Author: Scott Barlow

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.

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.

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

Looking for our updates on market movers, analyst actions, stock technicals, insider trades and other daily, weekly and monthly insight? Click here to visit our Inside the Market page.

Globe Investor highlights

Million-dollar TFSAs are a thing, but Rob Carrick finds out what’s a “normal” amount to have in your account

Trump’s presidential election win has forced bond strategists to make a material change in their outlook towards higher longer-dated Treasury yields. Meanwhile, here’s a rundown of where Wall Street is placing its bets for Trump 2.0

Investors see safety in India as Trump’s election win casts shadow on emerging markets

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)

In this edition we‘ll discuss how the history of tariffs does not bode well for the U.S. economy and why U.S. investors might be bigly overweight equities. The diversion details a man who invented his own polls that helped him make US$50-million on the election and, as always, we’ll look ahead to the important data points set for release.

Election aftermath

Self-destructive Trump trade policies

Canadians have ample economic reasons for concern after the U.S. election but most U.S. economists agree that the expected tariffs are bad for America as well.

George Mason University economics professor Tyler Cowen takes particular umbrage with the Trump team’s contention that tariffs in the 1800s helped the U.S. become an industrial powerhouse.

Mr. Cowen cites a paper from the National Bureau of Economic Research analyzing new local data regarding tariffs. He concludes “the results are not pretty.” Tariffs were found to adversely affect productivity, workers, inflation and political corruption (although it’s admittedly not easy to see how the latter could get much worse).

The paper noted that tariffs did result in more business in specific sectors but these operations were largely uncompetitive and unproductive and workers were stuck in jobs with low growth and not much of a future.

Tariffs were found to increase consumer prices and thus lower the standard of living. Mr. Cowen added that the paper also uncovered “lobbying, logrolling and political horse-trading [as] essential features of the shift toward higher US tariffs.” The target industries for tariffs depended on which politicians were in power and many were the result of successful rent-seeking behaviour by U.S. industrialists.

Roughly 80 per cent of Canadian exports go to the U.S. so tariff-related dangers to our economy are obvious and significant. There is considerable confusion as to when or how or if duties will be slapped on Canadian goods crossing the border. TD economist Marc Ercolao noted that the USMCA trade agreement might protect domestic exports until a scheduled review in 2026 but added, “we do not discount the very real risk that Trump could move forward with tariffs on Canada, which would have immediate negative impacts on GDP, inflation, and trade.”

It’s not very helpful for me to point out that a lot of uncertainty hangs over portfolio decision making. For now, markets are rallying on both sides of the border in hope that corporate tax cuts will spur the U.S. economy and increase American demand for Canadian goods.

Two things could short circuit the rally. One, the U.S. ten-year bond yield could rise above 5.0 per cent as a result of growth and inflation expectations – risk assets would not look as attractive as a result. Today, it’s sitting near 4.3 per cent. Two, the announcement of tariffs could not only cause an exodus from Canadian stocks that do considerable exporting, but also begin a slow decline for the American economy.

Portfolios

Demand for equities at risk

The Goldman Sachs weekly Briefings newsletter included information that gave me pause. U.S. households currently hold 48 per cent of their financial assets in equities, an amount just above the previous record set in 2000 ahead of the tech bubble implosion. The long-term median is 28 per cent.

These extremes of equity ownership are in part by design. The Federal Reserve cut rates to near zero during the financial crisis to prevent economic collapse, a move that incentivized equity investment over fixed income.

Record equity allocations seem a poor fit for an aging population. Personal finance guidelines recommend reduced risk through a higher government bond and cash weighting to protect portfolios during retirement.

It’s possible that the rules have changed and high equity weightings will remain the norm. Even so, it seems reasonable to worry about demand for equities in the decades ahead.

Diversions

Genius bet on the U.S. election

Alex Tabarrok, a professor of monetary policy and financial economics at George Mason University, wrote a fascinating post about the effectiveness of prediction markets in forecasting the U.S. presidential election.

As voting day approached, experts including Nobel Prize-winning economist Paul Krugman disparaged the potential accuracy of betting markets because a series of large trades were viewed as manipulation. The biggest “whale” bettor, a man who was in contact anonymously with a Wall Street Journal reporter, made US$50-million by wagering not only that Donald Trump would win the presidency, but also would win the popular vote.

The story as to why the bettor was so confident is a really interesting sociological tidbit. (Essentially, he felt official polling failed to account for the ‘shy Trump cover effect’ – and he had a solution for that.)

The essentials

Looking for our updates on market movers, analyst actions, stock technicals, insider trades and other daily, weekly and monthly insight? Click here to visit our Inside the Market page.

The Rundown

Ian McGugan on how financial markets will check Trump’s ambitions – and other reassuring thoughts as he returns to power

Don’t be too quick to bet against renewable energy stocks with Trump reelected, says David Berman

David Rosenberg suggests bond investors are overreacting to the inflation threat posed by Trump

Rob Carrick says this is an ideal time to check out your weighting of U.S. stocks

Larry MacDonald reports on how short sellers have ramped up their bets against Shopify – but they might regret that call as earnings are released this week

Bets in money markets are now favouring another jumbo BoC rate cut in December, reports Darcy Keith

CIBC’s chief market technician shares his latest Top 10 momentum-driven TSX stock ideas – and reasons why

What’s up next

There’s not much on the domestic economics calendar this week as September manufacturing sales on Friday is the only data point important enough for the Bloomberg terminal to post a consensus estimate (it’s a decline of 0.8 per cent month over month). Existing home sales for October is also out the same day.

Tuesday is the big day for domestic earnings reports. Shopify Inc. (US$0.269 per share expected), Power Corp of Canada ($1.153) and Suncor Energy Inc. (US$1.094) all report. Brookfield Corp. releases results on Thursday (US$0.826).

The Americans get CPI ex-food and energy for October on Wednesday – a 0.3 per cent month over month rise is forecasted. PPI ex-food and energy is out the next day and 0.3 per cent month over month is also predicted there. Remarkably, a 0.3 per cent month over month gain for October is also expected for advance retail sales that same day. Month over month industrial production for October, also slated for Thursday, is forecasted to decline by 0.2 per cent.

U.S. earnings (all in U.S. dollars obviously) include Home Depot Inc. on Tuesday ($3.644), Walt Disney Co. on Thursday ($1.101) and Applied Materials Inc. ($2.193), also on Thursday.

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

There is a distinct theme for this edition of Market Forces and it’s the health of the U.S. government balance sheet and, by extension, the value of the U.S. dollar and gold. Concerns about U.S. debt are nothing new but pandemic-era fiscal spending is causing a relatively novel and rapid deterioration of government finances. For diversion, we have a list of the top 100 TV episodes of the century and as always we’ll look ahead to important economic data releases.

Precious metals

A different playbook

Gold is not playing by the usual rules according to Morgan Stanley Wealth Management chief investment officer Lisa Shalett. This might indicate volatility ahead.

Bullion prices are sharply higher year to date, setting records, but Ms. Shalett notes that “the impressive move has defied historical correlations.” Under normal circumstances, gold moves higher as the U.S. dollar falls, inflation pressures moderate, and inflation-adjusted interest rates climb. None of these conditions are being met now.

The strategist has a threefold hypothesis for the ongoing gold rally. One, geopolitical concerns in eastern Europe and the Middle East. Second, and more alarmingly, global investors are getting concerned about the sustainability of U.S. deficit spending, and are diversifying away from greenbacks.

The third reason is a growing suspicion that inflation is set for a comeback as U.S. economic growth remains robust (much robust-er than Canada’s).

Geopolitical tension is hopefully temporary and the Federal Reserve has tools to tackle inflation pressures if they arise. The federal deficit, on the other hand, is not a problem easily addressed and it might be the case that the political will to cut spending doesn’t exist.

Treasuries

10 reasons to worry about the U.S. dollar

There is something about getting older that makes people start worrying that government debt is about to collapse the U.S. dollar and the global economy and apparently I’ve reached that stage. It’s a package deal along with lower back pain and the inability to drive at night.

The source of my disquiet is a late summer post by Torsten Slok innocuously titled 10 Facts about the U.S. Treasury Market (hat tip to the Financial Times’ Gillian Tett for the find). It starts with the fact that U.S. government debt is set increase from 100 per cent to 200 per cent of GDP. A time frame was not provided but the Congressional Budget Office projects this dubious target will be reached in about 20 years at the current pace.

Next is that U.S. federal deficits are expected to be more than US$1-trillion every year for the next decade.

The next one is this notice that really got me worrying: “US$9-trillion of government debt will mature in the next 12 months.” At first I thought this was global – but unfortunately no, this is U.S. alone.

Facts number four and five concern rising pension buying of bonds and a reduction in China’s holdings of Treasuries, neither of which worry me much. Number six is that the weighted average maturity of U.S. government debt is six years, which sounds low to me – shorter maturities can cause liquidity issues.

Number seven, T-bills are a larger share of total debt, is not a surprise. Number eight is that Treasury auctions this year are on average 27 per cent larger than last year. That’s a lot for the market to digest.

Number nine is that debt service costs are now 12 per cent of U.S. government outlays and number ten quantifies this: daily interest payments have doubled to US$2-billion per day since the pandemic.

I don’t know what to do with this information except buy some gold bullion. I’m reasonably certain the U.S. dollar will not collapse but if it does we’ll have bigger problems than our investment portfolios. The upheaval will be familiar to fans of The Road and Station Eleven (a great book by Canadian author Emily St John Mandel, by the way).

Mr. Slok suggests that investors watch for weak Treasury auctions indicating demand is insufficient for supply, a credit downgrade, and a steepening yield curve that implies investors want more returns for longer term issues to compensate for excess risk.

Diversions

The best of television

I started reading Bill Simmons in the early 2000s because his ESPN column was right next to Hunter S. Thomson’s blatant cash grab of a drug-addled football column. Mr. Simmons moved up quickly in ESPN, was given his own site within ESPN, Grantland, before he got mad at his employer, left, and founded The Ringer.

He doesn’t write anymore, which is regrettable, but I spend a lot of time with Ringer podcasts The Watch and Rewatchables in particular.

I don’t look for reading material there very often but I should start because I just found the highly entertaining 100 Best TV Episodes of the Century. I’ve only seen seven of the top 20 so have some watching to do. No one can make me watch Jersey Shore though.

The essentials

Looking for our updates on market movers, analyst actions, stock technicals, insider trades and other daily, weekly and monthly insight? Click here to visit our Inside the Market page.

Globe Investor highlights

Further to my concerns expressed above: Jamie McGeever of Reuters reports on how the relationship between U.S. Treasury yields and the oil price have broken down, suggesting that the near-term inflation outlook has taken a back seat to long-term deficit fears in the bond market.

Bearish bets against the TSX 60 have nosedived over the past year, reports Larry MacDonald, who breaks down the most heavily shorted stocks this month.

Scotiabank’s chief economist Jean-François Perrault thinks housing prices are headed for significant gains next year and believes Ottawa’s reduction in the number of permanent residents probably wasn’t the right move for the country.

Hugh Smith of the London Stock Exchange Group did some stock screening to turn up eight stocks that could offer a pleasant earnings season surprise

What’s up next

Canadian GDP growth estimates for August will be reported on Thursday – a month over month increase of 0.1 per cent is expected. The S&P Global Canada Manufacturing PMI for October will be released Friday. International merchandise trade data is out November 5th. Domestic job numbers won’t be reported until Nov. 8.

It’s a big data week for the Americans. GDP for the third quarter on Wednesday showed 2.8 per cent annualized growth, modestly lower than the consensus expectation – as well as the previous quarter’s reading – of 3 per cent. The employment cost index, an important inflation indicator, is out Thursday.

Non-farm payrolls will be released Friday – 120,000 new jobs is the consensus forecast – along with the unemployment rate. ISM Manufacturing PMI for October is also out Friday and a contractionary 47.6 reading is the consensus estimate. ISM Services, more important for the U.S. economy but less correlated with S&P 500 profit growth, is published Nov. 5.

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