Ross Healy, chairman, Strategic Analysis Corporation; portfolio manager, MacNicol & Associates Asset Management

FOCUS: North American large-cap stocks 

MARKET OUTLOOK:

We are in a “consensus market” where there appears to be broad agreement on a number of important issues.

1. Inflation is high now but is coming down in 2023.
2. This means that interest rates which are high now are coming down in 2023.
3. If there is a consensus about the potential low for the S&P 500, it is probable that the 3,000 mark is a good round number.
4. We are in (or are heading for) a recession – the most widely heralded recession in history.
5. Given the further sell-off needed to get there, the market will be attractive for renewed investment, especially since there is so much cash sitting on the sidelines.

So, what can go wrong?

Some commodity prices may have fallen, but inflation is one of those pernicious things that manages to ooze its way into everything and this seems to be an issue right now. Thomas Hoenig of the Federal Reserve Bank of Kansas City is concerned that inflation will remain in the seven to eight per cent range into 2023 and the U.S. Federal Reserve will have to keep raising rates – meaning things will remain tight for longer. Therefore, any recessionary influences will be deeper when they come. This probably means that the stock market will have further to fall than “just” 3,000.

At present, the Nasdaq 100 stocks overall have a negative intrinsic value of some -20 per cent, and one shouldn’t invest in stocks which do not offer decent upside potential. A big chunk of the U.S. market only offers negative rewards.

I have one very positive message, however. The TSX offers an intrinsic value which is close to 70 per cent higher than its current price. That is why the Canadian market has relatively outperformed the U.S. – and should continue to do so throughout the next market cycle.

While growth has slowed, the Fed is focused on the employment picture. Despite the slowdown in growth, the labour market remains extremely tight, with the unemployment rate at a 50-year low, job vacancies still very high and wage growth elevated. Job gains have been robust, with employment rising by an average of 289,000 jobs per month over August and September. Although job vacancies have moved below their highs and the pace of job gains has slowed from earlier in the year, the labour market continues to be out of balance, with demand substantially exceeding the supply of available workers. The labour force participation rate is little changed since the beginning of the year. In his recent statement, Fed Chair Jerome Powell stated very clearly that “the window for a soft landing was narrowing” – which indicates Hoenig’s comments may be on the money!

Has the U.S. election changed the outlook in any way? Not really. Any actual changes will take a long time to institute in any case. Lots of media chatter but no real insights until we see the “whites of their eyes” on Jan. 3, 2023. 

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TOP PICKS:

Peyto Exploration (PEY TSX)

Low P.E. and a very nice yield with strong FMV potential.

Alamos Gold (AGI TSX)

Excellent and growing high-quality reserves, is holding well despite its weak intrinsic value and has a very strong balance sheet.

Cameco (CCO TSX)

A bit speculative, but a superb alternate energy stock. 

PAST PICKS: October 28, 2021

Laurentian Bank (LB TSX)

• Then: $41.95
• Now: $31.18
• Return: -26%
• Total Return: -22%

Crescent Point Energy (CPG TSX)

• Then: $6.20
• Now: $10.48
• Return: 69%
• Total Return: 74%

Torex Gold Resources (TXG TSX)

• Then: $14.66
• Now: $11.34
• Return: -23%
• Total Return: -23%

Total Return Average: 10%