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A once-in-a-century pandemic combined with unprecedented central bank monetary support has distorted the market cycle, making it difficult for investors to navigate changing equity market leadership.

In Friday’s What to do When Everything’s Rich report, Morgan Stanley strategist Vishwanath Tirupattur noted that investors are confronted with early-cycle market timing (relative to the market bottom), sector leadership indicative of mid-cycle and the high valuations that usually occur late in the market cycle.

Mr. Tirupattur reiterated the perspective of the firm’S global strategist Andrew Sheets, who wrote in his mid-year outlook published earlier this month last month that, for investors, “now comes the hard part.” As a firm, Morgan Stanley expects rising volatility and minimal single-digit returns from global markets over the next 12 months.

Mr. Tirupattur’s recommended investor solution, collateralized loan obligations (CLOs - corporate loans bundled into structured products), is unlikely to go over well with investors who remember similar investment vehicles blowing up spectacularly during the financial crisis.

With vaccinations and the domestic economic re-opening proceeding, Canadians will be tempted to believe that the market recovery is still in its early stages. Mr. Sheets, however, believes that we are entering a mid-cycle market stage complicated by stock valuations at extremes usually apparent just before equity downturns.

Mid-cycle markets have historically been characterized by strong equity returns, a rising U.S. dollar, corporate bond strength and commodity underperformance. Morgan Stanley commodity strategists believe resource prices have already overshot their estimation of fair value, but they respect the power of price momentum to drive commodity prices higher and see no major corrections in the short term.

Central banks and federal governments were doing their job by providing unprecedented financial support during the pandemic. These policies have, however, upended the market cycle, allowing investors to price stocks for a recovery at a very early stage and at a rapid clip.

There are fewer promising investment opportunities available now than would normally be the case only 14 months from a market bottom. The imminent loosening of quarantine conditions makes it feel like a new dawn for investors, but they should remain cautious and conscious of their risk tolerances.

-- Scott Barlow, Globe and Mail market strategist

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Stocks to ponder

Algonquin Power & Utilities Corp. (AQN-T) Gordon Pape thinks a recent pullback in the share price and the dividend increase provides an opportunity to take a position in this well-run business at a reasonable price.

Saputo Inc. (SAP-T) Ahead of Thursday’s release of its growth plans, Jennifer Dowty looks at the Quebec-based company, which she thinks is best suited for consideration for investors seeking a defensive stock with a dependable dividend.

VitalHub Corp. (VHI-X) Shares of the health technology company hit an all-time high on Monday amid rising demand for its software used by health professionals worldwide, particularly during the pandemic. Brenda Bouw profiles the Toronto-based company.

The Rundown

Investors should consider these two sectors for an inflationary environment

How markets react to today’s inflationary boomlet will hinge on how well behaved it is. Nobody expects inflation to hit 1970s-style double digits, but some of the upcoming numbers may be unsettling by today’s tamer standards, says Ian McGugan.

Canadian banks’ growing cash piles raise expectations for big dividend hikes when possible

The cautious approach over the past year has left the banks holding enormous amounts of excess capital above what regulators require. Some of this cash will likely flow to shareholders in the form of higher dividends when the pandemic subsides and OSFI gives the go-ahead. During the fiscal second-quarter reporting season this week, some bank executives dropped tantalizing hints about what these higher dividends could look like, writes David Berman.

Regulators now equipped to crack down on misleading financial metrics

After years of work, Canadian regulators have finalized rules designed to force companies to clean up the numbers they present to investors. David Milstead looks at the changes.

Eight kids and a nun may have doomed coal’s future

A court ruling that Royal Dutch Shell must speed up plans to curb greenhouse gas emissions rocked the global oil and gas industry, but another decision in a case brought by eight school-aged teens and a nun may end up being more significant, writes Clyde Russell of Reuters.

Others (for subscribers)

The most oversold and overbought stocks on the TSX

Monday’s analyst upgrades and downgrades

Monday’s Insider Report: Company leaders are trading these five dividend stocks

Clearing up cross-border dividend yield confusion

The Globe’s stars and dogs for the week

Bullish on Axcelis Technologies Inc.

Others (for everyone)

Why the pandemic was a breakout moment for the U.S. cannabis industry

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Ask Globe Investor

Question: What would a bond market collapse mean for us seniors?

Answer: It would hurt but not as much as a stock market crash. And it all depends on the type of bonds or fixed income funds you hold. Short-term bonds would be much less affected than long-term issues.

The worst bond market plunge in recent memory was in 1980-81 when interest rates skyrocketed. The prices on long-term bonds dropped by about 21 per cent. Shorter-term issues were hit less hard. Compare that with the dot-com crash of 2000-02 when the S&P 500 fell 49 per cent and the Nasdaq Composite lost 78 per cent.

-- Gordon Pape

What’s up in the days ahead

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Compiled by Globe Investor Staff

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