Citi’s chief U.S. equity strategist Tobias Levkovich does not like this market at all. In Wednesday’s Feeling a 1999 Vibe (and That’s Risky), the strategist directly compares current market euphoria to the last months before the collapse of the 1990s technology bubble.
The report is only two pages long but still provides plenty of detail to keep investors with short time horizons awake at night.
Mr. Levkovich begins by noting that fund managers are feeling compelled to carry high levels of equity portfolio risk to keep up with the index and competition, “even if there’s also a recognition that it could end badly.” This pressure was widespread during the tech bubble, and particularly acute in Canada where portfolio managers had the choice to either hold a huge position in Nortel Networks or risk dramatic underperformance.
Citi believes U.S. equities are overvalued, as the S&P 500′s market cap to sales ratio is now well above the year 2000 peak. Mr. Levkovich sees profit forecasts turning lower in some major industry sectors, including Financials and Materials. He also feels that investors are under-estimating the risk that President Biden will enact sharp and retroactive increases in corporate tax rates.
Wait, there’s more. The strategist called the high degree of market optimism “very worrisome” and reminded clients that his Panic/Euphoria sentiment indicator is deeply into euphoria territory, signaling negative S&P 500 returns in the next 12 months.
This all sounds terrible. We have, however, been taught by history that attempting to time the market by reducing and adding risk is a no-no, so it’s hard to advocate adding to cash positions here - tempting as it may be.
Mr. Levkovich’s strong case for imminent market volatility is, on the other hand, a good excuse to review portfolio positioning to assess whether it still fits our intended risk profiles.
-- Scott Barlow, Globe and Mail market strategist
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Ask Globe Investor
Question: I am a beginner investor and I’m learning. I am being extremely cautious in this as I don’t want to make a mistake. In November 2020, I purchased a stock through a margin account. I transferred that position from my margin into my TFSA. At the time, it was at a loss from the time I bought the position. I am worried that the transfer may not have been allowed? I want to make sure it was alright to do. I don’t want to get hit with a big penalty. Travis
Answer: What you did is called a transfer “in kind.” You can contribute to a TFSA either in cash or “in kind”. The thing you should know is that if the stock was at a loss when you transferred it in, you cannot declare the loss on your tax return. Conversely, if you had a gain, you would have to declare that for tax purposes. In this regard, the TFSA operates the same way that a self-directed RRSP does. You can own stocks, bonds, mutual funds within it.
A TFSA is not just a savings account. It is best used as an investment account. Its purpose is to tax shelter any gains or income that occur within it.
--Nancy Woods, Vice-President & Portfolio Manager at RBC Wealth Management.
What’s up in the days ahead
Get ready, dividend fans. This Friday Rob Carrick returns with the latest instalment of the 2021 ETF Buyer’s Guide. This week, it’s a look at the best funds for Canadian income stocks.
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Compiled by Globe Investor Staff