BofA U.S. quantitative strategist Savita Subramanian believes the S&P 500 will finish 2022 close to current levels, held back by tightening monetary policy but supported by the TINA phenomenon which dictates that There Is No Alternative to equities because inflation-adjusted bond yields remain mired in deeply negative territory.
Ms. Subramanian’s colleague, the firm’s chief investment strategist Michael Hartnett, appears far more concerned about markets next year.
Mr. Hartnett believes the U.S. economy is over-stimulated and that 2020 marked the end of the controlled inflation and stable interest rate environment. He notes that global policy makers added US$9-trillion in stimulus to the economy in 2021 ($4-trillion in fiscal support, $5-trillion in quantitative easing) after injecting $23-trillion in 2020.
The strategist sees inflation as the driver of this year’s strong commodity returns – the highest since 1973 – and the weakest government bond market performance since 1949.
Mr. Hartnett sees the late 1960s/early 1970s as the most accurate market precedent. At that point, “inflation and interest rates [broke] higher from secular low/stable trading ranges on the back of high budget deficits, Vietnam, ‘Great Society’ policies, civil unrest [and a] political and acquiescent Fed.”
The strategist does not see a market downdraft as imminent even if he believes fund managers’ bullish positioning shows over-exuberance as 2021 ends. Over the mid-term, however, he thinks a bull market in commodities and volatility (as measured by the CBOE Volatility Index for equities and the ICE BofA MOVE index for Treasuries) has begun. The bull market in broader equities and credit has, in his estimation, almost reached its end.
As for positioning, Mr. Hartnett recommends high quality stocks in defensive sectors like consumer staples, telecommunications services, pharmaceuticals and sectors like oil that have historically outperformed during periods of inflation. He recommends short positions in copper-related stocks (global growth is set to slow) and semiconductors.
I’m not going to waste time trying to guess whether Ms. Subramanian’s or Mr. Hartnett is right.
But I will keep these forecasts in the back of my mind – along with those of BMO’s Brian Belski, Morgan Stanley’s Michael Wilson and Andrew Sheets, Hugo Ste-Marie at Scotiabank, and Jonathan Golub and Andrew Garthwaite - just to name a few – as the year begins.
Each outlook represents a potential roadmap for asset price behaviour in 2022. If markets start following the script of one of these forecasts, it will be time to pay far closer attention, because that strategist is the most likely source of accurate forward-looking indicators.
-- Scott Barlow, Globe and Mail market strategist
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Ask Globe Investor
Question: Is there an easy way to look up the sector weightings of the S&P/TSX Composite Index? I like to compare the performance of my self-directed portfolio against the S&P/TSX. This year, I am slightly trailing the index, and I would like to determine if this has to do with my preference for avoiding certain sectors.
Answer: One method is to use an exchange-traded fund such as the iShares Core S&P/TSX Capped Composite Index ETF (XIC) as a proxy for the index. If you navigate to XIC’s page on the iShares Canada website (do an internet search for “XIC ETF”) and scroll down to “Exposure Breakdowns,” you’ll find up-to-date sector weightings for the fund. As of Nov. 25, the top five weightings were financials (31.9 per cent), energy (13.2 per cent), information technology (11.9 per cent), industrials (11.6 per cent) and materials (11.4 per cent).
You’ll also find a list of individual stock weightings on the XIC page. Note that Shopify Inc. (SHOP) is the highest-weighted stock in the fund – and on the index – at about 7.5 per cent. If you don’t have a position in Shopify, which has a year-to-date return of about 44 per cent, that could also explain your portfolio’s underperformance compared to the index.
I’m not suggesting you should buy Shopify shares. But if your goal is to keep up with the S&P/TSX, you could simply buy the index through XIC or a similar fund such as the BMO S&P/TSX Capped Composite Index ETF (ZCN). Thanks to their very low management expense ratios of 0.06 per cent, both ETFs do an excellent job of tracking the index.
What’s up in the days ahead
Robert Tattersall will have some thoughts on the unintended consequences of the explosion of small ETFs on the TSX.
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Compiled by Globe Investor Staff
Editor’s note: An earlier version of this newsletter incorrectly stated BofA U.S. quantitative strategist Savita Subramanian believes the S&P 500 will post a 6.5 per cent return in 2022. Ms. Subramanian expects earnings per share growth of 6.5 per cent next year, but has a year-end 2022 target of 4600 for the S&P 500, which would represent little change from current levels.