In this edition of Market Factors we’ll list the ways markets are acting contrary to history, and then detail ‘growth at a reasonable price’ stock buying opportunities benefitting from AI. The diversion is a reminder there’s really smart people doing good things and we’ll look ahead to the important data releases for the week.
A trader gestures in front of screens.ANDREA COMAS
Trends
11 market aberrations
BMO chief economist Doug Porter identified more than 10 instances of aberrant market behaviour in recent months. A reversion to the mean of normal market trends may be painful.
Mr. Porter’s style was tongue in cheek in his recent weekly report, listing new lessons the market has taught us, “all of which pretty much defied every textbook ever written.”
The first lesson is that military actions in the Middle East would be followed by lower oil prices and a falling greenback. The reverse has been true in all of modern market history.
Lesson two is markets rally on severe levels of political uncertainty. On again/off again tariffs, attacks on Iran that could spread into a wider conflict, and the threatened replacement of the Fed chairman are just three examples of uncertainty the markets have ignored.
Lesson three is that uncertainty-driven equity rallies extend to the TSX, where a series of new highs has been hit despite low growth expectations for the Canadian economy. The benchmark’s limitations as a reflection of the domestic economy are well known but the size of this disparity is notable according to Mr. Porter.
Mr. Porter’s fourth sarcastic lesson is that huge U.S. deficits would lead to lower bond yields. Fixed income investors are not demanding any premium for the added risk.
Mr. Porter is particularly surprised that bond yields are falling despite the threats to Federal Reserve independence. Thus, lesson five is that central bank political risk contributes to lower bond yields.
Number six is that rate cuts cause currency appreciation. This lesson comes from Europe, where the European Central Bank has cut its policy rate by a full percentage point and the euro is up 13 per cent year to date against the U.S. dollar.
Lesson seven is that tariffs cause lower inflation. Every textbook says the reverse.
Lesson eight is that Dr. Copper needs its credentials revoked. The copper price, usually a reliable indicator of global economic growth, has been climbing at the same time economists are continually shaving their growth expectations for 2025.
Lesson nine is U.S.-specific and self-explanatory: lumber prices improve as the housing market sinks. Lesson ten is that gold prices rise as inflation cools. Bullion has been known as a hedge against inflation, rising along with consumer prices, but it’s up 25 per cent this year as inflation pressure has eased.
Lesson 11 is that the Mexican peso will rise the longer the country stays in the crossfire of U.S. tariff threats. The peso is up almost as much as the euro, even though 30 per cent of its GDP is exported to the U.S. and the economy is dependent to a significant degree on remittances from the U.S.
Some of these market abnormalities – the peso and the U.S. housing market, for example – are of only peripheral interest to most Canadian investors. If, on the other hand, North American equities start reacting to uncertainty (after a Trumpian straw that broke the camel’s back maybe, or gold prices drop precipitously) that will be more painful for domestic portfolios.
Dado Ruvic/Reuters
Stock picks
GARP ideas for AI
AI remains among Citi’s top growth investing themes, with attractive PEG ratios relative to the global market and attainable expectations implied by current stock prices.
Citi strategist Drew Pettit helpfully provided a list of growth at a reasonable price (GARP) AI stocks in a report last week. The universe of AI and AI-adjacent stocks were limited to those with market caps of US$5-billion and above, and with historical free cash flow and profit growth above the profitability implied by current stock prices.
The list is too long to recount in full here. The names most likely to interest domestic investors (according to me) include Comcast (CCZ-N), Automatic Data Processing (ADP-Q), Advanced Micro Devices (AMD-Q), Mastercard (MA-N), QUALCOMM (QCOM-Q), Dell Technologies (DELL-N), Arista Networks (ANET-N), Northrop Grumman (NOC-N), Corning (GLW-N), Ciena (CIEN-N), Docusign (DOCU-Q), NetApp (NTAP-Q), Visa (V-N), Amazon.com (AMZN-Q), Adobe (ADBE-Q), Alphabet (GOOG-T) and Seagate Technology Holdings (STX-Q).
Diversions
Remarkable technology for rare diseases
When I get irritated by the state of the world, I like to remind myself that there are really smart people doing really smart, positive things in laboratories across the planet. One example is a European research project called Nanospresso that gives hope to people with rare diseases.
Drug companies don’t work on rare disease treatments because they’re rare – there’s not a large enough patient base to make the costs of research recoverable with sales. Nanospresso provides the potential for bespoke genetic treatments that are built at the local level.
If perfected, pharmacists could manufacture specific mRNA combined with lipid nanoparticles (protective shells to precisely deliver the treatment built with fats like cholesterol) to treat rare conditions anywhere.
The essentials
Looking for our updates on market movers, analyst actions, stock technicals, insider trades and other daily, weekly and monthly insight? Click here to visit our Inside the Market page.
Globe Investor highlights
Ian McGugan looks at the many ways the market is shrugging off some very big risks. And David Berman shares his thoughts on the return of U.S. exceptionalism
Norman Rothery updates his Smaller Stable Dividend portfolio, which has trounced the TSX Composite over the past 25 years
Eric Reguly details how oil traders did a surprisingly accurate job predicting where the Israel-Iran dispute would go
Jeff Sommer of the New York Times provides the recipe for doubling your stock returns, again and again
What’s up next
The domestic economic calendar for the next week is just the S&P Global Canada manufacturing PMI for June (no forecasts posted yet) on Wednesday and the international merchandise trade report for May (a $6.05-billion deficit is expected) on Thursday. There are no corporate earnings reports of wider interest in the coming week.
In the U.S., the ISM manufacturing survey results are out on Tuesday and economists expect a contractionary 48.8 result. Even in a services-oriented economy, the manufacturing survey is important because it is sensitive to changes in the economic cycle.
The always-hyped change in non-farm payrolls data for June (120,000 new jobs expected) will be released Thursday morning. ISM services (50.8) results are also out Thursday along with durable goods orders for May (no estimates available yet).
U.S. corporate earnings include Constellation Brands ($3.308 per share expected) on Tuesday and MarketAxess Holdings Inc. ($1.944) on Friday.
See the full earnings and economic calendar here