Ross Healy, chairman of Strategic Analysis Corporation and portfolio manager at MacNicol & Associates Asset Management
Focus: North American large caps

MARKET OUTLOOK

The stock market as epitomized by the S&P 500 has remained in a range-bound trade by what we refer to as structural support at two-and-a-half times book value (roughly 1,550 basis points) at the lows and its fair market value (roughly 3,075) at the peak. We find it very intriguing that the range of the values at those two parameters has barely budged over the past 12 months.

Structural support, an adjusted price-to-book measure, is related to balance sheet growth and therefore we can see at a glance that there has been almost no growth in this important area. Not that this should be a surprise, as share buybacks have taken all balance sheet growth away for some time. The surprise is that our fair market value measure, which is directly related to overall earnings growth, has also barely budged more than 25 points either way over the past year. Consider that the earnings forecasts that we use in its construction are based on analyst consensus earnings, even after all of those buybacks have been factored in, earnings forecasts looking forward one year show no visible overall earnings growth not only for the rest of 2019, but also well into 2020.

Since the S&P 500 has yet to exceed its fair market value as long as we‘ve been using our measure, I have to say that the index is far closer to a potential top than a springboard for much higher prices in the coming months ahead, which some seem to be expecting.

Earnings for the first quarter for 2019 were down and in the second quarter they’re also likely to be down, but if you believe the analysts, there appears to be no visible earnings recovery (which the market bulls are counting on for their positive market case) for the next four quarters.

The bottom line is, if you think that earnings weakness in the first half is temporary, and then don’t whine at me if I see no improvement: whine at the 10,000 or so analysts that produced the numbers that I have to work with. Someone is wrong, either the bulls or the analysts.

TOP PICKS

NEWMONT GOLDCORP (NEM.N)

VALERO ENERGY (VLO.N)

MANULIFE FINANCIAL (MFC.TO)

PAST PICKS: AUGUST 20, 2018

LAURENTIAN BANK (LB.TO)

• Then: $47.62
• Now: $45.22
• Return: -5%
• Total return: 1%

BLACKSTONE MORTGAGE TRUST (BXMT.N)

• Then: $33.81
• Now: $36.02
• Return: 7%
• Total return: 15%

GOLDCORP (G.TO)
Acquired by Newmont Goldcorp at April 23, 2019.

• Then: $14.07
• April 22, 2019: $14.20
• Return: 1%
• Total return: 2%

Total return average: 6%

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