Following the staggering depths of 2020 and dizzying highs of 2021, the markets have reverted to the mean in 2022, aping historical trends and setting the stage for a rally anew. Seasonality-focused, Toronto-area analyst Don Vialoux of investing website timingthemarket.ca tells Investor’s Digest in a June 27 telephone interview that according to several measures, North American equity markets turn positive near the end of June.
“Selected equity sectors such as biotech and technology began to outperform the S&P 500 and TSX Composite (in mid-June), a sign that favourable seasonal influences by these sectors have returned on schedule,” he adds. “Those are two of the sectors you want to be invested in going into fall.”
The analyst underlines that the second year of a new U.S. presidential term typically records the worst performance (over the four-year term) in Canadian and U.S stock markets, but adds that this means the best time to buy into the market is around the end of June in that year, when stocks hit a nadir, then recover.
Investors and the public at large are optimistic at the beginning of a new presidential cycle, in part because of new spending and policies, so the first year is generally the best-performing period. That optimism ebbs in the second year, as the actual cost of programs and their level of success become clearer.
“It’s the low point in the four-year cycle, and it’s particularly true when you have a change in the control of the presidency (from Democratic to Republican or vice versa),” says Mr. Vialoux.
Considering President Joe Biden’s tanking popularity and stock sales by investors fearing multiple interest hikes meant to control high inflation, Mr. Vialoux remarks of political and market events from last January up to mid-June, “It fits so nicely into historic patterns.”
As of June 17, the Bank of America’s Bull & Bear Indicator for the S&P 500 sat at 0.0 in a range of 0.0 to 10, implying extreme bearishness. The analyst notes that the last time the score reached that level was in March 2020, at the height of the initial COVID scare.
Major drop in the S&P 500 in first half of 2022
The S&P 500 itself dropped 24 per cent from its peak in early January to mid-June, while the TSX Composite fell 15 per cent from its April peak and the NASDAQ Composite fell 35 per cent from its November 2021 peak.
However, Mr. Vialoux says, “All the market focus in recent weeks has been on things like what the Fed is doing. There’s been very little focus on things like corporate earnings.” These have continued to rise despite the expected cooling effect of higher interest, which he suggests the markets have already priced in. For example, a consensus of analysts forecast S&P 500 companies earnings will rise 10 per cent on average year-over-year in 2022.
Mr. Vialoux says that meanwhile, an exchange-traded fund that tracks U.S. Federal Reserve rate expectations, the ProShares Inflation Expectations ETF (NYSE/Arca—RINF) reached double peaks and rolled over in the third and fourth weeks of June. This is a sign that the worst of inflation has passed, and investors are looking toward the upside again rather than estimating losses, he explains.
“The demand (for commodities and goods in general such as vehicles) is still huge and the supply is still limited, particularly when it comes to labour,” Mr. Vialoux says. “As long as that scenario continues going forward, even if the price is somewhat dampened (as has been the case for corn, wheat, soybeans, and oil in recent weeks)…the demand is still there.”
In the meantime, Mr. Vialoux recommends ETFs heavily weighted in biotech and technology as his “best buy”. They historically rise from late June until the beginning of September, often buoyed by product and treatment launches.
On a longer-term basis, major expansions at computer chip plants now underway promises to support far greater use of chips, famously in short supply over the last two years.
“You can’t do more software development unless you have more computer chips to put into computers,” says the analyst, adding that there are currently lots filled with nearly-complete automobiles sitting idle for lack of chips.
Which ETFs to buy on the rebound?
ETFs fitting the bill include the Invesco QQQ ETF (NASDAQ—QQQ), which tracks the NASDAQ 100 (its makeup is about 70 per cent in technology and 15 per cent in biotech). Canadians preferring to trade in loonies can buy the BMO NASDAQ 100 Equity Hedged-to-CAD Index ETF (TSX—ZQQ).
For more biotech exposure, Mr. Vialoux recommends the iShares Biotechnology ETF (NASDAQ—IBB), VanEck Biotech ETF (NASDAQ—BBH), and First Trust NYSE Arca Biotechnology ETF (NYSE/Arca—FBT), all of which are “very actively traded,” he says.
This is an edited version of an article that was originally published for subscribers in the July 15, 2022, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.
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Investor's Digest of Canada •10/6/22 •