Stock markets continued their grind higher through November and look to climb the ‘wall of worry’ into year end. The long-awaited China-US trade deal looks to be in the final stages of being signed, as both countries seem ready to move on to other issues. Meanwhile, the US impeachment hearing appears to have been a waste of time, at least so far.
Many of the concerns that had been weighing on the market earlier in the year have faded away and the bears are running out of arguments for a sell-off. The only concern in the short term is a technical overbought condition, which could result in a quick pullback. Central banks are dovish, the consumer seems happy and markets are responding. However, sentiment is one of the trickier parts when figuring out the valuation of an investment.
Most investors spend way too much time trying to figure out the earnings per share of multi-billion-dollar corporations to the penny. It’s a bit futile when the multiples people pay for those earnings can swing from 15x to 20x and back, depending on a tweet or a change in sentiment.
At the moment, everyone is pretty content. The Fed is market-supportive and the White House wants to run this market higher into the election. As a result, yields have remained low and multiples have expanded.
Q3 earnings season came and went and, while the headlines were lacklustre, investors can be reassured the worst-case scenario of an earnings recession isn’t here. Top-line growth has been ok and bottom-line earnings have grown as the result of buybacks, not margin expansion. CEO confidence is getting stronger as fears of the trade war impacting business haven’t materialized as much as feared. We’re also starting to see a pickup in corporate activity, including acquisitions.
2019 is setting up to end as one of the best years on record. The returns are a little overinflated when you consider how badly 2018 ended, but both bonds and equities have performed well.
Strategies such as hedging, shorting or pair trading, which are done to mitigate risk, aren’t needed when everything is working. But that doesn’t mean they are dead forever and shouldn’t be written off, they will be needed in the future. So, when everything is working, where are the opportunities?
Tax-loss selling may give us some buying opportunities. Energy and cannabis stand out as the sectors which have lagged the market the most with many investors looking to offset gains. We are becoming more constructive on the energy sector. The valuation disconnect has widened throughout the year as earnings have improved. Cannabis could take longer to recover as reality has failed to meet heightened expectations, but there are several opportunities worth looking into.
Trimming risk may not be a bad strategy into year-end, as you never want to wait until everyone else has decided to sell. Of course, selling everything too early can also be a negative event. The bull market in stocks is now the longest on record, yet that alone isn’t reason for a sell-off. Volatility will come back and hedging strategies will be needed once again. As we head into the next decade, we can’t forget the lessons of the last.
Ideas with Purpose
Purpose Tactical Asset Allocation Fund (RTA) – With the holidays around the corner, most investors will start paying more attention to their personal lives and less attention to their trading screens. December is typically a positive month for markets, but last year reminded us that typical isn’t a guarantee. RTA gives investors peace of mind, as its systematic, rules-based model can quickly move from risk-on to risk-off when the market turns sour. It’s a simple way to add some security while ensuring you keep most of the upside, should markets chug along.
Purpose Multi-Asset Income Fund (PINC) – Diversification is another proven way to be more proactively defensive. PINC takes the concept even further with active management and the unique addition of alternative asset classes. Who wouldn’t want to find consistent, stable income from multiple return streams under the tree?
— Greg Taylor, CFA is the Chief Investment Officer of Purpose Investments
All data sourced from Bloomberg unless otherwise noted.
The content of this document is for informational purposes only, and is not being provided in the context of an offering of any securities described herein, nor is it a recommendation or solicitation to buy, hold or sell any security. The information is not investment advice, nor is it tailored to the needs or circumstances of any investor. Information contained in this document is not, and under no circumstances is it to be construed as, an offering memorandum, prospectus, advertisement or public offering of securities. No securities commission or similar regulatory authority has reviewed this document and any representation to the contrary is an offence. Information contained in this document is believed to be accurate and reliable, however, we cannot guarantee that it is complete or current at all times. The information provided is subject to change without notice.
Commissions, trailing commissions, management fees and expenses all may be associated with investment funds. Please read the prospectus before investing. If the securities are purchased or sold on a stock exchange, you may pay more or receive less than the current net asset value. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated.
Certain statements in this document are forward-looking. Forward-looking statements (“FLS”) are statements that are predictive in nature, depend on or refer to future events or conditions, or that include words such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” intend,” “plan,” “believe,” “estimate” or other similar expressions. Statements that look forward in time or include anything other than historical information are subject to risks and uncertainties, and actual results, actions or events could differ materially from those set forth in the FLS. FLS are not guarantees of future performance and are by their nature based on numerous assumptions. Although the FLS contained in this document are based upon what Purpose Investments and the portfolio manager believe to be reasonable assumptions, Purpose Investments and the portfolio manager cannot assure that actual results will be consistent with these FLS. The reader is cautioned to consider the FLS carefully and not to place undue reliance on the FLS. Unless required by applicable law, it is not undertaken, and specifically disclaimed, that there is any intention or obligation to update or revise FLS, whether as a result of new information, future events or otherwise.