Barron’s Weekend Summary: The Fed, battling inflation unlike any it has seen in the past 40 years, could raise interest rates higher than currently expected
Cover Story:
-The Fed, battling inflation unlike any it has seen in the past 40 years, could raise interest rates higher than currently expected—there’s a 89% chance of another three-quarter-point increase in July, although the chances of that happening in September are much lower—while signs of an economic slowdown emerged this past week as housing starts fell 14% month over month in May and retail sales dipped 0.3%: “The Fed needs to bring inflation down, and the growth rate of the economy will be a victim,” says Dave Donabedian, chief investment officer at CIBC Private Wealth US.
That’s scary enough, but the biggest near-term concern for the stock market might be earnings. Right now, they’re expected to be quite good, with analysts forecasting 11% growth to $228 per share in 2022, and 9.6% growth to nearly $250 in 2023.
Interview:
-Economist Lawrence H. Summers spoke with Barron’s by phone about where monetary policy, and the economy. He warned early and often that massive fiscal and monetary stimulus unleashed in response to the impact of the Covid pandemic would result in the economy overheating. He was right: Consumer prices rose 8.6% year over year in May, the fastest pace in 40 years. Summers is now concerned that the U.S. economy is headed for a hard landing as the Fed fights inflation.
Tech Trader:
-Investors have made Apple the country’s most highly valued company largely due to its ability to innovate—to deliver new ideas that can drive revenue even higher. To boost revenue by 10%, Apple needs to find $40B in additional annual sales. That’s about the size of the company’s Mac business, which has been around since 1984, or its entire “wearables, home, and accessories” segment, which includes Apple Watch, AirPods, and HomePods.
The Trader:
-Even the factors that should have helped banks have yet to work in their favor. After years of low interest rates that squeezed profits, higher rates were supposed to provide a boost to earnings. Instead, the bank ETF dropped 3.8% on Thursday, the day after the Fed raised rates by three-quarters of a percentage point. It turns out that investors are less excited about the prospect of growing net interest income when it’s expected the Fed will trigger a recession. It’s a challenging economic backdrop for banks—but they should be able to handle it. This isn’t 2008, when financials were at the center of a global meltdown. Even if the economy is recession-bound, banks are better equipped to handle economic shocks than they were more than a decade ago.
-Small-company stocks have gotten hit hard—harder than their larger peers. That means small-caps could face less risk if the market continues to fall and more upside once it starts to turn. Make no mistake—the pain in small-cap stocks has been acute. The Russell 2000 has fallen 26% in 2022, on pace for its worst first-half performance on record. The worst before now was in 2020, when the Russell fell 13%, and then 1982, when it dropped 11%, and 1984, when it fell 9.5%. The index followed up with a much better second half in all three cases, gaining 38% during the last six months of 2020, 40% in 1982, and 2.4% in 1984. “Worst 1st half ever for small-caps, tends to mean better 2nd half,” writes Jefferies strategist Steven DeSanctis.
Features:
-The transformation of the United Kingdom–based GSK is the culmination of a long process that’s turned virtually all of the world’s largest pharmaceutical companies into bigger versions of biotechnology companies like Amgen (AMGN) and Gilead Sciences (GILD), which sell high-priced, complex medicines, often for rare conditions. It’s a shift investors have demanded—and the science has, too, drug executives say. But by taking away stable revenue streams that cushioned the ups and downs of the drug-discovery business, it could turn Big Pharma stocks from buy-and-stuff-under-the-mattress blue chips into riskier bets. At the same time, it may reinforce the long-term shift that has pulled Big Pharma’s focus toward expensive, specialized treatments and away from drugs for the most common causes of death in the US, such as heart disease and diabetes.
-Many women work successfully with male advisors, and vice versa. In this case, the woman had recently taken over the investments after her husband became unable to manage them. Holland was the fit she was looking for. “As a female advisor, I naturally take other women’s questions, concerns, and worries as valid and important to them,” says Holland, who has $1.7B in assets under management and places 91st in Barron’s Top 100 Women Financial Advisors for 2022.
European Trader:
-A shortage in semiconductor chips caused robotics and industrial automation giant ABB to miss first-quarter revenue forecasts in April, dragging down the stock. But new leadership and the effects of the electrification trend that is sweeping the globe—ABB is the market leader for robotics in China and it also makes charging points for electric vehicles around the world—means this is time for the stock to get a boost. The Zurich-based company has turned a corner since CEO Björn Rosengren joined in 2020, following a decade of disappointing performance. Disruption from a period of deal making caused ABB’s American depository receipts to decline 17% in the past 12 months.
Emerging Markets:
-Alibaba stock has recouped 30% in the past month to a recent $106.45, as Chinese policy makers intent on stabilizing the economy have hit the pause on their regulatory onslaught of the internet sector. Even emerging markets managers bargain-hunting elsewhere in China—in software, financials, or renewable companies while de-emphasizing the internet sector that once dominated their portfolios—expect Alibaba to remain dominant and the go-to spot for anyone trying to sell to Chinese consumers.
Commodities:
-Gold has once again shown itself to be a solid haven investment in the face of market turmoil. Even though bullion prices have dipped a little this year, they have massively outperformed other major asset classes such as stocks, bonds, and cryptocurrencies, which have all taken a beating. It should be a reminder to prudent investors to consider allocating a portion of their portfolio to the yellow metal.
Streetwise:
-What’s next for housing? That’s the question Jack Hough explores this week. Home equity is said to be hitting record highs. Then again, taking comfort there would be like slipping on a financial toupee—everyone knows that underlying conditions have deteriorated. The latest reading on nationwide pricing comes from back in March. Since then, 30-year mortgage rates have shot up to nearly 6%, and applications from buyers have slowed.