Goldman Sachs chief U.S. equity strategist David Kostin provided an excellent roundup of 2022′s market carnage to date and offered a three-prong strategy for investors to follow for the remainder of the year in order to protect asset values.
Mr. Kostin wrote the best one-sentence explanation for first half market action I’ve read so far. It read: “Higher-than-expected inflation readings translated into a faster-than-expected pace of Fed tightening, which prompted a back-up in nominal 10-year Treasury yields (1.4% to 3.0%) and a jump in real yields which compressed the S&P 500 P/E multiple by 24% (from 21x to 16x), and led to a 20%+ decline in US equities.”
In effect, the jump in bond yields made equities less attractive, causing a re-rating lower of price-to-earnings ratios. The strategist noted that the entirety of S&P 500 declines has been valuation-driven rather than earnings-driven - consensus profit forecasts have actually climbed this year, rather than been cut. As an aside, Mr. Kostin’s counterpart at Morgan Stanley, Michael Wilson, believes downward earnings revisions are the next shoe to drop for equity markets.
Goldman Sachs has three strategic recommendations to combat expected market volatility for the second half of the year. The first is to focus on companies where the pace of earnings growth is the least volatile, rather than the highest rate. Mr. Kostin pointed to his Stable Growth basket of stocks which includes Alphabet Inc., Home Depot Inc., Colgate-Palmolive Co., Amgen Inc., Waste Management Inc., Automatic Data Processing Inc., Visa Inc., and American Tower.
The strategist also recommended health-care stocks. He noted that profit margins in the sector have historically been resilient during recessions – consumer staples is the only sector where margins held up better. Health-care stocks have actually increased earnings during the past six recessions.
Mr. Kostin also recommends dividend stocks to combat volatility, particularly companies with high and growing payouts. The median stock in his High Dividend Growth basket has a yield double that of the S&P 500, dividend growth twice that of the index, and a lower PE ratio than the benchmark’s average.
Stocks in the U.S. dividend growth basket that are most likely to interest Canadian investors include Ford Motor Co., Molson Coors Beverage, Merck & Co. Inc., Amgen Inc., United Parcel Service, Corning Inc., Analog Devices Inc. and Packaging Corporation of America.
Goldman Sachs, along with Morgan Stanley, BofA Securities and others, is another example of a major Wall Street firm recommending that investors batten down the hatches and get defensive. Canadian investors have so far been spared a lot of volatility because of strength in energy stocks, but recent weakness in oil could be a signal that defensiveness is the right trend on this side of the border too.
-- Scott Barlow, Globe and Mail market strategist
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Stocks to ponder
Air Canada (AC-T) The airline stock has come under renewed selling pressure amid well publicized flight delays and skyrocketing fuel costs. But David Berman believes investors should ponder buying shares now for a couple of reasons. First, the recovery in airline traffic is real, which bodes well for industry profits next year if airlines and airports can fix the problems now weighing on flight schedules and disgruntled passengers. And second, the current bout of flight cancellations – which aren’t affecting Air Canada’s international flights beyond the United States – could actually work in favour of airlines if a recession is brewing.
Three smaller-cap energy stock picks that offer yields greater than 6%
Energy stocks have taken a pounding of late, but it could be opening up a buying opportunity for yield-hungry investors. Gordon Pape looks at a handful of smaller TSX energy stocks that he recommends for their juicy, and for the most part reliable, dividends.
The bonfire of the NFTs
The NFT dream isn’t dead, but it’s taken a big non-fungible beating. The market shone gloriously last year as crypto-rich speculators spent billions of dollars on the risky assets, pumping up prices and profits. Now, six months into 2022, it’s looking ugly, reports Reuters.
Others (for subscribers)
Number Cruncher: These twelve U.S. tech stocks have withstood market sell-off
Number Cruncher: Nine TSX financial stocks that may be flying under your radar
Wednesday’s Insider Report: Executive invests over $1.7-million in this stock yielding 4%
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Ask Globe Investor
Question: If I get paid a monthly dividend via a dividend reinvestment plan (DRIP), it shows up as additional shares in my account rather than as cash. Is the cash equivalent amount reported as income for that year for taxation purposes, or is it taxable as capital gains when I sell the shares? Thanks, Martin
Answer: Unfortunately, the answer is both – you’re taxed twice, assuming the security is in a non-registered account.
The cash equivalent of the DRIP payment is taxed as dividend income, even though it’s received in the form of shares. The one bit of good news is that it’s eligible for the dividend tax credit.
The shares purchased by the DRIP will be recorded at book value. When you sell, 50 per cent of any capital gain will be taxable.
If the shares are in a registered plan, you won’t have these problems.
What’s up in the days ahead
Ian McGugan explains why investors should beware the myth of a friendly recession.
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Compiled by Globe Investor Staff