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Global roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
Morgan Stanley Wealth Management’s chief investment officer Lisa Shalett sees real rates and China’s weak economy as the biggest short-term risks,
“We believe the complex crosscurrents that have impacted stocks for most of 2023 are likely to persist, validating a cautious response to the “all-clear” signal. We are far from out of the woods, and we prefer an active approach to risk management. Consider preparing for rangebound US stock indexes, neutralizing extreme sector and factor overweights and balancing offense and defense while focusing on quality… The 10-year real rate rose above 2.0 per cent last week, its highest since the Great Financial Crisis. As investors know, it is the fundamental “risk-free” benchmark underpinning most valuation calculations across capital markets … If we are approaching a longer-term regime change for interest rates, as we believe, the implications for equity valuations are significant: Real rates of 1.5 per cent to 2.0 per cent have historically been correlated with price/earnings ratios close to 17, as opposed to the current 20 times forward earnings estimates … [China’s] growth picture has been rapidly deteriorating, as evidenced by purchasing managers’ indexes (PMIs), loan demand, residential construction and inflation that last month reversed to outright deflation … China is plagued by a crisis of confidence, with the household sector exhibiting limited pent-up demand, despite excess savings … Disappointments in China are … likely to reverberate, impacting global demand, currencies and US rates, as policymakers there scramble to revive confidence.”
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Goldman Sachs chief U.S. equity strategist uncovered the stocks active managers are using to play the move to cyclical market sectors,
“The median S&P 500 stock’s return has sharply become more micro-driven this year, representing alpha opportunity for hedge funds and mutual funds … Reflecting the fertile stock picking environment, mutual fund and hedge fund favorites have outperformed in recent months. The most popular mutual fund overweights have outperformed the largest mutual fund underweights by 5 percentage points (10 per cent vs. 5 per cent) since the start of 2Q, although overweights are still trailing underweights by 3 percentage points year-to-date. The most popular hedge fund long positions have outpaced the largest shorts by 21 percentage points year-to-date (24 per cent vs. 3 per cent) after a record stretch of underperformance in 2022 … Hedge funds and mutual funds both increased exposure to the cyclical Energy sector. Hedge funds entered 3Q 115 basis points overweight the sector relative to the Russell 3000, compared with 48 basis points underweight during 1Q…Chevron Corp., and Exxon Mobil, were among the top stocks that generated the most positive alpha for mutual funds. Check Point, Energy Transfer LP, EQT Corp., and Valaris Ltd. rank among hedge fund favorites … There are only six ‘shared favorites’ between our Hedge Fund VIP basket and Mutual Fund Overweight basket, the lowest number in 9 quarters: Cigna Group, Fiserv inc., Mastercard Inc., Uber Technologies Inc., Visa Inc., Workday Inc.
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Conventional economics states that consumer inflation expectations are a vital factor as spending behaviour changes when inflation pressure is taken as a given. So, BMO senior economist Priscilla Thiagamoorthy’s recognition of rising U.S. inflation expectations is a concern, not least for the Federal Reserve,
“The University of Michigan’s consumer sentiment index was unexpectedly revised down to 69.5 in August from a nearly two-year high of 71.6 in the prior month. One-year inflation expectations edged up to 3.5 per cent year-over-year, a three-month high. Meantime, the average inflation forecast over the next five years was stuck at a still-high 3.0 per cent for the third straight month. U.S. gas costs have steadily climbed over the past few weeks and are now at the highest since last autumn. Higher pump prices are weighing on household confidence and the inflation outlook.”
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Diversion: “Is today’s music just plain bad? Here’s one way of looking at it” – A Journal of Musical Things
