Thursday, October 4, 2018

4Q Outlook

Sometimes economies decouple, at least for a while, from the stock markets. We appear to be in one of those periods at least in Canada. Our stock market is essentially resources and finance. While oil is breaking through $80 a barrel for international companies, our oil patch gets nearly a 50% penalty for being unable to economically transport out of Alberta. Banks can’t make up the difference as they too have a pall over them as worries about housing collapse keeps investors cautious. 2018 year to date, total return on TSX is 1.4% Bonds actually dropped by -0.5%. 

US companies are profitable and growing, unemployment is at record lows yet interest rates are still low, moving slowly towards a more realistic level above 3% for US ten year bonds. Although some US stocks are making new highs, many still lag. Few sectors like technology and defense are responsible for much of the action boosting S&P 500 return to 10.6% his year.

This kind of uncertain market condition when the economy is likely to slow after effect of tax cuts and free repatriation of foreign income back to US yet inflation and wages slowly rising, often marks the turning point in stock markets. This phase however can last for many quarters and is a dangerous time when investors tend to panic buy and sell. Dividend paying stocks with growing income, although also under pressure have time and again proven to be a good place to bide your time while earning some return.

Our strategy is to stay invested in sectors like banks, utilities and preferred shares until we see a cooling off, hopefully no dramatic drops and make changes at that time. Cashing out and sitting on the sidelines requires us to guess when this is likely to happen. That is beyond our abilities and find hardly any strategies out there which has a better outcome.

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