Stan Wong, portfolio manager at Scotia Wealth Management

FOCUS: North American large caps and ETFs

MARKET OUTLOOK:

The fourth-quarter rally for equity markets has been robust with the S&P 500 Index up nearly 15 per cent from the October lows. At The Stan Wong Group, we take a constructive view of equities as market headwinds shift to tailwinds. Inflation, the market’s primary worry appears to have hit an inflection point. Prices for a wide range of commodities including oil, natural gas, gasoline, aluminum, copper and wheat have retreated sharply from their highs earlier this year. Housing and used vehicle costs also appear to have peaked.

Cooling inflation pressures should allow central banks to take a more dovish tone in the coming months and quarters. Indeed, current market expectations indicate a pivot in the U.S. Federal Reserve’s monetary policy in 2023. Additionally, the U.S. consumer continues to be resilient with recent retail sales numbers marching higher.

From a fundamental view, the S&P 500 Index is now trading at a discount to its 10-year historical average, particularly when we look at the S&P 500 Equal Weight Index which carries a much lower weighting in the more expensive technology and communication sectors. From a technical analysis viewpoint, recent bullish divergence signals seem to indicate the end of the downtrend.

Remarkably, we note that since 1950, more bear markets have ended in October (over 35 per cent) than in any other month. Upcoming seasonality trends could further help equities. Historically since 1950, we note that the S&P 500 Index has never produced a negative one-year return following the U.S. midterm elections. In fact, the average one-year gain following midterm elections has been 14.7 per cent.

In Stan Wong Managed Portfolios, we continue to favour value stocks over growth stocks. The energy, health-care and financial sectors represent our highest sector weightings while the technology and communications sectors remain decidedly underweight. Selectively, names in the consumer discretionary sector are beginning to look attractive.

From a geographic perspective, we prefer U.S. and Canadian equity markets over European and Asian equity markets. The energy crisis in Europe and sluggish growth in China discourage us from these regions. In our fixed-income allocation, we see a path for traditional government and investment-grade corporate bonds to perform well over the next year.

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TOP PICKS:

CHEVRON (CVX NYSE)

Last bought in October at ~US$155

Chevron is one of the world’s largest integrated energy companies and is forecasted to gross over US$225 billion in revenue for 2023. Chevron boasts approximately 11.3 billion barrels of proven reserves and produces about 3.1 million barrels of oil a day. The company’s downstream operations account for over 70 per cent of sales. Last month, Chevron reported revenue and earnings results that well-surpassed analyst estimates.

Like other large-cap energy companies, Chevron has been focused on returning excess cash to shareholders and keeping capital expenditures and production increases in check. Earlier this year, management announced a boost in its share buyback program to a ceiling of US$15 billion of stock. Chevron’s free cash flow yield of over 10 per cent remains very attractive. CVX currently pays an attractive three per cent dividend yield and reports its next quarterly results on Jan. 23.

VISA (V NYSE)

Last bought in October at ~US$180

Visa is the world’s leader in digital payments boasting about 3.7 billion credit and other payment cards in circulation across 200 countries. The company is expected to gross over US$32 billion in revenue for fiscal 2023. Last month, management announced a new US$12 billion share buyback program along with a 20 per cent dividend increase.

With pent-up travel demand surging, Visa should benefit from more transactions in the higher margin cross-border segment. Overall, the U.S. consumer continues to appear resilient with recent retail sales data marching higher. Today, Visa boasts ample free cash flow, no material debt, and is forecasted to have predictable sales and earnings growth for the foreseeable future. Longer-term, the secular trend of electronic payments should have plenty of runway for growth. The Company reports its next quarterly results on Jan. 27.

WALT DISNEY (DIS NYSE)

Last bought this month at ~US$90

With over US$91 billion in expected fiscal 2023 revenues, Walt Disney is one of the world’s largest and most recognized media and entertainment companies. Disney is quickly gaining market share in its direct-to-consumer streaming segment. Its combined streaming subscriber count, when combining Disney+, Hulu and ESPN+ is now over 235 million subscribers, surpassing that of its rival, Netflix.

Disney’s parks and resorts segment is expected to rebound strongly from the pandemic lockdowns as pent-up travel demand intensifies. The studio segment’s future looks strong with a strong slate of content ahead. Lastly, the return of Bob Iger to lead the company could also spark the stock price. DIS shares are down more than 50 per cent from last year’s highs, providing compelling value for savvy investors. The company reports its next quarterly results on Feb. 9.