Outside the Box: America first? Our standard of living hinges on immigration and engagement with the world

Until recently, most Americans believed that the U.S. should play a leading role on the global stage. The political landscape, however, has shifted.

Only 53% of Americans now believe an active role in the world is good. Among Republicans or Republican-leaning voters, the proportion drops to 45%. But as the world around us rapidly changes, our wish may soon become reality. Regardless of how the presidential election turns out, Americans should begin thinking about what it means to be second, especially if certain economic and demographic trends continue.

Consider that all the emerging markets combined already represent more than half of the global economy, which has huge implications for the United States’ position in the world. And I don’t just mean China. India will likely become a larger consumer market than China by the 2040s by virtue of its larger and younger population. Before Trump, American companies and workers were intent on competing for market share in emerging markets. Now, isolationism seems to be the governing principle out of Washington.

From isolationism to inequality

The problem with isolationism is that it will make it much harder to reduce inequality, which remains one of the largest issues we face. Think about how difficult it is to address inequality without economic growth, and now consider that the markets of Asia, Africa and the Middle East are growing much faster than those in Europe and the Americas.

If “America First” or “Buy American” policies remain our approach — cutting off the U.S. economy from foreign markets — then our own economy will continue to stall. And a stagnant American economy will most likely perpetuate patterns of inequality by income, race, ethnicity and gender. We must consider ways of protecting all Americans without resorting to nativism as the only solution.

Meanwhile, the pandemic has exposed larger issues that will come to define this coming decade in the U.S. We have a rapidly aging population, and the pandemic will only accelerate that trend. In addition to the high mortality rate among the elderly, young people will postpone having children during periods of uncertainty or during spells of high unemployment.

Now consider the first responders to the present crisis. According to a 2016 study by George Mason University, immigrants represent about 13% of the total population of the United States, but are 28% of physicians and surgeons, 22% of nursing, psychiatric and home health aides, and 15% of registered nurses. Another study revealed that in 2017 more than half of internal medicine residency positions for new physicians were filled by foreign-born doctors.

Baby drought

It may be popular in some circles to demonize immigrants, but the truth is that their contribution to America’s ailing public health sector is essential. It is safe to say that under present circumstances they are literally saving American lives.

Furthermore, the American population is not replacing itself, meaning for the first time in modern history, we are experiencing a baby drought rather than a population boom. As a result, the latest report from the trustees of Social Security anticipates that the trust fund’s ratio will fall below the minimum level of financial adequacy by 2029.

An America that is engaged with the world, and welcoming to those who wish to make a life in America, can help cover the difference through an influx of new people, which can help provide the financial safety net our senior citizens deserve. All of this becomes far more important during a period of grave uncertainty and a raging global health crisis.

Both Donald Trump and Joe Biden have put the future of America on the ballot in November. Each delivered their case for American greatness. But the world is changing rapidly, and simply arguing for greatness will not make it come true.

An America dedicated to a more just society domestically and engaged abroad may be ready to weather this inflection point in world history. But certainly an isolated America will not. I’m afraid, if this becomes our new normal, then America being second may become our new reality.

Mauro Guillen is a professor of international management at the Wharton School and author of the best-selling new book, “2030: How the Biggest Trends Today will Collide and Shape the Future of Everything,” from which this article is adapted. Follow him on Twitter @MauroFGuillen.

Outside the Box: Zombie companies are proliferating — here’s how to keep them out of your stock portfolio

The Covid-19 pandemic has radically altered the dynamics of our global economy and capital markets. Before the recent selloff, markets had rallied to all-time highs despite the pandemic’s economic damage. This climb upward likely left investors feeling confused and curious, while so much uncertainty persists. Surely, there must be more to this story.

Digging deeper into this market’s performance, it’s clear: Not all is as it seems.

There are investments lurking in portfolios today that, if left unaddressed, may wreak havoc on longer-term investment returns. Zombie companies — those with excessive debt levels and failing business models — are presenting new and unforeseen challenges for investors.

Read:Schwab’s Liz Ann Sonders: Stock market today is ‘a small handful of winners and a heck of a lot of pain’

Minimizing zombie risk

In the first half of 2020, the number of zombies more than doubled. In certain sectors, this trend has become even more pronounced: The tally of energy and consumer discretionary businesses that fell into the zombie abyss tripled over that same time period. Smart investors have already seen that across the entire corporate landscape, technological changes and shifting consumer preferences have rendered many business models obsolete.

Fortunately, there are ways to minimize the risk of ill-fated zombie businesses to one’s portfolio.

First, with this pandemic-induced environment in mind, it’s worth putting into perspective the impact of zombies by simplifying the equity universe into three types of companies: runners, fighters and zombies.

Runners, in short, are growing companies in growing markets. The most visible examples are the mega-cap technology firms. But runners exist in other markets, too. They can grow in a Covid-19-infected economy and can do so profitably. Even as some runners risk growing too large and attracting attention from regulators, they’re making life worse for the zombies, with every percentage point of gained market share coming at the expense of these companies.

Fighters are those companies battling for, and winning, market share in flat or low-growth markets. Fighters may have growth-like characteristics or may trade at low valuations. They’re not limited by geographic or size distinctions. Technology and a landscape permanently altered by Covid-19 are presenting new opportunities for these companies to reinvent themselves through innovative customer experiences, for example. Large retail brands featuring a direct-to-consumer relationship and omni-channel capacity are illustrative of fighters finding new life in a challenged space.

Which brings us to the zombies. Losing share, losing pricing power and being kept alive by debt servicing, zombies ultimately cannot cover their cost of capital. Fundamentally, zombies lack a path to profitability.

The pandemic has accelerated the zombie’s demise, and certain industries have become more infested with them. The energy sector, particularly exploration and production firms, are plagued by low prices, weak demand and leveraged balance sheets. Banking, already squeezed by a diminishing branch footprint, has been negatively impacted by the flattening yield curve, a record-low rate environment and stagnating loan growth. The communications industry is also a breeding ground for zombies, as shifts in consumer preferences for content, including more customized streaming options, have made legacy structures obsolete.

One obvious question arises about zombie companies: How long can they survive? It depends, but a zombie’s negative impact to your portfolio can last for years — and the issue is exacerbated by today’s monetary environment. Even as their fundamentals decay, zombies continue to shuffle forward, underperforming the market and introducing unhealthy competition to the real economy. The wave of monetary stimulus since the 2008-09 financial crisis has made access to capital historically easy, providing fresh food (cheap debt) to the business model with no future.

Next steps

So, in this uncertain world, how should investors manage the risk posed by these fundamentally doomed companies? As policy decisions drive market performance and prop up failing businesses, investors must carefully assess the characteristics of their holdings to discern the living from the living dead.

First, go big. We believe an overweight to mega- and large-cap firms (Russell Top 200 Index, Russell 1000 Index) will shift equity holdings to a significantly safer neighborhood than the more zombie-populated small-cap universe (Russell 2000 Index) can provide. Certainly, there are plenty of large-cap zombies as well, but the likelihood of being exposed to a failing company is higher in small-caps.

Next, seek runners and fighters. Finding long-term winners in the current environment is a difficult undertaking, but rigorous analysis can help uncover fundamentally good business. For example, maintaining an equity bias toward growth characteristics could help limit zombie exposure. Even within the much-maligned value equity universe, looking for stocks that can grow profitably — by gaining market share or by building brands — often distinguish the runners and the fighters from their doomed peers.

Finally, play offense in fixed income. Yes, fixed income proved to investors in 2020 that credit can, and will, break out of its lower-volatility slumber quickly in response to new information. That said, we’ve seen a remarkable normalization in the level of volatility in fixed income markets, and we see opportunity in investment-grade and preferred securities as an effective means of driving additional risk-adjusted yield. Within high-yield fixed income, zombie risk is best addressed with an active approach that limits potential drawdown risk from zombie surprises.

Within the credit universe, to identify those industries with the highest incidence of zombie companies, we review several criteria including debt interest coverage. When examining this metric within the high-yield market, the consumer-discretionary and energy sectors show the highest prevalence of zombies, while in the investment grade credit space, energy and industrials show the most extensive occurrence of zombies.

By taking steps to minimize the negative impact of zombie companies, investors will be better positioned to navigate financial markets as this exceptional time unfolds.

Todd Jablonski is chief investment officer of Principal Global Asset Allocation at Principal Global Investors.

Stock market is at the start of a selloff, says veteran trader Larry Williams

Attention, investors: Spooky times are on the way for the stock market.

You should trust your instincts if you’re nervous because of the wobbly action in the S&P 500 Index SPX, -1.11%,  Nasdaq COMP, -1.07%  and the Dow Jones Industrial Average DJIA, -0.87%  since these indices got slammed in early September.

Starting right about now, the stock market will see a significant and sustained selloff through about Oct. 10. Don’t look to gold as a hedge. It’s riding for a fall, too, despite the widespread misbelief that it protects you against losses in weak stock markets.

The bottom line: Ghosts and goblins come out in the market in the runup to Halloween, and we can expect the same this year.

That’s the view of trader Larry Williams, who offers weekly market insights at his website, I Really Trade. Why should you listen to Williams?

I’ve watched Williams accurately call many market twists and turns in the 15 years I’ve known him. I know of more than a few money managers who trust his judgement. Williams has won or placed well in the World Cup Trading Championship several times since the 1980s, and so have students and family members who apply his lessons.

He’s popular on the traders’ speaking circuit both in the U.S. and abroad. And Williams is regularly featured on Jim Cramer’s “Mad Money” show.

Time-tested mix of indicators

To make market calls, Williams uses his own time-tested mix of fundamentals, seasonal trends, technical signals and intelligence gleaned from the Commitment of Traders report from the Commodity Futures Trading Commission (CFTC). Here’s how he thinks about the three types of positions the CFTC reports. Williams considers positioning by commercial traders or hedgers and users and producers of commodities to be the smart money. He thinks large traders, mainly big investment shops, and the public are contrarian indicators.

Williams mainly trades futures because he thinks that’s where you can make the big money. But we can apply his calls to stocks and exchange traded funds, too. Here’s how he’s positioning for the next few weeks and through the end of the year, in some of the major asset classes and stocks.

Expect an extended stock market selloff

To make market calls in September, Williams turns to what he calls the Machu Picchu trade, because he discovered this signal while traveling to the ancient Inca ruins with his wife in 2014. Williams, who is intensely focused on seasonal patterns that consistently play out over time, noticed that it’s usually a great idea to sell stocks — using indexes, mostly — on the seventh trading day before the end of September. (This year, that’s Sept. 22.) Selling on this day has netted profits in short-term trades 100% of the time over the past 22 years.

Williams also notes that selling on the 11th through the 20th trading day of September has been the right thing to do 80%-95% of the time, with one exception. Sales on the 17th trading day net gains 75% of the time — still not bad.

This year, that means the time for selling is Sept. 15-28. The percentage success rates cited above are for very short-term multi-day trades. But stocks tend to peak for the month in this time range, and then stay weak through around the middle of October. He thinks the pattern will repeat again this year.

“We’re most likely going to have a pullback in the market here,” says Williams.

One caveat: Watch the advance-decline line, one of Williams’ favorite indicators. If fewer stocks are declining relative to advancers on days the stock market is weak, or if there is a broadening out of participation on up days, this is a sign the any selloff may be coming to a close.

“If great breadth comes in to the market [on up days], then I will get bullish,” he says.

Gold offers no hedge

A lot of people think gold serves as a hedge during stock market declines, but this isn’t true, says Williams. Gold has slumped along with stocks in most of the major market selloffs. He expects the same over the next three to four weeks. He’s advising gold traders to sell any rallies now, and then revisit when gold falls later this year to buy back lower.

To make this call, Williams looks at the typical seasonal pattern for gold that plays out every year, and also the historical trends in election years. The conclusion: Gold typically peaks around the middle of September then weakens for most of the rest of the year. This year, gold has underperformed its typical seasonal pattern, which is bearish for the metal.

“Gold has not been able to stay in step with what happened in the past, therefore the seasonal pattern should work this year,” he says.

Another sign of potential weakness is the “crazy bullishness on gold” among the right-wing pundits like Ron Paul who have a long-standing affinity for the medal.

“They’re all on the bandwagon because of the rally in gold,” he says.

As with gold, he expects a similar seasonal pattern in other precious metals and copper. They will be weak from now through the end of the year, with a possible bounce in the middle of October.

Buy the dollar

Gold and the dollar have such a strong inverse relationship, if you are long gold, you are basically short the U.S. Dollar Index DXY, +0.03%. That’s not a good place to be, with gold about to fall. Better to be long the dollar now.

“I’m wildly bullish over next six months,” says Williams.

He bases this call on where the dollar is in a 60- to 70-day cycle that tends to play out over time. It’s now coming off the recent lows in early September. He also cites readings from the Commitment of Traders Report showing that “smart money” commercial buyers are getting long the dollar, which is unusual.

“There’s a pretty good rally coming in the dollar,” he says.

Stock ideas

Here are some stock patterns that should play out over the next several months, according to Williams’ system.

•?Amazon.com AMZN, -1.78% tends to decline now through mid-October and even through to Christmas, but then it returns to rally mode. Williams expects the same thing this year. This is a “high conviction” call, he says.

•?It makes sense to buy retail names just before Thanksgiving for the typical rally that plays out for a few weeks heading into the holiday shopping season. Names to consider at that point include: Walmart WMT, -1.02%, Target TGT, +0.82%, Home Depot HD, -1.70% and Costco Wholesale COST, -0.86%.

•?Sell jewelry stocks such as Tiffany TIF, +1.43% and Signet Jewelers SIG, -2.82% in the middle of December because they tend to go down in January for a month or so.

•?International Business Machines IBM, -1.72% tends to rally from late October, suggesting the stock will be a good trading buy in that time frame.

•?Buy natural gas because Williams expects it to rally. If he’s right, this would be good for natural gas-related stocks I’ve recently suggested in my stock letter, Brush Up on Stocks, or Continental Resources CLR, +1.71%  and Comstock Resources CRK, +3.86%. Continental Resources founder Harold Hamm has been a big buyer of his stock. Comstock is implicitly backed by Dallas Cowboys owner and energy investing expert Jerry Jones, who owns a majority stake in this name.

Also consider exchange traded funds like United States Natural Gas Fund UNG, +3.22%, ProShares Ultra Bloomberg Natural Gas ProShares BOIL, +6.72%, ProShares UltraShort Bloomberg Natural Gas KOLD, -6.81%, United States 12 Month Natural Gas Fund UNL, +1.53% and iPath Series B Bloomberg Natural Gas Subindex Total Return ETN GAZ, +3.43%.

If you are psyched about Williams, here’s some bad news. He plans to close his trading site at the end of the year to focus more on personal trading.

“It’s a labor of love. It’s time to leave,” says Williams, who turns 78 in October.

I’ll stay in touch with him, and hopefully report to you on his market and trading views from time to time.

Michael Brush is a columnist for MarketWatch. At the time of publication, he owned CLR and CRK. Brush has suggested AMZN, IBM, WMT, TGT, HD, TIF, CLR and CRK in his stock newsletter, Brush Up on Stocks. Follow him on Twitter @mbrushstocks.

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Market Extra: Yes, the U.S. economy really does need more fiscal stimulus – and the stock market knows it

A reflection of the United States Capitol makes Washington seem upside down.

Stefani Reynolds/Getty Images

Remember the massive disconnect between the real economy and the stock market?

It was the story of the spring: all of a sudden a terrifying virus was stalking the land, tens of millions of Americans were jobless, businesses were shuttered, and government officials were reeling to get control of the situation. Yet despite it all, after crashing in March, U.S. stocks spent the next few months roaring higher.

See: 16 million people just got laid off but U.S. stocks had their best week in 45 years

That narrative has receded as time has passed. As the economy “re-opens,” after all, it makes sense to see financial markets pushing higher. But the foundation underpinning the recent recovery is shaky, according to several analysts, and many believe that both the economy and financial markets will need more government help – fiscal stimulus – to continue to make gains.

“There has always been a reckoning that needs to occur which has not yet taken place,” said Steve Blitz, chief US economist for TS Lombard. “And that is the possibility of an extended recessionary environment. Because most people believe this is a COVID cycle as opposed to a true economic cycle, the forward sentiment never dropped like it would in a regular recession.”

By “COVID cycle,” Blitz means changes in economic activity dictated by the need to control the spread of the virus: short-term business closures, temporary layoffs, and so on. The sense that this is not a “real” recession comes from the fact that the economy is so bifurcated, keeping the Americans who need assistance “off the radar,” he said in an interview.

“The burden is more on the people making $14 an hour than those making $40 an hour,” Blitz said. That also masks the blow to the economy: “The $14-an-hour people are only responsible for 9% of consumer spending. And the top 40% have had a lifestyle change but their lives haven’t changed and their balance sheets are bigger than they were at the beginning of the crisis.”

See: ‘The stock market no longer thinks it needs the economy if it has the Fed,’ David Rosenberg says

It’s fair to acknowledge that the economy has made big steps toward recovery over the course of the summer. But that’s to be expected, given the events of the spring, pointed out Lindsey Bell, chief investment strategist for Ally Invest. “When you go from completely shut down to somewhat open, there’s going to be a huge pop. This was a bigger pop than in a normal recession. It’s also normal to see that momentum begin to taper off.”

Tapering momentum was evident this past week in a slower pace of growth in retail sales and industrial production.

Bell thinks American consumers, overall, are in a surprisingly healthy place. Consumer sentiment was stronger than expected, and at its highest level since March in a reading from the University of Michigan, published Friday.

Still, she worries about the normal fading of momentum taking place alongside the pull-back in expanded unemployment benefits.

“There are 12.6 million people still receiving unemployment benefits,” Bell said. “That’s why we need stimulus from the government by the end of the year. The consumer can chug along and withstand the next couple of months, but 12.6 million Americans are going to need more than the typical unemployment benefit to weather the storm.”

Strategists at BCA Research earlier in September quantified exactly how much fiscal support they believe is needed: at least $500 billion, to ensure consumer spending grows about 2% over the next 12 months. In the aftermath of the 2008 financial crisis, spending growth averaged between 2% and 6%, BCA notes.

BCA’s calculations show that if Congress were to extend another $1.1 trillion worth of stimulus, that would boost spending to 6% over the next 12 months. But the team estimates that even just holding spending growth flat requires more spending – roughly $249 billion, they reckon – “and that outcome would almost certainly disappoint markets,” they said.

There is some consensus that the lack of any deal so far is already disappointing investors.

“I don’t think we’re going to get stimulus before the election and I think that’s what’s been weighing on the markets for the past couple of weeks,” Bell told MarketWatch. Since the September 2 high, the S&P 500 SPX, -1.11% has lost about 5.3%.

And in an analysis published the day after the most recent meeting of the Federal Reserve, AxiCorp analyst Milan Cutkovic wrote, “The focus will now shift back to the US Congress, where Democrats and Republicans are still struggling to agree on a stimulus package. Investors are becoming increasingly impatient with the lack of progress, and market sentiment could turn sour if there is no deal soon.”

Investors may have been expecting too much of monetary policy, Blitz thinks.

“The Fed can only affect the economy that’s working and open,” he said. “They can’t do anything about the airlines, the restaurants, the hotels. They are doing twice as much as they normally would have, because they can only be half as effective. As long as that dynamic is still in play, the short-term loss of the fiscal initiative doesn’t mean a lot. As time goes on, though, the virus controls everything. Things will stall because the economy isn’t working 100%, and if the federal government doesn’t send out income support, it will pull growth lower. “

U.S. stocks closed the week lower Friday, extending a three-week sell-off. The Dow Jones Industrial Average DJIA, -0.87% was less than 0.1% lower for the week, but the Nasdaq Composite index COMP, -1.07% slid 1.1%, and is now down 8.3% from the early September peak.

In the week ahead, investors will get more information on the health of the economy, and the consumer. The National Association of Realtors will report on sales of previously-owned homes on Tuesday, and the government will release data on new-home sales Thursday. On Friday, a report on durable goods orders is due.

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