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Ben Hunt is the chief investment strategist at U.S. asset management firm Salient Partners. On Tuesday, Mr. Hunt published an interesting central bank-focused framework for understanding Monday’s equity market sell-off.

“This market, like all markets, cares about two things and two things only — the price of money and the real return on invested capital. Or, as they are typically represented in cartoon form, interest rates and growth… Even if the Fed is raising interest rates, so long as they’re doing it ‘for the right reasons’ (meaning robust growth in the real economy), then the market can go up. Likewise, even if real economic growth is anemic, so long as that means that the Fed ‘has got your back,’ then the market can go up.

”This market, like all markets, needs a positive narrative on risk (the price of money) or reward (the real return on capital) to go up. Any narrative will do! But when neither risk nor reward is represented with a positive narrative, this market, like all markets, will go down. And that’s where we are today.”

This template helps explain why, in the U.S. in particular, strong corporate profit growth has not translated into higher equity prices.

Merrill Lynch quantitative strategist Savita Subramanian’s most recent research report noted that S&P 500 companies generated year over year earnings growth of 23 per cent and this profit surge went far beyond the effects of corporate tax cuts. Ms. Subramanian expects continued strong earnings growth in the second quarter with gains of about 20 per cent.

Despite this impressive corporate performance, the U.S. equity benchmark is only flat for the year.

There are factors outside of central bank monetary policy presenting hurdles to market upside, not least a White House prone to arbitrary and emotional trade policies. Globally there are concerns that economic growth, while still high, has peaked and is set to decline.

Nonetheless the market-moving power of the U.S. Federal Reserve, and to a lesser extent the Bank of Canada, is on full display. Investors who have enjoyed the safety net effects of low rates and loose monetary policy are now confronted with extreme volatility as the stimulus is withdrawn.

--Scott Barlow, Globe and Mail market strategist

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Stocks to ponder

Pinnacle Renewable Holdings Inc. (PL-T). This is a newly listed dividend stock whose share price has shown resilience during times of market turbulence this year. For instance, the share price inched higher on Monday while the S&P/TSX composite index tumbled 266 points, or 1.6 per cent. The stock may surface on the positive breakouts list in the near future if analysts’ expectations are correct. Analysts are forecasting the stock to deliver a total return (including the dividend yield) of 23 per cent over the next year. The stock pays its shareholders an attractive yield of 4.3 per cent. Richmond, B.C.-based Pinnacle is the third largest industrial wood pellet manufacturer worldwide operating seven facilities in western Canada with a upcoming plant that is currently under construction located in Smithers, B.C. Jennifer Dowty reports (for subscribers).

Emera Inc. (EMA-T). This stock surfaced on the positive breakouts list. The stock is trading at an inexpensive valuation relative to its historical average. Analysts are anticipating its share price will experience a double-digit price return on top of its 5-per-cent dividend yield. Halifax-based Emera is a utility company with investments in electricity generation, transmission, and distribution, as well as gas transmission and utility energy services. Management targets a minimum of 75 per cent of its adjusted earnings will come from its rate-regulated businesses. Jennifer Dowty reports (for subscribers).

The Rundown

Unravelling the mystery of booming small-cap stocks

In theory, betting on the stocks of smaller, less well-known companies shouldn’t pay off. In practice, it’s doing spectacularly. In the United States, the S&P SmallCap 600 Index has jumped 23 per cent over the past year. This basket of modestly sized, typically anonymous U.S. companies isn’t just a one-hit wonder, either. Over the past decade, it has generated better returns than its far bigger, far more famous cousin, the S&P 500, which includes Facebook, Amazon and all the other heavy hitters of the corporate world. Ian McGugan reports (for subscribers).

Hey Canadian banks, maybe it’s time for stock splits

When Dollarama Inc. concluded a stock split last week, the discount retailer may have signalled bullish confidence in its financial performance. So why aren’t Canadian banks, some of them with shares trading at more than $100, making similar moves? Stock splits are essentially cosmetic changes, of course. They increase the number of outstanding shares and decrease the price of each share, leaving investors with a holding that is unchanged in value. some investors (especially small investors who prefer to make purchases in 100-share lots) could be deterred from buying shares, or even holding them, if the price appears too lofty. David Berman reports (for subscribers).

How an $800-million RBC emerging markets dividend fund manager is investing right now

It has been a rough few months for emerging markets. Geopolitical tensions are adding a wide swath of uncertainty from China to Brazil to Turkey. “The next few months will continue to be volatile,” predicts Laurence Bensafi, deputy head of emerging markets and senior portfolio manager at RBC Global Asset Management, based in London, who has more than US$800-million in assets under management across three funds. Her main fund, the RBC Emerging Markets Dividend Fund, has returned 10.9 per cent in the year ended June 15, after fees. That gain is despite an 8.6-per-cent dip over the past three months because of volatility in emerging markets spurred by trade wars and political unrest. The Globe and Mail recently spoke with Ms. Bensafi about how she’s investing amid the uncertainty and the sector she wished she owned more of right now. Brenda Bouw reports (for subscribers).

Vanguard launches four mutual funds in Canada with fees well below industry averages

Investment giant Vanguard has entered the mutual-fund industry in Canada, with a suite of four actively managed mutual funds that offer significantly lower management costs than what has been traditionally offered in the Canadian marketplace. Vanguard Investments Canada Inc. on Monday launched four global investment strategies available for Canadian investors to purchase through their financial advisers or on certain discount brokerages. They are: the Vanguard Global Balanced Fund, the Vanguard Global Dividend Fund, the Vanguard U.S. Value Windsor Fund and the Vanguard International Growth Fund. Clare O’Hara reports.

Yes, you can get a juicy yield from a pot ETF. But here’s the catch

Is it worth it to buy the U.S. version of Horizons Marijuana Life Sciences Index ETF? John Heinzl examines.

Top Links (for subscribers)

‘Investors lose faith’ as ‘new cloud of fear’ grips markets

Others (for subscribers)

DIY investors: Swallow your pride and check out these dividend mutual funds

Tuesday’s analyst upgrades and downgrades

Tuesday’s Insider Report: Companies insiders are buying and selling

Monday’s analyst upgrades and downgrades

Monday’s Insider Report: RBC executive continues to sell

The Globe’s stars and dogs for last week

Others (for everyone)

Investors search for answers amid stock selloff

Trump trade angst deepens as more funds say they’ve cut stocks

Goldman, Citi hunker down as trade war hits emerging markets

The trade war has sent the yield curve to its flattest since 2007

Number Crunchers

Fifteen U.S. companies with plenty of cash on hand

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What’s up in the days ahead

School’s nearly out, and we’ll be grading John Heinzl’s dividend-growth portfolio.

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Compiled by Gillian Livingston

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