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U.S. institutional portfolio manager Ben Carlson noted Friday that one out of every five U.S. stocks was down more than 20 per cent from 52 week highs, one in eight was down 30 per cent and over six per cent had their values wiped out by more than half. Despite this, the S&P 500 as a whole was only lower by 3.5 per cent relative to the November 18 high.

Mr. Carlson’s conclusion, correct in my opinion, is that most stocks don’t matter to index returns. The largest stocks in the market capitalization-weighted S&P 500 - those that predominantly determine index returns - are holding up well and obscuring the damage under the surface. (Apple Inc. performance, for instance, affects index returns about 20 times more than Blackrock Inc. because of their relative market caps).

There is significant evidence of market carnage over the past week. I almost passed out when I saw the stock of pandemic beneficiary Docusign Inc. was lower by US$99 or 42 per cent in Friday’s trading session. The ARKK Innovation fund, which generated huge returns by holding the highest of high flying stocks in 2020, is down 40 per cent from the February peak. There are nine of the fund’s holdings down more than 70 per cent according to CNBC.

Most investors have become accustomed to the current trend of megacap outperformance. But nothing lasts forever where markets are concerned. At some unknowable point in the future, the broader market will outperform the largest stocks which, in most cases, are now expensive in price to earnings terms.

Megacap underperformance will, I think, confuse a lot of investors. The index will be down sharply while portfolios more diversified by sector will be just fine.

We are accustomed to thinking of the index as the stock market but this is not really the case. To a significant extent, benchmarks are merely tracking the price action of the largest decile of companies. I should note that this is also the case for the S&P/TSX Composite Index, where Shopify Inc. price moves have roughly 20 times the effect on the index compared with Telus Corp.

-- Scott Barlow, Globe and Mail market strategist

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Stocks to ponder

Cameco Corp. (CCO-T) This Canadian uranium stock has been resurrected this year by the potential of nuclear power to help address the climate crisis. But it could be a long and painful wait for that potential to become a reality. Tim Shufelt looks at the latest investment case for the company.

Fiera Capital Corp. (FSZ-T) Over the past three weeks, the share price has tumbled 11 per cent, putting this stock in correction territory. But the share price may soon find downside support, says our equities analyst, Jennifer Dowty. She sees a lot of potential catalysts for a stock rebound, including proven leadership, reasonable valuation and an attractive 8.4 per cent yield.

The Rundown

Tight labour markets spell danger for investors

Drum-tight labour markets in the U.S. and to a lesser degree in Canada are resulting in rising wage pressures. From a social perspective, there is a lot to like in this trend, but for investors, there are also dangers. Ian McGugan explains.

Hawkish Fed boosts value stocks’ appeal for some investors

Some investors are preparing for a hawkish turn from the Federal Reserve by buying the cyclical, economically-sensitive names they gravitated to earlier this year, as expectations grow that the central bank is zeroing in on fighting inflation. David Randall of Reuters reports.

New rules for advisers mean they should be saying a big, fat no to a lot of new investing products

One of the ways investment advisers earn their fees is to act as a client’s own personal Dr. No. That cool new way to invest in real estate? No – you already have enough real estate exposure in your life. Bond replacements that offer better returns? No – they won’t do a thing to protect your portfolio when stocks crash. Maybe an exchange-traded fund investing in metaverse stocks? No – just no. But as Rob Carrick tells us, it appears that advisers are not saying no often enough. By the end of this year, they must follow “know your product,” or KYP, rules designed to ensure they and their employers think harder about the products used in client portfolios.

Others (for subscribers)

The most oversold and overbought stocks on the TSX

Gordon Pape: My Buy and Hold Portfolio continues to gain over 13 per cent annually

Share buybacks by firms globally hit a three-year high

Monday’s analyst upgrades and downgrades

Monday’s Insider Report: CEO is a buyer of this financial stock after it hit a record high and hiked its dividend

Ask Globe Investor

Question: In 2000, I purchased shares of Imaging Dynamics Co. Ltd. (IDL) because I thought its digital X-Ray technology looked promising. At one point, I had 1,000 shares. However, the company has consolidated its shares several times over the years, including a one-for-20 consolidation this month, and now I have just two shares. Do you think there is a scam going on here? And with the share consolidations, how do I calculate my adjusted cost base?

Answer: I don’t know if it’s a scam, but it’s certainly been a terrible investment. The shares, which are listed on the TSX Venture Exchange, were the subject of a cease-trade order in May for the company’s failure to file audited financial statements. The stock resumed trading in November and last changed hands on Nov. 17 at 10.5 cents a share. Assuming you could sell at that price, your two shares would be worth a grand total of 21 cents. In other words, they’re pretty much worthless.

The shares do have some value, however, if you sell them for a capital loss. You could then carry the loss backwards up to three years or forward indefinitely to offset capital gains in those years and reduce your taxable income.

Even with all the share consolidations – I counted three since 2013 – determining your adjusted cost base (ACB) should be relatively simple. Just add up all of the money (plus commissions) you invested in the stock. That’s your total ACB. Your capital loss is the ACB minus any proceeds you receive when you sell your shares (which will be negligible, if not negative, after commissions). You may wish to ask your broker or the company’s transfer agent – depending on the form in which your shares are held – if it can help to facilitate a disposition of the shares. Keep in mind that you can only use the loss for tax purposes if the shares are held in a non-registered account.

I probably don’t need to remind you that investing in early-stage companies is a risky endeavour. That’s why I stick with established, dividend-paying stocks and broad index exchange-traded funds.

--John Heinzl

What’s up in the days ahead

The Contra Guys look at the investment case for buying shares in the banking giant Credit Suisse.

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

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Compiled by Globe Investor Staff