Brooke Thackray, research analyst, Horizons ETF Management Canada

FOCUS: Seasonal investing and technical analysis

MARKET OUTLOOK:

There are currently a lot of headwinds for the stock market. Leading economic indicators continue to point to an economic slowdown. At the same time, central banks are removing liquidity out of the system. The U.S. Federal Reserve just raised its federal funds rate and continues to execute a policy of quantitative tightening, selling bonds in the market. Monetary policy takes 12 to 18 months to work through the system.

The recent increases in central bank interest rates have not made their way into the economy. At the same time the stock market is fighting substantial headwinds, we have now entered into the “Sell in May” period for the stock market. On average, over the long-term, the stock market tends to underperform in the six-months from May to October compared to the other six months of the year.

The combination of substantial headwinds and a weak seasonal period for the stock market, do not bode well for the stock market over the next few months.

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TOP PICKS

Consumer Staples Select Sector SPDR Fund (XLP NYSEARCA)

The consumer staples sector has been performing well relative to the S&P 500 as investors have been seeking refuge in the defensive sectors amid the stock market turmoil. The sector is expensive with a PE ratio of 22.45 (TTM), but in times of greater uncertainty, investors are willing to pay a premium. So far, in this earnings season, a large number of consumer staples companies have reported strong earnings, as they have been able to maintain pricing power.

Health Care Select Sector SPDR Fund (XLV NYSEARCA)

The health-care sector is a defensive sector that is less sensitive to economic cycles compared to the broad stock market. On a seasonal basis, the health-care sector tends to perform well from early May to early August. Given the current market uncertainty, the health care sector could be a good place to hide.

BMO Mid Federal Bond Index ETF (ZFM TSX)

Government bonds have a strong seasonal period from early May to early October. Investors on the margin rotate from equities to government bonds in the weaker six-month period for the stock market, pushing up the price of government bonds. Government bonds also provide a diversification benefit in a portfolio.

Past Picks: January 24, 2023

BMO Equal Weight Oil & Gas Index ETF (ZEO TSX)

• Then: $63.15
• Now: $59.18
• Return: -6%
• Total Return: -5%

BMO Equal Weight Banks Index ETF (ZEB TSX)

• Then: $35.79
• Now: $33.35
• Return: -7%
• Total Return: -5%

Eastman Chemical (EMN NYSE)

• Then: $90.61
• Now: $80.80
• Return: -11%
• Total Return: -10%

Total Return Average: -7%