Citigroup Inc. global strategist Robert Buckland maintains a Bear Market Checklist, a series of 18 indicators that have historically helped identify an upcoming bear market. The current readings, after a 16.5-per-cent decline for the MSCI All Country World Index year-to-date, offer a definitive signal: Buy the dip.
The checklist’s constituents range from valuation measures like forward and trailing price-to-earnings ratios, to sentiment signals like analyst bullishness, to profit margins and the health of corporate balance sheets.
Only six of the 18 indicators check boxes that represent red flags for equity markets right now, down from a peak of 8.5 in December, 2021. For comparison, 13 of 18 indicators warned of the 2007-08 bear market and fully 17.5 signals were flashing red or cautioning yellow ahead of the 2000-03 tech wreckage. (A half-point check occurs when the signal is flashing an amber “caution” rather than full red flag.)
Mr. Buckland emphasized that the checklist is not intended as a market timing model. Nonetheless, he went on to note that buying global equities after the checklist declines to six red flags has previously led to a strong 31-per-cent return, on average, in the following 12 months. (His data go back to 1996.)
The Bear Market Checklist’s last definitive call occurred during the initial COVID-19 sell-off in the spring of 2020. In February, 2020, there were only 5.5 boxes checked – indicating a very low risk of a bear market – so the checklist continually signalled that dips should be bought. The All Country index fell 35 per cent in March, but had recovered completely by September. Investors that bought the weakness in March generated significant profits.
The drop to six check marks could highlight an important inflection point for equities. It took only a 15-per-cent decline in the MSCI All Country World Index to fall to six this time but in 2000-03, stocks had to fall 47 per cent to get the checklist down to six marks. During the financial crisis, the index fell 49 per cent before the bear market checklist showed only six warnings.
In each case, the fall to six check marks occurred within 10 per cent of the market bottom in global equities. In 2003, the index rose 18 per cent in the year after the number of check marks dropped to six, and in 2009 the All Country benchmark jumped 44 per cent in the 12 months after the checklist fell to six.
Mr. Buckland concluded his research report with a caveat. He is concerned that the current checklist does not measure tightening monetary policy – the reduction of market liquidity caused by rising interest rates and the end of central bank quantitative easing operations. If it did, the overall signal from the checklist could be far less bullish.
Overall, Citi’s bear market checklist is a rare note of optimism amid considerable bearish sentiment among Wall Street pundits. For instance, Michael Wilson, U.S. equity strategist at Morgan Stanley, believes the S&P 500 will fall another 600 points to the 3,400 range. The checklist is a reminder that plausible bullish scenarios are out there, and that good things often happen in markets when everyone fears the worst.
-- Scott Barlow, Globe and Mail market strategist
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Stocks to ponder
Malibu Boats Inc. (MBUU-Q) In the midst of turmoil in financial markets, the war in Ukraine, deglobalization, inflation and rising interest rates, value-investing students at the Ivey Business School could still find value in stocks that would satisfy even Warren Buffett. This is one of them. Malibu Boats also met the basic criteria of Ben Graham, the father of value investing, for being obscure and undesirable. Here’s why the students went for the maker of recreational powerboats as their stock pick.
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Globe Advisor
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Ask Globe Investor
Question: Can you recommend some top ETFs that invest in international pharma companies? My preference is to go the ETF route versus buying individual pharmaceutical companies. – Mike E.
Answer: First, it’s important to make a distinction here. The request is for pharmaceutical ETFs, not health care ETFs. That narrows the field considerably.
I was not able to find any Canadian funds that focus only on pharmaceutical companies, but there are several in the United States.
The largest, with US$387-million in assets under management, is the iShares U.S. Pharmaceuticals ETF (IHE-A). It’s been a steady performer over the years, with an average annual compound rate of return of 10.46 per cent since it was launched in May, 2006. However, it is down 3.7 per cent so far in 2022 (to May 20). The fund is heavily weighted in two stocks, Johnson & Johnson (23.6 per cent) and Pfizer Inc. (20.8 per cent). The management expense ratio is 0.42 per cent.
Other pharma ETFs to consider include these.
Invesco Dynamic Pharmaceuticals ETF (PJP-A). This ETF is more equally balanced than the iShares entry. There are 27 stocks in the portfolio, with the largest positions in Eli Lilly and Co. (6.9 per cent of the assets), Merck & Co. (6.5 per cent), Johnson & Johnson (6.2 per cent), and Amgen Inc. (6.1 per cent). The fund has a 10-year average annual compound rate of return of 10.8 per cent (to April 30) but is down about 6 per cent year-to-date. The MER is 0.58 per cent.
VanEck Vectors Pharmaceutical ETF (PPH-Q). This is an international fund. About two-thirds of its holdings are in U.S.-based companies, 10 per cent in the U.K., and the rest scattered around. The portfolio consists of 25 stocks, more or less equally weighted. Top holdings include Merck & Co. (5.5 per cent), Eli Lilly (5.4 per cent), Bristol-Myers Squibb Co. (5.4 per cent), and AstraZeneca PLC (5.3 per cent). The 10-year average annual compound rate of return is 9.5 per cent (to April 30). In contrast to the other funds mentioned here, this one was modestly in the black for the first four months of this year, with a gain of 1.3 per cent. The MER is 0.35 per cent.
SPDR S&P Pharmaceuticals ETF (XPH-N). This fund has the worst track record of the four we’ve discussed. The 10-year average annual compound rate of return is only 5.7 per cent and it’s down more than 10 per cent year-to-date (to April 30). The reason for the underperformance may be the lack of exposure to the big international pharmaceutical companies. This is also a equal weight portfolio, with no big bets on any one stock. Top holdings are Merck & Co. (5.8 per cent), Bristol-Myers Squibb (5.8 per cent), and Eli Lilly (5.6 per cent). The MER is 0.35 per cent.
I would not advise investing in any of these ETFs – I would prefer a more broadly based health care fund for greater diversification. But if you want only pharma, the iShares or the Invesco entries are the best choices, based on historical performance.
--Gordon Pape (Send questions to gpape@rogers.com and write Globe Question in the subject line.)
What’s up in the days ahead
David Berman will examine why Canadian retailers are holding on relatively well, even as U.S. retailers struggle.
Five things investors need to watch for the week ahead
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Compiled by Globe Investor Staff