Seven reasons to stay cautious on equities

A daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow

Citi US equity strategist Scott Chronert is recommending capital return strategies, share buybacks and dividends primarily, and provided a list of stocks fitting a dividend growth strategy,

“Capital return discussions often resonate during periods of market volatility. Year-to-date, dividend strategies have generally outperformed buyback strategies… We look for dividend growth approaching + 8% in ’22, and assume a flat dividend growth base case for ’23 as recession risks unfold… We continue to advocate for capital return strategies in navigating ongoing market volatility, albeit with a preference for dividends over buybacks. ”

Mr. Chronert’s dividend growth stock screen includes 25 members where the firm’s analysts see dividend growth of 25 per cent or more. Because Canadian investors generally prefer domestic financial, mining and energy stocks, I’ll list the stocks not in those sectors. These are Wingstop Inc., Outfront Media Inc., Dick’s Sporting Goods Inc., Sirius XM Holdings, TJX, Ross Stores, Advance Auto Parts Inc., Molson Coors, Inter Parfums Inc., Tractor Supply Company, Marvell Technology Inc., and Darden Restaurants Inc.


BMO chief economist Doug Porter continues his discussion of one of the most important issues for economic forecasters – the degree to which growth is sensitive to higher interest rates,

“Readers of this space will be well aware that we have been pounding the drum on the upside risks to inflation since early 2021, and we remain doggedly at the high end of consensus expectations for CPI in both the US and Canada. However, where we differ from this emerging chorus of Fed doubters is on how high rates will need to go to seriously chill the economy (and thus, eventually, inflation). Our view is that growth will prove to be highly sensitive to the combination of coming rate hikes, the drag from inflation, QT, less fiscal largesse, and — in the case of the US at least – a strong dollar. We now expect the Fed to hike rates to the 3.25% -to-3.50% range by year-end (a 25 bp lift from previously), and then stay there. Recall that just barely three months ago, the target funds was still 0-to-0.25%; this call would imply 325 bps of tightening in nine months. The Fed has not hiked rates at such a rapid pace since, well, the early 1980s. (The great tightening cycle of 1994/95, which this episode seems most closely related to, saw a total move of 300 bps in 12 months.) A 325 bp rise will make a major dent in growth — we look for GDP to essentially stall late this year and into early 2023. In fact, there are early signs that growth is already catching a chill from high inflation, and even rising rates. A big pullback in housing starts last month may be a first warning that near-6% mortgage rates will take a fast toll. The Atlanta Fed’s GDP Nowcast is already looking for no growth in Q2, after an actual 1.5% dip in Q1. ”

As I noted previously, I am concerned that Canadian household debt, combined with higher rates, might result is a very quick deceleration in consumption and economic growth.

Re-rating Recession Risks – BMO Economics


Credit Suisse global asset allocation strategist Andrew Garthwaite provided a number of reasons for investors to remain cautious on equities,

Recession risk (inverted yield curve or commodities): Remains very high… Stage of cycle: When we enter a bear market, unemployment has had to rise close to or above full employment – we are not near this level. Valuation: The ERP [Equity Risk Premium] is 4.8% (below its long-term average), the warranted is 5.4% (driven by spreads and lead indicators)… Earnings risk: PMIs imply earnings revisions fall significantly further, and this is not discounted… We can easily see EPS declining 0 -5%. Equity closely correlated to credit: Credit spreads are not yet pricing in recession risks. Bear markets: On average equities decline 35% (which would imply 3120 S&P 500) and if there is a recession 44% (which would imply 2,700 S&P 500)… Sentiment is very negative: But this is not reflected in positioning (ie fully invested bears). ”

“Reasons CS’s Garthwaite remains cautious on global equities” – (research excerpt) Twitter


Diversion: “Climate change will force tens of millions of people to migrate by 2050. In Zimbabwe, it’s already started.” – MIT Technology Review

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