The boreal forest stands in this aerial photograph taken north of Fort McMurray, Alberta, Canada, on Wednesday, June 19, 2014.Ben Nelms/Bloomberg
Former BNN personality Frances Horodelski repeated an investment maxim over the weekend, one that I've heard many times before and might be very important to remember in the coming months, "Market tops are a process. Market bottoms are an event."
Market bottoms like March 9, 2009, are quick, violent affairs. A strong rally is followed by a re-test of the lows and if they hold, trading volume and stock prices explode to the upside.
Longer-term market tops are painful slogs. Optimism and bullish market sentiment are met by asset prices that refuse to budge -- flattening out and repeatedly failing to break out of narrow ranges. The oil market, with a West Texas Intermediate crude price stuck between $50 (U.S.) and $55 since the beginning of December, while gasoline demand falls, has some of these hallmarks.
There is another rule of investing and trading – only fools try to pick market tops – that offers a firm counterpoint to any contention that investors should now head for the hills and go to 100-per-cent cash positions. Nonetheless, equity valuations remain high relative to historical averages and this has limited future returns in the past.
Morgan Stanley also notes that the likelihood of a significant correction in the S&P 500 is increasing: "Year-over-year changes in oil, real yields and the level of jobless claims are all consistent with a 30-per-cent-plus probability of a 15-per-cent-plus drawdown over the next 12 months." Morgan Stanley strategists are careful, however, to note that numerous other factors including credit spreads indicate a lower possibility of a market downdraft.
There are continued signs that the global economy is accelerating so I don't believe investors should obsess about a market top in the current environment. U.S., Canadian and global market benchmarks are all hitting new highs.
There will come a time, hopefully a few years out but possibly much sooner, where markets stagnate, grind sideways, and investors sentiment fades. The longer those conditions are visible, the more investors should be concerned about a sustained decline in equity markets.
--Scott Barlow
Stocks to ponder
Geodrill Ltd. This micro-cap stock is covered by four analysts, one analyst is from a major firm, TD Securities. Geodrill is a drilling company with a modern fleet of 46 multi-purpose rigs that service mining companies with operations in west Africa. This is a stock whose share price can be volatile, writes Jennifer Dowty. This stock's price soared 314 per cent in 2016 with a forecast for a 48-per-cent gain for 2017.
Northern Dynasty Minerals Ltd. This Vancouver miner, blindsided by a short-seller's scathing report, fired back on Friday, saying the polemic is "unsupported speculation" from a "troubled organization" that doesn't understand mining. Kerrisdale Capital Management, a New York investment firm, hammered Northern Dynasty's stock on Tuesday when it published a report arguing the miner is "worthless" because its undeveloped copper and gold resource in Alaska is not commercially viable. In response, Northern Dynasty said Kerrisdale's analysis contains numerous errors and misunderstandings. "Their report isn't worth the paper it's written on," Northern Dynasty chief executive Ron Thiessen said in an interview.
The Rundown
Why long-term investors should take another look at Canadian forestry stocks
Investors, start your chainsaws. Canadian forestry stocks have been lagging their international peers amid a trade dispute with the United States and the prospect of crippling duties on their softwood-lumber exports, writes David Berman. But the uncertainty is good news for anyone who recognizes trees as a valuable commodity and wants to invest alongside savvy institutional investors.
The right – and wrong – way to prepare for a market sell-off
One reader writes in that the U.S. market has likely run up as far as it's going to go and worries about a pending disaster and wants to know how to hedge his portfolio. John Heinzl looks at how challenging, if not impossible, it is to predict the markets. Market timing is frowned up for a good reason: It rarely works. A better approach – and the one I use – is to stop worrying about what "the market" will do, and instead focus on the individual stocks in your portfolio.
Is it time for dividend investors to switch back to bonds?
It's a sign of how depressingly low bond yields were that, even after a huge rise in the past year, we're still not even close to a decent return, writes Rob Carrick. Bond yields have shot up dramatically in the past 12 months, in large part because of expectations that the economic policies of Donald Trump will generate increased economic growth and inflation. The yield on the five-year Government of Canada bond, probably the bond maturity with the most impact on everyday people, has just about doubled over that period.
Gordon Pape: Ignore Trump and his noise with your RRSPs
What do you do about your RRSP when the whole world seems to be going crazy? The answer is simple: ignore all the background noise and carry on as before. Your RRSP is going to be around a lot longer than Donald Trump, writes Gordon Pape. But all this will pass. Pension fund managers never worry about the day-to-day movements of the indexes; they focus instead on investing in sound, long-term securities. Your RRSP is simply a small pension plan so you should adopt the same psychology.
Six dividend-growth stocks for your RRSP
When building a retirement nest egg, dividend growth stocks can offer investors the best of both worlds – potential capital gains, and rising regular payouts even when markets turn flat or shaky, writes Shirley Won. Dividends can play a key role in an investor's total return. Studies show that companies that increase their payouts consistently are generally well-managed and have competitive advantages. We asked three fund managers to offer dividend-growth-stock picks for an RRSP. Here are their picks.
Prospect of declining returns a hard pill for savers to swallow
There are no sure things in this world except death and taxes but, with a little luck, medical advances will allow death to take a long sabbatical. News on the tax front isn't as encouraging because rumours are rife that the upcoming federal budget will punch savers right in their portfolios, writes Norman Rothery. Some speculate that the capital gains inclusion rate will surge from its current level of 50 per cent up to as much as 100 per cent. Such a move would be quite distressing because taxes already eat into returns in a big way.
How former Olympian Cassie Campbell-Pascall invests her money
Former Olympian-turned broadcaster Cassie Campbell-Pascall has always been a saver, writes Brenda Bouw. Since hanging up her skates in 2006, Ms. Campbell-Pascall has become a familiar face on Hockey Night in Canada, among other broadcasting roles. While the money is good, and steady, she hasn't forgotten what it's like to live on a smaller budget. The Globe recently spoke with Ms. Campbell-Pascall, 43, about her conservative investing style and why she often gets asked to invest in private ventures.
Investor seeks greater diversification to ride out Trump-era volatility
In this week's Me and My Money column, Larry MacDonald profiles professor George Karaphillis, a value investor who has diversified his portfolio so it can ride out the volatility he expects is coming.
Six questions to ask yourself if you're considering an annuity
If you're considering purchasing an annuity you need to think about your lifespan, expected returns, income needs and other issues first, writes Rob Carrick.
A mortgage, family and retirement savings: Can young families do it all?
The cost of owning a house and starting a family just might be the lost opportunity to get a good head start on saving for retirement. With the March 1 deadline for contributions to registered retirement savings plans just ahead, it's a good time to look at how to balance life's biggest financial responsibilities. Home ownership, starting a family and retirement saving – can you do it all? Rob Carrick looks at how home affordability is key to your retirement plans.
Research Reports
Eye on Shorts: What bearish investors are betting against
Ask Globe Investor
The Question:
Why keep bonds in a portfolio when we anticipate interest rates to go up in 2017?
The Answer:
Reduced risk is the primary reason. Fixed-income securities like bonds provide a safety net in the event of a stock market crash. A portfolio that is 100 per cent exposed to equities is going to experience heavy losses if the market crumbles. Quality bonds rarely produce a negative total return in any given year and when it happens the losses are usually small.
When interest rates are rising, as we expect in 2017, short-term bonds are the best option from a risk perspective. The market price of issues with long maturities will be hit harder when rates go up. Of course, any bonds held to maturity will be redeemed at par.
One more point –winter predictions don't always translate into reality, as I know from long experience. Last year, for example, bond prices rallied strongly in mid-year when interest rates unexpectedly declined. They lost most of those gains in the fall but bonds still ended 2016 in the black. The iShares Canadian Universe Bond Index ETF (XBB-T) was up 1.36 per cent last year and had a three-year average annual compound rate of return of 4.28 per cent.
-- Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters. For more information and details on how to subscribe, go to www.buildingwealth.ca.
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What's up in the days ahead
Brenda Bouw will take a look at Exco Technologies Ltd., a maker of molds, components at other equipment for the automotive industry. David Milstead will examine infrastructure company AltaGas Ltd.
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Compiled by Gillian Livingston