Citi credit strategist Matt King’s latest report was ominously entitled Stand by for sudden pressure loss. In it, he attributed recent market strength to the Federal Reserve’s monetary stimulus designed to quell U.S. banking system upheaval.
The problem for investors is that the stimulus is set to be reversed, and the process is likely to drag stocks lower.
Mr. King has (somewhat famously) attributed a significant portion of post-financial crisis asset price gains to central bank monetary stimulus. He frequently publishes a chart showing a strong correlation between changes in balance sheet assets for the Federal Reserve, European Central Bank, Bank of England and People’s Bank of China and changes in the MSCI All Country World Index of stocks.
It should be noted that the chart drives some economists crazy because there is no mechanism directly connecting Federal Reserve stimulus and the real economy. When the Fed buys an asset from a major bank, the resulting funds are kept on account with the central bank – they can’t be used for new loans or used as collateral to fund new loans.
Mr. King believes central bank stimulus keeps bond yields artificially low, pushing portfolios into higher-risk assets and driving risk asset prices higher.
In the wake of the Silicon Valley Bank crisis, Citi estimates that US$1-trillion of monetary stimulus has been added to the global economy. This equates to a 10 per cent increase in equity prices according to their analysis.
Mr. King expects a reduction in monetary stimulus of between US$600-billion to US$800-billion in the weeks ahead. Proportionally this equates to a 6 to 8 per cent drop in stocks, or a 250 to 330 point drop in the S&P 500.
Perhaps more importantly, the strategist believes that the March gains in equities defied a darkening outlook for corporate profit growth. Now, with monetary tightening on the way, investor realization of slower profit growth could add to the declines.
-- 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
Saputo Inc. (SAP-T) Investors need to pack their patience with this one. For the stock to break out of its current trading range, continued earnings improvement and margin expansion may be required, says Jennifer Dowty, who takes a look at the investment case.
Bearish fundamentals, buoyant charts complicate outlook for U.S. stocks
As U.S. stocks test the top of a range that has held for months, two widely used analytical styles appear to be painting conflicting scenarios for where they might go next. Technical indicators such as equity price movement largely show stocks are poised to continue a rally that has seen the S&P 500 climb 8% year-to-date, analysts who track them said. Many investors who look to fundamentals, on the other hand, see choppy waters ahead when they study measures like corporate earnings and valuations. Saqib Iqbal Ahmed reports from New York.
Higher bond yields, lower stock prices and the myth the bears keep telling us
For over a decade, bears claimed puny interest rates were the sole reason stocks soared, saying investors had no viable alternative. They see global central banks’ rate hikes ending that. Fallout from failures at Credit Suisse and U.S. regional banks further fan those fears. But billionaire investor Ken Fisher thinks such thinking is folly. Interest rates don’t rule stocks, as he explains.
Why dividend growth investors may want to pass on ETFs
Dividend growth resonates with investors to the extent that it’s often a key feature in the building of portfolios for exchange-traded funds holding dividend stocks. Unfortunately, dividend growth in the stocks held by a dividend ETF doesn’t always translate into dividend growth for investors holding the fund, as Rob Carrick tells us.
How to beat the pros, Part 4: A Canadian stock we think will continue to outperform
Portfolio managers Jason Del Vicario and Steven Chen are back with the next instalment of their “beat the pros” series with a look at how Constellation Software (CSU-T) fits their strategy well. This stock has been a “100 bagger” for them, with compounded annual returns of more than 30 per cent since its IPO nearly a decade ago. They see more strong returns ahead.
We’ve taken a shine to the companies that took over miner Yamana, for now anyway
So, what do you do when you own a company and it is performing admirably, with about a 50-per-cent gain in less than two years, plus dividends, yet remains far from the initial sell target? We just sit and wait. But then what if it is acquired by two other companies in a rather complex deal that doesn’t fit into your investing style? That is what happened to us with Toronto-based Yamana Gold, when Agnico Eagle Mines Ltd. (AEM-T) and Pan American Silver Corp. (PAAS-T) swooped in to acquire the Canadian miner. The Contra Guys explain what their strategy is going forward.
ESG: The good, the bad and the ugly, or just the bad and the ugly?
Exchange traded funds following environmental, social, and governance principles have been the fastest growing segment in the ETF space in the past few years. But is the trend toward ESG-type investing a fad that will go away or a Trojan horse undermining the capitalist system and hurting investors, companies, and the economy? Investing professor Dr. George Athanassakos is a skeptic, believing their growth has more to do with the finance industry wanting to make higher margins than any sustainable market outperformance.
New rules will require asset managers to divulge full costs of investing on clients’ annual statements
A group of securities and insurance regulators have greenlit new disclosure rules that will make it mandatory for Canadian asset managers to report the total cost of owning investment funds and segregated funds as part of a client’s annual investment statement, as Clare O’Hara reports.
Investors seek to break through Japan Inc.’s ‘value trap’
Corporate governance in Japan has suddenly become a cause celebre, rousing the world’s third-largest stock market out of decades of lethargy and drawing in hordes of foreign investors, as Ankur Banerjee reports from Singapore.
How investors can become better forecasters than a ‘dart-throwing chimpanzee’
Making an investment decision is no more or less than making a forecast. How can investors and others improve the accuracy of their predictions? Professional investor Biff Matthews shares some ideas.
Others (for subscribers)
Number Cruncher: 12 U.S. homebuilder stocks with attractive valuations
Number Cruncher: Differentiating valuations amongst Index funds
Friday’s Insider Report: Billionaire shareholder invests over $4-million in this stock yielding 5%
Monica Rizk: Bullish on Carpenter Technology Corp.
Are you a financial advisor? Register for Globe Advisor (www.globeadvisor.com) for free daily and weekly newsletters, in-depth industry coverage and analysis.
Ask Globe Investor
Question: If I hold U.S. stocks worth over $100,000 in a non-registered personal account at a bank brokerage, am I required to fill out Form T1135? - Ajit G., Ottawa
Answer: Yes. The form is titled Foreign Income Verification Statement. It’s required from all Canadian taxpayers who own specified foreign property costing more than $100,000. Such foreign property includes “a share of the capital stock of a non-resident corporation.”
Note, the CRA website uses the word “costing,” not “worth.” So, if the book value of your U.S. shares is less than $100,000, it appears you don’t need to file the form, even if the market value is now more than that amount.
--Gordon Pape (Send questions to email@example.com and write Globe Question on the subject line.)
What’s up in the days ahead
The mood was ebullient at an annual value investing conference this past week in Toronto. But is value really back? Ian McGugan will explore the topic.
More Globe Investor coverage
For more Globe Investor stories, follow us on Twitter @globeinvestor
Compiled by Globe Investor Staff