Consumer Sentiment Rises as Inflation Expectations Fall

All five index components rose this month, led by surges of over 24% for both the short- and long-run outlook for business conditions. There was a broad consensus of improved sentiment across age, income, education, geography, and political identification.

A growing share of consumers—about 14%—spontaneously mentioned the potential impact of next year’s elections. Sentiment for these consumers appears to incorporate expectations that the elections will likely yield results favorable to the economy.

Dr. Copper Sends a Warning

Daily Insights

BCA Research
Dec. 7: Copper benefited from the recent improvement in global risk sentiment, participating in the broad-based rally in November. To the extent that the red metal has vast applications across many economic sectors, it is considered a reliable gauge of global economic conditions. Indeed, Dr. Copper’s recent rally coincides with favorable economic developments including rising economic surprise indexes in the euro area and China.

In this sense, it is not surprising that copper prices typically track the relative performance of cyclical stocks vis-à-vis defensive ones and that U.S. cyclical equities have outperformed defensives over the past month.

However, this recent trend follows a breakdown in the relationship this year whereby cyclicals have outperformed defensives, despite the year-to-date decline in copper prices. We expect this divergence to be corrected with a deterioration in the relative performance of cyclicals/defensives as economic conditions worsen and it becomes clear that the U.S. economy is heading toward recession in 2024. As such, we view cyclicals/defensives as vulnerable to the downside and are overweight defensives over a 12-month horizon.

Roukaya Ibrahim and team

Stock Rally Broadens Out

The Weekly Speculator

Marketfield Asset Management
Dec. 7: Although the
S&P 500
index churned around without going anywhere over the past five sessions, this headline inertia hid a notable broadening of gains, allowing the
S&P 500 Equal Weight
index to increase 1.5%, and the
Russell 2000
index, 2.67%, while the
Nasdaq
index dropped -1.25%. We view this as a healthy broadening of gains, although there is an element of speculative capital chasing the market that risks an overcommitment should something cause the mood of the market to sour.

Michael Shaoul, Timothy Brackett

Pharma/Biotech: More M&A

The MIZ-Diagnosis: Strategy/Trading Commentary

Mizuho
Dec. 6: We would not be surprised to hear of additional pharma-for-biotech mergers before year end. Although very difficult to call on a timeline basis, we would suspect that pharma may want to get ahead of early calendar-year investor meetings/conferences if possible in order to change and/or improve the narrative following a rough year for the sector outside of a few names.

This year has been very active in terms of sector M&A, with 19 transactions in excess of $500 million, including the recently announced
AbbVie
/
ImmunoGen
deal last week. [AbbVie subsequently said it will acquire
Cerevel Therapeutics
]….

We would anticipate deal velocity to remain high for a few different reasons, including

1) revenue requirements among large-cap pharma, which can’t be satisfied with current research-and-development efforts, given cost/timing and other logistical constraints,

2) surplus/abundance of publicly traded biotech companies that are likely more willing to engage with buyers as cost of capital continues to increase and market dynamics are difficult to predict, and

3) meaningful increase in number of investors on small-cap biotech boards who are able to direct business-development strategy in a more pronounced way.

We contend that pharma would be far better off reducing R&D expenditure and using this related cost savings for tuck-in deals, but acknowledge it may be difficult to employ this tactic, given internal (and also political) pressures.

Management teams across global pharma are typically slow to cut bait on high-cost/low-odds clinical programs, although they would likely be much better off re-prioritizing projects to development areas with greater success probabilities and/or more significant market opportunities to better capture sales.

Jared Holz

Japanese Savers’ New Era

The Daily

Gavekal Research
Dec. 6: To the extent that fiscal easing outweighs halfhearted efforts at monetary tightening, Japan’s investment environment has changed. At the very least, Japanese households with half their 2,115 trillion yen ($14 trillion) of financial assets in low-yielding cash and bank deposits should not be expected to continue sitting on their hands indefinitely as inflation erodes their purchasing power.

Instead, as interest rates rise at home and the government pushes households to deploy more of their savings into riskier assets like equities via the so-called asset income doubling plan, Japanese financial institutions will have to compete more aggressively for funding….In short, the investment environment both within and outside Japan in the next few years is likely to be very different.

Udith Sikand

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