At what point will rising bond yields start to hurt stocks? According to Bank of America's chief investment strategist, Michael Hartnett, history points to the moment when the 10-year U.S. Treasury bond rises above 5 per cent – giving stock investors plenty of breathing room over the year ahead.
But the current environment, Mr. Hartnett noted, is far from typical.
For the past several months, the yield on the 10-year U.S. Treasury bond has been climbing sharply. It rose to 2.6 per cent in mid-December, up from just 1.4 per cent in the summer, as investors began to price in stronger U.S. economic growth, bigger deficits and higher inflation. Stocks have performed well over this period, with the S&P 500 rising about 8 per cent.
But Mr. Hartnett believes that the "taper tantrum" in 2013, when the stock market sold off after the U.S. Federal Reserve announced the end of its quantitative easing (QE) stimulus, suggests that the low bond yields of recent years make stocks far more vulnerable when rates rise.
"This is well worth bearing in mind given the likely end of QE in Europe and Japan in the next 12 to 18 months," he said in a note. "Once that is signalled to the markets, look for rates volatility to hit stocks."
He expects that the next half-to-three-quarters of a percentage point increase in bond yields (to between 2.9 per cent and 3.15 per cent), triggered perhaps by trade wars or additional inflation, will bring bond yields to an interesting threshold. At that level, Mr. Hartnett said, "the risk of a financial 'event' is likely to jump."
-- David Berman
Stocks to ponder
GDI Integrated Facility Services Inc. This is is an industrial stock that appears on the positive breakouts list. The share price appears overbought in the near-term. Consequently, investors may wish to wait for a pullback for a better entry level, writes Jennifer Dowty. In addition, this company is sweeping in money with revenues poised to hit $1-billion this year. The average one-year target price is $18.50, implying the share price may appreciate 10 per cent over the next 12 months.
Agellan Commercial Real Estate Investment Trust. This real estate investment trust (REIT) offers investors an attractive yield of over 7 per cent, writes Jennifer Dowty. In addition, given its focus on U.S. commercial real estate, the rising value of the greenback is positive for the REIT. The average analyst one-year target price is $11.43, implying the unit price may appreciate over 7 per cent over the next 12 months.
Investor alert: Your most important investment statement ever is on its way
Please open it and pay close attention to two new and vitally important pieces of information, writes Rob Carrick about the new investment statements that are or will soon be on their way to Canadian investors. One is an accounting in dollar terms of how much you're paying for investment advice and services, and the other is a personalized report on how your portfolio has performed. This data will give you more power than you've ever had to assess the job your adviser is doing for you. Rob provides a handy checklist for determining whether you are receiving value from your adviser.
One of the market's best-known theories is sending a warning signal about U.S. stocks
Donald Trump and his followers insist the rest of the world is taking advantage of the poor, beleaguered United States, writes Ian McGugan. Oddly enough, financial markets indicate just the opposite. In fact, U.S. stocks have thrashed their global counterparts for seven years in a row. Some investors may want to bet on that long streak of U.S. victories continuing. However, if you believe in mean reversion – the idea that a burst of unusually good performance is nearly always followed by a string of weaker results – it's time to start worrying about the outlook for Wall Street over the next couple of years.
BMO reveals its 33 top stock picks for 2017
While the S&P/TSX composite index was the top performing equity index in developed markets in 2016, Brian Belski, BMO's chief investment strategist, anticipates this strength will fade in 2017. He anticipates the S&P/TSX composite index will rise just 4.6 per cent, climbing to 16,000 by the end of the year, writes Jennifer Dowty. The BMO team of equity analysts recommended 33 stocks as their top investment ideas for 2017 in its Canadian edition of the "Best of BMO" report.
Fourth-quarter earnings season: Will the Trump optimism hold?
As the first earnings season since the U.S. election gets started, investors are eager for evidence that corporate executives' optimism matches their own, writes Tim Shufelt. Fourth-quarter earnings season begins in earnest this week with a number of big U.S. banks, including JPMorgan Chase & Co., Bank of America Corp., and Wells Fargo & Co., among the S&P 500 companies to report their results. Amid the wave of financial statements and management conference calls this week, investors will be looking for confirmation that the profit backdrop is strong enough to justify the remarkable rally in stocks.
Why investors should curb their enthusiasm about an oil rally this year
This week's sharp decline in crude prices might just be a temporary correction from frothy, overly optimistic market conditions but the expert view remains that investors should not look for significant upside in the sector for 2017, writes Scott Barlow.
What value investors should make of the latest meltdown of department-store stocks
The current meltdown in major department-store stocks reverses what had actually been a pretty good run for names such as Macy's Inc. and Kohl's Corp., which had seen their shares rise robustly from the depths of pessimism in early 2016, writes David Milstead. Last week's disastrous sales reports, however, should be a sharp reminder of the perils of investing in brick-and-mortar retailing in what is largely becoming Amazon's world. Traditional retailing isn't dead, certainly, but chances are good that investors in the sector will feel as much pain as gain as they watch the major department stores lurch from quarter to quarter.
What high-net-worth investors should expect for 2017
Every January, analysts and pundits give their predictions for the new year. While they certainly make for interesting reading, Thane Stenner says he's always found them of limited value to long-term investors. Trying to pin down exactly which stocks will outperform in 2017, or what level the S&P 500 will be at the end of the year, or what will happen with gold or oil or the Canadian dollar or whatever else – all of this seems more about PR than practical advice. On the other hand, asking "what if" questions and trying to understand the issues and trends that might affect your ability to protect and preserve wealth – this strikes him as a prudent move for every investor. He outlines what the rich see ahead for the new year.
The five best and worst performing IPOs of 2016
At least once a year, David Milstead takes a look at initial public offerings from an investor's perspective, rather than an investment banker's perspective: How many of these stocks actually made money? The focus, of course, is on Canada, but this year the exercise is problematic. As you've likely read, 2016 was a dismal year for new offerings on the Toronto Stock Exchange. The three IPOs in the fourth quarter were the only ones of the year, with PricewaterhouseCoopers saying the total dollar volume of offerings was the worst figure in the firm's 20-year history of tracking the market. It's a different story in the U.S. The 134 IPOs, according to data provided to The Globe and Mail by Bloomberg, represented a dropoff from past years, as there were 209 IPOs on the major U.S. exchanges in 2015 and 265 in 2014. But again, how did the stocks perform. And in that regard, in 2016 they had one of the best performances in years.
Bad behaviour from the big banks? Try their competitors
Make it a goal in 2017 to try one new financial product from a company not associated with one of the big banks, writes Rob Carrick. Try an alternative bank offering comparatively high interest rates on savings, or a credit union. Try a robo-adviser, where your investment portfolio is managed for you online at low cost. Try an independent financial-advice firm, or one of the non-bank online brokerage firms that scored well in The Globe's recent broker ranking.
Your New Year's investing quiz queries answered
Did John Heinzl's New Year's investing quiz leave you with more questions than answers? He takes a look at a few of the toughest questions in his annual quiz and explains the answers.
This accounting professor uses a classic investment approach
In this week's Me and My Money feature by Larry MacDonald, an accounting professor outlines how he examines financial statements and values securities as he shapes his investment portfolio.
Ask Globe Investor
Why would you own a stock such as Brookfield Infrastructure Partners LP (BIP.UN) when it is paying out way more than its net income? This does not seem sustainable.
It's true that BIP.UN's distributions exceed its net income. In the third quarter, for instance, it distributed about 39 cents (U.S.) a unit – more than double its reported net income of 16 cents a unit.
But with a business such as BIP.UN, which owns a lot of long-life assets, net income does not provide an accurate picture of its ability to pay and sustain a distribution. That's because net income is reduced by accounting charges such as depreciation and amortization that don't affect the company's cash flow.
For that reason, BIP.UN – and similar companies – often report their payout ratio as a percentage of cash flow. In the third quarter, BIP.UN's "funds from operations" or FFO – which is defined as net income excluding depreciation, amortization and a few other items – was 68 cents a unit. The payout ratio – including incentive distributions to parent Brookfield Asset Management and preferred unit distributions – was 68 per cent, which is within BIP.UN's target range of 60 per cent to 70 per cent.
Not only is BIP.UN's distribution sustainable, but the company has stated that it intends to raise its distribution by 5 per cent to 9 per cent annually. (Disclosure: I own BIP.UN units both personally and in my Strategy Lab model dividend portfolio).
Do you have a question for Globe Investor? Send it our way via this form. Questions and answers will be edited for length.
What's up in the days ahead
Our resident dividend guru John Heinzl is buying more Enbridge shares, and he'll explain why in Wednesday's Globe Investor. David Berman looks at the investment case for Jean Coutu Group while Ian McGugan will present a bullish outlook for base metals investors.
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Compiled by Gillian Livingston