Brooke Thackray, research analyst, Horizons ETF

FOCUS: Seasonal investing and technical analysis

MARKET OUTLOOK:

The stock market is being driven by macro factors such as interest rates and inflation. The Russia-Ukraine war continues to add inflationary pressures and uncertainty in the stock market, which has been struggling since the beginning of 2022, well before the start of Russia’s invasion. The conflict is causing additional disruptions in the stock market. The Federal Reserve and the Bank of Canada should have been raising interest rates in 2021. High inflation has pushed the central banks into a tightening cycle; they are being forced to raise rates as the economy is showing signs of slowing down. This will probably result in a volatile market as investors adjust their expectations to the pace at which central banks raise their interest rates.

The stock market is still in its seasonally strong six-month window when, on average, it tends to perform well from late October to early May. It is possible this year that the stock market could transition into weaker performance before early May. In previous years, in the summer months when the stock market tends to be weaker on a seasonal basis, the Federal Reserve has typically initiated its monetary stimulus policies. This year, investors should not expect the Federal Reserve to come to the rescue if markets falter in the summer months as it will be in a tightening cycle.

TOP PICKS:

iShares S&P/TSX Capped Energy Index ETF (XEG TSX) 

The energy sector is typically strong from late February until early May. The Canadian energy sector has performed particularly well since the beginning of the year. The Russia-Ukraine war has put additional upward pressure on the price of oil. Investors should expect the price of oil and the energy sector to be volatile depending on the Russia-Ukraine war developments. 

Materials Select Sector SPDR Fund (XLB NYSE) 

The materials sector has been outperforming the S&P 500 since early February. Although the economy is showing initial signs of slowing, investors are still focused on the cyclical sectors of the economy, including the materials sector. On a seasonal basis, the materials sector tends to perform from late January until early May.

The Real Estate Select Sector SPDR Fund (XLRE NYSE)

The real estate sector (REIT) has a strong seasonal period from early March until mid-September. The sector has been outperforming the S&P 500 since mid-February. In a volatile market, this sector becomes attractive to investors. If the economy starts to deteriorate rapidly, investors should be looking to exit the sector as it tends not to perform well in a recession.

PAST PICKS: December 23, 2021

BMO Equal Weight Banks Index ETF (ZEB TSX)

• Then: $31.56
• Now: $41.65
• Return: 32% 
• Total Return: 36%

VanEck Vectors Gold Miners ETF (GDX NYSE)

• Then: $30.90
• Now: $38.35
• Return:  24%
• Total Return: 26%

First Majestic Silver Corp (FR TSX)

• Then: $21.29
• Now: $17.88
• Return: -16%
• Total Return: -16%

Total Return Average: 15%