David Burrows, president and chief investment strategist of Barometer Capital Management

FOCUS: North American large caps

MARKET OUTLOOK:

After digesting the November-December overbought condition, the Nasdaq and the SPX have now made six new all-time high closes in the second half of January. Barring a major reversal, this bodes well for the year. When the market made a new high after a cyclical bear market, the forward-looking returns one to three years out were consistently positive over 90 per cent of the time since 1959.

Under the surface, market breadth remains resilient, especially for global markets, especially Asia including Japan (making 34-year highs), India and Latin America. While Canada lagged through most of 2023, the TSX has also seen a lift in the number of stocks in uptrends despite negative foreign flows. Improving breadth for equities around the world, in particular for economically sensitive sectors, provides both signalling for the global economy and a shock absorber should we have unexpected bad news.

For companies, it appears that the U.S. saw a trough in earnings growth in early 2023. As is usual, markets bottomed in the early fourth quarter of 2022 in looking forward, anticipating slow improvement.

While mega-cap tech continues to have an outsized and positive impact on U.S. indices, sectors with the broadest equity participation include financials, industrials and materials. Canadian energy is looking interesting as crude moved up through US$76 today - seasonality tends to kick in here and the Trans Mountain pipeline begins filling in February. The WCS spread has been narrowing in advance.

In materials, the potential for People's Bank of China bazooka response to the very weak Chinese economy could challenge bearish positioning by hedge funds who are using short commodities positions to express their negative views on the global economy. Commodities positioning remains as short as it has been since the financial crisis, while the equities have been quite resilient. After pulling back to support, many commodities and related equities have rallied from important levels.

In portfolios, we continue to own and like large-cap tech leaders, but also have significant over-weights in financials, industrials and materials, with a smaller overweight oil producers.

Finally, after 15 years of underperformance, it appears global equities are set to provide investors returns given the sector make-up vs. U.S. concentration in tech. Largest weights for global markets include financials, industrials and large weights in both energy and materials. Valuations are at the biggest discount versus U.S. stocks in 25 years. We are adding global exposure to all portfolios after avoiding for many years.

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TOP PICKS

Canadian Natural Resources (CNQ TSX)

Teck Resources (TECK.B TSX)

iShares MSCI Japan ETF – (EWJ NYSEARCA)

Japan is experiencing reflation for the first time since entering a deflationary cycle in 1991. Companies have restructured and business culture has shifted to be much more investor-friendly. Japanese stocks are under-owned after 30 years of flows out and valuations low. Industrials and financials which are important components of the Japanese market are benefitting domestically and globally from reflationary forces.

PAST PICKS: FEBRUARY 27, 2023

Past Picks: 

JPMorgan Chase (JPM NYSE)

Then: US$142.16
Now: US$172.33
Return: 21 per cent
Total Return: 25 per cent

Stantec (STN TSX)

Then: $79.40
Now: $108.62
Return: 37 per cent
Total Return: 38 per cent

ATS (ATS TSX)

Then: $54.92
Now: $59.00
Return: 7 per cent
Total Return: 7 per cent

Total Return Average: 23 per cent