With its ninth anniversary coming up on March 9, does the bull market still have legs? Definitely, in the opinion of the nine market gurus participating in Barron's annual investment outlook roundtable discussion. The consensus of the panelists: more gains for stocks in 2018, in all market cap categories, buoyed by the most coordinated level of worldwide economic growth since the 1950s.
Their optimism falls into five main themes: robust global economic growth; no recession in sight; the power of technology; the massive deflationary power of the dominant platform tech firms; and economic stimulus from tax reform. They also share some concerns.
The participants in Barron's 2018 investment roundtable on January 8 were:
- Abby Joseph Cohen, senior investment strategist, Goldman Sachs
- Jeffrey Gundlach, CEO and chief investment officer, DoubleLine Capital
- Mario Gabelli, chairman and CEO, Gamco Investors
- William Priest, CEO and co-chief investment officer, Epoch Investment Partners
- Henry Ellenbogen, fund manager and investment strategist, T. Rowe Price
- Paul Wick, fund manager, Seligman & Columbia Threadneedle Investments
- Meryl Winter, general partner, Eagle Capital Partners
- Scott Black, founder and president, Delphi Management
- Oscar Schaefer, chairman, Rivulet Capital
Summaries of their views on the five main themes follow.
Robust World Economy
"There are signs of sustainable growth everywhere; the momentum will continue for a while," as Cohen tells Barron's. "You can't find a recession anywhere," per Gundlach.
No Recession in Sight
Gundlach also observes that recessions don't follow unless the Index of Leading Economic Indicators turns negative, but it has been on a persistent uptrend. Various indicators of business sentiment, which tend to "fall off a cliff in front of a recession," remain at high levels, he adds.
Moreover, a recession normally ensues when the spread between junk bond yields and the yields on U.S. Treasury debt hits 100 to 200 basis points, Gundlach says. While this spread has increased, it is nowhere near that danger zone, he notes. As a proxy for equities, the prices of junk bonds typically fall, sending their yields upward, when stocks are faltering. That's not happening to any significant degree, per Gundlach.
'Growing Impact of Technology'
Priest remarks that GDP growth ultimately flows from only two factors: workforce growth and productivity growth. "The biggest thing happening today is the growing impact of technology," he says, adding that it is increasing profit margins and the return on assets, while reducing the need for equity in a business and thus increasing leverage. As the result of technological advances, what he calls "capital-light" business models are the wave of the future.
'Massive Deflationary Power'
Ellenbogen agrees with Priest's points on technology, and adds a few more. He observes that the U.S.-based FAANG group, plus China-based Alibaba Group Holding Ltd. (BABA) and Tencent Holdings Ltd. (0700.HK), are "the dominant platform technology companies," with "an impact far beyond their own robust growth."
While robust global growth historically triggers inflationary pressures, "these global platforms have massive deflationary power," Ellenbogen adds. A prime example, he says, is Amazon.com Inc. (AMZN), which is pushing down prices in every market or merchandise category that it enters.
Moreover, he continues, these platforms are helping "small and nimble businesses" to implement business models based on "eliminating the middle man and going straight to the consumer." As a result, Ellenbogen has seen companies reach $100 million of sales in less than 18 months, despite having fewer than 20 employees and less startup capital than would be required to open a single storefront in many cities.
The recently enacted tax bill will increase corporate earnings and lift U.S. GDP. It also should set off a wave of investment that will stimulate the economy further, as cash previously kept overseas to avoid repatriation taxes now flows into the U.S. economy. More M&A activity, as well as higher dividends and more share repurchases, should follow as well. Gabelli believes that "The benefits of the tax cut will be powerful psychologically, as well as economically." (For more, see also: 8 More Stocks That May Surge On 2018 Takeovers: Goldman.)
Causes for Concern
Cohen is concerned that the tax cut was enacted when the U.S. economy really did not need stimulus. Moreover, she expects that it will increase the federal budget deficit significantly, and thus add greatly to an already massive federal interest burden. Gundlach estimates that the federal deficit is headed towards $1.2 trillion, and that this will become a matter of widespread concern by the third or fourth quarter.
Both Gundlach and Wick are worried about higher interest rates, if the economy continues to gain steam, inflation rears it head, and the Federal Reserve thus decides to apply the brakes. If so, this will "take a chainsaw" to stocks with high valuations, Wick warns. (For more, see also: How The Fed May Kill The 2018 Stock Rally.)
The Fed's announced plan to unwind its massive balance sheet, selling off about $600 billion of bonds in Gundlach's estimation, will add to upward pressures on interest rates. He also indicates that the yield on the 2-Year U.S. Treasury Note now exceeds the dividend yield on the S&P 500, thus making stocks less attractive. Additionally, he anticipates tightening by the European Central Bank (ECB). (For more, see also: 5 Global Risks That Could Hammer Stocks.)