Sell-off in context and ‘stocks to help you sleep at night’ from a BofA quant strategist

Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
BofA U.S. equity and quant strategist Savita Subramanian put Monday’s sell-off in context and provided “stocks to help you sleep at night” options,
“The S&P 500 has retreated over 8% from its July 16 high. But pullbacks of this magnitude are not unusual: 5%+ pullbacks have occurred 3x per year, on average, since the 1930s … And 10%+ corrections have occurred 1x per year on average; we are effectively due, as we last saw a correction in fall 2023. In our view, a full-fledged bear market (i.e., 20%+ drop) is unlikely: just 50% of the signposts that historically preceded S&P 500 peaks have been triggered vs. an average of 70% ahead of prior market peaks … Bear markets have historically occurred once every three to four years, on avg. (the last one was from January to October 2022). Despite rising recession concerns on softer economic data (jobs report, ISM, etc.), our economists expect a soft landing, do not expect recession-sized rate cuts and forecast the first cut in September”
The screen for safer companies looks for stocks where the five-year beta is below one, credit quality is B or better according to Standard and Poors, underweight by long only funds and buy-rated at BofA.
The stocks are Consolidated Edison Inc., Lockheed Martin Corporation, Jack Henry & Associates Inc., Alliant Energy Corp., Rollins Inc., Procter & Gamble Company, CMS Energy Corporation, Kroger Co., ResMed Inc., Xcel Energy Inc., Aflac Incorporated, W. R Berkley Corporation, PepsiCo Inc., Assurant Inc., CH. Robinson Worldwide Inc., Essex Property Trust Inc., Packaging Corporation of America, Kimberly-Clark Corporation, Digital Realty Trust Inc., Walmart Inc., Oboe Global Markets Inc., M&T Bank Corporation, Coca-Cola Company, Domino’s Pizza Inc., Akarnai Technologies Inc., Costco Wholesale Corporation, Pinnacle West Capital Corporation, Colgate-Palmolive Company, McCormick & Company Incorporated, Public Service Enterprise Group Inc., Quest Diagnostics Incorporated., West Pharmaceutical Services Inc., Air Products and Chemicals Inc., AvalonBay Communities Inc., Republic Services Inc., Cisco Systems, Home Depot Inc., Equinix Inc., Ball Corporation, Entergy Corporation, Medtronic PLC and Starbucks Corporation.
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BMO analyst Michael Markidis details a difficult week for REITs,
“Following five consecutive weeks of gains, the S&P/TSX Capped REIT Index was -1.7% for the week ended August 2. Only two index constituents, PMZ (+2.2%) and FCR (+0.6%), finished in positive territory. Standouts to the downside were AP (-7.7%), NWH (-3.9%) and DIR (-3.5%). The 10-year GoC was -31bps and now stands at 3.01% vs. the 50-day and 200-day moving averages of 3.42% and 3.52%. Q2 earnings season has commenced. The volume of reporting is set to pick up during this holiday-shortened week”
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UBS strategist Andrew Garthwaite gave four reasons for the sell-off and six reasons for more global equity upside,
“4 potential catalysts for recent events which in order are: i) weak US data (initial jobless claims, UoM consumer confidence, NFP [Non-farm payroll], ISM), ii) the general concern over tech (both valuation and the worry of too much capex going into AI), iii) the surprise BoJ move (and hence carry trade unwind)), iv) the lack of any aggressive stimulus in China post the Third Plenum. July/ August sell-offs of 10%+ are not that unusual can be quickly reversed (2007, 2010, 2011, 2013 and 2015) or, occasionally, the start of a bear market (2008)”
And for upside,
“i) Tacticals: Risk Appetite is now 0.4 std[ standard deviations] below average and consistent with the current weak ISM (which is pricing in c1% GDP), VIX has risen much more than implied by high credit spreads (and spreads tend to be the judge and jury of the bull and bear markets) … markets are now discounting a rollover in earnings momentum ii) the ERP [equity risk premium] is now 4.7% without Gen AI (5.4%and back to its average if you believe, as we do, that Gen AI pushes up productivity growth by 1% from 28) – the warranted ERP (based on PMI/ISM and spreads) is 4.9% – this gives c9% upside; iv) credit spreads are 2x the default rate (and still more upgrades than downgrades in IG) so we don’t see a further sell off in spreads; v) the best lead indicators imply 3% US wage growth (i.e unit labour costs of 1.5% or lower) – So the Fed can respond aggressively if required … it also alleviates the margin squeeze; vi) we see no reason why monetary policy should not work (there is no bank or private sector balance sheet problem or over-investment) – 1% off rates in Europe adds 1% to GDP growth; vi) if the Fed cut and there is no recession, then normally markets do well (as in1995, 1998)”
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Diversion: “Shaping the Habits of Teen Drivers” – Marginal Revolution