A sign board displaying Toronto Stock Exchange (TSX) stock information is seen in Toronto June 23, 2014.Mark Blinch/Reuters
Globe editors have posted this research report with permission of Canaccord Genuity. This should not be construed as an endorsement of the report's recommendations. For more on The Globe's disclaimers please read here. The following is excerpted from the report:
We reiterate our bullish intermediate-term view due to the combination of a still-positive core fundamental thesis and the post-crash history in the context of an ongoing bull market. While we still think another move to the lower end of range is possible, we believe it is time to focus on the intermediate-term opportunity rather than the very near-term risk.
Our positive fundamental core thesis remains in place, as we believe low inflation and tame economic growth allow the Fed to remain accommodative for a very long time.
While Corporate Credit has been under pressure, it has been largely limited to the commodity-related sectors. We are watching corporate paper and CDS very closely to get a sense of a more problematic spread of credit tightening.
It is pretty hard to imagine a sustainably negative economic environment with a steep yield curve, easy Fed policy, a new cycle high in consumer confidence, generational lows in initial unemployment claims, historically low household debt service ratios and delinquency rates, and improved housing trends.
Despite fear of a global recession, (1) the Global PMIs, (2) historically accommodative world central banks, and (3) the recent uptick in money supply readings in Europe and Asia may suggest fear might be worse than reality.
We reiterate our 2015 S&P 500 (SPX) year-end target of 2,150, and are initiating a 2016 target of 2,360. We are using 2016 SPX operating EPS of $124 and a 19x multiple, which is the average multiple when core inflation is between 1-3%.
We view the sharp decline of the S&P 500 into the August 25 low as a "crash" in the context of a secular bull market. The rapid decline in price brought the 10-day rate of change indicator (ROC) to -10.
The three prior "crashes" outside of bear markets were in 1987, 1998 and 2011. Each of those was followed by a retest of the low and then a ramp with a minimum gain of 16% in the next 3 months.
We believe the move out of the bottoming process should be led by the areas that have seen the most damage as was the case in 2011. As a result, last week we moved the Energy, Materials and Industrials sectors to "equal weight" from "underweight" while moving Consumer Staples, Utilities and Telecom to a slight "underweight." Our fundamentally favorite sectors remain Financials, Info Tech and Consumer Discretionary.
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