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U.S. equity markets rallied hard Monday while the Toronto Stock Exchange was closed and the surge may be notable for far more than its scale. The stocks leading the rally were not the usual suspects - health care and ‘stay at home’ technology. They were the cyclical, low valuation companies that have trailed the benchmark for most of the past decade.

This same trend was evident again on Wednesday as the S&P 500 rose further, as of midday, with energy and materials stocks posting some of the biggest gains.

The benchmark U.S. index rose 3.2 per cent on Monday, its best day in six weeks. Finance site Irrelevant Investor saw the move as a potential sign of ‘The beginning of the end’ of the struggle with COVID-19.

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“Being long the ‘stay-at-home stocks’ has been the trade of the year," it noted. An equal-weight basket of digital communications firms Zoom and Slack, telemedicine stock Teladoc, and home exercise bike company Peleton was up more than 200 per cent this year. But on Monday, these four names had their worst day relative to the broader market since March 24th, the day after markets bottomed, the site added.

Author Michael Batnick also noted that small cap value stocks Monday had their best day relative to large cap technology stocks since October 2008.

Morgan Stanley U.S. equity strategist Michael Wilson had been predicting Monday’s market action for weeks. He is one of the few market strategists still predicting a sharp, V-shaped recovery for the U.S. economy which would feature the outperformance of undervalued economically sensitive and small cap stocks versus the S&P 500.

Mr. Wilson noted in a report this week that sector returns since the market bottom in March are already showing signs of a ‘classic early cycle rotation’. In the current circumstances, this involves the underperformance of secular growth companies like Facebook Inc., Shopify Inc. and Alphabet Inc. in favour of cyclical stocks in energy and consumer discretionary industries.

Since markets bottomed on March 23, economically sensitive energy and materials stocks rebounded by 63.0 per cent and 41.0 per cent, respectively.

Technology stocks are not yet underperforming the benchmark as a whole - they’re in third place – but cyclical consumer discretionary companies are close behind them in terms of performance.

Defensive sectors – among the most popular with investors earlier in the year- are now lagging significantly as consumer staples, real estate and utilities are among the worst performing industries.

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With so much pandemic-related uncertainty, it’s likely too early for investors to switch entirely out of technology and move to energy and materials stocks that will benefit most from a global economic resurgence. At the same time, a compelling argument for value stocks continues to build.

-- 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

Big Rock Brewery The Contra Guys believe they could score a triple with this micro-cap in the beer sector. The stock is thinly traded and comes with a lot of baggage. But early numbers show that alcohol sales have risen steadily since people have been corralled at home because of COVID-19.

The Rundown

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How to optimize your portfolio amid the coronavirus crisis (and what Rob Carrick actually holds in his own portfolio)

Investing editor Darcy Keith had a wide-ranging discussion with personal finance columnist Rob Carrick last week to discuss portfolio recommendations as the COVID-19 crisis lingers on. Listen to the interview here to find out what Rob’s best guesses are for what markets will do next, and for advice on how to better construct your investments. Rob also discloses what he himself holds in his own portfolio.

Find investing peace of mind by thinking five years ahead

If you’re living in fear of which way this plague-ridden economy will lurch next, try a new perspective: Think about what the pandemic will look like five years from now. In all probability, an investor in 2025 will find it difficult to discern any lasting impact from today’s crisis, asserts a reassuring new report from research firm Morningstar. Ian McGugan tells us more.

A look at the risk of losing money in supposedly safe parking spots for investing cash

If you’re looking for a safe parking spot for investing cash in these troubled times, it’s hard to beat the high interest savings account packaged as a mutual fund. Covered by Canada Deposit Insurance Corp., these products are well-suited to investors who want to keep cash secure while they evaluate their investing options. A next-best choice is the high-interest savings account exchange-traded fund, a new but popular option for holding cash in your investment account. Finally, running a distant third, is the money market fund. Rob Carrick takes a detailed look at all the options.

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These grim times for dividend investors won’t last

Investors are worried about their dividend stocks. Canadian dividend payers lagged the market in the recent downturn and companies are starting to trim their dividends. But low share prices offer the prospect of reasonable returns to long-term dividend investors. Norman Rothery has crunched some numbers to prove just that.

First-quarter earnings a sign of the decline to come

The second-quarter contraction in Canadian profits is expected to approach 40 per cent. Still, stock markets in both countries are absorbing the shock with a level of calm bordering on indifference. Tim Shufelt reports

How to exploit down markets by building a balanced ETF portfolio at no cost

Stop waiting for stocks to hit bottom. The time to start building a portfolio that takes advantage of the market decline since late February is now. Rob Carrick tells us how to do just that.

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Others (for subscribers)

Gordon Pape: My High-Yield Portfolio continues to hit targets, but COVID-19 has prompted a shakeup

Wednesday’s analyst upgrades and downgrades

Tuesday’s analyst upgrades and downgrades

Tuesday’s Insider Report: Canadian billionaire invests over $2.8-million in this stock

Wednesday’s Insider Report: CEO and CFO cash out millions from this soaring stock

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Number Cruncher: Six fundamentally strong mid- and large-caps with room to grow

Did hedge funds score on masks and sanitizer? Not so much

Globe Advisor

What’s the opportunity cost of holding on to cash?

Are you a financial advisor? Register for Globe Advisor (www.globeadvisor.com) for free daily and weekly newsletters, in-depth industry coverage and analysis, and access to ProStation - a powerful tool to help you manage your clients’’ portfolios.

Ask Globe Investor

Question: I am new to investing. Until recently, I only invested in mutual funds. Now that I am retired I have decided to do some direct investing through my TFSA.

At the moment, my TFSA is invested in Canadian mutual funds. I would like to expand my TFSA investments into U.S. income securities. Are there any tax implications from investing in U.S. securities within my TFSA?

Answer: Yes there are. Any dividends from a U.S. company will be subject to a 15-per-cent withholding tax. This is because the U.S. does not recognize TFSAs as “retirement accounts.” Dividends paid to RRSPs and RRIFs are not subject to this tax.

This is especially frustrating because there is no way to recover that money. Since it is paid into a registered plan, you cannot use the foreign tax credit when you file your tax return. That money is simply gone. So, in this case, Tax-Free Savings Accounts are not tax-free.

When Canada and the U.S. get around to renegotiating the tax treaty, this might change. But for the foreseeable future, it’s the rule. You’d be better off earning your dividend income from Canadian companies.

--Gordon Pape

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

The students of Dr. George Athanassakos have placed their bets on two stocks they think have considerable upside. We’ll tell you what they are.

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

Click here share your view of our newsletter and give us your suggestions.

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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