My Monday pre-market column for subscribers was titled “The Countdown to Market Downturn has Begun.” Global manufacturing data, weak overall, had been released in the wee hours and the column featured bearish strategic research from Citi and Morgan Stanley.
The S&P/TSX Composite Index proceeded to climb 126 points or 0.8 per cent, and the S&P 500 jumped 1.2 per cent for the day. I got fixated on negative data but markets did not. I was taught very early in my career in finance that the ‘market’s never wrong’, so the last thing I want to do is assume that investors are focused on the wrong thing and I have the near (more pessimistic) future of the market sorted out.
In an effort to think this through, here are my picks for the most important market-related facts in bullet point form:
- Comparing equity indexes to the Goldman Sachs Financial Conditions index underscores how markets sold off in late 2018 on fears central banks would continue to tighten credit conditions. Markets recovered when central banks backed off, and now Canadian and U.S. markets are close to levels, including price to earnings ratios, when the sell-off began.
- Bond yields have plummeted in 2019, helping dividend-paying equity sectors tremendously. Lower risk-free government bond yields can not compete with most equity-based dividend income at this point.
- Domestic bank stocks have dropped almost three per cent since mid-March while much of the rest of the market rallied. The current price to book value for the sector is 1.5 times, well below the five-year average of 1.7. Right or wrong, the market is expecting an earnings slowdown.
- Global economic growth remains a huge concern. The J.P. Morgan Global PMI Manufacturing Index is at the lowest levels since early 2016. The index shows minimal growth in activity.
- Base metal prices are historically correlated to global manufacturing activity, but have rallied ahead of sluggish economic data.
- U.S. earnings forecasts for the first quarter of 2019 predict a year-over-year decline in S&P 500 profits.
- China, the world’s second largest economy, is attempting to arrest a slowdown with stimulative measures. There is evidence of stabilization, but regional indicators remain extremely weak. South Korea, a central trade and technology hub in Asia, just reported an 8.25-per-cent, year-over-year decline in exports during March.
- Resolution of the U.S.-China trade dispute would provide an equity market catalyst, particularly in technology stocks. However, the extent to which market prices already reflect an expected negotiated solution is difficult to calculate.
- The Canadian economy is expected to expand by a decent – but not spectacular – 1.5 per cent in 2019. U.S. gross domestic product is forecasted to rise 2.4 per cent for the year.
Economic growth is slow and earnings growth is becoming increasingly scarce. Equity markets have made a central-bank-driven round trip – down in 2018 when more interest rate hikes were expected, and almost all the way back when the Fed and Bank of Canada signalled a pause – and are now in search of direction. There is a real sense in which future gains depend on inflection points – from lower to higher – for global economic growth and corporate profit forecasts.
That, in basic terms, is how I frame the potential outcomes for equity markets for now.
-- 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
5N Plus Inc. (VNP-T). This stock appears on the positive breakouts list (stocks with positive price momentum). Last year, while the S&P/TSX Composite Index tumbled, this stock provided investors with downside protection with its share price edging 3 per cent higher. Year-to-date, the share price has increased 16 per cent. It has buy recommendations from five analysts and a 24-per-cent further gain is expected. Montreal-based 5N Plus produces specialty metal and chemical products with manufacturing facilities in North America, Europe, and Asia. Jennifer Dowty profiles the company (for subscribers).
The Rundown
Ready for a recession: Portfolio manager is shifting toward cash and bonds
Jason Del Vicario shudders when he hears the phrase, “this time is different” from market forecasters – especially those who don’t believe a recession is on the horizon. “I don’t think it’s different this time,” says Mr. Del Vicario, a Vancouver-based portfolio manager and investment adviser at HollisWealth, a division of Industrial Alliance Securities Inc. Mr. Del Vicario, who oversees about $118-million in assets, is expecting a recession to hit as early as this year and is positioning his portfolio in preparation, moving further into cash and government bonds. Brenda Bouw reports (for subscribers).
Ten reasons to love dividend investing
Dividend investing isn’t the only strategy that works, but John Heinzl believes it is one of the simplest and most effective ways for small investors to build wealth. He hears from people all the time who have used the dividend approach with excellent results. So, he lists 10 reasons to love dividend investing.
Also see: Yield Hog: John Heinzl’s model dividend growth portfolio as of March 31, 2019
Should this investor give up her ‘steady Eddie’ dividend portfolio?
The recent downturn in interest has reignited the debate about whether investors can substitute dividend stocks for bonds. A retired 58-year-old reader says she was recently told by a fee-for-service financial planner (paid an hourly or flat rate, doesn’t sell products) that her portfolio is overweight in stocks and needs more bonds. “I’m struggling with giving up my steady-Eddie dividend portfolio,” she wrote. “In this day and age of relatively low interest rates, what are your thoughts on portfolio composition as we move into retirement?” Tough one. Conventional thinking is that a retiree’s portfolio should have a significant weighting in bonds to limit the damage when the stock market plunges. On the other hand, bond yields today are low and could fall further. Rob Carrick explains his view (for subscribers).
Make a difference to your portfolio during tax-filing season
Building tax-efficient portfolios is a year-round job for financial advisors, but tax-filing season is a great opportunity to review strategies with clients that can add value to their portfolios and to the client-advisor relationship. To do that, advisors should go beyond discussing investment products and seek to better understand each client’s tax situation to ensure the advice fits with their clients’ big-picture plan. Brenda Bouw reports.
After suffering a setback, it’s time to shake up this high-yield portfolio
Gordon Pape reviews his High-Yield Portfolio, which he started seven years ago in March 2012. (For subscribers).
Others (for subscribers)
Top stock picks in the Canadian oil sector
Two strategies, one portfolio: 10 U.S. momentum, 10 U.S. dividend-growth stocks
Tuesday’s Insider Report: Million dollar trades in these two stocks
Tuesday’s analyst upgrades and downgrades
Monday’s Insider Report: Chairman invest over $4-million in this large-cap dividend stock
Monday’s analyst upgrades and downgrades
Others (for everyone)
Why some green investors are passing on Uber and Lyft
Lyft shares fall further below IPO price after receiving first ‘sell’ rating
Investing for impact doubles as savers seek to do good
The Globe’s stars and dogs for last week
Bullish potential on Restaurant Brands International
U.S. bond market takes worst beating in three months
Amid bitcoin uncertainty, ‘the smart money knows that crypto is not ready’
BlackRock CEO Larry Fink overhauls leadership ranks in key business units
Ask Globe Investor
Do you have a question for Globe Investor? Send it our way via this form. Questions and answers will be edited for length.
What’s up in the days ahead
John Heinzl looks at independent power producers and utility stocks in light of the sharp drop in interest rates. It could be a good time to power up your portfolio with three stocks he’ll highlight.
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
Click here share your view of our newsletter and give us your suggestions.
You may also be interested in our Market Update or Carrick on Money newsletters. Explore them on our newsletter signup page.
Compiled by Gillian Livingston
Scott Barlow