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Good morning. There’s plenty of green on the screens as investors shake off COVID fears, election jitters and the headwinds that come from a strong dollar.
Let’s see where investors are putting their money.
Markets update
Asia
- The major Asia indexes are gaining in afternoon trading, with Hong Kong’s Hang Seng up 1%.
- Ban averted. A U.S. District Court granted an 11th-hour reprieve to TikTok owner ByteDance, blocking a Trump Administration ban on the video-sharing platform that was to go into effect mere hours ago.
- Meanwhile, the U.S. imposed export restrictions on China’s biggest chipmaker, Semiconductor Manufacturing International Corp. It’s not quite as restrictive as the sanctions slapped on Huawei, but adds loads of red tape to any U.S. firm that wants to do business with SMIC. Shares were down 5% on the news.
Europe
- The European bourses were mostly higher out of the gates with Germany’s Dax up 1.7% at the open.
- It’s crunch time this week in the Brexit talks as both sides meet tomorrow to try to salvage a trade deal. Judging by the dismal performance of the pound sterling and FTSE, investors have already said goodbye to Britain.
- The stakes are high for both sides to get a deal done. According to a German economic research center, EU companies that export to the U.K. could see 700,000 jobs vanish in a no-deal scenario.
U.S.
- U.S. futures are pointing to another solid open. That’s after the Dow and S&P 500 secured a fourth consecutive losing week last week, the longest such slide in over a year. (In that respect, September has been worse than March.)
- Chris Harvey, Wells Fargo’s head of equities strategy, is advising clients against putting any new money into stocks. He thinks America’s COVID situation and the threat of a contested election are two very real risks. “In a contested election, we can see 10% downside to the equity market,” he told CNBC.
- Google shares are flat in pre-market trading this morning. That’s as Attorney General William Barr is believed to be close to opening the biggest antitrust investigation in the past two decades into a U.S. company over, among other things, Google’s search dominance.
Elsewhere
- Gold is down, trading below $1,860/ounce.
- The dollar is down; no surprise there with equities climbing.
- Crude is off, with Brent trading around $42/barrel.
***
The I-word, revisited
One of the wackiest things about pandemic economics is the task of making sense of inflation. The consumer (particularly those who’ve gone shopping for a bicycle recently) thinks everyday prices are out of control, while economists fret we’re closer to deflation than inflation. Much of the eurozone, in fact, went into the deflation zone last month.
Despite U.S. CPI sitting at a meager 1.3%, investors too are pretty concerned about inflation. There are plenty of reasons for anxiety. Record deficit spending, a monster COVID case load and super-easy monetary policy are text-book indicators for rising inflation. In normal times, when prices rise, the Fed jumps in and tries to cool the economy down by raising interest rates. And higher rates tend to depress stock prices.
In a Sept. 25 research note, Goldman Sachs tried to put investors’ minds at ease by offering a bit of advice on how to think about your portfolio, should prices begin to rise.
Firstly, they think rising prices would be a good thing for equities. The Fed, as we now know, will let inflation of more than 2% run hotter than normal. Translation: there’s virtually no risk of a rate hike for a few more years. With that risk out of the way, Goldman thinks “rising inflation will support equity returns in the near term.”
They continue: “From a fundamental standpoint, rising inflation lifts S&P 500 earnings. Inflation is positively correlated with earnings because rising prices translate into faster nominal revenue growth. Although input costs also rise, the boost to nominal sales more than offsets inflation-driven margin compression. All else equal, a 100 bp increase in average annual core CPI relative to our baseline assumption would boost our 2021 S&P 500 EPS forecast of $170 by around $1/share.”
Over the past 50 years, Goldman calculates, sales growth outstrips higher input costs to deliver higher profits in times of higher prices.
Of course, some sectors fare better as prices rise.
As you can see from the chart above, some of the most battered sectors of 2020—financials and energy—have the highest upside to inflationary pressures.
The main drawback to this analysis is that inflation has been highly inconsistent. Food prices are sky-high while energy prices are in the dumps. That’s unlikely to change any time soon, depressing, very likely, the profits for Big Oil for the foreseeable future.
But one thing is clear: investors (and borrowers) don’t have to worry about interest rates any time soon. And they probably shouldn’t fret about inflation any time soon, either.
***
Postscript
Rome, famously, is perched upon a series of hills that roll up along either side of the Tiber. Our place is on one such hill situated between two parks, which is convenient for dog owners, and their dogs.
On our morning or afternoon walk, Scilla has a choice of running around a large park attached to the Basilica of Saint Paul (downhill), or a smaller park (uphill) that was built atop a series of early-Christian catacombs. Most archaeologists would frown at this, but it’s Rome. The ancient city under our feet is vast, and rather than dig the whole place up and turn it into a major open-air museum, the modern-day Romans instead decided to pave over most of it and put up apartment complexes and businesses.
Every once in a while, the old city exposes itself and we get an up-close look at how our previous neighbors lived. This is true of the small park up the hill, locally known as the parco di Commodilla, named after the third-century Christian martyr. The ancient Christians dug into the volcanic tufo rock here an extensive warren of catacombs. And the park sits on one of the most significant pieces of those catacombs.
You used to be able to book a visit to the Commodilla catacombs to see the famous 4th Century mural depiction of a bearded Christ. But it’s been mostly off-limits for years thanks to budget cuts and larger local issues with managing the city’s historical legacy.
In recent years, the outlines of the catacomb structure have been emerging from the soil. The rocky remains of an old wall create a kind of bench. Today, Roman teenagers plop down on the smooth rocky surface and take selfies. Scilla too hops on and off the low wall, following the scent of other dogs.
When the girls were young, we used to take them to the other side of the park, where they could play on the slide and shimmy up a tall, rocket-ship-like platform. Now, I’m on the other side, with the dog owners.
Whenever I enter the park, I’m always conscious I’m stepping into a special place—sacred ground, really. That moment of reflection soon fades. The dog wants to be free of its leash and bound around in the grass with the other dogs just as the girls wanted to break free of my hand to commandeer the playground toys.
These days, the girls sometimes accompany me on the walks with Scilla. I often point out how the ancient ruins are becoming more visible, but the girls couldn’t care less. They just want to run around with the dog.
Which makes sense. It’s a park, after all.
***
Have a nice day, everyone. I’ll see you here tomorrow.
Bernhard Warner
@BernhardWarner
Bernhard.Warner@Fortune.com
As always, you can write to bullsheet@fortune.com or reply to this email with suggestions and feedback.
Today's reads
Multiplier effect. When the book—or, heck, film—about this wacky 2020 bull market gets written (agents, let's talk!), the day trading retail army will land a starring role. And when it does, there will probably be reference to this research from two academics from Harvard University and the University of Chicago. The duo found that individual investors have an outsized impact on the markets. Every day-trader dollar invested is worth five, their theory goes.
Mean reversion. In investing parlance, that's the tendency of stock and bond prices to, as Fortune's Shawn Tully explains, "return to their long-term norms." Tully is talking here about, yep, tech stocks. The biggest of big-cap tech stocks have fallen 16% so far this month. And, thanks to the forces of mean reversion, they almost certainly have further to fall. Here's why.
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Market candy
Quote of the day
We see the U.K. as a value trap... Valuations might be attractive, but fundamentals are not.
That's Seema Shah, chief strategist at Principal Global Investors, who sums up why global investors have soured on U.K. equities. I ran the numbers, and found London's FTSE is trading this year like none of its peers, but rather like an emerging market index. Emerging markets are highly volatile. But time your EM investment right, and the returns can be impressive. Nobody sees that kind of upside in the once mighty FTSE. Here's why.
