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I don’t always have access to the research of Credit Suisse global strategist Andrew Garthwaite and, given the unequivocal bearishness of his latest report, maybe that’s a good thing. His most recent report is about as bearish as it gets for a prominent strategist.

In Thursday’s Add to defensives, but where?, Mr. Garthwaite began by warning clients against buying economically sensitive stocks. He argued that valuations in these sectors imply excessive optimism – requiring a global manufacturing PMI level of 60 (it’s currently 50, indicating neither growth or contraction in activity).

Cyclical stock prices also reflect global economic growth of 3.5 per cent in 2023, he says. Unfortunately, consensus expectations are for a much lower 2.4 per cent growth, down from estimates of 3.5 per cent in March 2022.

Mr. Garthwaite sees numerous red flags for the world’s largest economy. The U.S. yield curve is extremely inverted (the 10-year bond yield is well below the two-year bond yield). The last time it was this inverted and a recession did not occur was 1964, a long time ago.

Credit Suisse also notes that inflation in services sectors is well above the Federal Reserve’s target. Unemployment will have to climb to levels near 5.0 per cent (currently 3.6 per cent) to address this pricing pressure, and this would likely be accompanied by flat GDP growth for two quarters.

The projected slower-growth market backdrop would not be good news for Canadian commodity, industrial and retail-centric companies.

Mr. Garthwaite recommends higher weightings in defensive stocks with the lowest sensitivity to economic growth. These include pharmaceuticals, food producers, utilities, brewers and tobacco.

-- Scott Barlow, Globe and Mail market strategist

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