American institutional portfolio manager Ben Carlson wrote “5 Signs This Might Be a New Bull Market” almost a week ago, before recent market volatility. His intention was to outline the main drivers of the bullish case for markets. As it turns out, he managed to detail all the important ways the market rally has stalled and the column might be more relevant as a result.
Mr. Carlson first noted that, at the time, the Nasdaq Composite Index was making new highs, showing strong price momentum. The technology-heavy benchmark is now 5.7 per cent from its recent peak but still a whopping 57.7 per cent above the March 23 lows.
The manager then noted the strong performance of U.S. small cap stocks relative to large caps as an indicator that the market recovery was broadening out from FAANG leadership as the economy recovers from the near-full shutdown. But the Russell 2000 small cap index has dropped a painful 12.4 per cent from its highs on June 8th.
The late-May resurgence of value stocks was cited as another sign that more companies were participating in the rally. This trend, however, has reversed in recent days with value stocks underperforming the broader benchmarks significantly.
The outperformance of high beta stocks – those that rise or fall most when benchmark levels change – relative to defensive stocks was then discussed as a signal of optimistic investor sentiment and further market gains ahead. Again, this trend reversed. The Invesco S&P 500 High Beta ETF has dropped 18 per cent since June 8th.
Mr. Carlson then emphasized rising U.S. bond yields to underscore improving expectations for future economic growth. The U.S. 10 year bond yield climbed 25 basis points to 0.9 per cent between the end of May and June 5th but has now dropped back to 0.67 per cent.
The author was outlining the bullish argument, not making a forecast, so I’m not judging the timing or the content of the piece at all.
What it provides for investors now, is a roadmap to assess when the current bout of equity market volatility will end. New highs for the Nasdaq or rising bond yields, for example, could very well signal the resumption of the rally as the economy recovers from the COVID-19 pandemic.
-- Scott Barlow, Globe and Mail market strategist
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Stocks to ponder
Cargojet Inc. (CJT-T) This stock is soaring to record highs. A key driver for the company is e-commerce growth as consumers in lockdown shift their shopping behaviours to online purchases. Consequently, the company is delivering solid earnings growth - a trend that is anticipated to continue. But the stock is not cheap and is trading at a lofty multiple relative to its historical levels. Jennifer Dowty has a complete profile of the stock. (for subscribers)
The Rundown
Advice on what portfolios should look like right now
Back in early April, Gordon Pape was suggesting a high cash position in portfolios, in the 35-per-cent range. He also advised high-quality (AAA bonds) for 20 per cent to 25 per cent of the portfolio. As for stocks, he advised being very selective. Given the uncertainty about what was coming at the time, he suggested limiting equities to 30 per cent to 40 per cent of the total. He also thought a small holding in gold would be prudent. Now that we’re into mid-June and stocks are on a better footing, he has some updated advice on what to do with portfolio weightings right now. (for subscribers)
Bombardier, BlackBerry axed from blue-chip TSX 60 index
Two legendary names of Canadian business that have seen better days – Bombardier Inc. and BlackBerry Ltd. – have fallen out of the country’s blue-chip stock index. S&P Dow Jones Indices said late Friday it will remove the two from the S&P/TSX 60 later this month. They will be replaced by Algonquin Power & Utilities Corp. and Canadian Apartment Properties REIT, known as CAPREIT. The index manager also removed Bombardier from the S&P/TSX Composite Index, the broadest measure of the Canadian market. All told, S&P Dow Jones Indices added seven companies and removed 14 from the S&P/TSX Composite in Friday’s announcement. David Milstead goes over all the changes and explains why investors need to pay attention. (for subscribers)
How investors should react to the explosive mix of uncertainties they now face
It is just like stock markets to ricochet from ecstasy to despair and back again. What is unsettling is that they are now doing so over the course of days, not months. So what should investors do in this uncertain time? Ian McGugan has this analysis. (for subscribers)
Also see: How to approach investing at a time of a global pandemic
For shrinking stock markets, corona crisis looks like a turning point
The coronavirus crisis is likely to reverse a decade-long trend of shrinking equity supply that helped to power the longest bull market in history as cash-strapped companies are forced to raise equity instead of buying back their shares. Sujata Rao and Ritvik Carvalho of Reuters report. (for everyone)
Others (for subscribers)
The highest yielding stocks on the TSX, plus risk data
Monday’s analyst upgrades and downgrades
Monday’s Insider Report: Chair invests over $2-million in this Canadian bank stock
Insiders buy as Aimia sets a new flight path
Others (for everyone)
Gold and iron ore are doing equally well. Their miners are not
Globe Advisor
COVID-19 offers lesson in the importance of diversification
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Ask Globe Investor
Question: A few years ago, I sold the stocks in my tax-free savings account and withdrew the cash for a down payment on a home. Now, I want to move some of my non-registered assets back into my TFSA and use up the available contribution room. My understanding is that I must sell the holdings in my non-registered account first – which would trigger capital gains taxes – before contributing the cash to the TFSA and repurchasing the shares. Alternatively, I was considering waiting until a future maternity leave when my income is lower, hoping to lessen the tax implications. Any advice?
Answer: First, a clarification: You do not need to sell and repurchase your investments. You can transfer the shares “in-kind” to your TFSA, which will avoid brokerage commissions. However, when you transfer shares in-kind to your TFSA (or registered retirement savings plan), for tax purposes you must still report the transfer as if it were a sale, using the fair market value of shares at the time of the transfer as the “sale” price to calculate your capital gain. (Only 50 per cent of capital gains are added to your income and taxed.)
If you transfer shares with unrealized losses, however, you are not permitted to use those losses for tax purposes to offset your capital gains. That’s because, when you maintain ownership of the shares, the Canada Revenue Agency considers it a “superficial loss." If you have shares with unrealized losses, you may be better off selling the stocks first and contributing the cash to your TFSA so that you can claim the loss. Keep in mind that, to avoid triggering the superficial loss rule, you must wait at least 30 days before repurchasing the same security in your TFSA. Alternatively, you could purchase a similar but not identical security immediately in your TFSA without triggering the superficial loss rule.
If you expect to have a lower marginal tax rate soon – say in the next year or two – waiting to do the in-kind transfer could make sense. However, consider that you will be paying taxes on any investment income received while your stocks remain in your non-registered account. So, if the timing of your maternity leave is uncertain, you may wish to consider doing the in-kind transfer now.
It’s also important to consider how much your marginal tax rate will actually drop when you take a leave. “She’ll probably be getting employment insurance maternity benefits … and her employer [may] top up her maternity benefits. Perhaps her income won’t be that much lower,” said Dorothy Kelt of TaxTips.ca. That would also strengthen the argument for transferring the shares now.
Another option is to make an in-kind contribution to your registered retirement savings plan, assuming you have room available. Because RRSP contributions are deducted from income, “an RRSP contribution of some of the investments would help offset the income from capital gains,” Ms. Kelt said. However, “if she’s in the lowest tax bracket then TFSAs are the best option.”
There are a lot of variables to consider, and I suggest you run some different scenarios to see which is likely to produce the most beneficial results for you.
--John Heinzl
What’s up in the days ahead
Savings account interest rates are drying up as a shaken nation rethinks the stock market. Rob Carrick will have some advice on how savers can make the best of the situation.
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Compiled by Globe Investor Staff