Stock markets around the world are in correction mode. Leading the way for major markets are U.S. stocks. As I offered for more than a year, U.S. were very expensive. Canadian stocks don’t have the same growth profile as U.S. stocks, and they have offered very good value for quite some time. Rising earnings and falling prices have helped to create even greater value for the Canucks. Also, U.S. stocks are moving more in line with valuation levels of the last 20 years. In this post we’ll touch on Canadian stocks that are looking good. And you’ll find a great list of Sunday Reads.
In the Globe and Mail, this chart caught my eye.
We see that the U.S. stock market (S&P 500) and the growth-oriented Nasdaq are moving in-line with the historical price to earnings ratios of the last 20 years. The PE ratio is a measure of the profitability of the market. That’s the measure market analysts largely refer to when they consider stock markets to be expensive or cheap. The measure for the above chart is the forward PE ratio, meaning that it is an estimate of next year’s earnings. Those earnings may or may not appear based on economic conditions. And the market analysts’ estimates could also be wrong.
You should be buying
You should be adding on a regular schedule if you own an asset allocation ETF.
Stocks are going on sale. There is very decent long term value. And sure stocks could fall further. That would be even better; you will be able to buy even more shares as prices fall.
With a concrete investment plan, you can and should always be fully invested. That means that based on that plan you will always find a place for new monies whether that be in stocks, REITs, bonds, cash, gold, commodities, commodity stocks and bitcoin. Yes I am still commited to that long-term potential of bitcoin.
We should not give up on assets just becuase the price is down, or because the asset is volatile. Preet Banerjee offers …
Canadian banks are getting more attractive
Canadian investors love their big dividends. Top of the love-list is often the Canadian financials and Canadian banks. The big Canadian banks operate in an oligopoly setting and given that, they have been paying dividends longer than Canada has been Canada.
According to RBC Dominion Securities, bank stocks trade at just 8.6 times estimated 2023 earnings. That is well below the 15-year average price-to-earnings ratio of 10.8.
This past week Toni Gravelle, Duputy Govenor of the Bank of Canada offered that …
Rising interest rates are designed to slow the economy by making borrowing more expensive. That tends to slow sectors like housing,” Mr. Gravelle said, according to the English version of the speech.
But this slowing might be amplified this time around because highly indebted households will face high debt-servicing costs and will likely reduce household spending more than they would have otherwise.”
There are increased risks due to the rising rate environment. There are economic risks and that risk translates to housing and borrowing (and defaults) for banks. Value for sectors is often created by additional or rising risks. You often have to wade into the risk. That’s where they keep the generous stock market returns, and often market-beating returns for those who are more active with their portfolio execution.
In August of 2020 I passed along the observation that it was the cheapest Canadian banks had been in 20 years. From August of 2020 to the end of April 2022. For Canadian banks we’ll use the BMO Equal Weight Bank Index ETF.
- Cheap banks – 32.9% annual
- Canadian stocks – 18.7% annual
Of course past performance does not guarantee future returns.
We have to accept risk to generate returns that are greater than that of ‘no risk’ assets such as savings accounts. And then we often have to take on even greater risks to generate outsized gains.
Make your cash work harder at EQ Bank.
There was risk in Canadian energy stocks. But the gains have been tremendous. I continue to like oil and gas stocks and I would add to them in a heartbeat. That post was recently updated for Million Dollar Journey.
I’ve recently shifted my focus for Canadian oil and gas stocks, as I am building the energy dividend portfolio. The retirement income strategy is to replace stock price volatility with dividend health risk. I’ll make, and take that bet.
And here’s an update for 2022 on the retirement ETF portfolio.
And the link to the recent retirement-focused video on the YouTube channel. The Zoom call Q&A was also recorded, and is posted.
The Sunday Reads
At My Own Advisor we have the active investing vs passive investing debate – the Weekend Reads post.
That is a very good post. And I’d agree with Mark that passiving indexing is much more active then we would think. Passive cap-weighted (biggest stocks get bigger positions) indexing is a large cap momentum strategy. It will follow the market makers wherever their whims may take them. And sometime the market gets it wrong – see the lost decade for U.S. stocks.
But of course passive index investing is still a very good investment approach. The idea is to buy a bunch of successful companies around the globe and trust the market pricing. That the markets are not efficient (they get it wrong at times) is not a deal breaker. Over time, the markets will eventually follow earnings and business success.
For many great links and the stock stories of the week we’ll head over to Dividend Hawk.
Here’s a snip of the action.
From that list I will highlight how to set financial goals from Tom at Dividends Diversify.
Core vs advanced couch potato
At MoneySense I had a look at the core vs advanced couch potato portfolios, and performance. Given that we’ve entered an inflationary environment and recently a stagflation environment it is no surprise that the advanced models (more all -weather) are outperforming the core models.
Also on MoneySense, Kyle from Million Dollar Journey is making sense of the markets.
Bonds? No thanks
On the Findependence Hub, why this portfolio manager is not buying bonds, and hasn’t for decades. That’s an argument for good stocks and good dividends over bonds. One can certainly make that argument. I am still holding a modest bond component in our portfolios. We are seeing treasuries move higher as the market (recently) predicts a looming recession.
And speaking about those good stocks we have the April update from Matt at All About The Dividends.
Here’s the top Canadian REITs on stocktrades.ca
On the subject of dividends, Bob at Tawcan looks at the tax considerations for Canadian, U.S. and international stocks and ETFs. While we should be reasonbly tax efficient with respect to our portfolio construction, I’ve often suggested that tax considerations should not drive the bus. Diversification and risk tolerance considerations trump all.
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