Canadian economist David Rosenberg is known as a ‘permabear’. Meaning that he is usually predicting a market decline or recession. Of course the old joke is that economists have predicted eight of the last two recessions. That said, Rosenberg (Rosey) and a select few economists and portfolio managers did predict the last two major stock market declines and recessions – the great financial crisis (2008-2009) and the dot-com crash of the early 2000’s. And while Rosenberg has been more than cautious during the pandemic, he has offered his take on where to invest. He now suggests that Canadian stocks are looking rosy, on the Sunday Reads.
The U.S. markets (driven by the mega technology companies) have delivered absolutely incredible returns. Here’s the S&P 500 ETF (IVV) returns history.
Of course, this is not ‘normal’. And U.S. stocks are expensive by almost every measure.
Stocks will average 7-8% annual over longer periods, not the 16.58% that we’ve seen over the last 10 years.
Here’s the CAPE or Shiller P/E ratio for U.S. stocks.
The Shiller ratio can’t predict stock market crashes, but it is a good indicator for future returns over several years or a decade. For the U.S. stock market, we are not buying a lot of current earnings. Earnings matter, eventually.
In the above chart, the blue dots represent 10-year forward annualized total returns at historical Shiller P/E ratios. In the near 40 P/E range we see very muted or negative returns. We see most of the generous returns at very low P/E levels.
Once again, let’s not forget the lost decade for U.S. stocks.
Awareness is preparedness
Of course, I’m not suggesting that you sell your U.S. stocks. Anything can happen when it comes to stock markets. I put it on the table once again, because awareness is preparedness.
Look to the great white north
David Rosenberg writes that U.S. stocks are expensive. But that’s not the case with Canadians stocks. They are somewhat in line with historical averages.
In the Globe and Mail (paywall) – Why Canadian stocks are looking particularly attractive right now.
I’ll skip to the ending of the article, and then we’ll look at the valuation and sector picture.
Ultimately, with our belief that the outlook for forward returns remains poor for the U.S. stock market, adding international equity exposure is a prudent strategy.
While Asia has long been a favourite of ours, lately the Canadian market has been creeping up on our watch list and is another option for investors to consider.David Rosenberg, Globe & Mail
On the total returns potential for the Canadian stock market.
Another way to look at it is to use the Gordon Growth Model to calculate potential upside. This aims to calculate the intrinsic value of a stock based upon future dividends that grow at a steady pace.
Based on this methodology, the return outlook for Canada tops the list among some of the largest stock markets on the planet and is in line with the annualized total return for the TSX over the past 40 years of 9 per cent.
And Rosenberg on the valuation metrics.
Lastly, the earnings outlook is being revised higher, as forward 12-month earnings per share estimates have increased by 7.5 per cent over the past three months, which is a historically fast pace. The result is that the price-to-earnings multiple, at 15.6 and in line with its historical average of the past 10 years, has held steady despite the October rally.
Canadian stocks have been going up nicely (in fact, they’ve outperformed U.S. stocks over the last year), but so have earnings, meaning the valuation level for Canadian stocks has stayed in check.
On sectors and types of stocks
In terms of favourite sectors, our preference is for a mix defensive/defensive-growth as well as select value exposure: energy, financials, real estate and materials.
Recently I asked – what is the cost or your Canadian home bias?
This might not be the time to be backward-looking, trying to fix the fact that U.S. greatly outperformed the Canadian markets for the last 12 years or so coming out of the financial crisis. And by ‘fix’ I mean that you would move a significant portfolio or your portfolio to U.S. stock market index ETFs, or the more expensive U.S. stocks.
Of course, we certainly want the continued U.S. exposure to fix the portfolio sector holes created by a Canadian market that is dominated by financials, pipelines and utilities. I will leave that final geographic allocation decision to you. You might simply listen to the bear if you are considering any portfolio shifts.
The Sunday Reads
I’ll start with my Saturday post on Cut The Crap Investing. This will surprise a few ETFers perhaps …
And it’s a big one, my MoneySense weekly, Making Sense of the Markets.
Dividend Hawk is a good place to stop by each week for a roundup on the markets and some favourite blog posts of the week.
The Sunday Reads at My Own Advisor – why cash flow is king edition.
Bob Lau at Tawcan gives us his version of the 12 best Canadian dividend stocks for 2022.
That’s a good list, also consider the Beat The TSX Portfolio.
On the Findependence Hub – is early retirement in your future?
And speaking of early retirement, here’s how Fritz will spend his time these days. Fritz is so precise, he even put his breakdown into a pie chart.
For now, here’s an outline of the changes in time spent in retirement vs those nasty working years.
That’s some good math.
And here’s how one might kill their retirement – is 90% in stocks too much?
First off, it appears that the investor saved and invested too much, unless a massive legacy was the end goal. Ben Carlson at A Wealth of Common Sense then shows that dividends don’t work during market corrections, but then suggests that they are a good inflation hedge over a 100 years or so?
Even during the Great Depression when the stock market fell more than 80% on a real basis, dividends fell “only” 47% or so. Dividends snapped back much quicker than the market after that period as well (it nearly round-tripped before stocks fell an additional 50% in 1937-1938).
Dividends fell just over 20% in the nasty 1973-1974 bear market that witnessed stocks fall more than 50% real.
Real corporate payouts fell just 12% when the stock market got cut in half from 2000-2002 while the Great Recession saw dividends fall 25% when the market fell well over 50%.
And good luck starting retirement with that current 1.2% dividend yield for U.S. stock markets.
On stocktrades.ca. a subject I am more than interested in these days – Canada’s top renewable and clean energy stocks.
The energy reality of today might favour traditional oil and gas stocks, in the near term, but the future hopefully belongs to renewables and nuclear.
But here’s the current path that we’re on, unfortunately …
On the topic of energy, on MoneySense, Jonathan Chevreau asked are energy stocks a good buy now?
Bieb detour and diversion …
And yes, I misspelled ‘biebs’ in my tweet.
The Bieb’s next stop in search of advertising dollars?
Beaver Tails agreed with me.
Greater growth in the TFSA …
That can be a great idea if you’re using the TFSA as a long term growth account, and you have a higher tolerance for risk. There’s nothing like tax-free income in retirement.
I have ample TFSA room, I intend to build that with bitcoin, some Canadian energy stocks, and some thematic plays such as that BATT ETF that we hold in other accounts, plus I’m looking at semiconductor ETFs, and I’ll be sure to add some U.S. growth stocks or ETFs should they ever get cheap again.
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Consider Justwealth for RESP accounts. That is THE option in Canada.
Make your cash work a lot harder at EQ Bank. RRSP and TFSA account savings rates are at 1.25%. You’ll find some higher rates on certain GICs. They now also offer U.S. dollar accounts.
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