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

Citi global quantitative strategist Dirk Willer argued that equity prices did constitute an asset bubble and now it’s deflating. The report is entitled Deflating Bubble Trouble,

“2 sigma deviations from price trends are a bubble signal from which most asset classes mean revert. Forward returns, after prices fall back below the threshold, are subpar. US assets exiting bubble land — US equities and growth/value have been bubbles and are now exiting. Other global assets have not triggered bubble warnings, including US real estate … For CAPE-based bubbles, it also pays to wait for the exit. Using Shiller data, CAPE has also just exited the bubble, also suggesting caution … Using valuation more holistically, we show that momentum signals tends to beat valuation … Kick them when they are down – which is now. Waiting for the market to turn down does seem to be a better idea. On average the time span between entering and exiting is over a year, with wide dispersion between 3 months in 29 and over 4 years for the years (97-01). Once markets exit, median returns are negative for 3m, 6m and 1yr after bubble exit. The hit ratio is highest for 3m returns, which are negative 4 out of 5 times. Then returns become positive again, starting in year 2, and hit ratios deteriorate, but median returns stay well below unconditional ones across all time-periods. Currently, we entered the bubble in October 2020 and are exiting bubble territory this week.”

“Investors should ‘kick stocks when they are down’” – (research excerpt) Twitter


Morgan Stanley economist Ellen Zentner slashed her forecast for U.S. GDP growth by a lot,

“Global challenges and a faster pace of policy normalization have led us to downwardly revise our forecast for real GDP growth this year by 100bp to 2.0% 4Q/4Q (2.6%Y). Our forecast for 2023 growth is unchanged at 2.1% 4Q/4Q (2.6%Y). Our forecasts for economic growth this year are more cautious when compared to the March Summary of Economic Projections from the FOMC (2022: 2.8%, 2023: 2.2%), and Bloomberg consensus (2022:2.3%, 2023: 2.0%) … An expedient hiking cycle. Following the 50bp hike at the May meeting, we expect the Fed to raise the federal funds rate by an additional 50bp at each of the June and July meetings, before settling in to 25bp hikes at each meeting thereafter for the balance of the year … The labor market is tight and will remain so for the foreseeable future … The oil price shock, higher interest rates, and broad-based inflation are headwinds to the consumer, with a disproportionate impact on lower-income households.”

“MS takes an axe to U.S. GDP forecasts” – (research excerpt) Twitter


BofA global strategist Nigel Tupper developed a Global Wave model to measure the investment environment. Components include industrial and consumer confidence, capacity utilization, employment, producer prices, credit spreads and profit outlooks. The model now points to a difficult backdrop for investors,

“Global Wave has now fallen for six consecutive months. Previous downturns have averaged one year so the Global Wave could potentially fall for another six months as central banks globally hike short-term rates to address inflation. Weakening earnings expectations and moderating confidence continue to weigh on the Global Wave. A downturn in the Global Wave suggests investors position defensively, although our Triple Momentum analysis – which identifies bottom-up themes – suggests a few pockets of cyclicals appear unusually attractive in this downturn… The components contributing most negatively to the Global Wave this month were the Global Earnings Revision Ratio as earnings expectations moderated, Global Industrial Confidence which fell in 85% of countries, Global Consumer Confidence which fell in 64% of countries, and Global Credit Spreads which widened 31bp during the month. In contrast, Global Producer Prices contributed positively.”

“BofA’s Tupper: “The Global Wave has now fallen for six consecutive months”” – (research excerpt) Twitter


Newsletter: “5 Reasons the market keeps falling” – Barlow, Globe Investor

Diversion: " What’s Behind America’s Shocking Baby-Formula Shortage?” – The Atlantic

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