Developed Countries

Highlights Portfolio Strategy Firming leading rail freight indicators signal that intermodal, coal and commodity (ex-coal) carloads are in high demand. Tack on the global economic reopening in the back half of the year and rising commodity prices, and factors are falling into place for a durable outperformance phase in rails. Boost exposure in the S&P rails index to overweight. Recovering lodging demand coupled with restrained industry capacity should restore hoteliers’ pricing power and boost profitability. The S&P hotels, resorts and cruises index remains a high-conviction overweight. Recent Changes Boost the S&P railroads index to overweight, today. On March 9, our 5% rolling stop on the S&P autos & components index was triggered and we lifted exposure to neutral that netted our portfolio 29% in relative gains since the January 25, 2021 inception. This move also augmented the S&P consumer discretionary sector back to a benchmark allocation resulting in a 7.5% gain.  Table 1 Feature While President Biden signed a new $1.9tn fiscal package into law last week, valid concerns surrounding the path of the 10-year US Treasury yield added choppiness to the stock market’s consolidation phase (Chart 1). Junk bond spreads stayed calm despite the ongoing Treasury bond market selloff and related MOVE index (bond market volatility) jump and remain a key indicator to monitor in order to gauge if a garden variety equity market pullback can morph into something more significant. Recent empirical evidence suggests that the deviation between the MOVE index and junk spreads will likely return to equilibrium via a settling down of the former, as occurred in the May 2013 taper tantrum episode (Chart 2). Chart 1Choppiness Galore Chart 2A Taper Tantrum Repeat? Importantly, delving deeper in the relationship between bonds and stocks and putting it in historical context is instructive. Our sister Emerging Markets Strategy service recently posited that in the coming years the current negative correlation between stock and bond prices will revert to positive as it prevailed prior to the Asian Crisis (Chart 3). The post-1997 era is largely characterized as disinflationary, while the period from the 1960s to the mid-1990s as primarily inflationary. As a reminder core PCE price inflation was last above the Fed’s 2.5% target in the early 1990s (please see grey zone, top panel, Chart 3). Chart 3From Inflation To Disinflation And Back To Inflation? Importantly, what will cement the correlation between stock prices and bond prices becoming definitively positive anew will be a shift upward of core PCE price inflation. Chart 4 shows that core PCE inflation leads the stock-to-bond correlation by 45 months and can serve as a confirming signpost that bonds will no longer offer downward protection to stocks and likely render risk parity useless. Chart 4Joined At The Hip, Albeit With A Lag If this paradigm shift is indeed taking root, this raises two questions: First, how will the broad equity market perform during a more persistent bond market selloff phase? Second, what equity sectors will likely outperform under such a scenario and which ones should equity investors avoid/underweight in their portfolios? Our analysis centered on historically significant bond market selloffs, which we clearly depict in the shaded areas in Chart 5. Chart 5Don’t Fear The Bond Bear Table 2 shows the results of our analysis broken down in two separate eras. Between the 1960s and the early-1990s, “the inflation era”, we use monthly data, whereas from the early-1990s onward, “the disinflation era”, we use high quality daily data. In the seven inflationary iterations the SPX median fall was 3%,1 whereas in the nine disinflationary episodes the SPX median rise was 18%.2 Impressively, since the LTCM debacle every single bond market selloff has been cheered by the stock market (Table 2). Table 2SPX Returns During Bond Bear Markets Table 3 delves deeper into GICS1 sectors and compares relative returns to the SPX during sizable bond market selloffs. Table 3US Equity Sector Returns During Bond Bear Markets During “the inflationary era” deep cyclicals outperformed the broad market, whereas early cyclicals trailed the SPX. The defensives’ performance is split down the middle with telecom and utilities faring poorly, while health care and staples outshining the SPX. One surprising result is that during “the inflationary era” relative tech performance was very resilient compared with what one would expect. There is an accentuation of relative returns in “the disinflationary era”, with all the defensives significantly underperforming and the deep cyclicals broadly outshining the SPX. Early cyclicals make a U-turn and are clear outperformers. One surprising result is the energy sector’s negative median return. Finally, the real estate sector’s significant underperformance really stands out in “the disinflationary era”. Netting it all out, the broad equity market has historically risen consistently in tandem with a bond market sell off primarily in “the disinflationary era”. Impressively, the SPX has been resilient on average even in “the inflationary era”; granted there have also been some notable drawdowns (Table 2). The implication is that at the current juncture the SPX may have some trouble digesting the bond market’s rapid selloff, but will recover smartly especially as the bond market selloff eventually proves more reflective of growth rather than restrictive. (For inclusion purposes, the appendix on page 16 shows the GICS1 sector performance since the 1960s with shaded areas depicting periods of significant bond market selloffs, and similar to Chart 3 the appendix on page 19 plots the relative share price monthly returns correlation to bond price monthly returns.) This week, we update our high-conviction overweight view on an early-cyclical sub-group with a reopening tailwind, and lift a deep cyclical transportation index to an above benchmark allocation. Hop Back On The Rails The Dow Theory is in full force and serves as a confirmation of the breakout in the Dow Industrials recently, as transports have been firing on all cylinders of late, and is also a harbinger of new all-time relative share price highs in railroads (Chart 6). Today we recommend investors get back on board the rails, a key transportation sub group, and lift exposure from neutral to overweight. Chart 6Dow Theory Green Light Leading indicators in all three key rail freight categories suggests that the railroad rebound is still in the early innings. The V-shaped recovery in the ISM manufacturing and services surveys is underpinning total rail shipments and signals that our rail diffusion indicator has more upside (Chart 7). Chart 7All Aboard… The Cass Freight Index shipments and expenditures components are also on a tear and corroborate that demand for rail freight services is robust. The upshot is that still beaten down sell-side analysts’ relative revenue growth estimates will likely surprise to the upside (Chart 8). Importantly, our Railroad Indicator does an excellent job in capturing this firming rail demand backdrop and signals that relative share price momentum has more room to rise (second panel, Chart 9). Chart 8...The Rails Chart 9Intermodal Is On Fire On the intermodal front, the back half of the year economic reopening due to the population’s inoculation along with President Biden's freshly signed fiscal spending bill suggest that retail related hauling services will pick up steam. The overall business sales-to-inventories (S/I) ratio in general and the retail S/I ratio in particular corroborate the upbeat demand outlook for intermodal carloads (third panel, Chart 9). Similarly, the LA port is as busy as ever as containerships are arriving non-stop full of cargo from China (bottom panel, Chart 9). On the commodity front, coal shipments are staging a comeback from extremely depressed levels and there is scope for a jump to expansionary territory especially given the soaring natural gas prices (second & middle panels, Chart 10). With regard to the broad commodity complex (excluding the historically large coal carload category) the demand profile for rail services is as upbeat as ever. Not only are commodity prices galloping higher, but also BCA’s Global Leading Economic Indicator is steeply accelerating painting a bright picture for rail hauling (fourth & bottom panels, Chart 10). Moreover, the surging global PMI signals that the global economic recovery is also on the ascent, which bodes well for relative profit growth (middle panel, Chart 11). Chart 10Commodity Carloads Set To Surge Chart 11Global Recovery Is A Tailwind Importantly, on the operating front our railroad industry profit margin proxy is at an historically wide level and underscores that the path of least resistance is higher for margins (Chart 11). Thus, rail profits are highly levered to industry pricing power that is on the cusp of spiking higher, especially if our thesis of the firming rail demand backdrop is accurate. The implication is that a rerating phase is in the cards for the S&P railroads index (middle panel, Chart 12). Finally, our EPS macro model has slingshot higher and suggests that rail earnings have a long runway ahead (bottom panel, Chart 12). Netting it all out, firming leading rail freight indicators signal that intermodal, coal and commodity (ex-coal) carloads are in high demand. Tack on the global economic reopening and rising commodity prices, and factors are falling into place for a durable outperformance phase in rails. Bottom Line: Boost the S&P rails index to overweight, today. The ticker symbols for the stocks in this index are: BLBG: S5RAIL – CSX, KSU, NSC, UNP. Chart 12Pricing Power Holds The Key   Stay Checked In To Hotels In late-November we boosted the S&P hotels, resorts & cruises index to overweight and got some eyebrows raised from our diverse client base. Subsequently, we added this niche consumer discretionary sub-group to our high-conviction overweight list for 2021 and the client pushback intensified. Today, we reiterate our high-conviction call on the S&P hotels, resorts & cruises index that has already added alpha to our portfolio to the tune of 17% since inception. While relative share price momentum has climbed of late and relative valuations have troughed, our sense is that the re-rating phase is just getting under way (Chart 13). As the global push for COVID-19 vaccinations heats up, the semblance of normality will serve as a catalyst to unlock excellent value in hotels.    True, lodging services demand is as downbeat as ever, but this index is a prime beneficiary of the reopening trade. Pent-up services demand will get unleashed with consumers likely indulging on more lavish vacationing starting this Memorial Day. Rising government transfers, a soaring savings rate and increasing incomes all augur well for lodging demand and is also corroborated by our hotels demand indicator (Chart 14). Tack on firming consumer sentiment and the ISM services index staying squarely above the 50 expansion line, and the industry’s demand outlook lifts further.   Chart 13A Valuation Re-rating Phase Looms Chart 14Leading Demand Indicators Give The All-clear Given that hotel capacity has been restrained, there are high odds that upbeat demand will likely catch hoteliers unprepared to fulfil it, and thus causing a jump in selling prices (Chart 15). Business travel is also slated to return as a flexible work place environment becomes the norm and the need to meet clients and prospects in order to conduct business will come back with a vengeance. The implication is that beaten down industry profit margins will recover smartly and boost lodging profitability especially given the collapse in the industry’s wage bill (Chart 15). Finally, our S&P hotels, resorts & cruises macro sales model encapsulates all these moving parts and signals that the budding recovery in revenue growth will gain momentum in the back half of the year (Chart 16). Chart 15Widening Margins Will Restore Profitability Chart 16Macro-based Revenue Growth Model Points To A V-shaped RecoveryAdding it all up, recovering lodging demand coupled with restrained industry capacity should restore hoteliers’ pricing power and boost profitability.   Bottom Line: We reiterate the high-conviction overweight status in the S&P hotels, resorts and cruises index. The ticker symbols for the stocks in this index are: BLBG: S5HOTL – MAR, HLT, CCL, RCL, NCLH.   Anastasios Avgeriou US Equity Strategist anastasios@bcaresearch.com   Appendix Chart A1 Chart A2 Chart A3 Chart A4 Chart A5 Chart A6     Footnotes 1     Given the different time frames of the bond market selloffs we decided to show annualized equity returns. 2     Ibid. Current Recommendations Current Trades Strategic (10-Year) Trade Recommendations Size And Style Views February 24, 2021 Stay neutral cyclicals over defensives January 12, 2021  Stay neutral small over large caps June 11, 2018 Long the BCA Millennial basket  The ticker symbols are: (AAPL, AMZN, UBER, HD, LEN, MSFT, NFLX, SPOT, ABNB, V). January 22, 2018 Favor value over growth

Today we take a deep dive into the S&P 500’s seasonality patterns. While over the last two decades Q1 has been the weakest quarter for stocks, on average, with March registering the steepest losses, using reconstructed S&P 500 daily data since 1928 tells a slightly different story. Interestingly, the market is fairly consistent with the upward sloping, albeit volatile, Q1 long-term seasonal trend. Historically, the weakest months are May, September and October the latter which eventually culminates into the “Santa rally”. Given that Q1 choppiness is 3/4 of the way done, Q2 should prove a lower vol quarter before investors have to contend with the seasonally weak months of September and October. Bottom Line: We reiterate our cyclically constructive broad equity market view.

Weekly Performance Update For the week ending Thu Mar 11, 2021 The Market Monitor displays the trailing 1-quarter performance of strategies based around the BCA Score. For each region, we construct an equal-weighted, monthly rebalanced portfolio consisting of the top 3 stocks per sector and compare it with the regional benchmark. For each portfolio, we show the weekly performance of individual holdings in the Top Contributors/Detractors table. In addition, the Top Prospects table shows the holdings that currently have the highest BCA Score within the portfolio. For more details, click the region headers below to be redirected to the full historical backtest for the strategy. BCA US Portfolio Total Weekly Return BCA US Portfolio S&P500 TRI 6.05% 4.56% Top Contributors   QFIN:US TTEC:US EVR:US LPX:US TX:US Weekly Return 105 bps 41 bps 38 bps 37 bps 37 bps Top Detractors   TTWO:US AM:US WES:US VICI:US CL:US Weekly Return -6 bps -2 bps -2 bps -1 bps 3 bps Top Prospects   TX:US SCCO:US UHAL:US QFIN:US LPX:US BCA Score 99.56% 96.29% 95.40% 93.79% 91.25% BCA Canada Portfolio Total Weekly Return BCA Canada Portfolio S&P/TSX TRI 6.05% 4.02% Top Contributors   LNR:CA APHA:CA CS:CA ENGH:CA VII:CA Weekly Return 80 bps 50 bps 39 bps 35 bps 35 bps Top Detractors   NXE:CA MIC:CA SOY:CA CCA:CA MRU:CA Weekly Return -3 bps 1 bps 4 bps 5 bps 7 bps Top Prospects   LNF:CA IFP:CA CFP:CA FTT:CA MIC:CA BCA Score 99.49% 99.43% 98.90% 89.34% 86.41% BCA UK Portfolio Total Weekly Return BCA UK Portfolio FTSE 100 TRI 1.23% 1.45% Top Contributors   TRMR:GB AO.:GB FDEV:GB CVSG:GB WOSG:GB Weekly Return 36 bps 26 bps 25 bps 22 bps 19 bps Top Detractors   CNE:GB DGOC:GB MXCT:GB LNTA:GB NLMK:GB Weekly Return -37 bps -21 bps -16 bps -14 bps -9 bps Top Prospects   NLMK:GB SVST:GB PLUS:GB GLTR:GB MNOD:GB BCA Score 99.75% 99.24% 97.88% 97.62% 96.93% BCA Eurozone Portfolio Total Weekly Return BCA EMU Portfolio MSCI EMU TRI 2.31% 3.32% Top Contributors   DLG:IT SAA1V:FI KESKOB:FI GCO:ES ABIO:FR Weekly Return 40 bps 22 bps 20 bps 19 bps 19 bps Top Detractors   WEG1:DE PHH2:DE QTCOM:FI FLUX:BE PMAG:AT Weekly Return -20 bps -11 bps -8 bps -6 bps -5 bps Top Prospects   SOL:IT FSKRS:FI LOG:ES RWAY:IT IPS:FR BCA Score 98.26% 97.91% 97.72% 96.18% 96.16% BCA Japan Portfolio Total Weekly Return BCA Japan Portfolio TOPIX TRI 4.43% 2.13% Top Contributors   8336:JP 8174:JP 6448:JP 7943:JP 9401:JP Weekly Return 32 bps 30 bps 30 bps 29 bps 28 bps Top Detractors   4966:JP 8739:JP 8979:JP 8595:JP 4694:JP Weekly Return -10 bps -8 bps -1 bps -1 bps -0 bps Top Prospects   4966:JP 8198:JP 8255:JP 8739:JP 3167:JP BCA Score 99.69% 99.29% 97.18% 96.36% 95.98% BCA Hong Kong Portfolio Total Weekly Return BCA Hong Kong Portfolio Hang Seng TRI -0.23% 0.81% Top Contributors   973:HK 182:HK 867:HK 1798:HK 6198:HK Weekly Return 17 bps 17 bps 17 bps 16 bps 14 bps Top Detractors   185:HK 1571:HK 579:HK 719:HK 2666:HK Weekly Return -21 bps -20 bps -17 bps -17 bps -14 bps Top Prospects   1378:HK 1830:HK 1571:HK 297:HK 1866:HK BCA Score 99.17% 99.13% 98.54% 98.41% 98.23% BCA Australia Portfolio Total Weekly Return BCA Australia Portfolio S&P/ASX All Ord. TRI 0.64% -0.62% Top Contributors   CXL:AU GRR:AU WPP:AU ADO:AU SDG:AU Weekly Return 27 bps 25 bps 13 bps 13 bps 12 bps Top Detractors   HT1:AU BFG:AU ADH:AU YAL:AU STX:AU Weekly Return -23 bps -13 bps -13 bps -11 bps -10 bps Top Prospects   GRR:AU BSE:AU BLX:AU BFG:AU PSQ:AU BCA Score 99.76% 99.68% 99.55% 99.26% 98.99%