Skip to main content
investor newsletter

Equities sold off yet again Wednesday, tempting many investors to buy the dip. The work of two prominent strategists, however, suggest that the market bottom is likely still much lower than current levels.

Reports from both strategists this week provide five reasons to believe we’re not at the point where a sustainable rally can begin.

The first reason is inspired by BofA Securities’ widely followed monthly survey of global portfolio managers. The report compiled by chief investment strategist Michael Hartnett uncovered a big jump in bearishness among professional investors at the end of April. Cash weightings were the highest since the aftermath of the 9/11 terrorist attacks and, among managers with the flexibility to invest in different asset classes, equities were at their biggest underweight since the onset of the pandemic.

Despite the pessimism, Mr. Hartnett does not believe investors have fully capitulated on stocks quite yet. That’s because money managers still expect further central bank rate hikes, and he thinks they need to believe that rate cuts are imminent before markets can bottom.

Reasons two through five can be gleamed from a research report Tuesday by Credit Suisse global strategist Andrew Garthwaite called Equities: too early to add & what we need to get optimistic.

Mr. Garthwaite’s primary concern - and the No. 2 reason on our list - is that the rising risks of a U.S. recession are underestimated by current market prices.

The strategist believes that U.S. GDP growth needs to slow to 1 per cent in order to contain wage inflation, and this will require the Federal Reserve to raise policy rates from 1 per cent now to between 3.5 and 4 per cent. Both sharply slower growth and much higher interest rates will put downward pressure on equities, whether an official recession happens or not.

Our third reason to believe that markets are likely to go lower concerns the U.S. equity risk premium (ERP), the earnings yield investors require to invest in equities relative to bonds. The simplest form of ERP is using the earnings yield of the S&P 500 compared with the 10-year Treasury yield.

Currently, the earnings yield on the S&P 500 is 5.6 per cent and the Treasury yield is 2.9. This makes the ERP 2.7 per cent (the S&P 500 yields 2.7 per cent more than bonds.)

ERP is an important measure of investor risk tolerance. When markets are risk-averse, the ERP is high because investors require more earnings on stocks before their investing capital is attracted away from risk-free bonds.

Mr. Garthwaite estimates that the ERP should be 5.5 per cent, which would mean stock prices must fall or earnings expectations must climb significantly higher before the market is fairly valued.

Our fourth reason for expecting lower North American stock prices is the deteriorating corporate profit outlook. Earnings revisions - updated estimates of profit - have started to fall and 71 per cent of the time when this happens, markets decline over the next quarter, according to Mr. Garthwaite. He added that recent global manufacturing data implies “significant further downside to revisions.”

Credit Suisse also sees risks to profit margins. The strategist pointed out that roughly half of the improvement in return on equity, a widely used proxy for profitability, over the past decade is attributable to lower interest and tax rates. These trends are now moving in the other direction.

Reason No. 5: the end of the ‘Fed-put’. This futures market-derived term describes equity investors’ belief that any deep market sell-off will be met by a Federal Reserve interest rate cut that will push stocks higher.

The financial crisis of 2008 was the most obvious example of the U.S. central bank combatting asset price weakness by slashing rates. The same pattern appeared after late 2018′s 19.8-per-cent drop in the S&P 500, after which the Fed’s policy rate went from 2.5 per cent to 1.75 per cent by early 2020.

The onset of the pandemic saw a repeat of the trend when the initial equity market downdraft was met by Fed chairman Jerome Powell slashing rates by a full percentage point.

But with inflation now at 8.3 per cent in the United States and 6.8 per cent in Canada, neither the Federal Reserve nor the Bank of Canada have the freedom to cut rates this time.

Mr. Hartnett and Mr. Garthwaite are only two examples of strategists that have turned decidedly bearish. Michael Wilson of Morgan Stanley is another, having recently written that fair value for the S&P 500 is between 3,700 and 3,800, compared with current levels near 4,000.

Strategist forecasts are often viewed as contrarian indicators, which implies that near-uniform bearishness signals an imminent rally. There does, however, seem a lot of reason for caution this time around.

-- Scott Barlow, Globe and Mail market strategist

This is the Globe Investor newsletter, published three times each week. If someone has forwarded this e-mail newsletter to you or you’re reading this on the web, you can sign up for the newsletter and others on our newsletter signup page.

Stocks to ponder

Walmart Inc. (WMT-N) When one of the world’s largest retailers loses more than 10 per cent of its value in a matter of hours - as it did on Tuesday - investors should stop and ask themselves what that slide implies for the broader stock market, writes Ian McGugan. If a huge, well-managed flagship such as Walmart is having trouble navigating this economic storm, how successful will other companies be?

IBI Group Inc. (IBG-T) This is a small-cap industrial stock whose share price quickly rebounded from its COVID low and continues to surge higher. Month-to-date, the share price is up 15 per cent on the back of better-than-expected quarterly earnings reported earlier in the month. The Street remains highly bullish: the stock has a unanimous buy recommendation from eight analysts and a 12-month forecast return of 39 per cent. Jennifer Dowty looks at the investment case.

The Rundown

How to navigate the current bond-market turmoil

Many people continue to struggle with the issue of bonds in a portfolio. That’s understandable. For 40 years, with the occasional blip, bonds have provided stability and reasonable income in an investment account. Now, suddenly, the bottom has fallen out of the bond market, leaving investors shell-shocked. Most people invest in the bond market through mutual funds or ETFs. Recently, a confused young reader wrote to ask if she should be thinking short-term or long-term bond funds. Here’s what Gordon Pape suggests.

An ‘old-school’ approach to lending allowed this investment fund to generate decades of positive returns

With 326 consecutive months of positive returns, Romspen Investment Corp. might have the country’s most consistent investment fund. As a provider of high-interest mortgages to property developers who typically don’t qualify for bank loans, the fund may not appear at first glance to be built for an almost absurd level of steadiness. But no manner of scandal, shock or disaster has managed to compromise Romspen’s performance – until the pandemic. Managing partner Derek Jenkin spoke with The Globe and Mail about those fraught early days in March, 2020, and how the fund got back on track.

What the pros are doing

Third Point’s Loeb adds Suncor Energy stake, turns back on Disney

Buffett’s Berkshire buys Citigroup and several other stocks, slashes Verizon

Tiger Global raised stakes in some tech names battered by year’s rout


Wednesday’s analyst upgrades and downgrades

Tuesday’s analyst upgrades and downgrades

Wednesday’s Insider Report: CEO invests $1.3 million in 2022′s top-performing TSX stock

Tuesday’s Insider Report: CFO invests over $900,000 in this environmental services company

Tesla removed from S&P 500 ESG Index, prompting Musk pushback

Globe Advisor

The crypto shake-out shows boring is back

Are you a financial advisor? Register for Globe Advisor ( for free daily and weekly newsletters, in-depth industry coverage and analysis, and access to ProStation - a powerful tool to help you manage your clients’’ portfolios.

Ask Globe Investor

Question: I own BIP.UN (Brookfield Infrastructure LP), BEP.UN (Brookfield Renewable Partners), and was awarded BIPC and BEPC (corporate spin-offs) a few years ago.

In the meantime, the values have increased. BEP.UN, currently at $45.10, is somewhat in line with BEPC ($46.46) but BIP.UN ($78.89) is out of whack with BIPC ($90.53). The dividends are not that different.

I have been debating whether it would be to my advantage to sell the original stock and buy the corporations or vice versa. Would you have an off-the-shelf answer?

Thank you very much for this and past information. – Wayne N.

Answer: The off-the-shelf answer is: It depends. It comes down to priorities. Are you investing for yield or capital gains?

If yield is the goal, there is not much to choose between BEP.UN and BEPC since the price is reasonably close and the dividend is the same. But there is a significant gap between BIP.UN and BIPC-T. Both pay 54 US cents per quarter (US$2.16 a year). So, the yield on BIP.UN is 3.53 per cent while BIPC yields 3.08 per cent.

So, take your pick. If it’s capital gains you’re looking for, the trading history says the corporate shares are the way to go. If it’s cash flow, the edge goes to the original limited partnerships.

--Gordon Pape

What’s up in the days ahead

Financial advisor John De Goey has some words of caution for those buy and hold investors thinking they can just wait things out.

Click here to see the Globe Investor earnings and economic news calendar.

More Globe Investor coverage

For more Globe Investor stories, follow us on Twitter @globeinvestor

You may also be interested in our Market Update or Carrick on Money newsletters. Explore them on our newsletter signup page.

Compiled by Globe Investor Staff

Follow related authors and topics

Authors and topics you follow will be added to your personal news feed in Following.

Interact with The Globe