Barron’s Weekend Summary: Both Wall Street and Main Street are focused on the outlook for interest rates
Cover:
-As the Federal Reserve heads into its final policy meeting on December 12-13, both Wall Street and Main Street are focused on the outlook for interest rates. With inflation falling steadily, the question is whether the US central bank will cut rates aggressively in the coming year. The likely answer is below today's target range of 5.25%-5.50%, but higher than many economists and policy makers expected a year or two ago. The consequences will be profound, affecting the global economy, investment portfolios, and monetary and fiscal policy for years to come. The long-term trajectory of interest rates lies at the heart of a debate over the neutral rate, which is pushing the neutral rate higher than it has been in decades. Factors at play include government spending without raising taxes, persistent consumer demand, and a slowdown in globalization.
Interview:
-Barron’s has interviewed Ramona Persaud. She is the lead manager of Fidelity's Equity-Income fund and Fidelity Global Equity Income fund, uses precision in selecting high-quality companies with a growing dividend and attractive prices. She studied engineering and computer coding before joining Fidelity in 2003. Since 2018, the fund has returned an average of 9.06%, outperforming its value-investing peers. Persaud's savvy stock picks and willingness to stray from her index have been praised by analysts.
Tech Trader:
-In 2023, tech investors have been focusing on buying the market's largest companies, including Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta Platforms, and Tesla. Apple has seen a nearly 50% rally, adding $1 trillion in market value despite revenue declines. This has caused market distortions, with many funds taking a market-weight position in Apple shares, despite skepticism about the company's near-term fundamentals. The year when bigger was better was also a factor, with the Nasdaq Composite rallying 37% and the Russell 2000 index up 4%.
The Trader:
-The stock market is aiming to return to its all-time high, but it needs a catalyst, possibly earnings. The S&P 500 finished the week up 0.2%, while the Dow Jones Industrial Average remained flat and the Nasdaq Composite rose 0.7%. The November jobs number was expected to move the market, but it was nonevent due to revisions, strikes, and other factors. The market needs solid fourth-quarter earnings to force sellers to step away, as aggregate S&P 500 earnings are expected to grow by 3.6% to $54.49 and sales by 3.5% per share to $470.35.
-Quality stocks are shares of companies with high, stable profit margins, stable sectors, long-standing brands, and large balance sheets. They are generally safer investments than lower quality ones. The iShares MSCI USA Quality Factor ETF has seen a 25% increase since the start of the year, topped by Apple, Microsoft, and Nvidia. However, since November 15, the quality ETF has only risen 0.8%, while the S&P 500 has gained 1.5%. Big Tech companies, such as Visa, Nike, UnitedHealth Group, and Eli Lilly, make up a significant portion of the ETF. 22V Research has screened high quality stocks that have performed poorly recently but have been executing their strategies. Cigna stock, down 19% year-on-year and potentially in merger talks, is attractive due to its low price and 9.3 times earnings per share estimates for the coming 12 months.
Features:
-The US Treasury Department is reducing an exemption for some mortgage lenders to offer "no doc" loans, which allowed them to bypass Dodd-Frank rules post-crisis. The changes are part of new regulations governing Community Development Financial Institutions (CDFIs), which now must consider borrowers' ability to repay loans. Change Company, a California-based lender, has become the largest issuer of nonqualified mortgages. Other CDFI lenders have also used the no-doc provision to offer loans to borrowers.
-Carrier Global is selling its Global Access Solutions business to Honeywell International for $4.95B. The division, which has 1,200 employees, will become part of Honeywell's commercial building technology businesses. Carrier's Global Access Solutions business provides tech to protect homes and businesses and is part of Carrier's Fire and Security business segment. In 2022, Carrier generated about $20.4B in sales. The stock moves added $1.8B to Carrier's market capitalization and took $1.8B from Honeywell's. The $5B price tag is about 17 times estimated 2023 earnings before interest, taxes, depreciation, and amortization (Ebitda). Honeywell paid a premium and expects to generate cost savings and synergies by slotting the business in its commercial building technology businesses.
Europe:
-The European Union is entering winter 2023-2024 with gas storage tanks nearly 95% full, with Germany and its neighbors activating terminals for importing LNG. France plans for six new nuclear power reactors, while thermostats are down and solar power capacity increases by a quarter. The REPower EU plan has worked, surprising Vladimir Putin and others. However, European gas prices have settled at about twice their 10-year average, and EU governments spent over EUR 600B ($647B) in consumer energy subsidies last year. The heaviest blow could fall on industry, as cheap Russian gas accounted for a third or more of EU supplies before Putin invaded Ukraine. EU steel production dropped 11% in 2022 and has fallen again this year, leading to Germany's first recession in three decades.
Emerging Markets:
-No update this week
Commodities:
-Gold, unlike stocks, has no cash flow, dividends, or underlying business to value. Despite its lack of intrinsic value, goldbugs love it for its history and hope it will act as a store of value during inflation. However, gold's limitations are evident in its returns over the past 20 years, with the S&P 500 returning 8.3% to the S&P 500's 9.7% over the past 20 years, 4.1% to the S&P 500's 11% over the past 40 years, and 5.6% to the S&P 500's 12% since Dec. 4, 1975. Deutsche Bank strategist Jim Reid has data showing that gold has returned just 0.32% a year after inflation since 1800, compared to 3.07% for 10-year Treasury notes and 6.83% for US stocks.
Streetwise:
-Intel's stock has outperformed Nvidia's year-to-date tripling, but its 62% total return puts it ahead of the S&P 500 and PHLX Semiconductor indexes. It's unclear whether Intel is a serial turnaround tease or a genuine blue-chip comeback. General Motors stock has been disappointing in the end, with recent shares dropping to $33 following bankruptcy restructuring. However, GM's recent actions, including scrapping an electric-vehicle pact with Honda and a big stock buyback and dividend increase, have helped it recover. Microsoft, which ended 1999 at $58, has remained at $369, despite occasional head fakes and a collapse during the 2008-09 global financial crisis. The internet has not killed desktop software purchases, but software is now selling well in the cloud.