Anyone who followed the advice of the old adage to "sell in May and go away" must be feeling rather smug right now.
May was a lousy month for stock markets around the world and June didn't start any better with both Toronto and New York posting their worst losses in nine months on Wednesday.
But miserable as May was, Canadian investors can be consoled by the fact that most of the rest of the world fared worse than we did. The S&P/TSX Composite Index was off a mere 1% during the month. All the major U.S. indexes lost more with the S&P 500 dropping 1.4%, the Dow 1.9%, and the Nasdaq Composite 1.3%. However, the Dow is still the top performer among major world indexes in 2011 with a year-to-date gain of 8.6%.
European indexes all gave ground with the German Dow falling 4.6% for the month while the U.K. Dow gave back 1.2%. The only winner was Switzerland where the SMI managed a small gain of 0.2%.
In Asia, the biggest loser was the Shanghai Composite, which was off 5.8%. In contrast, Hong Kong's Hang Seng Index came close to break-even, slipping only 0.2% on the month. In Japan, which is still recovering from the ravages of the March earthquake and tsunami, the Nikkei dropped 1.6% and is off 5.2% for the year.
Emerging markets are still reeling. India's NSE 50 lost 3.3% in May (9.4% year-to-date) while Brazil's Bovespa fell 3.3% (7.7% for the year).
A look at the TSX sub-indexes offers several clues about the current mind-set of investors. Resource stocks were clobbered in May. The Capped Energy Index and the Capped Materials Index both fell 3.4%, the Metals and Mining Index was off 3.5%, and the Global Gold Index dropped 4.5%. All except the Energy Index are now in the red year-to-date.
In contrast, traditional defensive stocks have been performing well, led by the S&P/TSX Capped Telecom Services Index which advanced a robust 7.4% during May and is up 12.2% year-to-date. Heavyweights BCE Inc. and Telus have been the driving forces there. The Consumer Staples Index also did well, advancing 3.6% during the month (6.9% year-to-date), led by companies such as Alimentation Couche-Tard, which is an IWB recommendation. Utilities also fared well, advancing 3.1% on the month to move into the black by 2.5% for the year.
These numbers show that investors are becoming much more defensive in their portfolios, scaling back on exposure to the highly volatile resource sector and increasing weightings in stocks that are perceived to have less downside exposure. Concerns about the fragility of the economic recovery, both here and in the U.S., are fuelling this trend.
Somewhat surprisingly, the official statement from the Bank of Canada following the May 31 rate-fixing seemed quite sanguine about the global economic situation. "The global economic recovery is proceeding broadly as expected in the Bank's April Monetary Policy Report (MPR)," the statement said. "The U.S. economy continues to grow at a modest pace, limited by the consolidation of household balance sheets. Growth in Europe is maintaining momentum, although the risks related to peripheral economies have increased. The disasters that struck Japan in March are severely affecting its economic activity and causing temporary supply chain disruptions in advanced economies. Commodity prices have declined recently but are expected to remain at elevated levels, supported by tight global supply and very strong demand from emerging markets. These high prices, combined with persistent excess demand conditions in major emerging-market economies, are contributing to broader global inflationary pressures. Despite the challenges that weigh on the global outlook, financial conditions remain very stimulative."
This outlook tends to confirm our belief that the current pull-back in resource stocks is a temporary correction in a long-term bull phase. That said, it could be several months before the upward trend begins again and in the interim individual stocks could experience significant losses. Therefore, I would not advise being over-exposed to commodities at this stage. Focus on defensive stocks for now, with an emphasis on those with attractive dividend yields.
BCE Inc. (BCE, Financial) is a good example. The stock has enjoyed a good run but thanks to yet another dividend increase it is still yielding a very healthy 5.4%. As a result of the 5% dividend boost announced in May, the stock will pay out $2.07 a share over the next 12 months. Despite fierce competition in the telecommunications business, BCE's downside risk appears to be limited at this stage. That makes it an ideal stock for the current market conditions and if you don't already own some shares I suggest you consider taking a position.
There is one other point worth noting: the bond market is faring much better than expected so far this year. Back in January there were fears that growing inflationary pressure would knock the stuffing out of bonds. Although inflation worries are still present (see the Bank of Canada statement), the market has held up remarkably well so far in 2011. As of the close of trading on June 1, the DEX Universe Bond Index was up 2.47% year-to-date, which was almost as good as the performance of the S&P/TSX Composite Index (+2.7%).
Corporate bonds are actually beating the TSX, with the DEX Universe All Corporate Bond Index up 3.11% for the year. Inflation-protected bonds have also done very well, with the DEX Real Return Bond Index ahead by 4.47% thus far in 2011.
All this shows that the principle of maintaining a well-balanced portfolio with good exposure to both stocks and bonds continues to pay off. I suggest you review your portfolio at this point and ensure your asset allocation formula is on-target. Emphasize defensive securities over the summer but be ready to take advantage of the situation when the next leg of the commodities bull begins. - G.P.
May was a lousy month for stock markets around the world and June didn't start any better with both Toronto and New York posting their worst losses in nine months on Wednesday.
But miserable as May was, Canadian investors can be consoled by the fact that most of the rest of the world fared worse than we did. The S&P/TSX Composite Index was off a mere 1% during the month. All the major U.S. indexes lost more with the S&P 500 dropping 1.4%, the Dow 1.9%, and the Nasdaq Composite 1.3%. However, the Dow is still the top performer among major world indexes in 2011 with a year-to-date gain of 8.6%.
European indexes all gave ground with the German Dow falling 4.6% for the month while the U.K. Dow gave back 1.2%. The only winner was Switzerland where the SMI managed a small gain of 0.2%.
In Asia, the biggest loser was the Shanghai Composite, which was off 5.8%. In contrast, Hong Kong's Hang Seng Index came close to break-even, slipping only 0.2% on the month. In Japan, which is still recovering from the ravages of the March earthquake and tsunami, the Nikkei dropped 1.6% and is off 5.2% for the year.
Emerging markets are still reeling. India's NSE 50 lost 3.3% in May (9.4% year-to-date) while Brazil's Bovespa fell 3.3% (7.7% for the year).
A look at the TSX sub-indexes offers several clues about the current mind-set of investors. Resource stocks were clobbered in May. The Capped Energy Index and the Capped Materials Index both fell 3.4%, the Metals and Mining Index was off 3.5%, and the Global Gold Index dropped 4.5%. All except the Energy Index are now in the red year-to-date.
In contrast, traditional defensive stocks have been performing well, led by the S&P/TSX Capped Telecom Services Index which advanced a robust 7.4% during May and is up 12.2% year-to-date. Heavyweights BCE Inc. and Telus have been the driving forces there. The Consumer Staples Index also did well, advancing 3.6% during the month (6.9% year-to-date), led by companies such as Alimentation Couche-Tard, which is an IWB recommendation. Utilities also fared well, advancing 3.1% on the month to move into the black by 2.5% for the year.
These numbers show that investors are becoming much more defensive in their portfolios, scaling back on exposure to the highly volatile resource sector and increasing weightings in stocks that are perceived to have less downside exposure. Concerns about the fragility of the economic recovery, both here and in the U.S., are fuelling this trend.
Somewhat surprisingly, the official statement from the Bank of Canada following the May 31 rate-fixing seemed quite sanguine about the global economic situation. "The global economic recovery is proceeding broadly as expected in the Bank's April Monetary Policy Report (MPR)," the statement said. "The U.S. economy continues to grow at a modest pace, limited by the consolidation of household balance sheets. Growth in Europe is maintaining momentum, although the risks related to peripheral economies have increased. The disasters that struck Japan in March are severely affecting its economic activity and causing temporary supply chain disruptions in advanced economies. Commodity prices have declined recently but are expected to remain at elevated levels, supported by tight global supply and very strong demand from emerging markets. These high prices, combined with persistent excess demand conditions in major emerging-market economies, are contributing to broader global inflationary pressures. Despite the challenges that weigh on the global outlook, financial conditions remain very stimulative."
This outlook tends to confirm our belief that the current pull-back in resource stocks is a temporary correction in a long-term bull phase. That said, it could be several months before the upward trend begins again and in the interim individual stocks could experience significant losses. Therefore, I would not advise being over-exposed to commodities at this stage. Focus on defensive stocks for now, with an emphasis on those with attractive dividend yields.
BCE Inc. (BCE, Financial) is a good example. The stock has enjoyed a good run but thanks to yet another dividend increase it is still yielding a very healthy 5.4%. As a result of the 5% dividend boost announced in May, the stock will pay out $2.07 a share over the next 12 months. Despite fierce competition in the telecommunications business, BCE's downside risk appears to be limited at this stage. That makes it an ideal stock for the current market conditions and if you don't already own some shares I suggest you consider taking a position.
There is one other point worth noting: the bond market is faring much better than expected so far this year. Back in January there were fears that growing inflationary pressure would knock the stuffing out of bonds. Although inflation worries are still present (see the Bank of Canada statement), the market has held up remarkably well so far in 2011. As of the close of trading on June 1, the DEX Universe Bond Index was up 2.47% year-to-date, which was almost as good as the performance of the S&P/TSX Composite Index (+2.7%).
Corporate bonds are actually beating the TSX, with the DEX Universe All Corporate Bond Index up 3.11% for the year. Inflation-protected bonds have also done very well, with the DEX Real Return Bond Index ahead by 4.47% thus far in 2011.
All this shows that the principle of maintaining a well-balanced portfolio with good exposure to both stocks and bonds continues to pay off. I suggest you review your portfolio at this point and ensure your asset allocation formula is on-target. Emphasize defensive securities over the summer but be ready to take advantage of the situation when the next leg of the commodities bull begins. - G.P.
