A daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
BofA Securities U.S. quantitative strategist Savita Subramanian recapped market action in 2021, noting that performance over the last three years is abnormal (my emphasis),
“The S&P 500 delivered another extremely strong year in 2021, +28.7% on a total return basis, fueled by a year-end 4.5% rally in December. Over the past three years, the index more than doubled including dividends, marking its first 100%+ three-year gain since the Tech Bubble and a 93rd percentile year based on data back to 1938. Today, stocks may be more at risk of a correction than extended gains amid a pause in a falling cost of capital … Other asset classes dropped including long-term Treasuries (-4.6%), investment-grade corporate bonds (-1.0%), and gold (-4.3%). International stocks also lagged, especially in USD terms … Big year for Quality; stick with it in 2022: High Quality stocks (B+ or better in S&P quality rating) in the BofA coverage universe outperformed Low Quality stocks (B- or worse) by 13ppt in 2021 (+27% vs. +14%), the biggest outperformance since 2008.”
“BofA: “. Over the past three years, the index more than doubled including dividends, marking its first 100%+ three-year gain since the Tech Bubble and a 93rd percentile year based on data back to 1938″” – (research excerpt) Twitter
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Citi global strategist Matt King’s most recent presentation argues that while monetary conditions are supportive for equities, stock prices follow the trend rather than the level of money supply growth,
“Consensus sees the negative level of real yields driving continued strength in economies in 2022, and extrapolates this to strength in risk assets. With nominal tightening likely insufficient to send real yields positive, surely cash should remain unattractive and the market party should continue? But markets are more sensitive to changes than to levels. As the flow of new money creation has dwindled, so the rally has become dangerously narrow - even before real yields have moved up. Rising real yields and subsiding inflation expectations - supposedly the recipe for a soft landing - have historically proved the combination that markets like least. For a healthy investment outlook, it’s best not to linger too long in crowded spaces.”
The summary here is that Mr. King expects equities to drop as central bank monetary stimulus declines and inflation-adjusted yields climb.
“Citi: “Equity performance lagging vs real yields ... But in line with slowing money creation”” – (chart) Twitter
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Morgan Stanley U.S. equity strategist Michael Wilson is predicting a drop in manufacturing activity and is recommends defensive market sectors over economically-sensitive stocks,
“Continue to lean defensive amid peaking PMIs and tighter Fed policy. Leading indicators point to decelerating PMIs in coming months. Our work in recent weeks shows this dynamic should be supportive of Defensives outperformance over Cyclicals. This week, we expand our analysis on this front at the industry level to show that within Defensives, Health Care, REITs and Consumer Staples tend to be the top performers in a decelerating but elevated PMI regime. Our work also shows that Health Care and REITs tend to meaningfully outperform in the first year of a Fed tightening cycle—also an environment we think we’re heading into next year.”
“MS sees U.S. PMIs dropping” – (charts) Twitter
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Also from BofA, strategist Anthony Cassamassino selected a top ten list of stocks for the first quarter of 2022,
“Perhaps the most consensus macro view at the moment is that volatility will be elevated in the current quarter and for the year ahead. While volatility creates potential opportunities it also necessitates a more selective approach to stock picking. Our strategy team is bullish on capex, cautious on consumption, and recommends companies with strong free cash flow and inflation-protected yields. Our 2022 year-end target for the S&P 500 is 4600. Drivers for Savita Subramanian’s outlook (see report) include a higher discount rate, US GDP primacy vs. China, rising capex but slowing consumption, and the end of the “equity shrinkage” bull case … Our 1Q22 list includes 9 Buys and 1 Underperform across 10 industries. Our Buys are Citigroup, Carrier, CNH Industrial, CrowdStrike, Lamb Weston Holdings, Occidental, Rexford, ViacomCBS, Xcel Energy, and AutoZone. Our Underperform is AutoZone.”
“BofA: “Introducing the Top 10 US Ideas for Q1 2022″” – (research excerpt) Twitter
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Diversion: “Be Curious” – Morgan Housel, Collaborative Fund
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Scott Barlow