Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, in this file photo.BRENDAN MCDERMID/Reuters
Falling bond prices has sent bond yields dramatically higher over the past month – and the trend is leaving investors with two big questions as we head toward 2017: Will the trend continue and what will it do to my portfolio?
Richard Bernstein, chief executive and chief investment officer at Richard Bernstein Advisors (and formerly a top Wall Street strategist with Merrill Lynch), has answers: Yes, and be prepared for major consequences.
"Investors' rabid fervour for bonds and income during 2016 might ultimately prove to be the bond market's equivalent of March 2000's over-enthusiasm for technology stocks or 2007's for housing stocks," he said in his latest strategy note.
In other words, chase income and yield at your peril. He argued that inflation expectations hit a low point in February and have since driven the yield on the 10-year U.S. Treasury bond above 2.4 per cent – its highest level in nearly two years.
Of course, the yield has been higher in previous years. It rose above 3 per cent in 2013, only to slump again. But Mr. Bernstein doesn't think today's rising yield is another head fake.
As he sees it, the incoming U.S. presidential administration is arguing for the largest stimulus package since the Great Depression, pushing up expectations for U.S. economic growth.
"The new administration's economic package might not match that promised during the campaign, but it seems reasonable to assume that there will be more fiscal stimulus rather than less," Mr. Bernstein said.
As well, he is becoming increasingly doubtful that the global economy is mired in secular stagnation, and believes that cyclical acceleration is under way: "Leading economic indicators (LEIs) around the world are strengthening in a unified manner that hasn't existed since the credit bubble," he said.
This sounds very upbeat – and it is – but Mr. Bernstein is warning investors that chasing after yesterday's winners will no longer work. Instead, he is turning to economically cyclical stocks, and smaller companies look especially good.
"This summer's 'lower for longer' rush for fixed-income and income-oriented equities ignored that deflation appears to slowly be giving way to re-inflation," he concluded. "Although some of our themes have become incrementally popular since the election last month, our overall positioning still seems quite out of consensus."
-- David Berman
Stocks to ponder
Magna International Inc. Auto parts makers have been on the rise, one of which appears on the positive breakouts list -- Linamar Corp., writes Jennifer Dowty. Magna may soon follow Linamar onto the positive breakouts list. Month to date, shares of Linamar, and Magna are up over 13 per cent and over 6 per cent, respectively. The company pays its shareholders a quarterly dividend of 25 cents (U.S.) per share, or $1 per share on a yearly basis. This equates to an annualized dividend yield of 2.3 per cent. Management has increased its dividend every year since 2010. This stock is well covered by the Street. Since October, 19 analysts have issued research reports, of which 11 are "buy" recommendations, and eight are "hold" recommendations. The average one-year target price is $64.52 (Cdn), implying the share price may appreciate 12 per cent over the next 12 months.
American Hotel Income Properties REIT Limited Partnership. Bond proxy securities have faced intense selling pressure in recent weeks with rising interest rates, writes Jennifer Dowty. This stock appears on the negative breakouts list. For investors seeking income, this security offers a yield of over 8 per cent and the current price weakness may represent a future buying opportunity. This security features an 8 per cent yield, 20 per cent upside forecast with six unanimous 'buy' calls.
Birchcliff Energy Ltd. This stock may soon appear on the positive breakouts list as it is just pennies away from making an appearance on the list, writes Jennifer Dowty. it's a gas-weighted energy stock, and recently the price of natural gas futures continues to push higher to its current level of approximately $3.74 (U.S.), up from under $3 less than a month ago. It's a top performer with 15 'buy' calls and it is initiating a dividend in 2017.
The Rundown
My dividends keep growing – in good months and bad
John Heinzl said his for his Strategy Lab model dividend portfolio, it was definitely not a November to remember. Hit by rising government bond yields – which are like kryptonite to dividend stocks – his model portfolio tumbled 2.93 per cent last month. It was the second-worst monthly performance for the portfolio since the launch of Strategy Lab in September of 2012, outdone only by the 3.93-per-cent skid in August, 2015. But you have to put that in context: despite the lousy November, his model portfolio still finished the month with a year-to-date total return – including dividends – of 17.3 per cent.
Measures to cool Canadian housing market good for banks: Fitch Ratings
Canadian banks have navigated through weak economic growth, low interest rates and a depressed energy sector with their profits intact, but one big threat remains: the domestic housing market, writes David Berman. Most observers believe the market is overheated, especially in Toronto and Vancouver, at a time when policy makers are introducing measures to cool things down. But Fitch Ratings believes that if the cooling measures are good for the housing market, they'll be good for the banks as well – offering a remarkably soothing view for investors.
David Rosenberg: U.S. stock market isn't really that hot after all
David Rosenberg wants to examine the " Trump Rally" a bit closer. No doubt there have been stellar performances among the two sectors that stand to benefit most from the "D" word (deregulation): financials and energy. These were the two sectors that were on the long list for a long time in the event of a Trump victory. But the other sector that has been getting heady has been the industrials – soaring on high hopes of some big infrastructure package. But frankly, the up-move in industrials premised on infrastructure looks really overdone. And when you look at the stock market excluding financials, energy and industrials, well guess what? It is actually down fractionally since Nov. 8. Go figure. It is not a stellar market at all. Just a stellar performance by a couple of sectors.
Gordon Pape: My Buy and Hold Portfolio has delivered over 12 per cent annual growth
Some investors don't want to be bothered with following their stocks on a regular basis. They prefer to buy and forget, checking in maybe once or twice a year to make sure there's nothing seriously amiss, writes Gordon Pape. This Buy and Hold Portfolio was created in June 2012 for this type of person. It contains a bond fund and a mix of Canadian and U.S. stocks, which will rarely change. This portfolio has delivered over 12 per cent annual growth.
The next big bubble could be in Canada's soaring pot market
The surge of capital into Canada's nascent marijuana industry has sent stock prices soaring -- and brought warnings it's a bubble that could soon burst, writes Bloomberg News' Jen Skerritt. The value of 26 marijuana stocks listed in Canada has swelled to almost $4-billion from close to nothing in the past two years, as investors rushed to bet on the country's move toward legalizing recreational use. Canopy Growth Corp. became the first marijuana unicorn, reaching a valuation of $1.24-billion on Wednesday. Other producers, including OrganiGram Holdings Inc. and Aurora Cannabis Inc., saw their share prices surge more than 250 per cent this year.
Why tobacco stocks still have allure
Investors have done very well with tobacco stocks, even as smoking rates steadily decline. But an obstacle is now emerging in the form of rising bond yields, writes David Berman. Are tobacco stocks still worth owning after tumbling nearly 9 per cent since the summer? You bet. Of course, you have to get around a thorny ethical issue before starting any discussion about tobacco stocks. Smoking kills about 100 Canadians each day, according to Health Canada. Infants also die from the effects of second-hand smoke, making tobacco stocks the No. 1 enemy of anyone who prefers ethically sound investments. But if you can look beyond this issue, tobacco stocks have one compelling feature: They deliver awesome returns over the long term – and there is no reason to believe that this trend is about to unwind.
Beyond the Big Six: The appeal of Canada's smaller banks
The case for investing in a big bank is easy: Buy shares, fall asleep for 20 years, wake up wealthy, writes David Berman. But what's the case for investing in the little guys? Laurentian Bank of Canada and Canadian Western Bank don't receive nearly the level of attention of, say, Royal Bank of Canada and Toronto-Dominion Bank. Yet, they hold appeal for investors who don't mind sacrificing diversification for lower valuations. This year Canadian Western Bank has gained nearly 37 per cent, which is more than double the return on the S&P/TSX composite index and better than all of the Big Six banks. Laurentian Bank's recent performance isn't as wow-inducing, but it is the cheapest bank stock you can buy (based on its price-to-earnings ratio), it comes with a big 4.4-per-cent dividend yield, and it outperformed RBC between 2014 and 2016.
Canadians investing in the U.S. market: To hedge or not to hedge?
The case for long-term investors ignoring currency risk in their portfolios has never been stronger, writes Rob Carrick. The return from the S&P 500 stock index, dividends included, was an annualized 7.47 per cent for the 20 years to Nov. 30. If you converted that return to Canadian dollars, you get 7.46 per cent. Virtually the same story is told by the 30-year numbers – the S&P 500 made 9.99 per cent in U.S. dollars and 9.88 per cent in Canadian dollars.
Longer lifespans for women make retirement planning all the more crucial
The most ignored aspect of retirement planning just might be that women live longer than men, writes Rob Carrick. Among people aged 65, just over half are female. At 75 years of age, 57 per cent are female. At 85 years old, 68 per cent are women. These numbers were provided by Kristina Hidas of the Healthcare of Ontario Pension Plan (HOOPP), which has just completed some research showing one way in which the longer lifespans of women matter hugely in retirement planning.
Reverse mortgages can be a good last choice, in special circumstances
If annuities are the nerds of the retirement planning world, then reverse mortgages would be the black sheep; sort of like that distant cousin who started smoking at 13 and writing graffiti in the school washroom, the guy your mother warned you to stay away from, writes Frederick Vettese, the chief actuary of Morneau Shepell and author of The Essential Retirement Guide. At least in the case of reverse mortgages, the bad reputation is overstated. A reverse mortgage is perceived negatively because it erodes the equity in one's home, an act that is regarded as practically sacrilegious. Sometimes, however, there is no choice.
Number Crunchers
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What's up in the days ahead
Tomorrow watch for our Report on Business cover story on Mortgage Overload, how too many people are house rich and life poor because their mortgage eats up so much cash each month. John Heinzl's Investor Clinic will talk about what you should do if you're not sure if you trust your broker's advice. And on Monday is the 18th annual Globe and Mail online brokerage ranking, done by Rob Carrick. You'll get everything you need to know to choose the right online brokerage for you.
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Compiled by Gillian Livingston