Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
I noted a rising degree of caution among Wall Street strategists in Monday’s newsletter and B of A Securities quantitative strategist Savita Subramanian continued the trend Wednesday morning with Five reasons to curb your enthusiasm.
“1. Sell Side Indicator <1ppt away from euphoria: Our contrarian measure of Wall Street’s bullishness is <1ppt away from a “sell” signal. Last cycle, when it was this close to a “sell” (May 07), the S&P dropped 7% over the next 12 months. Note, we’re not calling for a full-fledged bear market … 2. S&P 500 valuation indicates paltry (2% p.a.) returns over the next decade: Valuation is almost all that matters over the long-term (~80% explanatory power… 3. Outsized (2+ std dev) returns precede losses 75% of the time: The S&P 500 posted 12m returns of +54% through March, marking the best 12m since 1936, the third highest on record, and 2.3 std. dev. above average. Two+ standard deviation moves have only happened four other times since 1928, with losses occurring over the next 12 months in three of the four cases … 4. Fair Value model spits out S&P 500 3635 … 5. ERP [equity risk premium] dropped below 400bps – a contrarian negative signal: This is only the third time since the global financial crisis that the ERP dropped below 400bps.”
“@SBarlow_ROB BoA: “5 reasons to curb your enthusiasm”' – (research excerpt) Twitter
BMO economist Sal Guatieri pointed out signs of rising inflation among U.S. small business.
“The March NFIB survey showed a decent rise in U.S. small business sentiment after three soggy months, though the index is still more than six points below pre-virus levels. More concerning is a giant leap in the percentage of firms hiking selling prices, the most in over 12 years. While we don’t know by how much prices rose, we do know that firms are getting bolder in passing along higher input costs. So far, they have been less eager to boost pay…but if that shifts, the inflation embers could spark.”
" @SBarlow_ROB BMO: “[U.S.] Small Business Warning on Inflation”” – (research excerpt) Twitter
Capital Economics analyst Stephen Brown argued that Canadian housing prices are getting more negatively correlated to higher interest rates (my emphasis),
“While the economy coped well the last time the Bank of Canada’s rate hikes shook the housing market in 2017 and 2018, the risks are greater now because residential investment accounts for a much larger share of GDP… One overlooked factor is that mortgage rates were falling even before the pandemic. The 12% rise in the Teranet measure of house prices in the two years to February occurred against the backdrop of a halving of the five-year fixed mortgage rate to 1.8%. For those buyers not constrained by the required down-payment, this boosted the price they can afford by 22% .. There are, however, signs that another worrying cycle of rising prices and expectations has taken hold. The Bank’s quarterly survey showed consumers’ price expectations rose to the highest in its six-year history at the start of 2021 …This problem, which is not unique to Canada, puts central bankers in a bind. Some argue in favour of “leaning against the wind,” which is what the Bank did under Stephen Poloz in 2019, when it kept its policy rate higher than its forecasts suggested it should to reduce the risks from housing. Yet this is the same as saying a central bank should aim for below-target inflation by keeping the unemployment rate higher than it would otherwise be”
“@SBarlow_ROB Capital Economics on Canadian housing market” – (research excerpt) Twitter
Diversion: “A 3,000-Year-Old ‘Lost City’ May Be New Boon for Egypt Tourism” – Bloomberg
Tweet of the Day: “@chigrl IEA [International Energy Agency] monthly report out...here are the highlights” – (excerpt) Twitter
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