Credit Suisse U.S. equity strategist Jonathan Golub is providing investors with helpful perspective for following markets in the coming months with “Blowout Jobs Report,” a note released Monday. He believes equity prices will be the focus of a tug of war between two competing narratives.
On the one hand, economic data is likely to provide positive surprises as activity recovers from its pandemic-related anemic levels. Employment numbers released Friday are a good example as job creation in both Canada and the United States blasted past consensus forecasts.
Mr. Golub writes, however, that while improving data will “warm investors’ hearts … Over the intermediate term, by contrast, focus will shift to how long it will take to regain pre-crisis business and employment levels.”
There are globally prominent strategists, like Michael Wilson at Morgan Stanley and Credit Suisse’s Andrew Garthwaite, who believe that a rapid, sustainable economic recovery is already underway. There are others, like Citi economist Dana Peterson, forecasting a long, slow, economic slog of a recovery that equity investors are not prepared for.
Ms. Peterson published a research report Tuesday estimating when business activities in major global sectors will return to the fourth quarter of 2019 levels. She expects global manufacturing to return to normal in five quarters but regaining previous revenue peaks in other sectors will take much longer: more than two years for hotels and restaurants and also retail and wholesale trade.
James Rossiter, head of global macro strategy for TD Securities, expressed a view similar to Citi’s in a June 5 report. “The crisis will unfold in multiple stages," Mr. Rossiter wrote. "Longer-lasting [economic] scarring is likely to persist as recessionary dynamics emerge in the second half of the year across many key G10 economies.”
Even the bulls, like Mr. Garthwaite, admit that stock prices are likely ahead of themselves at this point – he predicts a period of flat to lower markets while asset prices reassess the pace of mid-term profit growth.
The drivers of the market rally are really strong, as I outlined in Monday’s newsletter. Essentially, ultra-low interest rates are incentivizing a giant wall of liquidity into equities that now includes bored sports fans becoming day traders.
I hold all of my market-related opinions lightly, but, at this point, I do expect that the fourth quarter of 2020 will prove treacherous for investors. With a better feel for 2021 profit estimates, the market will be forced to re-examine stock prices in light of a post-virus comeback that for many services-related sectors will be slower than currently believed.
If volatility does occur in the second half of the year, I will be ready with a list of stocks with the potential for stable long-term earnings growth.
-- Scott Barlow, Globe and Mail market strategist
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