Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
CIBC economist Benjamin Tal asks Are homeowners ready for higher rates?,
“Canadian households, wooed by historically low interest rates, have accumulated mortgage debt at a rate never seen in a recessionary period. Are they ready for higher rates? … The risk of more sustainable and sticky inflationary pressures down the road might lead to a more aggressive tightening trajectory. And with the effectiveness of monetary policy much larger than at any point in the post war-era due to a record-high level of household debt, a relatively small increase in rates could have a notable impact on the market … While the average mortgage size rose by almost 19% for first-time homebuyers in Q1, monthly payments were up only 3.7 per cent … Despite relatively small rate increases in 2017/2018, data at that time showed immediate impacts on consumers. The percentage of people paying their credit card in full each month dropped sharply at the time, a strong sign of cash flow constraints … With signs of cooling appearing this spring in the Canadian housing market, attention will quickly shift to the impact on prices. Suburban markets that surged in the past year, and properties in cottage country, are likely to be the first to pause. The real impact will become evident when interest rates rise in 2022. To the extent the Bank of Canada starts hiking rates in Mid-2022 as we expect, the tightening trajectory is likely to be gradual enough to allow the housing market to adjust at a healthy pace. Accordingly, delinquency and bankruptcies rates are expected to return to pre-COVID levels by early 2022.”
The credit card example from 2018 is a bit disconcertingm but Mr. Tal appears to be sanguine about the effects of higher rates on household debt levels.
“Are homeowners ready for higher rates? A closer look at trends in the Canadian mortgage market” – CIBC economics
BofA Securities U.S. quantitative strategist Savita Subramanian published her Relative Value Cheat Sheet, a frequent source of useful market insight,
“The S&P 500 remains expensive on most metrics except on forward PEG and relative to bonds. With the 10-yr yield falling 47bps since the March peak, the ratio of S&P dividend yield vs. the 10-yr yield rose to 0.98x, the highest level since February and in line with the post-GFC average. But given the lowest dividend yield since 2001 (1.3%), the ratio could quickly fall if rates start moving higher again (our house view) and pose downside risks to the market … Our tactical quant framework continues to favor Value/cyclicals, with Energy/Financials ranking #1/#2 … The “Rule of 20” has generally been a good strategy and is one of our Bear Market Signposts – when the sum of S&P 500 trailing P/E ratio and inflation (CPI) was below 20, stocks returned +11% over the subsequent 12 months (74% hit rate) vs. just +4% when it was above 20 (64% hit rate). But today, not only is the measure above 20, but it’s also at the highest level in history since 1935 at 36x, topping 30x only for the third time in history. The “Rule of 30” would suggest downside risk: the S&P 500 fell 2.1% on avg. (44% hit rate) over the subsequent 12 months when the reading was >30.”
“@SBarlow_ROB BofA: Rule of 20 has become rule of 30. Downside risk (marginal)” – (research excerpt) Twitter
Morgan Stanley chief U.S. equity strategist Michael Wilson updated his “Fresh Money Buy List” in his Weekly Warm-Up report,
“The market appears ready to take on a more defensive character as we experience a meaningful deceleration in earnings and economic growth… our mid-cycle transition narrative has been playing out nicely since mid-March, with small caps and lower-quality stocks underperforming consistently… Consumer Staples are the epitome of boring, but boring can be beautiful if the broader market begins to falter. We are upgrading today as the relative earnings revision breadth is just starting to turn up. This inflection higher will be driven more by revision breadth for the S&P 500 decelerating… With our Staples upgrade we add Mondelez (MDLZ) to our Fresh Money Buy List”
The nice and short Fresh Money Buy List includes Alphabet Inc., Citizens Financial Group , Exxon Mobil Corp., Humana Inc., Lamar Advertising Corp., MasterCard Inc., SBA Communications, Simon Property Group Inc., Synchrony Financial, and Welltower Inc.
“@SBarlow_ROB MS’s Fresh Money Buy List adds Mondelez” – (table) Twitter
Diversion: “Walking Dead Lawsuit Ends in $200 Million Settlement” – Gizmodo
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