Tuesday’s market volatility was blamed on “inflation angst” by one major news service, but this explanation is unsatisfactory.
Bond yields, both nominal and inflation-adjusted, barely budged on the day. Industrials and energy, two sectors that have historically outperformed during periods of inflation, were the two worst-performing sectors on the day.
This is not to suggest that inflation pressure that threatens corporate profit margins doesn’t exist. The U.S. consumer price index was released early Wednesday and indicated the biggest month-over-month jump in prices since 2009. (As an aside, the 2009 precedent may prove important in that it did not usher in an era of inflation – deflation remained the central risk for most of the next decade).
What’s more, BMO chief economist Doug Porter has highlighted an April survey that indicated 36 per cent of small businesses intended to raise prices, a 10 percentage point increase from March. The last month-over-month jump of this magnitude happened in 1981. That, combined with line-ups at U.S. gas stations and broadly rising global commodity prices reminded Mr. Porter of the 1970s.
The underperformance of cyclical sectors on Tuesday is the most important market trend of the week, even as energy stocks are performing well on Wednesday. It signals that the reflation trade has stalled out at least for now, and the bounce back to normal economic activity is already widely price into equities. As I noted Monday, Morgan Stanley believes we are seeing the peaks in year-over-year economic data and upwards profit revisions this quarter.
It’s not easy for Canadians re-confined by the pandemic, but investors should adopt a more ‘business as usual’ approach to new opportunities. Instead of trying to identify the biggest winners from the return to normalcy, the search should move to attractively valued sectors with the best growth profiles for 2022 and beyond.
Health care and cloud computing, for example, remain my favourite long-term investment themes thanks to age demographics and the ongoing digitization of the economy, respectively. My colleague Tim Shufelt recently detailed the positive outlook for copper miners as another promising theme, as the switch to renewable energy is set to increase demand.
Investors should continue to pick the sectors and investment vehicles that best suit their individual risk tolerances. Broadly, however, they should be adopting a longer-term perspective, positioning portfolios for the time when the pandemic is a distant memory.
-- Scott Barlow, Globe and Mail market strategist
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Stocks to ponder
Trisura Group Ltd. (TSU-T) This stock has been a standout among companies that have not let the pandemic slow them down. In 2020, profits soared 375 per cent and book value increased nearly 31 per cent. The share price has risen 200 per cent over the past 12 months, no doubt leaving investors wondering how a little-known insurance company can outperform the S&P/TSX financials sector by more than 150 percentage points. The bigger question: Where does the stock go from here? David Berman goes looking for answers.
First US Bancshares Inc. (FUSB-Q) This is a small bank that was established in 1952 and currently has 19 branches in Alabama and Virginia. The first-quarter results reported recently were tuned more to stability than exciting growth. Net income was US$950,000, up from US$847,000. Deposits climbed by 4.6 per cent and lending by 3.1 per cent. Numbers moving in the right direction, but not exhilarating. Nevertheless, the Contra Guys believe this stock is in store for a double.
Home Capital Group Inc. (HCG-T) Investors will be watching to see how Canada’s hot housing market has benefited the alternative mortgage lender when it reports first-quarter earnings before markets open on Thursday. Brenda Bouw has this earnings preview of the stock that has doubled in the past year.
The Rundown
‘What is the point of having a savings account if the government is going to tax it?’
Interest on savings is minimal these days, and the government takes a lot of it - unless it’s in a tax-sheltered account. So what’s the point? Rob Carrick shares his thoughts.
Peaky markets more durable than they look
Global investors have flipped from ‘buy everything’ to ‘peak everything’ in a matter of weeks. Fears of ‘too much, too soon’ prompted many investment firms - including Deutsche Bank, Morgan Stanley and JPMorgan - to warn in recent weeks of a possible 5-10% correction ahead. This week’s tech-led shakeout - the second such wobble in less than 3 months - reinforced a whole host of those anxieties - everything from ‘peak’ business sentiment, earnings and output growth to ‘peak’ central bank largesse, excess liquidity and investment flows. So, is that it? Has the great stock market ‘discounting mechanism’ - as Morgan Stanley describes it - already discounted the entire post-pandemic recovery? Not so fast, reports Mike Nolan of Reuters.
BMO hikes targets on TSX, S&P 500 after ‘blow-out’ earnings season
Heading into 2021, BMO’s chief investment strategist was predicting robust gains for the year ahead for both the TSX and S&P 500, cementing his status as one of Bay Street’s more reliably upbeat prognosticators. In the wake of the rosy first-quarter earnings season that’s just wrapping up, Brian Belski now thinks he wasn’t bullish enough. On Tuesday, he raised his year-end targets on both benchmark indexes as he jacked up earnings expectations for the remainder of the year. Darcy Keith goes over Mr. Belski’s new targets.
Looking to buy stocks at bargain prices? Try these emerging-market ETFs
In 2020, in light of the pandemic, the U.S. stock market’s performance surprised almost everyone. But further from the headlines, some far cheaper markets scored more goals. And as Andrew Hallam tell us, they are still trading at far more attractive valuations.
Record lumber prices have sent these four ETFs soaring
The home construction and renovation boom playing out during the pandemic has sent lumber prices soaring, alongside the handful of exchange-traded funds related to the sector. Joel Schlesinger takes a look at them.
Signs of investor vertigo as copper hits record highs
Copper continues to rewrite the record books. London Metal Exchange three-month metal punched through its previous record high of $10,190 a tonne, set in 2011, to touch $10,747.50 on Monday. But there is clear investor caution about a market that has risen in a near straight line for more than a year. And somewhat ominously, given China’s role in the global copper market, Chinese investors appear particularly cautious. Andy Home of Reuters looks at the inner workings of what’s really going on in the copper market.
Buyback to the future: prepandemic peak in sight
Trillions of dollars stashed by U.S. and European companies during the coronavirus pandemic are starting to flow to shareholders, largely through buybacks, after a 2020 drought.
Others (for subscribers)
Ark’s Cathie Wood predicts ‘serious correction’ in commodities
Wednesday’s analyst upgrades and downgrades
Tuesday’s analyst upgrades and downgrades
Wednesday’s Insider Report: Director cashes out $1.6-million from this soaring copper play
Tuesday’s Insider Report: Multiple insiders are selling this mining stock trading near record levels
Number Cruncher: Ten Canadian-listed small- and mid-cap value stocks to diversify your portfolio
Globe Advisor
The Financial Times: Realistic investors broaden out market bets with ETFs
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Ask Globe Investor
Question: I have about $70,000 to invest, but when I look at charts of the Canadian and U.S. indexes they are all near record highs. Would it be better to wait for a pullback before investing?
Answer: There are at least two problems with waiting for a pullback.
First, nobody knows when it will happen or how big it will be. Markets could rise another 20 per cent, for example, and then fall 10 per cent – the technical definition of a “correction.” But you’d still be buying at levels that are much higher than today.
The second problem is that, when a pullback arrives – now or later – you might not have the stomach to invest because you’ll be worried that the sell-off will continue.
Keep in mind, too, that stock indexes being near record highs does not necessarily signal that a correction is around the corner. For every strategist who says stocks are overvalued, there is another strategist forecasting continued gains in 2021 and 2022 as the economy rebounds strongly once the pandemic is under control.
Anyone who is being honest will tell you they don’t know where the market is heading in the short run. There are too many variables – interest rates, earnings, the pandemic, geopolitics, economic growth, valuations, the madness of crowds – to consider. But one thing we do know is that markets have risen over the long run.
Reflecting the market’s general upward trend, studies have shown that investing a lump sum usually outperforms the gradual approach of dollar-cost averaging. With that in mind, you may want to put the odds in your favour by deploying your cash now and focusing on what you can control, such as buying high-quality stocks or exchange-traded funds, keeping your costs low, staying diversified and resisting the urge to trade. Those things – not the ability to time your entry point perfectly – will have more impact on your returns over the long.
--John Heinzl
What’s up in the days ahead
Rob Carrick will have some thoughts on who the true winners will be coming out of this bull market.
Click here to see the Globe Investor earnings and economic news calendar.
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Compiled by Globe Investor Staff