Daily roundup of research and analysis from what The Globe and Mail’s market strategist Scott Barlow
I’ve discussed the relevance of inflation-adjusted yields and their correlation with S&P 500 PE ratios previously.
BMO economist Robert Kavcic extended the discussion on Thursday,
“Scorching demand, next to no labour supply, surging asset prices, rising wages and inflation. We could go on. Yet, real U.S. policy rates are probing the lowest level ever seen in the postwar era, deeply in negative territory. That comes as the fed funds rate still sits at the lower bound, while headline inflation has lurched higher. To be fair, we do see the inflation rate backing off over the course of the next year, which will naturally make this real rate less negative, but even a 3 ppt cut in headline CPI will leave real rates historically accommodative. Another way to think about it: We have almost never seen inflation accelerate by this magnitude without an upward move in policy rates. The 2010-to-2012 period saw inflation jump briefly to 3.6% alongside a fully accommodative Fed, but to compare this circumstance with that deflationary credit event would be a clear mistake.”
“BMO: “We have almost never seen inflation accelerate by this magnitude without an upward move in policy rates” via @RobKavcic " – (research excerpt) Twitter
“Real yields and the SPX forward PE ratio” – (chart) Twitter
BofA quantitative strategist Savita Subramanian noted that high-quality companies (she often uses credit rating as a proxy for quality) outperformed in November and should continue to do so ,
“The relative valuation of our long duration factor (dominated by secular growth/COVID beneficiaries) versus our Low P/E factor (dominated by cyclical re-opening beneficiaries) is at a similar premium to what we saw back in October 2020 ahead of the COVID vaccine … Quality is the only group with a positive return in November (+0.5% on avg.), amid the market decline potentially triggered by risks of the Omicron variant emergence and/or a more hawkish Fed. We see compelling cyclical, secular and fundamental reasons for persistent quality leadership: peak liquidity today (secular) plus decelerating profits growth and rising volatility (cyclical). The fundamental case? Valuation: quality is inexpensive, and is likely to re-rate, whereas risky stocks are likely to de-rate as easy monetary policy reverses.”
“BofA recommends high quality stocks over expensive growth” – (research excerpt) Twitter
“BofA: “Low Quality now trades at an 11% premium to High Quality”” – (chart) Twitter
CIBC equity strategist Ian de Verteuil is warming up to low volatility Canadian stocks (my emphasis),
“For most of 2021, we have generally been cautious on Quant strategies that depend heavily on Low Volatility factors. While these strategies do not appear to have lagged meaningfully, they have certainly not been as positive as other styles such as Quality, Value, and Momentum so far this year. We are, however, becoming less concerned on Low Vol. Our 2022 Equity Outlook report, recently issued along with the rest of our Research Department, argues for relatively mundane equity returns. It also appears as if long-term interest rate increases will be modest in 2022. This is an environment that could favor Low Vol approaches … 2. Historically, Low Vol performance has been inversely correlated with the change in interest rates – and this has actually, to some extent, been a tailwind for the strategy in Canada for years … Stocks with strong Low Vol characteristics currently include most financials (particularly GWO, POW, NA and TD) and the grocers (L and MRU). These stocks fit with the broadly defensive recommendations articulated in our 2022 Equity Outlook document.”
“CIBC likes these low vol stocks for 2022″ – (research excerpt) Twitter
Diversion: “Largest-Ever Flying Animal Jumped 8 Feet Into the Air Before Liftoff” – Gizmodo
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