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Global equity research firms are releasing their annual ‘year ahead’ reports and the tone is so relentlessly miserable it’s tempting to take a Buffett-esque ‘be greedy when others are fearful’ contrarian view and start looking for bargains. But I’m not – at least until there’s more clarity as to why the market is selling off so hard, and how long it’s going to last.

Markets have been terrible but even so, the degree of pessimism on Wall Street has been surprising. The title for Merrill Lynch strategist Ethan Harris’ outlook for 2019 was ‘It was fun while it lasted.’ Mr. Harris is not expecting disaster, just a global economic slowdown to average growth levels, but adds ominously that ‘risks are skewed to the downside.’

Morgan Stanley strategist Michael Wilson isn’t a barrel of laughs either, writing, “Not only does the price action this year suggest we are in the midst of a bear market – more than 40 per cent of the stocks in the S&P 500 are down at least 20 per cent – but it also trades like a bear market. According to analysis from our … colleagues, buying the dip has not worked in 2018 for the first time since 2002. Such market behaviour is rare and in the past has coincided with official bear markets (20-per-cent declines), recessions, or both.”

Goldman Sachs’ David Kostin is also bearish, predicting a significant slowdown in U.S. growth in 2019, and an inverted yield curve – one of the most reliable recession indicators – during the latter half of the year.

One of the most confusing elements of recent market tremors is that they started with fears of rising inflation and bond yields, and this changed with little warning to concerns about global growth. The rate-sensitive market sectors that were hit first – utilities and real estate, most pointedly – are now outperforming the market. If, as (so far) expected, central banks keep raising rates, these sectors will likely weaken again.

Also puzzling is that virtually the entire technology sector is getting crushed when two of the biggest catalysts for the selling were stocks with seemingly company-specific issues. Apple Inc.’s dilemma was perfectly summed up by Yahoo! Finance editor Sam Ro who wrote, “global markets tumble because people [don’t] like [a] $1,000 iPhone that does same thing as the $400 iPhone.” Chipmaker NVIDIA, a former market favourite, is down 50 per cent because demand from cryptominers dried up, not because of a broad-based sector slowdown.

The most negative scenario for investors is the 1937 template I wrote about on Nov. 13, but I don’t think we’re there yet.

There are still a number of key questions to be answered before adopting one investment strategy over another. Is U.S. inflation or global economic growth the main market concern? Can central banks in Canada and the U.S. keep raising rates? Will global economic growth recover if they can’t? Is slower than expected iPhone demand a signal that broad tech spending is set to slow worldwide? Will China’s stimulus efforts be enough to maintain global commodity demand levels?

In the current market, there is too much negativity already priced in to sell stocks and enough existing and potential problems to make prudent investors hesitate to buy. Clarity will come, but it might take a while.

-- Scott Barlow, Globe and Mail market strategist

This is the Globe Investor newsletter, published three times each week. If someone has forwarded this e-mail newsletter to you, you can sign up for Globe Investor and all Globe newsletters here.

Stocks to ponder

Shopify Inc. (SHOP-T). This stock may resurface on the positive breakouts list (stocks with positive price momentum). Last month, the company reported better-than-expected third-quarter financial results that sent the share price soaring over 12 per cent. Management also raised its top line guidance for the year. Year-to-date, this is the fourth-best performing stock in the S&P/TSX composite index given the company’s strong growth profile. Ottawa-based Shopify Inc. is an e-commerce company serving businesses in approximately 175 countries. Its software allows customers to perform functions such as inventory management, order and payment processing, and shipments of orders. Jennifer Dowty reports (for subscribers).

Indigo Books & Music Inc. (IDG-T). Investors in Canadian retailer Indigo Books & Music Inc. are hoping for another hot-selling holiday season – on the heels of last year’s record performance – to help revive the stock now trading at three-year lows. Shares of Canada’s largest book retailer have fallen about 30 per cent over the past year amid intensifying competition from giant retailers such as Amazon as well as digital books and magazines. Also weighing on the stock is the cost of an ambitious store renovation program that has eaten into profits, causing the company to miss expectations in its second quarter ended Sept. 29. The company said it has renovated 18 stores since 2016, with plans to complete another eight by the end of March. Indigo has 209 stores, including its first U.S. location that opened last month in New Jersey. Investors are hoping the renovations, which analysts estimate would add about 20-per-cent revenue growth per location, will pay off longer term. Brenda Bouw reports (for subscribers).

Stelco Holdings Inc. (STLC-T). Stocks that are broadly exposed to economic activity are struggling right now amid widespread concerns that the global economy is sputtering. But wait, there’s hope for investors: Fairfax Financial Holdings Ltd. has grabbed a major stake in Stelco Holdings Inc., the steelmaker based in Hamilton, which suggests that wily institutional investors are perhaps seeing compelling value in cyclical stocks. Stelco reappeared on the Toronto Stock Exchange a year ago, after emerging from protection under the Companies' Creditors Arrangement Act in November, 2017. David Berman reports (for subscribers).

The Rundown

Is a year-end bounce realistic for struggling Canadian stocks?

A stock market sell-off focused on the U.S. tech sector flared up again Monday, dimming the odds of a winter rally that would pull the Canadian market into the black for 2018. Heading into what is historically the strongest period of the year, Canadian stocks are more than a long way from ending 2018 in positive territory. Tim Shufelt looks at the prospects for a Santa Claus rally this year. (for subscribers).

David Rosenberg’s memo to Canadians: Lighten up on real estate and move into TSX stocks

The Canadian stock market trades at barely more than a 13 times forward price-to-earnings multiple right now, which has only been this low 5 per cent of the time in the past. So yes, the news may be bad, but the Canadian equity market seems to be priced for something worse than just ‘bad’. David Rosenberg outlines his view (for subscribers).

The FAANGs are in a bear market. But analysts don’t seem overly worried

Big Tech, meet bear market. With Apple Inc.'s drop on Tuesday morning, all FAANG stocks – Facebook Inc., Inc., Apple, Netflix Inc. and Alphabet Inc.'s Google – have fallen into a bear market, meaning they’ve dropped at least 20 per cent from recent highs. It marks a rare downturn for a group that reliably produced outsized returns for years. Matt Lundy takes a look at the tech giants (for subscribers).

Rob Carrick’s 2018 robo-adviser guide: Find the right firm for you

Rob Carrick’s robo-adviser guide takes a look at the 14 options for Canadian investors.

These 14 TSX dividend stocks have stellar credit ratings and are positioned to weather the next crisis

Dividend stocks have endured a rough year, but investors still seem as enthusiastic as ever about these supposed money machines. Share buyers love the notion of a reliable payout every year, no matter how the market performs. It’s easy to sympathize with this quest for dependability. But if rates continue to edge higher – and they likely will – bonds will offer increasing competition for dividend stocks. There’s also the risk of a recession to ponder. It has been an unusually long time since the last downturn, so it’s reasonable to expect another slowdown in the next two to three years. Which stocks are best positioned to weather a new crisis? Ian McGugan takes a look (for subscribers).

What Canadian investors should do as the outlook darkens for global growth

That hissing sound you hear is the air going out of the global growth story. Last week, Germany announced its economy unexpectedly contracted in the third quarter. Japan also reported its economy shrank during the July-to-September period. Meanwhile, Britain stumbled even deeper into its self-imposed Brexit nightmare, Italy continued its budgetary stare-down with the European Union and China reported disappointing growth in retail sales as its trade spat with the United States showed no signs of easing. On a brighter note, the United States and Canada continue to expand at a healthy clip. However, both countries face their own issues. The U.S. economy is widely expected to gear down next year as the stimulus from Washington’s tax cuts begins to fade. Canada must deal with a cooling housing market and recession-level prices for Alberta oil. Ian McGugan reports (for subscribers).

For investors who want a higher level of defence from bond ETFs

In hockey terms, bond ETFs have provided a porous defence for investors in 2018. All the gory details are available in a column Rob Carrick wrote last week, but here’s a quick summary. For the 52 weeks to the end of last week, a cross-section of exchange-traded funds offering core exposure to the Canadian bond market had share prices losses of 1.9 to 4.2 per cent. With bond interest added, some of these ETFs will produce slightly positive total returns. But the fact remains that bonds, the part of your portfolio you own to cushion volatile times like these, are not looking great. Short-term bonds seem well-suited to these times because they’re less vulnerable to the rising rate trend we’ve seen in the past 18 months or so, but even here we’re seeing less than stellar results. One thought for disappointed investors would be to consider ultra-short-term bond ETFs holding corporate bonds. Rob Carrick reports (for subscribers).

Could ETF fees fall to zero? They already have, sort of

The battle to woo investors to index funds is heating up, with some marketing strategies shifting to no-fee from low-fee. Boston-based Fidelity Investments Inc. has raised eyebrows in recent months by offering four no-fee index mutual funds to residents of the United States. While it is unclear how widespread “free” will become, the pressure to cut costs on mutual and exchange-traded funds (ETFs) is growing, industry experts say. Shirley Won explains.

Others (for subscribers)

‘Buy the dip’ strategy stops working after 16 years. Investors don’t take it well

What the Street is saying about the stock rout

Merrill Lynch’s 2019 ‘trades of the year' feature some surprises

BMO’s 2019 Toronto stock market outlook: The best case, the base case and the basket case

Tuesday’s analyst upgrades and downgrades

Tuesday’s Insider Report: CEO receives over US$26-million from sales of this Canadian stock

Monday’s analyst upgrades and downgrades

Monday’s Insider Report: CEO invests over $700,000 in this security yielding 11%

Hedge funds’ historic bond bet swing suggests Fed close to cycle end

Oil drops 4 per cent as equities slide sparks demand worries

Others (for everyone)

The Globe’s stars and dogs for last week

Bitcoin crashes to lowest this year, losses top 25% in a week

Why this online game and internet company is a bargain in the Chinese stock rubble

Ask Globe Investor

Question: Do you have any idea why shares of NFI Group Inc. (NFI) have been falling? Its recent results seemed fine and I can’t understand why the stock is down so much.

Answer: Winnipeg-based NFI, formerly New Flyer Industries, is the largest transit bus and motor coach manufacturer in North America. The shares had been on a roll for five years, producing a total return, including dividends, of about 640 per cent through the end of 2017.

Lately, however, they’ve run out of gas. Since the end of April, NFI has tumbled about 35 per cent – not a huge drop in the context of NFI’s previous gains, but jarring nonetheless, particularly for investors who hopped on board the bus maker recently.

What gives? Well, when a stock runs up as much as NFI did, there are going to be investors who are tempted to cash in their winnings at the first sign of a slowdown in the business. And the company’s recent results have been mixed.

Third-quarter bus deliveries, announced in October, were slightly better than expected, and the company raised its full year delivery target. However, its full third-quarter results, announced on Nov. 6, were below expectations, reflecting weaker profit margins in its Motor Coach Industries (MCI) subsidiary. The stock tumbled 13 per cent the day after the results were released.

In a recent note, Veritas Investment Research analyst Dan Fong said NFI is likely facing a period of slower growth reflecting heightened competition, uncertain U.S. federal funding for transit buses and fewer opportunities for consolidation. He has a sell rating and $38 “intrinsic value” estimate on the shares.

Other analysts say the stock doesn’t deserve such harsh punishment.

Many of the factors affecting NFI’s third-quarter results are transient in nature, including startup costs associated with a new parts fabrication facility in Kentucky, and price reductions related to the termination of MCI’s distribution rights agreement for Daimler’s Setra motor coaches, CIBC World Markets analyst Kevin Chiang said in a note to clients.

Given the hefty drop in NFI’s share price, investors apparently have deeper concerns. Above all, they’re worried that the bus market has hit a cyclical peak and that the economy is heading for a sharp slowdown, Mr. Chiang said.

“While the coach market has moved past its peak and there is some margin compression, we would argue NFI’s current share price is baking in a Great Recession-like downturn in the bus market over the next 12 to 18 months. We do not foresee the occurrence of such an event. Moreover, the transit bus market remains healthy,” he said.

At current levels, the stock offers “a compelling risk/reward” proposition, said Mr. Chiang, who has an “outperformer” rating and $61 target price on the shares. Using “conservative” assumptions – including a price-to-earnings multiple of 13 and a free-cash-flow yield of 10 per cent – he values the stock at about $39 “at the low end,” he said. NFI’s shares closed Friday at $37.84 on the Toronto Stock Exchange.

Even after the big drop in NFI’s share price, other analysts also remain bullish. There are six buy or equivalent ratings in total, one hold and one sell, according to analysts surveyed by Refinitiv. The average price target is $56.14.

--John Heinzl

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What’s up in the days ahead

Ian McGugan shares his thoughts on three reasons to stay optimistic about markets - and one reason not to be.

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