John Hood, Portfolio Manager, Croft Financial Group

FOCUS: ETFs

MARKET OUTLOOK:

Over the past year, markets have been driven by what U.S. Federal Reserve Chair Jerome Powell is going to do with rates. Markets declined as a result of a five-per-cent rate increase within one year so naturally, any portend of rate cuts – or at least no further increases – boosts markets. Last week, however, markets declined about 1.6 per cent as rate cut expectations in March were dashed by Powell himself.

Economic data however can always be re-interpreted. While jobs increased, the number of hours worked decreased, offsetting most job creation numbers. It seems counterintuitive to say that strong economic data is bad for markets, but when the Fed is taking a chainsaw to inflation, a strong economy reduces the likelihood of rate cuts.

When you look at shorter periods, the importance of earnings growth fades and the mood of the market dominates. This “mood” is expressed through the price-to-earnings ratio, as multiples grow higher, so do stock prices and risks unless justified by earnings.

For investors, it is worth noting that for decades, the S&P 500 Index has returned an average of 10 per cent to investors and that for the past 20 years returns have been driven by earnings. In other words, focus on the long-term strategy, not on the fickle mood swings of other investors or social media soothsayers. Since our clients have been overweight with U.S. equities for years, we are very pleased that the S&P 500 – led by “the magnificent seven” – has surged to new highs so we are not adding to those positions, rather we are looking for market gains to “broaden out” among the other 493 stocks. We are nonetheless being cautious, as there could still be an earnings decline.

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TOP PICKS:

Invesco S and P MidCap Quality ETF (XMHQ NYSEARCA)

Bought in December in personal and client accounts at $118.

ALPS Equal Sector Weight ETF (EQL NYSEARCA)

EQL is an equal-weight ETF, also from Invesco at $32.76. It holds all 500 stocks in the S&P500, but on an equal weight basis thereby eliminating the over-concentration on tech goliaths and reducing risk EQL is not held in either personal or client accounts, but will be.

Horizons 0-3 Month T-Bill ETF (CBIL TSX)

CBIL is a fixed-income ETF from Harvest priced at $50. This ETF is extensively held in client and personal accounts all around $50. It's based upon 0-3 month CAD T-bills and yields slightly above five per cent.

PAST PICKS JULY 8, 2022

Vanguard FTSE Canada All Cap Index ETF (VCN TSX)

Then: $38.46
Now: $43.36
Return: 13 per cent
Total Return: 18 per cent

Vanguard S&P 500 Index ETF (VSP TSX)

Then: $64.88
Now: $81.14
Return: 25 per cent
Total Return: 28 per cent

BMO Canadian Bank Income Index ETF (ZBI TSX)

Then: $28.18
Now: $28.29
Return: 0.4 per cent
Total Return: 6 per cent

Total Return Average: 17 per cent