By Adam Mayers, Contributing Editor
Is it a good time to buy stocks? That’s always the question, but for many it is top of mind after a particularly poor year in 2022. As I dug through my pile of reading this month, there are strong arguments on both sides and as an investor you have to choose one. I’m tilting towards selective buying if you have patience, knowing there is plenty of volatility ahead particularly in the first half of the year.
Investor sentiment shifted just before Christmas which led to a relief rally that has carried into February. Many see it as the first green shoots of spring, sensing that inflation is easing and interest rate increases have peaked and will gradually decline. It helped that the Bank of Canada has indicated it is pausing its hikes, supporting the rate cut view.
The lighter mood has carried the TSX Composite Index up by 7.35% since Dec. 20.
It’s a different situation in the US, where the Federal Reserve Board raised its target rate by another quarter point this month and indicated there is more to come. The Fed acknowledges inflation is moderating, but wants it to come down farther, faster. The latest US jobs report showed strong growth lending more weight to further hikes.
Despite the Fed’s more hawkish posture, the Nasdaq Composite is up 11% since Dec. 20 and the S&P 500 Index has gained 7%.
That still leaves room for selective buying. You can never call a top or a bottom, but you will win in the long run if you own companies that fill a need (as opposed to a want) and provide essential goods and services. They include household goods like soap and cleaners, groceries, healthcare and medicines, banking and insurance, utilities, infrastructure, and real estate. They are recession-resistant while offering opportunities for long-term growth while you wait.
In a recent interview with MarketWatch, Toronto economist David Rosenberg summed up these companies as having “strong balance sheets, earnings visibility, solid dividend yields and dividend payout ratios. If you follow that you’ll do just fine,” he said.
You find these companies in the Canadian and US primary core holdings of the IWB recommended list. If you own them and think they have sold off, now may be a good time to add to your positions.
Here is some commentary from my mailbag on the good-time-to-buy theme:
Certainty comes after the fact: Whether a stock is too expensive, or a bargain is something you find out in hindsight, writes Tom Bradley, founder of Steadyhand Investments. If you wait for that certainty, you’ll probably miss out on a lot of potential gain because prices will already be significantly higher.
Take a long-term view: News of the day often lacks perspective and reacts to events without the benefit of a sober second thought. Author and journalist Peter C. Newman used to call the news, the first rough draft of history. Taking a hard look at a company and its prospects lessens anxiety over whether today’s price is the right one. You are always taking a risk when you buy, but hopefully an informed, calculated one.
Price is important: As share prices have fallen, price-to-earnings (p/e) multiples have come down too. They are now closer to the historical average of 16x earnings from the mid-20s a year ago. That doesn’t mean all stocks are bargains or that multiples could not fall further, but it’s a useful benchmark. Whether the price is right depends on your assumptions about profits, interest rates, inflation, and how deep or mild a recession will be. Economist and financial commentator John Mauldin observed in a recent newsletter that all of these things are inherently uncertain and carry a risk, which is why stocks have profit potential.
Investor sentiment is changing: In early 2022 there was a shift to fear from the irrational exuberance brought on by interest rates near zero. The December rally indicates the fear factor has eased. Investor behaviour is a big part of stock movement. Brian Belski, Chief Investment Strategist at BMO Capital Markets acknowledged the sentiment shift in a research note. He argues stocks are in the early stages of a multi-year recovery. He sees a mild recession and opportunity in small and mid-cap US stocks.
The R word: The much-anticipated recession has likely started. Layoffs are mounting in the tech sector, profits are weakening, and outlooks revised. Soft landings don’t happen very often. Mr. Rosenberg believes the bear market for stocks is only half done. Mr. Mauldin likewise expects a painful first half. “I don’t expect anything like 2008 but the odds of getting through this painlessly are quite low,” he said.
So, plenty of opinion and no certainty. I was browsing through my bookshelf and revisited a book written 60-odd years ago by Bernard Baruch, a great investing mind and a multimillionaire adviser to five US presidents. He died in 1965 when he was 94.
One of his oft-quoted lines is: “If all you have is a hammer, everything looks like a nail,” a metaphor for we see what we want to see.
His 1957 memoir, My Own Story, is full of insights which still resonate. (The book is sold on Amazon.com or can be read free online at the Open Library.)
Here are a few of his observations:
When should you buy stocks?
Some people boast about selling at the top and buying at the bottom. I don’t believe this can be done. I have bought when things seemed low enough and sold when they seemed high enough.
On market psychology: During a Depression, people believe a better time will never come. At such times a basic confidence pays off if one purchases securities and holds them until prosperity returns.
On information overload: If anything, too much information is available today (1957). The problem has become how to separate the irrelevant from essential facts and determine what those facts mean.
Sound advice in a challenging time.
Adam Mayers is a contributor to The Globe & Mail’s Report on Business and a former investing columnist at The Toronto Star. His website is adammayers.com. He lives in the greater Toronto area.