Greetings Trade Secrets readers!
Jon Erlichman back again with your weekly Trade Secrets newsletter. We’re three weeks into The Globe and Mail’s Trade Off stock market competition and what a stretch it’s been. From Nvidia’s results to the trade war worries, there’s rarely a dull day in the markets.
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The leaderboard
Before we dive into some actionable investing insights, here’s a quick leaderboard update on the Trade Off game.
The week in markets
Typically, September tends to be the worst month of the year for markets. According to research from RBC, data going back to 1928 found that the S&P 500 declines on average 1.2 per cent during September. In Canada, a September slide is common. Since 1970, the S&P/TSX Composite had declined, on average, by 1.4 per cent every year over the same period.
RBC says there’s no smoking gun. The bank cites what’s called window dressing. That’s when investment funds tidy up their portfolios near the end of a fiscal year. Tax-loss selling also plays a role. The report also cites the self-fulfilling prophecy of September: that, because it’s known as a weaker month, it just becomes a seasonal trend.
What does the trade war mean for stocks? If your picks have been whipsawed by the headlines, you’re not alone. Canadian steel companies, auto parts manufacturers, lumber players and Canada Goose are all examples of stocks that were initially dragged down by the trade war news.
That said, it’s been tough to derail Canada’s stock market. Scotiabank strategist Hugo Ste-Marie reiterated that in a note to clients last week. “If oil, gold and copper prices remain elevated, they should continue to support the TSX,” he added. Add to that Canadian banks, many which displayed strong profit power in their latest earnings.
Luxury stocks beat to their own drum: On our most recent episode of Ticker Take, we spoke with Markus Hansen, portfolio manager with Vontobel. He invests in the world’s most exclusive brands for a living. Typically, companies aim to maximize sales. In luxury, the top players hold back on supply to retain pricing power. Hansen likes stocks such as Hermès and Ferrari because they’ve added value to their brands by playing the long game. “You can’t buy time,” he told me. “So building that heritage is one of the biggest moats.”
Could SpaceX grow more than 2,000% in five years? After SpaceX’s high-profile IPO, Wall Street analysts are trying to predict how much the company could grow. Right now, according to estimates compiled by Bloomberg, SpaceX’s revenue is expected to climb by more than 2,000 per cent over the next five years. Tesla, also owned by Elon Musk, is projected to see top-line growth of more than 100 per cent. When I posted those expectations on X, Musk commented, “I know this sounds crazy right now, but I think both SpaceX and Tesla will exceed these estimates.”
Why do bond yields matter to stock investors? There’s been a lot of focus on the rise in U.S. government bond yields. When investors sell bonds, yields go up. Some bond investors have been selling because they’re worried about the massive U.S. deficit. Others are concerned about lingering inflation, which could make it hard for the Fed to cut interest rates. Another factor is that tech companies are borrowing for their AI growth plans and they’re willing to pay borrowers attractive rates compared with Uncle Sam.
Ironically, when investors put pressure on bonds (which pushes up yields), those bonds can become more attractive than some stocks. We’re not seeing overwhelming evidence that investors are ditching stocks in favour of higher-yield bonds. But a lot of growth stocks, as an example, are valued based on their future earnings. And as yields rise, the math makes those future earnings worth less today, which can make growth stocks harder to justify at current prices.
Don’t put all your eggs in one basket: Part of the fun from this stock market competition is hunting for winners. But most of the time, it’s hard to beat the market with one name. Looking back at the performance of three well-known companies – AT&T, Citigroup and Macy’s – all of them have enjoyed solid stock moves in the past two years. However, they’ve been losers over the past 20 years. By comparison, simply buying the S&P 500 over that period of time would have netted you an incredible return. Just some food for thought.
Trade Secret tips
Here are a few helpful investing reads from The Globe.
Everybody loves a good comeback story. Can that be true for stocks too? Here’s a look at some names that could be set for a turnaround.
Speaking of comebacks, remember pot stocks? Here’s an interesting contrarian case for Cronos.
We often hear about stock buybacks. How beneficial can they be for investors? Here’s a crash course.
Good luck out there!
Jon
Jon Erlichman is the founder of Ticker Take on YouTube and a contributor to BNN Bloomberg.