Feb 13, 2020

Axios Markets

By Dion Rabouin
Dion Rabouin

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Situational Awareness: The International Energy Agency says oil demand will fall this quarter for the first time in a decade. (Bloomberg)

1 big thing: Investors see stocks overvalued, recession looming
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Data: BCG 2014-2019 investor surveys; Chart: Danielle Alberti/Axios

An overwhelming majority of the world's asset managers think stocks are overvalued and expect a recession this year or in 2021, according to a survey released Wednesday by the Boston Consulting Group.

  • Many say "the current bull market is running on borrowed time."

Why it matters: The survey of more than 250 asset managers and analysts who oversee $300 billion at firms that collectively manage over $10 trillion shows the continued apprehension of investors from around the globe.

  • "The survey, conducted in November and December 2019, found that, on average, respondents’ outlook is similar to what it was just before the market correction in late 2018."
  • Even with stocks racing higher into the end of 2019, market sentiment was "nearly identical to what we found in our 2018 survey when we saw a clear shift in sentiment from bullish to bearish."

Background: The S&P 500 has gone the longest amount of time in history without a 20% decline, or bear market, and that has a lot of money managers anxious — expecting that the good times cannot last forever.

  • BCG's survey also finds that worries about geopolitical uncertainty are adding to these fears as are the political environment and the upcoming U.S. presidential election.

Details: The stock market's historically high price-to-earnings ratio is the top concern, investors say.

  • 73% of respondents say they see markets as currently overvalued, up from 67% in the 2018 survey.
  • Among self-described market bears in the 2019 survey, 78% cited market overvaluation as the reason for their pessimism, versus 64% in the 2018 survey.

One level deeper: Fear that U.S. equities are headed for consistently weaker performance is gaining steam, with investors' expectations for total return falling to a record low of 5.6% — well below the average 10.1% annual total stock return of the S&P 500 since 1926.

  • Despite the S&P far outpacing these levels in three of the last four years, the expected return of 5.6% "roughly matches the expectation level reported in our previous three surveys," BCG analysts say in the report.

Yes, but: "Although many investors believe that the current bull market is running on borrowed time, few anticipate a major market crash or deep recession," the survey notes.

  • The 71% of respondents expecting a recession in the next two years is down from 74% in the 2018 survey.
2. Catch up quick

The White House cut scheduled pay raises for federal employees citing “national emergency or serious economic conditions affecting the general welfare.” (White House)

Labor strikes and lockouts last year caused the most work stoppages since 2004. (Axios)

China's Hubei province reported 14,840 new coronavirus cases, a significant increase in previous daily totals and bringing the overall number of confirmed cases in China to almost 60,000. (Bloomberg)

OPEC cut its forecast for oil demand growth this year by 230,000 barrels of oil per day from last month's estimate, citing China's coronavirus outbreak as the "major factor" behind the downgrade. (CNBC)

3. Judy Shelton vs. Fed independence

Illustration: Aïda Amer/Axios

Donald Trump hasn't given up on his dream of politicizing the Fed, Axios' Felix Salmon writes. After failing to get Herman Cain and Stephen Moore onto the Fed's board of governors, his latest candidate is one of his former campaign advisers, Judy Shelton. She's testifying in front of the Senate banking committee today.

Why it matters: Shelton is no more qualified to sit on the Fed board than Cain or Moore were. But she's already further along in the process than either of them ever managed. Her nomination is now being treated as a loyalty test for Senate Republicans, few of whom have any desire to provoke Trump's anger.

Context: The Supreme Court and much of the federal judiciary have been highly politicized for decades, even as the Department of Justice is currently at the center of a politicization firestorm. The Federal Reserve, for all that it has been on the receiving end of many irate Trump tweets, is the most important institution that has managed — so far — to stay above the political fray.

For the record: As Catherine Rampell has comprehensively documented for the Washington Post, Shelton's views on monetary policy are nakedly partisan.

What they're saying: Sen. Mike Rounds (R-South Dakota) told Fed chair Jay Powell this week that "on both sides of the aisle you’ll find strong support for an independent Fed." He then turned around and told the WSJ's Nick Timiaros that he would support Shelton's nomination, on the grounds that it's good to have a diversity of opinions on the Fed board.

  • If Shelton is confirmed, and if Trump is re-elected, she would immediately become the front-runner to be the next Fed chair. (There's no way that Trump will re-nominate Powell.)

The bottom line: Diane Swonk, chief economist at Grant Thornton, says of the prospect of Shelton joining the Fed board: "It’s mind-boggling. It’s disturbing. It’s dangerous." It's also entirely possible. The only thing that can prevent it now is a show of spine from at least four Republican senators.

4. The latest job openings report was even worse than advertised
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Data: BLS via Federal Reserve Bank of St. Louis; Chart: Axios Visuals

The Labor Department's Job Openings and Labor Turnover Survey (JOLTS) report showed the lowest number of openings in two years, but the rest of the report revealed some other negative facts about the labor market.

Details: November and December saw the largest two-month drop in job openings on record, dating back to 2001, notes Lou Brien, rates strategist at DRW Trading.

  • The number of job openings saw a net decline of 1.06 million in 2019. It was the first calendar year that overall job openings have declined since 2009 and is the largest decline for any year since 2008, when openings declined by 1.34 million.
  • The 12-month net change in job openings has been negative for the last seven months. From 2010 through the early part of 2019 there were only five months when the 12-month net change was negative; fewer in a decade than there has been since last June.

Don't sleep: The downward revisions to the jobs report announced earlier this month totaled 514,000, which was a 20% reduction in the number of jobs added and the largest downward revision for any year ending in March since 2009, Brien says.

5. Canceling Mobile World Congress leaves a giant hole

Axios' Ina Fried writes: Given how many large companies were already planning to skip Mobile World Congress over coronavirus concerns, it's not a surprise the organizers canceled this year's event, as they announced yesterday. But the move does leave a big hole for this year and raises challenging issues for the future.

Why it matters: The wireless industry is widely distributed. Key infrastructure players are based in Finland and Sweden, some of the largest phone makers are in Korea and China, and key software and chip makers are based in the U.S. Barcelona was the one place everyone showed up together.

The state of play: For the short term, the whole industry is scrambling to cancel hotel and plane reservations, find alternate means to announce new products and examine their contracts to see who is on the hook for what.

The large companies, of course, can get the audiences they need with reporters and travel to key vendors and clients. It's smaller companies that rely on Mobile World Congress that are more likely to get hurt by the cancellation — and have a tougher time absorbing any losses.

The big picture: This year's Mobile World Congress was to be a key launchpad for 5G networks and devices which are just beginning to roll out around the world. Plenty of phones were set to debut and, importantly, lots of carriers, device makers and other vendors were set to put pen to paper on their next deals.

Dion Rabouin

Born into slavery, Richard Allen earned $2,000 to buy his freedom and that of his brother in 1780 and went on to found the African Methodist Episcopal (AME) Church in America, opening the doors of Bethel AME Church on July 29, 1794, in Philadelphia.

  • The AME church now has a membership of more than 2.5 million people and 6,000 churches. It was the country’s first independent black church denomination.