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Equity outlook – What is the problem? The recovery

Equity markets have been finding the transition to the post-pandemic landscape more challenging than one might have expected. As Covid restrictions fall…

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This article was originally published by BNP Paribas Asset Managment Blog ( Investor's Corner)

Equity markets have
been finding the transition to the post-pandemic landscape more challenging
than one might have expected. As Covid restrictions fall away and consumer and
business confidence improves, the economic recovery should resume. However, in
a sense, the recovery has become the problem.
 


This is an abbreviated version of our
quarterly equity outlook


Demand has surged, but supply has lagged due to supply-chain
and job market bottlenecks. Prices have risen, more persistently than
anticipated. Nonetheless, we believe the disruptions will fade over time,
production will recover, and the ‘low-flation’ world we were in before the
pandemic will return.

Valuations – too high or about average?

Looking at metrics such as price-earnings, price-book and price-sales, equity markets look expensive. Is this really the case or are things different this time?

An alternative way is to look at the equity risk premium.
Today, the ERP is above the average
of 5.2%, suggesting S&P 500 valuations are at least fair value if not
better.

Interest rates and their impact on value and growth stocks

Movements in inflation expectations and real rates have
remained key drivers of the relative performance of the growth and value
styles. After another hawkish surprise at November’s US Federal Reserve policy
meeting, market expectations for the future level of fed funds rose,
contributing to the recent decline in growth stocks.

Since we expect inflation-adjusted rates to climb further,
growth stocks could remain under pressure.

Similarly, the comparatively flat performance of US value
stocks has over the last several months corresponded with (until recently)
stable inflation. Now that expectations are picking up, value stocks may show
some gains.

Inflation and margins

We believe the inflation expectations related to
supply-chain and labour market constraints are still likely to be temporary. We
see tentative signs of easing backlogs in parts of Asia.

The impact on margins varies by sector and in the months
ahead, we expect performance to vary more between sectors than between styles.

The IT sector has high margins, so higher input costs are
less of a threat to its profits. Materials and industrials companies such as
metals and mining, construction materials, and building products companies are
better able to pass higher input costs along to customers.

The poor performance of consumer staples is likely due to
this being a low-margin business with limited pricing power. In healthcare,
prices are often negotiated and difficult to change at short notice. When the
input price pressures reverse, as they did modestly last month, these sectors
could be the ones most likely to benefit.

This sector breakdown helps explain why the performance of
the growth and value styles has changed with respect to inflation and real
yields. 

  • Materials, industrials and consumer staples are
    all primarily value sectors, so they benefit from rising interest rates, but
    they respond differently to margin pressures.
  • IT and healthcare are largely growth sectors,
    but they are in different camps when facing higher input costs. 

Earnings – Back to normal?

Upcoming earnings reports will be critical as EPS growth
rates begin to return to more normal year-on-year levels. S&P 500 EPS
growth was 86% in the second quarter from the same 2020 quarter. For this
quarter, growth is forecast at ‘only’ 24%. 2022 profits are expected to rise by
nearly 8% from 2021.

We should note that earnings surprises were exceptionally
high recently, so it is probably inevitable that there will be comparatively
more disappointments in the quarters ahead. As a result, we expect some market
turbulence. However, a recovering global economy, reasonable valuations, and
rising earnings all point to further market gains.

US small caps – Follow the US dollar

A pickup in economic momentum, the return of the reflation
trade or a steeper yield curve could be drivers of small-cap outperformance. We
believe valuations are attractive. Relative to the broad S&P 500, the
forward P/E ratio and equity risk premium are near their lowest since 2004.

The longer-term outlook may depend on the value of the US
dollar. Should the dollar weaken further, small caps may resume their
underperformance.

Emerging market equities – A mixed bag

The list of headwinds facing emerging market equities is
unfortunately long: 

  • A stronger US dollar
  • Rising US interest rates  
  • Lagging Covid vaccinations
  • Regulatory crackdowns and highly indebted
    property developers in China
  • Higher energy prices
  • Supply-chain disruptions and labour
    shortages. 

The main factor in EM equities’ favour is comparatively low
valuations. In addition, the sustained rise in commodity prices has benefited
commodity exporters.

Some of the negative factors should fade in the months
ahead. However, developments in China will be critical as the government
chooses between supporting growth through increased credit and the desire to
reduce debt in the economy. Regulatory action could continue as Beijing
refocuses the economy towards high-value added technology hardware rather than
software.

Conclusion – Room for further gains

Managing price pressures and operational difficulties will
challenge many companies. We expect to see greater differentiation in
performance between companies, making active portfolio management propitious.

For equity markets broadly, we see further gains as the
economic recovery continues and supply chains unkink. We believe inflation will
eventually revert to pre-pandemic trends, meaning that monetary policy, while
less accommodative than previously, will not be tightened so much as to cause
economic growth to turn negative.


Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients.

The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.

Investing in emerging markets, or specialized or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).

Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

Writen by Daniel Morris. The post Equity outlook – What is the problem? The recovery appeared first on Investors’ Corner – The official blog of BNP Paribas Asset Management, the sustainable investor for a changing world.













Author: Daniel Morris

Precious Metals

These 29 Analysts See Silver Going Up Dramatically This Decade

More and more analysts are forecasting a significant increase in the price of silver over the balance of the decade and below are their projections.
The…

More and more analysts are forecasting a significant increase in the price of silver over the balance of the decade and below are their projections.

An original article by Lorimer Wilson, Managing Editor of munKNEE.com – Your KEY To Making Money!

1. Goldrunner: $800 to $1,200 by 2025; $5,300 by 2030/32

“My fractal analysis chart work on Silver points to a potential price for Silver of something like $800 to $1,200 a bit later than 2025 and $5,300 by the end of this decade or early in the next based on Gold reaching Jim Sinclair’s forecast of $80,500 and using a 1 to 16 ratio of Silver to Gold.” (personal email)

2. Keith Neumeyer: $300 to $1,000

“Silver is an extremely critical metal – a strategic metal – and the investment community will figure it out eventually” and, when they do, he believes the white metal could reach the $130 level and, if gold were to hit $10,000, he could see silver at $1,000. Source

3. Hubert Moolman: +$675

“The 70s pattern is very similar to the pattern that currently exists. Therefore, I do not think it is wishful thinking that silver will reach the target of $675 as a minimum.” Continue reading…

4. Egon von Greyerz: $600 to $1,000

“If we assume $10,000 for gold and a gold:silver ratio decline to the historical average of 15, we would see a silver price of $666…If we look at silver adjusted for real inflation based on ShadowStatistics, the $50 high in 1980 would equal to $950 today so silver at between $600 and $1,000 is not an unrealistic targetContinue reading…

5. Satori Traders: $50 by 2023; $1,350 by 2028

“My long-term forecast for Silver is $600 per ounce.” Source

6. Gary Christenson: $100 to $500 in 5-7 years; +$500 by 2030

“Silver prices for the next decade are dependent upon many unknowns but a ‘more of the same’ financial world suggests silver prices will rise toward $100 in the next 5 – 7 years. A more aggressive chart interpretation shows prices for silver rallying toward $200 – $300. Indeed, if the powers-that-be create or can’t stop hyper-inflation of the dollar, $500 silver will look inexpensive by the end of the decade.”   Continue reading…

7. Peter Krauth: $300+

‘I think silver’s ultimate peak could be $300, and I won’t rule out possibly even higher.” Source

8. David Smith: $166 to $250

“[If my forecast of $10,000 gold is realized, as I think it will then] you could see $166 silver, and if…[the gold:silver ratio] drops down to 40:1, which is not out of the question, [you could easily see] $250 silver.” Source

9. Mike Maloney: $100 to $200 in 5 years

“Investment demand for silver bullion has risen sharply and, with the silver market being so tiny, it doesn’t take much investment to have an out-sized impact on its price. Silver is dramatically undervalued and represents a very compelling investment opportunity. My prediction for silver 5 years out is $100-$200.” Source 

10. Jason Hamlin: $169 by end of 2025

“The silver bull has awakened and when silver finally breaks out, the move tends to be very explosive! I think we could see silver climb to $169…by the end of 2025.″ Source 

11. Nick Giambruno: +160 

“Once the dollar starts to lose its value in earnest…people will panic into precious metals just like they did in the ’70s and ’80s, and much of that money will make its way into the tiny silver market (roughly 1/10th the size of the gold market). This will cause the price to spike above $160. It’s a predictable pattern. Bottom line, the stars are aligned for a silver price spike for the record books and now is the perfect time to get in.” Continue reading…

12. Chris Vermeulen: $90 to $550

“We believe silver will soon…move up to well above $85 per troy ounce. Ultimately, we estimate it will likely top somewhere between $90 and $550.” Continue reading…

13. CoinPriceForecast.com: $84.81 by end of 2020; $100.12 by the end of 2032

“Silver price will hit $30 by the end of 2021 and then $40 by the end of 2023. Silver will rise to $50 within the year of 2024, $60 in 2026, $70 in 2027,   $75 in 2028, $80 in 2029, $90 in 2031 and $100 in 2032.” Source

14. Jeff Clark: $30 in 2021 to +$100 in 5 years

“My most confident prediction is that over the next five years, the silver price is going to increase a minimum of $100.” Source

15. Metals Focus: +$100

“See silver prices pushing “well above” $30 an ounce.

16. Paul Mladjenovic: +$100

“Triple-digit silver—$100 or more—is a possibility in the near future.” Source

17. David Morgan: $100

“Assuming a $4,000 gold price target in two to three years’ time, which is roughly a 100% increase from current levels, and assuming a normalization of the gold-silver ratio to 40-1, then silver should be trading at $100 by the time gold doubles in value.” Source

18. Gov Capital: $70 to $95 in 5 years

“Based on our custom algorithm we predict that silver will range between $70 and $95 in 5 years time.” Source

19. Mark O’Byrne: $50 to $100

“It is important investors focus on gold and silver’s value as hedging and safe haven assets rather than their nominal price highs in dollars.” That being said he believes silver could rise to between $50 and $100. Source

20. Dumb Money: $62

“History does serve as a guide for what’s normal and, based on the simple historical average, the price of silver should be about $62.” Source

21. Andrew Hecht: +$50

“Silver’s consolidation period and tightening price ranges could be the prelude to a new record high above the 1980 $50.36 peak in the COMEX futures market.” Source

22. CPM Group: +$50

“We fully expect silver to hit a new all-time high above $50.”

23. Lorimer Wilson: $40 to $60 by 2025

Every time the gold:silver ratio has reached at least 82:1, it has led to major rallies in the silver market. For example, in mid-2003 the gold:silver ratio peaked at 82:1 and over the next 5 years, silver went up 320%; at the end of 2008 the gold:silver ratio again peaked above 82:1 and, over the next 2 years, silver went up 453%. In early 2020 the gold:silver ratio again topped 82:1 and silver has already gone up by 124% since then so, based on history, silver could easily advance to somewhere between $40 and $60 per troy ounce.

24. Eric Fry: +$50

“When this ballgame ends…silver will be topping $35 and an extra-inning affair would not surprise me, lifting…the silver price to a new all-time high above $50.” Source

25. Bank of America: $35 in 2021; $50 in medium term

“$35 silver is feasible next year, but…could rally to $50 in the medium-term.” Source

26. Tom Fitzpatrick: $50

“A move back once more towards the $50 area is a very realistic target for Silver – and not necessarily something that will take years to materialize.” Source

27. Jim Willie: $50

“A quick march to the $35 mark, then to $50 in….a few months, not a couple of years.” Source

28. Don Durrett: $50

“Once we get over $30, we will run to $35 for one final pause. Then it will be off and running to $50 and an ATH. Get ready. It’s coming.” Source

29. Lawrence Williams: +$35

“While I still think $50 silver is perhaps just about out of sight, the metal can certainly move up to perhaps $35 or more given the current momentum.” Source

 

 

The post These 29 Analysts See Silver Going Up Dramatically This Decade appeared first on munKNEE.com.





Author: Lorimer Wilson

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Economics

The Good, The Bad, & The Ugly

The Good, The Bad, & The Ugly

Authored by Sven Henrich via NorthmanTrader.com,

“Sometimes I wonder if the world is being run by smart…

The Good, The Bad, & The Ugly

Authored by Sven Henrich via NorthmanTrader.com,

“Sometimes I wonder if the world is being run by smart people who are putting us on or by imbeciles who really mean it”

– Laurence Peter

After months and months of sticking to a transitory narrative despite ever rising inflation data Jay Powell finally caved yesterday and retired the word transitory. What a colossal embarrassing blunder. Once again a Fed Chair being in total denial about reality. Like Ben Bernanke in 2007 declaring subprime contained and not a threat to the economy, persistent inflation is suddenly a risk to the economy when it supposedly wasn’t all year long while the data clearly kept saying that it was.

The Fed not only got inflation wrong but by extension they got policy completely wrong and I find myself very much validated here: They’ve totally overdone it on the liquidity front as they kept printing like mad men into an inflationary environment that they denied existed. And it’s not only the Fed. Combined with the ECB both central banks have added a combined $3 trillion in liquidity just in 2021 into an inflationary environment no less. Mad. Which means they exacerbated a massive asset bubble exacerbating wealth inequality when the right policy should have been to taper sooner. And now they may be forced to slam the foot on the breaks, a point I made on CNBC today:

What’s this all mean for markets in the here and now? Since I promised some charts let me give you the good, the bad, and the ugly.

Let’s start with the good:

Let’s recap key technical developments as the context of the market action in oh so important. In late October I highlighted the case for “Make Bears Cry” the infamous broken trend and then new highs to retest the broken trend which was first identified in late September. Bears did indeed cry as everything broke out to new highs including aggressive rallies in small caps, the $NYSE, $DJIA and $SPX and $NDX of course.

On November 16th in the NorthCast I outlined an inverse pattern on $SPX with the technical target of 4740. This target not only got hit rather precisely but it served as a key reversal pivot again off of the trend line we’ve been watching all year long:

Note how stubborn and persistently $SPX keep tagging the trend line from the underside with the final highs coming on a very pronounced negative divergence.

As the sell off ensued I highlighted in MarketWatch the September highs, i.e. the 4550 zone, as a key price zone bulls must hold to continue to be constructive for year end. This level was almost reached yesterday and has so far held as support. But watch this price zone closely in the days and weeks ahead, for should bulls lose this zone things may get a lot uglier still.

Note the same applies to $NDX:

Whereas $SPX has broken its trend in September, the $NDX trend remains intact and the index has remained incredibly resilient. As long as the trend remains intact tech is in a good position to set up for a year end rally. $NDX also remains above the September highs and as long as these previous highs hold as support the price action can be constructive as a back test. Note also how precise the trend has remained both on the resistance as well as the support side in the past year:

Now to the bad:

Note in the chart above the $VXN, the underlying volatility index, has broken out and in the lead up to the November highs it kept warning with rising volatility prices, that’s the same event we saw leading up to the February 2020 top.

We can observe a similar even more pronounced breakout in $VIX a pattern that held its uptrend throughout 2021 which I again highlighted in “Make Bears Cry”:

While bulls can hope to compress the $VIX again for a backtest into late December the genie looks very much to be out of the bottle.

Another big issue is that ever more highs in $NDX this year have come on an ever weakening cumulative advance/decline picture and in recent days in particular that indicator has completely fallen off the cliff:

This again speaks to the narrowing of leadership of a few stocks that are holding up the index. Note the advance/decline was falling off the cliff even as $NDX made new all time highs on November 22. Indeed the intermittent peak was in early November way before Omicron was even identified. To highlight the extent of the damage beneath: The average Nasdaq component has experienced a 41% drawdown in 2021, 19% on the $SPX. So while we all get the impression of a massive bull market the underlying picture is not so pretty. The everything rally which sees many stocks getting hammered.

Which brings me to the ugly.

In the lead up to the November 22 highs on $SPX and $NDX many other indices did not follow suit as tech was leading driven by a few stocks. This is precisely the same development we saw in January 2020 going into February 2020.

Indeed, the September high backtest support I mentioned in $NDX has already broken in many indices, such as the $DJIA the broader $NYSE and also small caps which just got pounded dropping 12% in just 3 weeks one of the most aggressive drops from all time highs in history:

Indeed 2 out of the 3 previous similar sizable sell offs of this magnitude from all time highs came in March 2020 and in August 2007 just as the asset bubbles began to crack.

The key issue: Trapped supply above as many traders chased the breakout and are now finding themselves under water. Note $IWM is back at February levels.

And this same trapped supply issue with failed breakouts can be observed in the $DJIA and the broader $NYSE:

What all of these charts highlight is that there has been tremendous corrective damage inflicted in individual stocks far beyond what the main indices indicate.

And unless everybody owns only $SPX and $NDX index funds and only the winning stocks it appears people have gotten hammered hard somewhere in individual stock holdings. A question arises. If everybody has piled into stocks like never before:

Why are so many unhappy?

Consumer sentiment per University of Michigan shows levels commensurate with the March 2020 crash lows. Both can’t be true. So there’s something big time amiss here. And unless all the inflows are in the winning stocks only there is pain out there that is masked by the indices.

Unhappy consumers are not happy voters and this has to be a concern for Democrats going into mid term elections next year.

And it is consumers that have been hit the hardest by rising inflation exacerbated by the Fed’s reckless printing:

None of this does not preclude a Santa rally from oversold conditions still, but as we saw in early 2020, massive divergences in index performances leading up to new highs are a major warning sign, and the underlying volatility components in all of these charts, including the $VIX, show breakouts suggesting the genie is out of the bottle and will make for a much more volatile 2022.

Indeed I could even point to similar monthly candle in November as we saw in January 2020:

Back then the initial news of a new virus was very much ignored and $SPX and $NDX went onto new highs while financials and small caps did not. Sound familiar?

I’m not making a crash call here, but it may serve to remind the the S&P 500, despite the recent pullback, remains above its quarterly Bollinger band and remains far disconnected from even a basic quarterly 5 EMA reconnect:

Periods of excessive printing have seen such disconnects before, but the reconnect is coming, either this quarter or likely during the next quarter.

While in all of history this Bollinger band was resistance, the liquidity excess of 2020 and 2021 has turned this Bollinger band into support. How long this historical aberration continues very much depends on artificial liquidity injections continuing. The short term good news for bulls may be also this historical fact: Since 20009 all major corrections did not manifest themselves until QE programs were ended and corrections were ended with more liquidity coming in. In this sense it may be argued that the first larger correction will not come until the Fed actually ends QE.

But then we’ve never seen such a price and valuation disconnect from the underlying economy in history while we see the Fed’s credibility suddenly very much shaken. After all it’s all about confidence.

*  *  *

For the latest public analysis please visit NorthmanTrader and the NorthCast. To subscribe to our directional market analysis please visit Services.

Tyler Durden
Wed, 12/01/2021 – 17:01








Author: Tyler Durden

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Economics

US Close: December rally faded already, Mixed US data, US gets first Omicron case

US stocks were off to a good start in December as traders became both optimistic that Omicron would not lead to a more severe illness than the Delta variant…

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US stocks were off to a good start in December as traders became both optimistic that Omicron would not lead to a more severe illness than the Delta variant and viewed Powell’s hawkish twist as more of a shift to the center. Equities pared gains after South Africa COVID cases nearly doubled since Tuesday and after their infectious disease official Richard Lessells noted it is too early to say Omicron only causes mild cases. The next couple of weeks will likely see risk appetite take a cue from incremental Omicron updates, supply chain issues, and every inflation reading. A second day of Powell at Capitol Hill saw him stick to his faster taper talk and uncertainty over when will inflation come down.

Stocks gave up most of their gains after the US confirmed its first case of the Omicron variant. We’ve seen this movie before and Wall Street will likely remain COVID variant headline driven until a clear assessment over this wave can be made.

US Data

The ADP private payroll report showed 534,000 jobs were created in November, a beat of the 525,000 estimate, but lower than the 570,000 prior reading.  Leisure and hospitality jobs were over 30% of the positions added to the service sector, but that rebound could be in jeopardy if Omicron continues to increase. 

The ISM manufacturing report was somewhat positive, but nothing to brag about as the headline index rose marginally from 60.8 to 61.1 and as both new orders and employment posted modest increases. Supply chain issues appear to be improving, but orders are still below their recent highs. 

Author: Ed Moya

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