Robert McWhirter, president of Selective Asset Management Inc.

Focus: Canadian dividend and growth stocks
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MARKET OUTLOOK
The CRB commodities index bottomed in early 2016, signaling the end of disinflation.

The U.S. 10-year bond yield hit a low of 1.32 per cent in early July and has since risen by over 50 basis points (bp). If the U.S. 10-year bond yield rises above two per cent, it may confirm that the interest downtrend since 1981 has ended. Today’s U.S. jobs data came in at 161,000 in October, and September’s number was revised higher to 191,000. The unemployment rate fell to 4.9 per cent, the lowest level since 2008, providing further support that the U.S. Federal Reserve Board is going to raise interest rates in December.

Companies that increase their dividends tend to significantly outperform non-dividend growers. This is even more pronounced in a rising interest rate environment.

The real interest rate of 0.8 per cent on U.S. Long Treasuries is 171 bp below the 65-year real interest rate median of 2.51 per cent. In Canada, the real interest rate of 0.3 per cent on Canada long bonds is even further below (277 bp) the 65-year real interest rate median of 3.07 per cent. Interest rates could rise significantly if the market becomes concerned about rising inflation.

This appears to have started as the recent inflation breakeven rate of 1.83 per cent on U.S. Treasury Inflation-Protected Securities (TIPS) indicates rising expectations of inflation.

Gold ($1,304) appears to be confirming concerns about rising inflation as it is close to a new intermediate up-leg, which will register if gold closes above $1,335. It appears that the first up-leg of this bull market driven by accommodative monetary policy ran from October, 2008 to May, 2015. The second up-leg appears to have started in February of this year. Driven by improving economic conditions and accelerating earnings momentum, the second up-leg is usually the longest and strongest. Earnings growth is improving. Jonathan Golub, RBC Capital Markets’ Chief U.S. Market Strategist, notes that 410 companies (86 per cent of the S&P 500’s market cap) have reported growth.

Earnings growth is on pace for +5.0 per cent, assuming the current beat rate for the remainder of the season. We expect equities to move higher into the new year once the uncertainty caused by the U.S. election has passed.

Companies beating on both the top- and bottom-lines outperformed by 1.3 per cent, while those missing on both lagged by -4.2 per cent. This compares to +1.9 per cent and -3.0 per cent historically. Given concerns about stretched equity valuations, it makes sense that the response to earnings surprise was muted on the upside and magnified on the downside.

TOP PICKS

CAE INC. (CAE.TO)

CELESTICA (CLS.TO)

MAGNA INTERNATIONAL (MG.TO)
 

PAST PICKS: AUGUST 7, 2015

CELESTICA (CLS.TO)

• Then: $17.25
• Now: $16.04
• Return: -6.9%
• TR: -6.9%

DESCARTES SYSTEMS GROUP (DSG.TO)

• Then: $22.09
• Now: $27.53
• Return: +24.62%
• TR: +24.62%

PROMETIC LIFE SCIENCES (PLI.TO)   

• Then: $2.28
• Now: $2.59
• Return: +13.81%
• TR: +13.81%

TOTAL RETURN AVERAGE: +10.51%