Portfolio Strategy, US Equities & Oil: North American Portfolio Strategist Martin Roberge was recently visiting with Toronto-based clients and one commonly asked question through meetings was the level at which US bond yields could start to bite on stocks. His short answer is ~3% on US 10-year Treasuries. “For bond yields, we assume a range consistent with the expected level of US real GDP growth over the next year, that is 2.25%-3%”. The question then becomes, does the US hit this GDP growth target in 2015? Referring to his S&P 500 EPS and Equity Risk Premium matrix (Figure 1), Martin goes on to say, “this does not mean that the bull market stops at 3% but that EPS growth will have to accelerate for stocks to march higher.” Martin then turns his attention to oil asking if EIA oil demand forecasts are too pessimistic. Referencing global GDP growth and filling of strategic petroleum reserves by China and India, Martin feels the global oil market could balance earlier than expected. Quoting Martin, “The price of oil has yet to test the upper band of its range that we peg ~$70/bbl WTI. As such, the current dip in energy stocks, we believe, represents a buying opportunity.” Martin’s Chart of the Week takes a look at the spread between core and headline inflation, which has only been this large twice in the last 30 years. Reading central bank tea leaves is surely an art form, but Martin’s work suggests the Fed will likely wait to raise rates until headline inflation rebounds closer to the 2% level.
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