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

BMO economist Robert Kavcic continues to write definitive commentary on the potential end of the domestic housing bubble,

“The frothy psychology in Canada’s housing market has been broken by higher interest rates. According to weekly survey data from Nanos/Bloomberg, less than 44% now expect higher prices in the year ahead, down from near-record highs above 64% early in the year. That is much closer to pre-COVID norms of around 40%. It’s also telling that 23% now expect lower prices, up from less than 6% (i.e., nobody) early in the year (pre-COVID norms were around 15%). We’ve long argued that breaking the market psychology was key to settling conditions back down. No more widespread speculation; rampant preconstruction assignment flipping; or FOMO buying. A more balanced and well-behaved market lies ahead”

“BMO: “The frothy psychology in Canada’s housing market has been broken”” – (research excerpt) Twitter

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BofA Securities analysts continue to track slowing U.S. business activity in the economically sensitive industrials sector,

“The BofA Industrial Momentum indicator fell again, continuing its downward trend. The pullback in the Indicator since early 2022 (YTD) signifies caution. The indicator leads Global PMI and industrial sales revisions. Earlier this year, the downturn in the indicator was largely due to declines in the sentiment components (i.e., positioning, profit expectations by fund managers). While the sentiment components were still a drag this month, it is worth noting that these components are nearing extreme lows on a historical basis (i.e., how much further can these components fall?). That said, the real concern is weakness emerging in the other components such as copper and BofA’s Ken Hoexter’s Truck Shipper Survey”

The reference to the PMI manufacturing survey is important as the PMI index has historically been highly correlated to S&P 500 earnings growth.

“‘BofA Industrial Momentum Indicator continues to slide lower’” – (research excerpt) Twitter

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Goldman Sachs senior strategist Allison Nathan interviewed the firm’s chief U.S. equity strategist David Kostin who offered a highly plausible explanation for recent market volatility,

“I don’t see a paradigm shift in the fundamental drivers of the equity market, but rather a wholesale shift in the interest rate environment … As of September 2021, the market was anticipating just one 25bp Fed rate hike in 2022, but today it’s expecting ~14 25bps hikes … This de-rating [falling price to earnings ratios] makes sense because when rates were essentially zero throughout most of the pandemic, the cost of capital was extremely low and unprofitable companies weren’t punished so long as they kept growing. In that environment, company managements prioritized growth over profits and adopted the late 1990s mentality of ‘get big fast’ … This contributed to a massive increase in the valuations of the fastest-growing US companies—both profitable and unprofitable—which saw their multiples more than double from roughly 4-6x enterprise value to sales prior to the pandemic to 13-15x last year. But those valuations have since fallen back to 3-5x … So this is mostly a rates story given their negative impact on valuations and investors’ reduced appetite for holding longer duration stocks with more distant paths to profitability.”

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Newsletter: “Why it’s time to take another look at beleaguered REITs” – Globe Investor

Diversion: “The Best Historical Fiction: The 2022 Walter Scott Prize Shortlist” – Five Books

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