BofA Securities investment strategist Michael Hartnett attempted to provide all of the advice investors will need for the next decade in a single sentence in his weekly Flow Show report. To wit, “historic losses in government bonds reflect new secular reality but long-run returns from cash, commodities, small cap, value stocks only just beginning to rise, while U.S. stocks and tech stocks just starting long-term underperformance.”
The strategist’s usual bullet point writing style gives us a lot to process in a few words. The first portion of the sentence, indicating that the 30-year bull market in fixed income is over, likely signals the biggest change to the investing backdrop. For one, a sustained rise in borrowing costs (domestic bond yields historically follow U.S. yields closely) makes it highly unlikely that Canada’s favourite asset class – real estate – will be as lucrative, or even profitable at all, in the coming years.
Mr. Hartnett’s next claim that cash is beginning a period of strong relative performance is disquieting. Cash returns are always low, and outperformance by cash means mediocre-to-bad performance for the primary asset classes of equities and bonds. It also implies there won’t be many places for investors to hide from losses.
The prediction that commodities will outperform is far more welcome for domestic investors. The marked outperformance from the energy sector so far in 2022 – the S&P/TSX Energy Index has climbed 36.4 per cent compared with the S&P/TSX Composite’s loss of 6.3 per cent – suggests this process may have already begun, even if industrial metals prices remain well off their peaks.
It would take a brave investor to buy small cap stocks amid current high levels of market volatility but Mr. Hartnett believes they are set to outperform as larger cap stocks fall back.
The final three forecasts – value stocks to outperform while U.S. stocks and technology stocks underperform – are all related. What it boils down to is that technology stocks, which dominate the S&P 500 and the growth stock universe thanks to their enormity, are set for a long period of underperformance reminiscent of the early 2000s and the early 1960s. (I posted the relevant BofA chart on social media here).
Buying technology stocks on dips might be a difficult habit to break. Analysis of BofA client buying during the week before last indicated that technology stocks drew the most investor interest of all 11 major sectors.
The move from falling to rising rates, growth to value and the end of U.S. outperforming the rest of the world’s markets will leave few investment trends from the past decade intact. Investors will have time to absorb the new leadership but will have to keep an open mind to unfamiliar trends.
-- Scott Barlow, Globe and Mail market strategist
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Stocks to ponder
Cameco Corp. (CCO-T) The Contra Guys bought shares in the Canadian uranium miner in 2019 as a contrarian bet - and it turned out very well for them. But now, they’ve just sold their remaining shares. The first reason was valuation. When the final shares were sold last month, the stock was trading at its highest level since 2011, the price-to-sales ratio was at its uppermost point since 2010, and the price-to-book ratio had not been as elevated since before the financial crisis. Not only was Cameco expensive versus where it had traded historically, it was lofty versus peers and the market. There were other reasons as well, as Contra writer Philip MacKellar explains.
The Rundown
Tech wreck shows U.S. megacaps not immune to corrosive Fed tightening
Disappointing earnings from the megacap companies that led markets higher for years are cratering their shares and sending a disconcerting message about a U.S. economy that until recently had appeared to be weathering a barrage of interest rate hikes. Reuters sizes up the damage and explains why all investors should be concerned.
Also see: Fed may be alert to favoured yield curve alarm
Surprising names joining the club of banks offering 5% GICs
Just when you think you have the GIC rate game figured out, a new wrinkle emerges. Some surprising names have moved to the head of the list for best rates on guaranteed investment certificates. Rob Carrick tells us who they are.
Bullish on commodities in these inflationary times? This new TSX-listed ETF may be worth a look
Where should you invest to make money in inflationary times? One of the traditional answers is commodities. Prices of raw materials, agricultural products and metals typically increase as the cost of living rises. This translates into higher profits for producers, which in turn pushes their share prices higher. If you buy into this, where should you invest? Gordon Pape found a new ETF option for Canadian investors, and shares his thoughts.
Recession fears threaten perfect track record of post-midterm U.S. stock gains
A potential recession could end a streak of gains for U.S. stocks that has followed every midterm election since World War Two, as Lewis Krauskopf of Reuters explains.
U.S. junk bond investors face tough choice as yields spike
A sell-off in the U.S junk bond market is presenting investors with a buying opportunity. But as Reuters reports, some are holding back, worried that a looming recession could spark widespread credit defaults.
Investors beware – financial markets are laden with conflicts of interest
Financial markets are laden with conflicts of interest. Professional portfolio managers have them, as do analysts, rating agencies and some financial media. Investors must understand this. No one is watching investors’ backs, as investing professor Dr. George Athanassakos tells us.
Metal markets brace for a downturn of a different kind
The world is going to need a lot more metal if it is to meet its carbon reduction targets. Unfortunately current prices are too low to incentivize the necessary investment in new mine and smelter capacity. It’s a major conundrum which can be added to the puzzling mix of bearish outright pricing, existing supply disruption, potential Russian supply disruption and, in several cases, critically low exchange inventory. Confused? Don’t worry. So was just about everyone else in London at the metals industry’s biggest gathering this week, as Andy Home of Reuters reports.
Sustainable investing loses some shine but proponents say still good long-term bet
Some of the shine has come off sustainable investing this year amid questions about effectiveness and as oil and gas prices and stocks spiked while the wider market floundered, but those in the sector say it still makes sense for the long term, The Canadian Press reports.
Others (for subscribers)
The highest-yielding stocks on the TSX, plus risk data
Thursday’s analyst upgrades and downgrades
Friday’s analyst upgrades and downgrades
Number Cruncher: The true test of an IPO is how its business model weathers a slump
Number Cruncher: Where active management has shone in a volatile year
Globe Advisor
Should investors follow Canadian pension funds to India?
Deceptive fund name crackdown puts investment managers on edge
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What’s up in the days ahead
Are central banks really pivoting? And, if so, does that change the lackluster outlook for the stock market? Ian McGugan will share some thoughts.
It’s rate-hike central: World market themes for the week ahead
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Compiled by Globe Investor Staff