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How to keep calm and make money (while others lose theirs)

Briefing highlights

  • BMO, Goldman urge calm
  • Markets at a glance
  • Rio Tinto pays out record dividend
  • Snap surges 24 per cent
  • Ivanhoe pleads for calm on Congo tax hike

I've had it up to here with all those Keep Calm and [fill in the blank] T-shirts, coffee mugs and do-dads. It was fine when Britain did Keep Calm and Carry On in the war era, but it's seriously overdone now.

And with that off my chest, I'll tell you that's exactly what Bank of Montreal and Goldman Sachs are advising investors (thankfully, though, in different words).

"The stock market has a way of 'cleansing out' the emotion and rhetoric," BMO's chief investment strategist, Brian Belski, said Wednesday as North American stocks continued to swing wildly, though this time closing up.

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"While we never like to see clients lose money, investors need to remember that pullbacks, corrections, and pauses are vital components to any secular or cyclical bull market," Mr. Belski said in what amounts to a handbook on how to ride out the storm.

"Yes – the bull market is very much alive. This too shall pass. As such, allow the market to do its job and focus on the fundamentals of investing relative to the noise, machines, and emotion."

Goldman Sachs analysts said the same thing, also in different words, advising investors to "look past the technical correction, focus on the fundamentals."

Markets may be rebounding, but analysts warn of uncertainty ahead. Just look at what happened this morning, with New York futures down, then a slip at the open and then a bounce back.

"It remains too early for the moment to suggest that this might be the end to this particular bout of weakness, given that we remain below the levels of where we closed Monday's trading session," said CMC Markets chief analyst Michael Hewson.

"While the global economy continues to point to a positive economic outlook, the volatility around the moves of the past few days is likely to introduce an element of uncertainty and caution over the next few days, at least until the price action starts to settle down and become a bit more stable."

Having run up to record heights, global markets have been in turmoil for the past three trading days, with a rout that started Friday after a U.S. jobs report, which highlighted stronger wage gains, suggested inflationary pressures that could prompt the Federal Reserve to raise interest rates three or four times this year.

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What followed were waves of panic selling and huge index swings.

Wrong way to go about it, said BMO and Goldman Sachs.

Mr. Belski stressed he has not changed his year-end outlook for the S&P 500 or S&P/TSX composite, at 2,950 and 17,600, respectively.

Here are six points to live by from Mr. Belski:

1. A setback in U.S. stocks was overdue, and investors knew that, so "avoid feeding the momentum and stop acting surprised." Many clients, he said, have been trying to either "call the top or diagnose the market's imminent demise for months."

2. "Fundamental conditions are not ripe for a bear market or recession": Corporate profits are strong, the economy is perking up, "valuation is not extreme" and "the majority of sectors and industries in the U.S. market are showing improving fundamentals."

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3. It's not 2008-09: Most investors "default" to that ugly period as a base case for market woes, while "nothing could be further from the truth." So: "Please stop the knee-jerk comparisons whenever stock prices are negative. Those who are sounding alarms such as these are fuelling the negativity and discrediting investment strategy analysis and discipline, in our very humble opinion. Please stop."

4. "The likelihood of U.S. stocks returning to 'climbing the wall of worry' status is very high, in our view, when prices begin to recover. As such, remain disciplined and default to fundamentals instead of trying to time the market by diagnosing bottoms and tops."

5. "Avoid the hero complex." There will probably be widespread "temptation" to call the bottom but "investors should instead increase their fundamental stock-picking disciplines while focusing on high-quality, fundamental value and dividend growth, in particular."

6. "Sector and industry overreactions to the downside may create opportunities … While we continue to believe the best opportunities exist within our overweight sectors, additional emotional selling in U.S. technology, in particular, will likely provide fertile ground for bottom fishing."

Like Mr. Belski, Goldman Sachs analysts aren't changing their call for the S&P 500 to end 2018 at 2,850, 2019 at 3,000 and 2020 at 3,100, meaning gains of 5 and 3 per cent, respectively, in those final two years.

"We believe the fundamental drivers of the equity market remain intact," they said in a report.

"We continue to expect that earnings of 14 per cent, including a 5-per-cent boost from tax reform, will lift equity prices this year," they added, noting that S&P 500 earnings per share are "most sensitive" to U.S. economic growth, which is strong.

"Rising oil prices and a weakening dollar are also supportive of positive earnings growth."

Goldman's advice is to focus on cyclicals, stocks of companies with low labour costs, and those with strong balance sheets.

"We believe that each of these themes has dislocated from the underlying drivers during the past week," the Goldman analysts said.

"Rising inflation and interest rates should benefit cyclical sectors, such as financials, relative to bond proxies," they added, noting Goldman expects the yield on the 10-year U.S. Treasury to hit 3 per cent by the end of the year.

"We expect higher interest rates will also represent a headwind to firms with weak balance sheets … relative to strong balance sheet stocks … given that leverage is near record levels," Goldman said.

"Firms with low labour costs … will likely be most insulated from accelerating wages, a trend which our economists expect will persist through 2018."

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