Brooke Thackray, research analyst, Horizons ETF Management Canada
Focus: North American large caps & seasonal investing
 

MARKET OUTLOOK

As the economy reopens, the stock market rises at a much faster rate. Although the stock market is a forward-looking mechanism, it has gotten ahead of itself and has become fragile and could suffer a correction if investor sentiment changes or economic growth starts to subside. It is not just the economy and the stock market that are bifurcating, but also sectors in the stock market. Since the S&P 500 high on June 8, most sectors of the stock market have moved lower. Only a few, such as technology, consumer discretionary, retail and some others have moved higher since June 8.

On a seasonal basis, we are entering the danger zone for the stock market with August and September on average over the long-term being the two worst contiguous months of the year. Historically, this is the time period when the large market corrections have often occurred. There is no guarantee that a correction is going to take place, but this is the time that the stock market is susceptible.  This year in particular could provide investor anxiety which often results in poor stock market performance. The U.S. has a presidential election coming up on November 3. Typically, the stock market performs poorly in late August into October leading up to the election as investors become anxious about the possible outcome of the election. Given the fragile nature of the stock market at the current time, investors would be wise to consider a cautious stance in the stock market.

TOP PICKS

Horizons Gold ETF (HUG TSX) - Last Purchased: June 15 at $15.15

Gold bullion has been performing well recently. Investors have been attracted to gold bullion as Federal Banks print increasing amounts of money, increasing inflation expectations and driving real interest rates lower. Investors are concerned that eventually inflation will come back to the system, decreasing the value of fiat currencies. Gold has recently entered into its strong seasonal period which lasts until early October.

Fortis Inc. (FTS TSX)

Fortis is a utility company that generates its revenues primarily in regulated environments. Like many other defensive companies, it outperformed the TSX Composite Index from late February to late March and then underperformed into June. It has since shown stability. Given that the stock market is entering the seasonally weakest time of the year, it makes sense to consider a utility company such as Fortis to help weather any potential weakness in the stock market. Fortis is forecasting an average dividend increase of 6 per cent per year until 2024.

iShares 7-10 Year Treasury Bond ETF (IEF NASD)

US government bonds were fairly flat from late March into June. Recently they have risen moderately in value as the yield on the 10-Year Treasury Note has dipped lower. The seasonal sweet spot for US government bonds occurs in August and September. If the stock market were to correct in the next two months, US government bonds could be a recipient of cash as investors move to safe haven assets.
 

PAST PICKS: May 7, 2020

Consumer Staples Select Sector SPDR Fund (XLP NASD)

• Then: $56.85
• Now: $63.24
• Return: 11%
• Total Return: 12%

Health Care Select Sector SPDR  Fund (XLV NASD)

• Then: $98.90
• Now: $106.60
• Return: 8%
• Total Return: 8%

Cash

 Total Return Average: 7%