Markets this morning are stomach-churning, so here’s a positive view that offers some soothing words:
Scotia Capital strategist Vincent Delisle thinks that the selloff – ignited after chairman Ben Bernanke dropped strong hints Wednesday that the Federal Reserve will soon be tapering bond buying – is going to be short lived for equities.
He cites three reasons:
1. Historically, the S&P 500 return one year before the start of the Federal Reserve rate hike cycle is positive. And the Fed isn’t expected to start hiking interest rates any time soon.
2. Initial market reaction to shift in monetary policy tends to be wrong.
3. The drivers that will lead to the Federal Reserve tapering its bond purchases – such as better employment growth – are usually positive for cyclical stocks. It’s those equities – from companies that produce materials – that are coming under particular pressure today.
“We will wait for oversold/panicky conditions to pull the trigger and reallocate our overweight cash, but our bias is to stay the course with a positive S&P 500 outlook,” Mr. Delisle said in a Thursday morning note.
He thinks consumer staples stocks on the TSX are likely to outperform other defensive or high-yielding sectors, and recommends investors focus any stock purchases in these sectors: life insurance, asset managers, media, autos, industrials, technology, chemicals and lumber.
“We reiterate the view that investors should position portfolios for rising yields and a stronger U.S. dollar,” he adds. “Defensive sectors got hurt the most yesterday with yields spiking, which is not your typical correction. We have been carrying a tactical cash overweight in our asset mix and model portfolios since April, and we still expect sluggish markets entering Q3. However, we do not think the equity/S&P 500 cycle is over and would be buyers on pullback as U.S. macro improvements continue. Our 12-18 month view remains unchanged: Equity over bonds with a U.S./EAFE preference over EM/Canada.”