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

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MARKET OUTLOOK

The S&P 500 is only nominally positive for the year despite stronger-than-expected first quarter earnings. So far, they’ve come in 26 per cent stronger than a year earlier (Reuters, May 11). Earnings are solid even when the positive effects of tax reform are factored out.

U.S. manufacturing has shown strength over the last year with increasing PMIs. In comparison, many countries, including emerging markets, show recent economic weakness. France and Germany’s PMI manufacturing numbers decreased considerably. Japan recently had quarter-over-quarter GDP of -0.2 per cent.

Emerging markets have been underperforming on the strength of the U.S. dollar. The narrative has changed from globally synchronized growth to one of strong growth in the U.S. and a slowdown elsewhere. Investors should expect markets to be volatile, with differing growth rates in major economies and the possibility the U.S. follows the global trend.

Canada has shown fairly strong growth, with the fourth quarter of 2017 producing an annualized GDP growth rate of 1.7 per cent. Canada’s headline April CPI number came in as expected at 2.2 per cent, but the underlying components showed some weakness and the Canadian dollar pulled back. Although the country’s stock market has outperformed the U.S. recently, it’s possible to see Canadian stocks performance start to weaken, particularly if energy starts to pull back.

Stock markets entered into their six-month weak period which lasts from May 6 to Oct. 27. At this time, it’s typically prudent from a seasonal perspective to reduce risk and have cash available to take advantage of any major corrections in the stock market.

TOP PICKS

COSTCO (COST.O)

Costco has a strong seasonal period from May 26 until June 30. Although it’s a consumer staples, the company is a growth stock, with investors currently willing to pay a 26 forward price-to-earnings multiple (Reuters). Costco has recently outperformed the consumer staples sector as investors show a preference for growth companies. Costco releases its earnings report on May 31. Strong earnings could help it perform well in its strong seasonal period.

ISHARES CANADIAN GOVERNMENT BOND INDEX ETF (XGB.TO)

Yields on Canadian government bonds have been rising, making them negative year-to-date. The sector has a strong seasonal period from May 6 until Oct. 3, particularly strong during August and September. Despite the Canadian economy showing reasonable growth, the data has started to indicate the economy may not be as solid as previously expected. As a result, the expectation the Bank of Canada will increase its target overnight rate at its next meeting on May 30 has lowered to under 30 per cent. The BoC has to be careful with its rate-increase schedule, as NAFTA talks appear to be stalled. As a result, it’s possible we’ll Canadian government bonds perform over the next few months.

CASH

We’re in the six-month period when stocks tend to underperform compared to the other six months. It is also the time of the year when large corrections tend to happen in the stock market, most notably in  September and October. Both of these tendencies make this the ideal opportunity to raise cash in order to take advantage of any corrections that may lie ahead.

PAST PICKS

FINANCIAL SELECT SECTOR SPDR FUND (XLF.N)
Sold at $27.57 on March 29.

The U.S. financial sector has underperformed the S&P 500 despite rising interest rates. The yield curve continues flattening as yields at the short end of the curve rise faster than at the long end. Banks tend to make money by taking in deposits at the short end and lending out money at the long end. The danger of rising rates for the U.S. financial sector occurs if the narrative changes and investors become concerned rising rates will have a negative effect on the economy and on the banks’ profitability. U.S. banks finished their strong seasonal period in mid-April and tend to have poor seasonal performance in June.

• Then: $28.69
• Now: $27.91
• Return: -2%
• Total return: -2%

ENERGY SELECT SECTOR SPDR FUND (XLE.N)
Sold at $76.73 on May 11.

The energy sector has a seasonal period that starts on Feb. 25 and lasts until May 9. This year, energy performed very well in its seasonal period and strong momentum has helped it outperform the S&P 500 after the period’s end. Investors should still be cautious as the energy sector historically tends to perform poorly in June.

• Then: $67.34
• Now: $77.20
• Return: 15%
• Total return: 16%

CANADIAN TIRE (CTCa.TO)

On a seasonal basis, Canadian Tire tends to perform well from Feb. 11 to April 12. The company started its seasonal period on a positive note, with stronger-than-expected earnings on Feb. 12. Shortly afterwards, Canadian Tire pulled back, sharply doing so again more recently upon announcing that it was acquiring Helley Hansen for $985 million. Investors had trouble envisioning how Helley Hansen’s international assets would fit in with the current portfolio of companies owned by Canadian Tire.

• Then: $176.80
• Now: $166.16
• Return: -6%
• Total return: -6%

Total return average: 3%

FUND PROFILE

HORIZONS SEASONAL ROTATION ETF (HAC.TO)
Performance as of April 30, 2018

• 1 Month: 1.7 fund, 1.7 index
• 1 Year: 4.6 fund, 3.3 index
• 3 Year: 6.3 fund, 4.4 index

* Index: S&P/TSX 60. Annualized performance for periods of one year or greater.
* Funds performance includes reinvested dividends and is net of fees.

TOP 5 HOLDINGS AND WEIGHTINGS AS OF APRIL 30

1. Horizons S&P/TSX 60 Index ETF (HXT): 30%
2. Horizons US Dollar Currency ETF (DLR): 13%
3. Horizons S&P/TSX Capped Energy Index ETF (HXE): 11%
4. Horizons Active Floating Rate Bond ETF (HFR): 11%
5. Horizons Euro STOXX 50 Index ETF (HXX): 10%

TWITTER: @BrookeThackray