Brianne Gardner, senior wealth manager, Velocity Investment Partners, Raymond James

FOCUS: North American large caps 

MARKET OUTLOOK:

The market is still struggling for meaningful direction and hasn’t been able to make a solid push above this 4,200 resistance point, but has been treading water. We view the stock market in a wait-and-see mode. There doesn’t seem to be a lot of conviction from investors with lower volumes, which points toward uncertainty. The S&P 500’s trading range for the last three months has been the tightest we’ve seen in six years.

In eight of the last nine weeks, markets have moved less than plus or minus one per cent. Market breadth continues to stay weak with only 30 per cent of stocks above their 50-day and 38 per cent above their 200-day, which tells us caution is warranted. The S&P 500 is more concentrated now than during the great financial crisis or the tech bubble. All of the S&P 500’s gains year-to-date have come from the top 10 stocks, with the equal weight S&P 500 actually negative year-to-date. We believe this represents a fragile market. May was a month of divergence where tech and AI soared, and the rest of the market fell. Notably, the Nasdaq gained eight per cent in May while the Dow Jones fell over seven per cent. At the sector level, it was a similar story, where we saw eight of the 11 sectors were in the red for the month.

Rate hikes have appeared to work with the overall consumer price index ticking lower over the past few months. Importantly, core components that strip out volatility are finally starting to roll over. The Bank of Canada has more options back on the table after inflation came in higher than forecast for April and ticked slightly higher. This means we might not have seen peak rates in Canada yet, and while we believe the odds are about 40 per cent, the central bank could potentially raise rates at their June meeting. It might then have to turn around and make the first of many rate cuts by year-end or early into 2024. Higher rates are causing the housing component of inflation to stay sticky.

Meanwhile, the U.S. Federal Reserve realistically has three choices of what course of action to take at their June policy meeting: hike, "hop," or stop. The market and Fed watchers alike expect no move in rates in June and Fed policymakers have hinted as much in recent days, but that might not necessarily be the end of the hiking cycle. Rather, the Fed may just skip (or hop over) a meeting and resume tightening later this year. However, futures are now pricing a 90 per cent chance the Fed decreases rates by December.

Volatility could pick up in June even while uncertainty around headline items are worked out, but we also believe the second half of the year has the potential to be the strongest period yet. We have had a great start to the year and thus now taking profits, getting our portfolios slightly below their strategic asset allocation weights while keeping a defensive tilt. Given conditions, we are rebalancing from broader index exposure into lower beta, defensive equity exposure, and also rotating from high growth to some areas that have pulled back that present solid upside potential. We remain focused on quality and low volatility factors to de-risk.

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TOP PICKS:

Nike (Nike NYSE)

Nike stock is down almost 20 per cent over the past month but took some “markdown medicine” that should make inventories healthy for 2024. Nike has invested in industry-leading direct-to-consumer e-commerce solutions as it strives to reduce the importance of third-party stores like Foot Locker, allowing them to earn higher profit margins. Much of the selloff in the stock has been tied to two issues, slumping sales in China and the continued wind-down of excessive inventory. Nike said sales in China, its third-biggest market by revenue, fell eight per cent during the most recent quarter. China’s COVID-19 policies have hurt Nike’s sales, that said we have little doubt that Nike will have momentum as a global growth story over the longer term. Some key markets such as China are picking up steam and with earnings per share acceleration anticipated, Nike should find itself back on track soon. We wouldn’t be surprised to see the stock hit $135 in a rebound.

Verizon (VZ NYSE)

Verizon is a divisive stock for investors. Concerns arise due to its presence in a highly competitive industry where differentiation is limited. Verizon offers a robust seven per cent dividend with 18 consecutive years of dividend increases. While it’s trading near all-time low valuations, we believe that makes a total return potential very compelling. The consensus target price represents an implied 25 per cent upside over the next 12 months but with predictable, recurring revenue and a seven per cent yield. We believe the low valuation provides some margin of safety, making it an attractive choice at these levels, especially in a recessionary environment.

CCL Industries (CCL.B TSX)

It is the world’s largest label maker. It makes everything from the Avery labels used in almost all offices around the world to specialty packaging for some of the leading companies in automotive, healthcare, personal care items, food and beverages and even the polymer banknotes used globally.

CCL did have some headwinds and increased competition recently but has grown its revenue from $1.3 billion to $6.4 billion over the last 10 years with very stable margins. CCL’s balance sheet remains in a strong position and while it only has a yield of 1.7 per cent, it increased its dividend by almost 110 per cent in just five years between 2017 and 2022. The average price on the street by analysts provides an implied upside of over 20 per cent from the current level, with a consensus rating of outperform. CCL Industries is one of a few Canadian stocks that have the ability to be flexible and adaptable to changing economic conditions to protect its margins, which is why the stock has delivered positive returns to investors 13 out of the last 15 years. 

PAST PICKS: March 10, 2023

Microsoft (MSFT NASDAQ)

• Then: US$248.59
• Now: US$333.55
• Return: 34%
• Total Return: 34%

Wheaton Precious Metals (WPM TSX)

• Then: $55.95
• Now: $61.47
• Return: 10%
• Total Return: 10%

Enbridge (ENB TSX)

• Then: $52.36
• Now: $49.19
• Return: -6%
• Total Return: -4%

Total Return Average: 13%