Welcome to RBC’s Markets in Motion podcast recorded August 9th, 2022. I’m Lori Calvasina, Head of US Equity Strategy at RBC Capital Markets. Please listen to the end of this podcast for important disclaimers.
Today in the podcast, we highlight the most interesting chart we saw last week, the most interesting question we got last week, and some noteworthy shifts we’re seeing in some of the high frequency indicators that we track in terms of both investor sentiment and politics. Three big things you need to know: First, the most interesting chart we saw last week highlights how recession talk among S&P 500 companies is back to 2020 highs. Second, the most interesting question we got last week was on the 1% stock buyback tax in the Inflation Reduction Act. Third, our sentiment indicators, which have been a contrarian buy signal for stocks, are showing some signs of healing which is a positive for the stock market, but some of our political polling indicators are starting to shift in a way that’s unfriendly for stocks and are telling us that we need to keep a close eye on the midterms.
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Now, the details.
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Takeaway #1. The most interesting chart we saw last week highlights how recession talk among S&P 500 companies is back to pandemic highs, based on our transcript review. Digging deeper, two things jump out to us.
- First, recession commentary previously peaked in February 2016 (just as stocks bottomed in the industrial/earnings recession of 2015-2016) and in May 2020 (shortly after stocks bottomed in March). It remains to be seen if July 2022 will mark another high for recession chatter, but if this data starts to retreat we can add it to the list of other contrarian-buy sentiment signals.
- Second, the sector that’s seen recession commentary spike the most has been Financials, with moves higher by the Consumer, Industrials, Tech and REITs sectors as well. But our review of Financials’ earnings call transcripts suggests to us that while recession is a hot topic, many are not seeing imminent signs of a downturn and are highlighting the strength of consumer balance sheets. In other sectors, a lot of the commentary also appears to be centered on how companies are prepared to weather the economic storm when it arrives.
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Moving on to Takeaway #2. Our early thoughts on the 1% stock buyback tax that’s part of the Inflation Reduction Act.
- After a long year focused on the Fed and whether the US will enter a recession, we confess that we got excited late last week when we were asked about our thoughts on this. It’s nice to have something else to talk about. We’ll know more after companies start discussing it on earnings calls and at conferences. But for now a few quick thoughts.
- First, based on discussions with our industry analysts when this was floated in the past as well as late last week, we don’t see a major impact on companies’ buyback plans. One analyst told us his companies are highly motivated to buyback shares given how cheap they believe their stock prices are so this is unlikely to impact their planning. Another told us that while their companies may grumble publicly, it’s unlikely to impact planning since dividends are more permanent and tougher to back away from. Another wondered if their companies might accelerate buyback activity in the near-term before the tax takes effect.
- For those with a more negative view, we’ve been highlighting our chart showing which sectors are most active in reducing their share counts over the past year. Along with Tech, Financials and Materials have been highly active.
- Other quick thoughts are that no buyback benefit is baked into our own EPS forecasts at the moment, and that at the margin we can see some companies shifting to dividends and that renewed focus there might benefit high yielding sectors like Energy.
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Wrapping up with takeaway #3: our sentiment indicators are showing signs of healing, but the high frequency political indicators we track are starting to shift in a way that’s not friendly to the stock market.
- While we remained concerned that earnings expectations for the second half of 202 and 2023 haven’t come down enough, one thing that has kept us in the constructive camp for stocks has been how deeply depressed investor sentiment has been. Today, we see clear signs of healing in our investor sentiment work. This is true for retail investors in the AAII survey where net bullishness is starting to pick up after hitting Financial Crisis lows… flip to slide 5
- … as well as asset managers in the weekly CFTC datawhere net equity futures positioning is starting to pick up after hitting 2015-2016 lows. Flip to slide 6
- Recovery in bitcoin, which has become correlated to the S&P 500 and tends to bottom at the same time as the stock market, is also helping equities… Flip to slide 7
- …as is renewed leadership in popular hedge fund names. Flip to slide 8
- Stabilization in high frequency economic barometers like OpenTable and back to work are also positive for stocks by supporting the short/shallow recession and economic resilience narrative for now. Flip to slide 9
- But one thing we see shifting in a stock market unfriendly way is the political polls, where Democrats are starting to close the gap with Republicans in the generic Congressional ballot. Flip to slide 10.
- Betting markets are also now expecting the Democrats to retain control of the Senate.
- This all comes alongside better than expected turnout in some of the recent primaries.
- Why does this matter? It’s telling us that the consensus political outlook is starting to be questioned. Flip to slide 11.
- Many investors have expected Republicans to take control of the House and Senate this fall. That’s been good news for the stock market, as the combination of a Democratic President and split or Republican Congress has typically been one of the best environments for stock market returns. Flip to slide 12.
- We’ve also highlighted how a good showing for Republicans this fall might help stabilize consumer sentiment, since Republicans have been feeling worse than Democrats in the University of Michigan survey. Flip to slide 13.
- A good result for Republicans could also give them momentum heading into the 2024 Presidential race, particularly since the Democrats have been looking divided with nearly two thirds of Democrats saying they don’t want Biden to be the nominee in recent polls. Flip to slide 14.
- The bottom line here – the midterms are usually a positive catalyst for stocks, but politics are getting messy for the stock market. The assumption that November will go well for the Republicans may soon be called into question given what we’re seeing in the polling data and betting markets, providing another reason for stocks to turn volatile in the months ahead.
End with industries in motion page
That’s all for now. Thanks for listening. And be sure to check out our sister podcast, RBC’s industries in motion, for thoughts on specific sectors from RBC’s team of industry analysts.