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Goldman Sachs U.S. equity strategist David Kostin is recommending larger cash positions in a clear sign that for investors in 2019, taking on market risk might be more trouble than it’s worth.

Mr. Kostin’s market outlook for 2019 is called “The Return of Risk” and on page one he writes,

“We forecast the S&P 500 will generate a modest single-digit absolute return in 2019. The risk-adjusted return will be less than half the long-term average. Cash will represent a competitive asset class to stocks for the first time in many years.”

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The implication is that investors will need a strong stomach to weather market volatility for a meagre reward. Mr. Kostin is focused on U.S. equities but things aren’t likely to be any smoother for the S&P/TSX Composite Index. Merrill Lynch’s projections for a ‘pervasive and persistent global [economic] downturn’ would be very bad news for the almost half of the benchmark connected to mining and energy companies.

I believe it’s time for investors to get more defensive, and focus on how painful a large loss could be to their future wealth rather than the possible regret of missing part of a market rally.

The suggestion to increase cash allocations – to an extent dependent on individual investment time horizons and risk tolerances, of course – is less of a market timing call then it appears. In one sense, it would be chasing performance – a 2.5- per-cent, one-year GIC has outperformed the S&P/TSX Composite by almost 700 basis points so far this year.

A defensive, cash-heavier approach would also suit Canada’s aging population. As retirement approaches, investors have less time to make up for any temporary losses in the market.

I’ve been writing all week about the relentless pessimism in the 2019 market and economic forecasts published so far, but the consensus view has been wrong before. In the 2013-2016 period, for instance, economists repeatedly assured investors that interest rates were set to rise, only to see them keep falling every year.

Mr. Kostin’s prediction that returns on cash and similar investments will be competitive with equity market returns in 2019 could turn out wrong, but smaller returns and being able to sleep at night during volatile markets is not a terrible place to be.

-- Scott Barlow, Globe and Mail market strategist

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Stocks to ponder

Gibson Energy Inc. (GEI-T). Hardly a day goes by without demoralizing news from Canada’s oil patch. From a strangely low price for heavy crude to a back-up in inventories to a call for production cuts, a lot of grief has been weighing on energy stocks this year. But it’s not all grim. Some companies are performing well within the difficult operating environment. One stand-out winner: Calgary-based Gibson Energy Inc., which has seen its share price rally 29 per cent since the end of May. Why has Gibson been zigging when the energy sector has been zagging? It largely comes down to what Gibson does: It’s an infrastructure company that provides 12 million barrels of above-ground storage at terminals in Hardisty and Edmonton. David Berman reports (for subscribers).

The Rundown

Three reasons to stay optimistic about markets – and one reason not to be

Mr. Market is depressed. This does not mean Mr. Market is correct. The recent tumble in world stock markets reflects escalating gloom about the global economy, just as record highs for the S&P 500 in mid-September demonstrated boundless enthusiasm about the outlook for the U.S. economy. There is a strong possibility that both will turn out to be emotional overreactions. For all the reasons to worry about what lies ahead, there are corresponding arguments for optimism. In recent weeks, investors have fixated on one side of the argument – and for good reason, given the Brexit shambles and mounting U.S.-China tensions – but they should keep the other side of the debate in mind. Reasonable valuations, robust consumers (outside Canada, anyway) and supportive central banks suggest this is no time for panic. Ian McGugan examines (for subscribers).

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What the stock market correction has left in its wake

The on-again-off-again global sell-off has seen steep losses in technology, consumer and energy sectors lead the way for broad stock market declines. From peak to trough, the S&P 500 index dropped by 9.9 per cent over the past two months, avoiding correction territory by a hair, at least for now. The S&P/TSX Composite Index, however, surpassed the correction threshold last month with a top-to-bottom decline of 11.1 per cent. Going into what is historically the strongest period of the year for both U.S. and Canadian stocks, we survey the damage of the correction so far. Tim Shufelt reports (for subscribers).

The big global banks haven’t been this pessimistic on the outlook for markets since the financial crisis

The last time year-ahead forecasts from major global research firms were this pessimistic was during the depths of the financial crisis. The negativity has been so pervasive, stoked by a series of major downdrafts in equity and commodity markets, that it’s been difficult to maintain an objective perspective about investment prospects for 2019. Scott Barlow takes a look at what market strategists are saying (for subscribers).

What portfolio manager Christine Poole is thinking and buying amid the stock market selloff

Portfolio manager Christine Poole is getting a lot of the same questions from investors amid the recent market pullbacks. “Investors want to know, ‘Is this the end of the cycle? Should we be more conservative and raise cash?’ ” says Ms. Poole, chief executive officer and managing director at Toronto-based GlobeInvest Capital Management Inc. Her view is that the latest drop isn’t a prelude to a recession, at least not in the near term. Her firm, which oversees about $170-million in assets for predominantly high-net-worth clients, invests mostly in large-cap North American stocks, about 40 per cent of which are U.S. companies. GlobeInvest’s all-equity portfolios are up an average of 4 per cent over the past year, as of Nov. 16, versus a drop of about 5 per cent for the S&P/TSX Composite Index. The Globe and Mail recently spoke with Ms. Poole about what she’s been buying and selling, and a high-flying retail stock she regrets not getting into. Brenda Bouw reports (for subscribers).

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The Canadian oil ETF: This could be the ugliest chart you’ve seen all week

With the rise of niche ETFs, there is seemingly an exchange-traded fund for everything. That includes an ETF for Western Canadian Select, the heavy-oil benchmark that made headlines last week when it tumbled to less than US$14 a barrel. Not surprisingly, the Canadian Crude Index ETF (CCX-T) has plummeted in tandem. Created in 2015 by Calgary-based Auspice Capital Advisors Ltd., CCX tracks an index that was “designed to provide returns that reflect the price of owning crude oil that is produced in Canada,” specifically WCS, according to company documents. The ensuing years have been a struggle. At launch, WCS traded hands at around US$50 a barrel; now, WCS is about US$20, a reflection of continuing troubles in the oil patch. The ETF has plunged about 78 per cent since inception, as of Tuesday’s close. Matt Lundy reports (for subscribers).

Caught up in net-net: 12 Canadian value stocks that pass the test

Robert Tattersall takes a look at the bargain bin of stocks tossed out by discouraged tax-loss sellers. As a value investor, his preferred strategy to identify these bargains was the classic net-net working capital screen favoured by the original value investor, Benjamin Graham. These are stocks that trade below the value of current assets minus all liabilities. He outlines 12 stocks that fit the bill. (For subscribers).

Rob Carrick’s 2018 robo-adviser guide: Find the right firm for you

Rob Carrick takes a close look at all the robo-advisers in Canada and examines what they have to offer and which one might be right for you as an investor.

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Others (for subscribers)

Global fund managers are selling technology stocks to buy this sector

Texas holds the ‘worst nightmare’ for OPEC and Alberta

Thursday’s Insider Report: CFO invests over $280,000 in this security yielding 4.9%

Thursday’s analyst upgrades and downgrades

Wednesday’s analyst upgrades and downgrades

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Wednesday’s Insider Report: CEO invests over $1.2-million in this oversold stock

DoubleLine’s Gundlach: Now is the time for capital preservation

Here’s one pipeline stock ranking where Enbridge is tops

Bring me the bleach: Investors seek stability as stocks fall

Strong and growing cash flow: A bulwark against higher inflation

Stock market volatility: Options traders expect more, more, more

Investors caught in crossfire of fight for U.S. holiday shoppers

Others (for everyone)

Wall Street’s slide is flashing a warning about the U.S. economy

What you should be doing in reaction to every stock market downturn

Ask Globe Investor

Question: In anticipation of higher interest rates in Canada and the United States, is John Heinzl contemplating making any changes to the holdings in his model portfolio, particularly those holdings that are interest-rate sensitive?

Answer: Well, as I’m sure you realize, interest rates have already gone up. The five-year Government of Canada bond, for instance, now yields about 2.3 per cent – roughly double its yield at the start of 2017. So, the time to sell my interest-rate sensitive stocks has probably passed.

Not that I would have sold, anyway. My strategy is based on buying and holding great companies that raise their dividends regularly, and that includes utilities, power producers, real estate investment trusts and other stocks that are sensitive to rising rates. I would much rather collect an uninterrupted stream of dividends than try to time my sales and purchases based on predictions (which may be wrong) about where rates are heading.

Even if I timed my sales at precisely the moment when interest-sensitive stocks started falling (easier said than done), how would I know when to buy back in? Not only is trading fraught with risks, but it’s way more stressful than buying and holding.

Besides, research has shown that while sectors such as utilities tend to fall when rates initially rise, the shares eventually rebound. Indeed, utilities such as Fortis Inc. (FTS) and Emera Inc. (EMA) have posted double-digit gains over the past month, which suggests investors believed the stocks had been driven down to attractive levels. It could also indicate that, with the global economy slowing, rates might not rise as far, or as fast, as previously believed.

(Disclosure: I personally own FTS and EMA, which are also in my model Yield Hog Dividend Growth Portfolio.)

So, no, I won’t be trading in and out of interest-sensitive stocks. The only time I consider selling is when the outlook for the company has changed for the worse, but that’s not the case with any of my utilities, power producers or REITs.

--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

Preferred shares have been getting beaten up recently. John Heinzl will explain why in Saturday’s Investor Clinic.

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

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Compiled by Gillian Livingston

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