A daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
Credit Suisse U.S. equity strategist Jonathan Golub had been among the most bullish at his position but this appears to be changing after Thursday’s GDP report,
“Earlier today, the BEA released its 2Q Advanced GDP report, highlighting a contraction in economic output of -0.9% (QoQ annualized), a disappointing result (consensus estimates: 0.7%), and the second quarter in a row of negative growth. As we’ve discussed in the past, we believe that private sector domestic demand—which eliminates distortions from trade and inventories, and excludes government spending—is a more useful metric for equity investors. Unfortunately, that metric delivered a similarly uninspiring 0.0% growth rate in 2Q. Business investment ex-inventories experienced a substantial decline in the current quarter vs. a strong print previously, while spending weakened on goods purchases, with services showing greater strength. Despite economic deceleration, consensus expectations are for positive growth in both 3Q and 4Q. Whether or not we are in a recession will be debated by academics in the months ahead. However, today’s report unequivocally reflects a substantial weakening in economic activity, and raises the likelihood of a dovish pivot by the Fed.”
“CS getting slowly less bullish” – (research excerpt) Twitter
BMO analyst Sohrab Movahedi assessed the potential downside for domestic banks in the event of a recession,
“While no two recessions are the same, the banks would be entering the next one from a position of strength. Overall, we view the balance sheets and book values of the Canadian banks as safe in a recession scenario but concede sentiment towards the group needs to improve for banks stocks to outperform. Once investor sentiment improves, we expect the ‘cheaper’ valuation names to be relative outperformers. CM, NA, and BNS are rated Outperform … A review of bank earnings during the past six recessions suggests that banks are likely to experience average earning declines of 30% from higher provisions and revenue slowdown, but could outperform the composite index… P/B Valuation In Focus. As the recession fears increase, P/B valuation tends to become the preferred valuation metric for bank investors. The current P/B value of 1.5x for the Canadian bank index compares with the 1.4x average during the past six recessions. Notably, CM is the only bank that is currently trading at P/B lower than its recessionary average despite an improved risk profile.”
A chart in the research report shows that bank stocks tended to bottom at 1 times book value in recessions.
BofA Securities global strategist Ethan Harris explained why he is among the pessimists in a report called Us and Them: Why the consensus is too bullish,
“Last week we argued that a large chunk of the global economy is drifting into recession with perhaps more to come. Here we dig a bit deeper to explain why we are below consensus in so many countries: Remarkably, the Bloomberg consensus is predicting no recessions among the major economies. By contrast, we see recessions in about half of the major economies and below-consensus growth in most others. Why the seeming bullish bias? We think the consensus leans too much on trend extrapolation and central bank forecasts… Not only are the growth outlooks optimistic, in virtually every economy the central bank wins the inflation battle without a recession (Exhibit 2). Inflation falls in 2023 and continues to drop close to target in 2024. Apparently fighting inflation is a fairly painless exercise… some forecasters may lean too heavily on extrapolating recent trends in the data. Economies are slowing partly from supply shocks, but the more lasting shock is the policy tightening by central banks. Monetary policy operates with long and variable lags…we may be wrong and suffering from a bit of group think as we coordinate our forecasts. More likely, in our view, is that the consensus will gradually price in a more “stagflationary” picture, with more countries in recession and/or more sticky high inflation.”
“From BofA’s “Us and Them: Why the consensus is too bullish”” – (research excerpt) Twitter
Diversion: “Toronto’s Pearson airport has a PR problem: It’s known as the worst airport in the world” – CBC
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