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Morgan Stanley strategists built a bear market checklist of 10 market factors that most often accompany the end of a rally and the beginning of a bear market. Seven of these factors – contracting price earnings multiples, higher bond, equity and foreign exchange market volatility, narrowing breadth, widening credit spreads, peaking earnings, tightening financial conditions, and falling leading economic indicators – have already been checked off.

It’s also true that no strategist or fund manager in history has managed to time the market by picking market tops sustainably over time.

Much more positively, equity markets on both sides of the border have been getting steadily cheaper and more attractive as Morgan Stanley ticks off their bearish boxes. The forward price-to-earnings ratio of the S&P/TSX Composite has dropped from 17.6 times at the beginning of the year to 15.3 times. The S&P 500’s forward PE has fallen almost three full points, from 20.0 to 17.3.

Every investor, particularly those with short time horizons to retirement, has to decide for themselves whether to reduce risk ― and after what market signals ― based on their individual situation.

I have picked my poison – the signal that would motivate raising cash levels and reducing beta (stock price sensitivity to the overall market) in equity holdings: High-yield bond spreads. Until high-yield bond spreads (spread refers to the yield minus the comparable government bond yield) climb for four consecutive months, I am likely to remain bullish on North American equities.

In a February research report, Credit Suisse global strategist Andrew Garthwaite wrote, “[widening credit spreads] has forewarned on eight of the past nine equity market peaks. The period of spread widening typically begins about seven months ahead of a market peak, during which time equities rise by 12 per cent on average (and leverage as a style underperforms).”

The path of high-yield corporate spreads is posted here, and readers can follow it here on the Federal Reserve Economic Data site. So far, there are no signs that spreads have begun a multi-month upturn. This doesn’t ensure markets will head higher, but it does make me feel a lot more comfortable with my current portfolio positioning.

-- Scott Barlow, Globe and Mail market strategist

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Stocks to ponder

Onex Corp. (ONEX-T). When RBC Dominion Securities looked for defensive stocks within the diversified financials sector, one company it found held up particularly well when the stock market tumbled: Onex Corp., the Toronto-based private-equity firm. That is, when the S&P/TSX Composite Index fell at least 5 per cent – which has happened six times over the past five years – RBC found that Onex shares either rose or outperformed the index, which suggests the stock could do well if the good times end. David Berman reports. (for subscribers)

The Rundown

The dynamics underlying the loonie’s value could be changing

Is the Canadian dollar overvalued or are the primary factors driving the loonie’s value changing? This week’s Bank of Canada statement on monetary policy is likely to provide the answer to this important question. Scott Barlow takes a look at what’s driving the Canadian dollar right now (for subscribers).

Don’t ignore value stocks during a soft patch for the markets

We’re at an uncomfortable time in the market’s cycle when value is scarce. Even worse, investors are starting to doubt the staying power of value investing itself. It’s a hallmark of the late stages of a bull market. Only a handful of Canadian money-managers adhere to the sort of deep-value principles espoused by Benjamin Graham who made a fortune buying bargains in the decades following the Great Crash of 1929. The basic idea being to look for companies trading at a sharp discount to book value. Norman Rothery takes a look (for subscribers).

Five debt-laden stocks that could be attractive buys

Debt isn’t always the dirty word stock investors think it is. Some of the most successful investors over time have used debt to buy cheap companies, nurse them to health and reap the gains. John Reese takes a look at five stocks with debt that might be worth a look.

Three reasons to cheer this stock market (and three reasons not to)

Jamie Dimon, chief executive of JPMorgan Chase, raised eyebrows recently when he warned that markets are underestimating the risk of drastic interest-rate increases. Other prominent voices are also urging investors to be wary of this aging bull market. So be warned: This is not the time to be taking big risks with your portfolio. The trick, though, is judging exactly how much caution is merited. As a new earnings season begins, let’s evaluate the evidence – including three reasons to be at least modestly upbeat. Ian McGugan reports (for subscribers).

How the founder of social media site StockTwits is investing his money right now

Howard Lindzon is the co-founder and chairman of, a social platform for traders and investors. He also is a general partner in venture-capital firm Social Leverage, a long-time investment blogger and author of two investment books. He pays attention to stocks making new 52-week highs. There is empirical research that shows about 25 per cent of stocks outperform the market over the long run, and what they have in common is that they spend most of their time near 52-week highs. Larry MacDonald reports (for subscribers).

Top Links (for subscribers)

Post-crisis equity market rally has ‘limited runway’

‘Silence of the bulls’ highlights growing portfolio manager pessimism

Others (for subscribers)

Why investors should consider the lowest-yielding Big 6 bank

Tuesday’s Insider Report: Companies insiders are buying and selling

Tuesday’s analyst upgrades and downgrades

Monday’s analyst upgrades and downgrades

Others (for everyone)

Six ETFs to ride the continuing U.S. bull market

Loonie mocks efficient-market theory as April win streak lengthens

Grantham forecasts rough 7 years for equities, bonds

Fidelity likes CP Rail for crude opportunity amid pipeline spat

Winning ‘Black Swan’ investor in ’08 says market is fragile

Here’s how Wall Street is reacting to Netflix’s blowout quarter

BlackRock’s biggest stock-picking fund raises bet on Facebook

Markets ignore political risks until economic growth threatened

ETF manager renounces emerging markets to pile into gold

Why there is a demand and supply imbalance in the stock market

U.S. IPO wave is coming, and investors spy a payday

Investors should celebrate return of volatility

Wall Street eyes earnings stabilizer after FAANG stocks wobble

Number Crunchers (for subscribers)

Twenty Canadian stocks fit for a socially responsible investor

Ask Globe Investor

Question: I have invested with an online brokerage for the past 20 years and have been averaging an annual return of about 8 per cent. I also have about $270,000 with PH&N in its Dividend Income Fund, which has been losing money lately. I want to sell the fund and transfer the proceeds to my self-directed account to invest as my returns have been better than PH&N’s. However, that will trigger capital gains of about $120,000. I’m a retired senior with about $28,000 of income. Any suggestions?

Answer: There are a lot of moving parts here, so I’ll offer a few general comments and then have a tax expert weigh in.

First, you might want to cut the PH&N Dividend Income Fund a little slack. The Series A units – with a management expense ratio (MER) of 1.87 per cent – have posted a five-year annualized total return, including dividends, of 6 per cent through March 31 (despite dropping 5.4 per cent year to date). The less expensive D units – with an MER of 0.99 per cent – have a five-year return of 6.94 per cent, which is virtually identical to the total return of the S&P/TSX Composite Index. So the fund – which invests primarily in blue-chip dividend stocks – has been a decent performer.

Second, you should carefully weigh the pros and cons of selling. The main advantage of selling is that you’ll eliminate the MER, so if you hold the A units the case for selling is stronger because you’ll save more in costs. However, as much as I believe in keeping investing costs low, there is no guarantee the stocks you buy with the proceeds will outperform the PH&N Dividend Income Fund. What is guaranteed, however, is that you will take a haircut from the capital-gains tax.

Assuming you live in Ontario and have income of up to $42,960, the effective marginal tax rate on capital gains (only half of which are included in your income) is about 10 per cent. The rate rises gradually for higher income levels, topping out at 26.8 per cent for people who make more than $220,000. Is it worth sacrificing 10 per cent or more of your gains now for the possibility – but not the certainty – of earning higher returns later? You’ll only know in hindsight.

If you do decide to sell, you should do so in stages to spread the gains over several years and mitigate the tax hit, says Dorothy Kelt of Selling all at once is a bad idea, because your income for the year would spike to about $88,000 ($28,000 plus half of the $120,000 capital gain), a level at which the marginal tax rate on capital gains is nearly 17 per cent. What’s more, if you’re receiving Old Age Security, you would face a partial clawback of your benefits (for 2018, the clawback kicks in at income of $75,910).

Ms. Kelt adds that other income-tested credits and benefits for seniors – including the age amount tax credit, guaranteed-income supplement and various provincial programs – could also be affected depending on the size of the capital gain realized. The age credit, for instance, is reduced starting at income of just $36,976 for 2018. If you were to sell, say, $50,000 of units, that would trigger a capital gain of about $22,000 and a tax hit of $2,200, and your income would rise to $39,000 – above the threshold for the age credit reduction. These are just round numbers and I present them merely to illustrate the kinds of things you need to look out for.

“It would probably be beneficial to sit down with a qualified tax professional [CPA] and provide all the financial details so that a plan could be devised that would minimize any taxes payable,” Ms. Kelt says.

One way to offset the capital gains, Ms. Kelt says, would be to make a registered retirement-savings plan contribution, assuming room is available. (RRSP contributions must be made by Dec. 31 of the year you turn 71). Or, if you want to keep things really simple, you could hang on to the fund and not trigger any capital gains at all.

--John Heinzl

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 the investment prospects for Premium Brands; David Berman does the same for Norbord. Meanwhile, we’ll take a look at how the new Canadian pot exchange traded funds are faring.

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

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Compiled by Gillian Livingston

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