Barron’s 2019 Investment Roundtable, Part 1

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Barron’s 2019 Investment Roundtable, Part 1 By Jan. 11, 2019 10:05 p.m. ET Order Reprints Joel Kimmel Text size
It was a dark and stormy day. No, we’re not referring to the weather, which was perfectly chill for early January, but to the tenor of the conversation at this year’s Barron’s Roundtable, our annual investment talkfest and stockpickathon, featuring 10 of Wall Street’s smartest investors. Consider the panoply of problems on which our panelists dwelled: a rising ocean of corporate and government debt, a debilitating trade conflict, fake earnings, tech disruption, political paralysis, the withering of the middle class. Might as well cue the demise of the Western world, which, by the way, also came up for discussion.
And yet, for all the gloom-mongering at the gathering, held on Monday, Jan. 7, at Barron’s offices in New York, the takeaways are surprisingly reassuring. Almost none of our market seers is predicting a recession in 2019. Almost all expect the U.S. economy to keep growing, President Donald Trump and China’s Xi Jinping to strike a trade deal, and the Federal Reserve to apply a light touch to monetary policy in the months ahead. Related Jeffrey Gundlach on the Growth of U.S. Debt
While stocks might stumble through the year’s first half, the aforementioned forecasts suggest they will sprint through the second half and into 2020, when everyone and his aunt will be running for president and trying to keep the good times going. Meanwhile, after a disappointing 2018, stock markets here and abroad are cheaper than they have been in quite awhile. In sum, it looks like a grand year to be a stockpicker, as most of our panelists are.
You’ll find two new faces at the table this year. One belongs to Todd Ahlsten, chief investment officer of San Francisco–based Parnassus Investments, and lead manager of the Parnassus Core Equity fund (ticker: PRBLX). Also joining us for the first time: Rupal J. Bhansali, chief investment officer, international and global equities, and a portfolio manager with Ariel Investments in New York. 2019 Roundtable Experts Advisory director and senior investment strategist Goldman Sachs T. Rowe Price Baltimore
This week, we present the panelists’ big-picture views on the economy and financial markets, and the many forces—social, political, financial, and technological—that are reshaping both. Next week, we’ll share the group’s best investment bets for 2019.
Barron’s : What is the stock market telling us now, and should we believe it? Jeffrey, since your forecast a year ago was right on target, please start.
Jeffrey Gundlach: The market peaked in 2018 a lot earlier than most people think. The New York Stock Exchange Composite Index and non-U.S. markets peaked on Jan. 26. The stock market made a cyclical top initially characterized by a speculative mania for Bitcoin and other cryptocurrencies. There was no fundamental reason for Bitcoin’s price to go vertical in 2017. Although Bitcoin had started correcting in December 2017, the price was still pretty high when we met last January. Mario Gabelli Rivulet Capital New York
Market cycles often end with something insane. Think of back in 2000, which had little revenue and no profit, but a stock that exploded in value. It became a symbol of the dot-com collapse. After you see that sort of mania, markets begin rolling over. The Dow transports followed the NYSE Composite lower last year. Then the other major indexes turned down, leaving just a few stocks, such as [AMZN] and Apple [AAPL], to carry the market up. Finally, Apple said it would no longer break out unit sales of its most important products, and that was it. So now we are in a bear market, which isn’t defined by me as stocks being down 20%. A bear market is determined by the way stocks are acting. Jeffrey Gundlach Photograph by ioulex; grooming by Gina Marie Picciotto
Where to from here?
Gundlach: The biggest risk is the corporate bond market. U.S. junk-bond issuance has been prolific, and the quality has been poor. Many issues have been floated with no covenants [legal agreements regarding issuer behavior]. The investment-grade corporate-bond market has also grown massive; it is much larger than it was going into the prior credit crisis. A Morgan Stanley research report suggests that, based on leverage ratios alone, 45% of investment-grade corporate bonds would be rated junk right now. The report further suggests that around 60% of corporate bonds currently rated BBB would be rated junk by the same leverage-ratio metric. That’s around $1 trillion of par value, or about 150% of the junk-bond market’s value.
There are problems with debt broadly. I keep hearing the president say that this is the strongest economy ever, which isn’t true. There was a bump up in second- and third-quarter gross domestic product, but the growth is debt-based. We have floated incremental debt when we should be doing the opposite if the economy is so strong. In fiscal 2018, we increase...