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Climbing risk-free yields have made bonds far more attractive relative to equities in recent months and the possibility that investors are selling equities to buy fixed income has been blamed for stock market volatility. Goldman Sachs chief U.S. equity strategist David Kostin, however, notes that investor behaviour has been more nuanced and the potential for corporate stock buying means that, in aggregate, demand for equities will have a net positive effect on market prices in 2024.

In his most recent Weekly Kickstart report, Mr. Kostin began by citing Goldman Sachs strategists arguing that the surge in U.S. bond issuance to cover the newly huge federal budget deficit (thanks to COVID fiscal spending) would not cause a surge in bond yields. This is contrary to conspiracy theories available on social media.

The strategist then highlighted data showing that U.S. households have significantly increased holdings of bonds, from 2 per cent of outstanding issues at the beginning of 2022 to the current 9 per cent.

The funds to buy fixed income did not come from selling equities. Households remain the largest owners of equities (relative to retirement and pension funds, and corporate holdings) after selling only 0.42 per cent of total stock holdings during the first half of 2023. The average 42 per cent portfolio weighting to equities for households is at the 96th percentile for all results since 1952.

Goldman Sachs predicts that the high household weighting in equities combined with rising bond yields will result in modest selling of equities by households. On the other hand, selling by pension funds is expected to be more intense.

Pension funds use risk-free yields to calculate a discounted assessment of future liabilities to members. As yields (used as the discount rate) rise, future liabilities decline and the financial health of the fund improves.

Mr. Kostin said that the largest U.S. defined benefit pension funds are now 104 per cent funded. These funds are now positioned to reduce risk by selling equities and buying more fixed income. He estimates that pension funds will sell US$250-billion in equities in 2024.

Corporate buying of equities - through buybacks, mergers and acquisitions and new issuance – is the good news story for U.S. equities. Goldman Sachs believes that issuance and merger and acquisition activity will improve from weak levels in 2024, contributing US$550-billion in equity demand. This more than offsets the overhang expected from pension sales.

Bond yields at current levels will prove an overhang for stocks to some extent. An aging population will be tempted to lock in future income streams and reduce portfolio risk by adding to fixed income weightings.

Much will depend on the plight of global corporate earnings growth. The consensus on the Street points to a strong recovery in profits in 2024 but if this proves overly optimistic, and earnings are revised lower, fixed income will look all the more attractive. Stock market volatility could potentially intensify if this results.

-- Scott Barlow, Globe and Mail market strategist

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Stocks to ponder

Lululemon Athletica (LULU-Q) Shares in the retailer jumped by more than 10 per cent to an almost two-year high on Monday buoyed by the addition of the Canadian sportswear maker into the Wall Street benchmark S&P 500 index. As Reuters reports, it comes at an intriguing time for investors: the stock is still trading well below its five-year historical average

Air Canada (AC-T) The airline’s share price hit a one-year low on Wednesday as it navigates higher fuel costs, competition and interest rates. As The Canadian Press reports, shares in U.S. airlines are also on the descent.

The Rundown

For investors, Middle East conflict rarely moves dial for long

While exceptions prove the rule, conflagrations and war in the Middle East have for 20 years rarely caused global investors to de-risk or rethink their strategies - a thesis that will be tested once again this time around. Reuters’ Jamie McGeever reports that as long as these conflicts stay regional and don’t draw in multiple other countries, initial “safe haven” investment flows have been short-lived.

Also see:

How Middle East tension could ripple through markets

How oil and other commodities are faring this month amid concerns over Israel-Hamas war

Utilities are down, and this analyst is growing more cautious

Utilities have been struggling this year as interest rates rise, making their dividends look less appealing next to government bonds. Now, David Berman reports that some observers believe that the group faces challenging growth prospects as well.

India-Canada relations are on the rocks. Should you invest there?

India now has the largest population in the world. It is a rising power, both politically and economically. In a report released last week, the International Monetary Fund raised its Indian growth forecast for the current fiscal year to 6.3 per cent from 6.1 per cent previously. That’s higher than the prediction for China. But when Prime Minister Justin Trudeau rose in the House of Commons last month to accuse India of complicity in the June murder of a Canadian citizen, he plunged relations between the two countries into a deep freeze. All this leaves investors with a dilemma. Do you want to invest in India right now, given the dark cloud cast by the Prime Minister’s accusations? If so, Gordon Pape suggests these two Canadian-based ETFs are worth considering.

China’s growth surprise is not tempting investors

September data from China offered plenty of welcome surprises, with faster-than-expected growth, falling unemployment and a glimmer of momentum in consumption, but investors are not rushing to buy into the story.

Roaring economy and foreign murk feeds home bias in U.S.

With the U.S. economy roaring at a faster pace than China and global politics increasingly hard to fathom, there’s a feeling the best bet in town is to stick with U.S. stocks regardless of relative valuations, as Mike Nolan of Reuters reports.

Winter is coming as ether funds flounder in fall

The weak crypto market is wobbling through autumn. And winter’s on its way. As Reuters reports, the long-anticipated U.S. launch of a group of exchange-traded funds tracking ether offered fresh evidence of the malaise at a time when investors are running from risk amid economic gloom and war in Ukraine and the Middle East.

Others (for subscribers)

Markets and economists react: Odds of another BoC rate hike plummet after surprise drop in inflation

Long U.S. Treasury yields may rise further despite near-term swings, BlackRock says

Wednesday’s analyst upgrades and downgrades

Tuesday’s analyst upgrades and downgrades

Ask Globe Investor

Question: Having saved for many years after paying off our mortgage and helping our children with university, my husband and I now have about $1-million to invest. Most of this money, which also includes an inheritance, is sitting in a high-interest savings account exchange-traded fund. We are both 71 and semi-retired, and now have more time to devote to investing. I wonder if putting half of our assets in dividend stocks is a good idea. If so, should I replicate your own model dividend portfolio, and keep the other half in the HISA ETF or guaranteed investment certificates? I am terrified to do this without an honest view from someone like you.

Answer: First, there’s no need to be terrified. A 50-50 split between equities and cash or fixed-income is a relatively conservative approach. It will provide you with plenty of “sleep-at-night” money while giving you exposure to the potentially higher returns of stocks, albeit with greater volatility that equities entail. Assuming you can achieve an average yield of 4.5 per cent, which should be easily doable, a $1-million portfolio would generate $45,000 in pretax income without eroding your capital.

If you and your husband are also receiving Canada Pension Plan and Old Age Security benefits – which may well be the case given your ages – that will provide another layer of security. Your paid-off home offers yet another safety net. In a worst-case scenario, you could tap your home equity through a reverse mortgage or credit line, although I doubt it would ever come to that.

So, the good news is that you appear to be on very solid financial footing. However, I do have some reservations about the specifics of your asset-allocation plan, which I go into detail on here.

--John Heinzl (E-mail your questions to

What’s up in the days ahead

Tim Cestnick has a list of ideas for investors to save on tax before year-end.

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

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