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Citi U.S. equity strategist Scott Chronert reports that he is generally constructive on markets, but published Three Topics That Keep Us Up at Night on Friday anyway, providing further evidence of the increasing Wall Street emphasis on growing investment risks.

The strategist recognized that stock prices have suitably adjusted lower for rising bond yields already but is now concerned about asset flows. Inflation-adjusted 10-year U.S. bond yields have moved from -1.12 per cent at the end of 2021 to -0.67 per cent currently. He notes that if real yields go positive as the Fed raises rates, this “would create an argument for an asset allocation shift towards bonds.”

Large institutional portfolios - insurance companies and indeed every portfolio manager holding equities and fixed income - would be motivated to increase exposure in bonds not just because they offer positive inflation-adjusted returns.

It would also allow them to take profits on the sharp post-March 2020 equity market rally while de-risking portfolios.

Citi is also concerned that economic growth indicators are rolling over and turning negative at a time when central banks are set to tighten monetary conditions. U.S. consumer spending, the personal savings rate, new orders for durable goods and industrial production are only a few of the examples of growth data peaking and moving lower.

Slower economic growth will have negative effects on profit growth in many cyclical market sectors and rising interest rates will also make it difficult for corporate profit growth to meet high expectations.

Mr. Chronert’s anxieties over earnings growth were also reflected by BofA Securities U.S. quantitative strategist Savita Subramanian in a Monday research report analyzing the ongoing S&P 500 earnings season. Ms. Subramanian wrote, “The biggest deterioration has been in guidance, where our guidance ratio (# of above- vs. below-consensus guidance) fell to just 0.29 times so far in January, only slightly better than the Feb 2020 level when COVID first hit (0.26x).”

At 0.29 times, that means the number of companies guiding earnings higher relative to consensus analyst estimates is roughly 30 per cent of those guiding profits below forecasts’

Investors in both domestic and U.S. stocks should brace themselves for heightened levels of market volatility. Central bank rate hikes combined with slowing economic and profit growth makes for an uncomfortable market backdrop.

-- Scott Barlow, Globe and Mail market strategist

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Stocks to ponder

Dye & Durham Ltd. (DND-T) If you’re looking to invest in a company with pricing power as inflation surges, Toronto-based Dye & Durham Ltd. would appear to be a strong candidate: It has been boosting prices for its legal software, in some cases, at a triple-digit pace. So why is the stock now struggling, ending a hot streak? David Berman went looking for answers.

The Rundown

Don’t like bonds? Here’s another approach

Gordon Pape has argued for years that bonds should be a part of every income investor’s portfolio. Over the long term they provide cash flow, stability, and a respectable total return. But he can also understand why some people are reluctant to add bonds or bond funds to their portfolios right now. Inflation is taking hold, and central banks are going to fight back by withdrawing stimulus and raising interest rates. Higher interest rates translate into lower bond prices. Even staying in short-term bonds – the preferred strategy in this situation – is likely to end up costing you money. So, is there a solution? Yes. Instead of using bonds for all your fixed-income securities, put some money into a modified GIC ladder. Here’s his explanation on how to execute such a strategy in today’s market environment.

Value investing could be a useful shield from chaos

After a long stretch of underperforming returns, the outlook for value lovers is finally brightening. Over the past year, value stocks have ignited. They are beating the broader market. And this has also fed hopes that more gains are on the horizon. Ian McGugan shares some thoughts on how savvy investors can profit from the trend.

What you need to know about dividend investing in an era of rising rates

For many years, stocks paying a decent dividend have drawn strength from declining rates and yields. Now with consumer prices rising at their fastest pace in decades, and with the Bank of Canada shifting to inflation-fighting mode, yield strategies are facing a test. But this time around, market movements are deviating from long-established patterns, suggesting upcoming winners and losers may look quite different. Tim Shufelt explains.

Phantom distributions are back with a vengeance – and potential tax liabilities

Non-cash distributions have been bedevilling investors for years. But with Canadian and U.S. stock markets surging in 2021, the number of reinvested, or “phantom,” distributions has risen dramatically. Understanding how these non-cash distributions work, and the tax consequences they entail in a non-registered account, is critical for investors. If you ignore them, it could end up costing you money. John Heinzl tells us what an investor needs to know.

Why renewable energy stocks are tanking again, despite climate change fears

A sharp correction in technology and innovation stocks is hitting renewable energy companies again, fostering a new bout of whiplash for their share prices – and raising questions about investors’ recent emphasis on environmental, social and governance concerns, commonly known as ESG principles. Tim Kiladze and Jeffrey Jones report.

Also see: Andrew Hallam on why socially responsible ETFs might be the investment balance you’re looking for

Others (for subscribers)

Monday’s analyst upgrades and downgrades

The most oversold and overbought stocks on the TSX

Globe Advisor

Here are some big mistakes to avoid when trying to meet that March RRSP deadline

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What’s up in the days ahead

BlackBerry shares have been drifting – other than during brief meme stock interest last year – largely because it has four businesses that are difficult to quantify when they’re wrapped together. But that may now be changing. David Berman will explain.

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

More Globe Investor coverage

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Compiled by Globe Investor Staff