Brooke Thackray, research Horizons ETF Management Canada
Focus: North American large caps and seasonal investing

MARKET OUTLOOK

From late February until March 23, the stock market fell regardless of central bank and government stimulus. With each program announced, the market would rally and then continue down again. After March 23, things turned upside down. No matter how bad the economic data, investors pushed stocks higher. As soon as there were some reports that daily infection rates were decreasing, investors started to look forward to an economy that was back on track. Not only has the decline been unprecedented, but so has the recent “re-opening” rally. As of April 29, the S&P has retraced 61 per cent of its February 19 to March 23 decline. Given current conditions and the potential re-openings will proceed less smoothly than expected, the stock market has become divorced from the economy.

On a technical basis, the S&P is currently pushing up against a major resistance level at 2,900 to 3,000 points. The risk/reward ratio is not favourable for stocks. The market also just entered its six-month unfavourable period, which lasts from May 6 to Oct. 27. It’s time for investors to be cautious in the stock market.

TOP PICKS

CASH

Given the risk/reward relationship for the stock market at the current time, holding cash allows for tactical investments as opportunities develop in the near future.

CONSUMER STAPLES SELECT SECTOR SPDR FUND (XLP NASD)
Bought April 15 at $60.15.

Consumer staples is seen as a boring sector by many, particularly as investors are rushing to the technology sector. Nevertheless it holds some strong-branded companies that have produced good earnings growth and dividends over the years. The sector often performs well at this time of the year and into October, as investors seek shelter from volatile stock markets.

HEALTH CARE SELECT SECTOR SPDR FUND (XLV NASD)
Bought May 6 at $98.99.

The health care sector tends to perform well from early May into August. It’s now benefiting from the pandemic. As the stock market stumbled in late February, the health care sector outperformed. It remains attractive as demand for health care products and service is expected to remain strong in the near future. The heroic efforts of our health care workers are much appreciated by society.

Typically, in an election year, health care becomes a political football, which can have downward price pressure on the sector. This year, it is going to be very difficult for politicians to criticize it, giving the sector some reprieve as the U.S. election approaches.

PAST PICKS: FEB. 20, 2020

U.S. CONSUMER DISCRETIONARY SELECT SECTOR SPDR ETF (XLY NASD)
Sold position March 6 at $25.22.

The consumer discretionary sector historically has a strong seasonal period that lasts until April 22. The sector benefits from Amazon’s strong performance, as that company accounts for approximately 26 per cent of the ETF. As some restrictions are removed spending is expected to increase, but spending on consumer discretionary items or experiences is expected to take a long time to recover. Amazon’s costs to deal with the coronavirus are going to be high. Additionally, it is possible that investors may have to pull back spending on their discretionary items as the economy suffers from a recession and high unemployment.

• Then: $125.98
• Now: $114.67
• Return: -9%
• Total return: -9%

HORIZONS EQUAL WEIGHT CANADA REIT INDEX ETF (HCRE TSX)
Sold position March 25 at $17.47.

The REIT sector’s seasonality lasts from March 8 to Sep. 20, benefitting from both economic growth and acting as a bond proxy with its distributions. If the economic concerns become serious, the performance of the REIT sector tends to deteriorate. This year, as the economic projections were ratcheted down, the sector has been underperforming. Though the REIT sector usually performs well off a bottom, we are currently not at this part of the economic cycle.

• Then: $23.65
• Now: $18.45
• Return: -22%
• Total return: -22%

WALMART (WMT NYSE)

Walmart has seasonal strength from Jan. 21 to April 12 and has performed well in the coronavirus pandemic. The company was fortunate to get its online business in order before the pandemic occurred. Walmart is expected to perform reasonably well over the next few months, particularly if the stock market becomes volatile and investors seek defensive positions.

• Then: $116.56
• Now: $123.20
• Return: 6%
• Total return: 6%

Total return average: -8%

TWITTER: @BrookeThackray
WEBSITE: horizonsetfs.com/HAC