Investors are too bullish for markets to have seen a sustainable bottom and stock prices have further to fall, according to asset management firm RB Advisors. Dan Suzuki, the firm’s co-chief investment officer, published a seven part argument that lower, not higher, asset prices are on the horizon in Investors have capitulated so much, they’re bullish.
The U.S. market remains expensive and that is the primary reason for Mr. Suzuki’s pessimism. Valuations are well down from their peaks but the forward price-to-earnings ratio of 16.6 times remains above the long term average of 15.5 times.
Previous market bottoms have seen extreme bearishness among Wall Street strategists but currently there is only mild caution. The recommended asset allocation of 54.6 per cent in equities is only marginally below the long term average.
Analysts, also pessimistic at bottoms, are now bullish. Buy ratings make up 57 per cent of the total, four percentage points higher the five-year average.
The CBOE Volatility (VIX) Index is generally spiking higher when equities hit a sustainable low. The VIX is now below 25 – a far cry from the pandemic high of 83.
Mr. Suzuki’s fifth reason for lower markets is for me the most compelling: “Bubble stocks still dominate portfolios and headlines.” During the 1990s tech bubble, the sector’s share of the S&P 500 eventually dropped from 41 per cent to 16 per cent. Tech stocks continue to dominate the S&P 500 now, having fallen only three percentage points to 37 per cent.
Household equity allocations remain close to record highs, clearly not a capitulation signal, although my strong suspicion is that bond holdings will rise quickly in the coming months along with yields.
Investors are still pouring money into equities in an attempt to buy the dip, a trend Mr. Suzuki believes would not be happening if we were at a market bottom. He cited Bank of America data showing that client equity buying had accelerated to US$2-billion during the trading week ended July 15.
Longer-term market bottoms are made of investor misery, with participants selling stocks because they can no longer take the pain of losses. The common thread in Mr. Suzuki’s seven reasons for pessimism is that investors haven’t suffered enough, are still too bullish, and that the real bottom is significantly lower from here.
-- Scott Barlow, Globe and Mail market strategist
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Stocks to ponder
Netflix Inc. (NFLX-Q) Shares in the streaming giant have fallen a lot from their all-time highs, but they have stabilized over the past three months. Though being rangebound is not much to write home about, it is a good sign, and sure beats having an investment candidate in free fall. The valuations are also materially better than they used to be: the price-to-sales, price-to-book and price-to-earnings ratios are all at or near multiyear lows. As for recent earnings, the company’s second-quarter results were generally better than anticipated. Still, Philip MacKellar of The Contra Guys isn’t buying the stock quite yet, and here’s why.
The earnings season is off to a rocky start. Here’s what to look out for next
Investors are scouring second-quarter earnings reports, including several landing this week in Canada and the U.S., for signs of an economic slowdown and just how bad it could get. The impact of surging inflation and energy prices on corporate margins and revenues, and the outlook for the last half of this year, are all expected to give a better indication of what’s to come. So far, results haven’t been providing a great deal of confidence. Brenda Bouw reports.
A shopping list of ETFs for people who worry about recession
The big question in the financial world in the second half of 2022 is whether central banks will be able to lower inflation without driving the economy into recession. Say you’re worried they won’t pull it off and are looking for ways to tweak your portfolio using exchange-traded funds. Some ideas on ETFs to look at can be found in a recent report by National Bank Financial, as Rob Carrick tells us.
Three TSX stocks that have bucked the trend of falling prices this year
Let’s not mince words: It’s been a lousy year to be an investor. Everything seems to be down: stocks, bonds, gold, cryptos, real estate – even cash, if you consider the loss of buying power because of rising inflation. The TSX has been hammered so far in 2022, down 10 per cent so far. That’s not a bear market (a loss of 20 per cent or more from the most recent peak), but it is correction territory. Almost every sector except energy is in the red. But there are a few non-fossil fuel stocks that have bucked the trend. Here are three from Gordon Pape’s recommended list.
Here to stay: fund managers play the long game on inflation
Not convinced by central banks’ pledge to stamp on inflation, many investors are on the hunt for assets that will protect their portfolios from years of decline in the value of money. These funds are buying up inflation-linked bonds and real estate, while also taking long-term bets on the outperformance of stocks, including those in industries like timber and farmland.
Others (for subscribers)
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Ask Globe Investor
Question: As a retiree, I depend on monthly distributions for retirement income. I own the iShares Canadian Select Dividend Index ETF (XDV), which has more than half of its assets in financials. But even as banks and insurers have been raising their dividends, XDV recently cut its distribution by about 10 per cent. Is iShares not passing along all the bank dividend increases received XDV?
Answer: Nothing nefarious is going on here.
It’s normal for an exchange-traded fund’s distribution to fluctuate from month to month, or quarter to quarter. This reflects factors such as the timing of dividends from the ETF’s underlying securities, changes in the ETF’s constituents, increases or decreases in their dividend rates and the flow of investor funds into or out of the ETF.
Unless stocks in the ETF have cut their dividends, or the ETF’s composition has changed dramatically, any decline in its distribution is likely to be temporary.
In the case of XDV, it must have been disconcerting to see the distribution fall to 9.3 cents a unit in April, down from 10.3 cents in each of the three previous months. But here’s good news: This week, BlackRock Canada announced that XDV’s distribution will rise to 10 cents a unit for the cash payment on July 29.
It’s important not to lose sight of the big picture. Even as XDV’s distribution has bounced around from month to month, the long-term trend is still up. In 2017, XDV’s monthly cash distribution averaged about 7.95 cents a unit. So far in 2022, it’s averaged 9.19 cents. So the distribution is moving in the right direction.
--John Heinzl (E-mail your questions to firstname.lastname@example.org)
What’s up in the days ahead
The Contra Guys will have some inflation-beating stock picks.
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Compiled by Globe Investor Staff