Now, we have seen a total reversal with people having a hard time even imagining how the market could decline. We must admit the speed and relentlessness of the move is a bit troubling.
That’s from a Morgan Stanley note out last Monday and it underscores the extent to which the psychology around equities has morphed into an all out FOMO-fest of fanatical fuckery.
Things were briefly – and I do mean briefly – derailed on Wednesday when news that China is considering “halting” purchases of U.S. debt combined with the BoJ paring back purchases of 10-25Y JGBs to raise the specter of a “tantrum” episode. 10Y yields had risen to 9-month highs the day before and the calls for a bond bear market (and a “men” bear market) were coming in hot and heavy. The China story was fuel on the fire and suddenly, everyone began to question whether we could depend on stocks to diversify if bonds sold off hard enough and fast enough.
Everyone got over that really quickly after remembering that stocks don’t go down anymore so it makes no sense not to buy them. There will always be a greater fool willing to buy them higher, but because stocks never go down, that greater “fool” isn’t really a “fool” is he/she? No, he/she is actually a genius, just less of a genius than you are. There are no “fools” when stocks only go up. Only lesser geniuses. As far as whether you and the rest of these “geniuses” are any semblance of “stable”, well you’ll have to ask the President who knows a thing or three about stocks, stability, and genius.
But let’s just say, for argument’s sake, that you’re interested in wasting your time trying to pick stocks or otherwise find some alpha. Why you would do that is completely beyond me because when benchmarks are rising 30% every year and you can replicate those benchmarks for 10bps, it seems like you’d be a (greater) fool to waste time picking stocks when you could be golfing or doing whatever it is you prefer to do during your version of “Executive Time.”
Well assuming you’re looking for individual stock ideas, you might consider what works in a rising rates environment and also in the context of the new tax bill. Lucky for you, Goldman has done some thinking on that. Here’s what they’re calling “a selection of equity analysts’ favorite industries and stocks” within Financials and Industrials, both of which “typically outperform in rising rate environments and appear to be beneficiaries of tax reform.”
Among Financials, large-cap banks rank among the top beneficiaries of rising interest rates, tax reform, and deregulation. Buy-rated BAC and WFC (both on CL) are our analysts’ top picks.
Regional banks should also outperform as margins expand and business confidence grows. RF and CMA are our analysts’ favorites.
Our analysts also see potential upside in the Consumer Finance industry. [We] forecast 26% upside to our target price for COF, citing potential for lower-income consumers to use the additional cash from reduced income taxes to pay down debt.
Technological innovation should help insurance companies outperform in 2018. Our analysts’ target prices indicate MET and PGR will rise 14% and 17%.
Among Industrials, our analysts believe machinery stocks present a particularly compelling opportunity in 2018 as the industry continues to emerge from a cycle trough. Jerry Revich and team highlight CAT and DE specifically as likely to benefit from strong operating leverage.
Defense stocks should outperform again in 2018 as growth continues to exceed expectations. Noah Poponak and team believe the market is underestimating the pace of 2018 revenue growth in particular for NOC (GS 7% vs. consensus 6%, upside of 16% to target price) and LLL (GS 6% vs. consensus -3%, upside of 9%).