United States
Initial jobless claims rose to a nearly three-month high of 853 thousand in the week ending December 5, from 712 thousand, surpassing expectations of a more muted rise to 725 thousand. The disappointing data extended to continuing claims, which registered the…
Overweight We have been bearish this niche S&P sector and delivered alpha to our portfolio both via the cyclical and high-conviction underweights this year. Nevertheless, we do not want to overstay our welcome and the time is ripe for a bullish commercial real estate (CRE) stance. The bearish story is well known, but some bullish undertones are widely neglected. The rebound in relative share prices is substantially trailing the 2009 episode, when REITs outshined the SPX by 65% one year following the March 2009 trough. Currently, on a similar SPX advance from the March 2020 lows, REITs are lagging the S&P 500 by 22% (top panel). As large parts of CRE have been at the epicenter of the pandemic, any return to even semi-normalcy in 2021 should see these beaten down stocks sling shot passed the SPX. CRE prices will likely recover in the New Year as vulture funds and opportunistic investors are already bargain hunting. Tack on the likely refinancing lifeline bankers will extend to CRE debt originators (middle & bottom panels) and such a backdrop will loosen the noose around distressed property landlords. Bottom Line: Boost the S&P real estate sector to an above benchmark allocation and add it to the high-conviction overweight call list.
The performance of the Eurozone’s banks relative to the broad market follow the evolution of European inflation expectations. This relationship reflects many links. First, higher inflation expectations point toward higher nominal GDP growth, which at the…
The case to overweight traditional cyclical equities like industrials at the expense of tech equities is becoming stronger. The premise behind this recommendation is multifaceted. Industrial equities trade at a large discount to tech stocks but a catalyst…
In the latest Strategy Report we published our high-conviction calls for the year 2021 comprising four overweights and three underweights. We want to hedge our high-conviction calls with a long VIX futures position for the June 16, 2021 expiry. We are spending $25.3 to go long and are comfortable paying up for insurance when the SPX is at all-time highs and there is a risk of some growth disappointment in the next six months. The chart below draws a parallel with the March 2009 SPX lows and plots the VIX in 2009 and 2010. While the path of least resistance is lower for volatility, sporadic surges are typical in the year following recessions. The S&P 500 also troughed in March 2020 and if history is an accurate guide, the path to SPX 4,000 will be rocky next year. As a reminder, the S&P 500 suffered a 16% correction in May 2010 and the VIX spiked higher Bottom Line: We went long the VIX June 2021 futures as a small hedge to overweight equity positions.
According to BCA Research’s US Bond Strategy service, the climbing CRB Raw Industrials / Gold ratio is paving the way for higher US 10-year Treasury yields. November’s employment report was the worst since April, but the Treasury curve has bear-steepened,…
A crucial question for stocks next year will be the direction of the equity risk premium (EPR). BCA Research expects Treasury yields to move towards 1.2% to 1.5%, which should not topple equity prices if earnings improve along with the global economic…
After falling 8.5% since 2012, the S&P 500 divisor – a measure of the number of split-adjusted shares outstanding –expanded slightly this year. The end of the fall in the divisor reflects this year’s contraction in buybacks. The decline in buybacks has…
Over the past two years, the performance of EAFE equities relative to the US has tightly followed real bond yields. This is because both the relative performance of foreign equities and real interest rates are extremely sensitive to the global economic…
2020 will soon be history and on the eve of the New Year, it is instructive to update our presidential cycle and SPX returns research. Encouragingly, still elevated policy uncertainty will likely continue to recede next year and act as a tonic to equity returns. The chart shows the S&P 500’s performance in the first year of a presidential cycle. The market rallies 8% and 6% on a median and average basis, respectively. With regard to the range of outcomes, since 1952 the healthiest rally can net more than 30% in gains, while bear markets have also pushed SPX returns down 30%. Our sense is that 2021 will turn out to resemble 2013 or 2017 rather than 2001 or 2009. Currently, our end-2021 SPX 4,000 target (first introduced in our November 9 Special Report) represents a 17% gain from the Election Day and falls within the historical return norm. Bottom Line: Our cyclically sanguine broad equity market view remains intact.