Jul 23, 2018

Brooke Thackray's Top Picks: July 23, 2018

BNN Bloomberg

Brooke Thackray , BNN Bloomberg

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

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MARKET OUTLOOK

The stock market has had a strong rally into Q2 earnings season. In the first 18 days of July, the S&P 500 rallied 3.6 per cent as investors pushed up the stock market in anticipation of strong earnings. Currently, investors are expecting 20 per cent growth of earnings on a year-over-year basis for the S&P 500 (Thomson Reuters, July 20, 2018). Although some of the strong expectations can be explained by the effect of tax reforms, the result is strongly positive. There's a risk that the stock market has already had its summer rally and that strong earnings numbers have already been incorporated into the S&P 500’s recent rally.

Up until now, the trade war hasn't been taken seriously by investors as there has been an overall belief that everything will get resolved before too much damage is done. Investors have become desensitized to the constant back and forth of tariffs and trade war rhetoric. In a sign that the situation could get worse, the People’s Bank of China (PBOC) has let the yuan drop in value over 5 per cent relative to the U.S. dollar since mid-June. A lower yuan value reduces the impact of the U.S. tariffs. Last week, Trump openly criticized the Federal Reserve for raising its benchmark rate. This could be the first sign that the U.S. is looking to enact a weak dollar policy in order to protect its trade interests. The increased trade tensions come at a time when the stock market is entering into a seasonal period of weaker performance. Over the long-term (1950 to 2017), the worst two contiguous months of the year for the S&P 500 have been August and September. This period tends to be one of the most volatile times of the year and the stock market often has trouble producing a strong rally at this time. Large corrections in this time period can often be excellent buying opportunities, especially towards the end of September.

TOP PICKS

ISHARES GOLD TRUST (IAU.N)

Gold bullion has been performing poorly since April. Rising interest rates and a stronger U.S. dollar have been largely responsible for gold’s poor performance. At this point gold has become oversold, setting it up for a possible oversold rally. If the U.S. starts to implement an active weak dollar policy, or the Federal Reserve backs off the pace it is increasing its benchmark rate, gold would benefit in its seasonally strong period, which it recently started and lasts until early October.

FORTIS (FTS.TO)

Fortis is a regulated utility company that has an annual targeted dividend growth of 6 per cent through to 2022 and currently has a dividend yield of 4.0 per cent. Utility companies corrected sharply earlier in the year as investors were concerned with rising interest rates. Recently, utility companies have been increasing in value as investors have adjusted their expectations for a more gradual path of interest rate increases by the Bank of Canada. As a result, Fortis is expected to perform well over the next few months.

ISHARES 7-10 YEAR TREASURY BOND ETF (IEF.O)

U.S. government bonds have performed well so far in their seasonal period which started in early May and lasts until early October. Although the Federal Reserve has stated that it expects to raise its benchmark rate gradually over time, the current path of higher rates is already baked into the price of government bonds. If the U.S. economy continues to show signs of slowing, especially with the negative impact of the overhanging threat of trade wars, government bonds would be expected to appreciate.

DISCLOSURE	PERSONAL	FAMILY	PORTFOLIO/FUND
IAU	N	N	N
FTS	N	N	N
IEF	N	N	N

PAST PICKS: MAY 23, 2018

COSTCO (COST.O)

On May 31, Costco released earnings that were stronger than expected, helping to boost its stock price in its seasonal period that lasts from that date to June 30. The stock price has had a strong seasonal rally and has now become overbought on a Relative Strength Index basis. The seasonally strong seasonal period for Costco has finished and consideration should be given to exiting the position.

Then: $198.14
Now: $218.84
Return: 10%
Total return: 10%

ISHARES CANADIAN GOVERNMENT BOND INDEX ETF (XGB.TO)

Canadian government bonds have been rising in value as investors have decreased their expectations that the Bank of Canada will have to implement an aggressive interest rate hike schedule. Investor expectations of a stronger economy have retreated as worldwide growth has slowed and trade wars tensions have increased. On a seasonal basis, Canadian government bonds typically have their best two contiguous month performance in August and September. Stronger performance for Canadian government bonds is expected over the next two months.

Then: $21.04
Now: $21.25
Return: 1%
Total return: 1%

CASH

Cash was selected as a top pick in late May as the stock market tends to underperform from May until late October. In June the S&P 500 initially rallied in the first half of the month and then fell in the second half. For the first part of July, the S&P 500 has rallied strongly, as it often does coming into earnings season. Investors should still be cautious as August and September on average over the long-term have been the two worst contiguous months of the year.

Total return average: 5.5%