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I was a one-person department at a boutique brokerage firm during the financial crisis, tasked with helping financial advisers understand market volatility. I have often said that I have never learned as much, as fast, as I did in 2007 and 2008.

There was an advantage at the time though – markets kept going down. If something weird was happening, the market was likely to be down 10 per cent by the time you figured out what was going on. As such, there were no buying opportunities.

This time is much different because stocks are rallying. The longer it takes to comprehend the drivers of the rally, the more upside is missed for those holding cash.

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So, what do we know about what’s pushing equity markets up?

As Credit Suisse strategist Andrew Garthwaite points out, ultra-low interest rates are a key driver behind the equity rally.

In the U.S., for example, inflation-adjusted 10-year bonds yield negative 0.40 per cent, which means investors lose value over time. This forces large portfolios to reallocate funds from bonds to equities.

B of A Securities’ equity and quant strategist Savita Subramanian estimates that the S&P 500 rally is 90 per cent explained by new money - in other words, liquidity, which fits with Mr. Garthwaite’s thesis. “If the rally were from economic recovery inklings, the distressed, GDP-sensitive cohort of the benchmark would have [outperformed]." But this subset of the market has not rebounded until recent weeks. “Instead, liquidity looking for a home settled mostly into secular growth/stay at home beneficiaries.”

Morgan Stanley strategist Michael Wilson sees the current rally following the same patterns as markets after March 2009. He points to the rising cyclicals/defensives ratio – the relative performance of economically-sensitive stocks versus defensive sectors like utilities and consumer staples – as proof that a durable, long-term market rally has begun.

Ms. Subramanian and Mr. Wilson appear to be at odds over the returns for economically sensitive stocks. Ms. Subramanian emphasizes the high correlation between the Federal Reserve balance sheet and the dominance of FAANG stocks in the S&P 500 to show that secular growth companies are benefiting most from monetary stimulus.

Mr. Wilson, on the other hand, focuses on the 88 per cent rally in the S&P 500 Energy sub index from the March 23 lows to argue that industries dependent on economic growth are leading the market recovery.

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These perspectives indicate that investors should pay very close attention to bond yields, specifically the 10-year U.S. Treasury yield. The 10-year benchmark steadily climbed last week and is flirting with 1 per cent, almost double levels of the end of March.

Rising yields would support Mr. Wilson’s forecast of resurgent growth and cyclical stock outperformance of both defensives and the market leading technology stocks.

However, if yields climb to levels high enough to attract equity investors back into bonds, this threatens the asset class reallocation Mr. Garthwaite describes, and the higher levels of liquidity Ms. Subramanian sees driving the rally.

-- 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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Clorox Co. (CLX-N) Have you tried to buy a container of disinfectant spray lately? Or a pack of sanitizing wipes? Forget it. Amazon has a notice on its website saying they’re all reserved for front-line workers. The suppliers can’t keep up with the demand. One of the firms in this sweet spot is Clorox, which recently reported its biggest sales increase in nearly a decade. The stock has been rising fast. Gordon Pape takes a look at whether this is still a good investment opportunity. (for subscribers)

The Rundown (all for subscribers only)

Experts offer mixed outlooks after a puzzling market rally

Is the stock market out of its mind? Some investment mavens think so. They are skeptical of the record-breaking rally in global share prices over the past two months, including the best 50-day patch in the long history of the benchmark S&P 500 index. However, the experts differ in their forecasts of what comes next. Ian McGugan takes a look.

Short-sellers stay bearish as market claws back

As North American stocks have staged a remarkable recovery over the past few months, speculators have increased their short positions on U.S. equities to record highs. Short interest on S&P/TSX Composite Index stocks has barely budged since peaking around the same time the market bottomed out. Betting against markets that are now up by more than 40 per cent has been a distinctly painful trade for short sellers and hedge funds. The past week may have finally broken their will. There are early signs of a mass unwinding of short positions, as growing evidence of an economic resurgence propels equities toward their prepandemic peaks. Tim Shufelt reports.

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How the COVID-19 pandemic will affect the financial advice business

The last time the stock markets plunged, many investment advisers lowered their fees. They call this “sympathy pricing” in a new report on the state of the North American advisory business by PriceMetrix, a division of the global management consulting company McKinsey. If stocks end up being down in 2020, expect less sympathy from advisers, reports Rob Carrick.

Others (for subscribers)

Monday’s analyst upgrades and downgrades

The highest yielding stocks on the TSX, plus risk data

Monday’s Insider Report: COO tops up his investment in this REIT

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Insiders keep buying at Hudbay Minerals

Ask Globe Investor

Question: You mentioned recently that Bank of Montreal is now offering a 2-per-cent discount on shares purchased through its dividend reinvestment plan. How do I enroll in the DRIP and get the discount?

Answer: Bank of Montreal (BMO) isn’t the only bank offering a DRIP discount. When Toronto-Dominion Bank (TD) released quarterly results in May, it also announced a 2-per-cent discount on shares issued from its treasury under its DRIP. Both banks are hoping to attract more investors into their DRIPs, which are a convenient way for the banks to raise capital at a time when their earnings are under pressure from the economic ravages of the novel coronavirus.

There are two ways to sign up for a DRIP. The first is to enroll your shares in the company’s own DRIP through its transfer agent. The advantage of going this route is that every penny of your dividends will be reinvested, because company-operated DRIPs support the purchase of fractional shares. However, you will first need to ask your broker to register the shares in your name (for which there will be a fee) before you can enroll them with the transfer agent.

The second – and easier – way is to enroll your stocks with your discount broker’s DRIP. You can set this up with a phone call and there are no fees, but the downside is that broker-operated DRIPs do not support the purchase of fractional shares. This means that, when you reinvest your dividends, you can only purchase whole shares and will typically have some cash left over. You will also need to have sufficient shares in your account so that the dividends received are enough to purchase at least one new share, or the entire dividend amount will be received in cash.

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Most discount brokers will honour DRIP discounts offered by companies such as BMO and TD, according to However, before taking the plunge, you should verify this with your own broker.

--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

Rob Carrick will present a new way of looking at mutual fund performance that will illustrate why ETFs aren’t always the better choice.

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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