John Hood, president and portfolio manager, J.C. Hood Investment Counsel

FOCUS: Options and ETFs

MARKET OUTLOOK:

Volatility has re-emerged in the markets due to galloping inflation, expectations as to the Fed’s response through higher rates and nuclear sabre-rattling by Putin. Essentially, what we as investors need to look at is the likelihood that the Fed will raise rates and tighten the money supply too much and catapult the economy into recession; I doubt this will happen. Yesterday, Jerome Powell said “The economy is quite strong…We think it is well-positioned to withstand less accommodative monetary policy.”

According to Brian Westbury at First Trust, even if Powell raises rates by 50 basis points in both June and July, interest rates of three to four per cent are still historically at low levels. There is certainly no recession in the job market as employers are struggling to find workers. High inflation driven by energy prices affecting everything from gas and transporting food and manufactured goods, is not really sustainable over the long term and there has begun to be a tapering of inflation in some sectors. So a recession is unlikely unless the Fed really makes a mess and I think they have learned a lot since 2007. Unfortunately, the Fed kept the money supply too loose over the past year which is the primary cause of inflation; it’s not just about supply lines and COVID recovery. Retailers Walmart and Home Depot are down. Further, while ‘recession’ is the market bogeyman, recessions do not by definition have to be catastrophic, soft landings are more common.

As investors, we need to focus upon value and how market declines work to our advantage. As Warren Buffet has said, this is the only business where you put up a sign that says “ON SALE,” everyone heads for the exits. As BMO’s Brian Belski stated the forward P/E of the S&P 500 is now at 16.6, having been at 22! So we are looking at SALE items and oversold markets. I hope to see the S&P decline a further 200 points to 3,800 from the current 3,950 and I am also looking at NASDAQ and healthcare. Investor strategy is very important; while generally bullish, I do not intend to plunge into the market. It is a tactical approach. If the market is down 20 per cent, I will add five to 10 per cent to equities. If it drops further, I will add proportionately. We will be adding bond ETFs to our portfolios after the presumed .50 rate hike in June.

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TOP PICKS:

Harvest Healthcare Leaders Income ETF (HHL TSX)

HHL is an actively managed ‘covered call’ ETF. Despite a high management fee of 0.85 per cent it is not atypical of similar covered call products. Its principal attraction is the current yield of 8.36 per cent, consisting of U.S. dividends, taxed as income and covered calls which are taxed as a capital gain. The ETF holds 20 of the largest U.S. healthcare stocks including Pfizer J&J Abbott. It is diversified among pharma at 40 per cent/health care equipment 20 per cent/products and services 15 per cent biotech 14 per cent aging demographics are the source of growth. Baby boomers are entering their high health care spending years and the overhang of both elective and critical surgeries from COVID are compelling.

BMO Nasdaq 100 hedged to CAD ETF (ZQQ TSX)

It is down approximately 26 per cent from its high of $121.57 and is hitting our target range of $85.

BMO Covered Call CDN banks (ZWB TSX)

 For conservative investors, yield is six per cent, declined from one year high of $23.41 approximately 12 per cent.