Brooke Thackray's Top Picks
Brooke Thackray, research analyst at Horizons ETF Management Canada
Focus: North American large cap stocks and seasonal investing
The reflationary trade is the consensus narrative in the markets at this time, but there is a rising probability that the trade is overdone. Yes, the economy is re-opening and the COVID-19 vaccine rollouts are expected to help the economy return to something close to normal. Yes, central banks and governments have continued to pump liquidity into the markets and will probably increase their efforts as the stock market stumbles. All of this is priced into the markets. The stock market has become stretched by most metrics. Although this does not mean that the stock market is going to correct, recently, the stock market has started to show some internal weakness as investors have rotated into some of the defensive sectors of the market. The utilities sector was the top performing major sector in the U.S. market in March, despite rising interest rates. The consumer staples sector was also a top performing sector in March. The healthcare sector outperformed the S&P 500 in April. At this time, investors should be cautious and favour defensive investments, especially given that the stock market is moving into its six-month seasonal unfavourable period that lasts from May 6 to October 27.
Health Care Select Sector SPDR Fund (XLV NASD)
The healthcare sector has a strong seasonal period from May 1 to August 2. After underperforming the S&P 500 for many months, the health care sector is starting to show signs of strength. For most of April, the health care sector outperformed the S&P 500, just before it enters a period of seasonal strength. Overall, companies in the sector have strong balance sheets and cash for dividends and M&A. With the reopening of the economy, demand is returning for elective procedures, medical equipment and drug sales.
Consumer Staples Select Sector SPDR Fund (XLP NASD)
The consumer staples sector has a strong seasonal period from April 23 to October 27. Recently, the consumer staples sector has been starting to show strength relative to the S&P 500. The sector outperformed the S&P 500 in March, even when interest rates were rising. The sector tends to benefit when investors become concerned about market valuations, but still want to remain in the market. Despite the sector’s high Price/Earnings ratio of 21.5, typically investors are attracted to the summer months when the stock market tends to be more volatile, due to the stable nature of earnings in the consumer staples sector.
U.S. government bonds have a strong seasonal period from May 6 to October 3. As interest rates rallied from August 2020 to March of 2021, U.S. government bonds performed poorly. Recently, interest rates have been declining and U.S. government bonds have been performing well. The sector is out of favour with investors who have a large net short position in the sector. Look for this sector to get a boost if investors become more concerned about stock market valuations.
PAST PICKS: March 1, 2021
Suncor (SU TSX)
- Then: $25.59
- Now: $27.53
- Return: 8%
- Total Return: 8%
Eastman Chemical Company (EMN NYSE)
- Then: $111.84
- Now: $121.77
- Return: 9%
- Total Return: 10%
BMO Equal Weight Banks Index ETF (ZEB TSX)
- Then: $31.56
- Now: $34.21
- Return: 8%
- Total Return: 9%
Total Return Average: 9%
Twitter handle: @BrookeThackray