BofA Securities popular monthly survey of global portfolio managers has uncovered more bullishness. But Morgan Stanley chief strategist Michael Wilson contends that the positive signs are a deceptive “hall of mirrors” and adamantly urged clients to remain defensively positioned.
The continued bearishness of Mr. Wilson, one of Wall Street’s most closely followed strategists, puts him in the uncomfortable position of arguing that the market is wrong. In normal circumstances, the recent outperformance of economically sensitive stocks over defensive sectors would help signal a new rally. But the strategist’s highest conviction view is that earnings and profit margins are set to fall.
Mr. Wilson has developed an indicator of future earnings that includes factors like manufacturing data, borrowing costs and the relationship between input costs and revenue growth. He noted a wide discrepancy between the warnings his model is providing and far more bullish consensus estimates.
The last two times the gap was this wide was December 2001-July 2002 and August 2008-March 2009. The closing of the divergence saw the S&P 500 drop 34 per cent and 49 per cent, respectively, during these two periods.
The strategist is not expecting such a major decline in the months ahead – there is ample market liquidity and no obvious signs of excess corporate leverage – but Mr. Wilson is very confident in his bearishness. He writes, “we double down on our well below consensus earnings forecast; we think the timing for meaningful downward revisions is likely to be during the first quarter.”
The forward profit guidance provided by corporate management during the ongoing S&P 500 earnings season will be vital for investors to follow in the coming days. The more disappointing the guidance, the more likely Mr. Wilson’s bearish scenario becomes.
-- Scott Barlow, Globe and Mail market strategist
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Stocks to ponder
Hydro One (H-T) Investors lately can’t get enough of Ontario’s electricity distributor. At a time when rival utilities are struggling, partly because rising rates make many dividend-paying companies look less attractive, Hydro One has found a way to keep shareholders enamoured. Its shares are back near the record high they set in early December, around $38 apiece. Tim Kiladze explores the reasons behind it.
If you’re depending on RRIF income, you may be in for a shock
Income from your Registered Retirement Income Fund may be about to decline by hundreds or even thousands of dollars for many Canadians just at a time when inflation is driving up the cost of everything from food to mortgage payments. The culprit? Last year’s stock market woes, as Gordon Pape tells us.
Confused about investing in 2023? Here’s a tried and tested approach
The first decade of the 21st century (2001–10) is considered by many investors to be the “Lost Decade.” A person who had invested $12,000 in the S&P 500 in January, 2001, would have ended the decade with about $11,048, a return of minus-7.9 per cent for 10 years of patience. But Sam Sivarajan points out it wasn’t a loss decade for everyone. And there are three lessons from it that can bolster returns going forward, no matter what comes.
What CIBC’s Benjamin Tal expects for 2023
Jennifer Dowty speaks with Benjamin Tal, deputy chief economist at CIBC World Markets, for his 2023 perspectives on inflation, interest rates, the stock market and housing prices.
I managed bond mutual funds for years. This is why I think you should just buy an ETF
Many investment strategists are predicting a bull market in bonds in 2023. They believe central banks will, at a minimum, stop raising interest rates this year and may even begin lowering them significantly. That implies bond prices, which move inversely to bond yields, will rise. If you agree with the bulls, or just want to add to the fixed-income weights of your portfolio to reduce exposure to a risky stock market, what’s the most effective way to do so? You might be surprised to learn that Tom Czitron, a veteran fixed income investor and a former lead manager of Royal Bank’s main bond fund, advises to just buy an exchange-traded fund.
Bitcoin is back with a bonk
Bitcoin is on the charge in 2023, dragging the crypto market off the floor and electrifying bonk, a new meme coin. The No. 1 cryptocurrency has clocked a 26 per cent gain in January, leaping 22 per cent in the past week alone, breaking back above the $20,000 level and putting in on course for its best month since October 2021 - just before the Big Crypto Crash. Reuters takes a look at what’s behind it. And, here The New York Times looks at how the crypto faithful are keeping the faith.
Others (for subscribers)
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Ask Globe Investor
Question: What is John Heinzl planning to do with his Algonquin Power & Utilities Corp. shares now that the company has cut its dividend?
Answer: In November, with a dividend cut widely expected, I removed Algonquin (AQN-T) from my model Yield Hog Dividend Growth Portfolio. I also sold a portion of my shares personally. But I’m holding on to the rest of my shares for now.
Last week’s 40-per-cent dividend cut, along with reduced capital spending and about US$1-billion of planned asset sales, are necessary steps to preserve Algonquin’s credit rating and strengthen its balance sheet. However, some investors are questioning whether the dividend cut goes far enough, and there remains a great deal of uncertainty about Algonquin’s outlook. This was reflected in the sharp drop in the stock price after Thursday’s investor update.
One wild card is whether Algonquin’s proposed US$2.6-billion purchase of Kentucky Power will proceed. In December, the U.S. Federal Energy Regulatory Commission rejected the transaction as filed, triggering a rally in Algonquin’s shares. Some investors worried that the deal would saddle Algonquin with additional debt at a time of high interest rates, so the FERC decision was greeted with relief.
But the deal isn’t dead. Algonquin said last week it remains committed to the transaction and plans to file an amended application with FERC, which is not surprising given that Algonquin is required to use its best efforts to complete the acquisition. Should the process extend beyond the “outside date” of April 26, however, Algonquin “has the option to terminate the transaction and pay the US$65-million termination fee” or agree with the seller to extend the deadline, Nelson Ng, an analyst with RBC Dominion Securities, said in a note.
“Based on our discussions with shareholders and investors, we believe the market’s preference is for AQN to not move forward with the transaction and pay the termination fee. As a result, we believe there continues to be uncertainty on whether AQN will ultimately acquire Kentucky Power,” Mr. Ng said.
There are a lot of moving parts here, and I expect that Algonquin’s share price will remain under pressure until there is more clarity.
--John Heinzl (E-mail your questions to firstname.lastname@example.org)
What’s up in the days ahead
Tom Czitron returns with a look at why many investors are needlessly giving up a lot of income when it comes to bond investing.
More Globe Investor coverage
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Compiled by Globe Investor Staff