John Hood, president and portfolio manager at J.C. Hood Investment Counsel
Focus: Options and ETFs

MARKET OUTLOOK:

Other than the 17-per-cent correction in Q3/18, the S&P500 had been range-bound between 2,850 and 2,950 points going back to last October, essentially stalled because of recession fears and the inverted yield curve, Brexit, tariff wars with China and legal challenges to tech goliaths.

According to economist Brian Westbury at First Trust, it cannot be debated that U.S. industrial growth is slowing. The ISM manufacturing index in the U.S. dropped to 49.1 last week, but the larger ISM services index was up at 56.4. Unemployment remains at record lows. U.S. consumer spending continues to be buoyant largely as a result of the Amazon effect, which thanks to the ease of online purchases makes every week Christmas.

Trade with China is off 12.3 per cent, but it’s up with Vietnam, South Korea and Taiwan, reflecting a search for alternative supply lines. The benefits of Trump’s tax cuts are supposed to have dried up, but there has been growth of 3.5 to 4.5 in business equipment and services. It is not surprising that in the past week, markets appear to be strengthening, making another grasp at new highs, particularly with the news that there is an apparent tentative deal forthcoming between the U.S. and China.

Such events are not really the harbingers of recession. We tend to catastrophize events so that every market correction is a prelude to another 2008, but they aren’t. My concern is slow, disappointing growth. While I am retaining all of my growth-oriented U.S. ETFs, I am heading back into some covered call ETFs to offset very low returns on interest rates and gather 4.5 to 6 per cent distributions.

In Canada, David Rosenberg continues to be gloomy. This is not without good reason as Canada is closed to foreign investment and Canadian energy investors have shifted capital south. I still like the banks even though their net interest margins have declined along with rates, but there has been a sharp uptick in yields in past weeks. Let’s see how far the U.S. Fed cuts rate next week.

TOP PICKS

ISHARES S&P/TSX CAPPED ENERGY ETF (XEG:CT)

Bought four weeks ago at $8.13. Despite my pessimism about pipelines ever being built, the energy sector is improving. Cenovus has slashed debt and Suncor is doing well.

BMO U.S. HIGH DIVIDEND COVERED CALL ETF (ZWH:CT)

This ETF has good dividend, with upside potential.

BMO COVERED CALL CANADIAN BANKS ETF (ZWB:CT)

Not all shares are “covered,” so it has good growth potential as Canadian banks are off.  The management expense ratio is high at 0.75 per cent, but BMO is so large in covered calls they keep bid/ask spreads narrow and therefore cheap.   

PAST PICKS: AUGUST 15, 2018

ISHARES U.S. MEDICAL DEVICES ETF (IHI:UW)

• Then: $208.12
• Now: $248.79
• Return: 20%
• Total return: 20%

VANGUARD U.S. DIVIDEND APPRECIATION ETF (VGG:CT)

• Then: $47.53
• Now: $54.56
• Return: 15%
• Total return: 16%

ISHARES CORE U.S. AGGREGATE BOND ETF (AGG:UN)

• Then: $106.34
• Now: $111.75
• Return: 5%
• Total return: 8%

Total return average: 15%