Full episode: Market Call for Monday, January 14, 2019
Brooke Thackray, research analyst at Horizons ETF Management Canada
Focus: Seasonal investing and technical analysis
Stock markets are at reasonable valuations with the S&P 500 sporting a forward price-to-earnings (P/E) ratio of 15.15. Investors have become concerned that a recession is close at hand. Trying to predict a recession is like driving in the fog: you can’t see it until it’s right in front of you. Nevertheless, a flattening yield curve and slowing global economies have made investors very concerned that one is close at hand.
The U.S. Federal Reserve has substantially backed off its hawkish position in the last few weeks. Although this may help support the stock market, it’s difficult to tell if the previous rate increases have already done their “damage” to the economy. Monetary policy has a lag; interest rate increases don’t have their full impact until many months or years after they’re implemented.
After a negative year for North American stock markets, they’ve bounced higher on more positive sentiment and investors taking advantage of the tax-loss phenomenon. Markets are at an inflection point. This week the Q4 earnings season gets underway, with the U.S. banks starting to release their full year earnings report. A positive move by the U.S. banks would go a long way to support a market move higher. Often, when the financials are one of the top-performing sectors, market rallies tends to have “legs” (sustainability). Banks are somewhat a measure of a pulse on the economy: when banks perform well, they generally indicate health. Seasonally, markets tend to be strong at this time of the year. Stronger-than-expected earnings would help refocus investor attention away from the large number of weak economic reports around the world over the last month.
TJX COMPANIES (TJX.N)
TJX has a strong seasonal period from Jan. 22 to March 30. From 1990 to 2018, TJX has produced an average gain of 7.1 per cent in this seasonal period and has been positive 86 per cent of the time. TJX is particularly attractive as it focuses on off-price apparel. If the economy struggles, the sales of TJX are somewhat buffered compared to many other retail outlets. In a slower economy, many consumers will shift down market to stores such as TJX.
EASTMAN CHEMICAL CO. (EMN.N)
Eastman Chemical has raised its dividend for the last nine years in a row. It currently has a dividend yield of 3.3 per cent and is attractively valued, with a P/E ratio of 9.1. Eastman Chemical has a strong seasonal period from Jan. 28 to May 5. From 1994 to 2017, it has produced an average gain of 13.1 per cent in this seasonal period and has been positive 88 per cent of the time. With its high dividend yield, the company tends to be more defensive than many others in its sector. If progress is made on the U.S.-China trade war, companies such as Eastman Chemical should benefit.
ISHARES RUSSELL 2000 ETF (IWM.N)
Bought on Dec. 27, 2018 at $132.48.
The seasonal period for the small-cap sector is from Dec. 19 to March 7. Aside from its seasonal trend, typically it performs well when the U.S. dollar is strong, as most of the revenues for the sector are domestically-driven. The fact that it’s strong at a time when the greenback has been weak shows that the sector could have latent strength, with further upside potential if the U.S. dollar becomes stronger.
PAST PICKS: OCT. 25, 2018
FIRST TRUST CONSUMER DISCRETIONARY ALPHADEX FUND (FHD.TO)
Sold on Dec. 27, 2018 at $22.96.
The consumer discretionary sector has a seasonal period that lasts from Oct. 28 until April 23. The sector is performing relatively well as investors are focusing less on the deep cyclical companies that have been impacted by the U.S.-China trade wars. The U.S. economy is still relatively strong compared to most other countries around the world. Rising rates haven’t had a major impact on consumer spending. The sector is still expected to perform well until mid-April.
- Then: $24.75
- Now: $24.58
- Return: -1%
- Total return: -0.4%
SPDR S&P RETAIL ETF (XRT.N)
Sold Nov. 20, 2018 at $43.82.
The retail sector initially underperformed the S&P 500 in November. An oversold bounce in the sector towards the end of the year helped boost the sector. In early January 2019, Macy’s issued forward guidance, lowering their earnings forecast for the quarter. As a result, Macy’s dropped sharply and the overall retail sector responded negatively. Investors are trying to figure out if the company is the exception to the retail sector. The good news is that the next seasonal period of strength for the retail sector starts shortly, on Jan. 23.
- Then: $46.90
- Now: $43.60
- Return: -7%
- Total return: -7%
UNITED PARCEL SERVICE (UPS.N)
UPS started on a positive note in November, but corrected sharply at the beginning of December. Later in the month, competitor FedEx released its earnings and lowered their forward guidance, bringing down both companies. UPS has underperformed the S&P 500 so far in the month of January. Given that UPS tends to underperform the stock market in the month of February, at this time, it’s best if consumers consider other options for an investment.
- Then: $107.82
- Now: $98.91
- Return: -8%
- Total return: -8%
Total return average: -5%
HORIZONS SEASONAL ROTATION ETF (HAC.TO)
PERFORMANCE AS OF: DEC. 31, 2018
- 1 month: -7.5% fund, -5.6% index
- 1 year: -0.9% fund, -7.6% index
- 3 years: 4.4% fund, 7.2% index
INDEX: TSX 60 Index.
Returns include reinvested dividends, net of fees, and annualized for periods of one year or greater.
TOP 5 HOLDINGS AND WEIGHTINGS
- Horizons S&P/TSX 60 Index ETF (HXT.TO): 42.9%
- iShares Russell 1000 Value ETF (IWD.N): 11.1%
- Horizons NASDAQ-100 Index ETF (HXQ.TO): 10.1%
- iShares Russell 2000 ETF (IWM.N): 10%
- Horizons S&P 500 Index ETF (HXS.TO): 10%