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A roundup of what The Globe and Mail’s market strategist Scott Barlow is reading today on the Web

Morgan Stanley strategist Michael Wilson covered upcoming equity market risk in succinct fashion in a Monday report,

“With more than 100% of the rally in stocks this year coming from multiple expansion, the moment of truth may be arriving with 1Q earnings results. It’s more about guidance since S&P 500 1Q estimates are now very achievable, having fallen close to 10% over the past 9 months … The moment of truth is here. While we underestimated the impact of the Fed’s pivot on equity prices, we see the earnings recession as just beginning … 1Q earnings season offers a gut check for a market looking for some evidence that the worst is truly behind us.”

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There are two important points here.

The market has been rallying on relief that central banks are at least pausing in their monetary tightening plans. At the same time, investors are ignoring declining earnings expectations, hence the “multiple expansion.” S&P 500 earnings are expected to come in negative in year over year terms, and I suspect this will be a rude wakeup call if it happens, particularly if the decline is accompanied by more reductions in 2019 profit guidance.

“@SBarlow_ROB MS’s Wilson: “With more than 100% of the rally in stocks this year coming from multiple expansion, the moment of truth may be arriving with 1Q earnings results.” – (research excerpt) Twitter

“ Dow futures slide as mood turns cautious ahead of earnings season” – CNBC

“@carlquintanilla Morgan Stanley not backing off its earnings-recession call:” – (charts) Twitter

Related: “Global economy enters ‘synchronised slowdown’” – Financial Times (paywall)

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Reuters reports that the NAFTA update most Canadians believed was already done and dusted is in danger of not being passed in U.S. congress,

"The three countries struck the United States-Mexico-Canada agreement (USMCA) on Sept. 30, ending a year of difficult negotiations after U.S. President Donald Trump demanded the preceding trade pact be renegotiated or scrapped. But the deal has not ended trade tensions in North America. If ratification is delayed much longer, it could become hostage to electoral politics … “The USMCA is in trouble,” said Andres Rozental, a former Mexican deputy foreign minister for North America. Though he believed the deal would ultimately be approved, Rozental said opposition from U.S. Democrats and unions to labor provisions in the deal, as well as bickering over tariffs, made its passage in the next few months highly unlikely.”

“New NAFTA deal 'in trouble', bruised by elections, tariff rows” – Reuters

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U.S. analyst Ben Carlson notes that dividends are becoming less important as a source of investment returns which is a bit ironic in light of the current desperation for equity income,

“The big changeover came in the 1950s when the dividend yield on the stock market finally dipped under the yield on government bonds. Until the 1950s, when bonds yielded more than stocks it was a clear signal that it was time to get out of the stock market. That relationship broke down and I think one of the reasons it happened is because investors became more comfortable with the capital appreciation side of the return equation. The stock market was maturing as were investors. … I’m not saying dividend strategies don’t matter anymore; just that dividends don’t play as big of a role in market cap weighted U.S. indexes as much as they used to… it is fascinating to see witness the structural changes in the way dividends are viewed over time.”

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“Dividends Don’t Matter As Much As They Used To” – Carlson, A Wealth of Common Sense

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Tweet of the Day:

Diversion: “Psychological Features of Extreme Political Ideologies” – Association for Psychological Science

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