BMO economist Sal Guatieri cited Statistics Canada’s Portrait of Canadian Society survey to write Canadian Households: The Hangover for the firm’s Weekly Financial Digest.
“Fast-rising prices are dramatically changing consumer spending patterns. Nearly three-quarters of households said high inflation was squeezing their budget, forcing them to look for cheaper substitutes or delay spending, including for homes. Not surprisingly, lower income households are hurting the most … One fifth of households say they are likely to turn to food donations in the next six months … By our estimates, mortgage service costs on the purchase of a typical house are now as bad as in 1989, and that’s with five-year fixed mortgage rates closer to 5% than 12% ... About 19% of households owed in excess of 350% of disposable income in 2021, a record. The frenzy was due to “extrapolative price expectations”, or fear of missing out on future price gains”
“BMO: ‘By our estimates, mortgage service costs on the purchase of a typical house are now as bad as in 1989″ – (research excerpt) Twitter
Morgan Stanley U.S. equity strategist Michael Wilson, who has been correctly bearish since mid-2021, does not believe the slowing economic growth outlook is priced into stocks yet,
“In my experience, most investors don’t spend nearly as much time trying to predict multiples as they do earnings … Year to date, the biggest driver of stocks has been the de-rating in valuations. To illustrate this point, the S&P 500 P/E has fallen approximately 20% while the price has fallen only 15%. At the lows just a few weeks ago, the P/E was down close to 24% when the index was down 20%. At that point, the P/E was 16x, right in line with our de-rating forecast for this year but above our current fair value multiple of 14.6x … 10-year Treasuries may be pricing too much Fed tightening if growth continues to erode and recession risk becomes acute as Friday’s consumer confidence number suggests … Given the growing evidence of slowing growth and the risk to earnings … we think the S&P 500 is headed toward 3,400 before a more tradable low is in. With growth now the main risk to stocks, our focus remains on names that can deliver on earnings in a very difficult environment for many companies to navigate. In short, it is still the year of the stock picker as the index remains challenged. We continue to like classic late-cycle winners – defensives and energy – and companies with high operational efficiency.”
“MS: “Given the growing evidence of slowing growth and the risk to earnings ... we think the S&P 500 is headed toward 3,400″” – (research excerpt) Twitter
Citi strategist Maximilian Layton detailed the potential effects of higher commodity prices on global growth,
“Global consumers of commodities are set to pay producers ~$5.2tr more during 2022 than they did in 2019, an increase representing ~5.0% of world GDP, using Citi’s base case 2H’22 forecasts. In the scenario that 2H’22 forward prices materialise, the commodity ‘tax’ paid by consumers would be ~$6.3tr higher than during 2019, equal to ~6.2% of GDP. In either case, the ongoing commodity shock is on track to be a similar order of magnitude as the first oil shock almost 50 years ago, when taken as a share of global GDP. The longer the commodity shock persists, the bigger the negative impact on commodity consumers and on net, global growth and equities. We find that Europe and some EMs growth looks particularly vulnerable, as does € credit, to a higher for longer commodity price scenario”
Canada is generally a winner in this scenario but not entirely if the U.S. economy slows dramatically and demands less imports.
“Citi: “Quantifying the commodity consumer shock – at ~5-6% of global GDP it’s as big as the early 1970′s “” – (research summary) Twitter
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