No sign of the Grinch… yet

Stock markets continued their grind higher through November and look to climb the ‘wall of worry’ into year end

No sign of the Grinch… yet

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.

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