U.S. financial planner Blair duQuesnay‘s column Seismic Shift touched on a number of issues I’ve been considering a lot, primarily to do with the extent that markets will “return to normal.” The phrase is in quotes to emphasize that there’s not one definition of normal - most investors have their own version based on their early investing experiences.
Ms. duQuesnay states her thesis off the top. In a world where the financial crisis and COVID-19 have emboldened central banks and federal governments to experiment with walls of liquidity to stave off recessions, “one can no longer deny that something has permanently changed in the way we use, interact, view, and think about financial markets and risk.”
The author points to her intern, who is getting investment advice from new-ish social media platform Tiktok, and buying meme stocks with three clicks on the Robinhood trading site. One company the co-worker bought was AMC Entertainment Holdings Inc., a theatre chain stock that routinely doubles or halves in value on a weekly basis. That AMC purchase occurred despite the fact that the company’s CEO told investors not to buy the stock because the price no longer reflected financial reality.
TikTok trading is, of course, madness. It’s a near-replica of early internet message boards that encouraged investors to buy Pets.com in 1999, eventually resulting in many losing their shirts. There are other changes in market conditions, however, that traditionalists will have more trouble waving away as a passing fad.
The pandemic-induced fiscal spending initiatives in the U.S. are the largest since World War II. This, combined with unprecedented central bank monetary stimulus, leaves global markets awash in liquidity. As I’ve noted previously, the low inflation-adjusted bond yields that accompany extra liquidity serve to justify stock valuations above historical averages, and higher than the comfort level of most conventional value investors.
The make-up of corporate balance sheets has also changed dramatically and this creates a valuation conundrum even more complicated than loose monetary policy. In 1975, intangible assets – proprietary software, patents, brand value, licensing agreements and other intellectual property - made up 17 per cent of U.S. corporate balance sheets. That number is now 84 per cent of all assets, according to a BofA Securities report released last year.
Unlike basic manufacturing, companies with intellectual property can often meet rising demand without further investment in capacity. A software company, for instance, can just distribute more copies of their program without building anything resembling a new factory. This leads to higher profit margins and higher stock valuations.
Things are changing quickly, and I don’t have many firm convictions on what markets will look like in five or 10 years. I strongly suspect that government balance sheets will continue to expand – the green energy transition will be a big catalyst there - although maybe not central bank balance sheets.
I also believe that major equity benchmarks will be less dominated by the largest tech stocks, and neglected sectors will regain influence on index returns, as the recovery helps to boost more economically sensitive areas. New technologies will, however, create new dominant companies that will grow far faster than market average and overall valuation levels will remain well above post-war norms.
-- Scott Barlow, Globe and Mail market strategist
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Preferred shares have been all-stars in the past year. Now, what?
The S&P/TSX Preferred Share Index was up 42 per cent for the 12 months to May 31 on a total return basis, pretty much what you’d have made with an investment in the tech-dominated Nasdaq 100 index (with currency hedging). Not bad for an asset class that by tradition is valued for income, not capital gains. The preferred share index return for the past 10 years is just under 3 per cent on an average annual total return basis. So what’s ahead for the next 12 months? Rob Carrick has some thoughts.
Where is the inflation bump for the TSX?
The great postpandemic reopening was supposed to be an ideal set-up for Canadian stocks. The emergence of inflation, meteoric global growth, a run on commodities and a rotation into value stocks all play to Canada’s strengths. But the S&P/TSX Composite Index has merely kept pace with the S&P 500 index so far this year, with both gaining about 15 per cent. While that’s a strong showing in under six months by any standard, after a decade of underperformance, the TSX has lots of catching up to do. And history shows the greatest stretches for Canadian stocks generally coincide with periods of elevated inflation. So what’s the holdup? Tim Shufelt goes looking for answers.
Is the world holding down U.S. Treasury yields?
Just who or what is holding down U.S. government borrowing rates has become one the big financial questions of the year - at least for those who think the Fed’s ongoing bond-buying program is not a good enough explanation. The puzzling slide in Treasury yields around second-quarter inflation scares has fingers pointing at several culprits - wily Federal Reserve communications on ‘transitory’ price pressures, leakage from a temporary cash flood in money markets, wrongfooted speculators or even skewed debt sale dynamics. Either way, 10-year Treasury borrowing rates are sailing into midyear 25 basis points below where they started the quarter, even as core annual U.S. inflation readings exceeded forecasts in April and May to hit their highest in almost 30 years at 3.8%. Mike Dolan of Reuters examines what’s behind the surprising sticking power of low bond yields in the face of a sharp upturn in inflation.
Major traders see oil staying above $70 per barrel, $100 not impossible
The world’s biggest oil traders said this week they see oil prices staying above US$70 a barrel with demand expected to return to pre-pandemic levels in the second half of 2022. Oil prices crashed in April last year when the COVID-19 movement restrictions hit their peak with the U.S. crude benchmark turning negative for the first time. In a stark reversal, the traders do not discount a return to $100 per barrel oil further ahead.
When it comes to tax-loss selling, the ‘wait until the last moment’ mentality can be very expensive
Are you enjoying this tremendous stock market ride? Just remember that with every triumph comes – you guessed it – capital gains tax when it comes to non-registered accounts. At this time of year, the Contra Guys start to focus on tax-loss selling to offset some of the profits. One loser they’ve decided to cast off for now is Permian Basin Royalty Trust. Yet, they haven’t completely given up on the stock. They explain their strategy and rationale here.
Others (for subscribers)
Wednesday’s Insider Report: CEO invests over $446,000 in shares of this rebounding stock
Tuesday’s Insider Report: Chairman invests over $1-million in this soaring financial stock yielding 3.3%
Ask Globe Investor
Question: Why is XGD doing so poorly? What are the prospects ahead?
Answer: The official name is the iShares S&P/TSX Global Gold Index ETF (XGD-T). It invests in an international portfolio of gold miners, about two-thirds of which are Canadian. Top holdings include Newmont Corp., Barrick Gold Corp., Franco-Nevada Corp., Wheaton Precious Metals Corp., and Agnico Eagle Mines Ltd.
Given the nature of its assets, the fund’s performance is closely tied to the price of gold. When the metal went into a slump earlier this year, the price of the ETF dropped all the way to $16.69. Since then, both gold and the fund have rallied. The fund was up 3.2 per cent year-to-date.
Looking ahead, there are opposing forces at work. Inflation has been rising recently and gold is seen as a safe haven in that situation. However, there are also concerns that central banks may be forced to raise interest rates sooner than expected to deal with the inflation problem. High rates make it expensive to hold gold, which pays no interest, and could drive down the price.
On balance, I suggest you should own a small percentage of gold in a portfolio as an inflation hedge (say, 5 to 10 per cent). It can be done through a fund like XGD, that invests in mining stocks, or an ETF that invests directly in the metal, such as the SPDR Gold Fund (GLD-A) in New York or the Royal Canadian Mint – Canadian Gold Reserves (MNT-T).
What’s up in the days ahead
Rob Carrick outlines an aggressive ETF portfolio for renters who want to build wealth that will put them on a roughly equal footing with homeowners building equity.
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Compiled by Globe Investor Staff