATX boasts one of the strongest relative-strength charts versus the
S&P 500 Equal Weight Index
! It was only last August that relative strength soared from a huge 23-year base. Matson’s relative strength began its secular bull market just seven months ago. That means that its bull market has many years of life ahead of it.
The Fed’s Narrow Path
March 16: The first experiment during the pandemic involved Congress sending money to citizens and the Federal Reserve supporting markets while lowering rates. Sending money to citizens added fuel to already solid demand. Meanwhile, supply chains were shut down by government order. The Fed’s new experiment is whether increasing interest rates, long used to “cool” an overheating economy, will now be an appropriate tool to combat supply-chain inflation. We believe the Fed has a narrow path to tread this year. The risk in our view is that if the Fed proceeds to raise rates each meeting, and reduces the balance sheet too quickly, it could raise recession vulnerabilities heading into next year. Granted, at present none of our indicators are in recession territory, but we remain vigilant.
Time to Buy Real Assets
March 15: From an investing perspective, the age of ever-disinflation as a byproduct of globalization is probably behind us because most of the cost benefits on the labor side have been wrung out. We suggest investors consider adding a real-asset component to their portfolio mix. Real assets—like commodities and commodity businesses, inflation-protected securities, commercial real estate, and equities that tend to move in tandem with inflation—are natural inflation hedges. Investors also need to consider revisiting their emerging market holdings. The changing global trade landscape creates winners and losers. As a result, we recommend investors consider emerging markets active management, rather than exchange-traded funds that passively track the emerging markets index.
From an economic and business perspective, globalization drove decades of growth and profitability with low interest rates and little inflation. Like most economic phenomena, that pendulum swung too far. We expect, and must prepare for, a reversal of sorts, one that, given economics and human nature, will likely swing too far the other way, as well.
China’s Covid Crisis
Weekly Notes on China’s Economy
High Frequency Economics
March 14: The massive outbreak of Covid in Hong Kong—both the highly transmissible Omicron variant and the virulent Delta variant—has definitively spread to the mainland. As of this morning, Shenzhen is locked down for at least a week. Large swathes of Shanghai are locked down, schools have been closed, and access to as well as egress from the city have been limited. Other megacities under lockdown include Jilin and Changchun. Shenzhen is special, though: It is the center for electronics-assembly megafirms like
which announced a shutdown of operations for
including iPhones. Huawei and Tencent have head offices and operations there, as well. We can think of no risk to the global economy, excluding nuclear warfare, that is greater than the risk of a Covid outbreak in China that shutters industrial production. Uncountable manufacturing supply chains pass through China. And yet, it looks to us as though the virus is out of the bottle already.