U.S. equity markets snapped a two-day win streak as investors backed away from their recent buying frenzy, digesting sizable recent gains. Strong earnings from Walmart and Home Depot couldn't inspire enthusiasm as those were largely expected. Shares of Tesla (TSLA) managed to find their lane after it was announced that the electric carmaker will join the S&P 500 in December.
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Fund managers are becoming more enthusiastic about 2021, especially around emerging markets and energy (more below). They, like you, expect gains from the S&P 500 in the next year and they are choosing their sectors carefully. They are not afraid of the parade of debt-laden zombie companies roaming around the public markets.
Speaking of scary, Amazon formally announced it is entering the pharmacy space. We knew it was coming, we just didn't know when. Its new competitors in the space — CVS (CVS), Walgreens Boots Alliance (WBA), Rite Aid (RAD), and especially GoodRx (GDRX) — were expecting it and their investors reminded them of it today.
Big Money's Favorite Trades
As we noted on Friday, institutional investors finally allocated more money to global equities in the past two weeks after hiding out in cash and bonds all year.
According to BofA Research's October Fund Manager survey, most of the money went into small caps like the Russell 2000, emerging markets, value stocks, and financials. Money came out of consumer staples, cash, bonds, and healthcare stocks.
Fund managers' favorite investments for 2021, according to the survey, are emerging markets, the S&P 500, and oil (believe it or not).
It Takes A Lot ...
... for institutional investors to commit large amounts of capital, so these recent moves are noteworthy. It shows their conviction in the recovery and their acceptance of the geo-political landscape for the next several years. Individual investors, like us, don't need to follow them, but it's good to know what they are doing.
A punishing pandemic, a generous Federal Reserve, and ultra-cheap debt have created a nation of zombie companies that aren't earning enough to cover their interest expenses. Several of these are brand-named companies we all know well, including Boeing, Delta Air Lines, Exxon-Mobil, and Macy's.
According to a sobering analysis from Bloomberg, almost 200 corporations have joined the ranks of so-called zombie firms since the onset of the pandemic. Even scarier, these companies have added almost $1 trillion of debt to their balance sheets in 2020, bringing total obligations to $1.36 trillion. That’s more than double the roughly $500 billion zombie companies owed at the peak of the financial crisis, according to Bloomberg. Even worse, more than one-sixth of the Russell 3000 index, or 527 companies, haven't had enough income in 2020 to meet their interest payments.
Fed to the Rescue
The Federal Reserve laid somewhat of a safety net under many of these firms back in April when it pledged to buy up to $850 billion worth of zombie-debt. That emboldened other investors to buy it as well. But ultimately, high leverage weighs on a company's balance sheet and slows down innovation and growth. For now, though, those zombies will be roaming around and their debt owners will have to reckon with their listlessness.
As John Maynard Keynes put it:
"If I owe you a pound, I have a problem, but if I owe you a million, the problem is yours."
Companies Taking Their Lead from Countries
You can't blame companies for binging on cheap debt when you see what developed economies have been doing this year. Net debt as a percentage of GDP for countries including the U.S., Japan, Germany, Italy, Canada, and the U.K. has soared as governments have been fighting the pandemic with spending.
That spending is expected to continue for most of those countries for the next several years, according to the IMF's projections. That means more debt and very low to negative government bond yields for these countries.