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business briefing

Briefing highlights

* 10 popular market views ...

* ... that David Rosenberg thinks are bunk

* Markets at a glance

* U.S. economic growth slows

* Aimia CEO to exit

* TransCanada, Imperial profits rise

Please, somebody take these folks out to the woodshed

David Rosenberg, chief economist, Gluskin Sheff + Associates

David Rosenberg loves to shake things up.

The chief economist at Gluskin Sheff + Associates has already declared the bull market dead. Now, he’s tearing apart the popular views among market observers.

Not ripping them apart, exactly.

Rather, in a note to clients, he listed the 10 most “commonly held, well-entrenched consensus views at the moment,” and pointed out that they are thus “destined to be the most wrong.”

“It is funny that the pundits are all out talking about how the market selloff makes no sense given how strong the earnings backdrop is during the current reporting season,” he added.

“Please, somebody take these folks out to the woodshed.”

The 10:

1: “The correction lows in the equity market will hold.”

2: “Earnings fundamentals are strong, and will win out.”

3: The “setback” in first-quarter U.S. growth was temporary, and the gains from the Trump administration’s tax overhaul are simply lagging.

4: Stocks “will only get hurt” when the yield on the U.S. 10-year Treasury, which hit 3 per cent this week, actually tops 4 per cent.

5: “The secular bull market in bonds is over.”

6: “Corporate finances are in great shape.”

7 (and my favourite): “Don’t worry, there is a method behind Donald Trump’s madness.”

8: The Federal Reserve will raise its benchmark rate only twice more in 2018.

9: “We are in a strong synchronized global expansion.”

10: The U.S. will not slide into recession until at least 2020.

Indeed, analysts have cited the strength of the current first-quarter earnings season, and how many companies have topped the estimates of analysts.

But that, Mr. Rosenberg said, is looking backward.

“The market is forward-looking, and so last quarter’s earnings have already lost their power, being in the rear-view mirror,” he said.

“One can see that a whole lot of good news has already been priced in because the companies that have smashed through their estimates aren’t seeing much of a positive response in their share price following the release of the numbers,” he added.

“Looking back into the history books, I can find plenty of times in the past when the market was about to go through the wringer even with robust earnings.“

At about the same time Mr. Rosenberg was giving his clients his views, by the way, Morgan Stanley quantitative analysts were also warning of the findings of their new research, called “the market expectations model for equities,” or MEME, which looks at prices and estimated earnings.

The bottom line from this research by Morgan Stanley quantitative analyst Brian Hayes and Elizabeth Harrow and equity strategist Michelle Weaver is that market expectations are well down since the end of last year.

“The market’s expected return and growth rate for U.S. equities have declined sharply in 2018, falling by 1.7 per cent and 1.6 per cent, respectively, in three months,” Mr. Hayes, Ms. Harrow and Ms. Weaver said in their report.

For U.S. stocks, “the expected return as of the end of March, 2018, is 10.4 per cent, and the expected earnings growth rate is 8 per cent,” they added.

“These are both below median since 1986 … and the expected return is the lowest since January, 2007.”

Oh, but there’s some good news, as Mr. Rosenberg cited a recent, narrower “performance gap” between American and lagging Canadian stocks.

“The U.S. is a growth stock market, while Canada is deep value,” Mr. Rosenberg said.

“Late-cycle investing means rotating towards value. Canadian stock market valuations and equity risk premiums are among the most compelling at the moment,” he added, citing the fact that the Fed is raising interest rates and undoing other stimulus measures while the Bank of Canada holds steady and never took similar measures that it now must undo.

At the same time, Canada’s market is “a much more effective hedge against inflationary pressures,” so put it all together, and, in fact, Canadian stocks “can rally as the U.S. market falters or even heads into recession.”

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Markets at a glance

U.S. growth slows

The U.S. economy is slowing down, though not as sharply as expected.

The first reading of first-quarter growth showed an annual pace of 2.3 per cent, down from the fourth quarter but above the 2 per cent economists expected.

“U.S. GDP was a tad firmer than expected to start the year, but with that gap largely driven by inventory building, there will be no rush to rewrite the outlook for the year as a whole,” said CIBC World Markets chief economist Avery Shenfeld.

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