Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
BMO chief economist Doug Porter notes that the domestic economy’s dependence on real estate is falling, but still extremely high,
“The abrupt and steep correction in Canada’s housing market is cutting the sector down to size in double time. In volume terms, the residential construction share of GDP fell to ‘just’ 6.6% in Q3, from 7.0% in Q2 and the 8.7% peak in 2021 Q1. (That level was a record high, although a variety of past cycles have come close, such as in the late 1980s and mid-1970s.) Housing now makes up a smaller share of real GDP than the average of the past 20 years (7%). Still, it’s more than twice the size of housing in U.S. GDP (now 3.1%). That’s in volume terms. It’s a somewhat different picture in nominal terms, where the liftoff in prices over the past two years still holds sway. The share of housing has dropped to 8.2% from the 10.3% peak in early 2021, but that’s still far above the long-run average of about 7%. Even at its wildest in 2005, housing’s share of U.S. nominal GDP never got above 6.7%.”
“Canada: Residential construction share of GDP (BMO)” – (research excerpt) Twitter
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Wells Fargo U.S. equity strategist Christopher Harvey thinks the equity rally has room to run,
“Everything is backwards. Chairman Powell reiterates his hawkish views, China’s civil unrest continues to threaten supply chains, and fundamentals are not improving. Yet, the SPX bounced 3% and our portfolio of US stocks with significant sales into China jumped 4.6% on Wednesday … Long story, short: US equities indicate Powell has de-risked the Dec. 13 CPI print. Rates players are squaring up with the end of the tightening cycle in 1H23, and are pushing back on the incredible run in real rates. Chinese stocks suggest the re-opening remains on schedule … In recent weeks, we thought stocks would trade with an upside bias into the Dec. 13 CPI print, and now believe there is more room to run. The SPX has broken out above its 200DMA, [ 200 day moving average] while 10yr reals have fallen below their 50DMA”
“WF’s Harvey thinks rally has room to run” – (research excerpt) Twitter
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BMO chief strategist Brian Belski released his forecasts for Canadian markets,
“A return to a more fundamentally-driven, US centric market as opposed to the liquidity-driven macro-based environment seen over the last few years will see Canadian equity valuations ultimately normalize with the US … While we think Canada is in a unique position to benefit in 2023, we do not believe we are in a commodity super cycle which would potentially replicate a stretch of Canadian outperformance like in the 2000s … We believe the TSX is further along in repricing the deceleration of earnings growth and the potential for a mild recession in 2023. As such, Canada remains well positioned for near-term outperformance which, in our opinion, will translate into mild outperformance versus the US in 2023 as valuations begin to converge … Overall, we believe the Canadian stock market will attain mildly higher prices from current levels, with a 2023 year-end price target of 22,500 on earnings of just $1500. This represents a 7% annual return based on our 2022 year-end forecast, slightly ahead of our flat expected price return for the S&P 500 during the year.”
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Diversion: “Vote for Your Favorite Wildlife Photo of the Year” – Gizmodo
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