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Peloton Interactive Inc. has made headlines for the stock’s nearly 80 per cent plunge from its January 2021 high. Unfortunately for investors, Morgan Stanley U.S. equity strategist Michael Wilson wrote that “there’s a little bit of Peloton in everyone.”

Mr. Wilson, among Wall Street’s most bearish sell-side pundits, believes we are entering a period of earnings payback. After a number of quarters where profit growth came in 15-20 per cent about consensus estimates, S&P 500 earnings are now coming in near the historical average of about five per cent above forecasts. Morgan Stanley believes we are beginning a period where earnings are set to come in below expectations for the next few quarters as payback for the previous high growth period.

The market punishment meted out to Peloton, and also to Netflix Inc., Paypal Holdings Inc., and Meta Platforms Inc., is a sign of things to come, according to Mr. Wilson, thanks to tightening monetary policy and increasingly nervous consumers. In his words, “We have long held the view that payback was coming in 2022, as the extraordinary fiscal stimulus [to consumers] faded, monetary policy tightened and supply caught up with demand in many end markets.”

To combat expected volatility, Morgan Stanley recommends defensive market sectors like staples, financials and health care, and also select technology sectors where deep corrections have already occurred. Sectors to avoid include those leveraged to economic expansion and recovery, including consumer discretionary stocks.

Mr. Wilson helpfully provides his Fresh Money Buy List of U.S. stock ideas which reflects his defensive view (I posted the full table on social media here). The 10 company list is, in alphabetical order, AT&T Inc., Exxon Mobil Corp., Humana Inc., MasterCard Inc., McDonald’s Corp., Mendelez International Inc., SBA Communications, Simon Property Group Inc., Synchrony Financial and WellTower Inc.

-- Scott Barlow, Globe and Mail market strategist

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Stocks to ponder

Shopify Inc. (SHOP-T) After listing on the Toronto and New York stock exchanges in 2015, Shopify assumed the mantle of Canada’s next tech darling. Its hugely popular cloud-based commerce platform generated quarterly financial results that regularly beat analysts’ expectations and sent its stock soaring even as valuations reached stratospheric levels. But now the shares have plunged 50 per cent since November: Is yet another Canadian tech champion falling by the wayside – or is it time to buy the dip? Larry MacDonald explains why this might be an opportune time to snap up shares.

Rivian Automotive Inc. (RIVN-Q) This maker of electric vehicles that aspires to compete with Tesla completed an initial public offering last year that raised nearly US$14 billion. Its shares quickly soared, and the company briefly had a stock market value that was nearly twice that of Ford Motor. But three months after Rivian’s debut on the stock market, investors are worried that the company may not quite live up to its promise because it has had trouble increasing production of its pickup trucks, SUVs and delivery vans. With its stock down by nearly two-thirds from its peak and well below its IPO price, the New York Times reports on what’s next.

The Rundown

A reason to look again at forestry stocks

Investors appeared to ignore last week’s announcement that the U.S. Department of Commerce will reduce softwood lumber tariffs on Canadian shipments into the United States. But David Berman says the news adds a potential sweetener to the investment case for Canadian forestry stocks.

U.S. banks outlook positive with loan growth and rate hikes in view

While U.S. bank stocks had a rocky start to the year, investors and analysts see accelerating loan growth and Federal Reserve interest rate hikes boosting the sector.

Olympic fever spreads to China’s stock market

Olympic fever has unleashed a buying frenzy on China’s stock exchange this week, with investors pouncing on shares linked to the 2022 Beijing Winter Olympics, including some whose connection to the games was purely speculative.

After bitcoin ‘winter’, investors hunt risk in virtual worlds

As bitcoin drifts toward mainstream maturity in 2022, daring crypto investors are eyeing up new sources of explosive action: “altcoins” that power online games and worlds. But be warned – the foothills of the unformed metaverse are no place for the faint-hearted.

Investors brace for more weakness in U.S. corporate debt

Investors are preparing for more downside in U.S. credit markets, as bets that the Federal Reserve will become more aggressive than previously expected threaten to further drive up yields and pressure prices.

Others (for subscribers)

U.S. dividend funds receive huge inflows as investors switch out of bonds

ARK’S Wood sees coming slowdown in U.S. economy as oil prices spike

Wednesday’s analyst upgrades and downgrades

Tuesday’s analyst upgrades and downgrades

Globe Advisor

Investments in alternative strategies grow with rise of volatile markets

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Ask Globe Investor

Question: I’ve owned Citadel Income Fund (CTF-UN-T) for many years. It always trades at a significant discount (25-35 per cent) to net asset value. CTF pays a monthly distribution of 1 cent a unit.

Once a year, there is an option to tender shares back to the manager for net asset value less redemption expenses. The redemption is limited to 10 per cent of the outstanding shares only. For example, the most recent round of redemption enabled me to submit 14 per cent of my holdings for redemption. Not everyone who could tender did. I received $4.89 a share when the market price was roughly $3.60.

Why does it perpetually trade at such a large discount to the net asset value of the shares held in the fund? Why don’t more people buy it because of the discount, thereby closing the gap between market price and net asset value? Why hasn’t an activist investor taken steps to force the manager to wind up the fund and distribute the net asset value, since it is so much higher than the market price?

I can’t figure out the long-term irrationality of it all.

Answer: Many closed-end funds trade at a steep discount to net asset value. There are several reasons why this happens. One is liquidity. Closed-end funds have a limited number of shares outstanding and no more can be issued. CTF has a market cap of only $54-million and an average daily trading volume of 10,704. This tells us there are few buyers at any given time, which will tend to depress the trading price.

Other possible reasons could be that investors aren’t comfortable with management, or don’t like the composition of the portfolio, or simply don’t want to invest in a discounted product when they can get full value with an exchange-traded fund.

In the case of Citadel specifically, it doesn’t look very attractive from any perspective. The yield is respectable at 3.7 per cent but the market price is actually slightly lower than it was five years ago. That’s not going to encourage investors to rush to buy.

If I were you, I would continue to take advantage of the redemption offers, whenever they occur.

--Gordon Pape

What’s up in the days ahead

Balanced funds that hold bitcoin? Believe it. Rob Carrick will report on this latest trend.

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

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Compiled by Globe Investor Staff