Our 180-day stock market forecast

Here’s our forecast of what we expect of the economy and the stock market over the next six months.


Build your portfolio the way pioneers built houses–for the long term and not the latest weather.

Here’s our outline of what we expect of the economy and stock market over the next few months. But put little faith in short-term stock market predictions, including ours. The fact is, short-term stock market predictions are the weak link in the investment process. As we point out from time to time, billionaire Warren Buffett has joked that stock-market forecasters exist to make fortune tellers look good.

Stock markets in Canada and the US have set many new records. The S&P/TSX Composite index is above 20,000. The Standard & Poor’s 500-stock index and the Dow Jones Industrial Average have also reached new heights. This reflects optimism for a number of reasons.

Vaccines to the rescue

First, a significant and growing number of Americans and Canadians have received first and second doses of the COVID-19 vaccines. There’s a belief that the worst of the pandemic is behind us, at least in the developed world. With the reopening of restaurants, our market beaters include US stocks McDonald’s Corporation (NYSE—MCD) and Starbucks Corporation (NASDAQ—SBUX). They should profit as more people go out to eat, drink and socialize.

There are, however, risks to this positive outlook. Possible future waves of COVID-19 would force yet more lockdowns and damage confidence and stock prices. The Delta variant comes to mind. Also, until the developing world is vaccinated, there’s a risk that COVID-19 could mutate into a much more dangerous variant that is impervious to our vaccines.

A second reason that the stock market is optimistic is that most consumers are flush with cash. Many will go shopping to satisfy their ‘pent-up demand’. That’s why our market beaters include retail stocks Alimentation Couche-Tard (TSX—ATD.B), BRP Inc. (TSX—DOO), Goeasy Ltd. (TSX—GSY), Hardwoods Distribution (TSX—HDI), Loblaw Companies (TSX—L), Microsoft Corp. (NYSE—MSFT), Pepsico Inc. (NYSE—PEP) and Procter & Gamble (NYSE—PG).

A third reason that the stock market is optimistic is because the Biden administration plans to invest heavily in infrastructure. There is a dispute between the Democrats and the Republicans over the size of the investment. This is, however, the kind of investment that most members of Congress would like to be associated with. Such investment would improve the economy, company profits and the stock market.

Inflation may be accelerating

There are signs that inflation is accelerating. Inflation is often seen as too much money chasing too few goods. Most Canadian consumers now have lots of cash. Production in a number of industries was disrupted.

The prices of gasoline, fresh fruits and vegetables as well as commodities in general have jumped. Then, too, globalization is seen as a problem. Supply chains are unravelling. A Canadian furniture manufacturer convinced authorities to impose high tariffs on furniture imported from China and Vietnam. If it succeeds, furniture prices will spike. Some investors try to protect themselves with gold. Key gold producers Agnico-Eagle Mines (TSX—AEM) and Barrick Gold Corp. (TSX—ABX) should benefit. We’ve added them to our market beaters.

High inflation raises interest rates

The Bank of Canada and the US Federal Reserve think that the recent jump in inflation will dissipate. But if inflation continues to climb, then investors will demand to earn higher interest rates. Otherwise their purchasing power (what they can buy) will crumble year after year. Higher short-term interest rates could restore a more normal yield curve. This would help financial institutions. Banks would earn higher net interest margins on loans. So would insurance companies. In addition, higher rates would reduce insurers’ future liabilities.

Accordingly, we’ve added these financial institutions to our list of market beaters: Intact Financial Corp. (TSX—IFC), Manulife Financial Corp. (TSX—MFC), Royal Bank Of Canada (TSX—RY), and Sun Life Financial (TSX—SLF).

Higher interest rates can restrain the prices of utilities in two ways. First, they make the dividends of utilities stocks relatively less attractive. Second, it costs utilities more to borrow and invest into their capital-intensive businesses. But it’s important to maintain a balanced and well-diversified portfolio. Our market beaters include Fortis Inc. (TSX—FTS), Pembina Pipeline (TSX—PPL), Quebecor Inc. (TSX—QBR.B) and TC Energy (TSX—TRP).

Manufacturing stocks are diverse

Manufacturers are a diverse group of stocks. Our market beaters include Apple Inc. (NASDAQ—AAPL), and Medtronic PLC (NYSE—MDT).

Two multi-sector stocks include CGI Inc. (TSX—GIB.A) and Open Text Corp. (TSX—OTEX). They serve a broad range of clients in various industries.

Unforeseen adverse developments could damage the stock market’s optimism. One that comes to mind is cyber attacks seeking ransom. Another is high unemployment.

At some point, the market will decline. But nobody knows just when this will happen.

Do like the pioneers

Build your portfolio the way that pioneers built their houses. They built their houses based on the long-term climate, not the latest weather. Similarly, you should build your portfolio based on the market’s long-term advance, not on the stock market’s latest twitch.

This is an edited version of an article that was originally published for subscribers in the June 18, 2021, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.

The Investment Reporter, MPL Communications Inc.
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