Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
The most interesting phrase I read over the weekend was “bounce to malaise” from the JP Morgan economic research team,
“The bounce in consumer spending is likely to continue past midyear, spilling over to other components of activity. Trade flows from Asia began recovering in April, while next week’s China activity readings should show continued firming in May. Signs of an earlier pickup lead us to nudge down the 2H20 rebound but we continue to expect a record 32% ar surge in global GDP next quarter—down 3%-pts from last week. As this bounce takes hold, it will take time to distinguish whether we have embarked on a V-shaped recovery in the level of GDP or are tracking our forecast of a bounce to malaise. The path of inflation will also prove difficult to read. “
“@SBarlow_ROB JPM: V-shaped recovery or ‘bounce to malaise’?’ – (research excerpt) Twitter
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Morgan Stanley’s U.K.-based strategist Andrew Sheets remains steadfast in the V-shaped recovery camp,
“We think that this cycle has been, and will be, more ‘normal’ than appreciated. A new cycle has started, and we think that investors should position as such. We think that stocks and credit will be modestly higher and tighter over the next 12 months, but the more compelling opportunity lies in traditional ‘early-cycle’ rotations: smaller and cyclical stocks in the US, value stocks outside it”
For the record, my view lies between JP Morgan’s and Morgan Stanley’s – “bounce to boredom” might cover it.
“@SBarlow_ROB MS: "we think that this cycle has been, and will be, more ‘normal’ than appreciated"’ – (research excerpt) Twitter
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RBC economist Josh Nye believes that the negative effects of the economic slowdown on the domestic housing markets are only beginning to be felt,
“The oft-watched debt-to-income ratio has flattened out in the past few years but remains close to a record high. The more relevant debt service ratio (measuring households' ability to manage high debt loads) declined for a second straight quarter, with early mortgage deferrals providing some help. But debt servicing costs remain historically elevated, even in the current low interest rate environment. These number are a reminder (if one was needed) of the high household debt levels that have long worried economists and policymakers…. labour market shock hasn’t yet turned into a debt servicing emergency … The problem is those solutions are temporary. Recent Bank of Canada analysis suggested expiry of deferrals and income support programs later this year—when the labour market still hasn’t fully healed from the COVID-19 shock—will push mortgage arrears higher in early 2021…
“@SBarlow_ROB RBC: "Just the beginning of COVID-19 impact on household finances” – (research excerpt) Twitter
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I quote Citi U.S. equity strategist Tobias Levkovich a lot, and it’s not just because he’s Montreal born and bred. His most recent research report carries an important and well grounded warning (my emphasis),
“The concept of money supply being so large that it overwhelms the economy and flows into asset prices has validity, but we have witnessed this lead to problems in the past. The post-LTCM monetary policy from Alan Greenspan in 1998 arguably exacerbated the tech bubble, which then ended with stock price collapse. Some economists believe that the housing bubble also was the result of excessively low interest rates allowed by the Fed. Hence, there are no “free lunches.” Economic progress must back up the stock market surge, or severe pullbacks are inevitable… The idea of abandoning fundamental principles is uncomfortable and contradicts years of research. Permabulls appear brilliant in rising markets, and permabears are prescient when share prices fall. With equities climbing 78% of the time, it pays to be an optimist, but too many indicators suggest caution now.”
“@SBarlow_ROB Levkovich: "With equities climbing 78% of the time, it pays to be an optimist, but too many indicators suggest caution now” – (research excerpt) Twitter
“ @DiMartinoBooth Markets are in hysteria” – (chart of Citi’s Panic/Euphoria model) Twitter
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Diversion: “ The Three Sides of Risk” – Collaborative Fund
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