Tactically Cautious On Global Equities

A December Fed rate hike, uncertainty regarding the U.S. presidential elections, weak earnings growth, diminished buyback activity and concerns about European banks pose near-term risks to global equities.  Comments in italics are mine.


The summer rally has left equity valuations looking stretched. The median U.S. stock now trades at a higher P/E ratio than even at the 2000 peak. The Shiller P/E ratio stands at 27, but would be 37 if profit margins over the preceding ten years had been what they were in the 1990s. The fact that interest rates are low gives stocks some support, but with the Fed likely to hike rates in December, that tailwind will begin to fade.

Lackluster earnings growth remains another concern. S&P 500 and economy-wide profit margins have rolled over. Granted, the collapse in profits in the energy sector has been the major culprit, and this headwind should wane if oil prices edge higher over the next 12 months, as we expect. Nevertheless, faster wage growth and a firm U.S. dollar will limit any recovery in margins. A Trump victory could also trigger a trade war, while a Clinton triumph could mean higher taxes and increased regulatory burdens.  Let's not forget further spotlight on biotech and drug prices. Both will be headwinds for the corporate sector.  Let us also not ignore the "hard Brexit" tensions and $DB worries across the pond as well as China slowdown in exports.  When will they ever hit bottom?  It all makes you want to be long USD and short the Euro, GBP and CNY.  Oh btw, if the USD continues to benefit, what will that do to the energy sector which has been so hot in 2016?  Can OPEC's talk of holding production hold true when so many producing countries are not OPEC members?  What weight will that place on SPX?

Bottom Line: Our Global Investment Strategy service believes global equities are vulnerable to a near-term correction.

This does not mean we can't see individual stocks climb higher on news or their potential implied price targets however "bears" tend to choose their entry levels as I have.  Last Summers "breakout' in SPX did not exceed 4% of the prior level and is therefore suspect in my book.  I am short in certain names (LULU, BIDU, TSLA to name a few) and will establish more as needed.  I am still long some equity names at the same time; mostly anticipating higher rates.

Courtesy of BCA Research

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