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North American equity benchmarks continue to make new highs but there’s a lot of churning going on under the surface, a phenomenon Morgan Stanley chief U.S. equity strategist Michael Wilson calls ‘a rolling market correction’.

The most surprising aspect of recent market performance is that many of the companies with profits most leveraged to a re-opening economy have performed worst. Since mid-May, travel company Booking Holdings Inc. has been the biggest detractor from S&P 500 returns. Heavy equipment manufacturers Deere and Co. and Caterpillar Inc. have also been among the stocks with the most negative effects on benchmark returns.

The companies that have driven index returns higher in the past seven or eight weeks were the same technology winners from 2020, including Amazon.com, Alphabet Inc., NVIDIA Corp. and Adobe Systems Inc.

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The consensus global GDP growth estimate for this year has been ramping higher and now stands at 6 per cent, well above the previous average, but reflation trades aren’t working in many cases. Bond yields, a reflection of future growth and inflation expectations, have also been falling of late.

For Mr. Wilson, these signs indicate a market transitioning from early cycle behaviour to a more mature, slower growth stage of expansion.  He expects that early cycle winners, the economically sensitive sectors most beaten up during the recession (including commodities), will fade and stocks with higher quality balance sheets and more reliable, if lower, growth will outperform. He noted that corrections of as much as 20 per cent are common at this stage of the cycle.

Morgan Stanley screened the Russell 1000 index for stocks most suited to this kind of environment. The criteria ranked companies by quality and defensiveness and emphasized those with more positive earnings revisions than the index.

The stocks Mr. Wilson highlights are, in alphabetical order, AmerisourceBergen Corp, Amgen Inc., Atmos Energy Corp., Activision Blizzard, Becton Dickinson and Co., Cigna Corp., Costco Wholesale, CVS Corp., Facebook Inc., Gilead Science Inc., Alphabet Inc., Hill-Rom Holdings, Monster Beverage Corp., Altria Group , Match Group Inc., NRG Energy, O’Reilly Automotive, and Procter & Gamble .

-- 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

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VerticalScope Holdings Inc. (FORA-T) While the stock just began trading on the Toronto Stock Exchange on June 15, its share price is already up 23 per cent. Three analysts this month launched coverage on the company – all with buy recommendations. As Jennifer Dowty tells us in this stock profile, investors may want to put the small-cap stock on their radar screens.

The Rundown

Reaching a peak: The economic rebound is topping out, and stocks are at risk

Sometime soon, the Great Reopening will hit its high-water mark, and the groundswell of growth now underway will crest and begin to recede. When the preponderance of growth indicators starts to decline, history suggests that investors, on average, take that as a cue to start reducing risk. It’s also around that time that the outlook for market index returns typically dims. Tim Shufelt examines when all this is likely to play out.

Also see: Stock markets are trading at historically high levels. What should investors do?

The second-quarter earnings season is about to begin. Here’s what Canadian investors should expect

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When compared with the economic carnage caused by the pandemic last spring, this year’s second-quarter earnings season is expected to be one big love-in. Total earnings for companies in the S&P/TSX Composite Index are estimated to rise by 98 per cent year-over-year and 65.4 per cent for those in the S&P 500 index, driven largely by industrials, energy and consumer stocks. Still, as earnings reports start to roll out in the weeks ahead. Brenda Bouw tells us more.

Others (for subscribers)

The most oversold and overbought stocks on the TSX

Monday’s analyst upgrades and downgrades

Monday’s Insider Report: Eric Sprott invests over $800,000 in a stock that’s quadrupled in 2021

Ask Globe Investor

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Question: I have been a DIY investor for the past few years and have developed strategies to build the value of my portfolio and keep the momentum going. For example, I will sell an investment and redeploy the funds when the stock reaches a 25-per-cent loss to my purchase price. I need your advice on a strategy regarding when to book gains, especially when many of the stocks in my portfolio have risen more than 50 per cent.

Answer: Warren Buffett said it best: “When we own portions of outstanding businesses with outstanding managements, our favourite holding period is forever.”

Too many investors think the way to make money is to buy low, sell high and repeat. They see the stock market as a casino-like game that requires a strategy or trading system. But if you own a great company – one whose sales, earnings and dividends (if it pays any) are growing steadily – the best approach is often to do nothing.

Consider Amazon.com Inc. (AMZN). Since 2000, there have been three calendar years when the stock fell more than 25 per cent, and four years when it gained more than 100 per cent. The former would have likely qualified as sell signals based on your system. But simply buying and holding Amazon over the past 20 years would have produced a return of more than 24,000 per cent.

Granted, it’s easy in hindsight to point out the wisdom of holding a tech monster such as Amazon. So let’s look at a less extreme example from my model Yield Hog Dividend Growth Portfolio.

Over the past 10 years (through June 30), Algonquin Power & Utilities Corp. (AQN) has produced a total return, including dividends, of 411 per cent. That’s pretty good – it’s equivalent to a compound annual gain of 17.7 per cent – but it hasn’t been a straight uphill climb. During a six-month span in 2013, for example, Algonquin’s stock tumbled 25 per cent. Was that a good time to sell? Nope. It was a great time to buy: Over the next 16 months, the shares gained about 70 per cent.

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Even after that large advance, the shares went on to roughly double over the following five years.

This is the problem with selling a stock based on how much it has gained or lost in the past: It’s backward-looking information that, by itself, tells you nothing about how the stock will perform in the future.

Ultimately, I believe the reason people sell based on past performance is emotional. When a stock rises sharply, they worry that it will give back some of its gains. When a stock drops, they worry that it will continue to fall. So they sell. More than anything, it’s a way to control their fear by applying what seem like rational rules to automate their decision-making and, in theory, limit their losses.

But over the long term, this approach will very likely cost you. You would be better off buying and holding proven, profitable companies – or diversified exchange-traded funds – and learning to ride the short-term waves without constantly feeling the need to do something.

That’s not to say you should never sell a stock. If a company becomes wildly overvalued and there is no justification for its price-to-earnings multiple, or if the business has taken what appears to be a permanent turn for the worse, those could be valid reasons to sell. But how much the stock has gained or lost since you bought it is not.

--John Heinzl

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What’s up in the days ahead

There’s been a pullback recently in many commodities. Is it a chance to buy into the ‘commodity supercycle’ theme at attractive levels? David Berman will share some thoughts.

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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