Inflation fears are stoking volatility in stocks but they’re unlikely to derail the market rally, says UBS

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  • A jump in US inflation will stoke bouts of volatility in the stock market but it’s not likely to stop the overall rally, says UBS.
  • Consumer price inflation for April soared by more than expected, to a rate of 4.2%.
  • “We think that the reflation trade has further to run, UBS said Thursday.
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US inflation rates are flying up and worries about an acceleration in prices ranging from airline tickets to energy have knocked stocks off their record highs, but those fears are unlikely to derail the overall rally in equities, wealth manager UBS said Thursday.

The “latest volatility does not come as a surprise. But we also don’t see it as signaling an end to the bull market,” Mark Haefele, chief investment officer of global wealth management at UBS, wrote to clients.

The arrival of April’s Consumer Price Index confirmed months of caution from economists who said stronger inflation was on the way, a reflection of ongoing economic recovery from the COVID-19 pandemic. The higher-than-expected headline and core inflation readings drove stocks sharply lower Wednesday.

Market pricing of the inflation outlook also stepped higher, said UBS, noting the US 10-year breakeven rate moved to imply an average inflation rate of 2.56%, close to the highest level since 2013 and up from 2% when 2021 got underway.

The CPI data triggered Wednesday’s selloff in stocks that left the S&P 500, the Nasdaq Composite, and the Dow Jones Industrial Average each down by at least 2%, with the Dow industrials tumbling 682 points.

“The latest rise in inflation, in our view, reflects year-over-year comparisons, which will fade,” he said. “While raw material prices may climb further, we believe the bulk of the rise in commodity prices is now over. In addition, labor supply headwinds should ease in the next few months once schools fully reopen, vaccinations continue to rise, and supplemental unemployment benefits expire.”

The CPI jumped to 4.2% from a year earlier, the largest increase since 2008, and core inflation, which strips out volatile energy and food prices, surged 0.9%, the largest one-month climb since 1982.

The UBS wealth management chief said it was important to note that major central banks have indicated they will not tighten policy in response to a temporary increase in prices. He outpointed that Federal Reserve Governor Lael Brainard said Tuesday the Fed will be “patient” as an inflation surge looks transitory.

“As inflation uncertainty persists, and as economic reopening remains on track, we think that the reflation trade has further to run. Our preferences include small-caps, financials, energy stocks, commodities, and emerging markets,” said Haefele.

Investors on Thursday appeared to set aside inflation worries, with Wall Street’s key stock indexes riding up roughly 1% each after weekly jobless claims hit another pandemic-era low.

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Billionaire investor Howard Marks touts value stocks, trumpets high-quality growth stocks, and says he’s open-minded about bitcoin in a new interview. Here are the 9 best quotes.

Howard Marks
Howard Marks.

  • Howard Marks trumpeted value stocks and high-quality growth stocks.
  • The Oaktree chief is bearish on bonds and bullish on US economic growth.
  • Marks is keeping an open mind on bitcoin’s value.
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Billionaire investor Howard Marks touted pandemic-hit stocks as potential bargains, suggested growth stocks could serve as hedges against inflation, and said he was open-minded about bitcoin in a CNBC interview this week.

The Oaktree Capital Management co-chairman also dismissed bonds, argued the US economy has begun a new growth cycle, and underscored the difficulty of finding distressed assets with so much federal aid and liquidity in markets.

Here are Marks’ 9 best quotes from the interview, lightly edited and condensed for clarity:

1. “I’m never positive about anything.”

2. “The most opportunity is always found in the things other people are ignoring.”

3. “If you can find companies that have been penalized for their difficulties in the pandemic and the penalty was overdone and the difficulties are temporary, I think that’s a good sector right now.”

4. “Any company that has difficulties in this environment deserves to be distressed. The bailouts have been generous, the liquidity has been rife, and the default rate in 2020, which was predicted to get into middle teens, didn’t even reach half that.”

5. “Bonds may be fairly valued relative to stocks, but with yields of 1%, 2%, 3%, it’s hard to justify inclusion in portfolios. Nobody thinks they’re going to get the returns they need in the institutional realm just from stocks and bonds.” – arguing a portfolio split of 60% stocks and 40% bonds doesn’t do the job currently, and alternative assets are needed.

6. “We expect that there will be a recession once in a while. I believe last year’s recession was that recession for that cycle, and that we have commenced a new upcycle.”

7. “The fear is of an overheated economy that produces inflation and thus, calls for higher interest rates. I think that the great tech stocks, the great growth stocks, can offset inflation through their growth, but you have to pick the right ones.”

8. “I’m opening my mind on bitcoin. I was ‘knee-jerk’ skeptical.”

9. “While bitcoin doesn’t have an intrinsic value, the same can be said of the dollar and many, many other things that have value like paintings and diamonds. I’ve been more sensitized to the supply-demand case.”

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Warren Buffett’s Berkshire Hathaway scores $17 billion gain across 5 stocks as value stages a comeback

warren buffett
Warren Buffett.

  • Warren Buffett has racked up $17 billion in gains across just five stocks this year.
  • Berkshire Hathaway’s Bank of America stake has soared in value by $9 billion.
  • Buffett is up more than $1 billion on Kraft Heinz, GM, and US Bancorp in 2021.
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Warren Buffett is winning big from the flight to value stocks ahead of the global economy reopening this summer. The famed investor’s Berkshire Hathaway conglomerate has notched an astounding $17 billion in gains across only five stocks this year.

Buffett’s company is up $9 billion on Bank of America alone. The banking group’s stock price has surged 30% since the start of January, boosting the value of Berkshire’s enlarged stake from $30 billion to $39 billion.

Moreover, Berkshire has scored a $3.7 billion gain on American Express, as the financial-services group’s stock has jumped 30% this year. It has also made $1.5 billion on Kraft Heinz, $1.4 billion on General Motors, and $1.3 billion on US Bancorp in under three months.

Buffett’s bets on five Japanese trading houses last fall are delivering too. Itochu, Mitsui, Marubeni, Mitsubishi, and Sumitomo shares have gained an average of 26% this year, lifting the combined value of Berkshire’s holdings by $1.6 billion.

Other Berkshire investments are outperforming as well. Chevron, Suncor Energy, and Synchrony Financial have all climbed more than 20% this year, while Wells Fargo – previously one of Berkshire’s biggest holdings – has rallied 37%. Meanwhile, the benchmark S&P 500 index is up 5.8% this year.

However, Berkshire’s gains have been partly offset by the recent exodus from tech stocks. Apple – which makes up more than 40% of Buffett’s US stock portfolio – has slumped 7% this year. The decline has wiped close to $8 billion off the value of Berkshire’s stake.

Berkshire has also taken a hit from Coca-Cola, leaving its shares worth about $900 million less today than at the start of January. The company’s also down about $400 million on both Snowflake and Verizon.

Buffett’s signature approach of sniffing out high-quality, undervalued businesses and investing for the long term is finally paying off. Yet if growth stocks do take off again, his Apple wager will likely flourish. It appears Buffett’s found a way to have his cake and eat it too.

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The rotation into value stocks has a long way left to run, JPMorgan and Barclays say

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  • JPMorgan and Barclays say the rotation into value stocks should continue as economic growth continues to accelerate.
  • Rising bond yields and inflation should boost banks in particular, JPMorgan analysts said.
  • The MSCI Value index has jumped 8.7% this year, while the growth index is broadly flat.
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The global rotation into value stocks has further to go as countries reopen after the coronavirus pandemic and consumers start spending again, according to JPMorgan and Barclays.

Value stocks – or cheaper shares such as banks and energy firms – have handsomely outperformed fast-growing stocks such as the big tech names in 2021 so far.

The MSCI World Value index was up 8.7% year-to-date on Friday compared to 0.04% fall in the MSCI Growth index, Bloomberg data showed. Stocks such as Bank of America and Exxon are beating the likes of Tesla and Amazon.

The strong performance has led some investors to question the rally. But banks including JPMorgan and Barclays are saying previously unloved stocks will continue to climb as stimulus and vaccines power a recovery.

“Value continues to look very appealing, especially the banks,” JPMorgan analysts including Mislav Matejka said in a note on Monday.

They said the moves in value stocks are still well below what has been seen in past economic recoveries, suggesting they still have further to rise.

Analysts at Barclays, including Emmanuel Cau, said in a note that “value still has significant catch-up potential” because a “longer term rebalancing within the equity market may be underway.”

They said that after a decade of fast-growing technology companies dominating the markets, a strong economic recovery could cause a major shift.

Rising growth and inflation expectations – thanks to vaccines and stimulus – are pushing up bond yields, weighing on growth stocks.

“Higher rates naturally call into question the high (future) expected growth of these stocks trading on high valuations, as both future cash flows and the valuation look to be worth less today,” the Barclays note said.

The analysts said that stronger growth expectations are also pushing up earnings expectations for value companies, which tend to be more sensitive to the economic cycle.

JPMorgan said banks, which broadly benefit from higher market interest rates, “remain very attractive in a long term context.”

The Barclays analysts said they thought that growth and inflation “may even surprise” in the second half of the year.

They recommended investors use any dip to add to positions that stand to benefit, such as mining stocks, consumer-focused firms, and financials.

However, JPMorgan said rising bond yields and inflation could push up the US dollar, which may weigh on emerging-market companies and miners.

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A worryingly large number of US stocks are expensive, crowded, and pose a downside risk to the S&P 500, says Bank of America

Traders and financial professionals work ahead of the closing bell on the floor of the New York Stock Exchange (NYSE) from Getty Images
  • Mega-cap growth stocks are overcrowded, expensive, and dampen the outlook for the S&P 500 in 2021, BofA said. 
  • A team of strategists said in a Friday note that bullish sentiment and high valuations indicate risk in the stock market. 
  • With the S&P 500 set for flat returns this year, BofA favors value stocks, small-caps, and cyclicals.
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Mega-cap growth stocks are vulnerable to a downturn that could weigh on the whole S&P 500 index, according to Bank of America.

A team of strategists led by Savita Subramanian said in a Friday note that large-capitalization growth stocks – assets which make up a large chunk of the US market – are expensive and crowded, even when accounting for historically low interest rates. 

Stocks are forward-looking instruments, and investors attribute the record rally in stocks during the COVID-19 pandemic to the fact that equities were anticipating future growth. However, Bank of America said that some stocks, particularly those within large-cap growth “overshot,” future growth estimates.

Now, “bullish sentiment, lofty valuations, massive dispersion between rich and cheap stocks, and no rewards for EPS beats all indicate risk,” the strategists said.

All of this has led Bank of America to a 2021 year-end price target of 3,800 for the S&P 500, a slight decline from current levels. 

This doesn’t imply that 2021 won’t be a positive year for the economy, however. With the vaccine rollout underway, a large fiscal stimulus about to be passed, and impressive earnings beats, BofA economists are forecasting 6.5% US GDP growth this year.

The strategists emphasized that the S&P 500 isn’t a pure reflection of the economy-it’s more global, more levered to capex than consumption, has operating leverage, and has more exposure to technology, media, and telecommunications than the broader economy. Therefore, while the S&P 500 will remain flat for this year, profits and economic growth will be strong.

Against this backdrop, the strategists reiterated their recommendation for cyclical and small-cap stocks. They also said value stocks look attractive.

Read more: A CIO who earned up to 90% per trade during last year’s crash is now warning of a potential 20% crash in the S&P 500 by the end of March as 10-year Treasury yields continue to rise

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Value stocks will continue to rally into 2021-but overall S&P 500 returns will be tepid, says BofA

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Traders work during the opening bell at the New York Stock Exchange (NYSE) on March 13, 2020 at Wall Street in New York City.

  • A recent rotation into value stocks was just the beginning of a rally that will continue into 2021, said a team of Bank of America analysts led by Savita Subramanian. 
  • But a prospective value stock rally is not necessarily bullish for the broader S&P 500, said the analysts, as the benchmark index is already at extreme levels of valuation and value stocks won’t be able to lift the entire index higher. 
  • “Our value call underpins our tepid outlook for the S&P 500,” said BofA. “But the S&P 500 is very different from the US economy. Here we believe the recovery is intact and recommend value exposure via financials and energy and small over large.”
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The recent rotation into value stocks was just the beginning of a rally that will continue into 2021, said a team of Bank of America analysts led by Savita Subramanian.

In a Wednesday note to clients, the analysts highlighted that the Russell 1000 Value index has outperformed growth in the last three months, but the bargain-stock rally isn’t over.

“Despite the recent rotation, extreme valuations and entrenched positioning suggest we are in the early innings of a Value cycle. The relative discount for Value stocks remains nearly two standard deviations below average…” said BofA.

The financials sector is BofA’s top pick for value stocks. They also see opportunities in value-oriented cyclical industries like autos and multiline retail. The tech sector fell to the bottom of BofA’s list. 

But any rally in value stocks is not necessarily bullish for the broader S&P 500, said the analysts. In fact,Savita Subramanian sees the S&P 500 finishing 2021 at 3,800-only a 3% gain from current levels.

Read more:Morgan Stanley is warning that the stock market’s economic recovery trade may soon be over. Here are 4 strategies they recommend for finding the returns that still exist.

The analysts explained that the broader market is already richly valued and may not be able to climb much higher.  A value stock rally won’t be able to lift the entire market.

“Our value call underpins our tepid outlook for the S&P 500,” said BofA.” But the S&P 500 is very different from the US economy. Here we believe the recovery is intact and recommend value exposure via financials and energy and small over large.”

The bank remains cautious on stocks in the near-term, as valuations are rich and levels of optimism are at highs not seen since the Great Financial Crisis. The S&P 500 had the best November since 1928, soaring 11%, the analysts said.

“A lot of optimism is baked into stocks, along with rich valuations…and we remain cautious in the near-term. The medium-to-long-term bull case for stocks over bonds remains, although equity returns are likely to be sub-average (~5%),” added BofA.

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Why the market’s lowest-quality stocks are embarking upon a rally that should extend for months, according to one Wall Street strategist

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  • As the stock market continues to cross its fingers that a stimulus package is near, investors are more willing to invest in lower quality stocks, according to CFRA’s Sam Stovall.
  • “Historically, investors’ rotation into low quality stocks has anecdotally indicated an improvement in confidence that the economy will recover, encouraging an investment in companies with questionable financials that may have been priced to go out of business but now might not,” said the chief investment strategist.
  • Stovall highlighted stocks such as Salesforce, Wynn Resorts, and Charter Communications that rank low on quality but have potential for a strong upside, according to CFRA research. 
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As the stock market continues to hope that a deal on a new stimulus is near, investors are showing more willingness to invest in lower quality stocks, according to CFRA’s Sam Stovall.

The chief investment strategist wrote in a Monday note that low quality stocks are set to rally for the next few months.

“Historically, investors’ rotation into low quality stocks has anecdotally indicated an improvement in confidence that the economy will recover, encouraging an investment in companies with questionable financials that may have been priced to go out of business but now might not,” Stovall said. “These companies therefore offer the greatest upside price potential.”

Read more:Goldman Sachs says buy these 19 beaten-down stocks on its ‘holiday shopping list’ that are poised to break out in the 1st quarter of 2021

Stovall makes the case that there is empirical evidence that this assumption is correct, and also highlights several “low quality” stocks within the S&P 500-where quality is based on the consistency of the company’s ability to raise earnings and dividends over the past 10 years-that have “strong-buy” ratings from CFRA. The list includes names such as Salesforce, Wynn Resorts, Laboratory Corporation of America Holdings, and Charter Communications. 

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