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Our investment professionals share and challenge each other’s views, creating a diverse marketplace of ideas for the Wellington Blog.

Over the past several weeks, a number of high-profile individual stocks have experienced what many observers see as retail-driven, options-assisted “melt-ups.” Most of these stocks have rallied at least 25% – 50%, including one outlier that has garnered the most attention with its breathtaking run in recent weeks and a quadruple-digit year-to-date return as of this writing.

This meteoric stock rise and others have seemingly defied logic and left many institutional investors scratching their heads, concerned that we may be in for a replay of what we saw earlier this year. I think that’s unlikely.

In January 2021, a handful of “meme stocks” experienced similar upside moves, which caught many hedge fund managers by surprise, triggering widespread…

MARKETS
Gordy Lawrence
CFA
Director of Global Derivatives
Boston

The US stock market appears dramatically different to me now than it did just 12 months ago. Equity issuance by US-listed firms has gone up since then, while cash returned to shareholders has gone down. Based on net cash flow, I believe the market is starting to look overvalued and even bears some resemblance to the tech-stock bubble of 1999 – 2000, with stocks offering little reward potential but plenty of risk. As of this writing, I would suggest that US equity investors consider overweighting defensive, cash-producing stocks.

Is it 2000 all over again?

For 10 years following the 2008 global financial crisis, the US equity market was more or less a “cash cow,” reliably returning cash to shareholders via dividends and share repurchases. Broadly speaking, the market’s annual cash yield was around 3%, with a dividend yield of 2% and net repurchases of 1%. That changed in recent months, with net cash flow turning…

MARKETS
Owen Lamont
Owen Lamont
PhD
Associate Director of Quantitative Investment Group Multi-Asset Research
Boston

With so much money flowing into new markets like renewables and cleantech, we will see some companies succeed and perhaps become the next Tesla. We will also see some companies fail spectacularly. In other words, there will be a great deal of dispersion. We have seen hundreds of special purpose acquisition companies (SPACs) raised in the last few years, with many focusing on cleantech and other forms of energy and transportation disruption. Most of them assume a J curve in their revenues and profits, and I think it’s reasonable to expect that they won’t all achieve their projections. However, given limited sell-side coverage, identifying those that will make it and those that will not could prove to be lucrative.

The importance of time horizon for traditional and renewable energy sectors

In thinking about energy investment opportunities, I believe having a differentiated time horizon is essential — that is, focusing on the long term when others are focused on the short term, and vice versa. When things go bad in the energy sector, it’s difficult for investors to imagine how things can go back to normal. During the COVID crisis, for example, many were ready to write off the oil market, believing that prices were permanently impaired and treating the equities and debt of the companies accordingly. But as we saw…

“We suggest that a budget constraint be replaced by an inflation constraint.”
— Three MMT economists in a 2019 letter to the Financial Times

MMT in a nutshell

Modern Monetary Theory (MMT) is often dismissed as a fringe concept regarding unlimited government spending, but it’s a bit more nuanced than that. Basically, MMT holds that a nation’s budget doesn’t (or shouldn’t) really constrain spending because the government can always print more money if needed. Thus, it’s the “real” economy — the production, purchase, and flow of goods and services — that truly matters.

Taking it a step further, the government can theoretically spend as much as it wants to until said spending begins to create excess demand, thereby generating inflation, at which point the government should…

MACRO
MARKETS
Nick Petrucelli
Nick Petrucelli
CFA
Portfolio Manager
Boston

The recent flurry of US sanctions leveled against Russia has aggravated frictions between the two nations and cast a long shadow of doubt on the Russian equity market.

Russian President Vladmir Putin more or less forced US President Biden’s hand when he deployed an EU-estimated 150,000 troops to the Ukrainian border. However, pressure had already been mounting for the US to get tougher on Russia following the country’s unprecedented SolarWinds hacking operation and its largely unsuccessful attempts to interfere in the 2020 US presidential election.

The “new normal” for US-Russia relations

Based on these troubling incidents, it seems we have entered a “new normal” in US-Russia relations and should expect risk premiums in Russia’s equity market to…

MACRO
MARKETS
Jamie Rice
Jamie Rice
CFA
Equity Portfolio Manager
Boston
Thomas Mucha
Thomas Mucha
Geopolitical Strategist
Boston

In a recent blog post, I looked at long-term (10-year) performance patterns of value and growth equities and argued that, despite poor recent results, value is likely to outperform over the next decade.

In a similar vein, I’ve been having discussions with asset owners about the performance differential between US and non-US equities. As with value and growth, the data shows a clear trend of US outperformance. For example, US equities have outperformed EAFE equities on a one-, three-, five-, 10-, and 30-year basis. Over the last decade, the US has outpaced EAFE by 8.1% per year — a substantial margin.1

In the value/growth analysis, historical data showed that outperformance tended to flip-flop from…

MARKETS
Adam Berger
Adam Berger
CFA
Multi-Asset Strategist
Boston

As investors scrutinize sky-high prices in some areas of today’s equity market, comparisons with the dot-com bubble of the late 1990s are common. Having lived through both periods, I see some important differences between the two environments, as well as some potential lessons from the dot-com sell-off.

The dot-com bubble was a twofer

Obviously, the heat and light of the bubble we saw in 1999 was the internet sector, with established players and startups trading at crazy valuations that often were not linked to earnings, cash flow, or even revenue. A tidal wave of oversubscribed IPOs was a big part of the picture as well. However, I would argue that the broader market was…

MARKETS
Adam Berger
Adam Berger
CFA
Multi-Asset Strategist
Boston

I was recently asked, “How can you be confident that value investing will work again, when the historical results look so skewed to growth?” It’s a fair question. Looking at the Russell 1000 Growth and Value indices, growth is ahead on a one-, three- five-, 10-, and 30-year basis, and indeed since 1978, when data is first available. Among the most striking results are the one-year returns (37.5% for growth and -5.0% for value) and the 10-year annualized returns (17.3% for growth and 9.9% for value).1

However, these numbers mask how quickly the picture has shifted. As recently as February, value was beating growth since inception. And before the global financial crisis, value was ahead by more than 2% annually over almost three decades since 1978. Perhaps more importantly, there has been a strong cyclicality to the performance of growth and value that makes some “extreme” periods seem a bit more ordinary.

Haven’t we been here before?

In 1999 and 2000, growth was beating value since inception — and on a trailing one-, three-, five-, 10- and 20-year basis. Then, too, investors were asking, “Is value dead?” But value was…

MARKETS
Adam Berger
Adam Berger
CFA
Multi-Asset Strategist
Boston
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The relative performance of the managed care industry has struggled somewhat over the past several months, begging the question: What’s the prognosis from here? Following in-line fourth-quarter 2020 earnings releases and conservative 2021 outlooks from most managed care organizations (MCOs), the short answer is: Probably better than many investors think.

Most MCOs have been sounding the same theme around forward guidance lately, citing an array of opposing forces amid the ongoing COVID-19 pandemic. Of course, no two MCOs are exactly alike. The magnitude of the headwinds and tailwinds in each case depends on company-specific factors, including the MCO’s mix of exposures (i.e., commercial, Medicare, Medicaid).

However, I believe many of the headwinds facing the group are likely to be…

MARKETS
THEMES

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David Khtikian
David Khtikian
CFA
Global Industry Analyst
Boston

I call it: “Cheap US equities: the low-rate adjustment.”

The strong post-March 2020 rebound in US equity prices rekindled rumblings about stretched or even “bubble-like” valuations. Myriad metrics can be rolled out to suggest “excessive” price levels, but how often do these arguments account for the broader investing landscape — inclusive of interest-rate expectations and the relative risk/return offered by US Treasuries? I believe they should.

Acceptance of paradigm shifts

One way to think about the relative value and appeal of equities is to look through a fixed income lens with a focus on risk-free rates. For the past decade, US stocks have remained cheap relative to Treasuries because…

MARKETS

ARCHIVED

Connor Fitzgerald
Connor Fitzgerald
Fixed Income Portfolio Manager
Boston

I call it: “Cheap US equities: the low-rate adjustment.”

The strong post-March 2020 rebound in US equity prices rekindled rumblings about stretched or even “bubble-like” valuations. Myriad metrics can be rolled out to suggest “excessive” price levels, but how often do these arguments account for the broader investing landscape — inclusive of interest-rate expectations and the relative risk/return offered by US Treasuries? I believe they should.

Acceptance of paradigm shifts

One way to think about the relative value and appeal of equities is to look through a fixed income lens with a focus on risk-free rates. For the past decade, US stocks have remained cheap relative to Treasuries because…

MARKETS

ARCHIVED

Connor Fitzgerald
Connor Fitzgerald
Fixed Income Portfolio Manager
Boston

Commentators have written extensively about the recent surges in various pockets of the equity market — most recently, in heavily shorted stocks. Given the complexity and opacity of this market segment, the breathtaking moves left many investors understandably unsettled. While there is still more to learn about the volatility unleashed by the so-called “short squeeze,” for now, I’d like to address some client questions about the episode and attempt to put it in a larger context.

What happened?

A group of retail investors identified a handful of beaten-down stocks deemed to be “COVID losers” and went long these companies, both outright and on a leveraged basis via options. Positive investor sentiment in combination with thin market liquidity drove the stock prices higher. Call options buying accelerated the upward climb, as banks (which sold the options) had to…

MARKETS

ARCHIVED

Nanette Abuhoff Jacobson
Nanette Abuhoff Jacobson
Global Investment and Multi-Asset Strategist
Boston

I call it: “Cheap US equities: the low-rate adjustment.”

The strong post-March 2020 rebound in US equity prices rekindled rumblings about stretched or even “bubble-like” valuations. Myriad metrics can be rolled out to suggest “excessive” price levels, but how often do these arguments account for the broader investing landscape — inclusive of interest-rate expectations and the relative risk/return offered by US Treasuries? I believe they should.

Acceptance of paradigm shifts

One way to think about the relative value and appeal of equities is to look through a fixed income lens with a focus on risk-free rates. For the past decade, US stocks have remained cheap relative to Treasuries because…

MARKETS

ARCHIVED

Connor Fitzgerald
Connor Fitzgerald
Fixed Income Portfolio Manager
Boston

The massive amounts of fiscal and monetary stimulus injected into the global system last year have sparked debate around the prospect of potentially higher interest rates going forward. And the financials sector often tops the list of likely equity-market beneficiaries in a rising-rate environment.

Our take? Without trying to make a “call” on the interest-rate outlook, we see a compelling relative return opportunity in some interest-rate-sensitive financials — select multinational banks, insurers, and diversified financial service names — with strong fundamentals and underlying growth metrics.

It’s about the fundamentals

Understandably, the financial sector’s chronic underperformance and multiple “head-fakes” toward a possible recovery over the past five to 10 years make it difficult for many investors to…

MARKETS
THEMES

ARCHIVED

Daniel Pozen
Dan Pozen
Equity Portfolio Manager
Boston
Nick Petrucelli
Nick Petrucelli
CFA
Portfolio Manager
Boston

The massive amounts of fiscal and monetary stimulus injected into the global system last year have sparked debate around the prospect of potentially higher interest rates going forward. And the financials sector often tops the list of likely equity-market beneficiaries in a rising-rate environment.

Our take? Without trying to make a “call” on the interest-rate outlook, we see a compelling relative return opportunity in some interest-rate-sensitive financials — select multinational banks, insurers, and diversified financial service names — with strong fundamentals and underlying growth metrics.

It’s about the fundamentals

Understandably, the financial sector’s chronic underperformance and multiple “head-fakes” toward a possible recovery over the past five to 10 years make it difficult for many investors to…

MARKETS
THEMES

ARCHIVED

Daniel Pozen
Dan Pozen
Equity Portfolio Manager
Boston
Nick Petrucelli
Nick Petrucelli
CFA
Portfolio Manager
Boston

When I think of “old school” emerging markets (EMs), I think of Mexico. What started out as an exercise to determine if Mexico could be a “Biden trade” soon turned into my belief that some Mexican equities could perform well going forward regardless of the election outcome.

Mexico is not a “COVID reopening” trade, in my view, because President Andrés Manuel López Obrador (AMLO) neither locked the country down aggressively amid the pandemic, nor took any bold steps to stimulate the market. In fact, by not pursuing deficit spending in response to COVID, Mexico’s balance sheet may hold up better than most EMs’ heading into 2021.

More to the point for investors, some Mexican companies appear to be pivoting toward…

MARKETS
THEMES

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Jamie Rice
Jamie Rice
CFA
Equity Portfolio Manager
Boston

The short answer is that they up and left, at least judging by the percentage of value managers (80%) that were recently underweight value stocks (Figure 1). Some observers may offer reasonable arguments for why such positioning seems justified in the current environment, but the fact is that value equity managers have traditionally tended to lean into relative valuation extremes like today’s. Instead, most are leaning away.

Figure 1

Opportunity in value stocks? 80% of value managers were recently underweight the group

Déjà vu all over again?

This calls to mind a 20-year-old quote from retired Wellington Portfolio Manager Ed Owens that is relevant again today. In January 2000, Ed opined that “value is particularly attractive now, because it has…

MARKETS

ARCHIVED

Andrew Corry
Andrew Corry
CFA
Equity Portfolio Manager
Boston

While the UK equity market appears attractively valued and has the potential for a rebound, I remain neutral on UK equities for now as I believe the uncertain political outlook provides a poor basis for active risk taking. In essence, the outcome of the Brexit negotiations is hard to judge, and a non-cooperative outcome could prove highly disruptive for the UK economy and equities. In my view, this risk is not priced into the market at present.

The UK has had a poor COVID crisis

The UK’s health and economic outcomes have been in line with the worst in Europe, and managing this twin crisis will remain problematic in the near term. At the same time, the UK faces longer-term challenges, such as changes in the migration framework, a sharp rise in minimum wages and the perennial issues of low productivity growth and a large current-account deficit. Together, these near-term and structural challenges create a…

CORONAVIRUS
MARKETS

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Jens Larsen
PhD
Macro Strategist
London
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