Lots of clouds on the horizon mean it’s time to be defensive
While 2021 has seen record stock market highs, Canaccord Genuity Corp.'s Chad Larson warned the reopening trade is wound up and a “pretty choppy fall” is likely.
“The reopening trade is largely done. It looks to be winding up, so the easy money was made,” Larson, director, wealth management, and portfolio manager, told WP. “A handful of stocks benefited from it; some from a shift to e-commerce and online shopping during the COVID pandemic as consumption patterns shifted and people were more comfortable ordering their groceries as well as good and services online. That just accelerated where we’re going.”
After seeing record revenues and trading volumes for the past 18 months, though, Calgary-based Larson said several investment firms’ upper echelons had a quieter summer, so the trading breadths were skinnier, and the depth of market liquidity was not as deep as it would be with everyone at their desks. While he expected that to improve in September as people return to work, he was also considering several other features that could impact this fall.
“July was difficult in the marketplace. A lot of sectors underperformed, and you had to pivot accordingly,” he said. “The overall index ended up trading into the end of the month at all-time highs again, but that was really based on a select few companies, with tech and healthcare largely driving the market. But I don’t think that really reveals the clear picture of underlying stock performance because, despite indexes making new highs, the breadth or number of overall stocks going up continued to be quite poor.
“If you look in the TSX at the percentage of stocks that are above their 50-day moving averages, it peaked in April, and everyone was excited. 85% of stocks were above the 50-day moving average, and it’s been trending ever lower ever since. Currently, it’s just under 50%. Similar breadth statistics can be seen in all major U.S. indices as well. So, that indicated that while a handful of mega cap stocks are performing very well, the average stock did not.”
Larson, founder of MLD Wealth Management, said the self-correction is even more visible with small and mid-cap indices, which were down 3 to 4% for July. A potential taper tantrum, the rising Delta variant with the fear of stringent lockdowns or uneven business openings, concerns about interest rates and inflation, and questions about the sustainability of global growth have heightened anxiety. We could see a rotation out of economically sensitive sectors, such as discretionary consumer spending, and into more defensive sectors, like consumer staples and utilities.
“We just want to continue to rotate out of economically sensitive sectors and become a little more defensive, raise cash levels, and really remind people of our investment process and philosophy because people usually make bad decisions when they’re confused,” he added
Larson was not optimistic that the picture would turn around for the fall because “we’ve got a bunch of intangibles and government decisions with respect to lockdowns and the virus”.
“The economic activity that we’re seeing doesn’t really validate and dictate the multiple expansion and valuations that we’re seeing in the equity market,” he added. “Stocks have only been going up. But, very quickly, if that shifts, people can run for the exits and multiple contraction can happen.”
“It’s been a great 2021 from the stock market performance perspective, but there are enough clouds on the horizon that makes us uneasy about reaching out and taking on additional risk,” he said. “We’ve already made the returns needed to meet clients’ medium and short-term goals. So, I think a lot of the standpoint going into the end of the year is protectionism.
“No one’s hitting the seatbelt sign on the plane to come over the mountains yet, but I think prudency would dictate that liquidity is available within the portfolio. If the market has periods of violence or turbulence, you can then use that liquidity to take advantage of mispricings when people become irrational,” he said. “Just because you’re using your seatbelt doesn’t mean you land the plane.”
Chad Larson is a Director, Wealth Management and Portfolio Manager at Canaccord Genuity Wealth Management. His views, including any recommendations, expressed in this article are his own only, and are not necessarily those of Canaccord Genuity Corp.
