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Business Briefing BMO slices 1,000 points from its Toronto stock market forecast

Briefing highlights

  • BMO cuts its TSX forecast
  • Stocks, manatees and mermaids
  • Markets at a glance
  • TransCanada to change name
  • Bank of Canada holds key rate steady
  • Bank of Canada trims economic forecast
  • Constellation Brands cuts outlook
  • From today’s Globe and Mail

1,000 points

Bank of Montreal’s chief investment strategist has sliced 1,000 points from his 2019 forecast for the Toronto stock market.

Brian Belski still expects the S&P/TSX Composite Index to surge to a fresh high this year, just not as high as he originally projected.

“Ultimately, we believe barring a broad global recession (which we do not expect by the way), there’s a very good chance that Canadian stocks are already priced for a significant economic and earnings deceleration,” Mr. Belski said in Tuesday’s outlook.

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“However, we cannot ignore the precipitous drop in stocks that transpired in 4Q18 – one that we clearly believe was fueled more by speculation, rhetoric, innuendo and fear relative to fundamentals (even in Canada),” he added.

“As such, we are tweaking our 2019 yearend S&P/TSX index price target to 17,000 – which, oh, by the way, is still a new price high for the TSX. Nevertheless, we believe our projection provides Canadian stocks to under promise and over deliver, especially considering the relative earnings growth and valuation proposal that the TSX represents.”

That new call of 17,000 may be down from Mr. Belski’s earlier 18,000, but would still mean a gain of about 16 per cent from where the index currently stands and almost 19 per cent from the end of last year.

And “although earnings growth is likely to slow from current double-digit rates, it is still expected to remain positive by most analysts,” Mr. Belski said.

The TSX lost 11.6 per cent in 2018, marking its worst year since 2008, and we all remember what was happening then.

Mr. Belski also provided something of a history lesson for those who may be fretting about what could happen this year amid the wild swings we’ve seen of late.

Since 1956, the TSX has returned an average annual 12.3 per cent in years following a 10-per-cent decline. That’s above the overall average of 6.6 per cent.

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And when the decline is “driven by a multiple contraction,” the following year saw a 16-per-cent rise.

“Twenty-seven per cent of these years saw an over 20-per-cent return the following year, and over 90 per cent of the time the subsequent annual return was positive,” Mr. Belski said, adding that, since 1956, 2002 stood out as the only year of negative returns after a drop of 10 per cent.

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Stocks, manatees and mermaids

History.com tells us that, exactly 525 years ago today, Christopher Columbus saw three manatees off the Dominican Republic and thought they were mermaids. Obviously, they were “not half as beautiful as they are painted.”

Which brings us back to Mr. Belski’s view of what may be driving some investors.

As in, if you think a manatee is a mermaid, maybe it is a good time to get out of the market.

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Markets at a glance

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TransCanada to change name

TransCanada Corp. is changing its name, dropping both the Trans and Canada in what it says will “better reflect the scope of the company’s operations as a leading North American energy infrastructure company.”

The new name, if approved by shareholders, would be TC Energy.

Bank of Canada cuts outlook

The Bank of Canada has trimmed its outlook for economic growth, now expecting gross domestic product to expand by just 1.7 per cent this year.

That’s down from its earlier forecast by 0.4 of a percentage point, the central bank said today as it held its benchmark overnight rate steady at 1.75 per cent, as expected.

Governor Stephen Poloz, senior deputy governor Carolyn Wilkins and their colleagues said they still believe the key rate “will need to rise over time” to a neutral rate, which is seen at 2.5 to 3.5 per cent.

Bank of Canada senior deputy governor Carolyn Wilkins and governor Stephen Poloz

Adrian Wyld/The Canadian Press

“The appropriate pace of rate increases will depend on how the outlook evolves, with a particular focus on developments in oil markets, the Canadian housing market and global trade policy.

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The drop in global crude prices has had “a material impact” on Canada’s outlook, the central bank said, noting that, despite the narrowing of the differential between Canadian and global crude benchmarks, “investment in Canada’s oil sector is projected to weaken further.”

As CIBC World Markets put it, “the Bank of Canada has taken itself out of the rate hike game, and its message today suggests that it isn’t quite as sure about when it will come off the sidelines and hike again.”

The central bank said clearly that “the rate message wasn’t that they were done for good, but rather that the timing will be a bit more extended, adding the words ‘over time’ to the paragraph that refers to the need to get rates into the neutral range,” said CIBC chief economist Avery Shenfeld.

While cutting its 2019 forecast, the Bank of Canada also tweaked its 2020 outlook.

“But remember, that’s likely under the assumption that interest rates won’t have risen as quickly as in their last projection,” Mr. Shenfeld said.

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