A daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
There have been a lot of research reports detailing a global economy that is slowing rapidly.
TD’s head of global strategy James Rossiter was the latest contributor on Tuesday (my emphasis),
“Our high-frequency activity indicators are screaming “slowdown” across the board. Our daily global demand tracker has slipped into negative territory for the first time this year, as have TD’s hard-data surprise indexes across major economies … Global growth tracking suggests a sharp slowdown in 2022Q1. Year-over-year global growth is now likely a touch below its potential of 3% for the first time since the early days of the pandemic. We expect consensus forecasts to deteriorate across major economies in the coming months as consumers pull back in the face of high inflation… The situation in China is worsening, driven in part by COVID lockdowns. The weaker Chinese Manufacturing PMI and credit impulse data bode ill for the ISM”
Things could change rapidly if Chinese lockdowns ease or reflation accelerates in the U.S., but I’m currently very concerned about asset classes sensitive to global growth. This includes non-energy, non-agriculture commodities.
“TD: “Our high-frequency activity indicators are screaming “slowdown” across the board”” – (research excerpt) Twitter
The signs of slowdown covered above help put Scotiabank strategist Hugo Ste-Marie‘s forecast in context,
“The pullback in North American equities is essentially driven by a phase of acute P/E compression. We cannot rule out further P/E damage, but we believe the current compression phase is well past its midpoint … We believe that if equities were to suffer another leg down, it will have to come mainly from the earnings side. Bottom-up EPS forecasts continue to trend higher, but if the macro outlook were to worsen more dramatically, earnings expectations would swiftly reverse course… The macro environment is deteriorating for equities as the ISM Manufacturing and Revision Ratio continue their slow mean-reversion. Contracting valuations and deteriorating technicals are also weighing on our equity signal, which drops to UW for the first time since early 2020. Our overall bond signal stays at UW, but stands at its highest since May 2020 … Building up cash reserves allows a more nimble response as the model will be able to redeploy into equities or bonds once we get clearer signals.”
It’s subtle, but I take this as another warning about the effects of fading growth on equity prices.
“Scotia: “Bottom-up EPS forecasts continue to trend higher, but if the macro outlook were to worsen more dramatically, earnings expectations would swiftly reverse course.” – (research excerpt) Twitter
BofA Securities U.S. quantitative strategist Savita Subramanian described a terrible April for stocks and provided a framework for determining what is next for markets,
“The S&P 500 sold off 8.7% in April on a total return basis (a 98th percentile monthly return since 1936) on rising recession risk. Growth stocks were hit particularly hard, with the Nasdaq -13% (-23% from its Nov. peak), marking the worst month since GFC (Global Financial Crisis) and the 12th worst month in history since 1971. Corporate earnings failed to rescue the market - despite a 4% beat so far, forward-looking indicators (guidance ratio, earnings revision ratio, corporate sentiment) plummeted to the lowest level since 2Q20 … Our cursory math suggests the S&P is pricing in a one-third probability of recession (see Recalibrating our views 29 April 2022). Downside risks remain if the probability rises above that, and since 1936, the probability of an up month following similarly large declines was just 50% (vs. 63% for the entire history). We expect volatility to remain elevated and recommend High Quality stocks and defensive sectors (Health Care and Staples - the latter of which we recently raised to overweight)… Our Dividend Yield factor was the best performing factor in April (-1.8%) and YTD (+7.3%).”
The leading indicators for equities form another warning.
“BofA: “forward-looking indicators (guidance ratio, earnings revision ratio, corporate sentiment) plummeted to the lowest level since 2Q20 " – (research excerpt) Twitter
Diversion: “Boston Dynamics’ Robot Dog Spot Now Sees the World in Color, Has 5G, and Uses a Fancy New Controller” – Gizmodo
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