No one is quite sure where stock markets are going next. We’ve seen a strong rebound from the March lows, which is encouraging. But worries about a recession cloud the outlook for the coming months, leaving investors wondering what to do.
In my experience, there are four ways to make money in sideways or down markets.
Look for hot spots
There are always sectors of the economy that buck the trend for specific reasons. Last year it was energy stocks, which surged after Russia’s invasion of Ukraine drove up international oil prices. This year it’s gold. Mining stocks have been buoyed as the price of the precious metal has surged to about US$2,000 an ounce. The S&P/TSX Global Gold Index is up 14.69 per cent this year, as of April 21. But keep in mind that these situations tend to be temporary. The S&P/TSX Capped Energy Index is actually down 2.3 per cent this year, even though oil prices are still high.
Buy beaten-down quality
The S&P/TSX Capped Financials Index is down 9 per cent over the past 12 months. The collapse of Silicon Valley Bank and Signature Bank and the forced sale of Credit Suisse to rival UBS poured gas on recession fears that were already making investors wary. But we’re seeing evidence that the sector was oversold. The Financials Index is up about 3 per cent since the beginning of April, an indication that people see current prices as a bargain.
Find recession-resistant companies
George Weston Ltd. has gained 27.9 per cent from its 52-week low. Loblaw Companies Ltd. stock is up 16.4 per cent. Metro Inc. is ahead 15.3 per cent. Empire Company Ltd. has gained 9.6 per cent. What do they all have in common? Food. What could be more recession-proof?
Focus on yield
Almost all high-yield companies have seen their prices battered since the central banks started to aggressively raise interest rates to combat inflation. There are two main reasons for this.
First, many of these companies carry high debt loads. Utilities, pipelines, telecoms and REITs have invested billions of dollars to build networks or finance property purchases. All that debt carries interest costs. A lot of it is at fixed rates, so is not affected by central bank increases – at least not immediately. But any variable-rate debt increases the borrower’s interest costs, just as it does for a homeowner with a variable-rate mortgage.
Second, as yields on safe government bonds rise, investors demand a better return for holding riskier stocks. That means they’re looking for higher yields. Unless a company is able to implement unusually high dividend increases, the only way for yields to rise to meet the bond challenge is for stock prices to fall.
That’s exactly what has happened. The TSX subindexes tell the story. The Capped Utilities Index is off 11.74 per cent in the past year. The Telecommunications Services Index has lost 8.5 per cent. The REIT Index is down 14.5 per cent since this time in 2022.
But here’s something you may not have noticed. All these subindexes are up in 2023. It’s a sign that investors believe we are close to the end of this rate-hike cycle, which, if true, would see prices of these stocks continue to edge higher in the coming months.
Of course, some stocks will fare better than others, but the overall trend should be for prices of dividend stocks to rise and yields to decline accordingly as we work our way through the rest of 2023.
Gordon Pape is the editor and publisher of the Internet Wealth Builder and Income Investor newsletters. For more information and details on how to subscribe, go to www.buildingwealth.ca/subscribe