It’s not a 3 per cent yield that threatens stocks going by this 40-year pattern.
A two-week bounce in equities seemed to be losing steam as the 10-year Treasury yield approached the much feared 3 per cent. The worry is premature, according to Tom Lee, the co-founder of Fundstrat Global Advisors LLC.
While almost every major peak in bond yields since 1980 has coincided with declines in stocks, a trendline that plots the highs points to a danger zone of 3.25 per cent to 3.75 per cent. The study is part of a model that informs Mr. Lee’s prediction that the trouble for equities would be a 4 per cent yield, rather than 3 per cent.
“Since 1980, interest rates and bonds are negatively correlated. Higher rates = lower equities,” Mr. Lee wrote in a note to clients. “When the 10-year touches the trendline, it has marked past equity tops.”
It’s the second time this year that a 3 per cent yield emerged as a headwind for stocks. The S&P 500 fell for a second day Friday as the 10-year Treasury yield rose to as high as 2.94 per cent. A similar spike in February was blamed as one catalyst that sent the S&P 500 to its worst selloff in two years.
Debates over the ramifications of interest rates are heating up as the Federal Reserve is expected to raise borrowing costs at least three times this year. While Wall Street strategists agree higher bond yields will hurt earnings and make equities less attractive, they differ on what levels would present a pressure point for the stock market. Some cited 3.5 per cent, while others say it’s the pace of the increases that matters.
-- Lu Wang, Bloomberg News
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Stocks to ponder
BCE Inc. (BCE-T). While the stock is not officially oversold, BCE, one of the stalwarts of the Canadian equity benchmark, has been largely ignoring technical price signals. Previously – June of 2016 and July of 2017 are good examples – BCE could be relied upon to rally from oversold conditions. At worst, like in November 2016, an oversold RSI reading marked a temporary bottom and the beginning of a basing pattern. Two years is admittedly not a long-term history, but it’s notable that the 11.4-per-cent sell-off in BCE that began in December of 2017 is the deepest for the period by a significant margin. The series of RSI buy signals in January had almost no effect on the stock price as it continued sharply lower. It is reasonable, with this in mind, for investors to distrust the current buy signal. Scott Barlow reports.
The Rundown
Rob Carrick’s 2018 ETF Buyer’s Guide: Best U.S. and global dividend funds
How to take the sting out of slumping Canadian dividend stocks: Diversify globally. The sixth and final installment of the Globe and Mail ETF Buyer’s Guide covers U.S. and international dividend stocks, which have been steady performers. As documented in the fifth buyers’ guide installment, Canadian dividend ETFs have been pretty bad. Rob Carrick reports (for subscribers).
Flattening yield curve a worrying sign for investors, and the economy
The bond market is sending a disquieting signal to investors. Both the Canadian and U.S. yield curves are flirting with what’s called inversion, historically one of the most reliable -- and dreaded -- predictors of impending recessions and market weakness. Inversion occurs when the yield on the 10-year bond is lower than the two-year bond. Scott Barlow reports (for subscribers).
Why tobacco stocks’ downturn is likely to go up in smoke
When tobacco stocks are tumbling, buy tobacco stocks. That’s what David Berman did. After Philip Morris International Inc. reported its first-quarter financial results on Thursday morning, its shares slumped a head-spinning 14.6 per cent. The reason for the widespread panic? While Philip Morris reported a relatively stable profit and raised its full-year profit forecast for 2018, its cigarette shipments fell 5.3 per cent. After Thursday’s sell-off, the yield on Altria shares is now about 5 per cent, which suggests the shares are cheap. The yield on Philip Morris shares is similarly attractive. (for subscribers)
Mutual-fund regulators push for more fee transparency
Canada’s mutual-fund regulator is looking to further expand the way investment fees are reported to investors to include ongoing costs – such as management expense ratios – in annual reports. On Thursday, the Mutual Fund Dealers Association of Canada (MFDA) released a discussion paper asking for industry feedback on how to improve the transparency around total costs for investors. Currently, there are expenses associated with owning investment funds – as well as other investment products such as structured notes and market-linked guaranteed investment certificates – that do not need to be disclosed under existing cost-reporting requirements. Clare O’Hara reports.
Mutual-fund advisers given greater access to funds on NEO
In a move that’s expected to bring lower-cost funds to mutual-fund advisers, fund distribution platform NEO Connect and software maker Univeris Corp. announced a partnership that will provide advisers direct access to NEO-listed investment funds. Clare O’Hara reports.
Top Links (for subscribers)
Full steam ahead for market rally: BMO strategist not buying ‘late cycle’ thesis
Others (for subscribers)
Friday’s analyst upgrades and downgrades
Others (for everyone)
GE has ‘something for everyone,’ so bull/bear debate to rage on
Impact of trade tensions on U.S. markets set to become clearer
Next bubble to pop? Watch out for ‘most crowded trade’
$100 a barrel oil is the last temptation of Saudi Arabia
Number Crunchers
These top pipelines are poised to prosper, regardless of Trans Mountain
Ask Globe Investor
Question: Please advise ETFs and/or mutual funds that you would recommend that focus on artificial intelligence and on blockchain technology.
Answer: There is only one Canadian fund that focuses on blockchain. It was launched by the Harvest Funds earlier this year under the name Blockchain Technologies ETF (HBLK-T). So far it has been a loser, dropping from a high of $11.29 on its first day of trading (Feb. 7) to $9.05 as of the time of writing. I regard any blockchain funds as risky at this point – the technology is new and it is too soon to know which companies will prosper and which will end up on the scrap heap.
There are several U.S.-based artificial intelligence ETFs but the only Canadian one I know of is the Horizons Active A.I. Global Equity ETF (MIND-T), which was launched last fall. It has fared better than the blockchain entry, although it is down from its high of $26.49, reached in January.
The best-known AI fund is the Global X Robotics and AI ETF (BOTZ-Q), which was launched in September 2016. It’s coming off a very good year, gaining 39.35 per cent in the year to March 31. However, it has been soft recently, so you may want to watch it for a while before investing.
--Gordon Pape
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What’s up in the days ahead
John Heinzl takes a look at SIR Royalty Fund and on Monday Tim Shufelt takes a look at the heavy hitters reporting earnings in Canada next week, and gives a scorecard for the U.S. companies that have reported already.
Click here to see the Globe Investor earnings and economic news calendar.
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Compiled by Gillian Livingston