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Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow

Whenever a financial pundit declares the equity market is expensive, the first question in investors’ minds should be “compared to what?”

BofA Securities U.S. quantitative strategist Savita Subramanian provided some insight in this regard in a Monday research report,

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“S&P is statistically expensive on almost every measure except … relative to bonds (and maybe that’s all that matters) … Stocks are trading above average on all but two of the 18 valuation measures we track - only on its equity risk premium (i.e., relative to bonds) and on free cash flow (artificially depressed from low capex) does the market appear statistically inexpensive. But for income-seeking investors (which represent half of active US funds) the S&P 500, even after a spate of dividend cuts, offers ~3x the yield of the 10-yr Treasury, close to a 70-year record. … For the next one to three months, Health Care screens best in our tactical quantitative framework based on momentum and valuation whereas Energy ranks last. Tech valuations have grown extended, but strong earnings revisions and price momentum push it 2nd place in our short-term framework.”

“@SBarlow_ROB BofA: “S&P is statistically expensive on almost every measure except….” – (research excerpt) Twitter

***

National Bank economists Mattieu Arsenault and Alexandra Ducharme attempt to answer the important question, “Is a second lockdown inevitable?,”

“Government actions to reduce mortality early in the pandemic limited mortality. However, that variable explains less than one third of variations in death rate among OECD countries … we calculate that the [U.S. Congressional Budget Office]‘s COVID-induced downward revisions of U.S. GDP in the coming years amounts to no less than 37 per cent of 2019 GDP … The age distribution of people most likely to die of COVID-19 is one of the most basic arguments against a severe lockdown of the economy. The death rate is highest among those 65 and older, most of whom are no longer in the work force. Absent a mutation in the virus, governments will be justified in keeping major sections of the economy open "

So, National Bank sees a second lockdown applying primarily to the elderly.

" @SBarlow_ROB NBF: 2nd lockdown likely to apply mostly to the elderly’ – (research excerpt) Twitter

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***

Morgan Stanley U.S. equity strategist Michael continues to believe the current market recovery is more or less a garden variety cyclical recovery with legs,

“Equity markets trade at peak multiples when earnings forecasts are at the trough of the cycle, like now. Specifically, current consensus forward 12 month EPS for the S&P 500 is $143 and troughed in mid May. MS Research Analyst Mike Wilson expects valuations to come down by 10% as NTM EPS rises by close to 20% over the next year leaving 10% upside for the S&P 500. Additionally, market leadership has been decidedly cyclical since the market lows in late March. Such leadership aligns with Mike’s view that cyclicals typically exhibit the most operating leverage coming out of an economic downturn. Small caps have also done better than their larger brethren for the same reason. As the recovery progresses Mike expects GDP growth to pick up while labor costs are slower to accelerate. This mismatch in growth rates accrues to the benefit of employers in margins and the impact is greatest in pockets of the market where labor costs tend to take a higher percentage of revenue - Small Caps and Value.”

The main argument against this position is the underperformance of U.S. bank stocks which are grouped with cyclical sectors. His point about valuations - they always look bad at the early stages of a recovery because of trough-level profits - is well taken.

“@SBarlow_ROB MS’s Wilson: This is just a garden variety cyclical recovery (more or less)” – (research excerpt) Twitter

***

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Newsletter: “The market isn’t predictable but investor behaviour is” – Globe Investor

Diversion: “Our 25 Favorite Summer Blockbusters of the 1990s” – i09

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