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Morgan Stanley’s U.K.-based strategist Andrew Sheets used a really unlikely word – “normal” – to describe markets in 2020.

The strategist recognizes the daily upheaval caused by the pandemic, and that this year featured the worst quarter for global gross domestic product growth in recorded history. Nonetheless, in market terms, 2020 has shown a conventional bust-and-boom cycle.

Morgan Stanley emphasizes that signs of a U.S. recession were apparent well before COVID-19 hit. Inflation had climbed above the five-year average, consumer and investor confidence were high (confidence is a contrarian indicator), equity market leadership had narrowed and the yield curve had inverted. Those conditions were also present before the recessions of 1990, 2001 and 2007.

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In the previous cases, recessions occurred 15 months after the final Federal Reserve interest rate hike. This year’s recession happened 14 months after the last hike.

The market recovery has also been by the numbers, according to Mr. Sheets. Emerging markets stocks are climbing, the U.S. dollar is weakening, small-cap stocks are outperforming, defensive sectors are underperforming, the yield curve has steepened and inflation expectations, as measured by U.S. 30-year inflation-adjusted bond yields, have started to rise from their extreme lows.

In the short term, the strategist expects equity market volatility ahead of the U.S. election and the potential for a further uptick of COVID-19 infections. In the medium term, however, Mr. Sheets expects the usual early cycle, economically sensitive market sectors to outperform. He points specifically to U.S. small-cap stocks, European industrials, U.S. banks and Australian equities. Canadian investors can also expect to benefit because commodities and materials stocks, well represented in the S&P/TSX Composite, have historically outperformed in the early part of the market cycle.

-- 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 or you’re reading this on the web, you can sign up for the newsletter and others on our newsletter signup page.

Stocks to ponder

NanoXplore Inc. (GRA-X) The share price of this graphene powder manufacturer has risen 56 per cent over the past eight trading sessions. The stock has a unanimous buy recommendation from six analysts. The average one-year price target suggests there is 27-per-cent upside over the next year. The company has a strong shareholder base, including Martinrea International. Jennifer Dowty has this profile of the stock and explains why it may be best-suited for consideration by long-term investors. (for subscribers)

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Fortis Inc. (FTS-T) For the 10 years through Sept. 30, the owner of regulated gas and electric utilities in Canada, the United States and the Caribbean has posted an annualized total return – including dividends – of 9.4 per cent. Sure, that pales next to the returns of some high-flying tech stocks, but it handily beats the annualized total return – also including dividends – of 5.8 per cent for the S&P/TSX Composite Index over the same period. Our dividend growth investor John Heinzl thinks there’s more impressive gains ahead. He explains why Fortis deserves a place in every well-balanced dividend portfolio. (for subscribers)

The Rundown

The outlook for preferred shares is looking a lot brighter

There’s finally something to base a bullish case for preferred shares on besides hoping for rising interest rates, says Rob Carrick. You can forget higher rates any time soon, an outlook that normally would weigh on a pref market dominated by a type of share for which higher rates are like oxygen. So why have preferred shares been on an upswing in the past few months? Basically, there’s an expectation the pref market will shrink in the years ahead, creating a scarcity that drives prices higher. (for subscribers)

After a weak September, Trump’s illness is likely to send investors scurrying to the sidelines

Gordon Pape notes that September turned out exactly as advertised – it was a loser. All the major North American indexes lost ground, led by tech-heavy Nasdaq, which slipped 5.2 per cent. What about October? Despite its bad reputation, the S&P 500 has averaged a modest average monthly gain of 0.4 per cent since 1928. But given the U.S. election this year and COVID-19 striking right at the heart of American power, the September market declines may just be a prelude to a wild October. Gordon Pape provides his review of September, with some investment suggestions, and looks ahead to the expected volatility of this month. (for subscribers)

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Also see: Trump’s diagnosis fuels uncertainty for skittish U.S. stock market

Others (for subscribers)

The highest yielding stocks on the TSX, plus risk data

Monday’s analyst upgrades and downgrades

Monday’s Insider Report: Large shareholder invests over $5-million in this dividend stock

What’s up in the days ahead

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Norman Rothery crunches some numbers extracted from way back in history that illustrates just how successful a strategy of rarely monitoring your portfolio can be.

Click here to see the Globe Investor earnings and economic news calendar.

More Globe Investor coverage

For more Globe Investor stories, follow us on Twitter @globeinvestor

You may also be interested in our Market Update or Carrick on Money newsletters. Explore them on our newsletter signup page.

Compiled by Globe Investor Staff

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