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The cliché ‘the trend is your friend’ often applies to markets – we can point to the success of price momentum investing strategies over the past decade as evidence – but if the maxim applies now, portfolios are in for some pain. Thankfully, it’s not that simple.

On January 16, Citi economist Catherine Mann published a report called “Levels, and Deltas, and Sentiment, Oh My!” that highlighted the ongoing market battle between deteriorating investment trends and still-solid nominal growth rates and financial conditions. The term deltas is the current finance buzzword for rate of change. If, for instance, global economic growth estimates were revised downwards, this would represent a negative delta – a slower trend – for the world economy.

Ms. Mann writes, “The end of 2018 saw significant equity market turbulence, tightening financial conditions, plunging [purchasing managers indices] At the same time, unemployment continues to fall, labor force participation continues to improve, wages are on the upswing and boosted in real terms by lower energy prices, and an escalating trade war…Recession probabilities increased with the negative spiral of news… At the same time, unemployment continues to fall, labor force participation continues to improve, wages are on the upswing and boosted in real terms by lower energy prices… Will the deltas or the levels dominate global prospects in 2019? A focus on the deltas, particularly in the financial markets and the external environment, influences rising recession probabilities. But, the levels and [U.S.] focus may tell an alternative story.”

The (very quick) summary of these comments is that the investing environment is getting worse, but remains OK, and potentially OK enough that earnings and economic growth can continue to expand and boost equity returns.

The Citi report concludes that current levels of financial and credit conditions, labour markets, and manufacturing activity are strong enough to sustain bull market conditions. Recession risks are largely driven by the amount of optimism among corporate executives, “Continued weakness in external indicators and financial market turbulence could soften business investment intentions and consumer confidence, offsetting and then undermining labor market strength… Animal spirits are important – a self-fulfilling prophecy is not impossible.”

Historically, stocks representing companies with positive delta in terms of profit growth – a rising rate of year over year earnings growth – have been the most profitable investments. Ms. Mann’s research suggest these characteristics will be tough to find this year, and earnings growth is likely to be lower but still solid.

The market’s reaction to slower earnings growth will be an important factor driving portfolio performance in 2019. It’s possible that stock prices for companies that, for example, generated 15 per cent earnings growth in 2018 and offer guidance for 11 per cent profit growth in 2019 won’t see much change. It’s also possible their stock prices get punished.

Predicting market reactions in an environment of supportive but deteriorating trends is impossible , in my opinion. Animal spirits, indeed.

-- Scott Barlow, Globe and Mail market strategist

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Stocks to ponder

Air Canada (AC-T). This security may soon appear on the positive breakouts list (stocks with positive price momentum). Next month, the company is set to release its fourth-quarter financial results at which time management may provide insights into the integration of its recent acquisition. The stock has 15 buy recommendations and top pick recommendations from two analysts on the Street – Timothy James from TD Securities and Fadi Chamoun from BMO Nesbitt Burns. The consensus target price implies there is over 33-per-cent upside potential in the share price over the next year. Jennifer Dowty reports (for subscribers).

Badger Daylighting Ltd. (BAD-T) This stock appeared on the positive breakouts list earlier this week. During the past four consecutive quarters, the share price has increased upon the release of its quarterly results. Last quarter, the company reported record revenue and EBITDA [earnings before interest, taxes, depreciation and amortization]. Given the positive outlook provided by management in Nov., the company may report another solid quarter when it releases its fourth-quarter results in March. Furthermore, the consensus estimate for 2019 may prove to be too conservative given management’s guidance. Earlier this month, both the chief executive officer and the chief financial officer were buying shares in the market. Jennifer Dowty reports (for subscribers).

The Rundown

Why Canadian companies are dropping their dividend reinvestment plans

When Canadian Utilities Ltd. announced its first-quarter dividends this month, the company had some good news – and some bad news – for investors. The good news was that the Calgary-based energy infrastructure company hiked its dividend by 7.5 per cent, extending a decades-long record of annual increases. The bad news? Canadian Utilities (CU) suspended its dividend reinvestment plan (DRIP), which means investors won’t be able to use their dividends to automatically purchase additional shares – without brokerage commissions – directly from the company. Shareholders will also lose the 2-per-cent discount that applied to DRIP purchases. Canadian Utilities is just the latest company to drop its DRIP. Pipeline giant Enbridge Inc. (ENB) suspended its DRIP in November, saying it no longer required the plan as a funding tool, and several big real estate investment trusts – including H&R REIT (HR.UN) and RioCan REIT (REI.UN) – have also put their DRIPs on hold. John Heinzl reports (for subscribers).

‘POT’ stock symbol to be assigned via lottery due to high demand

It’s a rare moment when a ticker symbol generates envy, desire and great demand. But for an exploding cannabis industry, the imminent availability of POT may be it. The Canadian stock exchanges say they will hold a lottery to determine which cannabis company gets the ticker, which became available when Potash Corp. of Saskatchewan yielded POT in early 2018 upon its merger with Agrium Inc., creating a company called Nutrien. Exchange rules mandate an abandoned ticker stay dormant for 13 months, which means POT can be reused in just a few weeks. David Milstead and Clare O’Hara report (for subscribers).

So much for rising interest rates: The returns on GICs have taken an unexpected downturn

The rising trend for rates on guaranteed investment certificates has abruptly fizzled. Some fairly good deals are still available, but rates on average have actually fallen lately. Brandon Brot of GIC Wealth Management says his firm’s best rates on one-year GICs were 0.11 percentage points lower in the second week of January than at the beginning of December, and two-year rates were an average of 0.16 points lower. Yields on terms of 3-to-5 years have also fallen, but to a lesser degree. Rob Carrick reports (for subscribers).

After all these years, the One-Minute Portfolio keeps delivering results

Created in early 2003 and updated annually in various publications including The Globe and Mail, the One-Minute Portfolio (OMP) is still delivering the goods with minimal work and volatility. As of the end of 2018, the OMP2 version had gained an average 7.4 per cent annually – turning $100,000 into more than $300,000 with just a “minute” of work in some years and a smooth ride all of the way (its biggest decline was 8.8 per cent, during the crash of 2008). Larry MacDonald reports. (for subscribers)

So how did Bay Street’s top stocks picks perform in 2018? Miserably

It was a tough year for Canadian stocks in general, and an even tougher year for Bay Street’s top picks. Not only did those equities with the very highest analyst ratings at the start of 2018 underperform the market, they were among the segments of the market to post the worst returns on the year. While a global downturn in commodities was responsible for many busted top stock picks, the list of analyst darlings that flopped in 2018 spans almost every sector of the Canadian stock market. Tim Shufelt reports. (for subscribers)

How to find undervalued stocks in the he wake of last year’s big selloff

After letting off steam late last year, stocks have bounced back in a post-holiday rally that gives some rays of hope for investors. While companies are resetting earnings growth expectations lower this year, last year’s stock sell-off means there are likely some real bargains out there. John Reese looks at some possible candidates.

Others (for subscribers)

Canadian housing market is featured prominently in global research report, for all the wrong reasons

Four dividend-paying timber companies that could help in fight against climate change

We may have only seen the opening salvo of a protracted battle for Stuart Olson

Canada plans U.S. dollar global bond issue to pad FX reserves

Wednesday’s Insider Report: CEO invests over $459,000 in this cyclical stock

Wednesday’s analyst upgrades and downgrades

Thursday’s analyst upgrades and downgrades

Thursday’s Insider Report: CEO invests nearly $880,000 in shares of this bank stock

Others (for everyone)

Five pieces of investment advice from John Bogle, who died this week

As global growth clouds darken, sterling may not be hostage to Brexit fortune

Ask Globe Investor

Question: I own more than $100,000 of Enbridge Inc. shares that were enrolled in the company’s dividend-reinvestment plan (DRIP), which was recently suspended. Enbridge is the largest position of the nine stocks I own and accounts for about 22 per cent of my total equity exposure. My discount broker (Scotia iTrade) continues to offer its own DRIP for Enbridge shares and I was wondering if I should move my shares there and enroll them in its DRIP?

Answer: Given that you own just nine stocks and Enbridge already accounts for more than one-fifth of your equity portfolio, for diversification purposes you may wish to consider using your Enbridge dividends to purchase shares of other companies instead. DRIPs have their advantages: They make the reinvestment process automatic and they eliminate brokerage commissions. But with discount brokers charging $10 or less for trades, the commission savings from DRIPs aren’t as significant as they used to be. You could invest your cash – from Enbridge and other sources – manually a few times a year at very low cost. This approach, which I use with my own portfolio, would also give you control over how and when you reinvest your money and allow you to add stocks that you don’t already own. Nine stocks isn’t a bad start, but adding a few more – and making sure to spread your holdings across different sectors – would improve your diversification and lower your risk.

--John Heinzl

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

Dividend rich Power Corp. and Manulife shares sure look cheap right now. But that doesn’t instantly mean they’re buys. David Berman takes an indepth look at the two stocks.

Click here to see the Globe Investor earnings and economic news calendar.

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Compiled by Gillian Livingston

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