I pay more attention to investment guidance from the Morgan Stanley research team than any other firm. The group is led by New York-based equity strategist Michael Wilson, global strategist Andrew Sheets in the U.K. and chief economist and global head of economics Chetan Ahya.
Morgan Stanley strategists were among the first to declare a new bull market in April of 2020, the first to warn of building inflation pressures, and more recently downgraded U.S. small-cap stocks as they peaked in mid-March.
Mr. Wilson’s most recent research report emphasized a much more cautionary tone on equity markets. He believes Friday’s weak U.S. jobs number is a sign of things to come, as global supply chain disruptions and rising demand for labour put the brakes on the North American economy. For investors, “Reopening brings more risk than opportunity at this point,” he wrote.
Rising labour costs are much needed economically (boosting consumption) and socially (helping reverse wealth inequality), but they also threaten corporate profit margins. The sharp increase in materials costs – lumber, copper, crude oil, virtually all commodities – poses another threat to profitability that Mr. Wilson argues is not yet reflected in current stock prices.
The team also forecasts that the strength of the positive trends driving equities higher is set to fade. Mr. Wilson believes the current quarter will mark the peaks in year-over-year earnings and economic growth, market liquidity and investor leverage.
Importantly, Morgan Stanley is not predicting the end of the bull market - merely a pause likely to feature flat benchmark performance for the remainder of 2021 and potentially a temporary market correction of between 10 and 20 per cent. New highs for major equity indexes are expected in 2022.
The warnings from Mr. Wilson come at a convenient time for investors. After the furious rallies of the past 12 months, it feels like the right time to take a breath and patiently explore new, higher-quality investment opportunities better suited to the middle stages of a bull market.
-- Scott Barlow, Globe and Mail market strategist
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Stocks to ponder
Finning International Inc. (FTT-T) This dividend stock has a unanimous buy call from eight analysts and is reporting quarterly results this week. The world’s largest Caterpillar dealer has a healthy balance sheet, tailwinds from an economic recovery, and is benefitting from strong residential construction activity. Jennifer Dowty takes a close look at the investment case.
The Rundown
As mutual funds roar back, Canadian asset-manager stocks may be worth a look
Independent asset managers have been facing stiff competition from the onslaught of low-cost index-tracking products. But these companies are showing some life in 2021: Assets under management are rising and money is flowing back into mutual funds, giving share prices a lift. As David Berman tells us, investors looking at asset managers will find low price-to-earnings ratios of about 10 and high dividend yields averaging about 4 per cent.
How dividend stocks can protect you from inflation
Inflation is certainly heating up. So what should investors do? As John Heinzl tells us, owning stocks that churn out a growing stream of cash is a great way to preserve your spending power.
Why ‘sell in May’ just isn’t a good idea
Over the years, the Sell in May strategy has come to mean staying out of the markets over the period from May 1 to Sept. 30, although some versions suggest waiting until the end of October. Is it a good idea? Not according to Gordon Pape.
A five-part guide to eliminating nasty surprises from bonds in a rising rate world
Most investors need some degree of fixed income exposure for protection against a serious stock market decline. The challenge right now is to pick the right type of bond exposure to provide this portfolio insurance while offering some degree of predictability as rates rise. For help on this, Rob Carrick has put together this guide to help investors find the most comfortable fixed income fit for their portfolios.
The stock market loves Biden more than Trump. So far, at least.
From the moment he was elected president in 2016 through his failed campaign for reelection, Donald Trump invoked the stock market as a report card on the presidency. The market loved him, Trump said, and it hated Democrats, particularly his opponent, Joe Biden. During the presidential debate in October, Trump warned of Biden: “If he’s elected, the market will crash.” In a variety of settings, he said that Democrats would be a disaster and that a victory for them would set off “a depression,” which would make the stock market “disintegrate.” So far, it hasn’t turned out that way. Jeff Sommer of The New York Times has this reality check.
Fund managers see value, cyclical stocks running further despite slow U.S. jobs recovery
Some portfolio managers say that blow-out earnings from several large technology companies over the last few weeks are not enough to keep making outsized bets on the sector. Instead, those fund managers say that they are continuing to rotate into value and cyclical stocks - whose fortunes are closely tied to economic conditions - in anticipation that the economic recovery will be longer and more gradual than originally anticipated.
China’s commodity imports present increasingly mixed picture
Depending on your viewpoint, China’s imports of major commodities in April were either a sign of the ongoing strength as the world’s second-largest economy continues its post-pandemic recovery - or early evidence of moderating demand. Clyde Russell of Reuters explains.
Cryptocurrency ethereum is flourishing but risks linger
Ethereum has outperformed major digital currency rivals this year, bolstered by the surge in decentralized finance and the anticipation of a technical adjustment this summer, but it faces hurdles that could stall its rise. Gertrude Chavez-Dreyfuss of Reuters reports.
Also see: Dogecoin tumbles after Musk calls it a ‘hustle’ on Saturday Night Live
Others (for subscribers)
Monday’s analyst upgrades and downgrades
Monday’s Insider Report: Director invests nearly $1.6-million in this dividend stock
Wealthy hedge funds, money managers received Canada Emergency Wage Subsidy
Ask Globe Investor
Question: Are there any tax-free savings accounts that can handle a dividend reinvestment plan? I can’t find one.
Answer: There are two types of dividend reinvestment plans. Traditional or “true” DRIPs are available only to investors who register their shares directly with the company’s transfer agent. These DRIPs let you purchase fractions of shares, which means every penny of your dividend is reinvested. However, traditional DRIPs are not available for TFSAs, registered retirement savings plans or other registered accounts.
The other type of plan is a “synthetic” DRIP operated by a broker. These plans do not require you to register your shares with the transfer agent – the shares are held by the broker on your behalf as a “beneficial shareholder” – and are available for all types of accounts, including TFSAs, RRSPs and registered retirement income funds. The downside is that these plans typically allow purchases of whole shares only, which means a portion of the dividend will be paid in cash. I don’t consider that a deal breaker, however. You can always buy a low-cost index mutual fund that you can use to regularly “soak up” the residual cash that accumulates in your account. That way, all of your money will be reinvested.
--John Heinzl
What’s up in the days ahead
Larry MacDonald catches up with short seller Carson Block, who explains why he’s staying clear of Canadian stocks these days.
Click here to see the Globe Investor earnings and economic news calendar.
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Compiled by Globe Investor Staff