Stocks rallied sharply in July after bottoming in June and the big question for investors is whether a bigger move higher or a lower-than-June bottom is ahead. In Was That the Bottom?, U.S. institutional portfolio manager Ben Carlson frames the discussion as a legal courtroom battle.
The case for the bulls - that June was at least a mid-term bottom and it’s clear sailing higher for a while - starts with the belief that peak inflationary pressures are already priced into equities. As higher interest rates take effect and inflation fades, stocks have room to move higher.
Recession fears continue but strong labour markets and consumption should protect the economy from any deep downdraft, the bull case argues. Corporate earnings continue to come in strong and forward guidance has barely moved lower.
The bear case - that the July rally was merely a headfake and the market bottom for 2022 has not been hit yet - implies that even if peak inflation is reflected in stock prices, consumer goods prices will remain high and threaten overall discretionary spending.
The potential scenario where inflation forces central banks to tighten monetary policy to the point a recession results is plausible and would likely result in lower lows for equity benchmarks. The housing market is a huge determinant of GDP growth in North America and its ongoing slowdown also threatens the economy.
If I’m the judge here, I rule in favour of the bears although without strong conviction. Central bank policy rates are still set to move higher (even if bond yields fell through July) while the lagging effects of the previous rate hikes are still being felt.
I also expect further cuts to 2023 profit expectations. Analysts often wait until the fourth quarter to reduce next year earnings estimates because they don’t want to do it in the third quarter, and then have to change them again before the end of the year.
-- Scott Barlow, Globe and Mail market strategist
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Stocks to ponder
AMTD Digital Inc. (HKD-N) Call it the new ‘meme’ stock darling of retail investors, and boy has it ever gone on a ride. Despite a pullback Wednesday, it’s trading about 21,000 per cent higher since its July IPO, and recently surpassed the market value of Facebook-owner Meta Platforms. We kid you not. Here’s what you need to know.
What a $360-million fund manager who has beating the TSX Composite for 16 years is buying and selling
Money manager Stephen Takacsy isn’t waiting for the markets to fall further to buy stocks he thinks will be good bets down the road. The chief investment officer at Lester Asset Management in Montreal, who manages about $360-million in assets and has beaten TSX Composite returns over the past 16 years, thinks a lot of the damage has been done. Brenda Bouw found out what he’s been buying and selling.
A bond market sweet spot for investors who find GICs too tame
Success in bonds this year is judged by how little you lost, rather than how much you made. On that count, corporate bonds have outperformed mildly while offering better yields. Rob Carrick takes a look at why they may be right for your portfolio.
Do steel stocks stand a chance if a recession hits?
Investors in steel stocks, such as Canada’s Stelco Holdings, should expect some tough times ahead as recessionary threats dampen sector sentiment and prices continue to roller coaster. While some analysts remain bullish on the sector given prices remain elevated compared with historical levels – and demand is high in key sectors such as autos and housing – others expect steel prices to plummet as economic growth slows. Brenda Bouw reports.
What to expect from 10-year returns if we head into recession
It’s useful to turn to market history as the economy dances on the brink of recession to see what might be in store for long-term investors. Investors enjoyed positive real returns roughly 88 per cent of the time from 1881 to June, 2012. There were only a few periods – the other 12 per cent of months – when they suffered losses over the following 10 years. On average, the market generated annual returns of 6.6 per cent over the rolling 10-year periods. Norman Rothery has all the data-crunching details.
Wall Street’s ‘fear gauge’ in limbo as big investors keep shunning stocks
Wall Street’s most closely watched gauge of market anxiety shows expectations of choppy trading ahead despite a recent snapback in U.S. stocks, though institutional investors’ low exposure to equities may help curb gyrations. Saqib Iqbal Ahmed reports.
Others (for subscribers)
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What’s up in the days ahead
Investing professor Dr. George Athanassakos tells us why shares in companies that are pausing hiring could be overvalued.
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Compiled by Globe Investor Staff