Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
BofA U.S. quantitative strategist Savita Subramanian has been visiting institutional clients and reported on the feedback and mood of investors.
“Feedback indicates that the Tech rout is probably not over, Value has legs, and a capex cycle is imminent. ‘Give me a reason to be bullish.’ Here are five: (1) we are getting this question! Sentiment has soured and our models corroborate this; (2) one bubble – negative real rates – has popped; (3) the ~$20tn cash transfer from the public to private sector bolstered consumer/corporate balance sheets; (4) if energy security is paramount, the US is now energy independent, (5) wage pressure is hastening the need for automation with productivity gains likely to ensue – a long-term positive, and a long time coming… ‘How low can the S&P 500 go?’ Post-war recessions saw 250 basis point average increases in the ERP [equity risk premium], already 100bps off its trough…In a bad case scenario of recession and high rates (stagflation) we see a floor of ~3200, all else equal, which is also the avg. recession decline of 33% below peak…'When is it time to buy Tech?’ When clients stop asking this question. Tech is facing the quadruple whammy of rising discount rates, peak globalization, tough comps and crowding.
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Credit Suisse global strategist Andrew Garthwaite compared the current sell-off to previous bear markets in a Thursday research report.
“Twice recently, the S&P has flirted with a 20% fall from peak (which would be 3,837 on the S&P 500). In our recent piece on equities, we highlighted that bear markets (i.e. falls of 20% or more) tend to last around 12 months, and involve greater declines on average 31% (which would equate to 3,325 on the S&P500). If there is a recession, then bear markets tend to last 16 months and on average decline by 39% (this would equate to 2,925 on the S&P 500). We have had four occasions in the last 35 years when the S&P fell nearly 20% and entered a new very strong bull market; 1990, 1998, 2011 and 2018. Only the 1990 near miss bear market occurred against the backdrop of a recession (the S&P fell 19.9%) … On each of these near misses, the decline was arrested by Fed easing or pivot in language … We can see that even into initial stages of a sell-off that eventually turned out to be a bear market (i.e. 1980, 2001, 2008) we had rallies (9%-12%) after markets initially fell by 17.2%-19.7%, but within 130 days we hit new lows.”
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Morgan Stanley economist Christopher Collins published a mid-year outlook for the Canadian economy.
“We think GDP growth is poised to remain strong in 2022 at 4.6% before moderating somewhat in 2023 to 2.9% … we think healthy household balance sheets, strong labor income, elevated commodity prices, and the resumption of pandemic-sensitive services activity will support growth despite lingering global supply bottlenecks, shortages, elevated inflation, and the removal of monetary policy accommodation… We expect inflation, which has accelerated and broadened out in recent months, to remain elevated in the near term before slowing in the second half of this year and into next. We expect 4-quarter headline CPI inflation will rise to 7.0% in 2Q and 3Q before falling to 6.5% in 4Q22 and 3.2% in 4Q23, driven importantly by food and energy prices … Once the policy rate reaches 3%, the top end of the BoC neutral range of 2-3%, we expect it to remain there through the end of 2023 … We forecast CAD to outperform versus other G10 currencies this year. We expect USD/CAD to decline around 4% over the remainder of 2022 as North American growth remains resilient and both the Fed and the BoC largely deliver on lofty market pricing. However, as global growth expectations recover later in the year and oil prices rise, we expect USD/CAD to decline further in line with the broad USD”
“MS’s mid-year outlook for the Canadian economy” – (research excerpt) Twitter
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Diversion: “Top 10 Aerial Dogfights of All Time - A CineFix Movie List” – Cinefix (Youtube)
Tweet of the Day: “Citi’s bear market checklist says buy the dip” – (table) Twitter
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