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David Rosenberg’s ‘three little pigs’ of the stock market (and why FOMO isn’t a strategy)
Michael Babad

This article was published more than 6 years ago. Some information may no longer be current.

Briefing highlights

  • Rosenberg’s ‘three little pigs’
  • Morgan Stanley sees modest stock gains
  • Markets at a glance
  • Canadian dollar at about 79 cents
  • Global equities boost Caisse
  • Maple Leaf raises dividend
  • Fed grows ever more confident
  • Ford North America chief leaves post

Rosenberg's 'three little pigs'

David Rosenberg warns today about the "three little pigs" of the market and why FOMO - fear of missing out - isn't an investment strategy.

Here's what the chief economist at Gluskin Sheff + Associates is telling clients:

Pig No. 1: "The first pig is that we may well be in the process of seeing the fabled double-top in the S&P 500. This happens every cycle – a new all-time high that draws the masses in. Then the correction and volatility that can last weeks or months. The ensuing high is then a 'low quality high' which fails to receive ratification from breadth, volume or Dow Theory … The worst thing to do right now is re-adopt FOMO as an investment strategy."

Pig No. 2: "The second pig is all this talk about inflation. Yes, we have some cyclical inflation pressure. We always do late in the expansion. But the fundamental factors that brought us to this sustained low-flation backdrop, such as aging demographics, excessive debts, and rapid technological shifts which have permanently altered the shape of the global aggregate supply curve (as in much more elastic), have not changed in a matter of months or quarters."

Pig No. 3: "The third pig relates to how everyone seems to think the yield cruve has to invert to cause a bear market or recession… All we need to know is that this is the most leveraged economy in modern history."

Mr. Rosenberg recommended investors look more at the "real leading indicator," the yield on the two-year treasury, which "has suffered a massive coronary" over the last few months and is up by about 1 percentage point since Labour Day.

"There is not a snowball's chance in hell that we can see such a massive surge in front-end yields without there being lagged repercussions for other asset classes – in fact, at every turning point in the equity market and the economy, it was the two-year note that played the proverbial role as the canary in the coal mine," he said.

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What Morgan Stanley expects

Considered the "biggest bull on Wall Street" in 2017, and now what one might deem a calf given its outlook, Morgan Stanley still sees U.S. stocks rising in 2018, albeit only modestly by the end of the year.

This call by Morgan Stanley comes, of course, after the tremendous turmoil of the past month and amid what's still an very antsy market.

"The market is taking on a more defensive posture in this correction and recovery, and we can't help but notice the breadth deterioration," its analysts said in a new report this week.

"This is also in line with our views for 2018 and emboldens us to stick with our call for a mid-year peak close to 3,000 on the S&P 500 before a decline back to 2,750, a very modest full year price return of only 3 per cent," said equity strategists Michael Wilson, Adam Virgadamo, Andrew Pauker and Michelle Weaver.

"We reiterate that 2018 will be about alpha, not beta."

Their bull case for the end of 2018 would put the S&P 500 at 3,000, the base case at 2,750, and the bear scenario at 2,300.

The Morgan Stanley analysts aren't alone. Some others have also not changed their views.

But what's interesting about Morgan Stanley is that it led the running of the bulls last year, then found its 2018 year-end call for the S&P 500 "to be closer to the low end of the range of other sell-side U.S. equity strategists."

Given the "remarkable start" to 2018, the analysts thought they might hit that bull-case scenario of 3,000 by Valentine's Day. Well, someone put an arrow through that, of course, but Morgan Stanley still sees that bull case by summer.

"For us, we are more interested in understanding if our primary narrative for 2018 is on track or if something else is happening that would require us to change our year-end target," the equity strategists said.

Thus, they embarged on a "check list" of what they'd expected, to see where things stand now, finding that "the last few weeks have led to our narrative looking more likely, not less."

Indeed, they found that several of the things they thought would happen already have:

1. P/E multiples would contract, and are now down to 17.1x from 18.5.

2. Interest rate and currency volatility would lead "an equity volume normalization."

3. One or more 10-per-cent corrections. Yes, one or more, and the recent one was 11.8 per cent.

4. Market breadth would narrow, and it has.

5. Financial conditions would tighten, and they have.

6. Credit spreads would widen, and they have.

7. The breadth of earnings revisions and the annual rise in earnings per share would peak: "Not yet, but extreme measures virtually guarantee a peak and decline this year."

Additional items on their check list haven't happened yet but …

"We believe these will occur during the year, and could lead to a more significant top for this cyclical bull market," the Morgan Stanley strategists said.

"These include peaking and then falling operating margins, higher earnings estimate dispersion, falling [leading economic indicators] and surprises, and more defensive equity market leadership," they added.

"In addition to these items, we would add a flat yield curve, real Fed Funds above zero … and closer to 1 per cent for 10-year real rates."

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Markets at a glance

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