Equity analyst Don Vialoux says “The thing that’s going to drive inflation is greater consumer buying, whether that be homes, or cars, or other big-ticket items.”
After a brief retreat, the latest wave of US stimulus funding is lifting all economic boats anew, but inflation clouds the forecast later in 2021, cautions longtime equity analyst Don Vialoux.
Mr. Vialoux, based in the Greater Toronto Area, runs the seasonality-focused website, timingthemarket.ca, which he founded with his son and fellow analyst, Jon (who also created and runs equityclock.com). “Prospects for strength in North American equity prices during the current March-to-May period are above average, but for unusual reasons related to the pandemic,” he says, one of those being the dismal economic figures from the start of the pandemic in spring 2020.
The consensus is calling for S&P 500 companies to report an average year-over-year second-quarter earnings increase of more than 50 per cent, the analyst underlines. He expects a steady stream of good news to come from corporate annual general meetings in April and May.
Meanwhile, the US federal government began to distribute the third round of COVID-19 relief funding in mid-March, estimated to take up US$415 billion of the US$1.9-trillion stimulus package passed by the US Congress under the new Biden administration.
“At least a small amount of the US$200 billion distributed to recipients during the past three months was diverted into the equity market. US and Canadian equity prices responded accordingly,” recalls Mr. Vialoux. “Since the end of December, the S&P 500 Index has gained 5.7 per cent and the commodity-sensitive TSX Composite Index has advanced 8.7 per cent.”
Growing demand for consumer products
Aside from capital flowing into stocks, ETFs and mutual funds, recipients of stimulus cash have also spent it on themselves, which the analyst predicts will happen again. “More money in the pockets of US citizens is expected to trigger higher sales and higher prices for a variety of items, including consumer staple products and consumer discretionary products.” The larger economy, preparing for higher consumption in 2021’s second half, when most people will have access to COVID vaccines, has ramped up purchasing raw materials and manufacturing activities. This trend favours commodity stocks, as does a stimulus-devalued US dollar (since producers must be paid more greenbacks for US-denominated resources).
Low interest rates have made it easier to borrow for large purchases as well, favouring financial institutions because the spread between the rate they lend at and the rate they themselves borrow at has widened. This bodes well for the Canadian economy because of its intimate ties with the US economy and since, as Mr. Vialoux says, “It’s heavily weighted in two areas, financial services and commodities, and of course those are two areas that you want to be heavily invested in over the next few months.”
Consumer buying driving inflation
However, the analyst adds, “The thing that’s going to drive inflation is greater consumer buying, whether that be homes, or cars, or other big-ticket items.” Already, this inflation is evident in Vancouver and Toronto real estate prices.
Mr. Vialoux asserts that market activity will dwindle “once all the money is spent” and the springtime “honeymoon period” characterized by optimistic business headlines and the spending of stimulus capital passes. “The calls I’m making here are mainly, shall we say, for three months, maybe four.”
He points out that commodity prices are already strong; commodity-sensitive stocks are also currently performing better than the TSX Composite and S&P 500 generally, consistent with their period of seasonal strength from mid-March to May. “Very seldom do the technicals, fundamentals and seasonality come in together at the same time, but this is one of them.” As stock prices climb higher, the analyst expects more investors to take money off the table in anticipation of inflation and share pullbacks.
Thankfully, he says, “We’re not even close to that right now. That’ll probably not happen until the second half of the year.”
Agribusiness and base metals favoured as ‘buys’
As for what type of commodity plays to pick, Mr. Vialoux’s “best buys” (until sunny second-quarter announcements have played out) include the US-traded VanEck Vectors Agribusiness ETF (NYSEARCA—MOO) and the iShares Global Agriculture Index ETF (TSX—COW), listed on the Toronto Stock Exchange. The analyst says of grain prices: “They have just been going through the roof.” Both ETFs are international in scope, made up of such major agriculture-related companies as tractor maker Deere & Co. (NYSE—DE), meat-packer Tyson Foods Inc. (NYSE—TSN) and fertilizer producer Nutrien Ltd. (TSX—NTR; NYSE—NTR).
Other “best buy” options that the analyst advises investors to consider are ETFs tied to base metals, such as the iShares S&P/TSX Global Base Metals Index ETF (TSX—XBM) and materials, like the SPDR Materials Select Sector Fund (NYSEARCA—XLB).
This is an edited version of an article that was originally published for subscribers in the April 2, 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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