Market Factors: Five under-discussed reasons to buy stocks

In this edition, the BofA Securities Research Investment Committee describes five less commonly discussed reasons to buy U.S. equities, while some experts are questioning the post-election rally. Our diversion looks for answers for the surging crime rate in the 1970s and, as always, we look ahead to important data releases.

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Portfolio strategy

Less-obvious reasons to buy equities

BofA Securities’ Research Investment Committee (RIC) presented five unconventional reasons to own U.S. equities in their most recent monthly update. Many of these bullish drivers are more structural than tactical and might thus be more consistent positive forces for the longer term.

Increasing longevity, and its role in increasing demand for equities, is one under-discussed reason for all investors to own more stocks. Conventional portfolio strategy and products like target funds automatically decrease equity weightings in favour of fixed income as investors age. This strategy is designed to reduce risk but since 2020, inflation has made fixed income volatile. Portfolios with 80 per cent fixed income and 20 per cent equities, for instance, have failed to preserve capital in the past four years.

Current asset allocation recommendations are suited for the current average U.S. lifespan of 77 years. But if U.S. longevity increases to the OECD average of 80, portfolios would require a 2 percentage point higher equity weighting to maintain the same standard of living. Another five years of life would require a 6 percentage point higher equity weighting.

The Canadian average lifespan is already much better than the U.S., at 81. If this improves because of new medical technology, however, equity weightings would have to increase to maintain the same standards of living.

Bullish reason number two is that equities are scarce at a time when demand could increase and scarce entities fetch higher prices. There are now 4,642 publicly traded U.S. companies, roughly half of the number in 1996. The supply of stocks from IPOs, secondary issuance and stock compensation has been hugely outpaced by share buybacks. The amount of available U.S. stock has decreased in 12 of the past 16 years.

The RIC also noted that U.S. stocks are showing strong momentum – reason three to buy. Adding equities to a portfolio when the S&P 500 is at new highs has historically outperformed random entry points by five percentage points.

Reason number four to buy stocks utilizes the work of BofA’s equity and quant strategist Savita Subramanian. Ms. Subramanian emphasizes that the equal weighted S&P 500 is trading at a record discount to the conventional, Magnificent Seven-dominated cap weighted index.

The strategist believes that profit growth for non-technology sectors will play catch-up in 2025, broadening market leadership and driving the benchmark higher. As legendary Merrill Lynch strategist Bob Farrell noted as one of his ten rules of investing, “markets are stronger when they are broad.”

Corporate America owns oceans of cash and that is reason five to buy U.S. stocks. S&P 500 companies own almost US$8-trillion in cash that can be either returned to shareholders via higher dividends (the index dividend yield is currently near record lows) or benefit investors through buybacks. Companies executing buybacks have outperformed the broader market by 2 percentage points per year since 1994.

The RIC team recommend three U.S.-traded ETFs in this report. The S&P 500 Equal-weight Invesco ETF (RSP-A) and the S&P Bank ETF SPDR (KBE-A) are poised to benefit from the broadening of U.S. profit growth. The third suggestion, RBA American Industrial Renaissance ETF FT (AIRR-Q), is part of an unrelated on-shoring theme.

Market risks

There’s market downsides for the new president, too

The S&P 500 has climbed a full per cent since last Wednesday morning and the S&P/TSX Composite is up 1.2 per cent. Expectations for faster U.S. growth due to deregulation and a corporate tax cut are the obvious drivers of the rally. However, there are some experts urging caution about the rally’s sustainability.

Wells Fargo investment strategy analyst Austin Pickle urged investors to avoid letting elections and emotions determine portfolio strategy. He notes that campaign promises historically “give way to prioritization and give-and-take with Congress and the legal system.”

Mr. Pickle reminded investors that the first Trump administration incentivized a rally in small caps, real estate and energy stocks before these sectors underperformed to the next election in 2020. Additionally, President Joe Biden enacted incentives for clean energy companies only to see them lag the benchmark.

Wells Fargo recommends watching for the enactment of specific policies while remaining cognizant of the economic and earnings outlook for any new investment.

Former president of the Federal Reserve Bank of New York Bill Dudley also sounded a note of caution in a recent Bloomberg column. He conceded that a potential corporate tax cut and deregulation effort was positive for equities but listed a number of countervailing trends. These include the inflationary effects of expected tariffs and labour scarcity where deportations occur. He also noted that a half percentage point increase in inflation-adjusted yields in the past 10 weeks was negative for risk assets.

I don’t think any of this implies an imminent market bloodbath but I’m also not interested in chasing the rally at this point.

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Diversions

1970s crime wave: was it lead poisoning?

The Marginal Revolution podcast continued its study of the 1970s, this time discussing the sharp spike in violent crime. George Mason economics professors Alex Tabarrok and Tyler Cowen detail the doubling of homicides and tripling of overall violent crime between 1960 and 1980.

The professors paint a picture of New York City that was truly dire – violent crime, fires, graffiti and terrorism could not be handled by a city on the verge of bankruptcy. Off-duty police officers handed out Welcome to Fear City pamphlets to tourists with recommendations including never to ride the subway for any reason.

Potential explanations for the trend are weighed. These include the rise in youth population from 13 to 19 per cent, lead poisoning, hard drug popularization and contagion effects from the rise of serial killers.

The essentials

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What’s up next

A 0.8 per cent month over month decline in domestic manufacturing sales for September is expected when those results are released on Friday. Existing home sales will also be announced that day. For earnings, Brookfield Corp is expected to earn US$0.826 per share when announced Thursday. George Weston reports next Tuesday (C$3.553) and Metro Inc. (C$0.989).

U.S. PPI ex food and energy for October will be out Thursday and a 0.2 per cent month-over-month increase is forecast. (U.S. October CPI ex-food and energy came in Wednesday morning as expected – 0.3 per cent higher month over month). October advance retail sales will be released Friday – a 0.3 per cent month over month gain is expected – and industrial production for October is out the same day (a 0.3 per cent month over month decline expected).

Profits for Walt Disney Corp. are reported Thursday (US$1.102 per share forecasted) along with Applied Materials Inc. (US$2.193). Next Wednesday is a big day, not so much because of Palo Alto Networks Inc. earnings (US$1.48) but because semiconductor behemoth Nvidia Corp. (US$0.739) reports.

See our full economic and earnings calendar here (You can bookmark the page – it gets updated weekly)