Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
Wells Fargo strategist Christopher Harvey’s report entitled Fishing Season Canceled included a number of interesting observations, (my emphasis),
“We think the market has quickly shifted from fears of undersupply to oversupply, and corporate outlooks will shift dramatically as earnings are revealed … In our view this is a markets-driven hard landing and the comment that a 2% Fed Funds rate is not consistent with a recessionary environment will not age well … To help PMs hedge/moderate portfolio risk, we screened for a list of low-momentum stocks to avoid/short. We believe this group of stocks will underperform the market until we hear the Fed reference a slowing economy. This is strictly a ‘quant’ list. … We focused on a longer-term price Momentum factor because it typically performs well during periods of stress ... In our assessment, stocks with fundamental issues become even riskier during tumultuous times. In our experience, Fundamental PMs do not bottom-fish in uncertain times like now; rather, they focus on high-conviction names, sell anything deemed “marginal,” and save new ideas for another day.”
There are some extremely popular stock names on Mr. Harvey’s “avoid list” including Walt Disney Co., Netflix Inc., Meta Platforms Inc., Clorox Co., Kinder Morgan Inc., Paypal Holdings Inc., General Electric Co. and Citigroup Inc.
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One of my biggest concerns in the coming months is the Canadian consumer’s interest rate sensitivity. There is a risk that with goods prices rising and a correcting housing market causing a wealth effect in reverse, domestic spending might stall out abruptly.
BMO chief economist Doug Porter added to this discussion Thursday afternoon in a short report called Bracing for a Hard-ish Landing,
“Serious second thoughts on the Fed’s aggressive 75 bp rate hike have revived concerns over a more challenging economic outlook. The reality of tenacious inflation and coming restrictive monetary policy is slamming a wide variety of risk assets. And those concerns are now seeping into the previously resilient Canadian market. After hitting an all-time high as recently as late March (i.e., after the Fed had started to hike, and after the Ukraine invasion), the TSX has now dropped 14%. The index has also dipped below year-ago levels this week for the first time since early 2021. There is a growing view that markets and analysts are still wildly underestimating how much tightening the Fed (and others) will need to do to chill inflation. The counter argument is that the pronounced weakness in financial conditions will do some of the tightening work for central banks. While we have tended to be very much of the ‘inflation will prove to be much more challenging than expected’ view, we also believe that the economy will be very sensitive to the coming rate hikes. In other words, market stresses are telling us the peak in rates may not be so much higher.”
“BMO: “Bracing for a Hard-ish Landing " – (research excerpt) Twitter
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BofA Securities chief investment strategist Michael Hartnett has been almost comically bearish (but right, generally) in recent months. He is, however, starting to sound a bit more constructive in BofA’s weekly Flow Show report,
“S&P 500 entered a bear market on June 13, the 20th bear market in the past 140 years; average peak to trough bear decline = 37.3%, average duration 289 days; history is no guide to future performance but if it were, today’s bear market would end on Oct 19, 2022 (35-year anniversary of Black Monday) with S&P 500 at 3000 … 124 global rate hikes in ‘22 (Chart 3); Fed tightening always “breaks” something (Chart 2); bull markets in US$ and commodities, longs in big tech, pharma, defence, most vulnerable to “credit event”, US recession (Wall St leads Main St) … inflation shock (started H2′21) … rates shock (H1′22) … recession shock (H2′22 – Charts 10 & 11) + crash (not quite done yet) … once all done and dusted in H2, opportunity knocks; we say at SPX 3.6k nibble, at 3.3k bite, at 3.0k gorge;”
“Hartnett is ..... getting a bit less bearish” – (research excerpt) Twitter
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Diversion: “Photos: Devastating Floods Hit the Yellowstone Region” – The Atlantic
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Scott Barlow