The MAER stock ranking model: 10 years of out of sample history
28 February 2023 A bit of history Mill Street Research was founded around this time seven years ago, and the MAER stock selection model has been the anchor for Mill Street’s “bottom up” quantitative stock selection analysis since then. The MAER name is an acronym for the product’s original name, the Monitor of Analysts Earnings […]
Do Analyst Estimate Revisions (Still) Help Forecast Relative Stock Returns?
15 January 2023 Some of the common questions among fund managers who are looking at Mill Street’s stock selection and asset allocation tools are on the topic of whether using analyst estimate revisions metrics for stock return forecasting is useful: “Do analyst estimates really matter for stocks nowadays? “ “Aren’t equity analysts always conflicted, and […]
Divergent shelter costs are muddying the inflation debate
A key topic within the broader inflation debate is the influence of the biggest single component of the CPI: shelter. At about 33% of the current CPI weight, shelter (housing/rent) costs are clearly important, but measuring them is harder than it might seem.
Inflation in goods is already over
The focus of the inflation headlines, and most of the comments from Fed officials, has been on the year-on-year reported inflation rate of the CPI (or PCE). However, the extremely volatile macro environment has produced far more volatility in reported inflation data than has been seen for most of the last 30 years.
Can UK stocks keeping outperforming?
UK stocks have been outperforming the global market recently, and our indicators remain supportive, particularly if value and commodity stocks remain in favor.
After lagging for much of the last decade, UK stocks have been strongly outperforming the global market this year in local currency terms, and even in US dollar terms more recently. We have been overweight the UK in our regional allocation guidance since March and remain so based on our bottom-up indicators.
Analysts have become quite bearish on US earnings forecasts
A question we have heard several times from clients has been: when will equity analysts get as bearish as investors have been recently? Well, analysts may be getting closer to that point now, particularly for the large-cap US stocks that dominate the cap-weighted indices.
Watching the Fed watching the data
The markets have remained focused on the Fed (and occasionally the Bank of England), and the Fed has kept its focus on the trailing reported inflation data (CPI, PCE, etc.) and on the labor market data (job growth, wages, etc.). The Fed’s view is that inflation cannot sustainably come down to a suitable level (2-3%) unless income growth slows down significantly. That is, income growth must decline to reduce excess demand. This certainly makes sense up to a point, but of course prices are determined by the combination of demand and supply.
All eyes still on the Fed
Short-term movements in stocks, bonds, and currencies continue to be driven primarily by changes in investor perceptions about the Fed’s likely course of action over the next 6-12 months. In response to client questions, the following are some comments and charts reviewing recent history and the current backdrop.
Fed moving rapidly from “tightening” to “tight” monetary policy
The August CPI report released earlier this month was significantly worse than expected, and data since then has not changed the broader view of inflation for the Fed. Along with continued hawkish public commentary from Fed officials, this has driven a further rise in bond yields to new multi-decade highs, and cemented expectations for further aggressive rate hikes by the Fed.
However, despite the “hot” CPI reports, the level of expected inflation in five-year inflation swaps (the most direct way to bet on future inflation) has fallen to its lowest level in a year, and was recently trading around 2.6% (chart below), close to the Fed’s presumed target of about 2.5% on the CPI (dashed line). A similar picture is seen in the 10-year inflation swaps.
Banks & Thrifts have tailwinds despite flat Treasury yield curve
The Fed is raising rates as fast as it can, and the Treasury yield curve is flat or inverted. Is this a bad scenario for US banks? Not right now, since the rates banks pay on deposits have risen much less than rates on Treasury bills or the fed funds rate, as is often the case. And wider credit spreads on corporate loans have also helped improve lending margins. Our stock rankings show higher readings for the Financials sector, helped by strong earnings estimate revisions, particularly in mid- and smaller-cap banks and thrifts. Readings above zero on the chart below indicate analysts raising estimates more in Banks than in the overall US market, and recent readings have been far above average.