Market Sectors That Could Shine Under Biden’s Policies - Barron's

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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.

The Best Bonds to Own

Systems & Forecasts
Signalert Asset Management
Jan. 27: There are no bargains in today’s bond markets, but high-yield and floating-rate corporate bonds are likely to be your best bets. The absolute yields on these are at historical lows. However, spreads relative to Treasuries of comparable maturities, although narrower than normal, are well within historical ranges: 3.75% for high-yield corporate bonds and 3.59% for leveraged (below-investment-grade floating-rate) loans.

Are these rates sufficient to compensate for the default risk? Fitch Ratings currently projects default rates of 3.5% for corporate high-yield bonds and 4.5% for leveraged loans in 2021. Recoveries would have to be as little as 10 cents on the dollar for high-yield bonds and as little as 20 cents on the dollar for floating-rate loans in order for the returns on these riskier bonds to match that of their investment-grade counterparts of similar maturities. Such meager recoveries are well below historical averages of 40 cents on the dollar for high-yield bonds and 65 cents on the dollar for leveraged loans. The bottom line is that, even on a buy-and-hold basis, below-investment-grade credit is likely to outperform investment-grade and Treasury debt.

—Marvin Appel

That’s Stateholder Capitalism

Weekly Market Commentary
Winthrop Capital Management
Jan. 25: The World Economic Forum takes place this week and will be held primarily in a virtual format. One session is on stakeholder capitalism, a concept pushed largely in northern Europe. The term refers to a form of capitalism that says companies should consider all stakeholders, including employees, community, banks, bondholders, and stockholders, in business decisions.

While this pushes up against the shareholder-focused capitalism of the U.S. that has been prevalent since the early 1960s, it doesn’t address the central-state-backed capitalism practiced in China, where the government owns pieces of a company. We maintain that the next decade will be defined by the two separate models of capitalism.

—Gregory J. Hahn, Adam Coons

Sector Winners Under Biden

Publication
Columbia Threadneedle Investments
Jan. 22: Now that President Biden has been sworn into office and Democrats have a majority in both the House and Senate, equity markets are likely to begin parsing policy proposals to understand the likelihood of passage. Throughout the 2020 election cycle, our fundamental-research analysts assessed the potential impact of core policy initiatives of the Biden campaign on equity sectors. Here are potential sector winners:
Utilities: Fiscal spending and possible tax changes are the principal drivers for positive change in this sector. Biden’s infrastructure-spending plans are likely to focus on renewables and electrification.
Consumer Staples: There could be an incremental positive for cannabis companies here, particularly if marijuana is decriminalized at the federal level. There is elevated risk for certain consumer products, namely tobacco and sugary beverages, in the form of higher excise taxes and greater regulation.
Materials: Improved trade would benefit exports, which would help many U.S. materials companies, including exporters of agricultural products and grains (particularly to China). There might be a negative impact if higher-cost renewable fuels are mandated by the Biden administration to replace lower-cost oil.
Consumer Discretionary: Affordable-housing programs, an expanded minimum wage, and made-in-America initiatives would be positive for this sector generally.
Information Technology: A small slice of this sector was the principal driver of the recovery in U.S. stocks after equities swooned in March, and the rising scale of Big Tech could inspire greater government intervention/regulation, which has the potential to unlock opportunities for smaller tech companies. A more open immigration policy would be a benefit here, encouraging non-U.S. tech talent to work in America.

—David Goodman

Bubble or Nothing?

Weekly Market Update
Cresset Capital
Jan. 26: This thundering stampede [that has led to huge gains in stocks such as GameStop (ticker: GME)] has disrupted the institutional marketplace, turning seemingly rational investments upside down. The point-and-click crowd is attracted to momentum stocks (names that are already advancing), penny stocks (where a $1 gain could represent 100% profit), and heavily shorted issues (which squeeze some of the most respected institutional fund managers). The herd has created massive short-term dislocations, drowning out sound investment theses with massive liquidity.

Favorites among Robinhood traders have included Tesla (TSLA), up over 900% from its March low, and Bitcoin, which enjoyed a 350% gain in the same period.

This level of speculation has all the makings of a bubble, although several factors could attenuate its adverse impact. First is the economy. Even though many sectors of are weak—for example, about 2.5 million fewer food-service jobs exist now than did prepandemic—other parts of the economy are strong. Personal income and household savings are near record levels, with nearly $5 trillion stashed in money-market funds. Second, the markets are brimming with unprecedented liquidity, thanks to aggressive monetary measures and fiscal support. Bond yields are at historic lows, and valuation excesses could persist for some time. At the same time, emboldened retail investors are not about to hide under their covers in a selloff. Many are playing with house money, so it’s unlikely a $5,000 loss would upset the market apple cart.

While pockets of speculation could be creating a bubble, we don’t believe the blowback would impair the entire market or financial system. Speculators hope to get rich quick, while investors must stay focused on matching investments with appropriate time horizons. Moreover, we would view short bouts of selling as longer-term buying opportunities. We recommend maintaining equity exposure to quality at a reasonable price in our Growth strategy and to thematic equity in our Aspirational strategy. Goals-based investing isn’t as exciting as speculation, but it’s certainly better for getting a good night’s sleep.

—Jack Ablin

Beware the First Quarter

Macro.Market.Movers.
LPL Research
Jan. 28: The S&P 500 historically has gained 6.8% during the first year of the four-year presidential cycle, but stocks have done better when the president was re-elected than when someone new occupied the White House. This makes sense, as a new president could bring new policies and potential uncertainty.

Stocks do better during years three and four under a new president, while they are much weaker early in the cycle. Breaking down all the quarters of the four-year presidential cycle shows that, historically, the fourth quarter has been the strongest of the year, with the first quarter the second-best, on average.

However, the first quarter of the first year in the cycle is one of only two quarters with a negative average return.

—Ryan Detrick

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