Apr 3, 2019

Brooke Thackray's Top Picks: April 3, 2019

BNN Bloomberg

Brooke Thackray

Brooke Thackray, research analyst at Horizons ETF Management Canada
Focus: seasonal investing and technical analysis

MARKET OUTLOOK

The big concern for investors currently is the possibility of a recession in the near future. The media is replete with articles on the inverted yield curve and whether it’s a good indicator of recessions. Overall, opinion is divided. A recession is coming at some point in time; it’s just hard to tell when. Predicting a recession is like driving in the fog: you can’t see it until the last minute and by then it’s too late to take action.

More important than trying to figure out if a recession is set to take place is the global trend of slowing economic growth. A slowing trend will eventually have a negative impact on corporate profits. Currently, S&P 500 earnings are expected to contract by 1.9 per cent in the first quarter on a year-over-year basis. If earnings contract and fail to meet expectations, the stock market could experience some problems.

Currently, the stock market is on a risk-on mode as technology and the semi-conductor sectors have been strongly outperforming the stock market. Investors would be wise to pay attention to the performance of the semiconductor sector relative to the overall stock market. The sector’s relative performance will probably be a canary in the coal mine. If the sector starts to underperform the S&P 500, this will be a sign that the risk-on mode is finishing. On a seasonal basis, the stock market tends to finish its strong six-month period on May 5. The relative performance of the semiconductor sector compared to the S&P 500 could help indicate if the seasonal period is finishing early or extending further into May with strong momentum.

TOP PICKS

CONSUMER STAPLES SELECT SECTOR SPDR FUND (XLP)

The consumer staples sector typically performs well relative to the S&P 500 and the consumer discretionary sector from April 23 to Oct. 27. In this period of the year, investors tend to become more conservative and gravitate towards companies that produce an earnings stream that tends to be more stable than the overall market. On average, consumer staples fit the bill. Although the sector will probably decline in a major stock market correction, it will tend to go down less than the overall stock market.

ENERGY SELECT SECTOR SPDR FUND (XLE)

The energy sector tends to perform well on a seasonal basis from Feb. 25 to May 9, based upon the increase in demand for oil that takes place starting with the driving season in May. Although many of the fundamentals have been strong for oil and energy, the sector has underperformed crude and has been performing approximately at market since the beginning of the year. A positive catalyst in the next few weeks could help the sector finish its seasonal period on a positive note.

MATERIALS SELECT SECTOR SPDR FUND (XLB)

The U.S. materials sector tends to perform well on a seasonal basis from Jan. 23 to May 5. The U.S. materials sector is composed of approximately 70 per cent chemical companies and it’s just started to show strength relative to the broad stock market. Progress in U.S.-China trade talks will help it finish its seasonal period on a positive note.