To save you time, I source key Investment Strategist insights from the week and plug them into a single email. Quotes, interviews, etc. All in one place for your convenience.
Bull vs Bear
BULL: Brian Belski, Chief Investment Strategist of BMO Capital Markets
- Brian holds a more optimistic view and points out that stocks tend to perform positively in seven out of 10 years on average. He believes recent recession predictions have not materialized and suggests that investors shouldn’t overly concern themselves with macroeconomic factors.
- Brian highlights the strength of the balance sheets of U.S. and Canadian banks, which he sees as a safeguard against credit issues. He also believes that a robust job market will help consumers manage higher debt levels and payments.
- Regarding the Federal Reserve, Brian acknowledges a delayed response in raising rates to combat inflation but believes they are now on the right path. He expresses a preference for more offensive sectors in the stock market, such as financials and technology in the U.S., and communications services in the U.S. and materials in Canada.
- In conclusion, Brian is bullish on the S&P 500 and believes it could surpass his base-case target of 4,550, potentially reaching his “bold case” level of 5,050.
BEAR: David Rosenberg, Rosenberg Research
- David believes the Canadian economy is already in recession, and the U.S. is on the brink of one due to factors such as past interest rate hikes, high debt-service burdens, and stricter lending standards.
- He recommends defensive investments like long-term government bonds and high-quality corporate debt as a strategy to navigate these economic challenges.
- David anticipates that central banks will need to reverse their “higher for longer” interest rate approach, and he advises limiting exposure to the stock market while advocating for an investment strategy that considers the economic cycle.
- In conclusion, David emphasizes the importance of capital preservation during this uncertain economic period.
Will Market Leadership Shift or Broaden?
Jurrien Timmer, Director of Global Macro at Fidelity Investments
The P/E premium (using trailing earnings) of the top 50 vs bottom 450 is only 8 points (28.3x vs 19.9x), for a spread of 42%. That’s only half of the premium that investors were willing to pay for the Nifties in both 1974 and 2000. So, perhaps there is still room to run.
My guess: When the bull market finally wakes up for real, the rest of the market will take over the leadership from the big growers. Or, if the current dovish inflation narrative proves wrong, that could drive valuations down for all stocks, much as it did in 1974-75. Either way, the long-running reign of the Nifty Fifty seems likely to end.
For equities in general, it’s difficult to be too bullish in the near-term. The S&P 500 has gained five P/E points on the expectation of a soft landing. Maybe it will happen, but earnings estimates are already ambitious, and the risk is that the inflation narrative is too optimistic. If we are in the twilight of a secular bull market, all we can probably hope for is a return to the old highs (4818), or maybe slightly better. With the S&P 500 at 4500, that leaves little upside.
Alternatives to US Equity Leaders
Lower inflation has helped to support economic confidence and offset residual concerns facing financial markets. Signs of economic stabilization are growing but appear to have been more than fully reflected in riskier asset market valuations, in our view.
Nimble management still required: We entered 2023 with an allocation preference away from stocks, which we have retained. The level of risk premium discounted in risk assets does not correspond with the macroeconomic environment and uncertainty we foresee. We continue to believe that a nimble investment style remains appropriate.
Where do we find opportunities: The notable leadership from US large-capitalization tech stocks may still have a way to go, but we are drawn to seek alternatives. We find greater attractions in smaller-capitalization stocks in the United States or among emerging market equities, which have been left behind in the rally since the start of October 2022.
Seeking Alternatives: As policy-tightening moderates, we believe the return potential from global bonds, especially lower-risk government bonds, has improved. We are attracted to naturally diversifying “alternatives” such as private assets, which offer the potential to earn an incremental return linked to their relative illiquidity.
September Total Return Webcast
Jeff Gundlach, DoubleLine Capital
GDP Growth Expectations
David Kelly, Chief Global Strategist at J.P. Morgan Asset Management
The Atlanta Fed GDPNow model projects 4.9% annualized growth for the third quarter. If this were to transpire and real GDP growth for the fourth-quarter was a trend-like 1.8% annualized, the year-over-year GDP growth rate would be 2.7% in the fourth quarter. Even with the less exuberant gains that we expect for the third and fourth quarters, of 4.1% and 1.6% respectively, fourth-quarter year-over-year real GDP growth would be at 2.4%, far above the Fed’s current projections.
Consequently, we expect the Fed to upgrade their growth projections for this year and, possibly for 2024, reflecting the resilience of business fixed investment and consumer spending in the face of higher interest rates. However, they are unlikely to boost their forecast of 1.8% real growth in the long run, given that the economy has seen only mediocre long-run productivity growth, is starting from a position of full employment and is still facing very slow growth in the working age population.