Global Investment Strategy May 25, 2023

Forget The Debt Ceiling And

Strategy Report Focus On These Equity Tailwinds
Listen to a short summary of this report

In this Issue Executive Summary

02 Drama for Drama’s • There will not be a debt default because the Republicans will cave in on their demand for deep
Sake spending cuts.
02 Why Stocks Are Up • With the soap opera in Washington out of the way, investors will likely focus on some of the
This Year tailwinds supporting stocks.
03 1. Positioning
Remains Bearish • These include stronger earnings growth, diminished bank stresses, better housing data, early
03 2. The Impact on signs of an upleg in the manufacturing cycle, the prospects of an AI-driven productivity boom,
the Economy from and the fact that labor slack has managed to increase without rising unemployment.
Bank Stresses
Looks Contained • We expect these tailwinds to delay the next US recession until 2024. Investors should resist
So Far turning bearish on stocks for now but look to become more defensive later this year.
04 3. Housing Data • The 10-year US Treasury yield has reached 3.75%, the level that we had said previously provides
Have Improved At
the Margin
a decent entry point. Hence, we recommend that fixed-income investors increase duration from
neutral to above benchmark over a 12-month horizon.
05 4. Global
Manufacturing • For now, given our sanguine view about near-term global growth prospects, we are maintaining
May be Bottoming our neutral duration recommendation over a tactical 3-month horizon.
09 5. Earnings
Estimates are • Our Currency Cruncher model has turned more upbeat on the US dollar over the past few
Rising weeks. As such, we are shifting to a more neutral view on the greenback. We are retaining our
11 6. AI Hopes long-term bearish dollar view, however.
11 7. Labor Slack Is • Our Gold Digger model is negative on the yellow metal. Go short GLD for a tactical trade.
Declining Even as
Unemployment • We will be producing white papers on our new quant models later this year and then initiating
Stays Low rapid-fire trades based on them.
12 Our Perspective
13 Increase Duration Based On Historical Patterns, Global Manufacturing May Surprise On The Upside Later This Year
in Fixed-Income
Portfolios Over a The median manufacturing cycle in
12-Month Horizon 80 US the US has lasted 36 months, with the 80
ISM MANUFACTURING: NEW ORDERS* length of the downleg roughly equal
15 Currency Cruncher to the length of the upleg
Update
70 70
15 Go Short GLD for a
Trade
15 Quant-Based Trades
Coming To GIS 60 60

Editorial Board 50 50

Peter Berezin
Chief Global Strategist
40 40
Melanie Kermadjian
Senior Analyst
Miroslav Aradski
Editor/Strategist 30 30
2023
Ritika Mankar, CFA
Editor/Strategist 50 55 60 65 70 75 80 85 90 95 2000 05 10 15 20
* SHOWN AS A 3-MONTH MOVING AVERAGE.
Lucas Laskey SOURCE: INSTITUTE FOR SUPPLY MANAGEMENT.
Associate Vice President
Chanhyuck Lee Bottom Line: Against the backdrop of cautious positioning, stocks should rise once the debt
Research Analyst
ceiling soap opera ends. A more defensive posture towards equities will be appropriate later
Garry Evans
Chief Global Asset
this year.
Allocation Strategist
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Global Investment Strategy Report May 25, 2023 02
Strategy Forget The Debt Ceiling And
Focus On These Equity Tailwinds

Forget The Debt Ceiling And

Focus On These Equity Tailwinds
Dear Client,

Our recent report, ChatGPT and the Curse of the Second Law, has garnered quite a lot of
attention from both clients and the media. As a follow-up, I discussed some of the economic
and financial implications of the AI revolution with my colleague, Roukaya Ibrahim, on her
Quicktakes podcast. It will be available online this Friday. Melanie Kermadjian and I have also
recorded a video on the existential risks posed by AI. I will be posting it to my Twitter account and
BCA’s YouTube channel.

Best regards,
Peter Berezin, Chief Global Strategist

Drama for Drama’s Sake The Republicans also do not want to be

blamed by pensioners if their social security
Over the past few months, we have done payments are suspended, which they will be
our best not to write about the debt if the debt ceiling is not raised.
ceiling because we did not want to indulge
the politicians in Washington who self- Investors should ignore the debt ceiling
servingly created this drama in order to soap opera and focus on the real forces that
give themselves yet another opportunity to matter for financial markets.
pontificate in front of the cameras.

Alas, with the debt ceiling deadline creep- Why Stocks Are Up This Year
ing closer and markets starting to notice, it
is impossible to avoid this topic. In our 2023 Strategy Outlook, published in
December, we wrote that “The conventional
Our view remains unchanged: There wisdom sees stocks falling in the first six
will not be a debt default because the months of 2023 in anticipation of a US
Republicans will cave in on their demand recession and then recovering in the back half
for deep spending cuts. The Republicans of the year once the first green shoots appear.
don't actually want to reduce spending, We think the exact opposite will happen:
which is why overall spending rose by 13% Stocks will rise in the first half of 2023 as
in real terms in the three years of Trump hopes of a soft landing intensify, and then dip
Administration and then rocketed higher in the second half.”
during the pandemic.

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Global Investment Strategy Report May 25, 2023 03
Strategy Forget The Debt Ceiling And
Focus On These Equity Tailwinds

We continue to think that the path of

CHART 1
least resistance for stocks is to the upside,
Fund Managers Are Defensively Positioned
although the rise in valuations since the
BONDS
start of the year, along with our conviction MAY 2023 GLOBAL
STAPLES
that a recession can be deferred but not FUND MANAGER
SURVEY CASH
denied, does temper our enthusiasm to POSITIONING VS. UTILITIES
HISTORY (Z-SCORE)
some extent. HEALTH CARE

EM
There are seven reasons why stocks have COMMODITIES
been so resilient: EUROZONE
DISCRETIONARY

1. Positioning Remains Bearish TECH

ENERGY
Going into this year, most equity investors MATERIALS
were positioned for further downside. This BANKS

remains the case today, suggesting that INDUSTRIALS

stocks can continue to climb the proverbial USD

INSURANCE
wall of worry.
REITs

According to BoA’s Fund Manager Survey, EQUITIES

2023
US
fund managers were nearly two standard
deviations underweight stocks in May -3 -2 -1 0 1 2 3

(Chart 1). SOURCE: BOFA GLOBAL FUND MANAGER SURVEY.

Stock market sentiment has improved

since the start of the year but remains quite
downbeat by historic standards. In general, We argued that the former scenario was
we have found that forward equity returns more likely, suggesting that the widespread
are highest when sentiment is bearish but expectation of a recession this year would
improving, and lowest when sentiment is prove to be premature.
bullish but deteriorating (Chart 2).
More controversially, in our report enti-
2. The Impact on the Economy from tled Could the Banking Crisis Be Good
for Stocks? we noted that the crisis might
Bank Stresses Looks Contained So Far
paradoxically lift equity valuations. This is
An open question in March was whether because the Fed wants slower growth, and
the implosion of several banks, starting slower growth resulting from more conser-
with SVB, foreshadowed the slow-burn vative bank lending would likely be better
financial problems of the Savings and Loan for stocks than slower growth stemming
Crisis, which began in the mid-1980s but from much higher interest rates because
did not culminate in a recession until 1990, the latter scenario would entail a higher
or the fast-burn problem of the GFC. discount rate for valuing equities.

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Global Investment Strategy Report May 25, 2023 04
Strategy Forget The Debt Ceiling And
Focus On These Equity Tailwinds

3. Housing Data Have Improved

CHART 2
At the Margin Stocks Do Best When Sentiment
A key difference between the Savings Is Improving From Bearish Levels
% %
and Loan crisis and the GFC is that the US
AAII* NET SENTIMENT:
residential housing market held up much BULLS MINUS BEARS

better during the former episode.

40 40

Housing is the most interest rate-

sensitive sector of the economy. Hence,
the state of the housing market provides 20 20

a good gauge of how tight underlying

monetary policy is.
0 0
The latest data hint at a stabilization, if
not an outright improvement, in the US
housing market (Chart 3). Single-family
-20 -20
building permits and housing starts have
ticked up since the start of the year. New
home sales are rising, as is homebuilder
-40 -40
confidence. According to the Atlanta
Fed’s GDPNow model, residential invest-
90 95 2000 05 10 15 20
ment is set to make a positive contribu- 28% * AMERICAN ASSOCIATION OF INDIVIDUAL INVESTORS.
tion to growth in Q2, the first time this NOTE: SERIES SHOWN SMOOTHED EXCEPT FOR LATEST DATA POINT.
S&P 500 ANNUALIZED FORWARD
24
has happened in nine quarters. REAL TOTAL RETURNS
FROM 2000 TO 2023
22

20
The Case-Shiller national home price
index increased by 0.2% in February (last 16

available data point), the first monthly

12
increase since July 2022.
8 6
North of the border, the Canadian
4
housing market has started to heat up, 2

with both sales and prices rising again 0

(Chart 4). The once-cooling Australian
-4
housing market is also showing signs
of life. If these two overvalued housing -8

markets can buck a recession-inducing -12

-9 2023

downturn, that bodes well for less frothy MORE BULLISH*** MORE BULLISH*** MORE BEARISH*** MORE BEARISH***
THAN AVERAGE THAN AVERAGE THAN AVERAGE THAN AVERAGE
AND AND AND AND
housing markets in other developed IMPROVING**** DETERIORATING**** IMPROVING**** DETERIORATING****

economies. MARKET SENTIMENT**

* AMERICAN ASSOCIATION OF INDIVIDUAL INVESTORS.
DATA SHOWN SMOOTHED EXCEPT FOR LATEST DATA POINT.
** DEFINED AS THE DIFFERENCE BETWEEN THE PERCENTAGE OF INVESTORS
WHO ARE BULLISH AND THE PERCENTAGE OF INVESTORS WHO ARE
BEARISH;
BASED ON AMERICAN ASSOCIATION OF INDIVIDUAL INVESTORS DATA.
*** MARKET SENTIMENT IS DEEMED TO BE MORE BULLISH (BEARISH) WHEN IT
IS ABOVE (BELOW) ITS LONG-TERM AVERAGE.
**** MARKET SENTIMENT IS DEEMED IMPROVING (DETERIORATING) WHEN IT
IS ABOVE (BELOW) ITS 20-DAY MOVING AVERAGE.
NOTE: TOTAL RETURNS DEFLATED BY HEADLINE CPI. DATA AS OF MAY 25, 2023.

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Global Investment Strategy Report May 25, 2023 05
Strategy Forget The Debt Ceiling And
Focus On These Equity Tailwinds

CHART 3
Some Green Shoots In The US Housing Market
Mn Mn % %
US
CONTRIBUTION TO PERCENT CHANGE IN REAL GDP:
US SINGLE-FAMILY RESIDENTIAL FIXED INVESTMENT
HOUSING STARTS
BUILDING PERMITS
1.2 1.2

2 2

1.0 1.0

1 1
.8 .8

.6 .6
0 0

Th Th

1000 NEW HOME SALES 1000

-1 -1
900 900
2023

800 800 18 19 20 21 22 23
SOURCE: BUREAU OF ECONOMIC ANALYSIS (BEA).
NOTE: RED BAR IS AN ESTIMATE USING THE ATLANTA FED'S GDPNOW MODEL.
700 700

600 600
4. Global Manufacturing May Be
500 500 Bottoming
On average, manufacturing cycles last about
three years – 18 months of accelerating
NAHB* HOMEBUILDER OPTIMISM growth followed by 18 months of decelerat-
90 HOUSING MARKET INDEX 90
ing growth (Chart 5).
80 80
The ongoing manufacturing downturn
70 70 began around June of 2021, as measured by
60 60 the forward-looking new orders component
of the ISM index. In January 2023, the new
50 50
orders component hit 42.5. It is too early
40 40 to say whether this marked the low for the
cycle (in April, new orders stood at 45.7),
30 30
2023 but if it did, the manufacturing downturn
would have lasted 19 months.
16 18 20 22
* NATIONAL ASSOCIATION OF HOMEBUILDERS.

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Global Investment Strategy Report May 25, 2023 06
Strategy Forget The Debt Ceiling And
Focus On These Equity Tailwinds

The latest manufacturing data have been

CHART 4
mixed. The S&P global manufacturing
Canadian Housing Market Seems
To Be Bottoming PMI ticked lower in May, with most coun-
Th
CANADA
Th tries other than Japan showing a decline
CAD
HOUSE PRICES* (LS)
EXISTING HOME
(Chart 6). However, the index remains
800 SALES** (RS) 60
above its late-2022 lows, as do important
700 subcomponents such as new orders and
40
new orders minus inventories.
600

20 Notably, the electronic equipment compo-

nent of the S&P global manufacturing PMI
180 AUSTRALIA 180
HOUSE PRICE INDEX*** has moved up smartly (Chart 7). If the
trend continues, as we think is likely, it will
160 160
greatly benefit economies such as Korea,
Taiwan, and Germany.
140 140
2023 From an equity perspective, cyclicals tend
18 20 22 to outperform defensives when the manu-
* MLS HOUSE PRICE INDEX (HPI) AGGREGATE COMPOSITE BENCHMARK.
SOURCE: CANADIAN REAL ESTATE ASSOCIATION (CREA).
facturing PMIs are rising (Chart 8).
** SOURCE: CANADIAN REAL ESTATE ASSOCIATION (CREA).
*** FIVE CAPITAL CITY AGGREGATE. SOURCE: CORELOGIC AUSTRALIA.

CHART 5
Based On Historical Patterns, Global Manufacturing May Surprise On The Upside Later This Year

80 US The median manufacturing cycle in 80

ISM MANUFACTURING: NEW ORDERS* the US has lasted 36 months, with
the length of the downleg roughly
equal to the length of the upleg

70 70

60 60

50 50

40 40

30 30
2023

50 55 60 65 70 75 80 85 90 95 2000 05 10 15 20
* SHOWN AS A 3-MONTH MOVING AVERAGE.
SOURCE: INSTITUTE FOR SUPPLY MANAGEMENT.
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Global Investment Strategy Report May 25, 2023 07
Strategy Forget The Debt Ceiling And
Focus On These Equity Tailwinds

CHART 6
Manufacturing PMIs Are Off Their Recent Bottoms
MANUFACTURING PMI* MANUFACTURING PMI*
60 OVERALL 60 NEW ORDERS MINUS INVENTORIES
NEW ORDERS 10 GLOBAL 10

5 5
50 50
0 0

-5 -5
40 GLOBAL 40

-10 -10

US US
60 60
15 15

10 10
50 50
5 5

40 40 0 0

-5 -5
30 30

EURO AREA EURO AREA

60 60
10 10
50 50
0 0
40 40
-10 -10
30 30
-20 -20

JAPAN JAPAN

50 50
0 0

40 40
-10 -10

30 30
-20 -20
2023 2023

16 18 20 22 16 18 20 22
* SOURCE: S&P GLOBAL / MARKIT ECONOMICS LTD. * SOURCE: S&P GLOBAL / MARKIT ECONOMICS LTD.

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Global Investment Strategy Report May 25, 2023 08
Strategy Forget The Debt Ceiling And
Focus On These Equity Tailwinds

CHART 7
Improvement In Electronic Equipment PMI
GLOBAL PMI*: ELECTRONIC EQUIPMENT
OUTPUT/ACTIVITY
65 NEW ORDERS 65

60 60

55 55

50 50

45 45

40 40

35 35

30 30
2023

2000 05 10 15 20
* SOURCE: S&P GLOBAL / MARKIT ECONOMICS LTD.

CHART 8
Cyclicals Generally Outperform Defensives When Manufacturing PMIs Are Rising
US
1.25 EQUITIES: CYCLICALS* / DEFENSIVES** (LS)
ISM MANUFACTURING NEW ORDERS*** (RS) 70
1.20
65
1.15

1.10 60

1.05
55
1.00
50
.95

.90 45

.85
40
.80
35
.75
2023

95 2000 05 10 15 20
* DEFINED AS CONSUMER DISCRETIONARY, INDUSTRIALS, AND MATERIALS. REBASED TO 2014 = 1.
SOURCE: MSCI INC. (SEE COPYRIGHT DECLARATION).
** DEFINED AS CONSUMER STAPLES, HEALTH CARE, AND UTILITIES. REBASED TO 2014 = 1.
SOURCE: MSCI INC. (SEE COPYRIGHT DECLARATION).
*** SOURCE: INSTITUTE OF SUPPLY MANAGEMENT.
NOTE: BOTH SERIES SHOWN SMOOTHED EXCEPT FOR THE LATEST DATA POINT.

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Global Investment Strategy Report May 25, 2023 09
Strategy Forget The Debt Ceiling And
Focus On These Equity Tailwinds

5. Earnings Estimates are Rising Earnings revisions tend to track the

economic surprise indices (Chart 11). US
Against beaten-down expectations, 77% of
earnings and sales are expected to grow by
S&P 500 companies beat earnings estimates
5.7% and 3.1%, respectively, over the next
in Q1. On a year-over-year basis, Q1 earn-
12 months, which is fairly tame by historic
ings fell by 0.2% against initial expectations
standards. With the Bloomberg consensus
of a 5% decline.
expecting a US recession later this year,
Encouragingly, 12-month forward earnings there is scope for earnings estimates to
and sales estimates are now rising both in improve further during the remainder of the
the US and in Europe (Chart 9). US profit year (Chart 12).
margins have also returned to 2019 levels,
suggesting that the worst of the margin
squeeze may be over (Chart 10).

CHART 9
US Sales Growth Has Outstripped Earnings Growth Over The Past Year
% % % %
S&P 500 EURO AREA
(PERCENT CHANGE SINCE BEGINNING OF 2022) (PERCENT CHANGE SINCE BEGINNING OF 2022)
20 12-MONTH FORWARD SALES-PER-SHARE 20 12-MONTH FORWARD SALES-PER-SHARE
30 12-MONTH FORWARD EARNINGS-PER-SHARE 30
12-MONTH FORWARD EARNINGS-PER-SHARE
PRICE INDEX PRICE INDEX

20 +19.5% 20
10 +10.2% 10
+14.0%
10 10
+2.2%
0 0

0 0
-3.6%
-10 -10
-10.2%
-10 -10

-20 -20 -20 -20

% JAPAN % % EM %
(PERCENT CHANGE SINCE BEGINNING OF 2022) (PERCENT CHANGE SINCE BEGINNING OF 2022)
12-MONTH FORWARD SALES-PER-SHARE 12-MONTH FORWARD SALES-PER-SHARE
20 12-MONTH FORWARD EARNINGS-PER-SHARE 20 12-MONTH FORWARD EARNINGS-PER-SHARE
PRICE INDEX 10 PRICE INDEX 10

15 +14.8% 15

0 0
10 10
+8.8% -3.4%
+6.7%
5 5 -10 -10

-16.3%
0 0
-20 -20.2% -20

-5 -5

-30 -30
2023 2023
-10 -10

JAN APR JUL OCT JAN APR JUL JAN APR JUL OCT JAN APR JUL
2022
22 202323 22
2022 202323
SOURCE: REFINITIV / IBES AND MSCI INC. (SEE COPYRIGHT DECLARATION). SOURCE: REFINITIV / IBES AND MSCI INC. (SEE COPYRIGHT DECLARATION).

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Global Investment Strategy Report May 25, 2023 10
Strategy Forget The Debt Ceiling And
Focus On These Equity Tailwinds

CHART 10 CHART 11
US Profit Margins Are Back To Pre-Pandemic Positive Economic Growth Surprises
Levels Tend To Bode Well For Earnings
% % %
US
NET PROFIT MARGINS 150 ECONOMIC SURPRISE INDEX* (LS)
12 US 12 80
EQUITIES: NET EARNINGS REVISIONS** (RS)
100
40
10 10 50

0 0

8 8
-50 -40

-100

% % GLOBAL %
ECONOMIC SURPRISE INDEX* (LS)
JAPAN EQUITIES: NET EARNINGS REVISIONS** (RS)
80
6 6 40
40

5 5 0
0

4 4 -40
-40

-80

% % % 04 08 12 16 20 %
EURO AREA EARNINGS GROWTH ESTIMATES
8 8 OVER THE NEXT 12 MONTHS***:
30 S&P 500 30
S&P 500 EX ENERGY

20 20
6 6

10 10

4 4
0 0

-10 -10
SALES GROWTH ESTIMATES
% % % OVER THE NEXT 12 MONTHS***: %
S&P 500
EM S&P 500 EX ENERGY
11 11 8 8

10 10 4 4

9 9 0 0

8 2023
8 -4 -4
2023

19 20 21 22 23 04 08 12 16 20 24
SOURCE: DATASTREAM WORLDSCOPE. * ROLLING 3-MONTH STANDARD DEVIATION OF DATA SURPRISES;
US ECONOMIC SURPRISE INDEX TRUNCATED AT 120.
SOURCE: CITIGROUP GLOBAL MARKETS INC.
** NET POSITIVE REVISIONS AS A SHARE OF TOTAL REVISIONS.
SOURCE: REFINITIV / IBES.
*** SOURCE: REFINITIV / IBES. S&P 500 EX ENERGY EARNINGS GROWTH
ESTIMATES TRUNCATED AT -10 DUE TO LOSSES IN THE ENERGY
SECTOR DISTORTING CALCULATIONS.
NOTE: TOP TWO PANELS: SERIES SHOWN SMOOTHED EXCEPT FOR
LATEST DATA POINT.

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Global Investment Strategy Report May 25, 2023 11
Strategy Forget The Debt Ceiling And
Focus On These Equity Tailwinds

CHART 12 CHART 13
A Revival In Global Growth AI Stocks Have Lifted The S&P 500 Higher
This Year
Ann% Ann%
Chg CONSENSUS* REAL GDP FORECAST FOR 2023 Chg
PRICE INDEX (REBASED TO BEGINNING OF 2023):
CHINA, 5.7% S&P 500
110 S&P 500 EXCLUDING AI* 110
5 5
108 108

4 4
106 106

3 3
WORLD, 2.6% 104 104

2 2
AUSTRALIA, 1.7% 102 102

US, 1.1%
1 JAPAN, 1.0% 1 100 100
CANADA, 1.0%
EURO AREA, 0.6%
UK, 0.2%
0 0 98 98

-1 2023 -1 96 2023 96

JAN APR JUL OCT JAN APR JUL OCT JAN FEB MAR APR MAY JUN
22
2022 23
2023 2023
* SOURCE: BLOOMBERG FINANCE L.P. * EXCLUDES THE FOLLOWING STOCK PRICES: NVIDIA CORP,
ADVANCED MICRO DEVICE, MICRON TECHNOLOGY, ORACLE CORP,
SALESFORCE.COM, ACCENTURE CLASS A, ADOBE SYSTEMS INC,
IBM, SERVICENOW, ARISTA NETWORKS,DEERE & CO, TESLA
MOTORS, AMAZON.COM, BOOKING HOLDINGS, EBAY, ETSY,
ALPHABET 'A' (GOOGLE), ALPHABET 'C' (GOOGLE), META
PLATFORMS A, ACTIVISION BLIZZARD,AND ELECTRONIC ARTS.

6. AI Hopes
According to our calculations, AI-linked 7. Labor Slack Is Declining Even
stocks account for almost all of the S&P as Unemployment Stays Low
500’s year-to-date gains (Chart 13). Today’s
rally in Nvidia shares has only reinforced Last summer, a heated debate broke out
this trend. between Fed Governor Christopher Waller,
on the one side, and Larry Summers and
Goldman Sachs recently estimated that AI Olivier Blanchard, on the other side, about
could boost S&P 500 profit margins by 400 whether job openings could decline without
basis points over the next decade, implying a significant rise in unemployment.
a substantial potential windfall for corpo-
rate America. Summers and Blanchard contended that
“We find it entirely unconvincing as support
AI hopes are coming at an opportune time. for the ‘soft landing’ idea – pushed mostly
What the economy now needs is faster recently by Fed Chair Jerome Powell in his
growth and lower inflation. With the labor July press conference – that vacancies can
market at full employment, the only way decline substantially taking pressure off
to achieve this is through a productivity- inflation without driving unemployment
driven supply-side boom. way up.”

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Global Investment Strategy Report May 25, 2023 12
Strategy Forget The Debt Ceiling And
Focus On These Equity Tailwinds

CHART 14 CHART 15
The Beveridge Curve Has Been Shifting Lower Declining Job Openings Foreshadow A
Slowdown In Wage Growth
8 % Ann%
US Chg
JOB OPENINGS RATE* (ADVANCED, LS)
US BEVERIDGE CURVE ATLANTA FED
7 WAGE GROWTH TRACKER** (RS)
7 APRIL 2020 - APRIL 2023 6
JULY 2009 - MARCH 2020
DECEMBER 2000 - JUNE 2009 6
6 5
APRIL
2023
5
5 4
VACANCY RATE (%)

4 3
3

3
2 2

% Ann%
2 Chg
JOB OPENINGS RATE* (ADVANCED, LS)
EMPLOYMENT COST INDEX*** (RS)
5
7
1

6
2023 4
0
2 4 6 8 10 12 14 16
5
UNEMPLOYMENT RATE (%)
3
NOTE: APRIL VACANCY RATE IS ESTIMATED USING INDEED JOB
POSTINGS INDEX. 4

3 2

2 2023

Nine months later, the evidence has not 2000 04 08 12 16 20 24

been kind to Summers and Blanchard. * SHOWN ADVANCED BY 9 MONTHS. SOURCE: BLS.
** 3-MONTH MOVING AVERAGE OF MEDIAN WAGE GROWTH,
Chart 14 shows that the so-called Beveridge HOURLY DATA, OVERALL UNWEIGHTED SERIES.
*** WAGES AND SALARIES OF ALL CIVILIAN WORKERS. SOURCE: BLS.
Curve has shifted down, which is another NOTE: HISTORICAL JOB OPENINGS DATA IS EXTENDED USING THE
COMPOSITE HELP-WANTED INDEX ESTIMATED IN REGIS BARNICHON,
way of saying that openings have declined "BUILDING A COMPOSITE HELP-WANTED INDEX", ECONOMICS LETTERS
without increased joblessness. “At this VOLUME 109, ISSUE 3, (DECEMBER 2010), AND THE APRIL JOB
OPENINGS DATA IS ESTIMATED USING INDEED JOB POSTINGS INDEX.
stage, Chris Waller is doing better than
the Blanchard-Summers team” Olivier Our Perspective
Blanchard conceded at a seminar at the
The combination of falling job openings and
Brookings Institution earlier this week.
a stable unemployment rate is consistent
Job openings are a reliable predictor of with our kinked Phillips curve framework,
wage growth (Chart 15). If wage growth which predicts that at full employment,
comes down without unemployment rising, weaker labor demand will mainly lead to
that would lift the perceived odds of a soft lower job openings and slower wage growth
landing. (Chart 16).

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Global Investment Strategy Report May 25, 2023 13
Strategy Forget The Debt Ceiling And
Focus On These Equity Tailwinds

CHART 16
Kinked Phillips Curve Framework

STICKY WAGES FLEXIBLE WAGES

LSUPPLY LSUPPLY
WAGE When the economy is at full WAGE
employment, weaker labor
GROWTH GROWTH
demand will mainly lead to
lower job openings and/or
slower wage growth rather W1
than increased
unemployment

W2
Job openings 1

Job
openings 2 LDEMAND2 LDEMAND1

LDEMAND1 LDEMAND2

2023 2023

L* LABOR (L) L* LABOR (L)

(FULL EMPLOYMENT) (FULL EMPLOYMENT)

Importantly, however, as we emphasized in Increase Duration in

our report, Macro Investors Are About to Fixed-Income Portfolios Over
Make a Huge Mistake, there is a non-linear a 12-Month Horizon
relationship between labor demand and
employment. At some point, falling labor Previously, we had signaled that we would
demand will clear out enough job openings recommend increasing duration exposure
that unemployment starts rising. Once that over a 12-month horizon if the 10-year
happens, a vicious cycle will ensue where Treasury yield were to rise above 3.75%.
higher unemployment leads to lower aggre- With yields now above that level, we are lift-
gate labor income, increased precautionary ing our recommended allocation to bonds
savings, and to even higher unemployment. and cutting our recommended allocation to
cash in fixed-income portfolios.
Given the supportive factors discussed in
this report, that eventuality will not occur For now, given our sanguine view about
until next year. As a precaution, we shifted near-term global growth prospects, we are
to neutral on stocks at the end of March. maintaining our neutral duration recom-
Investors should refrain from turning mendation over a tactical 3-month horizon.
outright bearish on stocks for now but
should look to become more defensive on
stocks later this year.

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Global Investment Strategy Report May 25, 2023 14
Strategy Forget The Debt Ceiling And
Focus On These Equity Tailwinds

CHART 17 CHART 18
Currency Cruncher Has Turned More Gold Digger Is Not Digging Gold
Upbeat On The Dollar
US$/ US$/
Oz REAL GOLD PRICE* Oz
160 US DOLLAR DXY INDEX* 160

2200 2200
140 140

1800 1800
120 120
1400 1400

100 100
1000 1000

80 80 600 600

CURRENCY CRUNCHER MODEL GOLD DIGGER MODEL

8 CUMULATIVE RETURN** 8 20 CUMULATIVE EXCESS RETURN** 20

7 7

6 6 15 15

5 5

4 4 10 10

3 3

2 2 5 5

1 1

% 85 90 95 2000 05 10 15 20 % 80 85 90 95 2000 05 10 15 20
CURRENCY CRUNCHER MODEL 1.2 GOLD DIGGER MODEL SCORE*** 1.2
PROJECTED SHORT-TERM DXY RETURN*** (1 = MOST BULLISH, 0 = MOST BEARISH)
8 8
1.0 1.0

4 4 .8 .8

0 0 .6 .6

.4 .4
-4 -4

.2 .2
-8 2023 -8 2023

95 2000 05 10 15 20 2000 04 08 12 16 20
* CARRY-ADJUSTED DXY INDEX. BASED ON ICE FUTURES US DATA. * DEFLATED BY HEADLINE CPI; IN APRIL 2023 US DOLLARS.
** INDEXED TO JANUARY 1981 = 1.0. ** EXCESS RETURN RELATIVE TO BUY AND HOLD.
SOURCE: MACROQUANT 2.0 BETA (CURRENCY CRUNCHER). INDEXED TO DECEMBER 1974 = 1.0.
*** BASED ON DEVIATION FROM MODEL FAIR VALUE. SOURCE: MACROQUANT 2.0 BETA (GOLD DIGGER).
SOURCE: MACROQUANT 2.0 BETA (CURRENCY CRUNCHER). *** SOURCE: MACROQUANT 2.0 BETA (GOLD DIGGER).

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Global Investment Strategy Report May 25, 2023 15
Strategy Forget The Debt Ceiling And
Focus On These Equity Tailwinds

Currency Cruncher Update Go Short GLD for a Trade

Over the past few weeks, our Currency We have been negative on gold since the
Cruncher Model has turned more upbeat start of the second quarter. Our Gold
on the US dollar, reflecting a widening in Digger model is confirming this negativity
interest rate differentials in favor of the US, (Chart 18). As of today, we are going tacti-
somewhat weaker PMI data in Europe and cally short the GLD ETF relative to cash.
China, and a deterioration in technical indi-
cators (Chart 17).
Quant-Based Trades Coming
While we are maintaining our long-term To GIS
bearish view on the US dollar, we are
cutting our near-term view to neutral. We will be producing white papers on our
new quant models later this year and then
initiating rapid-fire trades based on them. It
is an exciting time to be a BCA subscriber.

Peter Berezin
Chief Global Strategist
peterb@bcaresearch.com

Follow me on

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Global Investment Strategy Report May 25, 2023 16
Strategy Forget The Debt Ceiling And
Focus On These Equity Tailwinds

View Matrix

Global Investment Strategy Views

3-Month 12-Month 10-Year
Global Asset Allocation
Equities 3 3 3
Fixed Income 3 3 3
Cash 3 3 3
Global Equities (Region)*
US 2 2 2
Euro Area 4 4 3
UK 4 4 3
Canada 4 4 3
Australia 4 4 3
Japan 4 4 3
EM 4 4 4
Global Fixed Income**
Government 3 3 2
Investment Grade 3 3 3
High Yield 3 3 4
Duration 3 4 3 3
Inflation Protection 3 3 4
Global Fixed Income (Region)**
US Treasuries 4 4 3
UK Gilts 3 3 3
German Bunds 3 3 3
JGBs 2 2 1
EM Sovereign 4 4 4
Currencies***
USD 3 2 3 2
EUR 3 4 3 4
GBP 3 4 3 4
CHF 3 3 3
JPY 3 4 4 3 4
CAD 3 3 4
AUD 3 3 4
EM Currencies 3 3 4
Commodities (vs USD)
Energy 4 3 2
Base/Bulk Metals 4 3 3
Gold 2 2 3
Softs 3 3 3
LEGEND:
1 – DENOTES STRONG UNDERWEIGHT/VERY BEARISH VIEW.
2 – DENOTES UNDERWEIGHT/BEARISH VIEW.
3 – DENOTES NEUTRAL VIEW.
4 – DENOTES OVERWEIGHT/BULLISH VIEW.
5 – DENOTES STRONG OVERWEIGHT/VERY BULLISH VIEW.
* RELATIVE TO MSCI ACWI (CURRENCY UNHEDGED).
** RELATIVE TO BLOOMBERG BARCLAYS GLOBAL AGGREGATE (CURRENCY HEDGED).
*** IN TRADE-WEIGHTED TERMS.

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Global Investment Strategy Report May 25, 2023 17
Strategy Forget The Debt Ceiling And
Focus On These Equity Tailwinds

Special Trade Recommendations

This table provides trade recommendations that may not be adequately represented in the matrix on the preceding page.

Inception Initiation
Trade Return-To-Date* Stop Loss Comments
Level Date

Short SPDR Gold Shares ETF (GLD) 180.2 May 25/2023 -5% Tactical Trade

Long June** 2023 Canada 10-Year Bond futures contract (CNM3) /

21 bps June 30/2022 471 bps -125 bps Weight**: 0.72
US 10-Year Treasury Note futures contract (TYM3)

None, but keep

Long Proof of Stake (ADA, SOL, DOT) / the position
100 Jan 20/2022 -35.8%
Proof of Work (BTC, LTC, DOGE) small to minimize
risk
Special Shorting
None, but keep Technique***;
the position closed half of
Short Bitcoin*** $63,267 Oct 21/2021 115%
small to minimize the position for
risk a 97.6% gain on
May 10/2022
* THE MARK-TO-MARKET CALCULATIONS ARE BASED ON THE CLOSE OF EVERY WEDNESDAY AND THE MARKET PRICE OF BITCOIN AT 4:00PM (EDT) THURSDAY.
** ROLLED FROM THE SEPTEMBER 2022, DECEMBER 2022, AND MARCH 2023 CONTRACTS. THE WEIGHT IS CALCULATED SUCH THAT THE LONG AND SHORT LEGS OF THE TRADE HAVE
EQUAL DURATIONS.
*** THE PERFORMANCE OF THE SHORT BITCOIN TRADE IS MEASURED USING A SHORTING TECHNIQUE DESCRIBED IN THE GLOBAL INVESTMENT STRATEGY REPORT TITLED
“HOW TO SHORT BITCOIN, OR ANYTHING ELSE, WITHOUT LOSING YOUR SHORTS,” DATED APRIL 30, 2021.

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Global Investment Strategy Report May 25, 2023 18
Strategy Forget The Debt Ceiling And
Focus On These Equity Tailwinds

Current MacroQuant 1.0 Model Scores

2023

2023

2023

* THE MACROQUANT GLOBAL EQUITY SCORE IS A MARKET-WEIGHTED SUM OF ALL MACROQUANT REGIONAL EQUITY SCORES.
** THE MACROQUANT BOND MODEL IS BASED ON 76 BUSINESS CYCLE, MONETARY/FINANCIAL, SENTIMENT/TECHNICAL, AND VALUATION METRICS.
*** THE MACROQUANT DXY MODEL COMPUTES THE DXY SCORE BASED ON THE DEVIATION OF THE DXY FROM ITS FAIR VALUE AND VARIOUS SENTIMENT AND
TECHNICAL VARIABLES, INCLUDING MOMENTUM, FUND FLOWS, AND POSITIONING.
NOTE: SHADED AREAS REPRESENT NBER-DESIGNATED RECESSIONS.
SOURCE: MACROQUANT VERSION 2.0.
FOR MORE INFORMATION ON THE MACROQUANT MODEL PLEASE REFER TO: GLOBAL INVESTMENT STRATEGY TACTICAL GLOBAL ASSET ALLOCATION
MONTHLY UPDATE BASED ON BCA RESEARCH’S MACROQUANT MODEL.

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Global Investment Strategy Report May 25, 2023 19
Strategy Forget The Debt Ceiling And
Focus On These Equity Tailwinds

Archive Of Previous Reports – Global Investment Strategy

Please click on the links below to view reports:

1. King Dollar And Geopolitics - May 19, 2023

2. ChatGPT And The Curse Of The Second Law - May 11, 2023

3. How Deep Will The Next Recession Be? - May 4, 2023

4. A Chance Encounter With Mr. X - April 27, 2023

5. The Dollar Has Further To Fall - April 20, 2023

6. Macro Investors Are About To Make A Huge Mistake - April 13, 2023

7. The $6.5 Trillion Question: How Will A Turn In Japan’s Rate Cycle Affect Global Markets? - April 6, 2023

8. Second Quarter 2023 Strategy Outlook: 1998 Or 2008? - March 30, 2023

9. Is Bad News Becoming Good News For Stocks? - March 23, 2023

10. Could The Banking Crisis Be Good For Stocks? - March 16, 2023

11. Chatting With A Chatbot - March 13, 2023

12. In Health And In Sickness- March 10, 2023

13. Hot Or Not?- March 2, 2023

14. Is Canada Headed For A Soft Landing? - February 24, 2023

15. Rising Risk Of A Second Inflation Wave - February 17, 2023

16. There Won’t Be A Recession Until More People Are Convinced That There Won’t Be A Recession
- February 10, 2022

17. After Goldilocks - February 3, 2022

18. India: A Port In The Storm - January 27, 2022

19. It’s Not Like Gymnastics: The Economics Of Soft Landings - January 20, 2022

20. The Housing Downturn: Could This Time Be Different? - January 13, 2022

21. Rays Of Light - January 6, 2022

22. What Our Strategists Listen To - December 12, 2022

23. Strategy Outlook – 2023 Key Views: Edging Towards The Kink - December 8, 2022

24. Time To Bring Out The Saké? - November 25, 2022

25. European Housing: A Market Of Ice And Fire - November 21, 2022

Copyright ©2023 BCA Research Inc. All Rights Reserved. Refer to last page for an important disclaimer.
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