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Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow

Wells Fargo U.S. equity strategist Christopher Harvey has been noting wholesale changes in the stocks with the most price momentum as technology stocks are replaced by cyclical sectors.

Mr. Harvey has uncovered a number of investing opportunities he believes represent attractive valuation and price momentum, a promising combination,

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“A year ago Momentum investors were willing to payhistorically high premiums for past performance (high price momentum), conservative balance sheets, higher EPS growth, and lower risk. Conversely, the contrarian low-price momentum basket was historically cheap, as investors aggressively (and understandably)re-priced stocks with weaker balance sheets, lower growth, and higher risk.

The next 12-14 months proved this was a major mispricing. Since 3/31/20, the top-bottom quintile return to our 12-month Price Momentum factor is -50.6%. Today, investors no longer need to pay up to align themselves with the momentum style. Investors can now purchase past performance (high-mo’) at a small discount… High-momentum stocks now are slightly cheaper than Low-momentum names, a rare occurrence. Historically, this condition generally leads to attractive momentum factor returns over the following 6-12 months.”

The list of 27 “attractive value and high mo’’ names includes Walt Disney Co., Expedia Group Inc., Estee Lauder Companies Inc., JPMorgan Chase, Danaher Corp., Transdigm Group, NVIDIA Corp. and Extra Space Storage.

“@SBarlow_ROB WF: “Attractive Value + High Mo’ Names” – (full table) Twitter

***

BMO chief economist Doug Porter recognized a trend that investors, particularly those with commodity holdings, need to keep an eye on,

“There is a notable market divergence in the lead-up to the crucial May U.S. CPI report. Bonds have rallied heavily, clipping 10-year Treasuries back below 1.5%, down about 25 bps from the recent peak of just over two months ago. In the past month alone, the rally has been dominated by a collapse in inflation expectations. For example, since peaking the day of the shock April CPI on May 12, the 5-year implied inflation rate has tumbled by 25 bps (from above 2.7%, to below 2.5%). While that’s a notable move unto itself, it’s even more startling that this has happened even as oil prices have forged higher yet. WTI is at the $70 threshold for the first time since 2018, and is up $5 in barely a month. As the chart shows, that’s normally consistent with rising inflation expectations (for rather obvious reasons), not falling. Something’s gotta give.”

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“@SBarlow_ROB Oil and bonds: something’s gotta give (BMO)” – (research excerpt) Twitter

***

I’ve noted a number of times that low U.S. inflation-adjusted bond yields provide the primary support for high S&P 500 forward price to earnings valuations.

Morgan Stanley strategist Michael Wilson sees Thursday’s U.S. consumer price index report as a potential game changer for equities. The terminology can get confusing here, but for investors the key takeaway is that higher real yields mean lower equity prices,

" We are likely to see inconsistent leadership between Value and Growth as uncertainty around macro data continues. As such, we continue to believe upside is limited at the index level with 10-15% downside more likely, driven by multiple contraction. Investors should continue to focus on single stock alpha … We think a surprise in Thursday’s CPI print will trigger a move higher in real rates. If CPI is higher than expected adjustments to Fed expectations will push nominal rates higher relative to breakevens (real rates higher). If CPI surprises to the downside there will likely be a correction in breakevens (again, real rates higher). Higher real rates in the absence of higher growth expectations are a headwind to multiples”

**

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Newsletter: “How to think long term” – Globe Investor

Diversion: “‘Wake-up call for Canada’: Security experts say case of 2 fired scientists could point to espionage” – CBC

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