By Michael Brush, MarketWatch
Spreads this wide typically signal above-average default rates ahead. “This feels like round two,” he said, referring to the wave of bankruptcies in the energy space during 2105-16. “The energy sector has unraveled. People don’t want to own high-yield energy bonds.”
Negativity on energy, though, means that investment-grade blue chip multinational companies in the space are “dirt cheap,” he says. Shares of Exxon Mobil /zigman2/quotes/204455864/composite XOM +8.11% and Occidental Petroleum /zigman2/quotes/207018272/composite OXY +33.70% , for example, trade below levels they sold for during the financial crisis.
Earnings news: Occidental Petroleum swings to Q4 loss
3. It’s time to favor value
Because of risk aversion, the stocks and debt of high-quality companies look overvalued relative to those of more troubled “value” names that are out of favor because they have some flaws.
Walmart /zigman2/quotes/207374728/composite WMT -0.45% has a market cap of $313 billion vs. $4 billion at Macy’s /zigman2/quotes/201854387/composite M +6.82% . Procter & Gamble /zigman2/quotes/202894679/composite PG +1.96% has a market cap of $280 billion compared to $30 billion at Kraft Heinz /zigman2/quotes/203625533/composite KHC +3.59% . For the past year or more, investors have bunched up in quality “FAANG” tech names like Facebook /zigman2/quotes/205064656/composite FB +1.98% , Apple /zigman2/quotes/202934861/composite AAPL +2.85% , Amazon.com /zigman2/quotes/210331248/composite AMZN +0.91% and Netflix /zigman2/quotes/202353025/composite NFLX +1.27% .
“It is time to start thinking about favoring value,” says Vaselkiv. “The market is daring you to buy value today.”
4. Position for the reflation trade
“Reflation trade” refers to owning companies in sectors like energy, materials and industry which do better when economies and investor sentiment are improving — often because of central bank and government stimulus. “The coronavirus is a detour. Economies will get through this and we will see reflation,” says Vaselkiv. If so, it makes sense to consider stocks and bonds of companies with attractive yields in areas like energy and autos, he says.
Vaselkiv isn’t predicting a dramatic rebound in inflation, however. Because of trends like the continuing rollout of productivity-enhancing technology, “inflation is permanently out of the system,” he says.
That’s a bold statement. But if he’s right, it’s good news for investors. Recessions often start because the Fed overreacts to inflation and hikes rates too much, killing off growth. If inflation remains low, the risk that this will happen is very low.
5. No post-election stress disorder ahead
Economic weakness often crops up in the first year of a presidential term. Incumbent candidates pump so much federal money into the economy during the election that there’s a natural hangover afterward, according to this theory.
But Vaselkiv doesn’t see that in the cards this time around. He predicts no recession this year or next. He cites continued stimulus from the Fed, low interest rates, full employment, high consumer confidence and healthy consumer balance sheets.
“Barring some exogenous factor, we don’t see a recession,” says Vaselkiv. “And we don’t think the exogenous factor is coronavirus.”
At the time of publication, Michael Brush had no positions in any stocks mentioned in this column. Brush has suggested XOM, OXY, WMT, PG, FB, AMZN and NFLX in his stock newsletter Brush Up on Stocks.