JPMorgan says that growth is on the way
“Despite concerns about the recent shift in economic and business cycle momentum, we remain confident that strong growth lies ahead and activity is bound to re-accelerate,”
Concerns about the Covid delta variant and the unwinding of government stimulus, as well as labor market weakness and waning consumer sentiment, have dominated headlines in recent months. The S&P500 has been range-bound as a result of these concerns, but the index is still about 2% below its all-time high.
JPMorgan, on the other hand, stated that the slowdown is only temporary.
“We see these risks as well-identified and, in some cases, overstated,” Lakos-Bujas said.
The Wall Street firm remains bullish on the broader market this year and next, predicting that the S&P500 will reach 4,700 by January and surpass 5,000 by the end of 2022.
“As long as Covid remains at historically low levels, strong momentum should continue into 2022 as businesses begin to rebuild depleted inventories and ramp-up capex from historically low levels,” said Lakos-Bujas.
JPMorgan created a basket of stocks that could benefit from the reopening in order to capitalize on the expected economic momentum.
Based on their value composite score, JPMorgan screened for S&P 500 companies that became significantly cheaper during the pandemic compared to the pre-Covid period. This score takes into account analyst ratings, price-to-forward-earnings, price-to-book-value, and price-to-sales. Based on their revenue exposure, the list is then filtered to include only domestic candidates.
Take a look at the stocks available here.
JPMorgan’s list includes many of the industries that have been hardest hit by the pandemic, such as airlines, casino stocks, and retailers. The firm anticipates positive sales and earnings growth for the group.
United Rentals and Southwest Airlines made the list, as did General Motors, Lennar, and MGM Resorts International. Among the retailers on the list are TJX Companies, Gap, and Ulta Beauty.
The basket includes financial firms PNC Financial and Bank of America, as well as real estate firm Duke Realty.
Planet Fitness and CarMax were also named to JPMorgan’s list.
Investors prefer stocks than government bonds
Government bonds are quickly becoming one of the most despised asset classes, as their safe-haven appeal fades as the economy recovers. Meanwhile, the Fed, which has been purchasing $120 billion in Treasury bonds and mortgage-backed securities as part of its quantitative easing program, may soon begin its tapering process.
Bond yields are inversely related to bond prices. Indeed, many prominent investors have stated that the increase in yields will erode the value of bonds to the point where they are no longer a sound investment.
Bill Gross, a former bond king, recently called Treasurys trash, predicting that the 10-year yield will hover around 2% for the next 12 months. Last week, Leon Cooperman stated that bonds are “totally overpriced,” predicting a significant drop in prices.
Michael Burry, a “big short” investor, believes long-term Treasurys will fall, as Scion Asset Management held $280 million in puts on the iShares 20+ Year Treasury Bond ETF at the end of June. This year, the ETF has lost more than 4%.
“More growth-minded investors… look at the prospects of traditional fixed income and think, ‘fixed income hasn’t been adding much to my portfolio and now it looks like it’s just going to create potential risk,'” said Samantha Davidson, U.S. leader of Mercer’s outsourced chief investment officer business.
Stocks with Dividend Growth
According to Savita Subramanian, head of U.S. equity and quantitative strategy at Bank of America, companies that pay high and growing dividends can provide investors with stable income and inflation protection.
“Dividend growth stocks fall somewhere between bonds (pure income, no inflation protection) and commodities (all inflation exposure, no income) and benefit from inflation because earnings are nominal,” Subramanian wrote in a note.
According to the strategist, these stocks could be a scarce resource for inflation-protected yield in a low-rate environment where cost pressure risks are brewing.
The bank screened S&P500 companies for dividend growers using the following criteria:
Dividend yield exceeds 10-year Treasury yield
Dividend growth has occurred in at least three of the previous four years (and no negative years)
Less labor intensive than the average S&P500 company (in terms of employees/sales ratio)
In comparison to the Bank of America Inflation Composite, it has a positive relative beta.
Chevron, Exxon Mobil, Kinder Morgan, ONEOK, and The Williams Companies are among the energy companies on the list.
According to Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management, real estate investment trusts are a diversifying source of income that can also be leveraged to reflation.
REITs own or operate properties such as retail, commercial office space, apartments, and hotels. This year’s economic reopening has benefited the sector. For example, the Schwab U.S. REIT ETF is up nearly 27 percent in 2021, while the iShares Global REIT ETF is up about 20 percent.
“With real interest rates remaining negative and inflation expectations rising, we anticipate being selective opportunistic investors in the sector this year, with a focus on residential,” Shalett said.
Hedge funds are a type of mutual fund that invests
Hedge funds are becoming a popular alternative investment for more sophisticated investors, as the return of volatility and rich valuations has created a favorable environment for stock pickers to shine.
“Using hedge funds as a potential component as part of your fixed income consideration is definitely something we discuss,” Mercer’s Davidson said.
According to Hedge Fund Research, after three years of outflows, hedge funds saw more than $6 billion in client inflows in the first quarter, bringing the industry’s total assets under management to a record $3.8 trillion.
According to ETF.com, the largest exchange-traded fund that incorporates hedge fund strategies is the IQ Hedge Multi-Strategy Tracker ETF, which has more than $800 million in assets under management.
First Trust Long/Short Equity ETF is another popular fund that provides retail investors with access to hedge fund strategies.
Alternatives to government bonds, such as leveraged loans and high-yield corporate bonds, are popular among fixed-income investors.
Among the most popular high-yield corporate bond ETFs are:
The iShares iBoxx USD High Yield Corporate Bond ETF (AUM: $19.25B) is an exchange-traded fund that invests in high-yield corporate bonds.
The SPDR Bloomberg Barclays High Yield Bond ETF (AUM: $9.36B) is an exchange-traded fund that invests in high-yield bonds.
The iShares Broad USD High Yield Corporate Bond ETF (AUM: $8.08B) is an exchange-traded fund that invests in high-yield corporate bonds in the United States.
Wells Fargo strategists recommend middle-market direct lending for its high yield and short duration, as well as its floating rate nature, which provides a potential hedge against rising interest rates.
In a note, the bank’s strategists stated, “We believe there is an opportunity for qualified investors to invest in middle-market direct lending strategies for alternative or non-traditional income streams.”