Mar­kets, op­ti­mism surge on strong jobs data

Sur­prise gains should ban­ish notions of an­other Great De­pres­sion: an­a­lyst

Calgary Herald - - FINANCIAL POST - VIC­TOR FERREIRA

As re­cently as Thurs­day, North Amer­i­can mar­kets were look­ing tired. There were signs that they had risen from their March ashes too quickly and many an­a­lysts ar­gued eq­ui­ties had be­come so over­val­ued that they were due for a pull­back.

On Fri­day, in­vestors all but dis­carded that the­sis, driv­ing the Dow Jones In­dus­trial Av­er­age up 829 points and the S&P/TSX Com­pos­ite In­dex up 326 points on the back of em­ploy­ment data that sug­gested the worst of the pan­demic-in­duced eco­nomic cri­sis may be over.

The U.S. econ­omy added 2.5 mil­lion jobs last month and widely beat the ex­pec­ta­tions of economists who pre­dicted that it would in­stead lose eight mil­lion. A sim­i­lar turn­around oc­curred in Canada, which re­ported gain­ing 289,000 new jobs in May, when economists were ex­pect­ing a loss of 500,000.

The num­bers were al­most too good to be true for CFRA Re­search chief in­vest­ment strate­gist Sam Sto­vall.

“When I heard jobs ac­tu­ally rose in May, my first im­pres­sion was the (U.S.) gov­ern­ment must have done some­thing wrong,” Sto­vall said.

The ex­pla­na­tion of what hap­pened next is sim­ple for Sto­vall. Short sell­ers who were of the opin­ion that the mar­ket was too frothy, es­pe­cially in the sec­tors that were the poor­est per­form­ers dur­ing the mar­ket crash, were squeezed out. And those ma­ligned sec­tors, which had al­ready hinted that they were ready to push higher, ex­ploded.

Royal Caribbean Cruises Ltd. closed up by 20 per cent while dozens of Cana­dian small- and mid­cap en­ergy names surged more than 15 per cent. Once-slug­gish REITS such as Riocan Real Es­tate In­vest­ment Trust and Al­lied Prop­er­ties Real Es­tate In­vest­ment Trust each gained more than five per cent while both the Cana­dian and U.S. banks con­tin­ued their hot streaks, al­beit to a lesser de­gree.

Sprin­kle in a bit of FOMO from those who weren’t al­ready in­vested in these sec­tors and Fri­day’s mar­ket per­for­mance was un­der­stand­able, he said.

“In­vestors are feel­ing more op­ti­mistic and con­fi­dent that share prices can con­tinue to rise rather than be­ing set up for a bull trap,” Sto­vall said.

BMO Cap­i­tal Mar­kets chief in­vest­ment strate­gist Brian Bel­ski never lost faith in the mar­kets. He re­mained bullish for the year even as stocks bot­tomed in March. Fri­day’s em­ploy­ment data cou­pled with the rally should once and for all put to bed any notions of an­other Great De­pres­sion, he said. “The prog­nos­ti­ca­tions of the sec­ond great de­pres­sion and a brand new so­ci­ety was all bunk,” Bel­ski said. “If the U.S. is adding the jobs and all of a sud­den the more con­ser­va­tive and scared-of-their-own-shadow Cana­dian com­pa­nies are adding jobs, enough is enough on this.”

He also ex­pects that the neg­a­tive calls be­ing made on the Cana­dian banks will come to an end. Since the down­turn, tech­nol­ogy stocks such as Shopify Inc., Zoom Video

Com­mu­ni­ca­tions Inc. and the FAANG stocks led the mar­ket higher. Some of those names, like Zoom, have more cycli­cal sto­ries, Bel­ski ar­gues, and while he’s not sug­gest­ing in­vestors give up on Shopify, which closed in the red on Fri­day, or Ap­ple Inc., their fo­cus should be on the more beaten-down stocks, par­tic­u­larly the banks.

Un­like the air­lines and cruise lines, the Cana­dian banks are not go­ing to go through a mas­sive sec­u­lar change, Bel­ski said. That’s al­ready hap­pened in the past 10 years. Mean­while, Bel­ski ar­gues that the in­crease in loan-loss re­serves to more than $10 bil­lion at the Big Six is a good thing. His­tor­i­cally, a mas­sive spike in this met­ric is fol­lowed, on av­er­age, by a 25-per-cent re­turn over the next 12 months.

“They’re miss­ing the for­est through the trees on the banks,” said Bel­ski. “The yield trade, the eq­uity in­come trade, the big bank trade in Canada is go­ing to be the place to be.”

In­vestors who didn’t al­ready make bets on some of the worst per­form­ing sec­tors may have al­ready lost their chance to do so, Bel­ski said. He’s leery on cruise lines, for ex­am­ple, but does be­lieve there is still op­por­tu­nity in Canada on com­mu­ni­ca­tions plays such as BCE Inc. and Telus Corp.

Lorne Stein­berg, pres­i­dent of Lorne Stein­berg Wealth Man­age­ment, looks at stocks with a longterm fo­cus. He’s not in­ter­ested in play­ing a six-month re­bound and prefers to hold stocks for five to 10 years at a time.

Be­cause of the debt they carry, air­lines aren’t an op­tion for his port­fo­lios. He’s never owned a gold stock and “there’s eas­ier ways to make money” than bet­ting on oil.

Stein­berg still likes the FAANG stocks be­cause they have longterm sto­ries and wouldn’t ad­vise his clients against buy­ing them even at these val­u­a­tions. For 2020, the fun­da­men­tals may not be that im­por­tant any­way.

“I can look ahead as an in­vestor and say OK, let me for­get 2020 earn­ings be­cause they don’t ex­ist,” Stein­berg said. “The world is feel­ing like the worst is over.”

RICHARD DREW/AP FILES

Stocks climbed on the New York and Toronto stock ex­changes on the back of un­ex­pected job gains in the U.S. and Canada. Some of the worst-per­form­ing sec­tors, like REITS, banks and en­ergy, ral­lied af­ter stocks bot­tomed in March in the af­ter­math of COVID-19 up­heavals.

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