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This commentary was issued recently by money managers, research firms, and market newsletter writers and has been edited by Barron’s.
Technical Morning Meeting Comments
Aug. 13: The technical setup for stocks remains constructive, as record highs loom just overhead. Broadening market breadth and bullish momentum are confirming the advance. The fundamental outlook is also improving, as the economy reopens against a backdrop of decelerating coronavirus cases and continued progress toward a timely vaccine. While valuations are lofty, we believe they are supported by record-low yields, along with unprecedented fiscal and monetary policy. We reiterate our year-end price objective on the
index of 3,600.
For Now, Forget About Inflation
Monthly Fixed Income Monitor
National Bank of Canada
Aug. 13: At some point, perhaps early in 2023, sufficient slack may be been taken up that core inflation will be more realistically and consistently in the 2% zone. Theoretically, that could get the stage for a mild re-adjustment higher in policy rates. But we’d also offer a reminder that it took the Federal Reserve a full seven years to bring the policy rate above 0.25% in the wake of the global financial crisis—a crisis that has been dwarfed by the Covid-19 pandemic when it comes to GDP destruction and job losses.
While fiscal stimulus has been able to support consumers, there is a limit (at least politically) to how long government support will last and how generous it will be. If the recovery stalls from its already slowing pace, and government support isn’t there to fill the void, it’s even more unlikely that aggregate demand will be sufficient for significant traction on inflation. At the same time, the current recession is atypical in that the shuttering of certain supply chains and rising operational costs due to social distancing could support prices going forward. Still, all told, we don’t forecast a significant rise in inflation past 2% over the coming years.
—Warren Lovely, Taylor Schleich, and Jocelyn Paquet
Playing Tesla With Options
Midday Market Check
Schaeffer’s Investment Research
Aug. 12: The shares of
[ticker: TSLA] are surging this morning, after the electric car company announced a five-for-one stock split in the hopes of making its shares more accessible. Extra shares will be issued on Aug. 28 to shareholders of record on Aug. 21, while split-adjusted trading will begin on the last day of the month. As a result, the shares are up 7.1%, at $1,471.45 [as I write].
As noted by Schaeffer’s senior quantitative analyst Rocky White, returns tend to be higher after stock splits for equities that analysts are generally pessimistic toward. That’s good news for TSLA, considering that 17 of the 24 brokerages covering it rate it Hold or worse. After three sessions in which TSLA closed lower, the shares have bounced off their supportive 40-day moving average. Though it’s still down considerably from its July 13 all-time high of $1,794.99, Tesla boasts a staggering 526% year-over-year gain.
The options pits show a strong preference for calls [which allow holders to buy a stock at a certain price over a specific period]. There is an unusual call skew in the front three-month option series. Today, options bulls are piling on some more. Calls are trading at double the average intraday amount, with volume pacing in the 95th percentile of its annual range.
The good news for options traders is that premium can be had for a bargain. The security’s Schaeffer’s Volatility Index (SVI) of 62% is in the 24th percentile of its annual range, meaning that options players are pricing in relatively low volatility expectations.
What SOFR Is Saying
Wells Fargo Securities Economics Group
Aug. 13: At the time of our last update on the Secured Overnight Financing Rate in early April, Libor rates and SOFR had diverged significantly, due to financial market dislocations that the pandemic imparted.
However, “normalcy” has more or less returned to money markets due, in large part, to steps that the Federal Reserve has taken to ease tensions in financial markets. If, as we expect, the Federal Open Market Committee (FOMC) keeps its target range for the fed funds rate unchanged at 0% to 0.25% through at least the end of next year, then SOFR [which eventually will replace Libor—the London Interbank Offered Rate—as the linchpin for many other rates] should remain at rock-bottom for the foreseeable future.
Although SOFR followed the FOMC’s target range for the fed funds rate lower, one-month Libor moved higher in late March and early April. Fast forward four months, and the situation has returned largely to normal. The prompt response of policy makers, especially the Fed’s steps to support credit markets, has caused corporate bond spreads to compress nearly all the way back to levels that prevailed in late February. Consequently, one-month Libor has receded from roughly 1.00% in early April to 0.17% at present. At the same time, SOFR has edged up from its late-March low of 0.01% to 0.10%. What is going on?
On the Libor front, improved liquidity and tighter spreads in short-term unsecured lending markets, particularly commercial paper, have helped push three-month Libor down. Diminished concern about bank credit quality has likely also helped, as have the Fed’s numerous actions to improve access to dollar funding. On the SOFR side, more tranquil financial markets have likely reduced demand for secure places to park money on a short-term basis. In addition, the flood of Treasury issuance in recent months has also helped to push up SOFR.
Our current forecast looks for the FOMC to keep its target range for the fed funds rate unchanged through at least the end of 2021. Moreover, the “dot plot” [of FOMC members’ expectations] indicates that most believe that rates will be on hold through 2022. If the target range for the fed funds rate remains near zero for the foreseeable future, it’s likely that SOFR will, as well.
—Jay H. Bryson, Michael Pugliese, and Hop Mathews
Tough to Evaluate
Avalon Investment & Advisory
Aug 12: It is difficult to precisely understand the U.S. economic recovery. The New York Fed’s indicators show a bit of stalling out recently in GDP, while the Atlanta Fed’s GDP tracker continues to show improvement.
A pause in the economic bounce makes sense. The surge off the bottom was in easy-to-restart activity. It now becomes a bit harder to get back incremental activity.
While leisure and hospitality, alongside the labor market, is lagging behind the general recovery, mortgage applications are at a post-financial crisis high, and lumber prices have surged. But simply looking at the demand for housing [doesn’t show] the entire picture. After all, the housing market is still well below 2005-06 levels. Enter the remodeling side of the equation. More home renovations and more home buying are combining to drive lumber prices higher.
Given the general uptick in economic activity, a natural [impulse] would be to look for rising interest rates. But it is difficult to see interest rates rising in a meaningful manner. Why? [Because] a meaningful—or even subtle—rise in rates would deter the pieces of the economy that are accelerating.
—Samuel E. Rines
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