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No one is quite sure where the stock markets are going next. We’ve seen a strong rebound from the March lows, which is encouraging. But worries about a recession cloud the outlook for the coming months, leaving investors wondering what to do.
In my experience, there are four ways to make money in sideways or down markets. Here they are.
There are always sectors of the economy that buck the trend for specific reasons. Last year it was energy stocks, which surged after the Russian invasion of Ukraine drove up international oil prices. This year it’s gold, as mining stocks have been buoyed as the price for the precious metal has surged to around US$2,000 an ounce. The S&P/TSX Global Gold Index is up 14.69% this year, as of April 21. But keep in mind that these situations tend to be temporary. The S&P/TSX Capped Energy Index is actually down 2.3% this year, although oil prices are still high.
The S&P/TSX Capped Financials Index is down 9% over the past 12 months. The collapse of Silicon Valley Bank and Signature Bank and the forced sale of Credit Suisse to rival UBS poured gas on the recession fears that were already making investors wary. But we’re already seeing evidence that the sector was oversold. The Financials Index is up about 3% since the beginning of April, an indication that people see current prices as a bargain.
George Weston Ltd. has gained 27.9% from its 52-week low. Loblaws stock is up 16.4%. Metro is ahead 15.3%. Empire Company has gained 9.6%. What do they all have in common? Food. What could be more recession proof?
Almost all high-yield companies have seen their prices battered since the central banks started to aggressively raise interest rates to combat inflation. There are two main reasons for this.
First, many of these companies carry high debt loads. Utilities, pipelines, telecoms, and REITs have invested billions of dollars to build networks or finance property purchases. All that debt carries interest costs. A lot of it is at fixed rates, and is therefore not affected by central bank increases, at least not immediately. But any variable rate debt increases the borrower’s interest costs, just as it does a homeowner with a variable rate mortgage.
Second, as yields on safe government bonds rise, investors demand a better return for holding riskier stocks. That means they’re looking for higher yields. Unless a company is able to implement unusually high dividend increases, the only way for yields to rise to meet the bond challenge is for stock prices to fall.
That’s exactly what has happened. The TSX sub-indexes tell the story. The Capped Utilities Index is off 11.74% in the past year. The Telecommunications Services Index has lost 8.5%. The REIT Index is down 14.5% since this time in 2022.
But here’s something you may not have noticed. All these sub-indexes are up in 2023. It’s a sign that investors believe we are close to the end of this rate hike cycle, which, if true, would see prices of these stocks continue to edge higher in the coming months.
Of course, some stocks will fare better than others, but the overall trend should be for prices of dividend stocks to rise and yields to decline accordingly as we work our way through the rest of 2023.
Gordon Pape is one of Canada’s best-known personal finance commentators and investment experts. He is the publisher of The Internet Wealth Builder and The Income Investor newsletters, which are available through the Building Wealth website. To take advantage of a 50% saving on a trial subscription and receive the special report “The Tumultuous Twenties,” go to https://bit.ly/bwGP20s.
Follow Gordon Pape on Twitter at https://twitter.com/GPUpdates and on Facebook at www.facebook.com/GordonPapeMoney.
Notes and Disclaimer
Content © 2023 by Gordon Pape Enterprises. All rights reserved. Reprinted with permission. The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting, or tax advice. Always seek advice from your own financial advisor before making investment decisions.
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