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- Business Insider asked 20 financial experts — including Nobel-winning economists and acclaimed investment chiefs — to share charts that capture the biggest trends in markets.
- The charts below illustrate opportunities for the decade ahead, potential catalysts for the next economic recession, and other big themes that will inform where investors should be putting their money now.
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Investing in financial markets has never been cheaper or more convenient.
As transaction costs plummet to zero and dozens of platforms enable mobile trading of virtually any asset, it is imperative to have the soundest investing advice.
That’s why Business Insider once again solicited some of Wall Street’s most acclaimed experts — an elite group that includes investment chiefs overseeing trillions in assets, Nobel-winning economists, and strategists capable of moving markets.
We asked each of them to share a chart that illustrates the biggest message they would like to send to investors. Their responses were wide-ranging: from the biggest investment opportunities for the next decade, to brewing catalysts for the next recession and market implications of the coronavirus outbreak.
Their charts are accompanied by direct quotes on why each trend matters — and several experts included actionable guidance on where to invest.
Robots 1. Robert Shiller: An ‘existential threat’ that will worsen the next recession is gaining momentum.
“The chart is based on data (updated through 2019) in my new book ‘Narrative Economics: How Stories Go Viral and Drive Major Economic Events’.
“The chart shows the percent of articles in Proquest News & Newspapers (a digitized compendium of articles, searchable) that contain the phrase ‘technological unemployment’ and ‘artificial intelligence’ since 1900.
“In my book I argued that the surge in attention to ‘technological unemployment’ starting in early 1929 with the publication of Stuart Chase’s book ‘Men and Machines’ and lasting a decade was an important factor in making the Great Depression so severe. People worried that their jobs were being permanently replaced by robots, and so curtailed their spending, worsening the Depression. Note that attention to this phrase almost perfectly matches the decade of the Depression.
“The phrase ‘artificial intelligence’ today is getting an even bigger surge, and represents a more existential threat to our sense of economic virility. The next recession, if it substantially increases unemployment, may see this narrative stimulated further, worsening the recession.
“The surge of attention to ‘artificial intelligence’ is an order of magnitude bigger, but still hasn’t scared people so much so far, it seems. That could change in the future as the narrative develops further. (I did not directly compare these two phrases on one chart in the book, so this chart makes a new point, that the artificial intelligence narrative is much bigger than technological unemployment was.)
“My count of articles is based on a count of the number of articles each year containing the word ‘the.’ I count this way to avoid counting short non-articles, like want ads.”
Robots 2. Marko Kolanovic: A huge rotation is coming to the stock market.
“The low volatility stocks are trading at extremely high valuations while the value stocks are at record cheap levels. This dislocation within the market is not sustainable and may drive a huge rotation in the time to come.”
Robots 3. Rick Rieder: We’re seeing a ‘generational change’ in how inflation is created.
“We think we’re seeing a generational change in inflation that few expected, but that will continue for many years to come.
“Technology creates information symmetry, allowing us to efficiently find the cheapest price for any good or service: Hence no one is willing to pay higher prices even if they could afford to.”
Robots Rieder (continued).
“To us, this suggests that it’s declining corporate pricing power, rather than rising wages, which is driving the inflation dynamic today.”
Robots 4. Savita Subramanian: Financial stocks are in the early stages of a comeback.
“Every sector except one saw their price/earnings (P/E) multiple expand over the past decade: financials saw P/E contraction. We think financials’ re-rating may be in its early innings: more stable earnings, a rotation into value, and rising payout ratios/attractive cash returns should all benefit the sector.”
Robots 5. Mike Wilson: Large-cap tech stocks may not win the next decade.
“Over the past decade the returns from the S&P 500 have become very concentrated in growth stocks, namely large-cap tech. In the past few years this concentration has reached extreme levels never reached before with the top 5 companies (top one percent) now accounting for 18% of the total market cap of the index.
“This surpasses the prior high in the late 1990s. More concerning is the fact that the top one percenters’ share of net income has not kept pace. While we don’t know what the next big thing will be over the next decade, history suggests it won’t be the prior decade’s winners.”
Robots 6. Byron Wien: Based on current valuations, the next decade could deliver meager US stock-market returns.
“We’ve had a great decade of economic growth and equity returns. The 2020s are likely to be less rewarding. Based on current valuations, one could expect the broad market to only show 5% annual appreciation, with some bumps along the way.”
Robots 7. Gary Shilling: Here’s why slow growth won’t be a permanent feature of the economy.
“Economic growth in this decade-long economic recovery, at a 2.3% annual rate, has been the slowest in any post-World War II expansion.
“‘Experts’ are busy concocting theories as to why slow growth will persist forever — aging population, permanently slow productivity growth, etc. As usual, theory follows fact and there is a cosmic human need for theories that ensure that current economic conditions will last indefinitely.
“But many post-war babies are staying in the labor force because their health is good and they want to keep busy while others were poor savers earlier and lack the assets to fund retirement. So they need to work until they expire. Also, productivity-soaked new technologies such as robotics, self-driving vehicles and biotech aren’t big enough yet to move the overall productivity needle, but will be as their explosive growth continues.”
Robots 9. Lori Heinel: This ‘powerful cocktail’ could soon trigger inflation — and with far-reaching consequences.
“We have hit a point where there could be a meaningful pickup in wage growth. If this occurs, it could also spur inflation and the market’s inflation expectations.
“Tight labor markets, coupled with improving global growth and an accommodative Federal Reserve, are a powerful cocktail that could (finally) lead to inflation which has been dormant since before the Global Financial Crisis.
“Depending on how high, how quickly and from what sources inflation sparks, we could see a number of effects including increased pressure on corporate earnings (which are already under pressure), higher bond yields, higher real yields, and more.”
Robots 10. Lori Calvasina: The stock market has a crowding problem.
“The recent dip in the S&P 500 hasn’t fixed the stock market’s crowding problem. The latest data from CFTC indicates that stakes in US equity futures among asset managers are still above 2007, 2018, and 2019 highs despite slipping in the latest update (which is as of January 28).
“Note that each of the prior 2018–19 peaks was associated with policy catalysts (tax reform, trade war, Fed cuts). Building enthusiasm over the phase 1 trade deal with China and anticipation of a Trump victory in the 2020 election helped push positioning up to its current level, in our view.”
Robots 11. Paul Krugman: Trump’s tax cuts did not deliver as promised.
This chart shows “the remarkable failure of a huge cut in corporate taxes to produce any hint of an investment boom.”
Robots 12. Scott Minerd: The slowing Fed balance sheet expansion will be a market headwind.
“In September 2019, it became clear the Fed had drained too many excess reserves, as evidenced by the spike in overnight funding rates. Since then, the Fed has added liquidity through repos and Treasury bill purchases, which has been a catalyst for strong risk asset performance.
“We forecast further Fed balance sheet growth in 2020, but at a much slower pace, which could undercut the ‘QE-lite’ market narrative.”
Robots 13. Binky Chadha: Stocks have rarely been this expensive.
“The equity multiple has rarely been higher. Will this time be different?
“The S&P 500 P/E multiple has historically been in a 10x-20x range. At 20.5x, the multiple has now crossed beyond the upper end of this range. Indeed, excluding the late 1990s equity bubble, the multiple is in the 95th percentile over the last 85 years.
“Most prior episodes when it was higher were associated with recession exits, when earnings were down steeply (-20% to -25%) but prices rose in anticipation of a recovery. In contrast, earnings are currently near record highs.
“Outside of the recession-exit periods, there have only been four prior episodes of higher multiples: the 1964-65 golden age of growth (ISM averaged above 60); the steep rally preceding the 1987 stock market crash; the late 1990s equity bubble; and in early 2018 after the corporate tax cut when investors could count on an almost certain 10% jump in earnings.”
Robots 14. Liz Ann Sonders: There’s a gulf between corporate profits and stock prices.
“Domestic after-tax profits as measured by the Bureau of Economic Analysis (BEA) have been relatively flat for the past couple of years, versus a recent record high for S&P 500 earnings per share (EPS).
“Most of the wide spread between S&P 500 EPS and BEA profits appears to be due to:
- Some services sectors of the economy are under-represented in larger indices as they don’t meet the S&P 500’s criteria; often inflating some S&P’s sectors’ weights relative to their economic weights; e.g., technology is currently 24% of the S&P 500; while the digital economy is less than 7% of US real GDP (as of 2017 BEA data). There is wider use of tax havens by larger companies.
- The two measures use vastly different accounting for employee stock options (S&P uses GAAP, which allows for stock options to be expensed over time, using the value at the grant date; while BEA uses NIPA accounting, which only expenses options as they’re exercised, typically later and with higher expenses).”
Robots 15. Dubravko Lakos-Bujas: The trade war shoved other critical issues to the back seat.
The chart shows mentions per million words in earnings call transcripts for S&P 500 companies.
“Tariff concerns have seen increasing traction from the corporates so far; fundamentals like labor and input costs have received less attention. Could a de-escalation in trade tension change this?”
Robots 16. Tom Lee: History shows there’s hope for the battered manufacturing sector.
“Long-term yield curve (30-year less 10-year, 200-day change) leads ISM by 18 months and 2019 was ‘textbook.’ And it also tells us ISM should soar in 2020.”
Robots 18. Kristina Hooper: Standby for a rally in Chinese and emerging-market stocks.
“The chart shows the shrinking and re-growth of the Fed’s balance sheet over the last two years juxtaposed with the performance of the MSCI Emerging Markets Index.
“The shrinking of the Fed’s balance sheet was negative for emerging markets stocks because it removed liquidity from the system.
“In September 2019, the Fed ended balance sheet normalization. This, combined with liquidity injections into the repo market, has caused the Fed’s balance sheet to actually expand. This in turn has been positive for emerging markets stocks.
“Another catalyst for Chinese and emerging Asian equities is the signing of the US-China phase one trade deal, which should drive consumer and business spending. While Chinese stocks and emerging markets stocks in general face short-term headwinds because of the rapid spread of the coronavirus, I expect China to provide monetary and fiscal support and, once the virus has been contained, a resumption of EM and Chinese equity outperformance.”
Robots 19. Helima Croft: Libya’s latest disruption to the oil market could last for a while.
“Market consensus seems to be that the actual Libyan oil supply disruption is likely a temporary negotiating tactic and that all sides are financially incentivized to restore output. In our view, cutting off oil flow serves General Haftar’s political ambitions of seizing power in Tripoli.
“As we have noted, oil exports fund the rival UN-backed government he is seeking to topple. Haftar may relent again and restore output (like in July 2018) but will likely only do so if his foreign backers apply enough pressure and threaten to cut off his funding. That occured in 2018 after President Trump applied enough pressure on Haftar’s allies when WTI was pushing above $74/bbl.
“Yet given the current market environment, it is unclear if the White House will make this a diplomatic priority, especially as President Trump has publicly praised Haftar on multiple occasions. Hence, our warning this latest outage may not be as short lived as 2018 and may be more akin to 2013 & 2014 when Jathran used the oil weapon for his agenda.”
Robots 20. Torsten Slok: Climate change is about to become a huge market mover.
“Surveys across countries show that climate change is a major threat to the global economy. Changing behavior among politicians, companies, and households will likely have significant impact on financial markets in 2020.”