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Investment Ideas ‘Somebody call 9-1-1’ about equity markets, the best bond ETFs, and what to expect from the big banks this earnings season

It’s a good thing U.S. and Chinese officials are set to negotiate trade issues this week because a resolution of the dispute, along with price momentum, are the only real factors driving markets higher amid a slowing global economy and declining corporate profit estimates.

Bank of Montreal chief economist Doug Porter recently delved into the apparent disconnect between equity market action and underlying fundamentals. Mr. Porter’s tone is tongue-in-cheek, but it’s still relevant he metaphorically compares economic trends to an emergency,

Somebody call 9-1-1 … not because markets are struggling mightily—it’s quite the opposite, with stocks rolling higher yet again this week. Instead, it’s because the run of economic data globally has been so awful lately.”

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The economist went on to detail a laundry list of disappointing data points including a sharp decline in U.S. retail sales, the 0.9 per cent monthly drop in American manufacturing, Canada’s 1.2 per cent decline in manufacturing sales, and the European Central bank’s admission that the region’s slowdown is ‘stronger and broader’ than predicted.

For corporate earnings, Merrill Lynch quantitative strategist Savita Subramanian noted that with 88 per cent of S&P 500 companies having reported, aggregate earnings are only 0.5 per cent above expectations, the weakest results since 2011.

So far, investors have been unfazed as the supportive fundamental legs for the recent market rally continue to wobble. The hopes are that a resolution of trade tensions will allow China to regain its position as global growth driver. Many central banks have also declared a hiatus in interest rate hikes, and this has mitigated fears of higher interest rates that will hurt profits.

Early in my career in finance, I was taught “the market’s never wrong”, and this was good advice. Roughly translated, it means that when markets do something you don’t expect – not reacting to bad profit guidance and economic data in this case – it’s far more likely the market’s right and you’re wrong.

Still, I’m not comfortable, hiding behind Warren Buffett’s baseball metaphor for investors, “The stock market is a no-called-strike game. You don't have to swing at everything — you can wait for your pitch.”

Ideally, this is the part where there’d be some advice or at least a conclusion but I’m stuck. On one hand, I don’t want to give in to FOMO – fear of missing out – and chase the rally. On the other, the hesitation contradicts the ‘market’s always right’ argument, and this creates its own anxieties.

This is how it goes sometimes. Mostly it means that more work is required to understand market behavior and that’s fine. Stay tuned.

-- Scott Barlow, Globe and Mail market strategist

This is the Globe Investor newsletter, published three times each week. If someone has forwarded this e-mail newsletter to you or you’re reading this on the web, you can sign up for the newsletter and others on our newsletter signup page.

Stocks to ponder

Fiserv Inc.: The world is moving away from cash, and there is money to be made from this remarkable shift. Companies that provide credit cards, develop financial technology and facilitate mobile payments have been rewarding investors for years, with gains that have easily outperformed major stock market indexes. Here’s a lesser-known name to consider: Fiserv Inc., a Wisconsin-based company, has been driving the transition to digital transactions for decades, mostly through its work with banks, insurance companies, credit unions and other financial institutions. David Berman reports

The Rundown

Rob Carrick’s 2019 ETF Buyer’s Guide: Best bond funds

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It’s rare that we get a chance to see an investment product stress-tested like bond ETFs were in the past year or so. Between wild swings in the interest rate outlook and a stock market correction, exchange-trade funds that hold bonds have been tested in good and bad conditions. Use the second installment of the 2019 Globe and Mail ETF Buyers’ Guide to see how well these key portfolio building blocks held up. Look not only at how individual funds did, but also at the differences in how the various categories of bond ETFs performed.

Dividend hikes, volatile markets, slower loan growth: What to expect as the big Canadian banks prepare to reveal earnings

Canada’s biggest banks are set to report their fiscal first-quarter results starting this week, and once again the focus is on deteriorating economic conditions and slower loan growth – a theme that ran through the latter half of 2018. David Berman reports.

Why bonds are more attractive than you think

The bond market is trying to tell you things. Even if you don’t own any bonds, you should pay attention to what it is saying, writes Ian McGugan. The market’s clearest message is that the global economy is slowing. A recession is still far from a done deal. However, a significant downturn is becoming a distinct possibility.

The pot ETFs hardly anyone is investing in are providing the most stellar returns

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One year ago, the cannabis ETF space got a lot more crowded. Three marijuana-focused funds started trading in February of 2018, eager to tap into investor demand for a rapidly evolving sector that was turning obscure companies into household names seemingly overnight. How do they stack up against the cannabis sector’s most popular and first ETF? The answer may surprise you.

ETF options keep expanding as Franklin Templeton launches index funds while BMO offers ‘one-ticket solution’ products

Canadian investors’ stampede into exchange-traded funds has investment managers rolling out a host of lower-cost options to complement existing product lines. Franklin Templeton Investments has decided to step into ETF index investing with four new passive funds, while Bank of Montreal has launched a set of asset allocation funds that automatically rebalance for investors.

An investor wants a low-fee RRSP with returns of 5 to 7% – how realistic is that?

Sounds like an easy one, right? Wouldn’t a good low-fee balanced mutual fund or exchange-traded fund work, or a diversified portfolio of stocks and bonds? Possibly, but here’s why Rob Carrick has concerns.

Others (for subscribers)

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The market’s ‘rotting resilience’: Citi

How two Canadian financiers took an obscure Apple reseller for a wild ride

Others (for everyone)

GM retiree chooses a copycat annuity to make his income stronger

Ask Globe Investor

Question: Is there a website where I can look up annual dividend increases of Canadian companies? For retirement planning purposes, what sort of annual percentage increase do you look for?

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Answer: If you want a quick and dirty way to find stocks with growing dividends, check out the iShares S&P/TSX Canadian Dividend Aristocrats Index ETF (CDZ). You can find the exchange-traded fund’s website with a google search, then click on “holdings” to see a list of its 83 stocks. CDZ holds most of the usual dividend growth suspects – including banks, pipelines, power producers, telecoms, utilities and real estate investment trusts – and some lesser-known names as well.

Stocks in CDZ have raised their dividends for at least five consecutive years, but the ETF’s website doesn’t provide the annual percentage increases. To get that information, you could create a watchlist of stocks on and then use the drop-down menu to choose the “dividends” view. You’ll generate a table with a column that shows the five-year annualized dividend growth rate.

When looking up dividends or any other information, I strongly recommend that you also visit the investor relations section of the company’s website. Most companies provide a detailed dividend history so you can verify how frequently – and by how much – the dividend has grown over the years.

As for what sort of annual increase I look for, my favourite stocks are ones that offer the best of both worlds – a high initial yield and a strong dividend growth rate. One example is TransCanada Corp. (TRP), which yields about 5.2 per cent and targets annual dividend growth of 8 per cent to 10 per cent annually through 2021. In line with its forecast, the pipeline and power company hiked its dividend by 8.7 per cent this week.

Some stocks offer a higher initial yield, but modest future dividend growth potential. Many real estate investment trusts and restaurant royalty funds, for example, yield more than 6 per cent, but distribution growth is typically in the low single-digits. So, you get more income now but less growth later, which appeals to investors seeking immediate cash flow.

Just as you should diversify your portfolio across companies and industries, diversifying by yield and dividend growth rate can help you meet your goals and control your investing risk. Check out my model Yield Hog Dividend Growth Portfolio for more dividend stock ideas. Remember to do your own due diligence before investing in any security.

-- John Heinzl

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What’s up in the days ahead

John Heinzl will explain why Inter Pipeline’s 8-per-cent yield is safe.

Click here to see the Globe Investor earnings and economic news calendar.

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