Analyst likes big banks and big oil

California money manager Russ Mathews is bullish on Canadian bank stocks and US oil and gas stocks. He picks two of each as his current ‘best buys’.

Money manager Russ Mathews says that although more volatility and market pullbacks akin to the July 19 drop are on the way, nearly all of the economic indicators he tracks predict further gains.

Mr. Mathews is founder of Mathews Capital Management in Sacramento. Since beginning his finance career in the mid-’90s, he has worked as a stockbroker, consultant, and investment banking money manager, among other positions. He also hosts The Modern Stock and Options Trading Show podcast, available on Android, Apple, and Spotify.

Speaking to Investor’s Digest in a July 20 telephone interview, Mr. Mathews remarked that the broad market sell-off (prompted by rising COVID Delta variant cases) the previous day was due given the recent breakneck pace of stock prices.

“We went almost straight up from about the 20th of May until the end of June,” he says.
“We’re probably a little over our skis, like three, four per cent . . . but we don’t see a crash (ahead).”

US T-bills and the Fed are bullish

Mr. Mathews points out two of the eight indicators he follows that are especially bullish: 10-year US Treasury bill yields, and the extremely “accommodative” actions and posture of the US Federal Reserve (along with other central bankers).

“All debt in the United States, and probably Canada as well, is built on the 10-year treasury,” he says, arguing that for inflation to be a problem, yields on 10-years need to reach two per cent annually. However, as of July 20 their yield stood at 1.21 per cent per year, in fact lower than the 1.5 per cent annual yield several months ago.

Instead, he dismisses inflation as a transitory issue, reflecting the strains of reopening the economy after months being shuttered, that will work itself out.

As for the Federal Reserve’s growth-oriented stance, Mr. Mathews notes that Chair Jerome Powell was recently asked if it would scale back purchases of mortgage-backed securities given that the US housing market is already very hot, which could in turn lead to a slowdown.

“He said, ‘Nope,’ so at least for now, the answer is, ‘we’re going to keep doing it’.”

Mr. Mathews says the one indicator that is not so positive for the market is President Joe Biden’s pledge to introduce higher taxes, such as on capital gains and incomes. Nevertheless, he recalls that when Bill Clinton was president with a fully Democratic-controlled Congress, the markets performed well despite successful tax initiatives under his administration, so there is room for optimism even on that front.

Looking ahead, Mr. Mathews forecasts a good August following a subdued July. The money manager adds that investors should be prepared for more volatility, albeit swings of two per cent to three per cent, particularly in the historically shakiest months, September and October. From there, assuming COVID uncertainty wanes throughout, stocks should pick up again in November.

While Mr. Mathews expects more broad-based gains, he has opted to emphasize developed markets such as those in North America over emerging ones in light of the latter’s relative risk from lower vaccination rates and lingering COVID outbreak potential.

“Generally, Europe has my attention as an area of potential opportunity,” he says.

Bank stocks, oil and gas stocks named ‘best buys’

Closer to home, the money manager is bullish on Canadian financial stocks, naming Royal Bank of Canada (TSX—RY; NYSE—RY) and Toronto-Dominion Bank (TSX—TD; NYSE—TD) as his financial “best buys”.

The banks are a strong bet given their exposure to general post-pandemic prosperity, and unlike most companies, stand to gain handsomely should interest rates rise.

US banks and those that do business there, including Royal and TD, have “ironclad” balance sheets today thanks to more-stringent stress tests and asset holding requirements introduced in the wake of the 2008-09 recession, the money manager adds.

He also expresses enthusiasm for conventional energy companies given a solid run on oil prices in 2021 and the demand increase implied by economic reopening.

Although Mr. Biden has stressed adopting clean energy, Mr. Mathews says the world will continue to run (and recover after COVID) on oil and other fossil fuels.

To that end, he turns away from companies focused only on renewable energy and selects two oil and gas stocks as his energy ‘best buys’: fuel explorer, producer, refiner and retailer Chevron Corp. (NYSE—CVX) and energy services company Halliburton Co. (NYSE—HAL).

This is an edited version of an article that was originally published for subscribers in the August 6, 2021, 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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