Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
The U.S. presidential election this week could make things exceedingly hairy for markets and fundamentals are not likely to matter until the dust settles. Morgan Stanley strategist Michael Zesas has some advice for investors (my emphasis),
“In 2016, for example, the consensus incorrectly assumed a Trump victory would yield a market sell-off. Investors can avoid such mistakes by focusing on ‘plausible policy paths’ in order to separate policy reality from campaign promises. This involves thinking about likely policies based on total government make-up, not just presidential campaign rhetoric. That approach in 2016 would have steered you away from bearishness around a Trump victory, since his most likely policy path was fiscal expansion through tax cuts … we’re more confident in economically supportive fiscal policy across most outcomes, in particular a Democratic sweep scenario, whereas investors remain somewhat concerned about the impact of higher taxes and more regulation… we think investors may overestimate the perceived benefits of legislative gridlock in a scenario where Democrats win the White House but Republicans hold the Senate. Here we see underappreciated risks to proactive fiscal support for the economy… Our equity strategy team argues the S&P 500 could initially trade lower in a Blue Sweep scenario but, as rates rise, we’d ultimately view this as a dip to buy. That’s because the cyclical bull market, based on early economic cycle dynamics, would remain intact and be further underwritten by fiscal stimulus.”
Investors should keep a close eye on North American industrial stocks and bond yields after the election for the market’s view of what the election means for fiscal spending and the economic recovery – higher for either means rising growth expectations.
“@SBarlow_ROB MS with election week advice for investors” – (research excerpt) Twitter
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Citi U.S. equity strategist Tobias Levkovich is concerned about the large-cap technology secular growth stocks that have been leading global markets (my emphasis),
"IT sector expectations are high and therefore hard to meet… As we have highlighted since June, our Panic/Euphoria Model has indicated that portfolio managers were long equities even if they might have been uncomfortable being so … The heavy concentration in secular growth stocks also showed a very complacent willingness to continue adding names despite elevated valuation levels, while the powerful issuance of SPACs led us to believe that sentiment was too upbeat in the face of earnings revision momentum looking peak-like … it was troubling for many to witness soft guidance from a couple of major global software producers, plus a few semiconductor companies noting weakness, several industrial leaders citing “squishy” guidance, and even credit card processors suggesting that all wasn’t hunky-dory … the modest pickup in yields seems to have capped the upside for the stocks that have significantly greater index weights. Thus, if they slide somewhat, so might the S&P 500. Oddly, a better economy could restrain the mega-cap winners, which thereby would hurt the broad market’s levels."
Mega cap tech stocks dominate the S&P 500 to such an extent that any weakness translates almost automatically into lower benchmark levels until new leadership emerges.
"@SBarlow_ROB C: “A Cascade of Concern Meets Positioning” – (research excerpt) Twitter
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Also from Citi, economist Veronica Clark sees ‘scary data ahead’ for the Canadian economy,
"[The Bank of Canada] adjusted QE purchases to be relatively more concentrated in longer-term assets, but with a smaller size of weekly purchases. In our view, this suggests a potentially sooner-than-previously-expected end to balance sheet expansion. 2020 growth forecasts … were upgraded as anticipated, but with slower growth and greater uncertainty in the coming quarters... We expect much softer job growth of just 35k in October following a substantial increase in September and given new business closures in large cities … The CFIB survey of small businesses also showed a notable decline in the overall business barometer index from 59.2 to 53.3 in October … "
"SBarlow_ROB C on Canadian economy : "Scary data ahead?' – (research excerpt) Twitter
“Investors rush to get out of pre-built Toronto condo deals” - Younglai, Report on Business
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Diversion: " The messy, booming business of recycling cruise ships" – Bloomberg
Tweet of the Day: " @HelenCRobertson Oil kicked off what promises to be a turbulent week of trading by plunging to a five-month low" – Twitter
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Scott Barlow