1. Goldman Sees Trouble Ahead
Goldman Sachs sent out a somber warning yesterday that the S&P 500’s epic rebound from its December drop is doomed to stall out in the near future. Somber stuff indeed.
The 17% post-Christmas surge ranks as the fastest recovery in over 70 years and has done wonders to rebuild investor confidence. This may sound just dandy, but if history is any sign of things to come, then the future of the index is likely to be flatter than investors would have hoped for over the next 3-6 months.
Goldman’s chief strategists forwarded that all fears of recession and a hawkish Fed have all but vanished with investors pricing-in lower volatility and a doivish Fed. What is left behind is a capped upside in the equity markets with little space for positive surprises, but a heck of a lot of room for downside shocks.
The overarching consensus is that betting on the broader market in the form of passive indices/ETFs will likely yield far lower returns than individual stock-picking. Capital outflows form passive funds has almost quadrupled that of active funds since the start of January, indicating the growing trend in active management.
The idea is that company-specific factors will be the X-factor that allows stocks in trending sectors, such as consumer discretionary, healthcare and biotech to overcome the broadly bearish sentiment and outperform the market.
So step up active Invstrs. It’s your time to shine!
2. Farmers Feel The Pinch
While the government’s top brass may be crowing about positive developments in the US-China trade war, the soybean farmers have been hit with the harsh reality that their exports are likely to remain below pre-trade war levels until the 2026-27 season. Ouch!
The economic conflict between the two nations has wiped roughly 12% off the value of the soybean market, and conditions for farmers are only worsening with falling incomes and tightening credit conditions. The contagion has also spread into the ethanol and oilseed market which recorded its worst week of sales in history with the near-term outlook looking modestly worse over time.
While President Trump’s $8bn aid package helped ward off some demons in the early stages of the crisis, some serious long term damage has been done to the industry and one of his most important support bases is beginning to get restless.
Even if a trade deal is reached in the next few months it could be years before the worst-affected parts of the agricultural sector manage to bounce back. The breakdown in strategic partnerships has opened the gap for competitor nations to strengthen ties. The balance of trade between the two nations may take years to restabilise, and may find itself on far less favourable terms.
For now it’s the farmers who feel the real brunt of it. Let’s hope Presidents Xi and Trump can spit out a deal before the damage becomes too deeply entrenched.
Today we are watching…
1. John Deere (#deere)
Despite the downturn in crop prices, demand for John Deere equipment has managed to remain stable. Steady investments in new technology and geographies has helped boost margins and allow the stock to outperform its industry. Analysts have recently upgraded the stock ahead of its earnings today, which normally bodes well for the future. The consensus EPS estimate is $1.78 (+35.88%) on profits of $569.39bn.
2. Pepsico (#pepsi)
Sentiment is mixed ahead of PepsiCo’s earnings today with analysts erring on the side of caution. Strong fundamental factors in its business model and sales growth in emerging markets has helped the firm outperform its peers in 2018. However, industry-wide sluggishness in the soft drink category, thanks to health awareness, higher sugar taxation, rising transport costs and a stronger Dollar, seems to be the overriding factor for its 2019 guidance. The consensus EPS estimate is $1.49 on revenue of $19.53bn.