Developed Countries
Neutral This week we upgraded the S&P home improvement retail (HIR) index to a benchmark allocation and removed it from our high-conviction underweight list for a small relative loss. Similar to the parent Consumer Discretionary GICS1 sector, HIR stocks are inversely correlated with interest rates (fed funds rate discounter shown inverted, middle panel), given the close residential real estate market links they enjoy. Now that the bond market forecasts that the Fed will cut rates four times by next July, home improvement retailers should be cheering this news. Moreover, home improvement retailers have been flexing their pricing power muscles recently and this represents another boost to their top line growth prospects (bottom panel). Bottom Line: Lift the S&P HIR index to neutral and remove from the high-conviction underweight list. For additional details, on why it no longer pays to be underweight the S&P HIR index, please see this Monday’s Weekly Report. The ticker symbols for the stocks in this index are: BLBG – S5HOMI – HD, LOW.
Canadian data has been firing on all cylinders of late, so it was no surprise that Governor Stephen Poloz decided to keep interest rates on hold today. That said, details in its monetary policy report were notably cautious: Risks from the slowdown in…
We posited that the easy gains in equities were behind us, which stands in contrast to sell-side analysts who anticipate 10% EPS growth. Our four-factor earnings model also points to profit growth trouble into early 2020. Investors have also been obsessing…
Pushing The Production Frontier Is Increasingly Hard It is easy to overestimate the economic impact of new technologies. At first, like their predecessors, the microprocessor and the internet created entirely new industries. But this is not the case…
Three major forces are often used to explain why observed productivity growth is currently in decline: A slowdown in global trade penetration, productivity being mismeasured, and innovation that simply isn’t what it used to be. Slowdown In Global Trade…
In early June, we shaved our 2021 EPS forecast to $140, and our end-2020 SPX target fell to a range of 1,890-2,310. We posited that the easy gains in equities were behind us, which stands in contrast to sell-side analysts who anticipate 10% EPS growth. Our four-factor earnings model also points to profit growth trouble into early 2020. Investors have also been obsessing with the “Fed put”, but neglecting the looming profit recession (see chart). Moreover, while markets cheered the trade truce following the recent G20 meeting, odds are high that manufacturing will remain in the doldrums as the tariff rate on $200bn of Chinese imports went up from 10% to 25% on May 10, and no tariff rollback was agreed. As a result, highly cyclical global trade and manufacturing will likely continue to weigh on the economy for the remainder of the year. Bottom Line: We reiterate our cyclically cautious market outlook as the risk/reward remains to the downside, and we are not willing to play 100-200 points to the upside against a potential 1,000-point drawdown. Please see our most recent Weekly Report for more details.
The June NFIB softened from 105 to 103.3, but remains at a very healthy level. This is in sharp contrast with the ISM Manufacturing index which has collapsed from 60.1 last August to 51.7. This dichotomy highlights that the U.S. domestic economy continues to…
Historically, productivity growth has followed economic activity. When demand is strong, businesses can generate more revenue and therefore produce more. The historical correlation between U.S. nonfarm business productivity and the ISM manufacturing index…
Consumer discretionary stocks have marked time over the past year. But, now that the Fed is ready to ease monetary policy, it will no longer pay to be bearish. This early-cyclical sector is the prime beneficiary from lower interest rates. Thus, we are putting…
A tactical trading opportunity has re-emerged, and today our U.S. Equity Strategy team recommends trimming the S&P semi equipment index to underweight on a three-to-six month time horizon, but with a tight stop at the -7% relative return mark. Semi…