David Burrows, president and chief investment strategist, Barometer Capital Management

FOCUS: North American Large Caps

MARKET OUTLOOK:

In our early summer visit, we stated that it appeared June 24th marked an important low for equity markets and risk markets overall. We also felt that inflation was likely peaking. Though markets rallied through summer, the Fed's Jackson Hole reiteration of its determination to aggressively fight inflation using higher rate policy for longer, raised the probability of a hard landing recession. Over the last several weeks, investors have been factoring in these additional recessionary risks which has pulled asset prices lower toward a retest of the early summer lows.

While the investment team at Barometer does not forecast, we can comment on what we derive analyzing what is happening internally in asset markets. Barometer uses quantitative tools to track expanding or contracting market internal breadth by asset class, sector and themes to understand what investors are actually doing, reflecting their underlying views. Barometer manages portfolio exposures tactically to focus in market leadership themes while avoiding areas showing deteriorating breadth or relative strength.

Increased evidence of hard landing can be seen in the deterioration of some economically sensitive materials and energy producers. While Barometer believes that the longer-term setup for commodities versus equities setup remains bullish, investors have been reducing risk of all types and this cannot be ignored. Price performance for growth assets, real estate and bonds of all maturities have continued to be the weakest cohort while dividends in staples, utilities and healthcare, which are most defensive, continue to outperform.

Tactically, Barometer portfolios remain overweight energy, and defense contractors bar-belled with defensive over-weights in utilities and staples dividend payors. As Barometer uses stop losses on each portfolio position to limit losses, this has served to increase our cash position to approximately 30 per cent over the last several weeks which provides safety and flexibility to deal with further developments.

Barometer remains void of tech, communications (social media), real estate and consumer discretionary sectors and continues to avoid bonds beyond one year to maturity. Given the large sector weights of weak over-owned groups within the key equity indices, Barometer believes this in not the time to be a passive index investor.

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TOP PICKS:

Cash
 
Northrop Grumman (NOC.NYSE)
 
Vertex Pharmaceuticals (VRTX.NASD)

PAST PICKS: September 23, 2021

SVB Financial Group (SIVB NASD)

• Then: $642.15
• Now: $344.51
• Return: -46%
• Total Return: -46%

Lightspeed (LSPD TSX)

• Then: $156.85
• Now: $23.45
• Return: -85%
• Total Return: -85%

Tourmaline Oil (TOU TSX)

• Then: $42.87
• Now: $69.22
• Return: 61%
• Total Return: 80%

Total Return Average: -17%