Terry Shaunessy,  president and portfolio manager at Shaunessy Investment Counsel
Focus: ETFs

MARKET OUTLOOK

We’ve become cautious on the outlook for equities as an asset class and have begun to change our strategy for the U.S. stock market. The S&P 500 has significantly outperformed other developed markets so far in 2018, but the bulk of this outperformance can be attributed to just three factors: a handful of mega technology stocks, the positive effect on earnings of the one-time lowering of corporate tax rates and the strength of the U.S. dollar on investment flows into North American capital markets. The Trump administration’s aggressive U.S. trade policy has begun to undermine investor confidence that global economic growth and corporate earnings will remain unaffected by possible disruptions in worldwide trade. Also, other White House policy decisions, such as restricting immigration into the U.S. at a time of full employment may result in the unintended consequence of greater inflationary pressures, which, in turn, could lift interest rates higher than is generally expected. Moreover, it’s not clear that corporations will have the pricing power to pass along increased labour and input costs, narrowing profit margins and sabotaging the rosy consensus forecast for S&P 500 earnings over the next 18 to 24 months. If we add to these concerns, other major unresolved issues such as Brexit, NAFTA and overly leveraged consumers, the bullish case for equities dims further.

Under these circumstances, we have reduced our S&P 500 allocation and moved a part of the remaining allocation into an S&P 500 Equal Weight Index, which significantly reduces the influence of the FAANG stocks. Also, we have switched our U.S. High Yield Bond ETF for an investment grade U.S. Preferred Share ETF, thereby by upgrading credit quality with only a slightly lower yield.

Despite recent weakness, we continue to overweight international equities on the basis that much of the bad news is already priced into these stocks. Closer cooperation between Europe and Asia in the face of hostile U.S. policies may pave the way for better future investment prospect outside North America.

TOP PICKS

INVESCO S&P 500 EQUAL WEIGHT INDEX ETF (EQL.TO)

BMO U.S. PREFERRED SHARE INDEX ETF (ZUP.TO)

ISHARES FLOATING RATE INDEX ETF (XFR.TO)

PAST PICKS: JULY 5, 2017

BMO MSCI EAFE INDEX ETF (ZEA.TO)

• Then: $17.93
• Now: $18.95
• Return: 6%
• Total return: 9%

HORIZONS EURO STOXX50 INDEX ETF (HXX.TO)

• Then: $29.71
• Now: $30.95
• Return: 4%
• Total return: 4%

ISHARES CORE MSCI EMERGING MARKETS INDEX ETF (XEC.TO)

• Then: $25.33
• Now: $26.23
• Return: 4%
• Total return: 6%

Total return average: 6%

WEBSITE: www.shaunessy.com