September 17, 2020
Fiscal stimulus: Expectations for pre-election fiscal relief may have ticked higher following Tuesday’s $1.5T proposal from bipartisan moderates. Meadows continues to sound upbeat, Mnuchin is trying to bring people together and Trump sounds ready to sign almost any bill. Unfortunately, the key players (McConnel and Pelosi) remain ~$1.5T apart and each have political reasons to hold their ground. Yesterday’s weaker-than-expected retail sales number and today’s softer housing data help, but neither party feels enough pressure yet to compromise. Next week is seen as the last good chance to act prior to the election and expectations are probably still low enough to cushion the impact of inaction, while agreement would likely provide material upside for equities.
Monetary policy: Yesterday, the Fed committed to holding rates at zero for the next 3.25 years, which reinforces ‘lower for longer’ bond yields. Short-term bond yields will stay anchored by ZIRP and longer-term bond yields will trade off inflation expectations. In this environment, we expect frustrated fixed income investors to seek alternative sources of yield, namely bond-like equities. These are stocks that pay 3-4% in dividend yield and have 2020 EBITDA/dividend cost ratios greater than 3x. Investors will get their 3-4% yield plus a terminal value based on ten years of normalized FCF discounted at the lowest rate in their lifetime. There’s no shortage of opportunities and cyclically-sensitive names are preferred.