Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
Wells Fargo Investment Institute CIO Darrell Cronk sees nine potential reasons for a U.S. market pullback (my bold),
“Slowing economy — The U.S. economy seems to have lost momentum following a robust fourth quarter. Real consumer spending weakened in January, while the Institute for Supply Management (ISM) manufacturing Purchasing Managers’ Index (PMI) has been in contractionary territory for 16-stoaight … Sticky inflation — The headline February Consumer Price Index (CPI) ticked higher on a year over-year basis, while super-core inflation (services ex-housing, food, and energy) accelerated to 6.6% annually over the last three months … Fed policy uncertainty — Sticky inflation readings in the services and housing sectors, along with a resilient economy have made it difficult to estimate the timing and magnitude of the Fed’s pivot toward easing … Higher long-term interest rates — Stocks have been sensitive to interest rate movements over the last two years. Until inflation and Fed policy stabilize further, higher yields could become a catalyst for a market pullback … Corporate earnings — Year-end 2024 corporate earnings estimates have held steady for larger U.S. companies but only the traditional growth sectors (Information Technology. Consumer Discretionary. and Communication Services) have shown estimates moving higher throughout earnings season … Market breadth — After strengthening at year-end 2023, market breadth remains narrow with a handful of large-cap tech companies accounting for the bulk of the S&P 500 Index’s 8.6% year-to-date gain … Rich valuations — The price-to-earnings (P/E) multiple for the S&P 500 Index based on forward 12-month earnings estimates is 21.5x,7 well above its 10-year moving average, mainly due to expensive tech behemoths … Geopolitical risks — Roughly 40% of global gross domestic product (GDP), representing 70% of the world’s market capitalization, is voting for heads of government this year … Cracks in the U.S. labor market — Job growth has been a bright spot for the U.S. economy, consistently exceeding expectations and keeping the unemployment rate low. Yet, we now see signs of possible deterioration: non-cyclical sectors of health care, education, and government have accounted for most of the payroll growth over the last six months, and average weekly hours worked alongside temporary help jobs continued to decline, factors which historically have been precursors to job cuts "
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BMO senior economist Sal Guatieri checks in on housing affordability,
“Going back four decades, Canada’s housing market has seen three giant spikes in ‘unaffordability’. The first and worst, in 1981, reflected 21% mortgage rates that had payments (including for utilities) taking a 65% gulp out of disposable income. The second runup, nine years later, reflected a speculative bubble and 14% mortgage rates, requiring 55% of income to cover mortgage and utility payments. The third spike in late 2023 was almost as bad as the previous one and stemmed from cheap credit, FOMO, blazing population growth, and a subsequent surge in borrowing costs (albeit to half of 1990 levels). Affordability likely improved a bit early this year, as mortgage rates eased slightly, existing home prices fell further, and disposable income probably kept rising (even in per capita terms). But buyers shouldn’t expect meaningful relief until the BoC brings down policy rates”
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BofA Securities’ monthly survey of global portfolio managers is summarized by investment strategist Michael Hartnett,
“Global growth expectations for Fund Manager Survey (FMS) respondents at a 2-year high as recession risks dissipate; FMS “risk appetite” highest since Nov’21; stock allocation at 2-year high; big rotation into Europe, EM, financials … bullish but not yet extreme bullish … 2/3 of respondents say recession “unlikely” in next 12 months; “soft” landing remains consensus at 62% probability, while 23% say “no” landing (was 5% in Oct’23) and 11% say “hard” landing (was 30%); EPS optimism at 2-year high and investor desire for companies to return cash to shareholders highest since Jul’15 … 84% expect short rates to decline next 12 months, 40% expect lower bond yields (was 62% in Dec’23); “inflation” seen as #1 tail risk; “long Magnificent 7″ = #1 most crowded trade; asked if AI in bubble 45% say no, 40% say yes”
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Diversion: “Why Canada has so many cyberattacks—and why we’re all at risk” – Maclean’s
Scott Barlow