Stock market analysts call it the stock market rotation. The market makers (mostly fund managers) are rotating out of expensive high-flying tech stocks and moving to companies and sectors that offer more attractive valuations. That is, buying more current earnings compared to paying up for future earnings. Canadian stocks and value stocks in the U.S are starting to outperform the tech-heavy U.S. market (S&P 500) and Nasdaq 100. Of course, no one knows how this plays out. We’ve been cautioned on over-priced U.S. tech stocks for years, if not decades. All said, we can learn how to position to shape the portfolio in case this roation to value is ‘for real’. Big stocks take a breather, plus the Sunday Reads.
Here’s a very good post from yahoo!finance on the market rotation. It could end up being a positive event for most stocks, as greater market breadth can be a healthy sign. Here’s the backdrop from that link …
Until recently, large-cap tech/AI dominated stocks (the largest ones often referred to as the Magnificent 7), have been the key driver of the rally. And it sent the market-weighted S&P 500 and tech-heavy Nasdaq soaring. In fact, in the first half of the year, the S&P was up 14.5%, with the Nasdaq up 18.1%, all while the neglected small-cap Russell 2000 only added 1.02%.
60% of the gains from 7 stocks
The Magnificent 7 is comprised of 7 of the largest stocks by market-cap: Apple, Microsoft, NVIDIA, Alphabet (Google), Amazon, Meta, and Tesla (even though TSLA. Those 7 stocks had an oversized impact on the market’s returns. In fact, for the first 6 months of the year, the Magnificent 7 made up 59.5% of the S&P’s gains.
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About two weeks ago the sentiment changed, and investors started the move to value. Heres’s Canadian stocks (XIC.TO), Canadian High Dividend (VDY.TO) vs the U.S. market (IVV).
The big dividend sectors can find even greater value at times, compared to the TSX Composite. That said, U.S. small cap and U.S. small cap value have been on an even greater run.
Related post: Selling VDY to build a stock portfolio.
Many anaylysts think that Canada is about to play catch up and outperform U.S. stocks. Of course, that’s no reason to not fix your Canadian home bias, if you’re over-concentrated as are most Canadian self-directed investors.
That said, it would be a welcome event.
And who knows what will happen? No one
For MoneySense, in March of 2021 there was talk of a stock market rotation and tech running out of steam. Of course tech only built up more steam from 2021. Tech has been a steam roller and the AI frenzy has added another dimension and boost. The artificial intelligence phonomenon is real and likely to contribute to earnings and efficiencies in most every sector
How will AI power your portfolio?
This from a Globe & Mail article …
Optimists will tell you these lofty valuations aren’t necessarily a problem. “Admittedly, equity valuations are, in aggregate, starting to look a little stretched in relation to other assets,” writes John Higgins, chief market economist at Capital Economics. However, he argues that stock valuations could surge even higher since they are still not at the manic levels reached in the dot-com bubble of the late 1990s. He sees the S&P 500 rising from its current level around 5,500 and hitting 7,000 by the end of 2025.
I have nothing against balancing out that concentration risk in U.S. tech and the Mag 7. It may not be a concern for those in the accumulation stage with decades to go (you can keep adding and wait for any valuation issues to work themselves out). But retirees and near-retirees might add in a nice value tilt. We don’t have time to wait.
Let’s not forget the lost decade for U.S. stocks.
As I’m in semi-retirement I added another layer of U.S. value/quality and increased my overall U.S. equity exposure.
Checking in on iShares Quality Dividend XDU
When I sold half of my Bell (BCE.TO) stock I moved the proceeds to iShares Quality Dividend ETF – XDU.TO. I liked the valuation, the quality skew and sector arrangement. I added more cash that was in the account, and did a minor rebalancing from the Canadian stocks. I’m happy to see my XDU.TO move to an all-time high this past week. It is now the largest position in the Canadian dollar RRSP portfolio.
I already have some good growth in the U.S. portfolio with Apple, QCOM and BlackRock leading the way. I am happy to add that XDU and would acknowledge that it will underperform if and when tech finds its footing again.
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In 2024 XDU is outperforming the popular Schwab (SCHD) and the U.S. low volatility ETF (SPLV). Not only that, XDU has less volatility than the low volatility index.
For the retiree, there’s nothing better than strong total returns and lower volatility. Defense wins ball games, and retirement.
More Sunday Reads
I will have to be selfish and start with a Cut The Crap Investing post from this week. It is built around one of the best retirement funding charts you’ll see. A look at a 4%, 5% and 6% spend rates from 1994. How much can you spend in retirement?
Creating retirement income from your portfolio.
At Stocktrades, here’s Dan’s 12 favourite Canadian stocks to buy in 2024. That’s a good list.
Things are getting busy at Dividend Hawk as earnings season picks up the pace. Included in the mix was widely-held Coca-Cola (KO). Some solid numbers.
KO reports Non-GAAP EPS of $0.84, up 7% versus prior year and $0.03 ahead of estimates. Revenue of $12.4 billion beats analyst estimates by $650 million and increased 3.3% versus the same quarter last year. Mangement sees full-year adjusted organic revenue growth of +9% to +10% and EPS of $2.82 to $2.85 is anticipated.
For me, it’s Pepsi (PEP ), no Coke.
On the earnings front, more encouraging results from our Colgate-Palmolive (CL). Readers may remember that I started topping that up considerably in my wife’s accounts, a few earnings reports ago. That is a wonderful defensive consumer staple. The good news is it ran at tech-like speed. It ran into expensive territory. It’s beating the S&P 500 in 2024.
We’ll hold, not add.
BMO offers 4 ways to invest in U.S. stocks
Timely to his post, on the Findependence Hub BMO takes a look at U.S. ETFs. The BMO offering includes a U.S. Low Volatility ETF – ZLU. There is also a currency hedged version.
At Tawcan Bob offers his mid-year portfolio report.
Excluding new contributions, our dividend portfolio returned 9.12%. In comparison, VCN had a 6.69% return, XAW had a 15.25% return, and XEQT had a 12.6% return. When I reviewed our portfolio, I noticed that BMO, TD, BNS, CM, Telus, and BCE have dragged down our portfolio performance. Clearly, we need to focus more on total return.
It’s good to see Bob thinking about that total return. Accumulation is simple. Make more money. More money creates more retirement income. Invest for growth within your risk tolerance level.
You may be surprised to read that the dividends don’t matter in retirement, either. In fact, a dividend and share sale of equal value are equal, except for tax purposes. And then, share sales become much more advantageous as you have full control over your income. I will do a Cut The Crap Investing version of that post, and reality.
The week in review from Banker on Wheels starts with – how much equity risk should you take?
Also – why cash is not enough, why we also hold bonds.
On this blog I offered why retirees hold bonds, cash and GICs.
Oh behave …
From Carl Richards, it’s all about your behaviour.
So true. Good habits bring great results. Here’s my book on personal finance. Ok it’s so simple it only required a 1500 word blog post.
As Berkshire Hathaway is by far the largest position in my wife’s accounts, we’re happy to see this …
And if/when there is a recession, the world’s greatest investor goes shopping with almost $200 billion in his pocket. Perhaps that’s another reason why Berkshire is getting a lot of love.
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How to cut the crap …
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Eva Green
It’s interesting to see how even the big tech giants need to take a breather sometimes. I’m just starting to learn about investing, and this makes me think there’s more to the market than just riding the highs. Thanks for breaking it down in a way that’s easy to understand!